INTRODUCTION
In the framework of sound corporate governance, directors serve a variety of functions as the ‘gatekeepers’ or ‘watchdogs’ of their respective organizations. The first is to increase the company’s value for the benefit of its shareholders while taking the stakeholders’ interests into consideration. The second, which may be viewed as a corollary to the first, is to minimize or stop the company’s worth from being destroyed. A third responsibility of directors of publicly traded firms is to make sure that information is properly disclosed by the company so that investors may make well-informed judgments about the securities that are being offered. The directors are subject to fiduciary duties in order to prevent them from exploiting possibly weaker third parties who depend on them. This category of vulnerable individuals includes companies, which are artificial entities that are entirely dependent on their human agents. However, incidents involving directors’ violations of fiduciary responsibility are common, even with the proactive intent behind fiduciary requirements.
WHO IS A DIRECTOR?
Directors refer to the part of the collective body known as the Board of Directors, that is responsible for controlling, managing and directing the affairs of a company.[1] However, if we examine the definition of director as provided in the Company Law, it can be concluded that the definition is not illustrative and does not give a clear understanding of the term director. It is vital to note that an organization’s directors are often important because they wield control, leadership, management, and strategic direction. The appointment of independent directors, nominated directors, etc., is outlined in the Companies Act 2013. There appears to be a difference between directors who participate in the day-to-day operations of the business and those who merely attend board meetings and receive compensation for doing so. It is also pertinent to mention here that a company’s director can be rightfully termed as a company’s agent [2] and trustee.
“The directors of a company have a peculiar position in the management of a company since it must act through others,” the Hon’ble Bombay High Court stated in Bank of Poona Limited v. Narayandas Shriman Somani.[3] The Directors are seen as being in a fiduciary role, and they are supposed to do their obligations in the best possible faith.
A variety of director categories are recognized under the Act, including independent, nominated, non-executive, and whole-time directors. The managing directors and full-time directors are typically viewed as the people in charge of the day-to-day operations of the business, because they work for the firm on a full-time basis. Non-executive, nominee, and independent directors attend board and committee meetings where important business decisions are discussed and made, but they are not involved in the day-to-day operations of the firm.
THEORIES SURROUNDING DIRECTOR’S DUTY
The most laws in India are derived from the Common Law countries, therefore, there are particular theories which govern director’s duty. Some of them are illustrated hereunder for an understanding:
1. SHAREHOLDER’S THEORY
The Shareholder’s Theory was developed by Milton Friedman. According to the notion of business ethics created by American economist Milton Friedman, “an entity’s greatest responsibility lies in the satisfaction of the shareholders.” In order to boost returns for the shareholders, the company should continually aim to maximize its revenues and this company will do through the hands of directors. Therefore, it is also one of the views encompassing duties of the directors.
Shareholder theory’s normative and instrumental facets have been adopted by the CSR (Corporate Social Responsibility) movement and it is now a crucial step in the operationalization of CSR.[4] The view which sees activities as an ‘added extra’ rather than being deeply ingrained in a company’s daily operations should be avoided.[5]
2. BUSINESS JUDGMENT RULE
Delaware courts developed a legal presumption known as the Business Judgement Rule. After then, the majority of Commonwealth nations embraced it. It is assumed that directors of a company make business choices in good faith, with knowledge, and with the sincere conviction that the course of action is best for the firm. The Board of Directors won’t be held legally responsible for a poor business choice if the aforementioned requirements are met. The argument is that the Board should be free to take economic risks without always worrying about litigation in a world where doing business is inherently hazardous.
In the well-known Miheer H. Mafatlal v. Mafatlal Industries case,[6] the Supreme Court came the closest to stating that it would not get involved if the Director’s actions were “just, fair, and reasonable, according to a reasonable businessman, taking a commercial decision beneficial to the company.” Directors can benefit from this ruling if they can show that their personal interests were not at odds with their conscientious work for the greater welfare of the company. According to Section 179 of the Act, a firm’s Board of Directors has the authority to carry out all of the actions and activities that the company is permitted to do. Accordingly, the Board of Directors is empowered by Indian company law to make all decisions, with the exception of those that call for previous shareholder approval and, in some rare circumstances, the central government’s permission.[7]
STATUTORY DUTIES
The duties of directors can be grasped from two specific statutes. The one being Companies Act, 2013 and the another being Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements), 2015 (hereinafter, SEBI(LODR), 2015). It is vital to note that SEBI (LODR) governs only ‘listed companies’; therefore, the duties of director enshrined under SEBI(LODR) will be applicable to a director of a ‘listed company’ only.
DUTIES UNDER COMPANIES ACT, 2013
Although the United Kingdom acknowledges a very broad range of duties to be performed by directors, the J. J. Irani Committee recommended in their report prior to the codification of these duties under the Act that the Act should only provide an inclusive (and not exhaustive) list of duties because no rule of universal application can be formulated in this regard. This suggestion served as the foundation for the addition of section 166 to the Act.[8]
Section 166 of the 2013 Act outlines the primary responsibilities of directors, which are as follows:
> to act in line with the company’s articles of association;
> to act in good faith to further the company’s goals;
> to act in the best interests of the company, its workers, shareholders, the community, and the environment;
> to carry out duties with appropriate care, skill, and diligence and to use independent judgement;
> to avoid situations that directly or indirectly conflict with the company’s interests; and
> to avoid gaining an unfair advantage. [9]
These responsibilities may be roughly divided into two categories:
> Fiduciary Obligations: Fiduciary obligations mandate that the directors put the business’ interests ahead of their own or the interests of specific company members and creditors. Holding something in trust for someone else or acting in a fiduciary position are terms used here.[10] In keeping with this, courts have ruled that a director of a corporation unquestionably has a fiduciary duty to the business and must act in its best interests.[11]
> Responsibility Of Care, Skill, And Diligence: A director has a responsibility of skill, care, and diligence to spend as much time and attention to the company’s operations as one may reasonably anticipate from someone performing comparable duties. The courts have ruled that directors were responsible for breaches of their duty of care, skill, and diligence in cases where they failed to notice several warning signs that a sensible person would have noticed given their knowledge of such commissions.[12]
Directors have a responsibility of care, expertise, and diligence to dedicate the appropriate time and attention to the business’s operations, investigate problems that may emerge and make judgments that spare the firm to needless risks. Conversely, the directors’ fiduciary obligations demand that they prioritize the company’s interests over their own. The penalties for violating these obligations are likewise outlined in Section 166. A breaching director is subject to civil responsibility under subsection 5, which mandates that they restore any unjustified benefit or advantage they may have obtained as a consequence of the violation.[13] Directors who violate these duties, face a punishment between Rs. 1 lakh and Rs. 5 lakhs according to the sub-section 7 of section 166.[14]
DUTIES UNDER SEBI (LODR), 2015
In 2015, SEBI notified the LODR (Listing Obligations and Disclosure Requirements). In addition to the Companies Act, it gives independent directors rules and responsibilities.[15] The LODR, however, solely governs the behavior of listed businesses’ independent directors. The LODR’s Regulation 25 outlines the responsibilities of independent directors. This regulation prohibits a person from holding the position of independent director for more than seven listed companies.[16] The Audit Committee and the Nomination and Remuneration Committee are governed by Regulations 18 and 19, which also govern the responsibilities of independent directors serving on these committees.[17] In order to examine the performance of non-independent directors and evaluate the volume and quality of information exchanged between management and the board of directors, it specifies the bare minimum number of meetings that must be held annually.[18]
APPROACHES TO DIRECTOR’S DUTY
The equivalent right holder is a natural corollary of the director’s duty. This right holder under common law was the company.[19] It excluded the community, workers, and shareholders.[20] Scholars, however, have continuously contested this view, arguing that because of the important and influential position that businesses hold, they should have broader responsibilities to their employees, shareholders, the community, and the environment- collectively, ‘the stakeholders.’ Three general views have emerged as a result of the dispute. The first holds that directors have a responsibility to all stakeholders. If the obligation is broken, each stakeholder has a separate cause of action against the directors under this method.[21] According to the second method, the corporation alone is entitled to the duty of care, just like under common law. The traditional perspective in corporate law, which holds that directors are only accountable to the corporation and not to anybody else, is represented by this strategy, also referred to as the shareholder approach.[22] Although it would be completely up to the directors to consider stakeholders’ interests, this does not imply that they cannot. According to the third strategy, known as the ESV (enlightened shareholder value) approach, identifying the interests of the stakeholders helps enhance the company’s interests. Finding a balance between the stakeholder and shareholder approaches is the goal of the ESV strategy. It was introduced in England by the UK Companies Act and stipulates that directors have a duty to the company alone, but they also need to consider the interests of stakeholders when making decisions.[23] The fundamental tenet is that taking stakeholders’ interests into account eventually benefits the organization as well.
JUDICIAL DEVELOPMENTS
The judiciary is the primary source that controls the directors’ acts. Similar to other common law jurisdictions, the Indian judiciary has interpreted and assimilated the obligations of directors. The interpretation of directors’ obligations by the Indian judiciary is largely based on Common Law.
According to the Act’s requirements, an officer who is classified as ‘officer in default’ is often subject to liability of any type for a company’s default. According to the Act, a ‘officer who is in default’ includes, among other things, (i) a full-time director, (ii) key managerial personnel, or in the absence of key managerial personnel, the director or directors designated by the board in this regard, and (iii) every director who knows of wrongdoing because they participated in board proceedings without objecting, and where the violation occurred with their consent or collusion.[24]
> Re City Equitable Fire Insurance:[25] THE LANDMARK CASE
The case is considered to be the most authoritative case on the subject of directors’ duties of care and skill. The court noted that: (i) a director need not demonstrate more skill in carrying out their duties than would be expected of someone with their level of knowledge and experience; (ii) a director is not required to devote all of their attention to the company’s affairs; instead, their duties are sporadic and should be carried out at regular board meetings and at meetings of any board committee on which they are appointed; (iii) a director can justifiable assign his duties to some other person in case of business exigencies but should follow the procedure illustrated in Articles of Association. However, courts have been quick to hold directors accountable for failing to exercise reasonable care when they fail to act or refrain from actions that are part of their responsibilities as directors.
> Central Board of Secondary Education and Anr. v. Adiya Bandopadhyay and Ors.[26]
In paragraph 39, the Supreme Court clarified the concepts of ‘fiduciary’ and ‘fiduciary relationship.’ A fiduciary is someone who has a duty to act in another person’s best interests with honesty and good faith, particularly when the other party places significant trust and confidence in them. A ‘fiduciary relationship’ arises in situations where one person (the beneficiary) entrusts another (the fiduciary) with their affairs, business, or transactions. Additionally, a fiduciary may also refer to a person who holds something in trust for the benefit of another (the beneficiary).
> Sangramsinh P. Gaekwad and Ors. Vs. Shantadevi P. Gaekwad (Dead) thr. Lrs. and Ors[27]
In Sangramsinh P. Gaekwad & Ors. v. Shantadevi P. Gaekwad (Dead) Thr. LRs. & Ors., the Supreme Court, in paragraph 52, held that directors are not obligated under fiduciary law to advise current shareholders on how to sell their shares, as they are not typically considered agents of the shareholders nor responsible for managing their shares. However, if directors choose to provide advice, they must act in good faith and avoid any deliberate or negligent deception or fraud. The Court further clarified the distinction between a director’s fiduciary duty towards shareholders as share sellers and their duty to protect the company’s assets and finances. In cases of conflict, the director’s primary duty is to safeguard the company’s interests over those of individual shareholders.
The court tried to apply an objective test of the duty of care in the cases of N. Narayanan v. Adjudicating Officer, SEBI,[28] and Official Liquidator, Supreme Bank v. P.A. Tandolkar.[29] Nonetheless, in assessing a director’s liability in both cases, the court considered subjective elements such the director’s tenure with the company and management expertise. Furthermore, the P.A. Tandolkar verdict has been construed to maintain that a director’s long-standing strong affiliation with a corporation is a significant consideration when assessing their guilt for commercial fraud. In a related case, it was determined that an independent director had disregarded their need to use reasonable care and attention by permitting the corporation to make up numbers.[30] As a member of the audit committee, the director should have been aware of the statistics’ inaccuracy.
> Tata Consultancy Services Ltd. v. Cyrus Investments (P) Ltd., 2021 SCC OnLine SC 272
The Supreme Court’s judgment in the Tata Group vs. Mistry Group case favored the Tata Group, upholding the dismissal of Cyrus Mistry as Executive Chairman of Tata Sons. Mistry’s attempt to seek relief for wrongful expulsion under the Companies Act, 2013 was rejected, as the Court found no grounds justifying the winding-up of Tata Sons, which would be required for oppression claims. The Court emphasized that mere removal of a director is not sufficient for such a claim unless it is shown to be prejudicial or oppressive to shareholders. The judgment highlighted the high threshold for minority shareholder protection, underscoring that relief is difficult to achieve unless the oppression is severe. The Court also dismissed Mistry Group’s plea for a fair exit value for their shares, noting the request was made too late. It critiqued some actions of Mistry but avoided ruling on several allegations against the Tata Group. Ultimately, the decision stressed the challenges minority shareholders face in asserting their rights.
CONCLUSON
In a time when corporate influence is increasing, it’s critical to determine and assess the level of accountability that the law places on directors running businesses. In conclusion, we can identify two significant legislative loopholes pertaining to India’s directors’ duty of care. First, the people to whom the duty of care is owed. In this context, we have waded through arguments based on section 166, and have concluded that the duty of care, skill, and diligence under section 166(3) is only owed to companies in India. This is due to the textual interpretation. Second, we looked at India’s duty of care standards for directors. We have discovered and investigated various duty of care standards in order to determine which would be most desired in the Indian setting, as the Indian Companies Act and court decisions are still ambiguous on the subject. In conclusion, it would be fair to say that Section 166(3) leaves much to be desired. An essential component of corporate governance in India is the idea of director’s duties and liabilities. The Act establishes the parameters for the role and responsibility of directors and it can be summed up that fiduciary obligations are focused on the director’s honesty and devotion to the firm, whereas the responsibility to take reasonable care is focused on the director’s competence. So, directors’ choices should not be made to further their personal interests.
KEYWORDS: Director, Fiduciary Duty, SEBI, Companies Act, Corporate.
[1] The Companies Act, 2013, No. Of 2013, §2(34), (Ind.).
[2] Lee v. Lee’s Air Farming Limited, 1961 AC 12.
[3] Bank of Poona Limited v. Narayandas Shriman Somani, A.I.R. 1961 Bom 252.
[4] Manuel Castelo Branco and Lúcia Lima Rodrigues, ‘Positioning Stakeholder Theory Within the Debate on Corporate Social Responsibility’12 Electronic Journal of Business Ethics and Organization Studies 5, 5 (2007).
[5] R Edward Freeman, Stakeholder Theory: The State of the Art, 235 (2010).
[6] Miheer H Mafatlal v. Mafatlal Industries, (1997) 1 SCC 579.
[7] The Companies Act, 2013, No. Of 2013, §179, (Ind.).
[8] Ministry of Corporate Affairs, Gov’t of India,Report of Expert Committee on Company Law, 30 (2005), https://ibbi.gov.in/uploads/resources/May%202005,%20J.%20J.%20Irani%20Report%20of%20the%20Expert%20Committee%20on%20Company%20Law.pdf.
[9] The Companies Act, 2013, No. Of 2013, §166, (Ind.).
[10] Sri Marcel Martins v. M. Printer and Ors., (2012) 5 SCC 342.
[11] Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad, AIR (2005) SC 809.
[12] N. Narayanan v. Adjudicating Officer, SEBI, (2013) 12 SCC 152.
[13] The Companies Act, 2013, No. Of 2013, §166(5), (Ind.).
[14] The Companies Act, 2013, No. Of 2013, §166(7), (Ind.).
[15] The Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015.
[16] The Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, Reg. 25 (Ind.).
[17] The Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, Reg. 18,19 (Ind.).
[18] The Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, Reg. 25(3) (Ind.).
[19] Percival v. Wright, [1902] 2 Ch. 421.
[20] Andrew Keay, Tackling the Issue of the Corporate Objective : An Analysis of the United Kingdom’s Enlightened Shareholder Value Approach, Vol. 29, SYDNEY L. REV., 577-581 (2007).
[21] Umakanth Varottil, The Evolution of Corporate Law in Post-Colonial India : From Transplant to Autochthony, Vol. 30, AM. U. INT’L L. REV., 39 (2016).
[22] Supra note 19.
[23] Andrew Keay, Tackling the Issue of the Corporate Objective : An Analysis of the United Kingdom’s “Enlightened Shareholder Value Approach”, Vol. 29, SYDNEY L. REV., 592 (2007).
[24] The Companies Act, 2013, No. Of 2013, §2(60), (Ind.).
[25] Re City Equitable Fire Insurance Co., (1925) 1 Ch 407.
[26] 2011 (8) SCC 497.
[27] Sangramsinh P. Gaekwad and Ors. v. Shantadevi P. Gaekwad (Dead) thr. Lrs. and Ors, MANU/SC/0052/2005.
[28] N. Narayanan v. SEBI, (2013) 12 SCC 152.
[29] Supreme Bank Ltd. v. P.A. Tendolkar, (1973) 1 SCC 602.
[30] Securities and Exchange Board of India, Adjudication Order in respect of Shri. N. Narayanan and Shri. V. Natarajan in the Matter of Pyramid Saimira Theatre, 2011 SCC OnLine SEBI 66, Adjudicating Order No. BM/AO- 110-111/2011.
