Position of Directors In A Company

Directors are professionals deputed by the Company to run its business. They are officers who control the overall functioning of the Company involving day-to-day management and superintendence of the company’ affairs. Section 2(34) of the Companies Act, 2013 defines director means a director appointed to the Board of a Company. Directors are collectively referred as Board of Directors. Only an individual person can be appointed to hold the position of director. An artificial person or an entity cannot be appointed as the director of a company.

Role of Director

When we consider a company as a separate legal entity, then the directors are considered as the mind and the will of the company as they control the actions of the company. In simple words, they are the brain of the company. Their role is important in the overall administration and management of a Company. They act in multiple capacities at different times to run the Company in an efficient manner.

In this article, we are going to study the role of directors and their legal position as agents or trustees of the Company.

Understanding the Position of Director

As observed by the lordship in the case of Ram Chand & Sons Sugar Mills Pvt. Ltd. v. Kanhayalal Bhargava that the position held by the directors in a Company is a difficult subject to explain. To understand the position of director in a better way, we refer to Justice Bowen’s observations in a well-decided case of Imperial Hydropathic Hotel Co. Blackpool vs. Hampson, (1882) 23 Ch D 1 (CA) which is as follows:

“Directors are described sometimes as agents, sometimes as trustees and sometimes as managing directors. 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.”

This summarises the multi-dimensional position of a director in the capacity of agents or trustees to the Company even though they are not considered the same in a true legal sense. Let’s understand the position of a director in a company as agents and as trustees in detail further.

1. Directors As Agents of The Company

It is established in the case of Ferguson v. Wilson that the directors are considered as “agents of the Company” in the eyes of law. A company is an artificial person created by law and cannot act on its own. It operates through its directors i.e. agents of the Company. His lordship summarises the true position of the directors in case of Faure Electric Accuinuolator Co., (1888) 40 Ch. D. 147) that directors are agents for the company with powers and duties of carrying on the whole of its business subject to the restrictions imposed by the articles and the statutory provisions. Their role as an agent is guided by the powers and duties entrusted to them.

2. Authority to Act as an Agent

A director derives his authority to act as agent of the Company by virtue of its Articles of Association which is drafted in accordance with provisions of the Companies act. Thus, his actions as agents are considered as “actions of the Company” itself. However, the director is not held personally liable for his acts unless specifically provided in the law. Wherever a liability would attract to an agent; directors would be held liable whereas where the liability would attract to the principal, the burden of liability will be shifted to the company.

Liability of a Director while acting as an Agent

The relation of the directors with the company is guided by the general principle of agency. If directors have any personal interest in a transaction of the Company then they have to disclose the same as an agent. The directors of a company cannot be made liable merely because he is a director if he has not given any personal guarantee for a loan taken by the company as observed by his lordship in Indian Overseas Bank v. RM Marketing. Directors can incur a personal liability when they enter the contract in their own names when they use the name of the company for a fraudulent purpose,s and when they exceed their powers entrusted with them.

The directors must act in the name of the company and within the scope of their authority. If the directors enter into a contract that is beyond their powers but within the powers of the company, the company may ratify it. However, in case of a contract that is ultra-virus the company, the company cannot ratify it and neither the company nor the directors are liable for it. In such cases, the directors may be held liable for breach of implied warranty of authority.

Are directors agents of the members of the Company?

It is important to note that directors are agents of the company but not the agents of the members of the company. A company is a distinct legal entity apart from its shareholders. The directors are the agents of the institution i.e. Company and not of its individual members, except when that relationship arises due to the special facts of the case as rightly observed by his lordship in Ray Cylinders & Containers v. Hindustan General Industries Limited.

Are directors the agents of a Company legally?

The directors are not considered as agents in any legal statute. Agents are appointed by the principal whereas directors are elected by the shareholders of the Company. Agents work on a commission basis but that’s not the case with directors. Also, an agent is not required to disclose the name of his principal but a director has to do the same. Therefore, the directors are not agents in the true legal sense.

3. Directors as Trustees of the Company

I. Trustees to the money and property:

The office of the director is fiduciary in nature and powers are delegated to them to act on behalf of the Company. Directors are often referred to as “trustees of the company”. They are treated as trustees of the Company with regards to the money and the property of the company they handle. They undertake all the transactions on behalf of the company and utilize the company’s funds in the best possible manner to gain profits.

ii. Trustees to the powers entrusted:

The directors are also the trustees in respect of powers entrusted to them. They must exercise these powers bonafide and for the overall benefit of the company. They have the power to utilize the funds of the company, to declare dividends in the general meeting, to make calls and even to forfeit shares, to approve the transfer of shares, and accept the surrender of shares. They exercise their powers which are basically “powers in trust” in good faith and for the benefit of the Company.

iii. Management of the Company’s affairs as an office of trust:

The directors are officers deputed to manage the Company’s affairs for the benefit of the shareholders; it is an office of trust which, if they undertake, it is their duty to perform fully and entirely; as observed by his Lordship Romilly in York and North Midlands Railway Co. v. N. Hudson, 16 Bev. 485. Director is also required to consider the interests of all stakeholders such as labour, customers, consumers, suppliers which are affected by the operations of company; while executing their functions as trustees of the Company.

iv. Liabilities as trustees of Company:

Madras High Court has observed in a well-decided case of Ramaswami lyer v. Brahmayya and Co. (1966) 1 Comp. L.J. 107 (Mad) 7 that the directors of a company are trustees for the company and with reference to their power of applying funds of the company and for misuse of the power they could be rendered liable as trustees and on their death, the cause of action survives against their legal representatives. In this case his lordship also mentions about the liabilities that a director can incur as a trustee while asserting the role of director as trustees of the Company.

Trustees for individual shareholders of the Company?

It is important to note that directors are trustees of the company but not for individual shareholders of the company. It is laid down in the case of Percival v. Wright. The same principle was noted again in the case of Peskin v. Anderson that the directors do not hold any fiduciary relationship with individual members of the company. The directors are also not responsible as trustees for the debt due to a company or for the creditors of company even though they are trustees of the assets of the Company.

Trustees of Company in the legal sense:

In terms of Trust laws in India, a trustee holds legal ownership over the trust property of which the equitable ownership lies with the beneficiary. Considering this explanation, directors are not considered as full-fledged trustees of the Company. Unlike a trustee, the property of the company is not legally vested in him. Also, a trustee executes contracts in respect of the trust property in his own name whereas directors do the same under the common seal of the company and not in his personal capacity.

A trustee never manages the trust property for his benefit whereas the director undertakes the management of trust property for benefit of himself and other shareholders in the company. An artificial person can become a trustee but an artificial person cannot become a director of the Company. As the only an individual can be a director who can execute the transaction in the name of the Company. Directors are commercial officers managing a trading concern for the benefit of themselves and of all the shareholders in it. They are paid officers of the Company. Thus we can say that directors are not trustees in a real sense. Their functions and duties make them Trustees of the Company. Directors may better be regarded as quasi trustee looking at their roles.

Conclusion:

A director is an agent of the Company for the conduct of its business. They have a fiduciary relationship with the company as well as the shareholders when they act as an agent of a company. However, the directors do have independent powers on certain matters, unlike agents who act primarily on the instructions of the principal.

The directors occupy a fiduciary position in relation to the company’s affairs and they are considered trustees with respect to the company’s property and money. They are also trustees as regards powers entrusted to them. They must exercise these powers in the good interest of the company as they are accountable for the same. They are not trustees of individual shareholders and other persons entering into any contract with the Company.

As rightly observed by Justice Jessel, M.R. in Great Eastern Railway Co. v. Turner, L.R. 8 Ch. D. 149 that the directors have sometimes been called trustees or commercial trustees, and sometimes they have been called agents. It does not much matter, what you call them so long as you understand what their true position is, which is that they are commercial men managing a trading concern for the benefits of themselves and all other shareholders in it.

We should truly understand their roles as a director as a whole and refrain to term them as agents or trustees in the true legal sense. It can be concluded that directors are neither agents nor trustees in true legal terms. However, they possess the elements of agency, trusteeship in their nature of duty but none of these terms can describe directors in their position in totality. The role of director involves a combination of agency, trusteeship but does not make him an agent or a trustee in its real sense.

1)Introduction to Company Law Avtar Singh (Eleventh Edition)

2) Companies Act, 2013 with amendments thereon (www.mca.gov.in)

3)Ram Chand & Sons Sugar Mills Pvt. Ltd. v. Kanhayalal Bhargava

4) Imperial Hydropathic Hotel Co. Blackpool vs. Hampson, (1882) 23 Ch D 1 (CA)

5) Ferguson v. Wilson

6) Faure Electric Accuinuolator Co., (1888) 40 Ch. D. 147)

7) Indian Overseas Bank v. RM Marketing

8) Ray Cylinders & Containers v. Hindustan General Industries Limited

9)York and North Midlands Railway Co. v. N. Hudson, 16 Bev. 485

10) Ramaswami lyer v. Brahmayya and Co. (1966) 1 Comp. L.J. 107 (Mad) 7

11) Percival v. Wright

12)Peskin v. Anderson

13) Great Eastern Railway Co. v. Turner, L.R. 8 Ch. D.

This Article Authored  by Unmesh Shankar Zagade (BCOM, CS, LLB)

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