Duties Imposed on Directors by the Companies Act


(Part 1)

The Companies Act No. 7 of 2007 impose specific duties upon directors of companies and are, for the main part contained in sections 187, 188, 189, 190, 191, 192, 193, 194, 195, 196, 197, 198, 199, 200, 374 and 377.

The first part of this Article examines the some of the primary duties of a director in respect of his actions as a director of the company. The second part looks at some of the duties a director has in his dealings with the company and the manner in which he has conducted himself as a director.

The Act defines a director to include (a) a person occupying the position of director of the company, by whatever name called, (b) for the purposes of section 187, 188, 189, 190, 197, 374 and 377, (i) a person in accordance with whose directions or instructions a person occupying the position of the company, by whatever name called, maybe required or is accustomed to act, (ii) a person in accordance with whose directions or instructions the board of the company may be required or is accustomed to act, and (iii) a person who exercises or who is entitled to exercise¬† or who controls or who is entitled to control the exercise of powers which, apart from the articles of the company, would be required to be exercised by the board and (c) a person for the purposes of section 187 to 195, 197, 374 and 377, a person to whom power or duty of the board has been directly delegated by the board with that person’s consent or acquiescence or who exercises the power or duty with the consent or acquiescence of the board.

The definitions set out in (b) and (c) above are intended to capture those persons acting as “Shadow Directors”. This would mean that the duties imposed by the aforementioned sections of the Act will even bind those persons who may act “behind the scene” in the capacity of a director.

Section 187 states that a person exercising the powers or performing duties as a director shall act in good faith in what that person believes to be in the interest of the company. This position is a long established common law principle, consistently upheld in numerous decisions of court. However, sub-section 187(2) provides an exception to this rule, where a director of a company, which is a wholly owned subsidiary of another company may, if expressly permitted to do so by the company’s articles, act in a manner which he believes is in the best interest of that other company, even though it may not be in the interests of the company of which he is a director.

Section 188 provides that a director of a company shall not act or agree to the company acting in a manner that contravenes any provisions of the Companies Act or the provisions contained in the articles of the company.

A person who exercises the powers or performs the duties of a director cannot act in a manner which is reckless or grossly negligent and he must also exercise the degree of skill and care that may reasonably be expected of a person of his knowledge and experience.(Section 189) Whilst the edict to exercise the powers and perform duties without being reckless or grossly negligent is absolute, the test of acting reasonably in a given situation would be determined on a case by case basis, taking into consideration the facts and circumstances of that particular situation, including the knowledge and experience of the director in question.

A director may rely on reports, statements and financial data and other information prepared or supplied and also rely upon professional or expert advice given by an employee of the company or a professional advisor or expert in relation to matters which the directors believes to be within the person’s professional or expert competence or any other director or committee of directors in which the director did not serve, in relation to matters within the directors or committee’s designated authority. A director can rely upon such information or advice provided by the aforesaid persons if and only if the director acts in good faith, makes proper inquiry where the need for inquiry is indicated by the circumstances and has no knowledge that such reliance is unwarranted. The Act also provides that the provisions contained therein are in addition to and not in derogation to any provisions contained in any other law relating to the duty or liability of directors or officers of a company. (E.g. provisions under the EPF Act, ETF Act etc)

Section 197 of the Act provides that a director of a company who has information in his capacity as a director or employee of the company which would not otherwise be available to him, shall not disclose that information to any person or make use of or act on the information except for the purposes of the company or as required by law or in any other circumstances in which the company’s articles authorize the director to so. A director any also disclose, make use of or act on information if the director is first authorized to do so by the board, where it is satisfied that to disclose or make use of or act on such information, will not be likely to prejudice the company and the particulars of such authorization is entered in the “interests register”.

PART 2

In continuing to examine the duties and obligations imposed on directors of companies by the Companies Act, this article looks at some of the more important duties of directors when it comes to dealing with the company and his conduct when acting as a director.

Section 192 of the Act states that a director of a company must forthwith, after becoming aware of the fact that he is interested in a transaction or proposed transaction with the company, cause to be entered in the “interests register” and if the company has more that one director, disclose to the board of the company, the nature and extent of that interest. For this purpose, a general notice entered in the “interests register” or a disclosure to the board to the effect that a director is a shareholder, director, officer or trustee or another named company or other person or is otherwise connected with another named company or other person, and is to be regarded as interested in any transaction, which may after the date of the entry or disclosure be entered into with that company or person, shall be sufficient disclosure of interest in relation to any transaction with that company or person.

However, the failure of a director to comply with this requirement of the law, shall not affect the validity or a transaction entered into by the company the director. Nevertheless, a director who fails to company with the aforesaid requirement of disclosure, shall be guilty of an offence and be liable on conviction to a fine not exceeding two hundred thousand rupees.

A director is deemed to be “interested” in a transaction to which the company is a party if and only if (a) the director is a party to or will or may derive a material financial benefit from the transaction; (b) he has a material financial interest in another party to the transaction; (c) is a director, officer or trustee of another party to or a person who will or may derive a material financial benefit from the transaction, not being a party or person that is either the company’s holding company being a holding company of which the company is a wholly-owned subsidiary or a wholly owned subsidiary or the company or a wholly owned subsidiary of a holding company of which the company is also a wholly owned subsidiary; (d) is the parent, child or spouse of another party to a person who will or may derive a material financial benefit from the transaction; or (d) is otherwise directly or indirectly materially interested in the transaction.

However, a director is not deemed to be interested in a transaction to which the company is a party, if the transaction comprises only the giving by the company of security to a third party which as no connection with the director, at the request of the third party, in respect of a debt or obligation of the company for which the director or another person has personally assumed responsibility in whole or in part under a guarantee, indemnity or by the deposit of a security.

The Act also provides that a transaction entered into by the company in which a director of the company is interested, may be avoided by the company at any time before the expiration of six months after the transaction and the director’s interests in it have been disclosed to all the shareholders. This type of transaction however, cannot be avoided if the company has received fair value for it. The question whether fair value has been received by the company in a transaction will be determined on the basis of the information known to the company and to the interested director at the time the transaction was entered into.

The avoidance of a transaction in the manner described above shall not effect the title or interest of a person in or to property which that person has acquired, if the property was acquired from a person other than the company, for valuable consideration and in good faith without notice of the circumstances as a consequence of which the transaction becomes voidable.

Section 374 of the Act also imposes a strict duty upon directors where a company is wound up and a person who is a past or present officer of the company is deemed to have committed an offence if, within the two years preceding the commencement of a winding up he has (a) concealed any part of the company’s property to the value of Rs. 10,000/- or more or concealed any debt due to or from the company; (b) fraudulently removed any part of the company’s property to the value of Rs. 10,000/- or more; (c) concealed, destroyed, mutilated or falsified any book or document affecting or relating to the company’s property or affairs; (d) made any false entry in any book or document affecting or relating to the company’s property or affairs; (e) fraudulently parted with, altered or made any omission in any document affecting or relating to the company’s property or affairs; (f) pawned, pledged or disposed or any property of the company, which has been obtained on credit and has not been paid for, unless the pawning, pledging or disposal was in the ordinary course of the company’s business; (g) made or caused to be made any gift or transfer of or charge on, or has caused or connived at the levying of any execution against the company’s property, with the intent of defrauding the company’s creditor’s; or (h) concealed or removed any part of the company’s property since or within two months before the date of any unsatisfied judgement or order for the payment of money obtained against the company, with the intent of defrauding the company’s creditors.

A person who commits any of the above mentioned offences is liable on conviction to a fine not exceeding Rs. 1,000,000/- or to imprisonment not exceeding five years or to both such fine and term of imprisonment

 



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