Company Law Synopsis.docx

Dr. RAM MANOHAR LOHIA NATIONAL LAW UNIVERSITY LUCKNOW

CORPORATE LAW

SYNOPSIS

‘Duties of Directors of a Company’

Submitted to:-

Submitted by:-

Ms. Priya Anuragini

Shivanshu Singh

Assistant Professor (Corporate Law)

Roll no. 140 B.A. LL.B. (Hons.)- 6th sem

INTRODUCTION A Company, although has a legal personality, it cannot perform acts on its own. It performs its functions through living persons, who act as agents for the company.1 The Directors of a Company are its primary agent and are duty bound to carry on the various functions of a company. It is said that the Directors having been dismissed, the company cannot act. 2 They ought to fulfill the objects of the company’s existence which is prescribed in its Memorandum of Association (MOA) and his powers to fulfill these objects are prescribed in the Articles of Association (AOA).3 The intention of the company is identified through the acts of its Directors. They serve as a requisite channel to accomplish the decision making and action taking task of the corporation.4 The Companies Act, 1956 attempt to define the term “Director” entails the term such as “Director includes any person occupying the position of a Director, by whatever name called”. Bowen LJ. has made an elaborate effort to define the position of the Director as agents, trustees and managing partners with each of these expressions not used as exhaustive of their powers and responsibilities, but as indicating useful points of view from which they may for the moment and for the particular purpose be considered. 5 They are not servants or employees of a company but an officer who controls the operations of the company. 6 However, a managing Director exercises dual capacity since he is an employee as well as an agent of the company.7 The Companies Act 1956 provides that a public company should have a minimum number of three Directors and a private company should have a minimum of two Directors. 8 However, the Act does not envisage any specific provision that generally governs the duties of Directors. The duties are instead governed by common law, which judges are required to apply to a given set of facts and circumstances. Under common law, there are certain broad sets of Director duties: 1

Lennard’s Carrying Co. v. Asiatic Petroleum Co., 1915 AC 705 at p. 713. Charanjit Lal Chowdhuri v. UOI and Ors., 3 Gower and Davies' Principles of Modern Company Law, 17th Edn. 4 Avtar Singh, Company Law, 14th Edn, 2005. 5 Imperial Hydropathic Hotel Co. v. Hampson, (1882) 23 Ch D 1 49 LT 150. 6 Moriarty v. Regent’s Garage & Engg Co, [1921] 1 KB 423;Lee v. Lee Air Farming Co.,. 7 Ram Pershad v. Commissioner of Income Tax, New Delhi MANU/SC/0330/1972. 8 Section 3, Companies Act, 1956. 2

(i) Duty to act with skill, care and diligence, and (ii) Fiduciary duties (to act in the interests of the company, to avoid conflicts of interest and to act for proper purposes).9 However, past track record in India indicates that cases where common law Director duties have been applied are few and far between. For this reason, duties of Directors are incapable of being defined as clearly as one can in other jurisdictions, particularly in the developed markets. The Companies Act, 1956 has been amended from time to time in response to the changing business environment. The 2011 Bill proposes significant changes to the existing corporate law provisions dealing with mergers and acquisitions and corporate restructuring with some modifications to the Companies Bill, 2009.10 If approved by Parliament, it would replace a 55 year old legislation — the Companies Act, 1956. Recently, India has witnessed some major corporate scams. The Companies Bill, 2011 proposes to bring in a paradigm shift by providing for more stringent norms and increased penalty. The much anticipated Bill makes sweeping changes to the existing law. While the existing Act has more than 600 sections, the new bill has been presented with just 470 clauses. As a matter of fact, the new Bill was introduced to incorporate the changes that had been suggested by many stakeholders and members after the 2009 Bill had been presented before Parliament. 11 In order to induce a greater level of clarity in Directors’ duties, the Companies Bill, 2011 has a specific provision that deals with the subject matter. Clause 166 of the Bill is substantially similar to the provision contained in the Companies Bill, 2009, with some iteration. The UK too adopted the strategy of codifying Directors’ duties in the Companies Act, 2006 (sections 171-177).

9

A Ramaiya, A guide to Company Law, 17th Edn. 2010. Robert Goddard, India: Company Law reform and the Companies Bill, Corporate Law and Governance, September 2011, http://corporatelawandgovernance.blogspot.in/2011/09/india-company-law-reform-andcompanies.html 11 KPMG, The Companies Bill, 2011 presented before the Lok Sabha, December 2011, http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/taxnewsflash/Documents/indiadec20no2.pdf 10

The bill seeks to establish a new benchmark for corporate governance in comparison to the existing framework under the Companies Act 1956. In short, India has a chance with the Companies Bill 2011 to take a lead in corporate governance innovation rather than following developments in the United States or the United Kingdom.12 The new Bill seeks to repair and fine tune the 1956 Act. While the intentions are good, it cannot be forgotten that the road to hell is paved with good intentions too. There are some grey areas in the Act. However, the new Act still promises to be a welcome change to plug the ambiguities, increase disclosures and compliances, promote better governance and responsibility and provides safeguards for all stakeholders. The Act has also proposed a few industry-friendly measures like one person companies, the dormant company and allowing a small company’s merger. More importantly, it offers immense opportunities for all professionals.

Research Methodology: The Researcher has adopted the doctrinal form of research in completing this project. This form of research was most appropriate as the project is a study of the duties of Directors under the English law, Companies Act and the new Companies Bill. Research material used includes works of eminent researchers about the role of Directors in a company as well as case laws which provide evidence about the various duties. The researcher has relied upon the various books available in the RMLNLU library. Also, online sources like JSTOR, Google Books, Hein Online and various university sites have been used.

Tentative Chapterization:      

INTRODUCTION ENGLISH LAW INDIAN POSITION DUTIES OF DIRECTORS UNDER COMPANIES BILL, 2011 ARE THESE CHANGES ENOUGH? CONCLUSION

Bibliography: 12

Sonia Shekhar, Companies Bill 2011 - Major Highlights, Articlesbase, http://www.articlesbase.com/ask-anexpert-articles/companies-bill-2011-major-highlights-5509238.html

Books Referred: 

Avtar Singh, Company Law, 14th Edn, 2005

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A Ramaiya, A guide to Company Law, 17th Edn. 2010.

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AK Majumdar and GK Kapoor, Company Law and Practice, 16th Edn., 2011

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L.V.V. Iyer, Guide to Company Directors’ Powers, Rights, Duties & Liabilities, 2nd Edn, 2003

Websites Referred: 

www.kpmg.com

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www.articlesbase.com

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www.mca.gov.in

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www.thehindubusinessline.com

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www.indiacorplaw.blogspot.in