A director is appointed to manage the affairs of the company. He is responsible for formulation and implementation of the policy of the company for its effective functioning. He is also responsible for taking various important decisions which he considers necessary for the success of the company.

Obligation of Director

Director is responsible to manage the company for the best interest of stakeholders. He must not allow his personal interest to affect the interest of the company. The director must ensure that the company’s obligations are fulfilled.   

A director must:

1)   Act in good faith– A director holds an important position in the organization. He is responsible to promote the success of the company. Therefore he must act in the best interest of the company.

2)    Achieve the objectives– Director is responsible for the accomplishment of the goal of the organization.   

3)    Prohibited business– Director should avoid carrying the business of the company which is detrimental to the interest of the company and its Stakeholders.

4)    Exercise due diligence– Director must exercise the same care, skill and diligence that would be exercised by a reasonably diligent person while performing his duties.

5)    Declaration of interest– Section 177 states that if a director is directly or indirectly interested in a proposed transaction or arrangement with the company he must declare the nature and extent of that interest to the board before the company enters into that transaction or arrangement.

6)    Benefit from the third party– Directors must not receive any benefit from the third party which is likely to affect the interest of the company and its Stakeholders.

7)    Maintaining records-The director is responsible for managing and safekeeping of necessary documents, records relating to minutes of director and shareholders meeting, directors interest register, share register, etc.

8)    Secrecy– Director must not disclose any confidential information to anyone which he received while acting in the capacity of the director without the approval of those whose interest is likely to get affected from such disclosure.

9)    Other obligation– Along with the above-mentioned obligation there are certain other obligations of the director. He should ensure that company had adequate assets to discharge its liabilities and repay its debt in proper time.

Responsibility of director in Small Companies

In small companies and start-ups, the promoters and advisors often serve the company as directors. However, their role as a director is different. Thus they will have to act differently in a different scenario. Small businesses don’t have a board of directors because they cannot afford one and because their owners don’t think they need one. In fact, the perception of most small business owners is that “a board of directors is only for big business.” This is not true though, as most entrepreneurs desperately need a source of advice and support and the accountability of having to report to someone. A small company in some case may have only one director.

Directors of such business continually need to be reminded that a company is its own entity, and has a distinct legal existence that is separate from that of its owner, manager, operator, employees and agents.

The responsibility of director in a small company is almost similar to the directors of a big company.  A Director of a small company is responsible:

1)    Compliance– For ensuring that the company complies with all those obligations imposed on them.

2)    Sincere in approach– He must be honest and careful in dealing with the company and on its behalf with others.

3)    Repayment of loan-Ensuring that company pay its debts on time and keeps proper financial records which shows the true financial position of the company.

4)    Accurate information– A director must be fully up-to-date on what company is doing and in what manner its business is being conducted.

5)    A duty of loyalty– the directors of the company must act in the best interest of the company and avoid acting in their personal interest.

6)    Advice from professionals– The director who often take most of the decision by himself may get professional advice or any information if there is any doubt.

7)    Meeting– In a small business undertaking there is often one director of a company. Such director must take an active part in the meeting of the company.

8)    Utilisation of information– Directors must use the information he gets through his position properly and in the best interests of the company.

Who are prohibited to act as a director?

 Certain people are prohibited from acting as a director. They are:

1)    Persons under 18 years of age.

2)    Insolvent person.

3)    A person adjudged as an unsound mind.

4)    A person who has been convicted for any offense involving moral turpitude.

5)    A person disqualified under any other law for the time being in force.

6)    A person acting as an auditor of the company.

7)    Any other provisions as prescribed under Companies Act or any other law for time being in force.

Liabilities of Director

Under Companies Act 2013, directors may be held liable as officers of the company. The word officer has been defined to include, inter-alia directors of the company. The Directors will be responsible for contravention of the provisions of Companies Act 2013 by the company.

A director can also be made liable for fraud. According to section 447 of Companies Act 2013 Fraud in relation to affairs of a company includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether there is any wrongful gain or not. 

Any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud. Where the fraud in question involves public interest, the term of imprisonment shall not be less than three years.

Section 172 of Companies Act, 2013 states that if a company contravenes any of the provisions of CHAPTER-XI (Appointment and Qualification of Directors) for which no specific punishment is provided therein, the company and every officer of the company who is in default shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees.  

From the above discussion, we can conclude that the director holds the utmost important position in the organization. He will be responsible for managing the affairs of the company and at the same time he will be held responsible for contravention of provision of the act or loss caused to interested party because of his negligence until he proves that the loss caused or contravention occurred not because of his negligence or he exercised reasonable care to avoid such breach. Therefore it is necessary for the directors to work in the best interest of the company and to avoid conflict of interest so that the objectives of the organization can be achieved.

This article was drafted with the help of inputs provided by Nikhil Sharma from our Corporate Law Team. If you have any queries feel free to drop a line at info@taxmantra.com.