Chapter: 8.2 Duties of Directors in Company

Duties of Directors

a. Fiduciary obligation
Liability for breach of trust: A director of a company stands in a fiduciary relationship towards the company and shall observe the utmost good faith towards the company in any transaction with it or on behalf of it.

The first and the most obvious obligation of a person in a fiduciary obligation is to act with honesty. Thus, where a director of a company being also member of another company, earn bonus from the other company by providing some business facility of his company, he has held liable to account for such profits, although the company had itself lost nothing and also could not have earned the bonus.

Director's personal profit: When a director sold certain goods to his company out of his personal stock but at the market price of the day, so he did make a profit because he had obtained the stock earlier at lower rates. He was required by the court to account for his profit.

Business Opportunities: A director should not exploit to his own use the corporate opportunities. The doctrine of corporate opportunity has been described as an act of a director or controlling shareholder in diverting from the benefit of the corporation any enterprise or transaction in which reasonable persons would agree that the corporation had some expectancy or interest.

Fine Industrial Commodities Ltd. v/ s Powling
The demand for the company's product had fallen. The director in question knew the alternative product for which there~was a demand and he was also aware of the modification of the company' client and machinery which was necessary for that purpose. But instead of doing that he created a new company and obtained a patent of a new product in the name of his new company. He was held accountable for his profit. His knowledge of the product in demand and fact that the company's plant and machinery could be modified for that purpose was considered by the court to be the company's knowledge.

There are however some cases where director may profit by a corporate opportunity without incurring the liability to account for it. e.g. where the corporation is insolvent and defunct, its directors are free to act for themselves, since such condition is ascertainable and not easily feigned.

Misuse of Corporate Information: Exploitation of unpublished and confidential information belonging to the company the breach of duty and the company can ask the director in question to make good its loss, if any. It is a part of each director's fiduciary duty not to misuse confidential information without the company's consent.

b. Director's Duty of Care and Skill:
Liability for Negligence: Director has to perform his function with reasonable care. He has to attend with the due diligence and caution the work assigned to him.


In order to make them liable for negligence, their negligence must be in a business sense culpable and gross. Directors were held liable where they release the company's fund for paying the debt without trying to know whether anything was really due and for purchasing assets without knowing whether there was any really transfer of these assets.

Special Statutory Protection: Under section 633, Act gives special protection against the liability that may have been incurred in a good faith. When it appears to the court that the director sued "has acted honestly and reasonably and that having regard all the circumstances of the case ---, he ought fairly to be excused, the court may relieve him either wholly or partly from his liability on such terms as it may think fit." Thus, three circumstances must be shown to exit. The position must be such that the person to be excused is shown to have acted firstly, honestly, secondly, reasonably, and thirdly having regard to all the circumstances he ought fairly to be excused.

c. Duty to Attend Board Meeting:
Negligence by Non-Attendance: Duties of directors are of intermittent nature to be performed at periodical board meetings. A director is not bound to attend all the meetings of the board, although he is under an obligation to attend whenever in the circumstances, he is reasonably able to do so. According to Section 283 (g), the office of the director will be vacated if he absence himself from three consecutive meetings of the board, or from all meetings of the board for a consecutive period of three months, whichever is longer, without obtaining leave of the absence from the board. A director's habitual absence from board meetings may, take in the light of other circumstances, become evidence of negligence on his part.

d. Duty Not to Delegate:
Liability for co-directors' defaults: Generally, a director has to perform his functions personally. He is bound by the maxim delegatus non-potest delegate. Shareholders have appointed him because of their faith in his skill, competence and integrity and they may not have the same faith in another person. The rule is, however, not inflexible. In the following two cases at least delegation is proper and valid. Firstly, a delegation of functions may be made to the extent to which it is authorized by the act or articles of association of the company. Secondly, there are certain duties which may, having regard to the exercises of business, properly be left to some other officials. Directors must be able to entrust details of management to subordinates, or else business could not be carried on. A proper degree of delegation and division of responsibility by the Board is permissible but not a total abrogation or responsibility since this would undermine the collegiate or collective responsibility ofteh Board of directors which is of fundamental importance to corporate governance. A director might be in breach of duty if he left to others the matters for which the Board as a whole had to take responsibility.

Duty to disclose interest [Ss. 299-300]
Conflict of interests: Every agent occupies fiduciary position towards his principal. As such it is his duty to se that his personal interest and his duty to principal do not conflict. For the proper exercise of the functions of a director, it is essential that he be disinterested, that is, be free from any conflicting interest. This conflict invariably arises when a director is personally interested in a transaction of the company.

In the first place, a director who is interested in a transaction of the company is required to disclose his interest to the board. The disclosure must be made at the first meeting of the board held after he has become so interested.

Secondly, an interested director is not allowed to take part in the discussion by the board on the matter of his interest. Neither shall he vote nor shall his presence count for the purpose of quorum. If he does vote, his vote shall void.

These provisions are based upon the sound principle that the company is entitled to the unbiased advice of every director upon matters which are brought before the board.