The Collins English Dictionary defines a director as “A member of the governing board of a business concern who may or may not have an executive function”. This article covers the fundamental concepts of directorship and the legal position of directors.
Significance of Directors
Directors form the most significant part of a company’s personnel. They are the fulcrum of an organization. The image and integrity of the company is dependent on the image and integrity of the directors. The reliability of the directors determines the reliability of an organization. The directors of a company would be liable in case of any default on the part of the company, as defaults usually do not occur without their knowledge or actions.
Board of Directors
Apart from minor restrictions, the Board of Directors enjoy comprehensive control over the company’s affairs. They are authorized to perform the policy-making and monitoring tasks of the enterprise. The proper functioning of an enterprise, as well as the achievement of its objectives as enshrined in the Memorandum of Association, is entirely dependent on the performance of the Board of Directors. Hence, it is vital that the Board of Directors act in the best of interests of the company.
Position of Directors
It is implicit that a director is responsible for the proper governance of a company, and as already described, the Board of Directors enjoy comprehensive dictatorship, barring minor limitations. They must execute these powers in good faith and in the best of interests of the company. Non-compliance with any duty will result in a penalty under the Companies Act 2013 or any other statute. The role of a director is complex, versatile and intricate. The position of a director varies according to his/her role, responsibility and function in the company. The legal position of a direction in an organization can be classified as follows:
Director as an Agent of the Company
A company is merely an artificial entity, conferred with certain powers. It needs human support to perform and take decisions on its behalf. A director is empowered to bind the company through contracts. The directors act on the company’s behalf while dealing with outsiders. This way, the company becomes the principal and the director, an agent.
Director as a Trustee of the Company
Directors are custodians of the company’s properties. The assets and funds of an organization are entirely vested with the directors. The funds must be utilized in a prudent manner, in a way which suits the interests of the company. They must act in good faith with the stakeholders, and thereby ensure their interests are protected. Further, they must play the role of guardians against oppression and mismanagement, so that the interests of minorities are given due protection. As the directors hold the position of trust, they are considered as trustees of an organization.
Directors as Executives
An executive role bestows the director with the day-to-day management of the company. A director occupying an executive position is not considered as an independent director. Directors in executive capacity ordinarily work as an employee of the company. Directors of this kind are also known as working directors.
Proficiency of Directors
As per the latest amendments to the Company’s rule (2014), [Rule-8, sub-rule(5), Clause(iii)], the director of a company has to undergo online proficiency self-assessment test every year. This test will be conducted by the Ministry of Corporate Affairs. The exact amendment text is provided below:
“(iiia) a statement regarding opinion of the Board with regard to integrity, expertise and experience (including the proficiency) of the independent directors appointed during the year”
The notification can be accessed below:Proficiency test for directors
However, as per the latest notification on 28th February 2020, the directors does not need to undergo proficient self-assessment test for directors who serve a minimum of 10 years as on the date of inclusion in the database for a listed public company or unlisted company with a paid-up capital of minimum of ten crore or the corporate body listed in any of the stock exchange in India. The relevant notification can be accessed below:Independent-Director-Notification