A director is someone elected or appointed to manage a company’s business and affairs. A director of a company is neither an employee nor a servant of the company. They are professional people hired by the company to direct its affairs. Team of directors of the company is collectively known as its Board of Directors, which wields the supreme executive authority controlling the management and affairs of a company.
It is not easy to explain the position that a director holds in a corporate enterprise. He is not in a servant-master relationship, as he controls the affairs of the company. Bowen L.J. observed “directors are described sometimes as agents, sometimes as trustees and sometimes as managing partners. But each of these expressions is used not as exhaustive of their powers and responsibilities, but as indicating useful points of view from which they may, for the moment and for the particular purpose, be considered.”
Director as an Agent of the company
Directors are agents of the company as they act on behalf of the company. Like agents, directors have to disclose their personal interest, if any, in any transaction of the company.
In agency a person is employed to establish, maintain and annul a relationship of principal with third parties and he has necessary authority for the same and directors also enjoy the same authority in terms of company and third parties. This authority they get from memorandum and articles of the company and if their act is beyond it, it is ultra vires.
In Ferguson v. Wilson ([1886] LR 2 Ch 77), the court clearly recognised that directors are in the eyes of law, agents of the company. It was held that, the company has no person; and it can only act through directors. When the directors’ contract in the name and on behalf of the company, it is the company which is liable and not the director.
In Elkington & Co. v. Hurter ((1892) 2 Ch 452), where the plaintiff supplied certain goods to a company through its chairman, who promised to issue him a debenture for the price, but never did so, and the company went into liquidation, he was held not liable to the plaintiff. Similarly, a director was held to be personally not liable in a suit against a private chit fund company and attachment of the property of the director was not permissible.
Director as a Trustee of the company
In trust an author creates a trust for the beneficiary which is managed by a trustee. Being trustee of the company, they are custodian of the assets of the company and they should apply the funds in best interest of company and the shareholders. They must account for all the money over which they exercise control and shall refund any money that has been improperly paid away. If they misapply, misappropriate or divert the use of fund for their own vested interests they must be held liable, and in case of their death, cause of action survives against their legal representatives.
It is an office of trust, which if they undertake, it is their duty to perform fully and entirely. This peculiar nature of their office is one of the reasons why the directors been described as trusties.
In Percival v. Wright ((1902) 2 Ch 421), the directors were not held liable for buying shares from shareholders who were not disclosed about a pending transaction of sale of an asset of the company. But if they would have induced the shareholders to sell their shares to them concealing the fact that they were going to merge the company to another company at a profit, they would have become trustees of this profit to the individual shareholders
In Peskin v. Anderson ([2000] 2 BCLC 1) it was held that ordinarily the directors are not agents or trustees of members or shareholders and owe no fiduciary duties to them. However, in the decision of Allen v. Hyatt ((1914) 30 TLR 444) it was held that, the directors are trustees of the profit for the benefit of the shareholders. They cannot always act under the impression that they owe no duty to the individual shareholders. But it is of no doubt that the primary duty of the director is to the company.
The directors however, are not trustees in strictu senso. Unlike a trustee a director does not enter into contracts in his own name. He enters into contracts for the company of which he IS a director and he does not hold any property in trust, because the property is held by the company in its own name.
Director as Managing Partners of a company
Directors have been defined as managing partners of a company because, on one hand, they are entrusted with managing the affairs of the company and on the other hand, they are shareholders of the company. They manage the affairs of the company for their own benefit as shareholders and for the general benefit of company. Moreover, they perform almost all the proprietorial functions such as allotment of shares, making calls, forfeiture of shares, etc.
However, directors are not managing partners in strict sense because the liability of directors are limited to the value of shares held by them, unlike partners, who have unlimited liability. Further, unlike a partner, a director has no authority to bind the other directors and shareholders.
Director as Employees of a company
Where a director accepts employment under the company under a separate or special contract of service, he will be treated as an employee or servant of the company. He shall be entitled to remuneration and other benefits admissible to employees, in addition to his remuneration as Director under the Act.
In Re Lee Brehens & Co., ((1932) 2 Comp Cas 588), it was held that directors are elected representatives of the shareholders engaged in directing the affairs of the company in its behalf. As such directors are agents of the company but they are not employees or servants of company. However, there is nothing in law to prevent a director from accepting employment under the company under a special contract which he may enter into with the company.
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