A company is a legal entity with a separate legal standing and artificial jurisdictional status as per the provisions of the Companies Act. It is again separate from its promoters, members, and other stakeholders. The business of such a separate entity is to be conducted by the company alone. This depends on the collective body of humans who are appointed to the entity in a fiduciary capacity as directors.
The Board of Directors can be understood as persons who collectively manage the business of the company and are the reason for the success or failure of any business or company. The duties of directors vary or increase or decrease with respect to the composition of the company, along with its nature. However, while discharging any of its duties performed as a director or in a fiduciary capacity, it should be done with honesty and without negligence, where the directors act as if the business were owned by themselves.
Duties of Directors as per Gower’s Principles of Modern Company Law
By applying the general equitable principle, the following four rules were laid down with respect to the directors of the company:
- Directors must act in good faith in what they believe to be in the best interests of the company.
- The Directors must not exercise the powers conferred upon them for a purpose different from that for which they were granted.
- The Directors of the company must not fetter their discretion on how they shall act; and
- The Directors must not, without the informed consent of the company, place themselves in a position in which their personal interests or duties to other persons are liable to conflict with their duties to the company.
Case of Official Liquidator Vs. PA Tendolkar (1973) 43 Com
The honourable Supreme Court held in this case that, “a director may be shown to be “so placed and to have been so closely and so long associated personally with the management of the company that he will be deemed to be not merely conscious of but liable for fraud in the conduct of the business of the company even though no specific act of deception is proved against him. He cannot shut his eyes to what must be obvious to everyone who examines the affairs of the company, even in an apparent manner or outwardly. If he does so, he could be held liable for neglect of duties even if he is not shown to be guilty of participating in the commission of the fraud which is in question or is being reported. It is enough if his dereliction of duty is of such character as to enable frauds to be committed and losses thereby incurred to the company.”
Diversion of Business Opportunities of the Company
In certain circumstances, when deciding for the company, the personal interest of the Director would come into conflict with the interests of the company. This conflict-of-interest rule is universal and inflexible. And if, in such a situation, the Director diverts the company’s business opportunity, it creates even a conflict of duty and interest. This shall again be considered as the directors agreeing without informing the company about exploiting good business opportunities available to the company at the company’s cost.
A fiduciary is not allowed to enter into any engagements in which he had or could have, a personal interest conflicting with or which might be in conflict, with those of whom he is bound to protect is universal and inflexible. And such fiduciary would be required to disclose the details of such opportunity, which he diverted for his benefit, which otherwise would have been available to the company, prior to acting in such manner.
Case Crown Dilmum Vs. Sutton (2004)1BCLC 4688(ChD)
In this case, the Director diverted an investment opportunity available to the company and made the investment pursuant to an agreement. He also failed to disclose the same to the comptroller.
It was held that the Director cannot have a genuine directorship, that the company director is invested in such an opportunity, and thereby does not hold any right to decide to take the opportunity which came his way and divert it to another company at his own will. So, this can be considered a breach of statutory duties, and it commences from the moment when he fails to make full disclosure to the comptroller.
Duty of Disclosure
The duties of directors are higher than the duties that are imposed on an employee by the law. The Director is not a senior management fiduciary and is directly responsible for making decisions and acting for the success of the company, along with his fellow directors. So, the primary duty of such a director is to act in the good faith and interest of the company. And they thus must disclose their interest in any business connected with the company, as the duty of a fiduciary is combined with the duty of loyalty and honesty towards the company.
Various provisions of the Companies Act make it mandatory to disclose a director’s interest in any business in the Director’s Report; all directors should disclose their interests and be asked to abstain from voting or participating in such discussions that pertain to the transaction in which he is interested. Also, their presence will not be counted for quorum. A director may also be disqualified from continuing as a director or appointed as a director in a case where he fails to disclose his interest in the company under the Companies Act, 2013.
Liabilities held by the Director to the Company after Directorship.n
Even if the Director becomes the company’s Director, the Director holds liabilities to the company. And if such a director makes preliminary arrangements for the commission of a breach of duty in a fiduciary capacity while he is a director and then resigns from such position, he remains accountable to the company for any profit he obtains from the transaction as a whole.
CMS Dolphin Ltd. Vs. Simone (2001)2 BCLC704(ChD)
In this case, a director of an advertising agency resigned without giving any notice and set up another entity, which was again an advertising agency. It was a partnership entity, and that was carried on after the change into the company. He recruited staff from the previous company, took some of the major clients, and diverted the benefits of the new contracts. No, the company made certain profits and later became insolvent.
Here, the court held that the underlying basis of liability of a director who is trying to take advantage of a maturing business opportunity of the company after his resignation, of which he had prior knowledge as a result of his being a director. So, such an opportunity is to be treated as if it were a property of the company in relation to which theDirectorr held a fiduciary posDirectornd through resignationDirector setting or arranging to exploit the opportunity and other contracts of the company,y which is againae breach of his fiduciary duties.
We can say that a director shall be held liable to account for profits he makes by exploiting the opportunity available to the company in a personal manner, in a partnership, or through a company that is che controls shall also be liable even if his partners or fellow members were not aware of the breach of his fiduciary duty to conduct business in the new agency set up by him.
So, it was settled that a director shall remain under an obligation that he shall not use his own or another person’s benefit, the confidential information of the company, by holding a position, or when he releases him from the responsibility, or when the information is published or comes under the public domain.
