KNC501/KNC601 Constitution of India, Law and Engineering
Chapter 17: Sole Traders and Partnership
A company acts through two bodies of people – its shareholders and its board of directors. The board of directors are in charge of the management of the company’s business; they make the strategic and operational decisions of the company and are responsible for ensuring that the company meets its statutory obligations. Your role as an individual director is to participate in board meetings to enable the board to reach these decisions and make sure that the company’s obligations are fulfilled.
The directors are effectively the agents of the company, appointed by the shareholders to manage its day-to-day affairs. The basic rule is that the directors should act together as a board but typically the board may also delegate certain powers to individual directors or to a committee of the board.
You may also be a shareholder or an employee of the company (or both) and, if so, will have additional rights and duties going beyond those purely connected with your office as a director. It is crucial that you draw a distinction between these separate roles and ‘wear the right hat for the job’.
What are the Duties of Directors in Company Law?
The Companies Act 2006 puts ‘meat on the bones’ of the duties of directors by outlining the statutory duties that apply to all company directors.
1. To exercise reasonable skill, care and diligence
Company directors must exercise skill, care and diligence in regard to the functions they carry out on behalf of the business. Failure to act with a certain degree of competence for the benefit of others could give rise to negligence claims to compensate the company for mistakes the directors make.
2. To promote the company’s success
A company director must act in a way that demonstrates good faith in the business and promotes the company’s success for the shareholders as a whole. This duty relates to the purpose of the company as set out in the company’s constitution (the Memorandum of Association and Articles of Association). For example, if the company is set up for charitable purposes then the directors are obliged to work for the benefit of others.
3. To act within their powers
Company directors are given certain powers to enable them to manage the company. They must use those powers in the best interests of the company as set out in the company’s constitution and not to further their own narrow interests.
4. To exercise independent judgement
Directors must exercise independent judgement when making decisions and not subordinate their power to the will of others. While directors can seek professional advice, they should exercise their own judgement when deciding whether to follow it.
5. Not to accept a benefit from third parties
Company directors must work to promote the success of the business and cannot accept a benefit (a bribe) from a third party that may cause them to do or not do something. Offers of corporate hospitality or gifts should be regarded with caution as benefits provided to a director with the intention of winning new business could be considered a bribe.
6. To avoid conflicts of interest
It is a legal obligation for company directors to avoid conflicts of interest that relate to situations and transactions the company is involved in. Each director has a personal responsibility to avoid circumstances where they have or could have a direct or indirect interest that conflicts with the interests of the company. Non-compliance is seen as a serious breach of director duties and criminal action could follow.
7. To disclose any interest in a proposed transaction or arrangement
If the director of a business has an interest in a proposed transaction or arrangement then it must be declared to all members of the board either at a board meeting or in writing. For example, if the company is considering using a new supplier and a director is also on the board of the potential supplier that must be disclosed.
Power of Director of Company:
The board of directors can exercise the following powers, only by passing a resolution in the meetings of the board:
- Make calls on shareholders.
- Authorize the buyback of securities and shares.
- Issue securities and shares.
- Borrow monies.
- Investing the funds.
- Grant loans.
- Approve the financial statement.