Directors A corporation is created, (incorporated) by a group of shareholders who have ownership of the corporation, represented by their holding of common

stock, under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. It is a articial being, invisible, intangible and existing only in comtemplation of law.

Despite not being natural persons, corporations are recognized by the law to have rights and responsibilities like natural persons ("people"). Corporations can exercise human rights against real individuals and the state, and they can themselves be responsible for human rights violations.

Meaning of Director as per the Companies Act, 1956 A company is a legal entity and does not have any physical existence. It can act only through natural persons to run its affairs. The person, acting on its behalf, is called Director. A Director is any person, occupying the position of Director, by whatever name called. They are professional men, hired by the company to direct its affairs. But, they are not the servants of the company. They are rather the officers of the company. The definition of Director includes any person who occupies the position of a director is known as Director whether or not designated as Director. It is not the name by which a person is called but the position he occupies and the functions and duties which he discharges that determine whether in fact he is a Director or not. So long as a person is duly, appointed by the company to control the company's business and, authorized by the Articles to contract in the company's name and, on its behalf, he functions as a Director.

The Articles of a company may, therefore, designate its Directors as governors, members of the governing council or, the board of management, or give them any other title, but so far as the law is concerned, they are simple Directors.

Ammendment act, 2000

Sec 252 - Minimum number of directors.

(1) Every public company (other than a public company which has become such by virtue of Section 43A), shall have at least three directors. Provided that a public company having, (a) a paid-up capital of five crore rupees or more; (b) one thousand or more small shareholders, may have a director elected by such small shareholders in the manner as may be prescribed. Explanation : For the purposes of this sub-section small shareholders means a shareholder holding shares of nominal value of twenty thousand rupees or less in a public company to which this section applies.

(2) Every other company shall have at least two directors.

(3) The directors of a company collectively are referred to in this Act as the "Board of directors" or "Board".

Position of Directors Directors are agents of the Company in transactions they enter into on behalf of the Company, though they are not agents for individual shareholders or members. A director may be an employee, a servant or even a "worker" of the Company. He occupies the position of a trustee, though he is not a trustee in the strict sense in respect of the Companys properties and funds. Directors liability arises because of their position as agents or officers of the Company as also for being in the position of trustees or having fiduciary relation with the Company or its shareholders. Some of these liabilities are in contract, some are in tort, some are under the criminal law and others are statutory, i.e., under the Companies Act, 1956 and other laws. The courts have, in deciding the liability of Directors, taken into consideration a directors position as a whole.

Directors as an agent

Sec 182.of the Indian Contract Act, 1872 says that "An 'agent' is a person employed to do an act for another or to represent another in dealings with third person. The person for whom such act is done, or who is so represented, is called the principal"

Sec. 2(13) of the Companies Act, 1956 defines that "'director' includes any person occupying the position of a director by whatever name called"

Thus, director is an individual lawfully appointed to the Board of Directors of a company which is duly constituted to direct, control and supervise the activities and affairs of a company. Directors of a company are in the eye of law agents of the company for which they act and the general principles of the law of principal and agent regulate in most respects the relationship of the company and its directors.

In Puddokottah Textiles Ltd. vs. B.R. Adityan (1975) 88 Mad. L. W. 688, 790, the Madras High Court observed that normally a director is not an agent of the Company but where he acts as a director- in- charge and corresponds with another party to bring about a contract he will act as an agent. As such the liability is of the company and not the agent personally.

The court has power under its equitable jurisdiction to award interest whenever a person in a fiduciary position, such as Director of Company, misuses money that he controls in his fiduciary capacity. Whenever the transaction in which the money used was of a commercial nature the court will presume that it was profitable and the court will give adequate compensation for the profits assumed to have been made. (Wallersteiner vs. Moir (1975) 1 All E.R. 849, 865)

In Ramprasad Vs. Commissioner of Income Tax (1973) A. Sc. 637, 640; Commissioner of Income Tax Vs. Man Mohandas (1966) A. Sc. 743; 59, I.T.R. 699, The Supreme Court has described the office of a Director thus, "The Director of a Company is not a servant but an agent inasmuch as a company cannot act in its own person but only through its directors, who qua the Company have a relationship of an agent to the principal." A managing Director may have a dual capacity. He may both be a director and an employee. He has not only the persona of a director but also the persona of an employee or an agent depending on terms of his employment and the Company's Articles Association. The term 'employee' is facile enough to cover both these relationships. An agent though bound to exercise his authority in accordance with lawful instructions given to him is not subject to the direct control and supervision of the principal. A Managing Director of a Company if he is to act under the directions of a board of Directors is a servant.

Directors as trustees

Over two centuries ago, in the first reported case of its kind, Lord Hardwicke held the committee-men or directors of the Charitable Corporation guilty of breaches of trust, for which they had to account to the corporation. The concept of the director as a trustee persists through the cases and the textbooks to this day, but its origin is ill-explained and its modern relevance pimperfectly understood. In the non-profit world, directors and trustees are often used interchangeably; intended to refer to the group of individuals responsible for the management of the activities and affairs of the corporation (e.g., board of directors, board of trustees, board of governors).

Most state non-profit laws provide a common structure from which these individuals (whether directors, trustees, or governors) may carry out those responsibilities. Simply referring to a board member as a trustee as opposed to a director should not, in and of itself, automatically convert the duties of board members to the higher trust law standard. Yet, the concern is that by referring to governing board members as trustees, as opposed to directors, the non-profit corporation may unintentionally be increasing the boards exposure to trust law arguments. Read the full article to discover whether your board members would be most accurately titled trustees or directors, and what the difference is between the two.

In Percival vs Wright Swinfen Eady J held the directors owed duties to the company and not shareholders individually. It was strenuously urged that, though incorporation affected the relations of the shareholders to the external world, the company thereby becoming a distinct entity, the position of the shareholders inter se was not affected, and was the same as that of partners or shareholders in an unincorporated company. There is no question of unfair dealing in this case. The directors did not approach the shareholders with the view of obtaining their shares. The shareholders approached the directors, and named the price at which they were desirous of selling. The plaintiffs case wholly fails, and must be dismissed with costs. The decision in Percival v Wright left a scope for the rule that when negotiations reach a certain stage of maturity a disclosure of the directors profits to the selling shareholders would be necessary, otherwise the directors would be failing in their fiduciary obligatio towards them. In situations like where the directors act as agents for the shareholders, the latter would be liable to the purchasers of their shares for any fraudulent misinterpretation made by the directors in the course of negotiations.

Director As Organs Of Corporate Body The organic theory of corporate life treats certain officials as organs of the company, for whose action the company is held liable just as a natural person is for the action of his limbs17. Thus the modern directors are more than mere agents or trustees. The Board is also correctly recognised to be a primary organ of the company. Directors and managers represent the directing mind or will of the company and control what it does. The state of mind of these managers is the state of mind of the company and is treated by law as such. The practical effects of these rules are that the directors personal fault in the business of the company becomes the fault of the company; their reason to believe is attributed to the company and the intention to occupy a premises as expressed by their conduct is the intention of the company. As in Bath v Standard Land Co. The board of directors are the brain and the only brain of the company, which is the body and the company can does and act only through them. Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705 is a famous decision by the House of Lords on the ability to impose liability upon acorporation. The decision expands upon the earlier decision in Salomon v Salomon & Co. [1897] AC 22 and first introduced the "alter ego" theory of corporate liability. The House of Lords held that liability could be imposed on a corporation for the acts of the directors by virtue that the directors are the controlling minds of the company. Viscount Haldane explained the "directing mind" principle of corporate liability:

...a corporation is an abstraction. -It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation. .... It must be upon the true construction of that section in such a case as the present one that the fault or privity is the fault or privity of somebody who is not merely a servant or agent for whom the company is liable upon the footing respondeat superior, but somebody for whom the company is liable because his action is the very action of the company itself. It is not enough that the fault should be the fault of a servant in order to exonerate the owner, the fault must also be one which is not the fault of the owner, or a fault to which the owner is privy; and I take the view that when anybody sets up that section to excuse himself from the normal consequences of the maxim respondeat superior the burden lies upon him to do so. In considering the case of Mr Lennard himself he stated: ...whatever is not known about Mr. Lennard's position, this is known for certain, Mr. Lennard took the active part in the management of this ship on behalf of the owners, and Mr. Lennard, as I have said, was registered as the person designated for this purpose in the ship's register. Mr. Lennard therefore was the natural person to come on behalf of the owners and give full evidence not only about the events of which I have spoken, and which related to the seaworthiness of the ship, but about his own position and as to whether or not he was the life and soul of the company. For if Mr. Lennard was the directing mind of the company, then his action must, unless a corporation is not to be liable at all, have been an action which was the action of the company itself.

Powers of directors

The directors powers are normally set out in the articles. The shareholders cannot control the way in which the Board of Directors act provided its actions are within the powers given to the Board. Section 291 of Companies Act, 1956 provides for general powers of the Board of directors. It mandates that the Board is entitled to exercise all such powers and do all such acts and things, subject to the provisions of the Companies Act, as the company is authorized to exercise and do. However, the Board shall not exercise any power and do any act or things which is required whether by the Act or by the memorandum or articles of the company or otherwise to be exercised or done by the company in general meeting. Power of the individual directors Unless the Act or the articles otherwise provide, the decisions of the Board are required to be the majority decisions only. Individual directors do not have any general powers. They shall have only such powers as are vested in them by the Memorandum and Articles.

In Pulbrook v Richmond Consolidated Mining Co(1878) 9 Ch D 610, an individual director sued the company in question and the other directors, the basis of his action being that he was being improperly excluded from the boardroom and from otherwise discharging his duties as a director, for the other directors treated him as being not a director at all. In the course of his judgment the Master of the Rolls said : The first question is, whether a director who is improperly and without cause excluded by his brother directors from the board from which they claim the right to exclude him, is entitled to an order restraining his brother directors from so excluding him.

In this case a man is necessarily a shareholder in order to be a director, and as a director he is entitled to fees and remuneration for his services and it might be a question whether he would be entitled to the fees if he did not attend meetings of the board. He has been excluded. Now it appears to me that this is an individual wrong, or a wrong that has been done to an individual. It is a deprivation of his legal rights for which the directors are personally and individually liable. He has a right by the constitution of the company to take a part in its management, to be present, and to vote at the meetings of the board of directors. He has a perfect right to know what is going on at these meetings. It may affect his individual interest as a shareholder as well as his liability as a director, because it has been sometimes held that even a director who does not attend board meetings is bound to know what is done in his absence.

Shareholders intervention in exceptional cases

In the modern Companies Act 2006, section 168 allows shareholders to remove of directors by a majority vote on reasonable notice, regardless of what the company constitution says. Before 1945, removal of directors depended on the constitution, however this case contains some useful guidance on how to properly construe the provisions of a constitution.

In the case of Isle of Wight Railway vs Tahourdin.The shareholders of the Isle of Wight Railway Co instructed the board of directors to call a meeting so they could (1) appoint a meeting to investigate and potentially rearrange the company's management, and also (2) decide whether to remove the present directors and elect new ones. The directors called a meeting for the purpose of considering and determining upon a demand of the requisitionists for the appointment of a committee to inquire into the working and general

management of the company and the means of reducing the working expenses. But they did not allow the meeting to concern whether they would be dismissed. Disgruntled shareholders, including Mr Graham Tahourdin, boycotted the meeting, and issued their own notice to call a meeting to remove the directors under the Companies Clauses Act 1845, section 70. The directors brought the action to restrain the meeting.

In Life Insurance Corporation of India v. Escorts Ltd CHINNAPPA REDDY J cited a passage from the speech of COTTON LJ : it is very strong indeed to prevent shareholders from holding a meeting of the company, when such a meeting is the only way in which they can interfere if the majority of them think that the course taken by the director, in a matter intra vires of the directors, is not for the benefit of the company.

Mala fide In words of FAZL ALI J of the Supreme Court: Ordinarily the directors of a company are the only persons who can conduct ligitation in the name of the company, but when they themselves are the wrong doers, and have acted malafide, and their personal interest is in conflict with their duty in such a way that they cannot or will not take steps or seek redress for the wrong done to the company, the majority of the shareholders may take steps to redress the wrong.

In Marshall's Valve Gear Co. Ltd. v Manning, Wardle & Co. Ltd [1909] Neville J refused a motion to direct the removal of the writ which had been caused to issue without a Board or general meeting decision. In that case the managing director who had caused the writ to issue controlled the majority of the shares of the company. Neville J said: Mr. Marshall has commenced an action in the name of the company for the purpose of restraining an alleged infringement on

part of the owners of the new patent, and the other directors come to the Court and ask to have the writ in that action taken off file on the ground that the action was commenced without the authority of the company. It is admitted that the calling of a of shareholders to ascertain the wishes of the company would be useless because the position of the voting power is perfectly well understood. It is divided between the persons concerned, and undoubtedly the managing director, who has commenced this action, would have the majority of votes at a general meeting, and, therefore, if it is right that effect should be given to the wishes of the majority of the company in the present case, it is admitted that no object is to be gained by calling a meeting, because the result of that meeting is a foregone conclusion.

Deadlock Another occassion for shareholder to intervene would be when the directors are unwilling to act, or, on account of a deadlock, unable to act, as in the case of Barron v Potter. When the board is incapable of taking action, power to conduct the company's affairs will revert to the general meeting.

Barron v Potter, is a case concerning the balance of power between the board of directors and the general meeting. Mr Canon Barron was not on speaking terms with Mr William James Potter, the other director of the British Seagumite Co Ltd. Their office was 28 Fleet Street. The constitution said that the quorum for a meeting was two (art 26). Mr Potter was the chairman, with a casting vote. But Mr Barron was refusing to come to meetings. So on 23 February 1914, Mr Potter came to meet Mr Barron, as he got off the train on a Paddington Station platform, from his country home (Woodham Ferris, Essex). He told Mr Barron they were now holding a board

meeting. He proposed appointing more directors. Mr Barron objected. Mr Potter said he was using his casting vote, and declared the motion effective.

There followed a general meeting at which new directors were again said to be appointed, again with Mr Barron's objection. Mr Barron sought a declaration that the appointment of the directors were ineffective, arguing that the meeting on the train station was no meeting, and that the general meeting's resolution was invalid, since the board was the only organ that could appoint more directors. Warrington J held that in view of the deadlock, the power reverted to the general meeting. In this case, the appointments were valid. There had been no proper board meeting on the train platform, but the shareholder meeting was effective afterwards.

Those observations express a principle which seems to me to be as applicable to the case of a limited company incorporated under the Companies (Consolidation) Act 1908, as to a case falling under the Companies Clauses Consolidation Act 1845, and moreover to be a principle founded on plain common sense. If directors having certain powers are unable or unwilling to exercise themare in fact a non-existent body for the purposethere must be some power in the company to do itself that which under other circumstances would be otherwise done. The directors in the present case being unwilling to appoint additional directors under the power conferred on them by the articles, the company in general meeting has power to make the appointment. The company has passed a resolution for that purpose, and though a poll has been demanded no date or place has yet been fixed for taking it. The result therefore is to grant an injunction on the motion in Canon Barron's action and refuse the motion in Mr. Potter's action.

Residuary powers

The residuary powers of a company reside in the general meeting of shareholders. Thus it has been held that where a power to allot shares is conferred by the articles of a company on its directors and they act in excess of that power a residuary inherent power remains in the company to validate the allotment by an ordinary resolution in general meeting

Board Incompetent Majority of the shareholders may exercised a power vested in the board when the directors have, for some valid reason, become incompetent to act. One situation would be when all the directors are interested in a transaction of the company. In circumstances such that a valid board could not be constituted , majority of the shareholders could act to protect the interests of the company and they could conduct the companys defence in a suit pending against it.

Powers execisable by resolution at board meeting Section 292(1) of the Companies Act, 1956 provides that the Board of directors of a company shall exercise the following powers on behalf of the company and it shall do so only by means of resolution passed at meeting of the Board: (a) the power to make calls on shareholders in respect of money unpaid on their shares; (aa)the power to authorize the buy-back referred to in the first proviso to clause (b) of sub-section (2) of section 77A; (b) the power to issue debentures; (c) the power to borrow moneys otherwise than on debentures;

(d) the power to invest funds of the company; and (e) the power to make loan.

Powers exercisable with general meeting approval

Section 293 of the Act important restrictions on the powers of the board of directors of a public company ar any subsidiary of a public company. 293. Restrictions on powers of Board (1) The Board of directors of a public company, or of a private company which is a subsidiary of a public company, shall not, except with the consent of such public company or subsidiary in general meeting,(a) sell, lease or otherwise dispose of the whole, or substantially the whole, of the undertaking of the company, or where the company owns more than one undertaking, of the whole, or substantially the whole, of any such undertaking; (b) Remit, or give time for the repayment of, any debt due by a director 1[except in the case of renewal or continuance of an advance made by a banking company to its director in the ordinary course of business; (c) invest, otherwise than in. trust securities, 2[the amount of compensation received by the company in respect of the compulsory acquisition, after the commencement of this Act], of any such undertaking as is referred to in clause (a), or of any premises or properties used for any such undertaking and without which it cannot be carried on or can be carried on only with difficulty or only after a considerable time;

(d) borrow moneys after the commencement of this Act, where the moneys to be borrowed, together with the moneys already borrowed by the company (apart from temporary loans obtained from the company's bankers in the ordinary course of business), will exceed the aggregate of the paid-up capital of the company and its free reserves, that is to say, reserves not set apart for any specific purpose; or (e) contribute, after the commencement of this Act, to charitable and other funds not directly relating to the business of the company or the welfare of its employees, any amounts the aggregate of which will, in any financial year, exceed 3[fifty thousand rupees], or five per cent, of its average net profits as determined in accordance with the provisions of sections 349 and 350 during the three financial years immediately preceding, whichever is greater. The Consent of the general meeting may be expressed by means of a resolution or informally through conduct as it happened, for example, in Joint Receivers and Managers of Niltam carson Ltd v Hawthorne. The hotel premises of the company were handed over to a director of the company inder a lease granted by the managing director without the approval of the shareholders.

Audit Committee The Companies (Amendment) Act (2000), among other things, provides for the formation and functioning of audit committees (section 292A). Similar requirements for audit committees are prescribed under clause 49 of the Listing Agreement issued by Sebi. In India, perhaps the 1992 stock market scam and liberalisation of the economy contributed more to the introduction of these requirements than did Enron. Be that as it may, these scams and corporate failures have shaken investors confidence and the whole world is watching

intently the steps being undertaken by the various statutory authorities in this respect Today the audit committee of the board is being seen as the key pivot of any company. Being mandatory under Section 292A of the Companies Act, 1956 and Clause 49 of the listing agreement, the audit committee can be of facilitator of Board to implement, monitor and continue good corporate governance practices for the benefit of the company and its stakeholders. The main function of Audit Committee is to oversee the companys financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible. The Audit Committee can recommend to the Board, the appointment, re-appointment and, if required, the replacement or removal of the statutory auditor and the fixation of audit fees. The members of Audit Committee should have formal knowledge of accounting and financial management or experience of interpreting financial statements. The Audit Committee seeks to safeguard the interests of various stakeholders of an organization. It plays a crucial role in preventing fraudulent reporting. Corporate Governance seeks to ensure ethical business conduct and encompasses the timely and accurate disclosure of financial information. Good Corporate Governance starts from the top to percolate to the bottom. Mr. N.R. Narayana Murthy, Former Chairman and Chief Mentor, Infosys Technologies Ltd. can be quoted as the best example. To conclude, the backbone of corporate governance is to ensure adherence to ethics and audit committee can act as a monitor to ensure the ethical conduct. Board Sanction when directors interested Section 297 restricts the powers of individual directors. Section 297 states about obtaining consent of the board of directors, for entering into certain contracts in

which particular directors are interested. Thus, not every contract requires consent of the board, only those contracts in which directors are interested require the consent of board. It is to be noted that usually a contract is entered into with the approval of the board, or even with the authority of the Managing Director/CEO/VP, or with the sanction of the Management Committee. But, here the only way of getting sanction for the contracts (in which directors are interested) is boards sanction. Whenever a company has to deal for the sale, purchase or supply of any material or services or for underwriting any shares or debentures withs any other partner in such farm or with private company of which such director i a member or a director, the consent of the board of directors must be obtained.

Power to make political contributions Under Section 293A of the Companies Act, 1956, companies are prohibited from making contributions to a political party or for any political purpose.

The hitherto complete ban on contribution by companies to political parties or for political purposes was relaxed to a considerable extent by the Companies (Amendment) Act, 1985, by which the existing Provisions of Section 293A of the Companies Act, 1956 were substituted with effect from May 24, 1985.