DR.

RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY

LUCKNOW

2017-18

CORPORATE LAW

Final Draft:

Statutory and Fiduciary Duties of Directors

SUBMITTED TO: SUBMITTED BY :

MISS PRIYA ANURAGINI SAURAV SINGH

ASSISTANT PROFESSOR B.A.LL.B. (B) VI SEM.

Dr. RMLNLU ENROLL- 150101119

 CONTENTS

 Introduction
 Statutory formulation of Directors’ duties
 Fiduciary Obligations
 Breach of Directors' Duties and Their Remedies
 Conclusion
Statement of problem

This project provides an overview of directors’ and officers’ duties and liabilities. For
individuals that are acting as directors, or contemplating acting as directors of corporations,
understanding these duties and liabilities is good governance and helps to protect against
liability, both for the corporation and personally. In addition, if businesses are operated through
a partnership that includes a corporate partner, the directors of that company have directors’
duties and liabilities with respect to the partnership business. Where there is a duty there is also
a chance of breach of that duty and where ever there is a breach of a duty it gives rise to the
various remedies. So where there is a breach by the director of a company there are also
available certain remedies against him. The Chapter 3 of the paper critically analyze how these
duties are breached and what remedies are available to company, shareholders and other
stakeholders

Objective

The objective of this paper is to study the statutory and fiduciary duties of directors in
companies. Also it includes what if in case there is Breach on Directors’ part and remedies
available to Company, Shareholders and Stake holders.

Research Questions

 What are Statutory and Fiduciary duties of Directors’?

 What if there is Breach on Directors’ part and remedies available to Company?

Research Methodology

In this Project the researcher have adopted the Doctrinal method of research in which there is
reference of Books and Articles.

Tentative Index

 Introduction
 Statutory formulation of Directors’ duties
 Fiduciary Obligations
 Breach of Directors' Duties and Their Remedies
 Conclusion

Tentative References

 Company law, Avtar Singh

 http://whoswholegal.com/news/features/article/13044/directors-duties/
 https://www.ensafrica.com/news/duties-of-directors-under-the-new-companies-act-
business-as-usual?Id=381&STitle=corporate%20commercial%20ENSight
 https://www.lawteacher.net/free-law-essays/company-law/duties-and-responsibilities-
of-directors.php
  http://www.mandellpinder.com/wp-content/uploads/2015/12/Overview-of-Directors-
and-Officers-Duties-and-Liabilities-Dec-2015.pdf

Introduction-

The welfare of a company depends on the shoulders of the directors and the directors are also
responsible for the interests of the company as well as shareholders. Directors are basically
fiduciary agents and they owe duties to the company, directors' are appointed by the
company's shareholders to run the company's affairs for the benefits of the shareholders. Lord
Judge Bowen explains director's duties in these beautiful words that “directors are described
sometimes as agents, sometimes as trustees and sometimes as managing partners.

Statutory formulation of Directors’ duties-

The act of 2013 has in section 166 made a statutory formulation of Directors’ duties. Such
duties have been spelled out in terms of the following six points:

(1) Subject to the provisions of this Act, a director of a company shall act in

Accordance with the articles of the company.

(2) A director of a company shall act in good faith in order to promote the objects of the

Company for the benefit of its members as a whole, and in the best interests of the company,

Its employees, the shareholders, the community and for the protection of environment.

(3) A director of a company shall exercise his duties with due and reasonable care, skill

And diligence and shall exercise independent judgment.

(4) A director of a company shall not involve in a situation in which he may have a

Direct or indirect interest that conflicts, or possibly may conflict, with the interest of the

Company.

(5) A director of a company shall not achieve or attempt to achieve any undue gain or

Advantage either to himself or to his relatives, partners, or associates and if such director is

Found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain
to the company.

(6) A director of a company shall not assign his office and any assignment so made

shall be void.

(7) If a director of the company contravenes the provisions of this section such

director shall be punishable with fine which shall not be less than one lakh rupees but which

may extend to five lakh rupees.

Fiduciary Obligations

Duty to act for Proper Purposes:

According to this rule the directors have to use their powers within the company constitution
and only for the reasonable purposes in the best interests of the company. Furthermore,
directors are fiduciary agents of company, so they cannot use their powers beyond the
company's constitution and for their own benefits. This rule in fact gives a remedy to the
shareholders to prosecute directors. Where directors misuse their powers and their acts are
not in accordance with the constitution of the company shareholders can challenge them in
the court of law.1

Duty to use Independent Judgment:-

This duty bound the directors that they must exercise independent judgement rule and must
not fetter their discretion under any body influence. They must only work and watch the
company's interests, affairs and always use their independent opinion in the best interest of
the company rather than any other person's interests. In Fulham Football Club Ltd. v Cabra
Estates2 it was held that directors could not enter in any contract, which will restrict them to
exercise of their future discretion and how they will vote in future election.

The Duty of Care and Skill:

This duty of reasonable care, skill and diligence has got huge attention in recent years also.
This duty has been codified in section 166(3) of the Companies Act 20133. Section 174 states
that a director of any company must display the highest level of care, skill and diligence,
while performing a director duty.

1
Joyce. Lee Suet Lin, making a case for the duty to act for property purpose, Singapore Journal of legal studies,
79-97(2014)
2
[1994] 1 BCLC 363
3
AVTAR SINGH, COMPANY LAW 305 (16th ed. 2016).
In a case Dorchester Finance Co v Stebbing4 where directors did not act with reasonable care
and signed the blank cheques, which allowed the company managing director to
embezzlement. So it is declared a negligent act on the part of the directors.

Avoid conflicts or No Personal Secret Profit:-

The directors must not enter into any agreement in where company's interest is clashed with
their own interests. Furthermore, directors cannot make a secret personal profit by unfair
using of their position or authority as a director. In Aberdeen Rly Ltd. v Blaikie Brothers5 it
was held that it cannot be allowed to anyone to enter an agreement for his own interest or he
would have get an interest with this agreement or there may be a chance of clashes of others
members of company's interests.6

Duty to Disclosure Interest in proposed Transaction:

Section 2(49) and 184 of the Companies Act 2013 is about disclosure of interest by a director
towards proposed transaction or arrangement. According to these sections director of any
company who has an interest or could be beneficiary in company any ongoing or future
transaction or arrangement. Therefore, that director has to disclose his interest with full
details, “nature and extent” of that interest in on ongoing or proposed transaction
immediately.7

Duty of Good faith-

This duty is mentioned in the Section 166(2) which requires the Directors to act in
accordance with the company articles. It says that the Directors of a company have to act in a
good faith in order to promote company’s objects for the benefits off its members as a whole
they have to act in the best interests of the company, its employees, and shareholders and also
for the protection of environment.

Duty to attend Board meetings

Directors are bound to pat continuous attention to the affairs of the company. A Director is
not even bound to attend all meetings of the Board, Although He is under an obligation to
attend whenever in the circumstances he is reasonably able to do so. According to Section
167(1)(b) the office of a director will be vacated if he absents himself from all meetings of
the Board for a consecutive period of 12 months, with or without obtaining leave of absence
from the Board . Moreover, a Director’s habitual absence from Board meetings may, taken in
the light of other circumstances, become evidence of negligence on his part.

4
[1989] BCLC 498
5
(1854) 1 Macq. 461
6
Sarah Bartholomeusz, Directors duties- Duties to avoid conflicts of interests, YOU LEGAL, Mar. 2015.
7
AVTAR SINGH, COMPANY LAW 318 (16th ed. 2016).
 Breach of Directors' Duties and Their Remedies

If directors do not discharge their duties, they can hold liable for their breaches of duties.
Generally directors cannot be personally liable for action by the company due to corporate
veil concept, however there are number of circumstances, when corporate veil can be lifted
and the directors can be tried personally.

The acts and functions of directors may be wrong and erroneous but to prove their offensive
intention is not too easy rather it is very difficult to prove. if they have been found committed
breach from their fiduciary duties, there are number of remedies available to company,
shareholders, creditors and other stakeholders against them.

Unfit Directors Disqualification:

For example in the Company Directors Disqualification Act 1986 (C.D.D.A) section 6
provides the mechanism for the disqualification of rogue directors on the ground of ‘unfit' to
runs the affairs of the company. The main purpose of the disqualification of a directors
provision is to protect the public from the wrong doer director otherwise this director would
be a great harm for a public interest.

Fraudulent Trading :-

If a company become insolvent or near to declare insolvent due to director's breaches of

duties, so there are number of remedies available to the shareholders, they can prosecute
directors under fraudulent trading and wrongful trading as describes in section 212
Insolvency Act 1986.

Unfair prejudice Petition:-

Any member of the company or group of the member in company can apply to the court by a
petition for the seeking an order on the ground that company's affairs have been conducted in
a way that is unfairly prejudicial to him / petitioner or against the interests of some members
of group in the company.

Conclusion:-

The directors are of significant importance under the domain of corporate governance and
they have to perform number of duties in order to conduct the business of the company. Such
duties are duty to act as proper purpose, duty to promote success of the company, duty to use
independent judgment, duty to use reasonable care and skill etc. These duties are laid down
under section 166 of Companies Act 2013.
In above lines we also discussed the mechanism that how the duties of the directors are
enforced. There are available various kinds of methods to enforce these duties such as they
are enforced through state, by statutory enforcement and by derivative action. The main
purpose to provide this system is to secure the interest of the public in general and to the
avoid abuse of the duties given to the directors. Although there exists an organised system to
enforce these duties, but still there is a need of some improvement in the enforcement of
these duties it means that there is a loop hole in the enforcement due to which there are big
examples of recent corporate failure. So there is a need of well efficient accountability system
which should give required results.

Where directors are in the breach of the duties mentioned above there are some remedies also
available to the persons who are affected by their breaches. Mainly the breaches occur where
the directors concentrate on their personal benefits. Directors can be penalized by
imprisonment and fine and there assets can also become the assets of the company. But the
procedure to enforce those remedies is complex and costly.