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Friday, April 22, 2016

Position of Directors of a Company

Position of Directors
It is very difficult to define precisely the position of directors in a company. The Companies Act, 2013, is also silent on this issue. Directors have been described sometimes as trustees, sometimes as agents or sometimes as managing partners. They have some attributes of all of them, but they are neither trustees nor managing partner in full sense of the term. The legal position can be discussed as under:
1. Directors as Agent: Directors are, in the eyes of law, agents of the company for which they act. The company itself cannot act, it can act only through directors and by the reason of which a relation of principal and agent is established between the company and the directors. Wherever as agent is liable those directors would be liable; where the liability would attach to the principal and principal only, the liability is the liability of the company.
Where the directors make contracts on behalf of the company, they incur no personal liability provided they act within the scope of their authority. In such a case, the company alone would be liable. Directors incur a personal liability in the following circumstances:
a)      Where the contract in their own names.
b)      Where they use the company’s name incorrectly.
c)       Where director’s exceeds their powers.
But the position of directors differ from that of the agents because an agent can enter into a contract in his own name but a director cannot. Again an agent may not disclose the name of his principal but a director must disclose the name of his principal. Hence, the directors are not agents in the true sense.

2) Directors as trustees: The directors have also been described as trustees of the company. They are trustees of the company’s money or property which comes into their hands or which is actually under their control and of the powers entrusted to them. But in real sense, the position of directors is differ from that of the trustees because a trustee can’t be an employee of the trust but a director can be an employee of the company. Again, an artificial person can become a trustee but an artificial person cannot become a director. As, only individual can be a director. Hence, directors may better be considered as quasi trustee.
3) Directors as officers: Under sec. 2(59) of the Companies Act, they are liable to certain penalties if the provisions of the Companies Act are not complied with. Moreover whether or not a director is in the employment of the company, he shall be treated as an officer of the company.
4) Directors as employees: Although directors are agents of the company, they are not employees or servants of the company. Hence they cannot claim their remuneration as a preferential creditor in the event of winding up of a company under sec. 327 of the Companies Act, 2013. But where any director, besides being a director, is also in the service or employment of the company, such as secretary, manager, accountant or otherwise, he will be treated as an employee. As such he will be entitled to the remuneration and other benefits admissible to his as an employee in addition to his rights as a director to sitting fee, etc.
5) Directors as managing partners: The directors are also sometimes described as managing partners because like a partner of a firm, they manage the affairs of the company and they are also usually important shareholders of the company. They do all proprietorial functions like allotting shares, making calls, forfeiting shares etc.
However, all the partners of a firm act on the principal of mutual agency. But it is not so in the case of directors. A director has no authority to bind the other directors and shareholders. Moreover, directors are subject to retirement by rotation whereas partners of a firm are not. Hence, the directors are not managing partners in the full sense.

Thus, directors are described as trustees, agents or managing partners. The board of directors are the brain and the only brain of the company which is the body and the company can act only through them.