duties rights liabilities of directors

7/30/2019 Duties Rights Liabilities of Directors

1/59

RIGHTS, DUTIES,

RESPONSIBILITES &LIABILITIES OF A DIRECTOR

A PRESENTATION BY

S ESHWAR

MASTER CLASS FOR DIRECTORS, IOD

CHENNAI HOTEL RADISSON 08-08-08


2/59

HOW WE PROCEED

Section 1 FAQs, Appointment,

Remuneration & Exit of a Director.

Section 2 Role, Responsibilities,Duties & Powers.

Section 3 Liabilities of a Director.

Section 4 Role of an Independent

Director.


3/59

FAQs FROM DIRECTORS1. Is there any limit on the total number ofCompanies where I can be a Director?

Yes. A person can be a Director in a maximum of15 Companies.

Exclusion in computing the Number:(a) Private Companies (other than subsidiaries of

Public Companies);(b) Unlimited Companies;

(c) Non-profit Associations;

(d) Alternate Directorships.


4/59

FAQs contd

2. Is there a distinction between the

designation of a Managing Director & an

Executive Director?

There is no distinction under the

Companies Act, 1956 in respect of thepowers.


5/59

FAQs contd3. Is there a limit on the total number ofCompanies where I can be a Managing

Director?

If you are a Managing Director only in Private

Limited Companies and not in Public Limited

Companies, then there is no limit.

If you are a Managing Director in a Public

Company and a Private / Public Company,

the maximum is 2. (Sec. 316)


6/59

FAQs contd

4. The Company where I am a Director is

paying me negligible amount that does not

even cover my conveyance as sitting fees.

What is the law regarding sitting fees?Primarily sitting fees is governed by the

Articles of Association and Central

Government notifications.


7/59


8/59

FAQs contd

5. The Company where I am a Directorwanted me to get a DIN. What is this DIN?

DIN is the acronym for Directors

Identification Number. Every person

who is a Director should have taken a

DIN by now and any person before

being appointed as a Director requires a

DIN now.


9/59

FAQs6. Is there any declaration that I need to give the Company

where I am a Director at any time?

7. I have been appointed as a Director in another

Company, do I need to inform the other Companies where I

am a Director?

8. What should I do if there is a conflict of interest?

9. Can I enter into a contract for supply of materials /

provision of service to the Company?

10. Is there a ceiling on remuneration of a Director?

11. Can I borrow money from my Company?

12. My son has done his Software Engineering, is there

anything that I need to do before he joins the SoftwareCompany where I am a Director?


10/59

FAQs

13. I sent in my resignation from the Board of

XYZ Ltd., they are yet to give me the Form 32

filed with RoC. Has my resignation taken

effect?14. Me and my Partner are the Directors, I

feel that my Partner may chuck me out of the

Company, is it possible?

15. The Company where I am a Director has

started a business which is not there in its

Memorandum. Is that fine? Will there be any

liability on me?


11/59

WHO IS A DIRECTOR?

Companies Act - Any personoccupying the position of a director by

whatever name called. Managing Director Person vested

with substantial powers of

management. Whole-time Director includes a

person in whole-time employment.


12/59

QUALIFICATIONS OF A

DIRECTOR Educational Qualification - ??

Share Qualification Check Articles of

Association of the Company.

Disqualification Yes.

Unsound mind, Insolvent, convicted for an

offence involving moral turpitude etc.,

Not filed the annual accounts and annual

returns for a period of 3 years Public

Company.


13/59

APPOINTMENT OF A DIRECTOR

Appointment by Incorporation documents.

Appointment by Board

Additional DirectorAlternate Director

Casual Vacancy

Appointment by Shareholders General Meeting

Retirement by rotation.


14/59

APPOINTMENT OF A DIRECTOR

Appointment by Financial Institutions.

Appointment by Government.


15/59

REMUNERATION OF A DIRECTOR

Private Limited Company

No restrictions.

Public Limited Company

Remuneration of MD / ED / WTD

Maximum of 11% of the Net Profits of a Company

Where there is only 1 MD / ED / WTD 5% of NP

Where there is more than 1 MD / ED / WTD 10% for all of them put together.


16/59

REMUNERATION OF A DIRECTOR Public Limited Company

Remuneration of MD / ED / WTD

Event of No Profit or Profit inadequate

Law permits payment in excess of 5%, on a slab rate

based on effective capital Paid-up Capital + Reserves

& Surplus + LT Loans (No WCL, OD etc)

(Investments + accumulated losses + preliminary exps

not w/o.)

Less than Rs. 1 Crore (Effective Capital) Rs. 75,000More than 1 Less than Rs. 5 Crores Rs. 1,00,000

More than 5 Less than Rs. 25 Crores Rs. 1,25,000

More than 25 Less than Rs. 50 Crores Rs.1,50,000

More than 50 Less than Rs. 100 Crores Rs. 1,75,000

More than Rs. 100 Crores Rs. 2,00,000


17/59

REMUNERATION OF A DIRECTOR

Public Limited Company

Remuneration of a person who is not a MD

/ ED / WTD

To pay a monthly, quarterly or annual payment

obtain approval of Central Government

Alternate structuring

Pay 1% Commission with approval of the

Shareholders.


18/59

EMPLOYING A RELATIVE IN THE

COMPANY Office or Place of Profit held by

Partner of a Director.

Relative of a Director. Firm in which the Director is a Partner.

Firm in which a relative of a director is a

Partner.

A Private Company where a Director is a

Director or a Member.


19/59

Salary, Fees, Commission, Perquisites,

Rent Free Accommodation All are to

be taken into account for computing the

limits. Effect of not taking required approvals

Where there is no Board Approval

Appointment invalid. Where no Shareholder Approval obtained

Vacates office.

EMPLOYING A RELATIVE IN THECOMPANY


20/59

Effect of not taking required approvals

The person is liable to return the money and

monetary equivalent of the benefit /

perquisite.

Company has no right to waive the recovery

unless Central Government approval is

obtained.

EMPLOYING A RELATIVE IN THE COMPANY


21/59

LOAN FROM COMPANY

Loan by a Company to its Director, to

his relative, to any person who is a

Partner of such Director, any firm inwhich the Director or his relative is a

Partner, any private company where the

Director is a Director or Member areregulated.


22/59

LOAN FROM COMPANY

Public Limited Company Closely held

and widely held.

Private Company which is a subsidiary

of a Public Company.

For Private Company this provision is

exempt.


23/59

REQUIREMENT OF COMPANIES ACT

Approval of the Board of Directors

Approval of Central Government. Not

required for a Private Company.

Entry in Register under Section 301.

Housing Loan to Director is exempt by a

notification. Disclosure in the Balance Sheet Debts

due by directors, firms or private

companies to stated separately.


24/59

CAN I SELL GOODS OR PROVIDE SERVICES TO THE COMPANY WHERE I AM A DIRECTOR?

Sale of

Goods &Materials by

Company to-Supply of Goods

& Materials by

Company to-Provision of

Service by

Company to-Underwriting

Contract with-

p

e

r

s

o

n

Purchase of

Goods &

Materials by

Company from-

Service availed

by Company

from-

(a)A Director of the Company;

(b) Relative of a Director under Section 6 read with Schedule 1A;

(c) Partnership firm in which the Director is a Partner;

(d) Partnership firm in which the Relative (under Section 6) of a Director is a Partner;

(e) A Partner of the Partnership firm in which the Director is a Partner;

(f) A Partner of a Partnership firm in which the relative of a Director is a Partner;

(g) A Private Company in which the Director of the Company is a Member;

(h) A Private Company in which the Director of the Company is a Director.


25/59

REQUIREMENT OF THE COMPANIESACT

Approval of the Board.

If Capital of the Paid-up Company is in

excess of Rs. 1 Crore, then priorapproval of the Central Government.

Making entry in Register maintained

under Section 301.


26/59

EXIT FOR A DIRECTOR

Resignation

State the date from which Resignation should

be effective.

Check Articles whether it states anything

about resignation.

Resignation if nothing stated in Articles will be

effective from the date stated in the letter, andif no date stated then will take effect from the

date of receipt by the company, if Articles

does not have a provision for resignation.


27/59

EXIT FOR A DIRECTOR

Removal

Vacation of Office Key items

Qualification Shares not obtained.

Absents from 3 consecutive Board Meetings

held over a period of 3 months without

obtaining leave of absence.

Takes a loan from the Company in violationof the Act.

Fails to disclose interest in a contract /

arrangement.


28/59

ROLE & RESPONSIBILITY OF THE

BOARD Primary role

To develop business and add value to the

Company Value to the Enterprise

Fiduciary Duties.

Statutory Duties. Business Duties.


29/59

DUTIES, RESPONSIBILITY &

LIABILITY Duty Task or an action that a person is

bound to perform for moral or legal

reasons. Responsibility the state or position of

being responsible; the ability or authority to

act on ones own, without supervision. Liability A state of being liable (legally

obliged or responsible)


30/59

POSITION OF DIRECTOR VIS--VIS THECOMPANY

Director is a Trustee of the Company

His position is that of an Agent to theCompany.


31/59

FIDUCIARY DUTIES

The directors have several duties to discharge under the common

law some of which have been evolved by Courts from time to time,

having regard to the position of directors in the company. Some of

these duties are:

1. To exercise his power in good faith, honesty and in the interest of the

Company.

2. Not to make secret profits.

3. Duty to take care.

4. Must avoid direct or indirect personal involvement in any transaction of the

Company.


32/59

FIDUCIARY DUTIES ..

5. In case of conflict between his own interest and the interest of the

Company, he must put the interest of the Company first.

6. Must exercise reasonable skill and diligence in the discharge of his duties.

7. Not to delegate their powers, which they are, required to exercise

personally.

8. To ensure that due compliance with the provisions of the Companies Act

and all other laws, by- laws, regulations, etc.

9. To ensure that the all Government dues are paid accordingly.


33/59

POWERS OF THE DIRECTORSThe Board has the power to do everything that a

Company can do, Subject to:

i. Provisions of The Companies Act, 1956. (The Act)

ii. Provisions of Memorandum and Articles of

Association.

iii. Shareholders approval wherever required.


34/59

POWERS TO BE EXCERCISED BY

The Directors, collectively as Board are responsible for the conductof Management of the Company and have to exercise powers at

Board meetings.(section 291- 293)

(In case of emergency, by circular resolutions section 289)

The Board can delegate its powers to: -

i. Committee of Directors.

ii. Any Single Director.

iii. Managing director / Whole-time director.

iv. Any Officer.

The Delegation of powers must be done by Board resolution.


35/59

POWERS OF DIRECTORS ASINDIVIDUALS:

The Managing Director is entrusted with general powers of

management. He has to exercise the powers, subject to

superintendence, control and direction of the Board. (As per

definition under section 2(26) of the Act.

One or more Whole-time Directors can assist a Managing Director,

if required. (section 269)

The Non-executive Directors meet only at periodical Board

meetings and are not concerned with the day-to-day Management of

the Company. They involve in taking decisions, which are either

policy or the ones required to be taken by the Board under the law.


36/59

GENERAL POWERS OF THE BOARD[Section 291]:

Except where express provisions are made that the powers of a company in

respect of any matter are to be exercised by the company in general meeting, in

all other cases the Board is entitled to exercise all its powers. They are

authorised to do what the company is authorised to do, unless barred by

restrictions on their powers by the provisions of the Companies Act, 1956, the

Memorandum or Articles of the company.

Thus, from the provisions of Section 291 and the exposition of the law stated

above, it is clear that subject to the restrictions contained in the Act,

Memorandum, Articles, the powers of the directors are co-extensive with those of

the company itself.


37/59

POWERS TO BE EXERCISED ONLY ATBOARD MEETINGS [Section 292(1)]

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 resolutions passed at meetings of the Board: -

a. The power to make cal ls on shareho lders in respec t o f money unpaid on thei r

shares;

b . The power to au tho ri se the buy -back (i f it is o r less 10% o f the tot al paid -up equ it ycapita l and free reserves of th e com pany);

c . The pow er to issue deben tu res;

d . Th e p ower to b or row money s o th erwi se t han on d eb en tu res ;

e. Th e p ower to in ves t th e fu nd s o f th e c ompan y; an d

f. The powers to make loans .

The Board may by a resolution passed at a meeting, delegate to any committee of directors,

Managing Director, Manager or any other principal officer of the company or in case of a

branch office, a principal officer of that office, the powers specified in clauses (d), (e), (f).


38/59

OTHER POWERS TO BE EXERCISEDAT BOARD MEETINGS:

1. The power to fill up casual vacancies in the office of directors [Section 262].

2. The power to make donation to political parties [proviso to sub-section (2) of Section

293A].

3. The powers to accord sanction for specified contracts in which one or more directors

are interested [Section 297(4)].

4. Disclosure of interest by a director [Section 299(1)].

5. The power to receive notice of disclosure of directors interest [Section 299(3)(c)].

6. The power to receive notice of disclosure of directors' shareholding [Section 308(2)].

7. The power to appoint or employ a person as Managing Director if he is the Managing

Director or manager of one and not more than one company [Section 316(2)].

8. The power to appoint or employ a person as its manager if he is the manager or

Managing Director of other company [Section 386(2)].

9. The power to make a declaration of solvency where it is proposed to wind up the

company voluntarily [Section 488(1)].


39/59

POWERS, WHICH MUST BE EXERCISED BYUNANIMOUS VOTE AT BOARD MEETING

Power to appoint or employ a person as its Managing

Director under Section 316 or manager under section 386

if he is Managing Director or manager of one and not

more than one other company.

Power to invest in shares or debentures of any other body

corporate under Section 372A. Not Applicable for a

Private Company.


40/59

EXERCISABLE ONLY WITH THE CONSENTOF THE COMPANY IN GENERAL MEETING

(Section 293): To sell, lease or otherwise dispose of the whole or substantially the

whole of the undertaking.

To remit or give time for the re-payment of any due by a Director.

To invest, otherwise than in trust securities, the amount of

compensation received by the Company on compulsory acquisition of

its property or undertaking.

To Borrow money where aggregate borrowing exceeding companys

paid up share capital and free reserves.

To Contribute to charitable or other funds.


41/59

LIABILITIES OF DIRECTORS

Civil and Criminal liabilities grouped under the following heads:

Liabilities to outsiders

Liabilities to the Company

Liabilities to the shareholders

Liabilities for statutory defaults and violations


42/59

LIABILITIES TO OUTSIDERS

They are personally liable to outsider parties in the following cases:

a. When they enter into contract on behalf of the Company if:

Contracts are ultra vires the Company

They act outside the scope of the scope of their own authorityThey act in their own name and not forand on behalf of the Company

b. When they issue Prospectus:

in violation of the provisions of the Companies Act which contains mis-statements

c. when they found guilty or fraud;

d. when they allot shares in irregular manner.

e. When their liability becomes unlimited under section 322 & 323.


43/59

LIABILITIES TO THE COMPANY

Cases:

Negligent in the performance of their duty

and the Company suffers loss

Acts ultra vires their power or the

Company

Breach of trust


44/59

LIABILITIES TO THE SHAREHOLDERS

They work as trustee of the Companys

property. They will be liable if

Breach of duty.

Wrongful use of their rights.

Personally liable if shareholders suffer

loss.


45/59

STATUTORY DEFAULTSDirectors are liable for consequences of the followingsituations

Failure to distribute dividend within 30 days of declaration

(imprisonment upto 3 years) section 207

Knowingly participating / voting in Board proceedings u/s 300

(fine upto Rs. 50,000) section 300(4)

Fails to disclose interest u/s 299 (fine upto Rs. 50,000) Section

283(1)(l)

Knowingly become party by contravening section 295 (fine upto

Rs. 50,000 or imprisonment upto 6 month)


46/59

CRIMINAL LIABILITY REMEMBER ALL OFFENCES UNDER ANY ECONOMIC LEGISLATION IS

TRIED IN A CRIMINAL COURT

Section 44(4)- Filing of prospectus containing untrue statements two years imprisonment and/or fine upto Rs.50,000.

Section 58A(6)(b)- Inviting deposits in contravention of the Rules, ormanner or conditions-five years imprisonment and fine.

Section 58A(10)- Failure to repay deposits as ordered by the CLB -Three years imprisonment.

Section 63 Criminal liability for mis-statement in prospectus-

Imprisonment upto two years or fine upto Rs.50,000 or both. Section 68- Fraudulently inducing persons to invest money-

Imprisonment upto five years, or fine Rs.1,00,000.


47/59

CRIMINAL LIABILITY Section 73- Failure to repay excess application money-imprisonment

upto one year and fine upto Rs.50,000.

Section 105-Concealing name of creditor-Imprisonment upto one

year or fine or both.

Section202(1)-Undischarged insolvent acting as director-

Imprisonment upto two years or fine upto Rs.50,000 or both.

Section 207 Default in distributing dividends- imprisonment upto 3

years and fine upto Rs.1,000 for every day.

Section 209A- Failure to assist Registrar or any officer so authorised

by the Central Government in inspection of books of account, etc-

imprisonment upto one year and fine not less than Rs.50,000.


48/59

CRIMINAL LIABILITY Section 210(5)- Failure to lay balance sheet etc.at annual general meeting-

imprisonment upto six months or fine upto Rs.10,000 or both.

Section 211(8)- Failure to comply Section 211 regarding form of balance

sheet and matters to be stated- imprisonment upto six months or fine upto

10,000.

Section 217(5)- Failure to attach to balance sheet a report of the Board

imprisonment upto six months for each offence or fine upto Rs.20,000 or

both.

Section 221(4)- Failure to supply information to auditor-Imprisonment upto

six months, or fine upto Rs.50,000 or both.

Section 250(9))- Improper issue of shares- imprisonment upto six months or

fine upto Rs.50,000 or both.


49/59

LIABILITY UNDER OTHER

ENACTMENTS Offences by Companies

If the person contravening any of the said

provisions is a company, every person who atthe time of the offence was committed was in

charge of, and was responsible to, the

company for the conduct of the business of

the company, as well as the company, shallbe deemed to be guilty of the contravention

and shall be liable to be proceeded against

and punished accordingly.


50/59

DEFAULT UNDER COMPANIES

ACT Officer in Default

Managing Director(s)

Whole-time Director(s) Manager

Secretary

Any person in accordance with whose directions or

instructions the Board is accustomed to act A person charged by the Board with responsibility of

complying with that provision.

Where a company does not have 1st 3, all Directors.


51/59


ENACTMENTS Labour Laws

Factories Act Only a Director can be

appointed as an Occupier. ESI MD is prima facie incharge of and

responsible forcompanys affairs and can be

prosecuted Karnataka HC.

EPF Raj. HC allowed prosecution of MD ashe was responsible for and incharge of

companys affairs.


52/59


ENACTMENTS Income-tax Act Kerala HC Companys

arrears of tax dues cannot be recovered

from directors personally. Income-tax Act SC MD was held liable

in the capacity of a principal officer under

the IT Act, for false verification of income-tax return.


53/59

LIABILITY UNDER OTHERENACTMENTS

Perjury Cal HC allowed prosecution

of MD for false statements made in a

civil action initiated by the Company. Pollution Laws P&H HC Persons

who are responsible for conduct of day-

to-day business of the Company will beliable to be prosecuted for offence.


54/59

BEFORE JOINING

Annual Report-last three years

Do an inspection / search on thecompany at the Roc.

Visit the website

Do a google search about thecompany for newspaper reports


55/59

ROLE OF AN INDEPENDENTDIRECTOR

Statutory Role

Audit Committee Sec. 292A Only

Public Companies having Paid-up Capitalin excess of Rs. 5 Crores.

Remuneration Committee Sch. XIII

Decide remuneration of MD / ED / WTD in

the event of Loss or Inadequate Profits.


56/59


Expected Role

Establish Governance Values and practices in

business model of companies. Bring an independent view on issues of

strategy, policy, performance, accountability,

resources, key appointments and standards of

conduct.

Scrutinise the companys performance in

achieving agreed corporate goals and

objectives.


57/59


Monitor the reporting of performance.

How to be a good independent director the

Derek Higgs definition: Non-executive directors need to be sound in

judgement and to have an inquiring mind. They

should question intelligently, debate

constructively, challenge rigorously and decidedispassionately. And they should listen sensitively

to the views of others, inside and outside the

board.

A G M d l


58/59

A Governance Model

Company

Board of

Directors

Management

Shareholders Stakeholders Creditors

Supervisory &

enforcementauthorities

Executive

Directors

Owner

Directors

Independent

Directors


59/59

THANK [email protected]

www.eshwars.com
mailto:[email protected]:[email protected]

duties rights liabilities of directors

Documents