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INTRODUCTION
1.1 Director An Introduction
The
pnncipal
role
of
the
board
of
directors
as
representatives
of
the
shareholders, is to oversee the function of the organization and ensure that it continues to
perate in the best interests of all stakeholders. Given the complexity of today's rgamzations,
that is no simple or straightforward task. Today, board effectiveness is a key performance
dnver of the Indian companies.
With expectations of them continuing to increase, boards can take several actions lo govern
more effectively Indian boards must move away from being a rubber stamp to emg a
strategic asset for the company. They need to set the tone from top in promoting a transparent
culture that promotes effective dialogues among the directors, senior management,
and vanous function and nsk managers. Boards should look beyond the old boy network'
and select directors with individual areas of expertise, and invest on an ngoing basis on
their
formal
and
informal
education.
Independent directors
should significantly
contribute to the functioning of the board through requisite understanding of e company and
the business. Boards must take a hard look at its own performance valuation and enable
continuous feedback and communication cycle. Effective boards build capabilities within
themselves and their organizations that llow them to do both, protect existing assets
(compliance role), as well as, manage eats to future growth (strategy oversight role). This
section of the site includes a range f useful publications relating to improving the
effectiveness of the board. The liability regime of executive and non-executive directors in
companies nstitutes a necessary corollary to control issues within a company It is based on
the etermmation of specific duties, it establishes the limits of management behaviour and it
rovides stakeholders and thud parties dealing with the company with legislative
protection against management misconduct. In that respect, directors' liability is an
unportant and effective compliance and nsk-allocation mechanism.
The comparison and analysis regardmg the substantive law govemmg directors duties covers
a wide range of matenal and procedural aspects, notably (i) where and how directors' duties
are addressed m the law
addressees of duties, (iii) how the mterest of the company is defined; (iv) what represents
the matenal content of the directors' duties
of habihty, covenng m particular the extent to which an mdividual director is Iiable for
decisions taken by the board, (vi) further, it describes the type of habihty flowmg from
breaches of the duties, and limitations to the habihty
Day-to-day management of a company is delegated to the directors by its shareholders.
Directors are imtially appomted by the shareholders and can usually themselves appomt
additional directors up to any hrmt set by the articles of association.
The decisions of the directors are taken collectively by the board of directors. A director
cannot act as a director on his own unless only one director has been appomted. Decisions
are either taken by majority vote at board meetmgs or by the signmg by all the directors of a
written resolution.The director's role and his powers are pnmarily defined m the company's
articles and, if he is also an employee, in his service contract.
The mere fact of appomtment does not normally give a director any executive powers. Most
directors are, however, also employees of the company with specific powers delegated
to them. A managmg director usually has extensive powers to take day to-day decisions on
behalf of the company Other directors such as sales directors or finance directors will have
a more limited role.
Directors owe a duty to the company and, if msolvency threatens, to creditors. Certam key
duties of directors have been placed on a statutory footmg under the Compames Act 2006
(the "Act") These duties are owed to the company Directors are also subject to a number of
other statutory requirements and restnctions. These mclude a duty to keep proper books
and records and restrictions
acceptmg loans from the company Breach of these duties and requirements can result m a
director bemg disqualified from actmg as a director and m many cases can lead to the
director mcumng personal habihty Insurance can be obtamed to cover some cases of personal
habihty
The orgamsation and structure of boards, covenng the choice between one her and two her
structures, the roles of employee representatives and the appointment and dismissal process.
The substantive provisions on directors' duties. This is the main part of the analysts,
compnsing the issues of who owes the duties and to whom, which are the interests of
the company; and the content of the duty of care and the duty of loyalty Further, it describes
the type of habihty flowing from breaches of the duties, and hrmtations to the habihty
Questions of enforcement, i.e. who has the standing to sue and whether a
derivative action ts possible.
Duties in the vicuuty of insolvency, in particular to file for insolvency and the
prohibition to engage in wrongful tradmg. Further, whether there are other
changes to directors' duties in the vicinity of insolvency, and whether there is a
duty to recaprtahze or a mere duty to call a meeting.
Cross-border issues, notably the influence of the real seat or the incorporation
theones on the law applicable to directors' duties.
GENERAL RESOURCES
Brown, Jim. The Imperfect Board Member: Discovering the Seven Disciplines
of Governance Excellence.San Francisco, CA: Jossey-Bass Publishers, 2006. 204
p1 Brown uses a fictional story to outhne seven pnnciples
effective boards.
The
protagomst
discovers
that
boards
be not
only
experienced,
or "smart,"
Brown
emphasizes
executive officer, capitahzes on the assets of the board members, carefully designs its
rmsston and structure, accepts the leadership role m producmg mnovation, takes part
m budget
connections.
and operational
external
relations
using its
Exceptional Board
Practices:
The
Source
white papers
transparency,
Exceptional Board Practices The Source m Action. Washmgton, DC BoardSource, 2007 xiii,
Non profit Board Answer Book: A Practical Guide for Board Members and Chief
Executives.
Panel on the Nonprofit Sector. Principles for Good Governance and Ethical
Practice: A Guide for Charities and Foundations. Washington, DC: Independent
Sector, 2007. 28 p6 The guide outlines 33 practices designed to support board
members and staff leaders of every charitable organization as they work to improve
their own operations. The Panel on the Nonprofit Sector incorporated a careful review
Collaboration I Partnerships
O'Connell, Brian. The Board Member's Book: Making a Difference in Voluntary Organizations.
3rd ed. New York, NY: Foundation Center, 2003. viii, 248 p
6
A Guide for Charities and Foundations. Washington, DC: Independent Sector, 2007. 28 p
DeVita, M. Christine. "Constructing a Partnership."
198 p8 This book homes m on the special relationship between the board and
the executive director, emphasizing the nature of mutual expectations of this
shared leadership role. The responsibilities of the team are outlmed, and mclude
mission and strategic plannmg, financial governance, fundraismg, and marketmg.
The particular challenges are also explored. Special resources, such as a sample
board-staff contract, board self-assessment, code of onlme practices, are appended.
With bibliographical references and an mdex.
Williams, Sherill K. and Kathleen A. McGinnis. Getting the Best from your
Board: An Executive's Guide to a Successful Partnership. Washington, DC:
BoardSource, 2007. x, 63 p9 Focuses on the special relationship between the CEO
and the board. With bibliographical references.
LEADERSHIP
Carver, John. Boards that Make a Difference: A New Design for Leadership in
Nonprofit and Public Organizations. 3rd ed. San Francisco, CA: Jossey-Bass
Publishers, 2006. xxviii, 418 p10 Onents board members to their role as strategic
leaders, emphasizing the necessary aspects of governance: makmg policy, articulatmg
the organization's mtssion, and sustammg its vision. Helps boards to concentrate their
energies on the overall purpose of their organization and guides them m workmg with
managers to accomplish that purpose. Presents procedures for evaluatmg the
executive staff, organizmg committees, delegating authority to management, makmg
decisions as a board, and estabhshmg bylaws for the board's self-governance. With
bibliographical references and mdex.
8
9
10
Reframing
the Work
of Nonprofit
Boards.
Hoboken,
NJ:
John Wiley & Sons, 2005. xxvi, 198 p11 Notmg that board oversight is now frontpage subject matter due to recent controversies, the authors have developed the
principles in this book as part of a larger Governance Futures Project. They present
Wertheimer, Mindy R. The Board Chair Handbook. 2nd ed. Washington, DC:
BoardSource, 2008. viii, 91 i3p. This guide explams the many factors that should be
considered when a person is deciding to accept the responsibility of bemg a board
chair Also delves mto the role of the chair, partnership with the chief executive, and
the importance of excellent communication. Includes numerous sample documents
such as a fundraismg letter to board members, job descriptions for board members,
and a letter requestmg terrmnation. With bibliographical references.
Werther, William B., Jr. and Evan M. Berman. "Leading the Transformation of
Boards." Nonprofit World vol. 22 (March-April 2004) pi4 9, 11-3. The authors
ahgn the life cycle stages of a nonprofit organization (start-up, growth, and matunty)
with changmg expectations and roles for board members.
11,
12Cialdini,
13
Robert B. "A Board Member's Guide to Influence." Associations Now vol. 3 (January 2007) p.
Wertheimer, Mindy R. The Board Chair Handbook. 2nd ed. Washington, DC: BoardSource, 2008 viii,
Werther, William B., Jr and Evan M. Berman."Leading the Transformation of Boards." Nonprofit World
14
LEGAL RESPONSIBILITIES
potential conflict of mterest issues that may anse when board members have techmcal
expertise, such as lawyers, financial advisors, or funders.
Bryson, Ellen and Andrew Schulz. Top 10 Ways Corporate Foundations Get into
Trouble. Washington, DC: Council on Foundations, 2004i6 21 p. Bnef guidelmes
for board members of corporate foundations, specifically related to certam aspects of
law self-deahng, disqualified persons, conflict of mterest, quid pro quo grants,
employee pledges and matchmg gifts, tickets to fundraismg events, shanng resources,
grants to mdrviduals, scholarships, grants to organizations that are not chanties, and
mternational grantmakmg.
15Bobowick,
Marla J "Rules for Board Members Who Provide Professional Services." Exempt, (September-
October 2007): p.
16
Bryson, Ellen and Andrew Schulz. Top 10 Ways Corporate Foundations Get into Trouble. Washmgton,
Tesdahl, D. Benson. The Nonprofit Board's Guide to Bylaws: Creatmg a Framework for Effective
research.
methodology
based
Qualitative
methodologies
research
an
insight
unstructured
and
and understanding.
exploratory
Quantitative
research is aimed to measure data and used some form of statistical analysis.
Several studiesmentioned
case studies)
is surtable m E-commerce
research.
This is because
the strength
of the
qualitative approach based man ability to investigate human subject motivation and actions
withm a research study, thus the nchness and detail data can be exposed m commerce
study
mto consideration. These methodologies are explamed m the next section below
Interviews
Aakerexplamed
because
that interview
information
and immediate
feedback.
Without
the
interviews, it would have been difficult to obtam important facts for this study This ts one
of the ways to get clanfication and explanation from the parties mvolved.
Personal interviews with lengthy structured interviews were earned out on this study The
interviews were conducted by e-mail, thus the result of the findmgs can be obtamed m
accurate and complete outlme. Another reason for usmg e-mail is that it is easy and faster
to gather and analyse the findmgs. However, lack of respond m answenng questions
occur
as researcher
cannot
probe
interviewees
directly
may
The interviews procedure, firstly, involved choosmg consultants, analysts, and wnter from
Malaysia and Indonesia (Appendix 18). These respondents were selected because they (1)
were familiar
SMEs and E-commerce, hence the respondents would be able to provide new mformanon for
this study
The interview questions were formulated to gather information from the impact of the
Tomatsky and Fleischer's model on SMEs' adoption and implementation of commerce.
The questions covered subjects such as level of E-commerce technology sophistication and
use in SMEs, major reasons, factors or people responsible for the adoption and extent of
implementation of E-commerce m SMEs, major reasons or factors facihtatmg or preventmg
from usmg E-commerce, etc. A pilot study was used with two IT consultmg firms in both
countnes. On this base, the questions were revised to improve the understandability of the
questions.
Case Study
Although respondents certainly can contribute significantly to this study, they are not
directly involved m the implementation and adoption of E-commerce. They merely give
opimons and ideas based on their observation and research studies.
Also any important issues which are covered directly in interviews were missed. The
questions of interview can show questions such as 'benefits of E-commerce' or 'what factors
are important', but fell short of addressing 'Its reasons and understand the problems'
To explore these questions, an interactive approach such as a case study was needed.
The ments of case study have also been discussed by other researchers. Benbasat et al.
pointed out that such approach is suitable for investigating "certain types of problems
those m which research and theory are at their early, formative stages, and sticky, practicebased problems, where the experiences of the actors are important and the context of action
are cntical." The way to conduct a case study, as Poon suggested, is "to do it the same way
as multiple expenments
Directors are mostly professional men hired by the company to managed its affairs and they
are not the servant of the company rather they are officers of the company there is no
exhaustive definitions of the duties of the Directors but based on the analysis of the
provisions of company act 1956 some general duities of directors are as follows - To file
return of allotments. a company must file with the registrar withm a penod of 30 days, a
return of the allotment, statmg the specified particulars and its failure leads to default with a
fine.
A company can enter mto contract with the director who rs mterested but such
director cannot vote m his mterest;
To prepare and place before the AGM, along with the balance sheet and profit and
loss account, a report on the company affairs mcludmg the report of the Board of
Directors,
>
>
>
>
>
CHAPTER II
DIRECTOR - INTRODUCTION
2.1 DIRECTOR
"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 given in this clause is an inclusive definition. It 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.
Directors are responsible for managing the company's day-to-day business and may, or
may not, be shareholders. Directors owe duties to the company, to its shareholders,
and to others dealing with the company.
of a company or organization.
or appointed
Other
names
members
include board
of governors,
board of managers, board of regents, board of trustees, and board of visitors. It is often
simply referred to as "the board".
A board's activities are determined by the powers, duties, and responsibilities delegated to
it or conferred on it by an authority outside itself. These matters are typically detailed in the
organization's bylaws. The bylaws commonly also specify the number of members of the
board, how they are to be chosen, and when they are to meet.
In an organization with voting members, the board acts on behalf of, and is subordinate
to, the organization's full group, which usually chooses the members of the board. In a stock
corporation,
management
membership,
the board is elected by the shareholders and is the highest authority in the
of the
corporation.
In a non-stock
corporation with
no general voting
the board is the supreme governing body of the institution; its members are
Selecting,
appointing,
supporting
and reviewing
the performance
of the chief
executive;
trading
Directors
are typically
much
For companies
more
rigorous
with
and
The directors of an organization are the persons who are members of its board. Several
specific terms categorize directors by the presence or absence of their other relationships
to the organization.
A. Inside Director
B. Outside Director
A. INSIDE DIRECTOR
An
inside
director
is
director
who
ts
also
an
employee,
officer, major
A Chief Executive Officer (CEO) who may also be Chairman of the Board
Other executives of the organization, such as its Chief Financial Officer (CFO)
Representatives of other stakeholders such as labor unions, major lenders, or members of the
community in which the organization is located
An inside director who is employed as a manager or executive of the organization
is
An outside director is a member of the board who is not otherwise employed by or engaged
with the organization, and does not represent any of its stakeholders. A typical example is a
director who is president of a firm in a different industry.
Outside
directors
bring outside
experience
watchful
directors
shareholders
in handling
and perspective
between
inside
is run. Outside
directors,
or between
objective and present little risk of conflict of interest. On the other hand, they might lack
familiarity with the specific issues connected to the organization's governance.
PROCESS
The process for running a board, sometimes called the board process, includes the selection
of board members, the setting of clear board objectives, the dissemination of documents or
board package to the board members, the collaborative creation of an agenda for the
meeting, the creation and follow-up of assigned action items, and the assessment of the
board process through standardized assessments of board members, owners, and CEOs. The
science of this process has been slow to develop due to the secretive nature of the way most
companies run their boards, however some standardization is beginning to develop. Some
who are pushing for this standardization in the USA are the National Association of
Corporate Directors, McKinsey Consulting and The Board Group.
NON-CORPORATE BOARDS
The role and responsibilities of a board of directors vary depending on the nature and type of
business entity and the laws applying to the entity. For example, the nature of the business
entity may be one that is traded on a public market (public company), not traded on a public
market (a private, limited or closely held company), owned by family members (a family
business), or exempt from income taxes (a non-profit, not for profit, or tax-exempt entity).
There are numerous types of business entities available throughout the world such as a
corporation, limited liability company, cooperative, business trust, partnership, private
limited company, and public limited company.
Much of what has been written about boards of directors relates to boards of directors of
business entities actively traded on public markets. More recently, however, material is
becoming available for boards of private and closely held businesses including family
businesses.
A board-only organization is one whose board is self-appointed, rather than being
accountable to a base of members through elections; or in which the powers of the
membership are extremely limited.
CORPORATIONS
In a publicly held company, directors are elected to represent and are legally obligated
to
represent
the
interests
of
the
owners
of
the
company the
Theoretically, the control of a company is divided between two bodies: the board of
directors, and the shareholders in general meeting. In practice, the amount of power
exercised by the board varies with the type of company. In small private companies, the
directors and the shareholders are normally the same people, and thus there is no real
division of power. In large public companies, the board tends to exercise more of a
supervisory role, and individual responsibility and management tends to be delegated
downward to individual professional executives (such as a finance director or a marketing
director) who deal with particular areas of the company's affairs.[14]
Another feature of boards of directors in large public companies is that the board tends to
have more de facto power. Many shareholders grant proxies to the directors to vote their
shares at general meetings and accept all recommendations of the board rather than try to
get involved in management, since each shareholder's power, as well as interest and
information is so small. Larger institutional investors also grant the board proxies. The
large number of shareholders also makes it hard for them to organize. However, there
have been moves recently to try to increase shareholder activism among both institutional
investors and individuals with small shareholdings.A contrasting view is that in large public
companies it is upper management and not boards that wield practical power, because boards
delegate nearly all of their power to the top executive employees, adopting their
recommendations almost without fail. As a practical matter, executives even
the directors, with
choose
DUTIES
The
directors
exercise
control
and
management
over
the
organization,
but
organizations are run for the benefit of the shareholders, the law imposes strict duties on
directOrs in relation to the exercise of their duties. The duties imposed on directors are
fiduciary duties, similar to those that the law imposes on those in similar positions of trust,
agents and trustees.
The duties apply to each director separately, while the powers apply to the board jointly.
Also, the duties are owed to the company itself, and not to any other entity. This does not
mean that directors can never stand in a fiduciary relationship to the individual shareholders;
they may well have such a duty in certain circumstances.
"PROPERPURPOSE"
Directors must exercise their powers for a proper purpose. While in many instances
an improper purpose is readily evident, such as a director looking to feather his or her own
nest or divert an investment opportunity to a relative, such breaches usually involve a breach
of the director's duty to act in good faith. Greater difficulties arise where the director, while
acting in good faith, is serving a purpose that is not regarded by the law as proper.
"UNFETTERED DISCRETION"
Directors cannot, without the consent of the company, fetter their discretion in relation to
the exercise of their powers, and cannot bind themselves to vote in a particular way at future
board meetings. This is so even if there is no improper motive or purpose, and no personal
advantage to the director.
This does not mean, however, that the board cannot agree to the company entering into a
contract which binds the company to a certain course, even if certain actions in that course
will require further board approval. The company remains bound, but the directors retain the
discretion to vote against taking the future actions (although that may involve a breach by
the company of the contract that the board previously approved).
As fiduciaries, the directors may not put themselves in a position where their interests
and duties conflict with the duties that they owe to the company. The law takes tJJe p)ew
tJJ;;tgooo f;;)tJJ mvst 220! 022)ybe 0022e, bot mvst be mt1miest}yseen to be done,
and zealously
patrols the conduct of directors in this regard; and will not allow directors to escape
liability by asserting that his decision was in fact well founded. Traditionally, the law has
divided conflicts of duty and interest into three sub-categories.
TRANSACTIONS WITH THE COMPANY
By definition, where a director enters into a transaction with a company, there is a conflict
between the director's interestand his duty to the company (to ensure that the company gets
as much as it can out of the transaction). This rule is so strictly enforced that, even where
the conflict of interest or conflict of duty is purely hypothetical, the directors can be
forced to disgorge all personal gains arising from it.
"A corporate body can only act by agents, and it is, of course, the duty of those agents so to
act as best to promote the interests of the corporation whose affairs they are conducting.
Such agents have duties to discharge of a fiduciary nature towards their principal. And it is a
rule of universal application that no one, having such duties to discharge, shall be allowed
to enter into engagements in which he has, or can have, a personal interest conflicting or
which possibly may conflict, with the interests of those whom he is bound to protect... So
strictly is this principle adhered to that no question is allowed to be raised as to the fairness
or unfairness of the contract entered into ... "
However, in many jurisdictions the members of the company are permitted to ratify
transactions which would otherwise fall foul of this principle. It is also largely accepted
in most jurisdictions that this principle can be overridden in the company's constitution.
In many countries, there is also a statutory duty to declare interests in relation to any
transactions, and the director can be fined for failing to make disclosure.[38]. Directors must
not, without the informed consent of the company, use for their own profit the company's
assets, opportunities,
prohibition
or information.
This prohibition
than the
against the transactions with the company, and attempts to circumvent it using
Directors cannot compete directly with the company without a conflict of interest arising.
Similarly, they should not act as directors of competing companies, as their duties to each
company would then conflict with each other.
COMMON LAW DUTIES OF CARE AND SKILL
"A director need not exhibit in the performance of his duties a greater degree of skill than
may reasonably be expected from a person of his knowledge and experience."
However, this decision was based firmly in the older notionsthat prevailed at the time as to
the mode of corporate decision making, and effective control residing in the shareholders; if
they elected and put up with an incompetent decision maker, they should not have recourse
to complain.
"Such care as an ordinary man might be expected to take on his own behalf."
This was a dual subjective and objective test, and one deliberately pitched at a higher
level.
More recently, it has been suggested that both the tests of skill and diligence should be
assessed objectively and subjectively; in the United Kingdom, the statutory provisions
relating to directors' duties in the new Companies Act 2006 have been codified on this basis.
In most jurisdictions, the law provides for a variety of remedies in the event of a breach by
the directors of their duties:
Injunction or declaration
Damages or compensation
Account of profits
Summary dismissal
THE FUTURE
Historically, directors' duties have been owed almost exclusively to the company and its
members, and the board was expected to exercise its powers for the financial benefit of
the company. However, more recently there have been attempts to "soften" the position, and
provide for more scope for directors to act as good corporate citizens. For example, in the
United
Kingdom,
the Companies
Act
2006 requires
directors
of companies "to
promote the success of the company for the benefit of its members as a whole" and sets
out the following six factors regarding a director's duty to promote success:
operations
on the community
and the
environment
The desirability
a reputation
for high
1. Provide continuity for the organization by setting up a corporation or legal existence, and
to represent the organization's point of view through interpretation of its products and
services, and advocacy for them.
2. Select and appoint a chief executive to whom responsibility for the administration of the
organization is delegated, including:
To review and evaluate his/her performance regularly on the basis of a specific job
description, including executive relations with the board, leadership in the organization, in
product/service/program
planning
and implementation,
and in management
of the
organization and its personnelTo offer administrative guidance and determine whether to
retain or dismiss the executive
3. Govern the organization by broad policies and objectives, formulated and agreed upon by
the chief executive and employees, including to assign priorities and ensure the
organization's capacity to carry out products/services/programs by continually reviewing its
work
4. Acquire sufficient resources for the organization's operations and to finance the
products/services/programs adequate!y
5. Account to the stockholders (in the case of a for-profit) or public (in the case of a
nonprofit) for the products and services of the organization and expenditures of its funds,
including:
o To provide for fiscal accountability, approve the budget, and formulate
policies related to contracts from public or private resources
o To accept responsibility for all conditions and policies attached to
new, innovative, or experimental products/services/programs.
The board
The directors act as a board but the board may (if the articles permit, as they generally will)
delegate powers to a committee of board members or to an individual director.
Non-executive directors
Executive directors
Executive directors are generally employees with specific powers delegated to them
either by a resolution of the board or under their service contracts.
Managing directors
Exceeding authority
Directors should not act outside the scope of the powers delegated to them. Major contracts
and commitments should always be authorised by board resolution. A director who exceeds
his powers (for example, by signing a contract not authorised by the board) may incur
personal liability for the performance of the company's obligations under that contract.
However, he will be relieved from such personal liability if the board subsequently ratifies
his actions.If a director is liable for conduct amounting to negligence, breach of duty,
default or breach of trust, the power to ratify such conduct lies with the shareholders. The
shareholder resolution ratifying such conduct must be passed without counting the votes of
the director concerned (if a shareholder) or those of any connected person.
General duties
A director's general duties are owed to the company and not to individual shareholders. The
Act codifies certain key duties, as follows:
Duty to act within powers
A director must act in accordance with the company's constitution (which includes its articles
of association and shareholder resolutions) and must only exercise his powers for their
proper purpose.
Duty to promote the success of the company
A director must act in the way he considers, in good faith, would be most likely to promote
the success of the company for the benefit of its members as a whole. In doing so, the
director must have regard to:
operations
on the community
and the
environment;
the desirability
a reputation
for high
Directors must exercise reasonable care, skill and diligence in having regard to this nonexhaustive list of factors, which may sometimes conflict with each other, but the overriding
consideration is the success of the company. This duty is subject to the existing
common law duty to creditors which will override almost all other interests if the company is,
or is at risk of becoming insolvent.
Appointment of a Director
The Articles of Incorporation must provide for the addition of Directors.
The newly appointed director must apply for a Director Identification Number by
filing E-Form DIN 1 with the Ministry of Corporate Affairs, Government oflndia.
Removal of a Director
A company may, by ordinary resolution, remove a director before the expiry of his period of
office provided he does not hold office for life (irrespective of the age of retirement for
directors mentioned in the Articles of Association)
Special notice of any resolution to remove a director must be sent by the company to the
director concerned
If on receipt of the notice, the director responds to the notice in writing, the company
must (unless the representations are received by it too late for it to do so):
Intimate all its members of the existence of the written representation to the resolution
for removal of the director in a notice
If the abovementioned process is not possible due to delay or default of the company,
the director has the right to have the written representation read out at the meeting of
members.
removed, provided special notice of the intended appointment has been given to all
members
A director so appointed shall hold office until the date up to which his predecessor
would have held office unless removed beforehand.
If the vacancy is not filled it may be filled as a casual vacancy as per 262 of the Companies
Act, 1956.
A Managing Director must be an individual and can be appointed for a maximum term of
five (5) years at a time.A person who is already a Managing Director I Manager of a public
company or a private company subsidiary of a public company can become the Managing
Director I Manager of only one other company (whether private or public) with the prior
unanimous
are
REMUNERATION
so provide, by a special
An Indian company may, therefore, in its Articles, stipulate qualifications for Directors. The
Companies Act does, however, limit the specified share qualification
of Directors which
CONDITIONS
FOR
APPOINTMENT
OF
MANAGING
WHOLE-TIME
DIRECTORS; DISQUALIFICATIONS
The Companies Act, under Schedule XIII, also prescribes certain other conditions that are to
be fulfilled for the appointment
of a Managing or a Whole-time
Director or Manager in
case of a public company and a private company that is a subsidiary of a public company.
Accordingly,
no person
as a Manager,
a Managing
viii. The Wealth Tax Act, 1957; ix. The Income Tax Act, 1961; x. The
Customs Act 1962;
xi. The Monopolies and Restrictive Trade Practices Act, 1969 - now
the
Competition Act, 2002;
1973 -
or convicted
3. He or she should have completed twenty-five (25) years of age, but be less that the age of
seventy (70) years. However, this age limit is not applicable if the appointment is approved
by a special resolution
person
remuneration from one or more companies subject to the ceiling specified in Section III of
Part II of Schedule XIII.
5. He or she should be a resident of India. 'Resident' includes a person who has been staying
in India for a continuous period of not less than twelve (12) months immediately preceding
the date of his or her appointment as a managerial person and who has come to stay in India
for taking up employment in India or for carrying on business or vocation in India. However,
this condition is not applicable for companies in the Special Economic Zone, as notified by
Department of Commerce from time to time.
The Companies Act prevents a Director from being a Director, at the same time, in more
than fifteen (15) companies. For the purposes of establishing this maximum number of
companies in which a person can be a Director, the following companies are excluded:
1. A "pure" private company;
2. An association not carrying on its business for profit, or one that prohibits
the payment of any dividends; and
3. A company in which he or she is only appointed as an Alternate Director.
Failure of the Director to comply with these regulations will result in a
fine of fifty thousand rupees (Rs. 50,000/-) for every company that he or she
is a Director of, after the first fifteen (15) so determined.
DIRECTOR IDENTIFICATION
NUMBERS
All Directors of Indian companies are required to obtain Director Identification Numbers
("DINs"). Primarily, DINs are required to authenticate any electronic filings made by the
company.
Additional disqualifications in case of a public company
In addition to the requirements mentioned above, the Companies Act further provides
that a person shall not be eligible to be appointed as a Director of any other public
company for a period of five (5) years from the date on which the public company, in which
he or she is a Director, has failed to file annual accounts and annual returns or has failed to
repay its deposits or interest thereon or redeem its debentures on the due date or pay
dividends declared.
A private company that is not a subsidiary of a public company can, by its Articles,
provides that a person shall be disqualified for appointment as a Director on any grounds in
addition to those specified in the Companies Act.
2. suspends, or has at any time suspended, payment to his or her creditors, or makes, or
has at any time made, a composition with them; or
3. is, or has at any time been, convicted by a court of an offence involving moral
turpitude.
These requirements are not only more stringent than the requirements for an ordinary
Director, but are also of an absolute and mandatory nature.
RETIREMENT OF DIRECTOS
If the vacancy is not filled and the meeting has not expressly
resolved to fill such vacancy, he or she shall be deemed to have been re appointed until
the next election meeting, unless he or she is not otherwise disqualified or is unwilling to so
act as a Director or no resolution for such appointment has been put to the meeting and lost.
REMOVAL OF DIRECTORS
A Director can be removed by an ordinary resolution of the general meeting after a special
notice has been given, before the expiry of his term of office. However,
applicable
to Directors
appointed
by proportional
representation
this is not
or the Directors
VACATION OF OFFICE
disqualifications for a Managing or a Whole-time Director) during his or her term of office;
2. Fails to obtain within any time period as may be specified in the Articles (two months in
case of a public company),
of the requirements
he or she fails to
of public
companies, if a Director or his or her relative holds an office of profit without the consent of
the company, and with such Director's knowledge, such Director shall be deemed to have
vacated his or her office.
In addition to these reasons for the Director's
office becoming
If a person continues to act as a Director, despite knowing that his or her office has
become vacant, he shall be punishable with a fine up to five thousand rupees (Rs. 5,000/-) for
every day that he or she continues to function and act as such.
RESIGNATION
The Companies Act is silent with respect to resignation of Directors. However, in a majority
of cases, the Articles provide for Directors to resign. Even in cases where the Articles
silent, there is no absolute bar on Director's
resigning,
are
submission of such resignation letter and the filing of the necessary form for such resignation
with the Registrar of Companies (whether or not the Board formally accepts the same, unless
the Articles provide otherwise). The filing of such resignation related form with Registrar
of Companies is an obligation to be discharged by the company in question.
The only exception to the above rule is in the case of Managing, Whole-time and Executive
Directors who are employees of the company, and where the terms of their respective
service contracts will ordinarily refer to resignations, notice periods and I or compensation
in lieu thereof.
OF NONPROFIT
BOARDS
Start your new board members off on the right foot with an orientation program that
introduces them to the basic roles and responsibilities of serving as a nonprofit board
member. Don't forget to include those special issues that pertain specifically to your
nonprofit's mission, plus information on: governance policies (so that all board members are
reminded about their legal and fiduciary duties); accountability practices (such as the need to
disclose conflicts of interest); and the responsibility to review and approve the executive
director's performance and compensation.
When board members are recruited, consider using a board member agreement to ensure
that everyone's on the same page. And for your nonprofit's officers (President, Secretary,
Treasurer, etc.) - make sure they understand what is expected for the specific roles they
will be playing as officers of the nonprofit.
They are not just meeting for routine reporting and discussing;
their talent and energy, and will give them more interesting work.
5) Plan big.
Bring big-picture strategic planning issues into regular board meetings.
For example,
you could take the standard strategic planning issues focusing on organizational strengths,
weaknesses, opportunities and threats (SWOT analysis).
Divide the four subjects over four board meetings and at each meeting, take your
board through a discussion or update of one of these issues.
6) Look at your board meetings as cheerleading sessions.
Get ready to fire up your board members and put them into action. For these meetings,
switch your view to seeing the board as the team that is out on the field, with the role of
the staff being there to encourage and congratulate them: How would you stage such a
session? Identify who would need to speak in order to rev up the energy of your board.
handling committee reports in this manner by providing written reports in the place of
lengthy oral reports.
8) Interview the Executive Director.
Occasionally consider allowing time for the board members to interview the executive
director about what is on his/her mind.
might go, then let a couple of trusted board members know in advance about the planned
discussion.Tell them your perspective and what you need from the board's conversation on
this issue.
action.
Use a
testimonial or a story about someone touched by your organization. This could be the
most powerful subject of the entire meeting.
encouraging shy people, those who typically avoid speaking to the full board, to
participate.
The Multiple Roles of Nonprofit Boards: A Resource List
Nonprofit
General Resources
Collaboration I Partnerships
Fiduciary Responsibilities
Fundraising
Leadership
Legal Responsibilities
Strategic Planning
organizations-collaboration,
Nonprofit
CHAPTER - III
ROLE OF DIRECTOR AS MAJOR PLAYER
3.1 ROLE OF A DIRECTOR
The Companies Act, 2013 ("Act") is enacted to gradually replace the old Act of 1956,
with the objective to bring more accountability and good corporate governance. The
Ministry of Corporate Affairs has notified ninety-eight sections of the Act which have
come into effect from September 12, 2013 and repealed the corresponding sections of the
1956 Act. The Act appears to place a higher degree of responsibility on the Board members
for good corporate compliance. A clear understanding of these obligations and
responsibilities will be critical for current and prospective Board members. In the Act, the
sections related to role, duties and removal of directors are yet to be implemented but it will
happen soon and, therefore, merits attention. In the context of the Board of a
company, the legislators have focused on the role of independent directors and have codified
the duties of directors, which were missing in the old Act.
This newsletter describes selective changes introduced by the Act regarding different
directors and their significance.
1. BOARD FORMATION
The .1956 Act prescribes minimum 2 directors for private and 3 directors for a public
company. This criterion is retained in the Act, but the maximum directors on the Board have
been raised from 12 to 15 and the Act has also dispensed with the approval from Central
Government for raising the number of directors above the prescribed limit. The
Act
requires the Board to devise mechanisms to ensure compliance with the applicable
laws which should be effective and adequate. The Board may consist of several
categories of directors including whole-time directors, managing directors, independent
directors, nominee directors 1 and women directors.
Under the Act, there is a mandatory requirement that one-third of the Board should
consist of independent directors for listed companies and public companies with a paid-up
capital of INR 1,000 millionor debt of INR 2,000 million Independent directors are expected
to be completely unrelated to the company or its
this, the
Act
has
prescribed
shareholders.
certain disqualifications
In
order
to
implement
director which aim to ensure that a potential appointee or his relative4 is not an employee or
involved
in any relationship
disqualification
or transaction
relationship
The most
important
or is a part of any
organization with which the company does business at the time of his appointment.
The Act mandates that not only him, but an independent director's relative should also not
be an employee
or be involved
in any relationship
or transaction
These detailed criterions for eligibility of independent director were missing in the old Act
and appear to have been introduced to bring objectivity to the functioning of the Board.
Independent
directors
remuneration
without any partiality. Independent directors may be selected from a data bank notified by
the Central Government and after proper background
independence.
Every listed company and unlisted companies with paid-up capital of INR 1,000 million will
now be required to appoint one woman director within one year and three years of
notification of Section 149(1), respectively. This requirement is introduced to facilitate the
presence of women in the Board room. India is already making progress in gender issues
and this is a welcome
companies.
The section also stipulates that at least one director of the company should stay in India for
182 days or more in the previous calendar year. This will ensure that the Board shall continue
to monitor
of the company
on a regular
basis
and shall be
responsible
for acts and deeds of the company. Their continued presence will not delay
statutory action steps and will be a step forward towards meeting the timely corporate
compliance
requirements.
This requirement
was missing
companies starting business in India typically appoint foreign directors as the directors of
the Indian subsidiary. With the implementation of this prerequisite, foreign companies doing
business in India will now have to appoint at least one resident director or Indian national to
act as director to comply with this qualification.
INDEPENDENT DIRECTORS
The role
of independent
directors is
"Code for
The legislators have also set certain generic duties for the independent directors to bring a
perspective on matters related to strategy, performance and risk management and balance
the conflicting interest of the stakeholders. The duties under the Code are exhaustive and
needs the director to maintain confidentiality and attend the general meetings of the
company. The independent directors have to hold at least one meeting every year,7 without
the attendance of non-independent directors and with the members of management to
review their respective performance, and determine whether the non independent directors
are meeting the specified targets and reporting compliance. They also have to ensure that
the financials are reflected accurately, controls system and risk management are in place,
seek clarifications in case of ambiguity and take and follow the advice of experts at the
company's expense.
Independent directors are also expected by the Code to act as a moderator to resolve
disputes, act in
the interest
of the
no partiality towards
senior
However, the exact process will be clear once the rules are finalized.
OTHER DIRECTORS
The non-independent directors are under an obligation to make disclosure for buying,
selling or disposing of any property, leasing of any property, appointment of an agent and
appointment in place of profit in the company or in associate/subsidiary.8 In view of the
fiduciary position held by directors, explicit provisions prescribing directors duties have been
added to the new Act. These include keeping away from situations in which they have
conflicting interest with that of the company, duty to make good in monetary terms any
undue gain/advantage on the part of the directors etc., similar to what was there in the old
Act.
There are also certain general duties, such as acting in good faith for the benefit of the
company and to ensure that the company is filing its financials, annual return and payment
of debentures in time. These amendments, though not substantial, have tried to shift the
onus on the director for the loss/liability suffered by the company due to their lack of
discipline by increasing the penalty and clearly codifying the role and duties.
The Act has focused on corporate compliance and a director will not be re appointed
if the company has failed to file its annual returns for three continuous years. Reappointment in such cases, in that company or any other company, can happen only after
five years from the date of the failure to file accounts. However, if the company chooses
to re-appoint a director even after its failure to file the accounts shall be penalized.
Additionally, the practice of directors absenting themselves from meetings and sending
proxy has been placed under check. Any director who was absent from the board meetings
for the previous twelve months, whether he sought leave or not, will have to vacate his
office. If the director continues to function as a director even after he knows that he is
disqualified to hold the office shall be imprisoned for up to one year or punishable
with fine.
The Act prohibits directors from buying, selling, leasing or disposing of any property,
appointment of an agent and appointment in place of profit in the company or
associate/subsidiary and, in all such cases, they are mandated to make a disclosure for these
transactions. In case of non-disclosure by a director, he will indemnify the company against
any loss incurred by it. The Act has codified and set high standards for a director's duty and
liability towards the company.
The role of the board changes as the company grows and the management team becomes
more diverse, with a wide range of experts who can contribute to strategy in different
ways.
A company passes through several stages in its life cycle. In the first stage 'Start up'
strategy is developed and implemented by the founder and a close team. At this stage it is
not often clear who is doing what. The team will switch from their shareholder role, to their
executive role and then their board role quickly whenever the need anses. Usually,
whichever role the founder plays most can be said to be the place in the organisation
where the strategy is developed.
As the company enters the second stage 'Growth' more people join and the roles start to be
defined with greater clarity. Skilled or qualified staff start to offer their inputs to strategy
and the board needs to be explicit about the sharing of the roles to ensure that efforts are
coordinated so that people feel engaged. Failure to separate and define roles will lead to
dissent and disorder. Failure to share opportunities to contribute will disenfranchise
management. The board need to be especially vigilant that the founder does not continue
to dominate the process although they may still design the process so that the founder has
the final say.
Eventually growth will start to slow down. This is a stage at which a company needs to
focus efforts on internal effectiveness, systems and processes. It is also a stage during
which the strategy development, in good companies, is formally delegated to the now strong
and experienced management team and the board moves into the more traditional role
of understanding, testing and endorsing strategy. Much will depend on the decision of the
founder to remain as an executive (usually CEO) or to move to a non executive role (often
Chairman but not necessarily always so).
If the transition is an abrupt or unexpected slowing of growth and represents a deviation
from agreed plans it is not uncommon for a board, at this stage, to step in and remove the
CEO or undertake other actions to restructure management so as to gain better visibility of
the path ahead. If the transition is smooth, expected and well prepared for then the role of
or
'Mature'.
This is the
stage of life
of most
large blue
chip
organisations. They undertake enough new developments to maintain their sustainability but
never so many that they revert to the risky volatile growth phase. Outcomes are expected to
conform to plans and the board spends as much or more time monitoring strategy
implementation as they do developing strategy.
Finally the organisation will enter the stages of decline and, if this is not arrested by
reinvention, decay. A good board will be alert for indications that decline is imminent and
will ensure that management are challenged with the task of developing new
strategies for growth to counteract the tendency of the organisation to drift into these stages.
Companies in decline are often paradoxically very profitable as investment in new lines of
business and growth projects slows whilst tried and tested products are efficiently produced
and sold.
Many family businesses enjoy this phase as a means of creating funding for the retirement
of the founder. Other businesses work hard to transcend the tendency towards decline and
decay. The board may, again, need to become more active (and possibly even forceful) to
ensure that management focus their efforts appropriately depending on the owners' desires
for the organisation.
Some not-for-profit businesses look forward to these stages as they will indicate that the
mission has been achieved; when a cure is found for cancer most cancer-related charities
will focus on transitional arrangements to assist current sufferers, on providing information
about the cure and on closing down in an honourable manner. A few will move into other
disease related work whilst most will seek to exit the marketplace. For commercial
companies the imperative will be to either create new business streams or to return capital to
the shareholders whilst meeting obligations to stakeholders. The board must step into their
role as the ultimate endorsers of strategy during these phases.
secondary data
THE VARIOUS TYPES OF DIRECTORS ARE :
a. MANAGING DIRECTORS
INSIDE DIRECTORS
c. OUTSIDE DIRECTORS
d. PROFESSIONAL DIRECTORS
e. NOMINEE DIRECTORS
f.
EXECUTIVE DIRECTORS
g.
INDEPENDENT DIRECTORS
A) MANAGING DIRECTORS
A managing director is someone who is responsible for the daily operations of a company,
organization, or corporate division. In some regions of the world, the term is equivalent to
"chief executive officer," the person who is the executive head of a company. In other
places, managing directors primarily work as the heads of individual business units within a
company rather than heading up the company as a whole. Whether managing an entire
organization or just a part of one, these professionals have a number of key duties.
B) INSIDE DIRECTORS
A board member who is an employee, officer or stakeholder in the company. Inside directors
- and outside directors, for that matter - have a fiduciary duty to the company of which
board they sit on, and are expected to always act in the best interests of the company.
Because of their specialized knowledge about the inner workings of the company, a strong
board of inside directors is a key element in its success.
C) OUTSIDE DIRECTORS
D) PROFESSIONAL DIRECTORS
Any director possessing professional qualifications and do not have any pecuniary interest in
the company are called as "Professional Directors". In big size companies, sometimes the
Board appoints professionals of different fields as directors to utilise their expertise in the
management of the company.
E) NOMINEE DIRECTORS
The banks and financial institutions which grant financial assistance to a company generally
impose a condition as to appointment of their representative on the Board of the concerned
company. These nominated persons are called as nominee directors.
F) EXECUTIVE DIRECTORS
Whole-time Director or Executive Director includes a director in the whole-time employment
of the company.
G) INDEPENDENT DIRECTORS
who-
(a) apart from receiving director's remuneration, does not have any material
pecuniary relationships or transactions with the company, its promoters, its directors, its
senior management or its holding company, its subsidiaries and associates which may affect
the independence of the director; (b) is not related to promoters or persons occupying
management positions at the Board level or at one level below the Board; ( c) has not been
an executive of the company in the immediately preceding three financial years; (d) is not a
partner or an executive or was not partner or an executive during the preceding three years,
of any of the following:- (i) the statutory audit firm or the internal audit firm that is
associated with the company; (ii) the legal firm(s) and consulting firm(s) that have a
material association with the company. (e) is not a material supplier, service provider or
customer or a lessor or lessee of the company which may effect the independence of the
director; and (f) is not a substantial shareholder of the company, i.e. owning two percent
Independent director as per Clause 49 of the Listing agreement shall mean non-executive
director of the or more of the block of voting shares.
The CA 1956 has not codified the law relating to duties of directors but in all cases all
directors must ensure compliance with the provisions
applicable laws. Further, under the CAI 956 the directors of Indian companies are subject to
common law duties. Thus, a director has fiduciary duty towards the company.
As per s.5 of the CA1956, for violation of the provisions of the CA1956 the managing
director/ whole time director (director who is in whole time employment of the company) I
manager (who is so appointment in accordance with the provisions of the CA 1956) and
the company secretary, if any, are responsible in first instance. In the absence of
aforesaid categories of officers, prosecutions should be against all other directors of the
company unless the directors have authorised any other person to make compliance with
that provisions of the CAI 956 and such person has accepted any such authorisation. The
Master Circular No. 1/2011 dated 29 July 2011 of the Ministry of Corporate Affairs,
Government of India ("MCA") consolidating the provisions relating to prosecution of
directors under the CA 1956 has clarified that Registrar of Companies should take extra
care in examining the cases where following directors are also identified as 'officer who is in
default' under s.5 of the CA1956:
For listed compames (companies of which shares are listed at Indian stock exchange),
Securities and Exchange Board of India requires nomination of certain Directors designated
as Independent Directors.
4.2 DISQUALIFICATIONS
OF THE DIRECTOR
This has three objectives. First, we consider some theoretical issues associated with the
regulation of directors' conflicts of interest. Second, we provide a brief overview of the
legal framework for regulating directors' conflicts. Third, we present the results of an
empirical study of directors' conflicts in India. It is a study of the disclosure by the largest
companies of financial benefits between these companies and their directors. The purpose is
to provide some insight into the types of matters which potentially
involve directors'
conflicts.
Our objective in this section is to examine a number of the issues associated with different
institutional mechanisms which regulate directors' conflicts. We commence by examining
the role of market forces in regulating directors' conflicts. We then examine the role of
disinterested directors, shareholders and courts.
Directorand Officer Liability for Dishonour of Cheques
(The following post has been contributed by Avirup Bose. Avirup is an Indian lawyer,
who has graduated from NUJS Kolkata and has an LL.M from the Harvard Law School)
On July 6, a Division Bench of the Supreme Court passed a judgment in K.K. Ahuja
v. VK.
considered the particular question as to who can be said to be persons "in-charge of, and
was responsible to the company for the business of the company" under Section 141 of
the Negotiable Instruments Act, 1881 ("NI Act"). Section 141 of the NI Act provides that
petition was allowed by the Delhi High Court, which was then challenged before the Supreme
Court in K.K. Ahuja.
The Supreme Court ruled in dicta that, "[] .... to be vicariously liable under Sub-section
( 1) of Section 141, a person should fulfill the 'legal requirement' of being a person in law
(under the statute governing companies) responsible to the company for the conduct of the
business of the company and also fulfill the 'factual requirement' of being a person in charge
of the business
of the company."
In other words,
any corporate
conduct of the business of the company under the provisions of the Companies Act, 1956
and (2) be in-fact also a person in-charge of the business of the company. REQUIREMENTS
TO SATISFY THE FIRST PRONG:
The Court, relying on Sections 5 and 291 read with clauses (24), (26), (30), (31) and (45) of
Section 2 of the Companies
Companies Act can be considered as persons who are responsible to the company for the
conduct of the business of the company. They are:
(a) the managing director/s; (b) the whole-time director/s; ( c) the manager;
(d) the secretary;
of complying
with that provision (and who has given his consent in that behalf to the Board);
and
(g) where any company does not have any of the officers specified in clauses
(a) to (c), any director or directors who may be specified by the Board in this
behalf or where no director is so specified, all the directors.
The above list is exhaustive
company
to the company
for the
The Supreme Court, relying on past precedents, held that the words "person in charge of
the business of the company" refer to a person, who is in overall control of the day-to-day
business of the company. The Supreme Court further held that, since the question as to
who is in "overall control" is a fact specific one, specific averment in the complaint is
required. This the Court felt necessary since a person may be a Director and thus belong to
the group of officers who are involved in policy-making for the company, yet he may not be
in-charge of the business of the company.
test-the
statute-based test, where to prove that a person is responsible to the company for the conduct
of the business of the company, one needs to merely check if the accused person falls in
any one of the listed categories.
specific averments
the complainant
test, where
through
in overall control of the day-to-day business of the company. Both the prongs need to be
complied with. Hence, if a person does not satisfy the first prong, i.e., if he is not one of the
above-mentioned officers as listed by the Supreme Court, then he is neither required to meet
the second prong nor can he be held liable under Section 141(1).
However, if the accused falls under one of the categories listed by the Supreme Court, i.e.,
he is under statute, the Companies Act 1956, a person responsible to the company for the
conduct of the business of the company, then the judgment provides for a sliding scale of
averment that needs to be made in the complaint, depending upon the particular category of
the officer.
These are as tabularized:
The Supreme Court also held that other officers of the company, apart from those tabularized
above, cannot be made liable under
Section
directors/officers
who may not be in-charge of the conduct of the business of the company,
but nevertheless
was
committed with their consent or connivance or due to their negligence. However, in such
circumstances,
This brings us to an interesting issue, albeit beyond the scope of the present case- say a nonexecutive
company,
director who is a financial expert and a past banker sits on the Board of
which has issued certain cheques, which have been dishonored
and returned
by the respective banks unpaid. By merely being a non-executive director he is most likely
not one of the officers responsible for the conduct of the business of the company, nor is
he in-charge
of the business
of the
circumstances,
company.
Hence,
in the
absence
of special
such a director votes in favor of a resolution, which provides for payment of a certain sum
of money, from one of the several bank accounts of the company, to a supplier/contractor
that cheque bounces-is
and
the director liable? Can his consent be construed from his "yes"
vote? I would argue that the case then depends upon how the executive director went about
doing his job. Did he ask relevant questions, did he try to inquire if the company had sufficient
funds in that particular account, especially if he had reason to believe otherwise?
Does the
fact that he is a financial expert make him more readily liable under Section 141(2) of the
NI Act than the other directors? In fact, in U.S. the Delaware chancery court in re Emerging
Communications, Inc. Shareholders Litig., 2004 WL 130 5745 (Del.Ch. June 4, 2004))
found that a particular director who was a former investment banker with relevant
experience in the particular industry be held to a higher standard of inquiry than non-expert
directors when he failed to apply his "specialized financial expertise", when evaluating a
going-private transaction. The case was
uniformly
held
to
have
taught
directors,
either given by the management or outside professionals, especially when they were
themselves experts in the relevant field.
One might wonder why the complainant needs to specifically aver in a complaint under
Section 13 8
committed, the person accused was in-charge of, and responsible for the conduct of the
business, since in the absence of such an averment, as held by the Supreme Court in the
three judge decision of S.MS. Pharmaceuticals Ltd. v. Neeta Bhalla and Anr ("S.M.S.
Pharma"(MANU/SC/0622/2005)),
Supreme
Court's
director/officer
logic
Section
in requiring
such
specific
averments
before
Faizi&AshishAggarwal,
Khergamvala
on
The
Negotiable
any
The
corporate
[See generally: OP
Instruments
Act 514
-525(2008)], is that the liability under Section 141(1) is raised by legal fiction, such that
even though a person is not personally liable, he will be held liable vicariously and hence a
clear case connecting the accused with the commission of the crime, as required under
Section 141 (1) has to be spelled out in the complaint through specific factual averments.
However, the obvious disadvantage the complainant suffers when he has to specifically aver
that a certain director or officer was in-charge is that, being an outsider, he might not know
exactly how the internal business of the accused company is organized i.e., who are its
principal executive officer bearers and who are only involved in business policy
making. This is easy when dealing with the Managing Director and the signatories of the
cheque, but beyond that the picture becomes fuzzy.
As per S.M.S. Pharma (which the Supreme Court heavily relied upon in KK Ahuja):
"The liability arises from being in charge of and responsible for conduct of business of
the company at the relevant time when the offence was committed and not on the basis of
merely holding a designation or office in a company. Conversely, a person not holding
any office or designation in a Company may be liable if he satisfies the main requirement of
being in charge of and responsible for conduct of business of a Company at the
relevant time. Liability depends on the role one plays in the affairs of a Company and not on
designation or status." (Emphasis Added)
Imagine a family based company having a majority shareholder holding more than 50% of
the stock. The company is nevertheless, run by a team of non-familial professional
managers. Can such a majority shareholder be held liable if, the managers of the
company, which he controls, issue a cheque, which, is dishonoured by the banks. In KK
Ahuja one of the people listed by the Supreme Court in paragraph 14 as persons
responsible to the company for the conduct of the business of the company is:
"(e) any person in accordance with whose directions or instructions the Board of directors of
the company is accustomed to act;"
A controlling shareholder can very well be someone who regularly instructs the Board and
the senior management.
controlling
specific
shareholder
factual
would
averments,
showing
how
in-fact
want to include
such a
such
controlling
shareholder
was
regularly consulted by the Board or otherwise in-charge of the business of the company. The
complainant might not have access to such materials if they are not in the public domain.
It is not enough
"controlling
shareholder."
merely
is a
practical business scenarios. The Court could have provided some more guidance, like
examples of factual averments that will be required, when a complainant
wants to hold
corporate officers, who are not managing directors or signatories of the bounced cheques,
liable under Section 141 (1) of the NI Act. The standard of averment that the Court in KK
Ahuja
suggests,
in paragraph
Delhi) MANU/SC/071112007):
Poddar
v.
State
(NCT of
what manner the accused was responsible for the conduct of the business of the company, or
otherwise responsible
described above.
Why cannot the complainant
under
Section 141 and then such officers can prove that they were not in-fact in-charge of the
company's business at the time of the commission of the crime? It would be much easier for
the directors to deny responsibility
on part of
internal corporate officers at the trial stage. This view although a minority one, found voice
in a two judge bench decision of the Supreme Court in N. Rangachari v. Bharat Sanchar
Nigam Ltd (2007) II CCR 191 (SC), which held the following in obiter:
presume that the directors of the company are incharge of the affairs of the company. If any
restrictions
on their
powers
are placed
by the memorandum
or articles
of the
company, it is for the directors to establish it at the trial. It is in that context that Section 141
of the Negotiable
person,
Instruments
was committed
was incharge
of and was
responsible to the company for the conduct of the business of the company, shall also be
deemed to be guilty of the offence along with the company. It appears to us that an
allegation in the complaint that the named accused are directors of the company itself
would usher in the element of their acting for and on behalf of the company and of their
being incharge of the company.
A person
normally
having
business
or commercial
dealings
with a company,
would
and
or
Articles of Association. Other than that, he may not be aware of the arrangements within the
company in regard to its management, daily routine, etc. Therefore, when a cheque issued to
him by the company is dishonoured, he is expected only to be aware generally of who are
incharge of the affairs of the company. It is not reasonable to expect him to know whether
the person who signed the cheque was instructed to do so or whether he has been deprived
of his authority to do so when he actually signed the cheque. Those are matters peculiarly
within the knowledge of the company and those in charge of it. So, all that a payee of a
cheque that is dishonoured can be expected to allege is that the persons named in the
complaint are in charge of its affairs. The Directors are prima facie in that position."
To conclude, the Supreme Court in K.K. Ahuja fine-tuned the principles relating to
director and officer liability for dishonour of cheques and built upon the policy laid down in
the previous case of S.M.S. Pharma. However, there continue to be some open issues as
discussed above, and the Court has left complainants with a somewhat insurmountable
burden of averment as outsiders to the company.
transactions".
Has not within the last three years been employed in an executive capacity by the
company or another group member or been a director after ceasing to hold any such
employment;
which could, or
could reasonably be perceived to, materially interfere with the director's ability to act
in the best interests of the company
REVIEWBY SHAREHOLDERS
As is the case with review of directors' conflicts by independent directors, the emphasis
placed on review by shareholders of such conflicts differs between countries. For example,
the emphasis on review by independent directors in the United States means there is less
emphasis placed on shareholder review in that country.
There are problems with shareholder review of directors' conflicts. First, in the case of
companies with many shareholders, it can be costly to have decisions made by shareholders.
Second, shareholders with only a small investment have little incentive to become informed
and vote on a matter regarding a director's conflict. Shareholders with a small investment
suffer a collective action problem when voting which undermines their effectiveness as a
decision-making body. A rational small shareholder in a public company will not
expend the time and effort to evaluate a particular director's
shareholder's costs of becoming informed and voting typically outweigh any expected
benefits. This is because the shareholder's vote would have only a small effect on the
outcome and the shareholder would have difficulty identifying any significant benefit in
voting.
REVIEWBY COURTS
It is possible to envisage a role for courts in reviewing directors' conflicts. There may be a
narrow or broad role. A narrow role is where the court determines whether a director has
made appropriate disclosure to either shareholders or disinterested directors. A broader role
is where the court reviews the fairness of a particular transaction in which a director is
interested. Such a role is given to the court under the Delaware companies law. Section
144 of the Delaware General Corporation Law provides that a contract in which a director
is interested is valid if the contract "is fair as to the corporation as of the time it is
SUMMARY
There are both costs and benefits to each of the review mechanisms for directors' conflicts
identified above. It can be efficient to have the review undertaken by disinterested or
independent directors. Alternatively, the review could be undertaken by shareholders in
asmall private company with few shareholders. As we have seen, the choice between
independent directors and shareholders turns,
CHAPTER-V
FINDINGS AND CONCLUSION
5.1 FINDINGS
Question
board leadership
Although there is a great deal of current debate about separating the combinedposition of
chairman and CEO, the survey group includes two-thirds from companies that still have this
traditional form of organization. Some companies questioned the benefits of separating
these roles and instead chose to adhere to the dictates of the stock exchanges, which call
only for an independent director who presides over executive sessions. While conceptually
weaker than most had hoped for, the lead director role has grown in both its influence
and responsibilities, thereby providing hope that it is a viable alternative to a separate
chairman and CEO. However, if in the long run the lead director role fails to deliver, it is
likely that calls for separating the chairman/CEO position will continue and grow.
Question 6. How long has the company had the lead directorposition?
Many companies created the lead director position in response to the new and enhanced
standards imposed in 2012, including demands for greater transparency, accountability, and
integrity. In the wake of the new regulatory and corporate governance environment created
by
strengthening the checks and balances between the CEO and board functions.
Question 7. How long have you been lead directorof this company?
In most cases, lead directors are likely to be trusted advisors, having intimate familiarity
with the major issues the company faces, the CEO' s preferences, and management
styles because of the lead director serving on the board three years or more.
Question 8. What other positions have you held with this company or another public
company?
Among respondents, more than half currently servmg as lead director of the company
have previously served as a CEO and more than one-third as chairman. The leadership and
executive skills garnered in these roles make for an easy transition to the lead director post
and will help better position the lead director as an important advisor to the chairman/CEO.
Question 9. Have you advised companies in this industryin any of the following
capacities?
Lead directors generally have significant management experience in the corporate world and
bring that experience to the advice they provide. People who are professional advisors, such
as lawyers, accountants, bankers, and consultants, are less likely to be lead directors. The
majority of respondents, 55 percent, have not advised companies in any of these capacities.
Question 10. How many additionalhours per month do you devote to the lead
directorrole on average, beyond the time you spend as a director?
Lead
10 hours
on their
responsibilities, our survey respondents say. But the typical director spends about 20
hours a month on average on board work, according to another recent PwC survey
Corporate
secretary 58%,
10%, Separate
director
investors,
is
much
less
involved
in
communication
issues
institutional
investors is interesting
The
with institutional
of
been view ed as
with
shareholders/investors
an
important
initiative
of
and may be an area where lead directors can get more involved in the future.
with the media and public will likely not change because the
remains
as the principal
representative
of the
5.2 CONCLUSION
LACK OF ENFORCEMENT
Member States, breaches of directors' duties do not normally lead to judicial enforcement of
claims against directors as long as the company continues to operate as a going concern.
There are several factors that contribute to what may be seen as under enforcement of
directors' duties. We find that the most important of these factors cannot easily be addressed
by changes to the national
directors'
the most important business decisions are taken by, or with the
that the issue in need of regulatory intervention is not so much wrongdoing by the directors
that affects the shareholders as a class, but rather the minority/majority shareholder conflict.
Second. the rules on standing do not seem to be working well. If the board of direct rs
in companies
with
a one-tier
board
structure
has
authority
on behalf
of the company,
the conflict
of interest
is apparent,
in particular where
incumbents are sued. However, data indicates that the problem is not alleviated by allocating
the power to enforce the company's
meeting or, in companies following the two-tier board model, the supervisory board.
Third,
the
enforcement.
institutional
preconditions
may
not
always
be
conducive
to
satisfactory,
enforcement is perceived in some Member States as being lengthy, expensive, and fraught
with uncertainties.
judicial
system
of the competence
positive
in all Member
States.
Shareholders may prefer to remove the incumbent directors and appoint new ones, rather
than applying to the courts.
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