LAB/U2 Topic 5 Duties of Directors
The position of Director of a Private Limited Company or Limited Company or One Person Company comes with certain duties and responsibilities. Many Directors of a Company are unaware of these duties and responsibilities expected of them and hold the position just as a namesake. Our intention with this article is to change that mindset and create awareness about the duties and responsibilities of a Director of a Company. This will in turn help create companies that have a strong and ethical Board of Directors, thereby benefitting all the stakeholders of a company.
Duty to act in the best interests of the Company
Directors are in a fiduciary position in relation to the company. So the Director must exercise his/her power for the benefit of the company or in the best interest of the company. A Director must also consider the interests of the company supreme and, in any case, above their personal interest. Therefore, a Director acting honestly but not in the best interests of the company is in breach of duty.
Fiduciary: A fiduciary is a person who holds a legal or ethical relationship of trust. Typically, a fiduciary prudently takes care of money for another person.
Duty NOT to misapply company assets
Directors do not have legal ownership of the company’s assets. They only have effective control of them, and they must use them and employe them for the proper purposes of the company, and in the best interests of the company.
Duty NOT to make secret profits
A Director holds a key position in relation to the company. Therefore, in the course of management of the business, the Director may get confidential and sensitive information concerning the company’s business and affairs, or trade secrets. This privileged information cannot be used by the Director for his/her personal benefit and gain to the detriment of the company.
Duty of confidentiality
Directors would have access to all the relevant information about the operations and financials of a company. However, a Director has a duty to ensure that such information is not, directly or indirectly, divulged. A Director must not disclose or make use of that confidential information for any purpose other than for the benefit of the company.
Duty to NOT permit conflict of interest
A Director of a company has a duty to not enter into any arrangement which will possibly impair the Director’s interest and cause conflict of interest with the Company. A conflict of interest arises when a person is in a position to derive personal benefit from actions or decisions made in their official capacity.
Duty to attend meetings
A Director of a company must make best efforts to attend as many board meetings as circumstances permit. In India, if a Director is absent from three consecutive meetings of the Board, or from all meetings held in three months, whichever is longer, without obtaining leave of absence from the Board, then the Director could lose his/her Directorship in the Company.
Duty NOT to exceed powers
The Memorandum of Association (MOA) of a Company states what the company is authorized to do. Whereas, the Articles of Association (AOA) of the Company state what powers are given to the Directors of the Company. It is the duty of the Directors to ensure that not only do they keep within the company’s powers but also that hey keep within the powers actually given to them in the Articles of Association.