Chapter: 8.1 Powers of Directors in Company

Powers of Directors

General powers vested in Board (Section 291)
Section 291 declares that subject to the provision to the Act, the Board of Director of the company shall be entitled to exercise all such powers and to do all such acts and things as the company is authorized to exercise and do, subject to the restriction mentioned in the memorandum and article of the company. The effect of this section is that powers of directors are coextensive with Tine ~~ the company itself.

Shareholders' Intervention in Exceptional Cases
Shareholders are the ultimate and final authority within the corporate enterprise. The inherent, residuary and ultimate powers of the company lie with the general meeting of the shareholders. Thus the shareholders can interfere in the management by replacing the existing management with the new one which would be more responsive to their and company's interest.

In LIC v/ s Escort Ltd.
Public finance institutions, including LIC was holding a majority of shares in the company. They requisitioned meeting to remove 9 directors. No reason was stated. But the background was that the directors have refused to register certain transfers and had engaged the company in a calamitous litigation against the government and also in the litigation to stay the requisitioned meeting and all this without consulting the principal block of majority shareholders who had so much at stake in the company. The Bombav High Court granted the stay. The Supreme Court vacated it.

The shareholder had right to meet and decide whether the destinies of the company were safe in the hands of present management. The company had no right to say that the public financial institutions were going beyond their investing institution. They have a right to be vigilant in safeguarding only investment and putting it in the hands of the management which can assure safety and security. In this respect, they exercised their elementary right as a shareholder. They do not thereby directly undertake to manage the company.

In the following exceptional situations the general meeting is competent to act even in the matter delegated to the board.
1. Mala Fide: When the directors act against the interest of the company or where the personal interest of the directors clashes with the their duty towards the company, they will try to avoid taking steps for the redressal of the wrong done to the company. In such a case, majority shareholders may act to redress the wrong.
2. Incompetency of Board: Majority of shareholders may exercise a power vested in the board when the directors have, for some valid reason, become incompetent to act One situation would be when all the directors are interested in the transaction of the company. When the circumstances were such that a valid board could not constituted, it was held that the majority of shareholders would act to protect the interest of the company and they could conduct the company's defense in a suit pending against it.
3. Deadlock: A third occasion for shareholders to intervene would be when the directors are unwilling to act, or, on account of a deadlock unable to act.

Barron v/s Potter
There were only two directors on the board of the company and the one refused to act with another. There was no provision in the articles enabling the general meeting of the shareholder to increase or reduce the number of directors.

It was held that there was a deadlock in the administration resulting from the fact the directors were unwilling to act and exercise their power, the company had the inherent power to take necessary step to ensure the working of the company and to appoint the additional directors for the purpose.

4. Residuary Powers: The residuary powers of the company reside in the general meeting of the shareholders. Where the power to allot shares is conferred by the articles of a company of its directors and they act in excess of that power, a residuary inherent power remains in the company to validate the allotment by ordinary resolution in general meeting.

Statutory Provisions: Restrictions on Powers

Powers exercisable by resolution at board's meeting
The Board of Directors of a company shall exercise the following powers on behalf of the company by means of resolution passed at the meeting of the board.
a)    Power to make calls.
b)    Power to issue debentures.
c)    Power to borrow money, otherwise on debenture (e.g. through public deposit)
d)    Power to invest the funds of the company.
e)    Power to make loan.

The board may, resolution passed at meeting delegate at least three powers to the committee of directors or managers or any other personal officer of the company but the board shall specify the limits of such delegations.

Powers exercisable with general meeting approval [Section 293]
Section 293 imposes important restrictions on the powers of the Board of Directors of a public company or any subsidiary of a public company. Following powers can be exercised by the board only with the consent of the company in general meeting:
a)    sale or lease of the company's undertaking,
b)    extension of the time for payment of a debt due by a directors,
c) investment of compensation received on compulsory acquisition in securities other than trust securities,
d) borrowing of money beyond the paid-up capital of the company. This, however, does not include temporary loans obtained from the company's bankers in the ordinary course of business.
e) Contributions to any charitable or other funds beyond fifty thousand rupees in one financial year or five per cent of the average net profits during the preceding three financial years, whichever is greater.

If the directors have in breach of the above restrictions sold or leased the undertaking of the company, the title of the purchaser or lessee will not be affected, provided he acted in good faith and with due care and caution. Thus the purchaser must see that the transaction is executed in accordance with the company's articles, because otherwise it would be ineffective to pass any title to him. This restriction does not apply to the case of a company whose ordinary business is to sell or lease property. Where borrowing has been affected exceeding the amount of the paid-p share capital, the lender may not be able to enforce the loan against the company, unless he can prove that he advanced the loan in good faith and without knowledge that the limit had been exceeded.