This article has been written by Anurima Malakar, from Guru Gobind Singh Indraprastha University

Table of Contents

INTRODUCTION:

The Companies Act, 2013^[1] serves as the bedrock of corporate governance, delineating the powers, and responsibilities of company officials who helm the decision-making machinery. In a dynamic business environment, understanding the scope of authority vested in these officials is pivotal.

In the intricate realm of corporate governance, the Companies Act, 2013 serves as a robust legal framework dictating not only the powers and functions but also the liabilities of company officials.

Company Officials Under the Legal Lens:

Board Of Directors: At the helm of strategic decision-making, the Board of Directors holds a pivotal role in shaping the corporate trajectory. The Companies Act, 2013 outlines the authority and responsibilities bestowed upon this governing body, orchestrating the governance symphony.
Managing Director and Key Managerial Personnel: Their powers and obligations, as delineated in the Act, underscore the harmony required between leadership and operational execution.
Shareholders: The Act intricately addresses the dynamics of shareholder engagement, ensuring a balance between ownership and governance.
Statutory Committees: Functioning as specialized organs of governance, statutory committees such as the Audit Committee, Nomination and Remuneration Committee, etc., play a pivotal role. Their composition, functions, and interactions are sculpted within the legal confines set by the Companies Act, 2013

Exploring the Corporate Landscape:

This article explores the power, duties, roles and liabilities accorded to company officials under the Companies Act, 2013. Navigating the legal intricacies, we unravel the fabric that binds corporate governance, shedding light on the dynamic interplay of responsibilities in the corporate ecosystem. This article explores the power, duties, roles and liabilities accorded to company officials under the Companies Act, 2013.

Power and Duties Of Company Officials:

I. Board of Directors:

At the helm of corporate decision-making, the Board of Directors wields substantial powers defined by the Companies Act.

Powers:

Section 179^[2] of the Act is instrumental in charting the course of authority for directors.
These powers, ranging from strategic decisions to financial transactions, underscore the pivotal role of the Board in shaping the company’s trajectory.
Notably, the Act permits the delegation of certain powers to committees or individual directors, which aids in facilitating streamlined decision-making processes.

Duties:

Director’s Duties as per Section 166^[3] of the Companies Act, 2013:

Compliance with Articles of Association: Directors must adhere to the company’s Articles of Association.
Acting in the Best Interests: Directors are obligated to act in the best interests of stakeholders, promoting the company’s objectives in good faith.
Exercise of Impartial Judgment: Directors must exercise impartial judgment with due consideration, ability, and diligence.
Conflict of Interest Awareness: Directors should be vigilant about potential conflicts of interest and take measures to prevent them in the company’s best interests.
Prudence in Related Party Transactions: Before authorizing related party transactions, directors must ensure proper deliberations and verify that transactions align with the company’s best interests.
Protection of Vigilance Systems: Directors must safeguard the company’s vigilance systems and users from harm resulting from misuse.
Confidentiality Maintenance: Confidential proprietary knowledge, business secrets, inventions, and unpublished prices must be maintained, disclosed only with board authorization or as required by law.
Prohibition of Self-Appointment: Directors cannot appoint themselves to the office, and any such attempt is considered invalid.
Penalties for Violation: Violations of Section 166 may incur fines ranging from one lakh rupees to five lakh rupees.

Roles Assigned to Independent Directors (Schedule IV):

Protection of Stakeholder Interests: Independently safeguard and promote the interests of all stakeholders, especially minority shareholders.
Mediation in Conflicts: Act as a mediator in cases of conflicts of interest among stakeholders.
Facilitation of Independent Decisions: Assist in delivering independent and fair decisions by the Board of Directors.
Attention to Related Party Transactions: Pay adequate attention to transactions involving related parties.
Reporting Unethical Activities: Report any unethical activities, breaches of the code of ethics, or alleged fraud honestly and impartially.

II. Managing Director and Key Managerial Personnel (KMP):

Power:

The Managing Director, along with the Key Managerial Personnel (KMP), occupies a crucial position in the company hierarchy. The Companies Act recognizes their significance by delineating specific powers and responsibilities.
Section 203^[4] of the Act, for instance, elucidates the appointment and powers of KMP, encompassing the Managing Director, Chief Financial Officer, and Company Secretary. These officials are entrusted with executing day-to-day functions, ensuring the company’s operational efficiency and compliance with legal obligations.

III. Shareholder Empowerment:

Power:

While the Board and KMP hold significant powers, shareholders, as the ultimate owners, exercise authority through democratic processes.
General meetings, as envisaged by the Companies Act, provide a platform for shareholders to collectively influence major decisions.
Resolutions passed by shareholders carry substantial weight, endorsing or vetoing crucial matters, including amendments to the company’s constitution and approval of significant transactions.
This democratic underpinning ensures a checks-and-balances mechanism in the exercise of company power.

IV. Statutory Committees:

The Companies Act recognizes the need for specialized focus in key areas, leading to the formation of statutory committees. E.g. The Audit Committee, for instance, plays a pivotal role in financial oversight and reporting. These committees, established under the aegis of the Act, possess delegated powers to delve into specific domains, providing a structured approach to decision-making and governance.

The Functions of Company Official:

I. Board of Directors:

The Board of Directors, often regarded as the brain trust of a company, assumes multifarious functions crucial for its effective functioning. The Companies Act, through its comprehensive provisions, outlines the overarching responsibilities of the Board. This includes formulating corporate strategy, approving financial plans, and overseeing the company’s overall performance.
The Act also mandates the establishment of specialized committees, such as the Audit Committee, to ensure a meticulous approach to financial oversight and compliance.
Section 291^[5] of the Act confers upon the board of directors the authority to exercise all powers and undertake all actions and activities permissible for the corporation, within the provisions stipulated by the Act.

Directors’ Rights and Functions under the Companies Act:

Resolution-based Rights: Directors possess certain rights that necessitate the passage of resolutions during Board meetings, as per Section 292^[6].
Power to Call Shareholders: Directors have the authority to make calls on shareholders for unpaid amounts on their shares.
Debenture Issuance Authority: Directors are empowered to authorize the issuance of debentures, a form of corporate debt.
Borrowing Flexibility: Directors can borrow funds for the company’s financial needs, other than through debentures.
Investment Authorization: Directors have the authority to invest the company’s funds judiciously.
Lending Capability: Directors can extend loans, subject to regulatory limitations.
Restrictions on Board Powers: Certain limitations on the Board’s general powers are enforceable. In such cases, shareholder approval must be obtained at General Meetings, as addressed in section 293^[7], 294AA^[8], etc.
Specific Rights Requiring Consent: Rights specified in Section 294AA (e.g., appointment of sole selling agents) and Section 295 (e.g., Loans to Directors) necessitate shareholder and Central Government consent.
Authorization by General Meeting: Section 180^[9] of the Companies Act 2013 mandates that specific powers can only be exercised by the Board if authorized by a general meeting.
Authorized Powers Include: Selling, leasing, or disposing of the company’s undertakings, wholly or partially, investing in trust securities or alternative financial instruments, taking loans for the company’s operational needs, and granting directors time to repay debts or refraining from demanding repayment.
Exception for Real Estate Companies: Section 180 restrictions do not extend to companies primarily engaged in real estate sale or leasing.

Right to contribute to charitable or other funds:

Under Section 181^[10], the Board of Directors has the right to contribute to legitimate charitable and other funds.
However, if the total contribution surpasses 5% of the company’s average net profit for the preceding financial years, approval in a general meeting is required.

Right of making a political contribution:

Section 182^[11] of the Companies Act 2013 provides companies with the right to make political contributions. However, organizations eligible for such contributions should not be government entities or entities operational for less than three years.
Furthermore, the aggregate amount of the contribution should not exceed 7.5 percent of the company’s net profit over the three preceding financial years.

Individual Rights of Directors:

Review of Books of Accounts: Directors have the individual right to review the company’s books of accounts under Section 209(4)^[12].
Receipt of Notices of Board Meetings: Directors are entitled to receive notices for board meetings as per Section 285^[13].
Participation and Voting in Proceedings: Directors possess the individual right to participate in board proceedings and cast votes on proposals as outlined in Section 300^[14].
Receipt of Draught Circular Resolutions: The right to receive draught circular resolutions is accorded to directors as per Section 289^[15].
Inspection of Minutes of Board Meetings: Directors hold the right to inspect minutes of board meetings individually.

Collective Rights of Directors:

Right to Refuse Share Transfer: Directors of private and deemed public companies collectively have the right, as per Section 111^[16], to refuse the registration of a share transfer to undesirable entities.
Right to Elect a chairman: Directors collectively hold the right to elect a chairman for board meetings under Regulation 76(1)^[17].
Right to Appoint a Managing Director: The Board of Directors collectively possesses the authority to appoint the company’s managing director or manager, as specified in the Act.

II. Managing Director and Key Managerial Personnel (KMP):

The Managing Director, along with the Key Managerial Personnel, constitutes the executive leadership charged with the day-to-day management of the company. Their functions span diverse areas, encompassing operational efficiency, regulatory compliance, and stakeholder communication.
Section 203^[18] of the Companies Act meticulously defines the roles of KMP, acknowledging their pivotal position in ensuring the company’s operational and regulatory health.

III. Statutory Compliance:

Ensuring compliance with statutory provisions is a cornerstone of company officials’ functions. From filing annual returns to adhering to corporate governance norms, officials play a pivotal role in upholding the legal integrity of the company. The Act entrusts the Board and KMP with the responsibility of ensuring that the company operates within the ambit of the law.

Right to form an Audit Committee:

Section 177^[19] grants the board of directors the right to establish an audit committee, which must consist of a minimum of three directors, with a mandatory inclusion of at least one independent director. The majority of the committee members must be independent directors. Competence in reading and understanding financial statements is a prerequisite for the chairperson and members of the audit committee.
The functioning of the audit committee should adhere to the written terms of reference approved by the Board.

Decision-Making in Specialized Committees:

The Companies Act recognizes the need for specialized committees to address specific facets of corporate governance.
These committees, including the Nomination and Remuneration Committee and the Corporate Social Responsibility Committee, serve functions aimed at enhancing corporate governance, ensuring ethical practices, and contributing to the community.

Shareholder Interaction:

Company officials are tasked with fostering meaningful interactions with shareholders, the ultimate stakeholders in any corporate entity.
Annual General Meetings (AGMs) provide a platform for shareholders to engage with company officials, enabling them to seek clarifications, ratify decisions, and exercise their democratic rights.
Transparent communication and the dissemination of accurate information are integral functions in maintaining a robust shareholder-company relationship.

Right to form Nomination and Remuneration Committees, as well as a Stakeholder Relationship Committee:

Section 178^[20] empowers the Board of Directors to establish two crucial committees: the Nomination and Remuneration Committee and the Stakeholders Relationship Committee. For the Nomination and Remuneration Committee, a minimum of three non-executive directors is required, with at least half of them being independent directors.
In the case of the Stakeholders Relationship Committee, the Board may institute this committee when the number of shareholders, debenture holders, or other security holders exceeds 1,000. This committee plays a vital role in addressing and resolving shareholder complaints.

Liabilities of Company Officials:

I. Directorial Liabilities:

Directors, as custodians of corporate governance, are entrusted with fiduciary duties to act in the best interests of the company and its stakeholders. The Companies Act imposes stringent liabilities on directors for any breach of these duties. Instances of mismanagement, fraud, or violation of statutory obligations may render directors personally liable. The Act establishes a mechanism for imposing penalties, ensuring accountability for actions that compromise the integrity of the company.

Liabilities of Directors:

Joint or Collective Liability: Directors may be held jointly or collectively liable for acts prejudicial to the company’s interests.
Director’s Responsibility for Company Actions: Despite the separate legal entities of Director and Company, the Director can be held responsible for the Company in specific situations.
Legal Action for Non-Disclosures: Directors failing to make necessary disclosures under SEBI (Acquisition of Shares & Takeovers) Regulations, 1997, and SEBI (Prohibition of Insider Trading) Regulations, 1992 can face legal action from SEBI.
Refunding Share Application Excess: Directors are liable for refunding share application amounts or excess in share application fees.
Payment for Qualification Shares: Directors are obligated to pay for qualification shares as required.
Civil Liability for Prospectus Misrepresentation: Directors may face civil liability for misrepresentation in the prospectus.

Criminal Liabilities Associated with Director’s Actions:

Bounced or Dishonoured Checks: A Director’s signature on a dishonoured check, as per the Negotiable Instruments Act of 1881, may lead to criminal charges. Additionally, this may result in the company facing income tax violations under the 1961 Income Tax Act.
Statutory Violations: Criminal liabilities may arise under the Employees Provident Funds and Miscellaneous Provisions Act, 1952, and the Factories Act, 1948.
Derivative Action: A derivative action involves shareholders taking action on behalf of the company. It must be presented in a representative manner, and a shareholder can bring action against the company and its directors for violations of the company’s Memorandum or Articles that no majority shareholder can sanction.
Liability for “Fraud on the Minority”: Directors and the corporation may be held liable if the majority of shareholders engage in “fraud on the minority” or discriminatory conduct. This provision is crucial for Directors to be aware of and utilize judiciously.
Insurance Requirement under Companies Act: The Companies Act mandates corporations to purchase insurance covering losses caused by directors. Directors themselves can also procure insurance to indemnify against losses due to liability to the company, with the premium charged by the company.

Key Managerial Personnel (KMP) Accountability:

The Companies Act extends specific liabilities to Key Managerial Personnel, including the Managing Director, Chief Financial Officer, and Company Secretary. Their roles in financial stewardship and regulatory compliance bring forth a unique set of responsibilities.
Non-compliance with statutory obligations, mismanagement, or participation in decisions where they have a conflicting interest may lead to legal repercussions. The Act demands transparency and accountability from KMP, and any deviation from these principles may result in personal liabilities.

Shareholder Actions:

Shareholders, as stakeholders with a vested interest in the company’s well-being, have the right to take legal action against company officials for oppressive conduct or actions prejudicial to their interests.
The derivative action empowers shareholders to sue on behalf of the company, holding officials accountable for wrongs committed against the company. This legal avenue ensures that officials cannot act with impunity, and their actions are subject to scrutiny, aligning with the Companies Act’s commitment to shareholder protection.

SIGNIFICANT JUDGEMENTS:

Case: Regal (Hastings) Ltd v. Gulliver (1942)^[21],

The Court established the principle that directors can be held liable to the company under the following conditions:

Relevance to Company Affairs: Directors are liable if their actions are closely linked to the company’s affairs, demonstrating that such actions occurred in the course of their management and utilization of opportunities and special knowledge acquired through their directorial roles.
Profit Resulting from Actions: Liability arises if directors derive a profit from their actions. The Court emphasized that the directors must have gained a financial benefit as a direct outcome of the activities in question.

Case: Weeks v. Propet (1873)^[22],

The company borrowed funds exceeding its authorized borrowing capacity, leading to debts considered ultra vires. The directors were held accountable for breaching their warranty. The directors’ responsibility was affirmed when they entered into an ultra vires contract with an affiliated party, and the members failed to rectify the situation. The contract, being beyond the company’s legal powers, did not bind the company. Consequently, the connected individual was granted the right to sue the directors for the breach of warranty.

Case: Bates v. Standard Land Co. (1911)^[23],

In this case the central question revolved around the distinction between an individual’s legal identity and that of a company.

The court clarified that the board of directors constituted the sole cognitive entity of the corporation, emphasizing that the company could only act through them. Despite this, the company, in many instances, possesses the legal status of a person, allowing it to enter into contracts and pursue legal actions, either initiated by its members or external parties. However, it is essential to note that a company does not hold the status of a citizen eligible for the Fundamental Rights safeguarded by the Indian Constitution.

Case: City Equitable Fire Insurance Company Ltd (1925), ^[24]

In this case the focus was on the duties of company directors. It was revealed that the directors had extensively delegated the administration of the company to the chairman, leading to fraudulent activities.

The court concluded that directors must uphold the duties of care and skill in the execution of their responsibilities. This decision underscored the importance of directors actively participating in the company’s affairs and exercising diligence to prevent fraudulent practices.

Conclusion:

Liabilities under the Companies Act form a critical aspect of corporate governance, creating a robust system of checks and balances. As custodians of corporate conduct, company officials must navigate their roles with a keen understanding of the legal responsibilities and potential liabilities they bear. The Act’s emphasis on transparency, accountability, and shareholder protection underscores its commitment to fostering a corporate environment that values ethical conduct and upholds the principles of good governance.

In the ever-evolving corporate landscape, company officials must not only be cognizant of their legal obligations but also actively contribute to a culture of ethical conduct. By doing so, they not only shield themselves from personal liabilities but also contribute to the overall health and sustainability of the corporate sector, aligning with the overarching goals of the Companies Act.

The functions of company officials under the Companies Act underscore the multifaceted nature of their roles in steering the company toward sustainable growth and legal compliance. The Act, with its nuanced provisions, establishes a framework where the Board, KMP, and specialized committees collaborate to ensure effective decision-making and regulatory adherence.

In an era marked by increased scrutiny of corporate conduct, company officials must navigate their functions with diligence and integrity. By upholding their fiduciary duties and aligning their actions with the overarching goals of the Companies Act, these officials contribute not only to the success of the company but also to the broader trust and confidence in the corporate sector. As the corporate landscape continues to evolve, the functions of company officials remain instrumental in shaping the trajectory of responsible and sustainable corporate governance.

The power accorded to company officials under the Companies Act reflects a delicate balance between empowering them for effective corporate management and safeguarding the interests of stakeholders. The Act, with its nuanced provisions, aims to foster transparent decision-making processes, ensuring accountability and integrity at the core of corporate governance. While the Board and KMP navigate the complexities of strategic and operational decisions, shareholders play a pivotal role in shaping the destiny of the company through their democratic rights.

As the corporate landscape continues to evolve, the delineation of powers under the Companies Act remains a cornerstone in shaping the governance structure of companies. It is incumbent upon company officials to wield their powers judiciously, recognizing the fiduciary duties and responsibilities entrusted to them. In doing so, they contribute not only to the success of the company but also to the overall health and sustainability of the corporate ecosystem.