Spread the love

This article is written by Dishant Malhotra of 6th Semester of the Trinity Institute of Professional Studies, Dwarka, an intern under Legal Vidhiya.

ABSTRACT

This article provides awareness regarding the directors’ duties which play a crucial role in shaping corporate decision-making processes, ensuring that decisions align with the long-term interests of the company and its stakeholders. These duties, rooted in statutory frameworks, fiduciary principles, and evolving governance standards, establish legal and ethical responsibilities that guide directors in managing corporate affairs. Directors’ responsibilities have evolved in response to globalization, technological advancements, and increasing emphasis on environmental, social and political factors, compelling them to integrate sustainability and innovation into decision-making. Also, the breaching of duties by them results in legal penalties, financial losses as well as damage to reputation seen in various cases from time to time. This explores the multifaceted impact of directors’ duties on corporate decision making, emphasizing their importance in fostering resilience, stakeholder trust, and long-term value creation in a dynamic corporate environment. Directors must act within the authority granted by the company’s constitution, avoid conflicts of interest and make confident decisions which in turn led to strategic direction, ensure accountability, oversee management as well as foster stakeholder trust. It is also said these duties are critical in shaping sound corporate governance, promoting sustainable growth and ultimately promoting and safeguarding the company’s reputation and success. Also, directors’ oversee that executive actions are aligning with the organization’s values and objectives or not is very vital as it is related to company’s interests.

KEYWORDS

Directors’ Duties, Corporate decision-making, Fiduciary responsibilities, Risk management, Accountability, Legal Compliance, Good faith, Corporate Ethics.

INTRODUCTION

Not only India but also among the world, many leading companies take steps to challenge directors to ensure that the company not only properly assesses and mitigates sustainability risks but also gets informed about important opportunities that the company would get. Corporate ethics and stakeholder governance is now an operational and strategic essential, at the heart of a corporation’s ability to run and get great success in the long term. Various companies have their relevant perspectives and regulatory measures to provide guidance to directors’ in carrying out their work which will attain the company’s strategic objectives and business model. It is said that the directors should act together as a board but sometimes the board may also delegate certain of its powers to individual directors or to committee of the board. A question of whether in whose interest companies ought to be managed and directed ahs attracted strong interest due to the growing impact of the corporate social responsibility. Directors’ duties are made ethically, strategically particularly derived from statutory frameworks, common law and evolving corporate governance standards, establish the foundation for directors to steer organizations towards success mitigating risks and fostering sustainable growth.

In the complex landscape of modern business, the role of directors in corporate decision-making is both pivotal and multifaceted. As the guiding force behind a company’s strategic direction, directors bear a fundamental responsibility to act in the best interests of the organization and its stakeholders. Their decisions not only shape the financial health and operational efficiency of the business but also influence its ethical standing, long-term sustainability, and reputation in the marketplace. The legal and fiduciary duties imposed on directors—ranging from the duty of care and loyalty to the duty to act in good faith—serve as essential pillars that underpin corporate governance. These duties are designed to ensure that directors make informed, responsible decisions that align with the company’s objectives while balancing the interests of shareholders, employees, customers, and the broader community. In this context, the role of directors in corporate decision-making is not just a matter of steering the company towards profitability, but also safeguarding its integrity, enhancing stakeholder trust, and navigating an increasingly complex regulatory and social landscape.

With respect to India, the Indian government has historically introduced several laws and rules in order to stop corporate fraud. For this, it is critical for directors and officers of companies to properly understand the legislative framework of directors’ duties and liabilities in India and use this information to maintain vigilance on their establishments and minimize the risk of occurrence of similar incidents in the future. A director is defined as a person appointed to the board of a company as mentioned in the Companies Act, 2013.

UNDERSTANDING IMPORTANCE OF DIRECTORS’ DUTIES

Directors’ Duties provides a foundation of effective corporate governance and accountability. Directors had a roadmap which provides clarity to them regarding their duties for ethical conduct, to make informed decisions and prudent risk management. It fosters responsibility and empower directors to fulfil their obligations carefully and with confidence thus promoting assurance. For shareholders and investors, wisdom of directors’ duties leads to trust and confidence in corporate leadership, boost transparency and integrity within the organization. Thus, directors will be accountable to shareholders for their actions and decisions and safeguarding interests and investments within the company. Understanding directors’ duties facilitates effective oversight, enforcement and regulation of behaviour in corporate environment. Directors hold a position of significant power and influence within an organization, tasked with making decisions that can affect a wide array of stakeholders, including shareholders, employees, customers, and the broader community. The duties imposed on directors—such as the duty of care, duty of loyalty, and duty of good faith—serve as checks and balances that promote responsible decision-making and ethical conduct. First and foremost, these duties protect the interests of the company, ensuring that directors prioritize its long-term viability over personal or short-term gains. The duty of care requires directors to make informed, diligent decisions based on thorough analysis and consideration of available information, which helps minimize risks and ensures the company remains competitive. The duty of loyalty mandates that directors act in the best interests of the company, avoiding conflicts of interest and self-dealing, thereby safeguarding the trust of shareholders and stakeholders alike.

In sum, the importance of directors’ duties extends beyond legal obligations—it is integral to sustaining a healthy, responsible, and trustworthy corporate environment. By upholding these duties, directors contribute to the long-term prosperity of the organization, foster positive relationships with stakeholders, and ensure the company’s resilience in the face of challenges.

LEGAL FRAMEWORK: INDIAN COMPANIES ACT Vs. COMPARATIVE JURISDICTIONS

The legal framework governing directors’ duties has been mentioned in the Companies Act of 2016 for India. The governance of Corporate Sector and regulation of companies is done through this act in India. This act also outlines the duties of directors, providing frameworks for their fiduciary responsibilities towards the company and its stakeholders through section 166. These duties include acting in good faith, exercising due care as well as promotion of the company at the world level.

 In some jurisdictions such as the United States, the United Kingdom and Australia, directors’ duties are somehow similar but also have remarkable differences. For example, there is companies Act 2006 and common law principles of fiduciary duties which laid the foundation for directors’ duties in the UK. The UK framework emphasizes directors’ duties to promote the success of the company, exercise reasonable care, skill and assurance and avoid conflicts of interest. Also, in the US, statutory law and judicial precedents laid the groundwork through which directors owe fiduciary duties of care, loyalty and good faith to the company and its shareholders.

Analysis of the directors’ duties across these jurisdictions reveals both adjustment and disagreement. While the elementary philosophy of directors’ duties remains normal, variations exist in the particular legal stipulations, mechanisms of enforcement and cultural provisions. These comparative insights promote reforms and improvements in directors’ duties frameworks, promoting international standards of corporate governance and accountability.[1]

DUTIES OF DIRECTORS

  • Act within their powers

A director must act within his powers which are enshrined under the constitution of the company and those powers should be used by him only when they are conferred for a particular purpose.

  • Promote company’s success

To promote the success of the company and for the benefit of its members as a whole, it is the duty of the directors to act in good faith. This kind of duty applies to the actions of directors. While making decisions, directors should always have regard to the long- term consequences of the particular decision taken. This means they must take account of the following:

  1. Employees interests.
  2. Impact on the community and the environment.
  3. Need to act fairly between members.
  4. A need of fostering business relations with customers, suppliers and others.
  5. Promote best reputation for high standards of business and conduct.
  6. Exercise independent judgment

A director always exercises and ensures an independent judgment. This duty largely saw the requirement by directors to independently exercise their powers, without delegating their powers to the will of others and without restraining their discretion.

  • To avoid conflicts of interest

There is a statutory duty on director to avoid any situations in which he has or could have any direct or indirect benefit that conflicts with the interests of the company. This particularly relates to any exploitation of property, any information or opportunity regardless of whether the company could take advantage of it. It also applies to a conflict of duty, as well as a conflict of interest and includes the interests of connected people.

  • No acceptance of benefits by third parties

Any kind of advantage from a third party which is given because of the position which the director holds or because of anything the director has done in his capacity as a director should not be accepted by him is one of his remarkable duties Acceptance of benefits is permitted only where the matter is approved by the company’s members or it can reasonably be regarded that there will be no rising any conflict of interest with the company.

  • Reasonable care, skill and diligence

All the attributes like reasonable skill, care and diligence which are exercised by a reasonably diligent person should also be enshrined in the directors. This includes there should be general knowledge, experience and relevant skills expected from a person carrying out the directors’ functions.

  • Declare interests in transactions or arrangements

A company’s director has to disclose any direct or indirect interest he has in a proposed transaction with the company which is a statutory duty of the director. Moreover, the duty of a director also includes to declare any interest whether direct or indirect held by him in any existing transaction or arrangement.

FIDUCIARY DUTIES OF DIRECTORS’: INDIAN PERSPECTIVE

The following fiduciary duties are set out by the Companies Act, 2013:

1. Directors were required to act in accordance with the company’s resolutions or nay articles of association passed by the shareholders. This ensures duty of directors operating within the framework established by the company’s governance and adhere to the decisions made by the shareholders. Not following these duties without a valid reason will constitute a breach of fiduciary duty.

2. They have to discharge their duties with independent judgment, ensuring they act for best interests of the stakeholders of the company. Directors’ priorities include the long-term success of the company over short term gains.

3. While promoting success of the company, directors should also consider the interests of all stakeholders including employees, customers and the community. This enhances the long-term value and management of the company, balancing the pursuit of profits with responsibility of society and environment.

DIRECTORS’ LIABILITIES

1. Under Company Directors’ Disqualification Act, 1986

  • the director has been guilty of three or more defaults ion complying with company’s legislation regarding the filing of documents with the Registrar of Companies during the preceding five years.
  • the director was found to be guilty of engaging in trading of fraud as defined in the Insolvency Act 1986.

2. Insolvency Act, 1986

  • Wrongful Trading: If a company has gone into insolvent liquidation and the director know or came to know before that liquidation take place that there was no reasonable possibility that the company could able to avoid that liquidation, then it could be seemed by the court that the director makes a personal contribution to the company’s assets and may declare the same as well.
  • Fraudulent Trading: This means that the director with the intent to defraud the creditors was knowingly a party carrying on the business of the company.

3. Corporate Manslaughter and Corporate Homicide Act, 2007

Under this Act, there is a failure by a senior management of an organisation in any breach of duty of care owed to the employees of organisation or members of the public, resulting in death. An unlimited fine along with the court can also order requiring the organisation to publish details of conviction and fine is the penalty.

LEGAL PRECEDENTS

Case Law: Stone Vs Ritter[2]

In this case, the Delaware Supreme Court affirmed the liability in Caremark and held that a claim regarding this for director liability, there should be following conditions:

  • that the directors failed in the process of implementation of reporting or information system or controls
  • that directors failed to monitor or oversee the operations of the information system if it is implemented.

Case Law: Smith Vs Van Gorkom[3]

In this case, the Delaware Supreme Court found that the directors of the Trans Union Corporation had acted in gross negligence by failing to make an informed decision regarding the sale of company and thus it resulted in breach of duty of care by them.

Case law: ASIC Vs Macdonald[4]

It was held that JHIL’s non-executive directors, together with the chief executive officer, chief financial officer and the joint company secretary/general counsel, had breached the statutory duty of care and confidence under the Corporations Act. The punishment includes the imposition of five-year disqualification and penalty of A$30,000 for each of the non-executive directors.

Case law: IL&FS Crisis[5]

This case talked about Infrastructure Leasing & Financial Services (IL&FS) which was a leading company in finance and infrastructural development was collapsed in 2018 due to issues of mounting debt, mismanagement and failures of corporate governance. Directors were accused with allegations of not exercising due assurance, monitor corporate governance and mitigate risks, which led to company’s downfall.

Case law: Satyam Scandal[6]

The chairman of Satyam Computer Services, Ramalinga Raju, admitted to performing a massive accounting fraud, inflating revenue and falsifying financial statements. It shook the Indian Sector and raised serious concerns about regulation practises of corporate governance. This case underscored the importance of directors’ fiduciary duties and thus felt the need for stronger enforcement mechanisms.

Case Law: Kingfisher Airlines Limited[7]

This case resulted in downfall of Kingfisher airlines founded by famous businessman Vijay Mallya related to fiduciary duty breaches in India. The airlines lead to significant debts, failed to pay salaries to its employees, which resulted in its eventual shutdown. The directors were held accountable for their breaches of fiduciary duty by subsequent legal proceedings and regulatory actions.

CONCLUSION

In a nutshell, directors’ duties play a foundational role in shaping corporate decision-making, providing a legal, ethical, and strategic frameworks for governing organizations. These duties, encompassing fiduciary obligations, statutory requirements, guide directors in navigating complex business environments while prioritizing the long-term success of the company. By acting in good faith, exercising care and diligence, avoiding conflicts of interest and promoting transparency, directors ensure that corporate decisions align with the interests of shareholders and other stakeholders, fostering trust and accountability. In an era marked by globalization, technological disruption, and evolving societal expectations, directors face increasing responsibilities to integrate environmental, social and governance considerations into decision-making. The role of directors is further amplified in times of crisis, where their decisions can determine the survival and recovery of an organization. Effective adherence to their duties ensures that risks are identified, resources are allocated prudently, and stakeholders are engaged meaningfully. But breaches of these duties, such as negligence, conflicts of interest or ethical lapses, can lead to significant legal, financial and reputational consequences which are mentioned in high profile corporate failures and cases.

Moreover, it is said that directors must continuously adapt to the evolving landscape of corporate governance. They must embrace digital transformation, prioritize stakeholder inclusivity and champion ethical leadership. By doing this, directors not only fulfil their legal obligations but also contribute to build resilient, responsible and future-ready organizations. As guiding principles of the company, directors’ hold the key to aligning corporate strategies with societal progress, thereby ensuring that their decisions leave a positive and lasting impact on the organization and its broader ecosystem.

REFERENCES

  1. ECGI, Evolving Directors’ Duties in the Common Law World by Jennifier G. Hill. www.ecgi.global January 4, 2025.
  2. Melbourne Law School, Stakeholders and Directors’ Duties: Law, Theory and Evidence by Shelley Marshall and Ian Ramsay. https://law.unimelb.edu.au January 4, 2025.
  3. Indus law, Publication on “Analysis of the Duties of Directors in India” by Avimukt Dar, Rashi Saraf and Amit Iyer. https://induslaw.com January 5, 2025.
  4. World Business Council for Sustainable Development (WBCSD) “Board directors’ duties and ESG considerations in decision-making” 2020 by Baker Mckenzie. https://archive.wbcsd.org January 5, 2025.
  5. Lawctopus, “Directors’ Duties and Liabilities in Indian Companies: A Comparative Analysis” by Tushar Rana https://www.lawctopus.comJanuary 5, 2025.

[1] Baker McKenzie, Board Directors’ duties and ESG considerations in decision making (McKenzie, 2020)

[2] Stone vs Ritter (Del. 2006) 911 A.2d 362

[3] Smith vs Van Gorkom (Del. 1985) 488 A.2d 858

[4] ASIC vs Macdonald 2009 NSWSC 287

[5] IL&FS Crisis 2019 SC 669

[6] Satyam Scandal 2009 Hyd 724

[7] Kingfisher Airlines Limited 2012 Del 614

Disclaimer: The materials provided herein are intended solely for informational purposes. Accessing or using the site or the materials does not establish an attorney-client relationship. The information presented on this site is not to be construed as legal or professional advice, and it should not be relied upon for such purposes or used as a substitute for advice from a licensed attorney in your state. Additionally, the viewpoint presented by the author is personal.


0 Comments

Leave a Reply

Avatar placeholder

Your email address will not be published. Required fields are marked *