As per my understanding before getting into the role, responsibility and functions of board of directors of the company it is very important to understand the meaning of the term director and board of director in the context of a company. In simple language director is a person appointed / elected by shareholders or stockholders and a group of directors collectively known as board of directors. In corporate language board of directors are known as representatives of the stockholders elected to form corporate policies, run the company and to make major financial and administrative decisions related to day to day affairs of the company.
Legal definition of term director is available in the Companies Act, 1956. According to section 2(13) of the said act, director includes any person occupying the position of a Director, by whatever name called. The above definition is not a descriptive one. However based on different interpretations, a director is a person who has been appointed by the shareholders on the Board of Directors of the company and for this appointment form 32 has been filed with Registrar of Companies of the concerned state. This form-32 is required to be filed within 30 days of appointment of director on the board of director of the company.
Something about director appointment process and appointing authority
It is worthy to note that complete procedure along with rules and regulations connected with appointment and removal of director is given in relevant sections of Companies Act, 1956. As mentioned in the introduction directors are elected by the shareholders through their general meeting resolution and directly accountable to them only for their working.
Methods for the appointment of directors
There are broadly 5 methods for the appointment of directors which are as follows:
- Appointment through Article of association as first director : It is a established practice in India which is also allowed by company law to appoint first directors of the company by naming them in article of association of the company. However if there is no name given in article for first directors, the subscribers who signed the memorandum of association of the company as first shareholders will automatically be considered as first director of the company until regular directors are appointed at the first annual general meeting of the company.
- Appointment by shareholders in the general meeting :The appointment of first directors is valid till the first annual general meeting of the company. In the first annual general meeting directors are appointed by the shareholders. Detailed provisions in this regard are given in section 255 and 256 of the companies act, 1956.
- Appointment by external agencies :In company law power has also been accorded to certain external agencies to appoint or nominate director on the board of a company. These external agencies may include Public financial institutions or banking companies. Banking companies used to appoint nominee director on the board of a company to whom loan or other financial assistance has been extended by the banking company.
- Appointment by board of directors under certain section of companies act, 1956 :Under companies act, 1956, section 260, 262 and 313 authorised board of directors to appoint new directors to ensure smooth functioning of companies work. Thus by following the provisions of section 260, 262 and 313, board of directors can appoint a new directors on the board.
- Appointment of director by central Government : Section 408 of the companies act, 1956 deal with the power of central Government to appoint a director. Section 408 is all about prevention of minority shareholders interests from oppression and mismanagement. Section 408 read with section 397 and 398 provide relief to the minority shareholders regarding It provides that the central government may appoint such number of directors on the board of the company as it may think fit to effectively safeguard the interest of the company, its shareholders, or public interest. Such an appointment shall be for a period not exceeding three years, and shall be made on the application of under companies act, 1956, section 260, 262 and 313 authorised board of directors to appoint new directors to ensure smooth functioning of companies work. Thus by following the provisions of section 260, 262 and 313, board of directors can appoint a new director on the board.
Legal position of directors
Companies act, 1956 is silent about legal position of directors. Various corporate law experts have defined legal position of directors in their own words. Some of corporate law experts define directors as agents and trustee of the company and shareholders.
Agent: A company is an artificial person in the eyes of law and cannot act like an individual on its own. A company can act through directors and that is why directors are considered as agent of the company and governed by the relation of principal and agent. Personal liability of the directors would be zero where directors act within their scope of authority and enter into contracts for the company.
Trustee:Directors are also recognized as trustee by the law. Directors are accountable for the use of company’s property and money which comes into their hands for the business of the company.
A director holds fiduciary position towards the company as far as his acts towards the company is concerned. It is an important duty of the director to use his management driven powers in the best interest of the company and shareholders because he is a representative of the company and shareholders. If he fails to do the same then this would be considered as breach or misuse of fiduciary position as fiduciary position is termed as position of trust.
If a director misuse his power for his own advantage then he would be personal liable towards company and shareholders because in the eyes of law this would be a case of breach of trust. There is also a provision of officer in default. In various sections of companies act, 1956 a director is referred as officer in default. If there is any violation of these sections then law will consider concerned director as officer in default and punish him accordingly.
To ensure justice with his fiduciary duties towards the company and shareholders, a director should act in good faith for the benefit of company. He should act honestly and should avoid any secret profit making activity using the resources of the company and his position. He should not use the powers which are not conferred on him by the management or shareholders.
Role and responsibilities of directors
As I said earlier board of directors are elected by shareholders and responsible to take all necessary steps to run and manage the company. Hence role of directors cannot be denied in the success of a company. The Companies Act, 1956, provides all the managerial powers of a company to the board of directors which should be exercised by the board with due care and caution.
Board of directors acts as bridge between the company and shareholders and third parties like business associates. Usually a director plays a double role in the management of the company. Firstly they act as an agent of the company and shareholders and secondly they act in the fiduciary capacity. In his fiduciary position a director should act within his powers and do his work on behalf of a company with greatest good faith, care, skill and in the best interest of the company.
The role of board of directors broadly includes maintain good relations and coordination among stakeholders, company and external business agencies, managing all the finance and admin related activities; ensure business growth and profitability of the company, ensuring all the government regulations w.r.t. the company.
No responsibility of director after resignation:
In a leading decided case of Suresh prabhu in 2003, Bombay High Court has held that the after acceptance of a director’s resignation he will not be liable for activities and default committed by the company. In case of resignation of the director provision of memorandum and article of association shall prevail.
Functions and powers of directors
Lots of powers are given to the board of directors in the companies act to ensure smooth functioning of the company and also to ensure proper discharge of their functions under the law. Board of directors are expected to exercise these powers in the best interest of the company.
As per section 291 of the Companies act, 1956, board of directors shall be entitled to exercise all the powers and do all such acts and things which the company is authorised to do to run the business of the company. However while using these powers directors should remain within four corners of law as these powers should only be used to achieve the main objects of the company which are mentioned in memorandum and article of association of the company.
In companies act, 1956 few acts and powers are reserved for the shareholders which shareholders can exercise through general meetings. Board of directors has no power do an act which is required to be performed by the shareholders in the general meeting. Even shareholders cannot rectify a director’s act later which was reserved for shareholders in general meeting.
General power and functions of the Board of directors
General power and functions of the board of directors are given in section 291 and 292. Section 291 we have just discussed above. Now let’s discuss some more power and functions of the board of directors given under section 292 of the companies act, 1956. Section292 confers certain powers up on board of directors which can be exercised by the board only at a duly convened board meeting by way of passing board resolution, on behalf of the company. These general powers under section 292 are as follows:
1. Power to make call on shareholders who are required to make payment to the company in respect of call money remaining unpaid on their shares.
2. Power to authorize the buy-back process pursuant to sub-section (2) of section 77A.
3. Power to issue Debentures to arrange long and short term funds to the company.
4. Power to borrow moneys by way of other options except issue of debentures.
5. Power to invest excess funds of the company to yield better returns on idle capital.
6. Power to make loans to other parties as per articles of the company.
Though these powers should be exercised by the board but an exception has been created to this rule by proviso to section 292(1) which provides that the Board may delegate power number (4), (5) and (6) to a committee of directors, the managing director, manager or a principal officer of the company. At the time of delegation of these powers board may put certain restriction to ensure fait use of these delegated powers.
More functions and powers of board of directors
Some more functions and powers assigned to the directors by the law in addition to the powers mentioned above. These powers are also required to be used by the board members in the board meetings:
1. Power to fill casual vacancy in the board caused due to death or resignation of a director.
2. Power to approve important business agreements through passing board resolutions.
3. Power to allow buy back of own shares if the buy back is up to 10% of paid up capital.
4. Power to appoint managerial personnel like managing director, whole time director and Manager.
5. Power to allow or disallow inter-corporate loans and investments.
Restrictions on the functions and powers of board of directors
There is one inbuilt mechanism in the law by way of section 293 which restricts exercise of powers by the board under certain circumstance. Section 293 sys that in certain cases powers of the board can be used subject to the approval of shareholders in the general meeting.
Let me explain this by way of an example:
Board of directors can borrow money for the company only up to the aggregate of paid up capital and free reserve of the company without specific approval of shareholders. But in case there is a need to borrow money in excess to the aggregate of paid up capital and free reserve of the company, then such board resolution can be passed subject to the approval of shareholders in the general meeting. In other words in this case resolution passed by board shall be effective only after confirmation of shareholders in the general meeting.
The importance of directors in the corporate form of business lies in the fact that company being an artificial person in the eyes of law cannot act on its behalf as a natural person. It is must for a company to delegate its powers and control of management to the responsible hands. Now the persons to whom powers and control of management is delegated is known as 'directors'. Position of directors is quite strong in law because they are also responsible to ensure good corporate governance and prevent various corporate frauds and scams.
Some time back the scam of Satyam is a burning example of involvement of board of directors in anti corporate governance practices. To prevent these kinds of scams the focus has been shifted to introduce the concept of independent directors. An attempt has been made by SEBI and Ministry of corporate affairs to strengthen the provisions related to corporate governance and independent directors to ensure proper code of conduct and transparency in the business activity of the company.
To conclude we can say that considering the role, responsibility and powers of directors in the present corporate form of business, directors are an inevitable part of a company. I hope that the above article will help you to understand the term director in a better way.
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