CHANAKYA NATIONAL LAW UNIVERSITY

The Final draft of Company Law-I on

Liabilities and Duties of Director: A comparative analysis of British

Companies Act 2006 and Indian Companies Act 2013

Submitted To:- Submitted By :-

Ms. Nandita Jha Aayushya Prakash

Roll no. : - 1503

Semester: - 7th

Session: - 2016-21
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 DECLARATION

I hereby declare that the work reported in the BA LL.B (Hons.) Project Report
entitled “Liabilities and Duties of Director: A comparative analysis of British
Companies Act 2006 and Indian Companies Act 2013 ” submitted at Chanakya
National Law University, Patna is an authentic record of my work carried out
under the supervision of Ms. Nandita Jha. I have not submitted this work
elsewhere for any other degree or diploma. I am fully responsible for the contents
of my Project Report.

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 ACKNOWLEDGMENT

It’s a fact that any research work prepared, compiled or formulated in isolation is inexplicable to
an extent. This research work, although prepared by me, is a culmination of efforts of a lot of
people.

Firstly, I would like to thank our Company law teacher, Ms. Nandita Jha for giving such a topic
to research which assisted me in acquiring some knowledge related to one of the important issue.
I would like to thank her for his valuable suggestions towards the making of this project.

Thereafter, I would also like to express my gratitude towards our seniors who played a vital role
in the compilation of this research work.

I would also like to express my gratitude towards the library staff of my college which assisted
me in acquiring the sources necessary for the compilation of my project.

Last, but not the least, I would like to thank the Almighty for obvious reasons.

---

AAYUSHYA PRAKASH

ROLL NO.1503

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Contents
Declaration ...................................................................................................................................... 2

Acknowledgment ............................................................................................................................ 3

1. Introduction ................................................................................................................................. 5

2. Duties of the Director.................................................................................................................. 8

3. Liabilities of the director ........................................................................................................... 13

4. Conclusion ................................................................................................................................ 16

Bibliography ................................................................................................................................. 17

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 1. INTRODUCTION

Aims & Objective:-

The aim so as to research on the topic ‘Liabilities and Duties of Director: A comparative analysis
of British Companies Act 2006 and Indian Companies Act 2013’ is as under:

1. To study the Companies Act 2013 and Companies Act 2006 of England.
2. To know about the duties and liabilities of director of a company.
3. To compare and draw difference and similarities of the duties and liabilities of a director
as provided under the provisions of the British and Indian Companies Act.

Research Methodology:-

1: Study Area- Researcher mainly focuses on Bare Acts, commentaries and case laws.
2: Sources of Data- Primary Sources- Laws, Acts etc. Secondary Sources- CNLU Library,
Journals, Books, Articles, Previous Researches, etc.

Background Study

India and the UK, both the countries follow common law system. The Indian Companies Act
2013 is highly influenced, if not the exact copy, from the British Companies Act 2006. In this
research paper we shall compare the Duties and Liabilities of the Director under the Indian
Companies Act 2013 and British Companies Act 2006.

Directorships are always susceptible to abuse. Here is a constant struggle to balance the personal
and the company’s interest. As they are equipped with immense power by virtue of their
position, it must not only be regulated in public interest but also for the protection of those who
have invested and are the stakeholders. Sec 149(1) of companies act stipulates that the company
should have a board of directors. Indian Companies Act, 2013 defines director under sec 2(34) as
a director appointed to the board of directors. Majorly directors are categorized as:

Executive Directors

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 1. Whole Time Director

He is in whole time employment and looks after the overall functioning and management of the
company.

2. Managing Director

He is the head of management who has substantial powers to control superintend and direct
managerial affairs subject to the Board’s approval.

Non- Executive Directors

He is neither a Whole-time Director, Managing Director nor a nominee director.

1. Independent Directors

He is a non executive director with pecuniary relationship with the company, its promoters,
senior management or affiliate companies, is not related to promoters or the senior management,
and/or has not been an executive with the company in the three preceding financial years as
defined in sec 149(6) and also as per clause 49 of the listing agreement,

2. Others

On the basis of the purpose of their appointment these further types of directors are recognized :

First Directors: Until directors are appointed in AGM, subscribers to MOA are the first directors.

Additional Directors: At the discretion of the board, additional directors can be appointed who
will hold office until next AGM.

Alternate Director: Board may also appoint an alternate director who will act when the original
director is not present for a minimum of 3 months, subject to the articles of the company.

Rotational Directors: These directors have to retire at the end of their tenure due to rotational
retirement mandated as per Companies Act, 2013.

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Nominee Directors: These are appointed by certain shareholders in case of oppression and
mismanagement in the company. However, their liability is not just restricted to such handful of
shareholders but extends to all shareholders as a whole.

Residential Director:- These are the ones who have resided in India for at least 182 days in an
immediately preceding year.

Directors are pioneers of the institution they represent. They are accolade with lots of powers and
with powers come liability and duty too. Many of such powers, duties, and liabilities have been
codified into statute. The rest of them being developed by the courts over hundreds of years
forming the common law rules and equitable principles applicable today.

Hypothesis:-

The similarity in provisions of the British Companies Act, 2006 and the Indian Companies Act,
2013 is more than their differences.

Limitations:-

The researcher have time limit of one month. Living in a small city the Researcher has limited
resources. Due to limited time, the Researcher is restricting his research in limited area.

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 2. DUTIES OF THE DIRECTOR

General duties applicable worldwide

The duty of good faith- The directors should act in the best interest of the company, interest
herein implies the interest of present and future members of the company, given the going
concern principle. They should not exploit corporate opportunities to their own personal benefit
resulting in secret profits. The good faith would require that all the endeavours of the directors
must be directed to the benefit of the company.1 Greatest good faith is expected in a discharge of
their duties.2

It has been held that men who are in complete control of a company’s business must not take the
company’s interest at liberty as they are bound to protect the same. Recently the Delaware
Supreme Court ruled out to postulate the character of the duty of good faith wherein it was made
clear that negligent conduct is different from conduct in bad faith because statutory provisions
differentiate between the two. If the conduct is in absolute disregard with duties and
responsibilities then it would constitute bad faith. Mere failure to act in good faith does not
impose fiduciary liability, as it is a subsidiary element of duty of loyalty.3

Duty of care

Director by virtue of his esteemed position should take utmost care and due diligence while
working in the best interests of the company. However not more than what an ordinarily prudent
man would have done can be expected out of him. The duty of care is uniform for all directors.4
Such care need not be extraordinary in nature. This degree of care and skills shall vary with
thenature of the business.5 However, courts have extended relief where liability has been

1
Bank of Poona Ltd v. Narayandas, AIR 1961 Bom 252 at 253
2
Turner Morrison & Co v Shalimar Tar Products (1980) 50 Comp Cas 296 Cal.
3
Stone v. Ritter 911 A.2d 362 (Del. 2006)
4
Jorchester Finance Co Ltd v. Stebbing 1989 BCLC 498 Ch D
5
In re city fire insurance, City Equitable Insurance Co, (1925) Ch 407

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incurred even after acting in good faith. They are not to be held liable for mere errors of
judgement.6

Duty not to delegate

As directors are agents of the company, they already have delegated a power which cant be
delegated any further. They are bound by the maxim delegates non potest delegare. It is their
skills and judgement on which shareholders rely and the same would get diluted when delegated
but there are many exceptions where delegation is permitted subject to the company law and the
articles of association. Subsequent to the delegation, if there is no suspicious activity, there is a
presumption that affairs of the company are properly conducted.7

Duty to act honestly

Directors hold the office of trust from where entails a duty to perform truly. Directors have an
obligation to act with honesty since they hold a fiduciary position of trust.8 They should be held
liable for straying from duties if that has culminated into frauds and losses.9

Section 166 of Indian Companies Act 2013 wherein various elements have been stated like:

How Director Shall Act

The law in subsection (1) specifies that a director shall act according to the article of association
of the company. Although this does not mandate any specific laying down of the duties if that is
so, it will be a desirable provision.

Acting In Good Faith and in Best Interest

The next subsection (2) provides that a director shall act in good faith. This encapsulates a great
amount of subjectivity but at the same time should be seen from an ordinarily prudent man’s
perspective. It has also been held that all efforts of directors must be directed towards benefiting
the company.10 Pertinently, a wide coverage has been made by usage of both the terms

6
Lagunas nitrate co. vs lagunas nitrate syndicate [1899] 2Ch.392 (p.428, C.A.)
7
Ganesan v. Brahamaya & Co (1946) Comp LJ 262 Mad
8
York and North Midland Railway Co v Hudson (1853) 61 Beav 485: 22 LJ Ch 529
9
Official Liquidator v. P.A. Tendulkar (1973) 43 Com cases 382
10
Turner Morrison & Co v. Shalimar Tar Products 1980 50 CompCas 296 Cal.

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“members” as well as “shareholders”. “Members are those persons who agree in writing to
become members and whose names are entered in the register of members or whose names are
entered as beneficial owners”.11 Necessarily it does not follow that all shareholders are members
and vice versa.

In English law, this duty is set out in section 172 of the Companies Act 2006 and provides that 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” This is very similar to the
existing common law duty to act in the “best interests” of the company.

Acting with Care, Skill & Independent Judgement

Subsection (3) of section 166 lays down that the director shall exercise his duties with due and
reasonable care. Although there is a great subjectivity involved here the touchstone for the same
can be that of what a reasonable would do in given circumstances. Further, an exercise of the
independent judgment indicates that there should be no external influence; he should have
complete freedom to reach to his judgement.

Under English law, it is provided under section 174. The duty of skill and care puts existing
negligence law onto a statutory footing and provides that a director must act with the care, skill
and diligence that would be exercised by a reasonably diligent person with both (i) the general
knowledge, skill and experience to be expected of a director and (ii) the general knowledge, skill
and experience that the director has.

In other words all directors will be held to the standard of the “reasonable director” and will be
assumed to have the knowledge, skill and experience to be expected of a director in that role. In
addition, a director with additional or more specialised knowledge (e.g. accountancy
qualifications) will be held to the standard of a reasonable director with that knowledge.

No Conflict of Interest

The following subsection (4) specifies that a director should avoid conflict of interest. This
dictates that a director should not get involved in such a situation where conflict may arise in his

11
Section 2 (55) of the Companies Act 2013

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personal interest and the company’s interest. Whenever any such kind of situation arises,
precedence should be given to the company’s interest over his personal interest.

There is now a very wide statutory obligation to avoid conflicts of interest in the English law
under section 175. A director must avoid any situation where they have or can have an interest
that directly or indirectly conflicts with or may conflict with the company’s interests. This duty
specifically applies to a director exploiting any property, information or opportunity (whether or
not the company could take advantage of that property, information or opportunity).

No Undue Gain or Advantage

The provision of the subsection (5) provides that no personal benefit should be made out of the
company’s business neither it should be accrued to director’s relatives, partners, associates. This
section also provides for disgorgement of gains as the intent behind this is that there should not
be any loss to the company.

Under the Companies Act, 2006 this particular provision is relatively lenient. It doesn’t prohibit
personal benefit to be accrued to directors, but it imposes a duty to disclose it. Directors must
declare to their company’s board the “nature and extent” of any interest they may have in any
transaction or arrangement to which the company is or may be a party. There are two sections,
s.177 dealing with a declaration before the transaction or arrangement is entered into and s.182
dealing with a declaration to a transaction or arrangement to which the company is already a
party.

If they are aware of their interest, a director must declare their interest before the arrangement is
entered into under s.177. However if the director only becomes aware of their interest (or the
interest only arises) after the company has entered into the arrangement then a director must
declare as soon as possible under s.182.

Declarations under either section may be made either at a board meeting or by notice in writing
or by a general notice. A director must update any declaration if it becomes inaccurate or
incomplete (although if a company has already entered into a transaction or arrangement this
may not be necessary).

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There is no breach of these duties if a director is unaware of their interest or the transaction or
arrangement to which the company is a party. In addition a director need not declare an interest if
they are unaware of a possible conflict or if their interest cannot reasonably be regarded as giving
rise to a conflict.

No Assignment

Subsection (6) prohibits the transfer of the office’s rights to another person. He cannot assign his
office, and if done it shall be void.

Contravention

The last subsection (7) lays down the penal provisions where a director contravenes the section.
Such director shall be punishable with fine which shall not be less than one lakh rupees but
which may extend to five lakh rupees.12 Although this attracts a penalty it does not ask for the
vacation of office u/s 167 of Companies Act 2013.

12
Section 166(7) of Companies Act 2013

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 3. LIABILITIES OF THE DIRECTOR

Along with duties, liabilities accompany. Liabilities can also be statutory liabilities as provided
in specific statutes, and it can also be general duties which are applicable to all uniformly. They
can be:

Liability to the Company

The liability of a director could arise in the following manner:

Breach of fiduciary duty: As the directors hold the office of trust along with power they are
expected to exercise this power in the best interest of the company. Whenever there comes
dishonesty in fulfilling this duty, there is a breach of fiduciary duty. There is always a possibility
of a conflict of interests but should such a conflict arise the concerned director should make
complete disclosure and try to obtain the confidence of stakeholders in the general meeting. If
such is not a case then it shall be held as a breach of fiduciary duty and he will be liable for
indemnification to the company.13 It has been held that directors being the trustee have to deal
with business and its property the way they treat their own personal property and interest.14

Ultra vires act: Directors have powers subject to Companies Act, Memorandum and Articles of
association. Whenever they exceed these limits they are personally liable for the act being ultra
vires. But if acts are intra-vires the company such acts can be subsequently ratified by the
shareholders in the general meeting, otherwise, if a company suffers a loss on ultra-vires acts of
its directors, the company can claim such loss from the directors.15

Negligence: As long as the Directors exercise reasonable care and due diligence, they are
fulfilling their duties to the company. But as soon as there is the failure to exercise such care and
precaution they are deemed to be negligent in their conduct and are personally liable for the
consequent damages. However, the error of judgement will not be deemed as negligence.16

13
P. K. Nedungandi v. Malayalee Bank Ltd A I R (1971) SC 829
14
Fleming Spinning and Weaving Co Ltd v. Naik 9 Bom. 374
15
Aggarwal V.S The Company Directors (1983)
16
Re Brazil Rubber plantations and Estates Ltd, (1911) 1 Ch.425

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“Business runs on a going concern, which will not be possible if people doubt every step of the
trust holders or office holders.”17

Mala fide acts: Directors are the trustees for the money and property of the company. They hold
an office of trust and if they misuse their powers they will be liable for breach of trust and may
be required indemnify the losses incurred due to.they need to make regular disclosures on their
profits, if any, earned in course of the performance of duties. Director can also be held liable for
misconduct, provided it is not willful.

Liability to third parties

The directors as agents of the company are not most of the times personally liable to third parties
for any transaction entered on behalf of the company. Their acts bind the company to third
parties. Generally, the rule is that wherever an agent, in a principal- agency concept liable,
directors would be liable. They can be held personally liable only in exceptional circumstances
when they contract in a personal capacity, or when the principal is not disclosed, or when it is a
pre-incorporation contract or when the contract is ultra vires the company and is not ratified
subsequently.

Positioning Directors duty in International Paradigm

Different countries have adopted different approaches to addressing the conundrum of duties and
liabilities of Directors. In the UK directors are given full discretion to run the companies.
Essentially directors are here deemed to have contractual powers according to which they can
enter into any profitable contract that they deem fit for the company. Thus they act in the
capacity of agents whereas, in the US, directors are neither “agents” of the corporation nor of the
shareholders. They have a fiduciary relationship according to which they have to manage the
corporation.

Directors owe duties of care and loyalty to their corporation. They also owe a duty of absolute
loyalty and utmost good faith. Prime difference between US & UK law is that in the latter the
duty is owed as a whole to the corporation instead of owing it directly to the shareholders

17
Dovey v. Cory [1901] AC 477

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However, an in-depth analysis shows that the duty of directors duties in the UK is basically a
duty to their shareholders, but the way of interpretation has brought this difference. The duty
herein is owed to shareholders as a body and not to individual shareholders18 which is well
evident now in sec 170 of their companies act 2006 On the other hand as far as the duty of
loyalty is concerned, directors have acted in the best interest of their company accompanies with
good faith. Although this case is considered to be a good law and followed throughout the same
has been dissented within subsequent cases wherein it was held that in circumstances where a
shareholder has solely relied on the director’s guidance, a director may owe a greater duty to an
individual shareholder.19

The American business judgement rule focuses more on procedure than on result whereas in U.K
there is an objective test to determine bad faith or good faith transactions. It’s only incomplete
irrationality that directors are made liable for business decisions in America.

Finally, U.K jurisprudence requires that directors should act in such a manner that there exists no
conflict of interests and also no personal advantage could be taken by virtue of their position.
Here the defence of business judgement rule is ineffective when there is a violation of the duty of
loyalty. They are better known here by the name of ‘The no- conflict rule’ and ‘The no-profit
rule’ respectively.

18
Percival v Wright [1902] 2 Ch 401
19
Coleman v Myers [1977] 2 NZLR 225[2] ; Peskin v Anderson [2001] BCLC 372[3]

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 4. CONCLUSION

A codified duty of directors is not a new concept. Its been since long that countries like the UK,
Singapore have done codification. .Section 170 of the English Companies Act stipulates that the
director’s duties are directed towards the company. The Indian Act fails to provide such clarity,
due to which there still remains confusion as to whom the directors own such duties primarily,
company or the shareholders.

Companies, by their very nature, are incapable of acting on its own despite having a separate
legal entity. This is where comes the role of directors who are akin to the company’s guardians.
In acting in such a capacity they are expected to work in the best interest of the company and its
shareholders and not in their personal interest- contra naturam suam.

This conflict of interest creates myriad conundrums leading to various interpretations. In light of
the same, there emerges an immediate need to analyse the duties and liabilities of directors
apropos American and British jurisprudence. Under custom-based law rules and even-handed
standards, executive’s obligations are to a great extent gotten from the law of office and trusts
(i.e., set of authoritative, semi-legally binding and non-legally binding trustee associations with
the Organization). Under the law of office, obligations of aptitude, care and persistence are
forced on executives. Then again, the law of trusts forces trustee obligations on chiefs. As needs
are, directors are the trustees of the organization’s cash and property, and furthermore, go about
as specialists in the exchange which they go into in the interest of the organization. Executives
are at risk as trustees for rupture of trust, on the off chance that they twisted the assets or
submitted break of byelaws of the organization.

A director is relied upon to play out his obligations as a sensibly persevering individual having
the information, ability and experience both of an individual, completing that director’s capacity
also, and of that individual himself. An executive, along these lines, assume different jobs in the
organization, let it be of a specialist, a representative (when designated on the rolls of the
organization), an officer and additionally a trustee of the Organization. Thereby wide
interpretation needs to be given so as to include each and every dimension of this duty.

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 BIBLIOGRAPHY
Books

 Singh, Avtar, Company Law, Eastern Book Company, 17th edition, New Delhi, 2018
 Kapoor, Dr. G.K., & Dhamija, Dr. Sanjay, Company Law-A Comprehensive Text Book
on Companies Act 2013 (University Edition), 22nd edition, Taxmann, New Delhi, 2019
 Companies Act with Rules-As Amended by Companies (Amdt.) Ordinance 2018, 2019
edition, Taxmann
 Davies, Paul & Worthington, Sarah, Gower: Principles of Modern Company Law, 10th
edition, Sweet & Maxwell, 2016

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