Company Management

DUTIES AND LIABILITIES OF

DIRECTORS
 General Duties of Directors

•DUTY OF GOOD FAITH

•DUTY OF REASONABLE CARE

•DUTY TO ATTEND BOARD MEETINGS

•DUTY NOT TO DELEGATES

•DUTY TO DISCLOSE INTEREST

 DUTY TO GOOD FAITH

•Directors must act honestly and in the interest of the company and
shareholders

•Should not exploit corporate opportunities to their own use

•should not make secret profits

•If No obligation or direction from company - no breach of duty

• - not liable to pay profits

 DUTY OF REASONABLE CARE

•With due diligence and caution, Director has to attend the work

assigned to him, If fails, he is guilty of negligence

•Not liable for mere errors of judgement

•Exclusion of liability for negligence clause - in articles or in any

agreement is void - as Companies Act does not allow
 DUTY TO ATTEND BOARD MEETINGS

•Director exercise powers at the meeting of the Board so:

• he should attend them but

•Not bound to attend all meetings

•But if he, without obtaining permission of Board, fails:

• to attend three consecutive meetings or
•absents in all the meetings for a consecutive period of three months
•his office shall be deemed to have been vacated:

• from the date of first meeting from which the director has absented
himself.
 DUTY NOT TO DELEGATES

•Directors are appointed because of their skill, competence, and

integrity so

•They should perform their functions personally and not to delegate

them to other persons

•Exceptions:

•Can delegate to the extent - Companies Act or Articles of Co.

authorizes (Sec.292)

•Can be left to other officials- in case of exigencies of business- but in

proper manner
 DUTY TO DISCLOSE INTEREST

•To avoid the conflict between the personal interest of the Director
and his duties towards the company:

•Directors should disclose his personal interest at the first meeting of

the Board held - after he becomes interested in a:

• Contract or some arrangements entered into or on behalf of the

company

• Punishment for non-disclosure- fine upto Rs.50 thousands

•Interested director can not participate in the discussion or arrangement
of his interest

•Can not vote on such matters - if votes ,it shall not be taken into account

•Presence of such director shall not be counted for the purpose of

forming a quorum (Sec 287)

•No ban on the company to enter into a contract in which director is

interested

•Company must have separate register for entry of such contracts in

which directors are interested(301)
•Only requirement - such interest must be fairly disclosed

•Non-disclosure - makes the contract voidable at company’s option

•If whole body of the directors is already aware of such interest

-formal disclosure not necessary

•Failure to disclose his interest – liability to:

• refund his remuneration

•cease to become director &
•Fine of Rs. 50 thousands
 Statutory Duties of Directors

Duties under Companies Act - include the duty :

•to file return of allotments,

• to disclose receipt of compensation from transfer of property and

shares

•to convene annual and the extraordinary general meeting

 Liabilities of directors
Liability may arise from due to :

•breach of fiduciary duty- trust and confidence,

•ultra vires acts,
• negligence- lack of reasonable care and skill, and
• mala fide acts- willful misconduct / willful negligence

•Can be held liable to compensate company or members - for loss

occasioned due to above reasons

•Directors may be personally liable to third parties for untrue

statement in prospectus
•Directors may be held liable -for Allotment of shares in contravention
of Companies Act- Sec 69, Sec 70, Sec 73 etc.

•For exceeding authority conferred -under Act or Articles. - ulta vires

•May also incur criminal liability under Companies Act and other
statutes

•For Ex: Offence of Cheating for issuing a cheque – knowing

inadequacy of funds and with intention to cheat
• Directors may be liable - If particulars of a charge are not filed with
registrar within 30 days of its creation

•Where annual return is not filed with the registrar within 60 days of
annual general meeting

•Where dividends are not distributed within 42/30 ???days of its

declaration

•Where register of directors, managing directors and managers is not

maintained
Minority Protection
and

Prevention of oppression
&
Mismanagement
 Supremacy of Majority and Protection of Minority

‘MAJORITY RULE’ OR THE ‘RULE OF SUPREMACY.’

Company is governed and managed by will of majority of

shareholders.

•Wide powers may be misused by majority shareholders to exploit the

minority shareholders.

•Need for balance for the smooth functioning of company

affairs
WHY PROTECTION OF MINORITY?

•A proper balance of the rights is done by -

• allowing minority to exercise their powers

•To regulate powers of majority and

•majority to observe principles of natural justice and fair play

•Companies Act and Common Law provide protection to minority

 RULES OF SUPREMACY OF MAJORITY
RULE IN FOSS v. HARBOTTLE(1843)

•The will of the majority shareholders is supreme and it should prevail

over the minority

•Court should not interfere with the internal management of

companies so long as company’s activities are within its powers

•As company is a separate legal entity independent from the members

who compose it.

•So, if a wrong is done to Co., the company is the proper person to

bring an action for the same.
 Principle of the Rule of Supremacy of Majority

•Where the alleged wrong in a transaction is binding on the company

by a simple majority of members-

•no individual member of the company is allowed to maintain an action

in respect of that matter.

Limitations:

Power of the majority is subject to company’s ‘memorandum of

association’.

Majority’s act must not be inconsistent with the provisions of the

Companies Act or any other law
 BASIS OF THE RULE OF SUPREMACY OF MAJORITY

•To honour the will of the majority shareholders

•To avoid the multiplicity of suits

•To Recongnise the separate legal entity of the company

•To preserve the right of the majority to decide the matters :

• The majority of shareholders has the right to decide how the

company’s affairs shall be conducted.

•The rule of supremacy of majority seeks to preserve this right of the

majority, as the minority is not allowed to challenge the lawful acts of
the majority.
EXCEPTIONS TO THE RULE OF SUPREMACY OF MAJORITY

•Certain acts cannot be approved or ratified even by the majority.

•Even a single shareholder may bring a legal action: Ex:-

•Ultra-vires acts –case of advance money at interest without security- directors

acting ultra vires the company – contrary to provisions of the company’s memorandum

•Fraud on the minority – case of compromise between two competing Co. – A Co.’s
decision was in favour of B Co. – Minority shareholders of A Co. may question the compromise
resolution if it amounts to fraud.
•Acts requiring special majority but passed by simple majority

•Acts inconsistent with the articles of association- a company in need of

further capital- majority can not alter article to enable them to purchase minority shares
compulsorily.

As altering company’s articles is not beneficial to the company as a

whole.

•The majority powers must be exercised in good faith and for the benefit
of the company as a whole.

• If powers exercised amount to a fraud on minority - liable to be

challenged by the minority.
•Personal rights of individual members :

•Right to vote, Right to have his vote recorded / counted

It is no ground for rejecting a member’s vote that he has voted against the interest of
the company.
•Right to receive dividend,
•Right to contest the election for a director of the company

Wrongdoers in control of the company

As wrongdoer themselves may not permit an action to be brought against
themselves ,any member may bring an action in the name of the company.-

Oppression and mismanagement

•If there is oppression of minority, or the mismanagement of company’s affairs.
Minority have right to bring an action under Companies Act.
PROTECTION OF MINORITY UNDER THE COMPANIES ACT

Right to apply to the court for the cancellation of the variation of

class rights [Section 106, 107]

But if it leads to fraudulent variations of the rights to the prejudice of the

remaining one-fourth minority.

class rights may be varied with the written consent of three-fourth majority of the
shareholders of that class [Section 106].

Right to apply to the Company Law Board/ National Company Law

Tribunal ( Now )for the investigation of company’s affairs [Sections 235,
236]

The specified number of members (even if they constitute

minority) may apply to the Company Law Board for the
investigation of company’s affairs. – Co. with share capital- at least 100
members or members having 1/10 of total voting powers/ No share capital- 1/5 of total
numbers
Right to apply to the court if not satisfied with the scheme of
reconstruction and amalgamation [Section 391 to 395]

In a scheme approved by the majority of shareholders- the minority shareholders who

do not give their consent to the scheme- may apply to the court to prevent the
compulsory acquisition of their shares.

Right to apply to the court for winding up of the company [Section 433 ]
If affairs of the company are conducted in a manner which is oppressive to the
members, or are mismanaged.

Right to apply to the Company Law Board for prevention of oppression and
mismanagement [Section 397 and 398]

The required number of members who may apply for the prevention of oppression and
mismanagement under 397 and 398 is mentioned in Section 399
 Prevention of Oppression and Mismanagement

•Several remedies are available to minority where majority indulges in

oppression or mismanagement

•An application can be made to the CLB under Sec 397

&398

•Complaining member must show that

• he is suffering from oppression in his capacity as member and

•not in any other capacity and

•oppressions is of continuing nature

 Acts held to be oppressive by the Courts/CLB

(i) not calling a general meeting and keeping shareholders in dark

(ii) non-maintenance of statutory records

(iii) not conducting affairs of company in accordance with the

companies Act

(iii) depriving a member of his right to dividend

(iv) transfer of shares to selected shareholders rather than making an

offer to all
(v) allotment of shares by directors in a manner by which an existing
majority of shareholders is reduced to a minority

(vi) continuous refusal by company to register shares with an ulterior

motive of retaining control over affairs of company

(viii) countermanding decision of Board - by a director who

controls majority voting power and not allowing Board to perform its
functions

(x) sale of assets to directors simultaneously giving them loan to

purchase the same

(xi) refusal to register transmission under will

(xii) issue of further shares benefiting a section of shareholders

(xiii) registration of transfer of shares in violation of articles

 Sec 398 CLB is empowered to grant relief in cases of
mismanagement

•When CLB is of the opinion that

• affairs of company are being conducted/ likely to conducted

• in a manner prejudicial to the public interest or interests of the

company
 Courts/CLB held – Acts amounting to mismanagement are :

•serious infighting between directors,

•illegal constitution of the Board of directors,

• gross neglect of interest of company by sale of its assets,

•diversion of funds to benefit majority, operation of bank account by

an unauthorized person,

• continuing in office of managing director after expiry of their term

To end oppression and mismanagement
CLB has been empowered under Sec 402 to grant certain specific
relief which include:

(i) regulation of conduct of company’s affairs in future

(ii) order to purchase shares or interests of any member by other

members thereof or by company and permission to reduce its
share capital

(iii) termination or modification of any agreement between

company and MD /director/manager/ third person,

(iv) set aside any transfer, delivery of goods, payment, execution

and other act relating to property,
Central Govt. may nominate a BO Dirs to prevent oppression and
mismanagement