Powers Exercisable by the Board of Directors

The Board of Directors is the primary governing body of a company, entrusted with its management and strategic direction. The powers of the Board are not unlimited; they are defined by and must be exercised within the framework of the Companies Act, 2013, the company's Memorandum of Association (MOA), and its Articles of Association (AOA). The fundamental principle, laid down in Section 179(1) of the Companies Act, 2013, is that the Board is entitled to exercise all such powers and to do all such acts and things as the company is authorised to do.

However, the Board cannot exercise powers that are specifically required by the Act or the AOA to be exercised by the members in a general meeting. This creates a clear division of power between the Board (management) and the shareholders (ownership).

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Powers Exercisable by the Board without Approval of Members

These are the general powers of management that the Board exercises in the day-to-day running of the company. Based on the authority granted by Section 179(1), the Board can independently make a vast range of decisions without seeking shareholder approval, provided these powers are not restricted by the Act or the AOA. These include:

• Formulating the company's business strategy and policies.
• Appointing and removing key management personnel (other than those whose appointment requires shareholder approval).
• Entering into contracts for the routine business of the company.
• Overseeing the company's daily operations and financial performance.
• Declaring interim dividends.
• Opening and operating bank accounts.

These powers are exercised through resolutions passed at duly convened Board meetings.

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Powers Exercisable by the Board only at a Board Meeting (Section 179(3))

While the Board has general powers of management, Section 179(3) specifies certain critical powers that are so important that they must be exercised by the Board only by means of resolutions passed at a formal Board Meeting. These powers cannot be delegated to a committee or passed by a resolution by circulation. This ensures collective deliberation by the entire Board on crucial matters. These powers are:

1. To make calls on shareholders in respect of money unpaid on their shares.
2. To authorise the buy-back of securities under Section 68.
3. To issue securities, including debentures, whether in or outside India.
4. To borrow monies.
5. To invest the funds of the company.
6. To grant loans or give guarantees or provide security in respect of loans.
7. To approve financial statements and the Board’s report.
8. To diversify the business of the company.
9. To approve amalgamation, merger or reconstruction.
10. To take over a company or acquire a controlling or substantial stake in another company.

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Powers Exercisable by Board only with the Approval of Members (Section 180)

Certain powers, although exercised by the Board, are of such a significant nature that they can fundamentally alter the company's structure or financial position. For these, the Board must seek the approval of the shareholders by passing a Special Resolution. These restrictions are laid down in Section 180 of the Act.

The Board of Directors can exercise the following powers only with the prior consent of the company by a special resolution:

1. To sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company.

An "undertaking" means a business unit in which the company's investment exceeds 20% of its net worth, or which generates 20% of the company's total income.

2. To invest otherwise than in trust securities the amount of compensation received from a merger or amalgamation.

3. To borrow money in excess of a certain limit.

The Board cannot borrow money where the total amount to be borrowed, together with the money already borrowed by the company, will exceed the aggregate of its paid-up share capital, free reserves, and securities premium. Any borrowing beyond this limit requires a special resolution.

4. To remit, or give time for the repayment of, any debt due from a director.

Delegation of Powers to Committees

To manage its workload efficiently and to enable deeper focus on specific areas, the Board of Directors is empowered to delegate some of its powers to smaller, specialised committees. A committee is a group of directors formed to deal with a particular function of the company. This delegation allows for more detailed scrutiny of issues before they are presented to the full Board.

The power to delegate is derived from Section 179 of the Companies Act, 2013, and must be authorized by the company's Articles of Association.

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Statutory and Non-Statutory Committees

The Board can form various committees. Some are mandated by law for certain classes of companies, while others are formed voluntarily.

Statutory Committees:

• Audit Committee (Section 177): Mandatory for all listed companies and certain other public companies. Its role is to oversee financial reporting, internal controls, and the relationship with auditors.
• Nomination and Remuneration Committee (NRC) (Section 178): Mandatory for listed and certain other public companies. It identifies persons qualified to become directors and formulates the policy on remuneration for directors, KMPs, and senior management.
• Stakeholders Relationship Committee (Section 178): Mandatory for companies with more than 1,000 security holders. Its purpose is to resolve the grievances of security holders of the company.
• Corporate Social Responsibility (CSR) Committee (Section 135): Mandatory for companies meeting specified net worth, turnover, or profit thresholds. It formulates and monitors the company's CSR policy.

Non-Statutory Committees:

The Board can also form other committees as needed, such as a Finance Committee, Investment Committee, or Risk Management Committee, to deal with specific operational or strategic areas.

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Limitations on Delegation

The Board cannot delegate all its powers. The law ensures that the most critical decisions are taken by the full Board collectively. As mentioned earlier, the powers specified under Section 179(3) (e.g., borrowing money, investing funds, approving financial statements) cannot be delegated to a committee of directors. These matters must be decided by a resolution passed at a duly convened Board Meeting.

Fiduciary Duties

Directors occupy a position of immense trust and confidence in relation to the company. This creates a fiduciary relationship, which means they must act in a manner that is loyal, trustworthy, and solely for the benefit of the company. These duties, which largely evolved from common law principles, are now codified in Section 166 of the Companies Act, 2013. A breach of these duties can lead to personal liability for the directors.

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1. Duty to Act in Accordance with the Articles

A director must act in accordance with the company's Articles of Association (AOA). The AOA contains the rules for the internal management of the company, and directors are bound to follow them. Any action taken by a director in contravention of the AOA is invalid.

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2. Duty to Act in Good Faith in the Best Interest of the Company

This is the cornerstone of a director's fiduciary duty. A director must act in good faith (honestly) and in a manner they believe to be in the best interests of the company as a whole. The interests of the company are paramount and must be prioritized over any other interest.

The duty is owed to the company as a whole, which includes the interests of its employees, shareholders, the community, and the environment. This reflects a shift towards a more stakeholder-centric view of corporate governance.

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3. Duty to Exercise Powers for Proper Purposes

The powers granted to directors are not for their personal use; they are held in trust and must be exercised only for the specific purposes for which they were conferred. A director cannot use their powers for any collateral or improper purpose, even if they believe their actions might benefit the company.

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4. Duty to Exercise Reasonable Care, Skill, and Diligence

A director is expected to conduct the company's business with a certain level of competence. Section 166(2) requires a director to exercise reasonable care, skill, and diligence. They must also exercise independent judgment.

• Care and Diligence: This is the level of care that an ordinarily prudent person would be expected to take in their own affairs. A director cannot be negligent in their duties. They must actively participate in meetings, review reports, and ask relevant questions.
• Skill: The level of skill expected from a director depends on their knowledge and experience. A director with a specific professional qualification (e.g., a Chartered Accountant appointed as a Finance Director) is expected to demonstrate a higher level of skill in that area than a non-executive director.

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5. Duty to Avoid Conflict of Interest

A director must not place themselves in a position where their personal interests conflict, or could potentially conflict, with the interests of the company. This is a strict rule to ensure undivided loyalty.

This duty includes:

• Duty not to make secret profits: A director cannot use their position or any corporate property, information, or opportunity to make a secret profit for themselves or their associates. If they do, they must account for that profit to the company.
• Duty not to compete with the company: A director should not engage in a business that is in direct competition with the company's business.

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6. Duty not to make Undue Gain or Advantage

Section 166(5) explicitly prohibits a director from achieving or attempting to achieve any undue gain or advantage, either for themselves or for their relatives, partners, or associates. If a director is found to have made any such undue gain, they are liable to pay an amount equal to that gain to the company.

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7. Duty not to Assign Office

The office of a director is one of personal trust and confidence. Therefore, a director cannot assign their office to another person. Any such assignment is void.

Statutory Duties

In addition to the broad fiduciary duties under Section 166, the Companies Act, 2013, imposes several specific statutory duties on directors throughout its various provisions. These are concrete obligations with prescribed procedures and penalties for non-compliance.

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Duty to Attend Board Meetings

While not an explicit duty to "attend", Section 167 provides that a director's office shall become vacant if they absent themselves from all Board meetings held over a period of 12 months, with or without seeking leave of absence. This implicitly creates a duty to attend meetings to participate in the company's governance. Regular attendance is a key part of exercising due care and diligence.

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Duty to Disclose Interest (Section 184)

This is a crucial statutory duty linked to the fiduciary duty to avoid conflicts of interest. Every director must, at the first Board meeting in which they participate as a director, and thereafter at the first Board meeting of every financial year, disclose their concern or interest in any other companies, bodies corporate, firms, or other associations of individuals. Furthermore, if a director is interested in any proposed contract or arrangement with the company, they must disclose the nature of their interest at the Board meeting where the contract is discussed and must not participate in such discussion or vote on the matter.

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Duty to Maintain Books of Account

Under Section 128, the responsibility for ensuring that the company maintains proper books of account that give a true and fair view of its affairs falls upon the Board of Directors. The directors are collectively responsible for the accuracy and compliance of the company's financial records.

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Duty to Prepare and Sign Financial Statements

As per Section 134, the Board of Directors is responsible for preparing the company's annual financial statements and the Board's Report. The financial statements must be approved by the Board and signed on its behalf by the chairperson or at least two directors (one of whom must be the MD, if any). The Board's Report, including the all-important Directors' Responsibility Statement, must also be approved and signed by the chairperson or two directors.

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Other Statutory Duties

The Act is replete with other duties, including:

• Duty to ensure the allotment of securities is done as per the Act.
• Duty to ensure dividends are paid within 30 days of declaration.
• Duty to file various returns and documents with the Registrar of Companies (RoC).
• Duty to appoint the first auditor of the company.

Failure to perform these statutory duties can lead to fines and, in some cases, imprisonment for the "officer in default", which almost always includes the directors.

Civil Liability

Civil liability arises when a director's actions (or inactions) cause financial loss or damage to the company or to third parties. The objective of imposing civil liability is primarily compensatory – to make good the loss suffered. Directors can be held personally liable to pay damages or restore property to the company.

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1. For Breach of Fiduciary Duty

As fiduciaries, directors owe duties of loyalty, care, skill, and diligence to the company. If a director breaches any of these duties, they can be held personally liable for any loss that results from the breach. The company can sue the director to recover the loss.

Examples of breach of fiduciary duty leading to civil liability include:

• Making Secret Profits: If a director uses a corporate opportunity to make a personal profit, the company can compel the director to account for that profit and pay it back to the company.
• Conflict of Interest: If a director enters into a contract with the company without proper disclosure of their interest and the company suffers a loss, the contract can be voided, and the director may be required to compensate the company.
• Negligence: If a director's lack of reasonable care (negligence) causes a loss to the company, they can be sued for damages. For example, if the Board approves a loan to a clearly uncreditworthy entity without proper due diligence, leading to a default, the directors could be held liable.

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2. For Ultra Vires Acts

An act is "ultra vires" if it is beyond the powers of the company as defined in its Memorandum of Association (MOA). If the directors use the company's funds for a purpose that is ultra vires, they are personally and jointly and severally liable to restore those funds to the company. Since such acts are void, the directors cannot be excused even if the shareholders approved the action.

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3. For Misfeasance (Section 340)

Misfeasance refers to a breach of duty or trust by a person in a fiduciary position, especially when it results in a financial loss to the company. It is not about non-feasance (failure to act) but about malfeasance (improperly performing a lawful act).

During the winding up of a company, the National Company Law Tribunal (NCLT) can, on the application of the liquidator or any creditor or contributory, examine the conduct of any past or present director. If a director is found to have misapplied or retained any money or property of the company, or has been guilty of any misfeasance or breach of trust, the NCLT can order them to repay the money or restore the property with interest, or to contribute such sum to the assets of the company by way of compensation.

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4. For Fraudulent Trading (Section 339)

This is a very serious ground for civil liability. If, in the course of the winding up of a company, it appears that the business of the company has been carried on with the intent to defraud creditors or for any other fraudulent purpose, the NCLT can declare that any directors who were knowingly parties to such conduct shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company.

This provision effectively lifts the corporate veil and makes the directors personally liable for the company's debts if they have engaged in fraudulent trading.

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5. For Mis-statement in Prospectus (Section 35)

If a prospectus contains any untrue or misleading statement, every person who was a director at the time of the issue of the prospectus can be held civilly liable. They are liable to pay compensation to every person who subscribed for the securities on the faith of the prospectus and has suffered any loss or damage as a consequence.

Criminal Liability

Criminal liability is imposed for more serious violations of the law. It involves punitive action by the state, which can include fines, imprisonment, or both. The Companies Act, 2013, has significantly enhanced the criminal liability of directors to deter corporate malpractices. The liability is typically imposed on the "officer who is in default," which is defined to include directors.

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For Offences under the Companies Act

The Act prescribes criminal liability for numerous defaults. Some of the key instances are:

1. Mis-statement in Prospectus (Section 34)

If a prospectus contains any untrue or misleading statement, every person who authorises its issue can be held criminally liable for fraud under Section 447. Punishment for fraud includes imprisonment for a term from six months to ten years and a fine which can be up to three times the amount involved in the fraud.

2. Failure to Repay Deposits (Section 74)

If a company fails to repay deposits accepted before the commencement of the Act within the specified time, every officer in default can face imprisonment up to seven years and a fine.

3. Failure to Pay Dividend (Section 127)

If a declared dividend is not paid within 30 days, every director who is knowingly a party to the default can be punished with imprisonment for up to two years and a fine.

4. Furnishing False Statement or Information (Section 448)

If in any return, report, certificate, financial statement, prospectus, or other document required by the Act, any person makes a statement which is false in any material particular, knowing it to be false, or omits any material fact, knowing it to be material, they shall be punishable for fraud under Section 447.

5. Fraud (Section 447)

This is a general, overarching provision that deals with any act of fraud in relation to the affairs of a company. "Fraud" is broadly defined to include any act, omission, concealment, or abuse of position committed with an intent to deceive or to injure the interests of the company, its shareholders, or its creditors. As mentioned, the punishment is severe, involving both imprisonment and a heavy fine.

6. Insider Trading (Section 195)

If a director engages in insider trading (i.e., trading in the company's securities while in possession of unpublished price-sensitive information), they can be punished with imprisonment for a term up to five years or with a fine from five lakh rupees to twenty-five crore rupees, or with both.

These provisions demonstrate that while directors are given extensive powers to manage the company, these powers come with a corresponding level of responsibility and accountability, with severe consequences for any abuse of power or dereliction of duty.