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Friday, April 22, 2016

Powers and Duties of Directors of a Company

Powers of directors
On incorporation, a company becomes a legal artificial person but it cannot act by itself and consequently it has to depend upon some human agency to act in its name. The members have no inherent right to participate in the management of the company. A large sized company may have its members running into lakhs, who are dispersed all over the country and they even lack the expertise to manage the affairs of the company, which makes it impossible to give the management of the company in their hands. Therefore a specialized body of persons called as directors are appointed by the members to manage the affairs of the company. The directors must act as a body without improper exclusion of any of the directors. The directors collectively referred to as BOARD. The board is the managerial body constituted by the members to whom is entrusted the whole management of the company.
The powers which vest in the board can be classified under three different heads:
1) General Powers: General powers are those which can be exercised in accordance with the articles. These powers are laid down in sec. 179 of the Companies Act, 2013. It empowers the board to exercise all such powers and do all such acts and things, as the company is authorised to exercise and do. There are, however, two limitations upon their powers:
First, the Board shall not do any act which is to be done by the company in general meeting
Second, the Board shall exercise its powers subject to the provisions contained in the Companies Act, or in the Memorandum or the Articles of the company or in any regulations made by the company in general meeting.

2) Powers to be exercised at Board meetings [Sec. 179 (3)]: The Board of directors of a company shall exercise the following powers on behalf of the company by means of resolutions passed at the meetings of the Board, viz, the power to:
(a) Make calls on shareholders in respect of money unpaid on their shares
(b) Issue debentures
(c) Borrow money otherwise than on debentures
(d) Invest the funds of the company
(e) Make loans
(f) To approve financial statement and the board’s report
(g) To diversify the business of the company.
3) Powers to be exercised with the approval of company in general meeting (Sec. 180)
(a) Sale or lease of the company’s undertaking
(b) Extension of the time for payment of a debt due by a director
(c) Investment of compensation received on acquisition of the company’s assets in securities other than trust securities
(d) Borrowing of money beyond the paid-up capital of the company
(e) Contributions to any charitable fund beyond Rs.50,000 in one financial year or 5% of the average net profits during the preceding three financial years, whichever is greater.
4) Powers under rule 8: Rule 8 of the Companies rule, 2014 provides that, the following powers shall be exercised only by means of resolutions passed at meeting of the board, namely:
a)      To make political contribution;
b)      To appoint or remove key managerial personnel;
c)       To appoint internal auditors and secretarial auditors;
d)      To take note of the disclosure of director’s interest and shareholding
e)      To accept or renew or review the terms and conditions of public deposits.
5) Other powers: In addition to the items referred above, there are various other matters, as illustrated below in the routine working of a company which are considered by the board at board meeting:
(a) Issuance of shares;
(b) Allotment of shares and debentures;
(c) Appointment of directors and managing directors;
(d) Merger and acquisition of companies;
(e) Capitalisation of reserves and issuance of bonus shares.
Duties of the Directors
A. Fiduciary duties: As fiduciaries, the directors must:
(a) Exercise their powers honestly and bona fide for the benefit of the company as a whole; and
(b) Not to place themselves in a position in which there is a conflict between their duties to the company and their personal interests. They must not make any secret profit out of their position. If they do, they have to account for it to the company.
B. Duties of care, skill and diligence: Directors should carry out their duties with reasonable care and exercise such degree of skill and diligence as is reasonably expected of persons of their knowledge and status. He is not bound to bring any special qualifications to his office.
C. Standard of care: The standard of care, skill and diligence depends upon the nature of the company’s business and circumstances of the case. They are various standards of the care depending upon:
(a) The type and nature of work
(b) Division of powers between directors and other officers
(c) General usages and customs in that type of business; and
(d) Whether directors work gratuitously or remuneratively
D. Duty to disclose interest: Where a director is personally interested in a transaction of the company, he is required to disclose his interest to the board. An interested director is neither to vote on the matter of his interest nor his presence shall count for the purposes of quorum.
E. Duty to attend board meetings: The Act only says that the office of a director is automatically vacated if he fails to attend three consecutive meetings of the board or all meetings for a period of 3 months, whichever is longer. Moreover, a director’s habitual absence may become evidence of negligence.

F. Duty not to delegate: A director should not delegate his functions to another person. But delegation of functions may be made to the extent to which it is authorized by the Act or the constitution of the company.