THE ROLE OF DIRECTOR’S DUTIES IN PREVENTING CORPORATE MISMANAGEMENT

Tiksha Galav,

S. S. JAIN Subodh Law College, Jaipur

PREFACE

Why directors? Why are they questioned? Why such a title?

In order to tackle these questions, it is imperative that we familiarise ourselves with the term “Company”

Haney J defines a company as “A legal persona created by statute, with a seal, perpetual succession and distinct existence.” The Supreme Court of India holds, “A director is one who formulates policy and oversees the management of the company or such a person by whichever title is irrelevant.” This is the definition of director given by the Supreme Court.

What follows from the above definitions of Company and Director is; a Company is a synthetic personality which means it does require individuals such as Directors to control and oversee the affairs of its business and operations.

Therefore, it is not possible to imagine a company, devoid of a director and vice versa. Since both are interdependent, it is equally important to appreciate the responsibilities and obligations of directors, as they are central in the understanding of the operations of the company.

ROLES OF DIRECTORS OF THE COMPANY

There is a company, the directors of that company are known as the Board of Directors and Section 149(1)(a) of The Companies Act, 2013 provides for the number of directors that are to be present in different types of companies, it states that

· In Public Company              -        at least 3 Directors,

· In Private Company             -        at least 2 Directors, and

· In One-Person Company      -        at least 1 Director must be there.

It should be noted that the limit for the number of directors in a business organization is 15 and in case such a need arises a special resolution is needed.

Here are the duties which a director should perform and which if not performed would cause mismanagement of the company.

1. Section 166(1) of The Companies Act, 2013 states that they must act in accordance with the article of the Company.

2. Section 166(2) of The Companies Act, 2013 obligates them to act with good faith and in furtherance of the objects of the company.

3. Section 166(4) of The Companies Act, 2013 places an obligation on directors to ensure that they do not place themselves in circumstances which are likely, directly or indirectly, to bring the interest that they have as directors in conflict.

4. Section 166(5) of The Companies Act, 2013 allows for private directors and directors to make such an allowance to their family members, among other things, but they do not allow for undue. As such, anyone who is found in violation of any of these sections will be required to compensate the society for the amount of the profit gained.

5. Section 166(6) of The Companies Act, 2013 also permits such an appointment of other officers, but not two areas, making them believe it is a form of self-says within their meaning without any rights of a director or other secretly assigning their office.

6. According to section 26 of The Companies Act, 2013 they must verify the prospectus so that it discloses as full and correct as any other similar document.

7. They are required by the provision of section 26(c) of the Companies Act of 2013, to include in the prospectus a declaration that the provisions of this act and a statement that nothing in the prospectus is in contravention of the provisions of this act and other acts.

8. Under section 26 of the Companies Act, 2013 they are obliged to sign the prospectus prior to it being filed with the registrar.

9. Under section 26 of the Companies Act, 2013 they have a duty to ensure that no prospectus has been delivered to public before it has been delivered to the Registrar.

10. Section 40(3) of the Companies Act 2013 indicates that no other application money except that provided in the schedule should be applied out of the deposited money.

11. According to subsection 39 of the Companies Act 2013, it is a mandatory condition for them to file the return of allotment of securities with the registrar.

12. According to section 56 of the Companies Act 2013, where share certificates have been issued, such certificates shall be issued to the allotees within two months from the allotment date.

13. According to section 92 of Companies Act 2013, they are required to sign and submit the annual return of the company to the registrar.

14. Section 129 of The Companies Act, 2013 provides the company members with the right to lay the financial statements for the financial year of the company at ANNUAL GENERAL MEETINGS.

15. Under the provision of section 96 of The Companies Act, 2013 they should convene ANNUAL GENERAL MEETING of the company without delay, or at such time as may be further permitted by the Registrar.

16. According to the provision of section 123 of The Companies Act, 2013 the Directors of the company recommend payment of dividend in general meeting of the company if there is available any profit. In the case where the general meeting votes in favor of the recommendations, the directors have a maximum of 30 days to distribute the dividends after the meeting.

17. A per section 96 of The Companies Act, 2013, it is the responsibility of the directors to prepare a directors report on an annual basis and attach it to the financial statements which are presented to the ordinary general meeting of the company The report must be prepared in accordance to the requirements of this section, some of points are as follows:

·       There shall be inter-alia some brief narration on the state of the Company’s affairs,

·       The frequency of Board Meetings held,

·       Company’s Directors’ responsibility Statement,

·       The particulars of any frauds which came to the notice of the auditors,

·       A prime declaration made by Independent Directors, not the least

·       Any amount to be carried to reserves, dividends and so forth.

1. A copy of the financial statements and other necessary papers must be filed with the registrar in accordance with section 137 of the Companies Act of 2013.

2. In accordance with section 173 of the Companies Act of 2013, they must call four board meetings annually and at least once every three months.

3. In accordance with section 184 of the Companies Act of 2013, they must reveal any interests they may have in other businesses or corporations, as well as any contracts they may have in contracts that the company may make.

4. In accordance with section 217 of the Companies Act of 2013, they are required to cooperate in the examination of the company's operations by supplying pertinent documentation and to provide the government with all necessary support in relation to the prosecution of the convicted individual.

CONSEQUENCE OF CORPORATE MISMANAGEMENT

1. Legal Liability

Ø  Breach of Fiduciary Duties: Directors are required to act in the interest of the company, and any harm resulting thereof could lead to legal suits against directors for negligence or misconduct.

Ø  Penalties: Section 120 and Chapter V of the Companies Act of 2013 ascertain punishment for various actions, including non-disclosure of financial impropriety, wrongful allotment of shares, or failure to conduct proper meetings.

Ø Criminal Liability: Involvement in a serious crime (for example, fraud or false misrepresentation of the financial condition) will result in high fines or a sentence of imprisonment under Section 447 of the Companies Act.

2.   Financial Implications

Ø  Liability: Directors may be held personally liable for any financial loss incurred on account of negligence or fraudulent conduct.

Ø  Loss of Job: If the performance of the company goes down, directors could be removed from their positions.

Ø  Defence Expenses: The directors may have substantial amounts requested in legal fees just for contesting the claims against them.

3.   Reputational Crisis

Ø  Loss of Credibility: Mismanagement would further damage a director's professional and personal reputation, reducing their prospects.

Ø  Public Scandal: A financial disaster or legal controversy may cause tangible and permanent damage to a director's reputation when media exposure portrays it to be a scandal.

4.   Imposition of Disqualification from Board Membership

Ø  Section 164: Disqualification could be accorded for directors involved in serious offenses such as fraud or mismanagement, sometimes for a whole life.

Ø Damaged Professional Networks: Disqualification could really damage professional relationships and career opportunities.

5. Heightened Regulatory Scrutiny

Ø  Audits and Investigations: Reporting mismanagement can lead to government or NGO-like audits, such as SEBI or the MCA, introducing distortion and brand-image risk.

Ø  Ongoing scrutiny: The monitoring period follows a specific time frame to keep the eye of regulators on directors even after their permission has been resolved.

6.   Decline in Investor Trust

Ø  Stock Value Decline: The poor management itself harms the investor's confidence, disequilibrating the stock value of the company—and making any future capital raising quite difficult.

Ø Investor Lawsuits: The other category of investors probably would sue the directors for getting the damages.

Ø Hostile Takeovers: It brings mismanagement issues into place or activates enough movement to pressure directors to resign under hostile takeovers or shareholder activism.

CONCLUSION

A company cannot function without the managers; hence, duties and the role managers under the Companies Act, 2013, would prevent maladministration. Therefore, the directors have to act in such a way that the interest of the company is suitably served and avoid conflicts of interests so that all actions taken must be above board. In case they are not able to do so, then it will come with very serious legal, financial, as well as reputational consequences through personal liability, penalties, loss of job, and disqualification from directorship.

With mismanagement, the company could attract more regulatory scrutiny, investment declined, and even be sued. To this end, with the goal of preventing such risks, directors shall act responsibly, maintain ethical standards, and ensure all legal obligations are met, thus enabling the company to operate with efficiency and transparency.