Rights and Responsibilities of Company Directors

In India, a company director is a person appointed to the board of a company who collectively oversees its management, decisions, and legal compliance. The legal definition of the director in the Companies Act, 2013 (Section 2(34)) includes both executive and non-executive directors. Directors in India enjoy collective and individual rights, including participation in board meetings, access to records, the right to remuneration, and indemnity for actions taken in good faith. Good governance depends on a responsible and vigilant board. Therefore, the directors must be aware of their responsibilities and act in the interest of the company, shareholders, employees, creditors, and other stakeholders.

In this guide, we will understand the legal framework governing the directors, their qualifications, and disqualifications, along with their rights, responsibilities, and liabilities.

Legal Framework Governing Company Directors

The Companies Act, 2013, is the primary law that governs the directors. The Companies Sections 149 to 172 include rules on appointment, disqualifications, duties, board functioning, and liabilities. Apart from this, rules notified by the Ministry of Corporate Affairs (MCA), such as the Companies (Appointment and Qualification of Directors) Rules, 2014, also apply.

For listed companies, additional governance standards are imposed through the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

Who is Qualified to Become the Director of the Company

• Age requirement: A person must be at least 18 years old to be appointed as a director.
• Number of directorships: An individual can hold directorships in up to 20 companies (public or private), with a maximum of 10 public company directorships.
• Resident director: Every company must have at least one director who has stayed in India for a total period of not less than 182 days in the previous calendar year.
• Special qualifications for certain directors: For example, independent directors and small shareholder directors in listed companies must fulfil specific eligibility criteria, such as experience, integrity, and independence from management.

Disqualifications of Company Directors

Section 164 of the Companies Act, 2013 lists various grounds on which a person can be disqualified from becoming or continuing as a director:

• Unsound mind or insolvency: Individuals declared as mentally unsound by a court or those declared insolvent cannot serve as directors in a company
• Criminal convictions: A person who has been convicted and sentenced to imprisonment for more than six months cannot become a director.
• Non-filing of returns: Individuals who have failed to file financial returns of previous companies for any continuous period of 5 years they were associated with may not be eligible to become a director.
• Bankruptcy: Individuals who have been declared bankrupt are not eligible to serve as directors.
• Order by court or regulatory authority: If a person has been declared disqualified by a court or regulatory authority, such as SEBI.
• Failure to attend board meetings: if a director absents themselves from all meetings of the board of directors held during a period of 12 months without obtaining leave of absence from the board.

Rights of Company Directors

The Companies Act, 2013, has empowered the directors of the company with several rights, such as:

1. Collective Rights (in the Board of Directors (BOD)

• Right to participate in board meetings: The BOD is responsible for making the policy decisions and strategy of the company. Directors have the right to participate in meetings and vote on resolutions.
• Right to appoint committees: The board has the right to constitute committees like the audit committee, nomination and remuneration committee, and Corporate Social Responsibility (CSR) Committee, depending on the size and type of the company.
• Right to authorise transactions: Directors, collectively, can approve major business decisions such as borrowings, mergers, acquisitions, or selling assets, subject to shareholder consent where necessary.
• Right to appoint auditors: The board appoints the first auditor of the company within 30 days of incorporation and fills casual vacancies in the office of the auditor.
• Right to contribute to charitable and political funds: Directors can authorise contributions within prescribed limits for social and political causes, subject to shareholder approval where applicable.

2. Individual Rights

• Right to inspect company records: Every director has the right to access the books of accounts, statutory registers, and meeting minutes to stay informed.
• Right to seek information: Directors can ask for information necessary to make informed decisions. The management must provide accurate and timely data upon request.
• Right to remuneration: Directors are entitled to receive sitting fees, commission, or salary as per the company’s Articles and shareholder approval.
• Right to indemnity: Directors are indemnified by the company for liabilities incurred during their service for the company, provided that their actions were in good faith.
• Right to dissent: Directors can dissent on board resolutions and have their dissent formally recorded in minutes. This dissenting opinion can protect them from liability if a decision later proves harmful to the company.

Responsibilities and Duties of Company Directors

The Companies Act, 2013, imposes various duties on directors, both statutory and fiduciary, to ensure ethical, responsible management.

A. Statutory Duties under Section 166 of the Companies Act, 2013

1. Act according to the Articles of Association of the company: Directors have to follow the company’s Articles of Association and act within the powers granted to them.
2. Act in good faith: Directors must act in good faith for the best interest of the company, its employees, shareholders, and other stakeholders.
3. Exercise due diligence: Directors are expected to exercise reasonable care and diligence while performing their duties.
4. Avoid conflicts of interest: Directors should avoid situations where their personal interests conflict with those of the company.
5. Avoid undue advantage: Directors must not make secret profits or use their position for personal benefit. Any undue gain must be returned to the company.
6. Not to assign their office: A director cannot assign their office to any other person. Any such assignment is void.

B. Fiduciary Duties

In addition to statutory obligations, directors also have fiduciary responsibilities towards the company and other directors/employees:

• Duty of loyalty: Directors need to prioritise the company’s interests above their own.
• Duty of confidentiality: Directors need to keep the sensitive business information confidential, even after resignation.
• Duty to disclose: Directors must disclose their interest in any contract or arrangement entered into by the company.
• Duty of oversight: Directors are responsible for ensuring that the company complies with applicable laws, maintains proper records, and conducts business ethically.

Liabilities of Directors

Non-fulfilment of the duties by the directors can result in various repercussions:

1. Civil liability: If a director acts negligently or beyond their authority, they will be personally liable. Any misuse of company funds, fraudulent acts, or entering into transactions without board approval can result in civil as well as criminal liability.
2. Criminal liability: The Companies Act, 2013 prescribes imprisonment and fines for certain offences, such as furnishing false information, fraud, or non-compliance with statutory duties. The directors can be held criminally liable for offences like non-filing of annual returns, failure to pay statutory dues, or environmental violations, etc.
3. Regulatory liability: Directors must ensure timely compliance with regulations like filing of annual returns, holding meetings, maintaining proper disclosures, and fulfilling CSR obligations. Non-compliance can lead to disqualification, penalties, and restrictions on holding directorships in other companies.

Special Responsibilities of the Independent Directors

The Companies Act, 2013, has introduced the concept of independent directors, especially for listed and large public companies, for the purpose of bringing objectivity and preventing dominance by promoters or management.

They are responsible for:

• Reviewing the performance of the board and management.
• Ensuring the integrity of financial statements.
• Monitoring the related party transactions.
• Acting as a whistleblower channel supervisor.
• Safeguarding the interests of minority shareholders.

Disclosures Required from Directors

Transparency is a key pillar of corporate governance. Directors are responsible for:

• Disclose the interest in contracts or arrangements under Section 184 of the Companies Act, 2013
• Declare any changes in shareholding or directorships in other companies.
• Submit declarations of independence and non-disqualification annually.
• Maintain registers of contracts and disclosures as per the Companies Act, 2013.

Failure to comply with disclosure norms can result in fines, vacating office, or disqualification.

Protections Available to Directors

While directors are held accountable for their actions and inaction, the law provides certain protections to them, such as:

• Act done in good faith: Directors acting honestly in the good faith and the best interests of the company are protected against liability.
• Reliance on experts: As per Section 149(12) of the Companies Act, 2013 and judicial precedents, independent and non-executive directors are not held liable for actions taken in good faith based on professional advice.
• Directors & Officers (D&O) Insurance: Many companies provide Directors & Officers Insurance to shield directors from personal financial exposure arising from litigation.
• Right to Record Dissent: Directors have the right to record their dissent on the minutes of the meeting, which helps them to limit their liability if the decision leads to some loss or legal actions.

Related Services

• Appointment of Director 
• Removal of Director

Frequently Asked Questions

1. Who can be appointed as a company director in India?

Any individual aged 18 years or above can be appointed as a company director in India. There is no specific educational qualification mandated by the Companies Act, 2013. However, specialised roles like independent directors may require experience, integrity, and other prescribed attributes.

2. What is the maximum number of directorships a person can hold?

As per Section 165 of the Companies Act, 2013, a person can hold directorship in up to 20 companies, of which no more than 10 can be public companies.

3. What is meant by a “resident director”?

A resident director is an individual who has stayed in India for at least 182 days during the previous calendar year. Every company must have at least one resident director, as per Section 149(3) of the Companies Act, 2013.

4. Can a person be a director in more than one company at the same time?

Yes, an individual can simultaneously serve as a director in multiple companies, subject to the limits set under Section 165 of the Companies Act, 2017.

5. What are the statutory duties of directors under Section 166?

Directors must act in accordance with the company’s Articles of Association, act in good faith, exercise due diligence, avoid conflicts of interest, not derive undue personal gains, and not assign their office to others.

6. What is the difference between executive and independent directors?

Executive directors are involved in day-to-day management and operations. Independent directors, usually in listed companies, are not involved in daily operations and are appointed to bring impartial judgment and oversight, especially in governance and audit matters.

7. Under what circumstances can a person be disqualified from becoming a director?

If the director is declared insolvent, is convicted of an offence involving imprisonment of over six months, fails to file financial statements for five continuous years, or is declared of unsound mind by a court.

8. What rights does a director have in the boardroom?

Directors have the right to participate in board meetings, vote on resolutions, inspect company records, ask for relevant information, receive remuneration, and have their dissent recorded during board decisions.

9. Are directors personally liable for company losses?

No, directors are not personally liable for company losses if they acted in good faith and within their authority. However, they may be held personally liable for losses caused by negligence, fraud, or breach of duty.

10. What are Directors & Officers (D&O) insurance?

D&O insurance protects directors and officers from personal losses if they are sued for wrongful acts while managing the company. It also covers legal fees, settlements, and other costs arising from litigation.

11. What disclosures are directors required to make annually?

Directors must declare any interest in contracts or arrangements, disclose their shareholdings, confirm their non-disqualification status, and, in the case of independent directors, submit an annual declaration of independence.

12. What special responsibilities do independent directors have?

Independent directors oversee board performance, financial integrity, related party transactions, and minority shareholder interests. They also act as whistleblower overseers and must provide an unbiased perspective during critical decisions.

13. Can directors delegate their powers to others?

While directors may delegate certain administrative functions, they cannot assign their office to another person. Any such assignment is void under Section 166(6) of the Companies Act, 2013. They remain ultimately responsible for the actions taken in their name.