CHAPTER 1INTRODUCTIONINTRODUCTION:A company is an association or collection of individuals, whether natural persons, legal persons, or a mixture of both. Company members share a common purpose and unite in order to focus their various talents and organize their collectively available skills or resources to achieve specific, declared goals. Companies take various forms such as: Voluntary associations which may be registered as a Nonprofit organizations A group of soldiers Business entity with an aim of gaining a profit Financial entities and BanksA company or association of persons can be created at law as legal person so that the company in itself can accept Limited liability for civil responsibility and taxation incurred as members perform (or fail) to discharge their duty within the publicly declared birth certificate or published policy.Because companies are legal persons, they also may associate and register themselves as companies - often known as a Corporate group. When the company closes it may need a death certificate to avoid further legal obligations.Meanings and definitionsA company can be defined as an artificial person, invisible, intangible, created by or under law, with a discrete legal entity, perpetual succession and a common seal. It is not affected by the death, insanity or insolvency of an individual member.

EtymologyThe English word company has its origins in the Old French military term compaignie (first recorded in 1150), meaning a body of soldiers, and originally taken from the Late Latin word companio companion, one who eats bread [pane] with you, first attested in the Lex Salica as a calque of the Germanic expression gahlaibo (literally, with bread), related to Old High German galeipo companion and Gothic gahlaiba messmate. By 1303, the word referred to trade guilds. Usage of company to mean business association was first recorded in 1553, and the abbreviation "co." dates from 1769. (The equivalent French abbreviation is cie.)United States of AmericaIn the United States, a company may be a corporation, partnership, association, joint-stock company, trust, fund, or organized group of persons, whether incorporated or not, and (in an official capacity) any receiver, trustee in bankruptcy, or similar official, or liquidating agent, for any of the foregoing. In the US, a company is not necessarily a corporation. United KingdomIn English law and other legal jurisdictions based upon it a company is a body corporate or corporation company registered under the Companies Acts or similar legislation.[4] Common forms include: Private companies limited by guarantee Companies without share capital (often non-profit entities) Private company limited by shares The commonest form of company Public limited companies Companies, usually large, which are permitted to (but do not have to) offer their shares to the public, for example on the stock exchangeIn Britain a partnership is not legally a company, but may sometimes be referred to informally as a company. It may be referred to as a firm.

private company means a company having a minimum paid-upshare capital of one lakh rupees or such higher paid-up share capitalas may be prescribed, and which by its articles,[footnoteRef:2] [2: ]

(i). restricts the right to transfer its shares;(ii). except in case of One Person Company, limits the number of itsmembers to two hundred:Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member:Provided further thatA. persons who are in the employment of the company; andB. persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and(iii). prohibits any invitation to the public to subscribe for any securities of the company;

public company" means a company which (a) is not a private company;(b) has a minimum paid-up share capital of five lakh rupees or such higher paid-up capital, as may be prescribed:Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles;

Formation of company.(1) A company may be formed for any lawful purpose by (a) seven or more persons, where the company to be formed is to be a public company;(b) two or more persons, where the company to be formed is to be a private company; or(c) one person, where the company to be formed is to be One Person Company that is to say, a private company, by subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect of registration:Provided that the memorandum of One Person Company shall indicate the name of the other person, with his prior written consent in the prescribed form, who shall, in the event of the subscriber's death or his incapacity to contract become the member of the company and the written consent of such person shall also be filed with the Registrar at the time of incorporation of the One Person Company along with its memorandum and articles:Provided further that such other person may withdraw his consent in such manner as may be prescribed:Provided also that the member of One Person Company may at any time change the name of such other person by giving notice in such manner as may be prescribed:Provided also that it shall be the duty of the member of One Person Company to intimate the company the change, if any, in the name of the other person nominated by him by indicating in the memorandum or otherwise within such time and in such manner as may be prescribed, and the company shall intimate the Registrar any such change within such time and in such manner as may be prescribed:Provided also that any such change in the name of the person shall not be deemed to be an alteration of the memorandum.(2) A company formed under sub-section (1) may be either(a) a company limited by shares, or(b) a company limited by guarantee, or(c) an unlimited company.The emergence of various corporate scandals in India over the past few years, there has been much attention and debate on the role of company Directors. There has been a lot of locus on independent Directors (and also, on nominee Directors). In particular, with India emerging as a preferred investment destination, there has understandably been a need to clarify the responsibilities of nominee Directors. As covered in this Note, the principles to determine the liabilities of Directors are, in large measure, common to all Directors, varying in degree depending on their respective roles and involvement in the companys affairs. Company law has known directorial duties and liabilities for decades and the principles of such obligations have been distilled for many years. To illustrate, the Supreme Court of India, while considering who is said to be responsible for the conduct of a company's business, especially the role of nonexecutive Directors had this to say in 1973 in the case of Official Liquidator, Supreme Bank Ltd. v. P. A. Tendolkar[footnoteRef:3] words that are of no less relevance today: [3: AIR 1973 SCI 104]

It is certainly a question of fact whether a director had acted reasonably as well as honestly and with due diligence. A director may be shown to be so placed and to have been so closely and so long associated personally with the management of the company that he will be deemed to be not merely cognizant of, but liable for, fraud in the conduct of the business of a company even though no specific act of dishonesty is proved against him personally. He cannot shut his eyes to what must be obvious to everyone who examines the affairs of the company even superficially.[footnoteRef:4] What types of actions can be taken against errant Directors and oppressive majority shareholders. Only when businesses appreciate the roles and responsibilities of Directors, and understand the basis on which liabilities can attach to Directors as a result of their acts or omission, can they be in a better position to critically evaluate and properly structure their investments in India, or appreciate legal advice on such matters arising in respect of their commercial arrangements in this country. We hope that this Note will prove to be a useful overview of, and guide to, the Indian legal position on this important subject. [4: Singh Avtar, Company Law, Eastern Book Company,2009, p.269]

Position of Directors in a CompanyThe law relating to companies in India is contained in the Companies Act, 1956. The Companies Act, 1956 is a consolidation of existing laws, statutory rules and certain principles laid down in decisions of the Courts in India and England. The Act of 1956 substantially incorporates provisions of the English Companies Act, 1948.A company means, a company formed and registered under Section 2 (20) or under any of the preceding Acts[footnoteRef:5]. The word company is used to denote an association of persons who have associated together to the conduct or to carry on a business for gain. The persons associating together will contribute some money for the conduct of the business and the amount is known as the share capital of the company. The association will be registered under the Companies Act and thereafter it will be a legal person having an artificial personality. A company is a legal person who is leaving only in the eyes of law. It's a creation of law which lacks both body and mind. It cannot act, just like a human being. It can act only through some human agency. Directors are those persons through whom company acts and does business. They are collectively known as Board of Directors. [5: Sec. 2 (20) of the Companies Act, 2013.]

Section 149 to Sec 205, the Companies Act, 195.6 deal with the appointment of directors, remuneration of directors, disqualification of directors, vacation of office by directors, Meeting of Board of Directors.Board of Directors is the brain and the only brain of the company which is the body, and the company can does act only through the board of directors. A director is a person who has control over the direction, conduct, management, or superintendence of the affairs of the company. Only an individual can be appointed as a director. An association or a firm cannot be appointed as director of a company.It is not easy to explain the position that a director holds in a corporate enterprise. A director is not a servant of any master. He is the controller of the company's affairs. Director of a company is neither an employee nor a servant to the company. They are professional people who were hired by the company to direct its affairs.However there is no restriction under the Act, that a director cannot be an employee to thecompany. In Lee v. Lees Air Farming Ltd[footnoteRef:6], it was held that, a director may, however, work as an employee in different capacity. There is no definite definition for director under the Companies Act, 2013, director includes any person who is occupying the position of director, whatever name called[footnoteRef:7]. so in order to understand the position of a director in a company we have to look in to various decided cases. [6: 1961 AC 12] [7: Sec. 2 (34) of the Companies Act, 2013.]

In Judhah v. Rampada Gupta[footnoteRef:8], it was held that, director of a company registered under this Act persons are duly appointed by the company to direct and manage the business of the company. A director is sometimes described as agents, trustees, managing partners etc. 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. [8: AIR 1959 Cal 715]

Legal Position of Directors in IndiaA Director is an agent of the Company for the conduct of the business of the company. The Directors of the subsidiary of a foreign company are not on any separate footing. As agents or officers of the Company, directors have a fiduciary relation with the Company and its shareholders. Directors are bound to use fair and reasonable diligence in discharging the duties and to act honestly, and with such care as may be reasonably expected from, having regard to their knowledge and experience. Express liability would usually arise only when a director has personally guaranteed the performance of a contract. As far as fiduciary duties are concerned, any breach by directors would make them liable. Directors would be liable for negligence, breach of trust, misfeasance, and ultra vires actions and for applying the funds of the company for such acts.The Articles of Association of the Cooperation of the Company may provide for the delegation of functions to the extent to which it is permitted under Indian Companies laws. In certain cases, a director might be in breach of duty if he delegates to others, the matters for which the Board of Directors as a whole had to take responsibility. Directors are ultimately entrusted with the management of the company, they cannot entirely divest themselves of their responsibility by delegation. They occupy very crucial position in corporate enterprise, they have key role to play. They are not servants[footnoteRef:9] of a company nor employees[footnoteRef:10] of it but rather the officers of the company who are in direct control of the affairs of the company. [9: Burland v. Earle, (1902) AC 83(100); S Gururaja Rao v. State of Karnataka,( 1979)49 Comp Cas 468.] [10: Normandy v. Ind. Coope& Co., (1908)1 Ch 84]

In India, Directors are required to ensure various compliances under the Indian Companies Act. However, for most of these responsibilities can be shifted to any other officer of the company, except which cannot be delegated like, disclosure of interest in transaction being entered into by the company, disclosure of shareholdings in the company, reduction of capital below statutory limit, liabilities arising by virtue of holding an office in the company. Boards report, declaration of solvency.Indian sales tax and income tax laws provides, if a private company is wound up and the tax assessed cannot be recovered, then directors of a private company can be held liable for the payment of such tax, if the non recovery is attributable to any gross neglect, misfeasance, or breach of duty on his part. Similarly, under the Central Excise and the Customs Laws, if any contravention has taken place with the consent or connivance of, or is attributable to any neglect on the part of any director, he shall be liable to be proceeded against and punished accordingly. Indian industrial laws provides a general rule in case an offence is committed by a company, then, every director, manager, secretary, agent or other officer or person in the management is liable for the offence, unless he proves that he had no knowledge. However certain laws make a director primarily liable in case of any breach or default, as under the Factories Act, 1948, an occupier (the person who has ultimate control over the affairs of the factory and in the case of a company, any one of the directors is deemed to be the occupier) of a factory is responsible for the provision and maintenance of common facilities and services, such as approach roads, drainage, water supply, lighting and sanitation, as he has ultimate control over the factory. Courts of India have view that only a director can be the occupier of the factory and responsible for the conduct of business of the establishment.Indian Environment Laws provides for the protection and improvement of environment and lays down specific guidelines with respect to handling of hazardous substances and emission norms for industrial undertakings operations and process and any violation of the provisions amount to an offence there under. Making every person directly in charge of, for the conduct of the operations and having control liable. It is possible to delegate this responsibility however if it can be established that any omission has been committed with the consent or connivance of, or is attributable to any neglect on the part of any director, he will be liable to be proceeded against and punished accordingly.Director as AgentsIn Ferguson v. Wilson[footnoteRef:11], the court clearly recognized that directors are in the eyes of law, agents of the company. It was held that, the company has no person; it can act only through directors and the case is, as regards those directors, merely the ordinary case of a principal and agent. When the directors contract in the name, and on behalf of the company, it is the company which is liable on it and not the directors. [11: 1866, 2 Ch App77: 15LT230]

In Elkington & Co. v. Hurter[footnoteRef:12], where the plaintiff supplied certain goods to a company through its chairman, who promised to issue him a debenture for the price, but never did so and company went into liquidation, he was held not liable to the plaintiff. Similarly, a director was held to be personally not liable in a suit against a private chit fund company. Attachment of the property of the director was held to be not permissible[footnoteRef:13]. [12: 1892, 2 Ch 452] [13: Kuriakos v. PVK Group Industries, (2002) 111 Comp Cas 826 Ker]

Like agents, directors have to disclose their personal interest, if any, in any transaction of the company. In Ray Cylinders & Containers v. Hindustan General Industries Ltd[footnoteRef:14], held that, the directors are the agents of the institution and not of its individual members, except when that relationship arises due to the special facts of the case. Also granted permission to file a suit against a company was not allowed to be treated as permission against directors as well. In Sarathi Leasing Finance Ltd v. B Narayana Shetty[footnoteRef:15], the articles of association empowered the managing director to represent the company in legal proceedings. It was held that a further authorization was not necessary to enable him to file a complaint for dishonor of cheque under Sec. 138 of Negotiable Instrument Act. [14: 2001,103 Comp Case 161 Del] [15: (2006) 131 Comp Cases 798 Kant]

Directors are the agents of a company. They are acting on behalf of the company. So the directors cannot be held personally liable for any default of the company. It was held that, for a loan taken by a company, the directors, who had not given any personal guarantee to the creditor, could not be made liable merely because they were directors.Director as TrusteesDirectors are the trusties of the company's money, property and their powers and such must account for all the moneys over which they exercise control and shall refund any moneys improperly paid away, and shall exercise their powers honestly in the interest of the company and all the shareholders, and not their own sectional interest.The directors of a company are trustees for the company, and for 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, cause of action survives against their legal representatives[footnoteRef:16]. Directors are those persons selected to manage the affairs of the company for the benefit of shareholders. It is an office of trust, which if they undertake, it is their duty to perform fully and entirely. This peculiar nature of their office is one of the reason why the directors been described as trusties. [16: Ramaswamy Iyer v. Brahmayya & Co, [1966] 1 Comp LJ 107]

In the real sense the directors are not trustees. A trustee is the legal owner of the trust property and contracts in his own name. On the other hand, director is a paid agent or officer of the company and contracts for the company[footnoteRef:17]. In fact, the directors are commercial men managing a trading concern for the benefit of themselves and of all the shareholders in it. To whom the directors are trustee? Whether to the company or to the individual shareholders. This principle was laid down in 1902 in Percival v. Wright[footnoteRef:18], and still holds ground as a basic proposition. In this case the court held that, directors have no duty towards individual shareholders. From this it is very clear that, the directors are trustees to the company and not of individual shareholders. The principle of the case was reiterated in Peskin v. Anderson[footnoteRef:19]. [17: Smith v. Anderson, (1880) 15 Ch D 247 at p 275] [18: [1902] 2 Ch 421, cited with approval of Madras HC in Ramaswamy Iyer v. Brahmayya & Co, [1966] 1 Comp LJ 107] [19: [2000] 2 BCLC 1]

Ordinarily the directors are not agents or trustees of members or shareholders and owe no fiduciary duties to them.However we have to take the decision of Allen v. Hyatt[footnoteRef:20]. It was held that, the directors are trustees of the profit for the benefit of the shareholders. They cannot always act under the impression that they owe no duty to the individual shareholders. But it is of no doubt that the primary duty of the director is to the company. [20: (1914) 30TLR444 ]

But in such circumstances where the directors act as agents for the share holders, the later would be liable to the purchasers of their shares for any fraudulent misrepresentation made by the directors in the course of negotiations[footnoteRef:21]. [21: Briess v. Woolley, 1954 AC 333 ]

Director as Organs of Corporate BodyThe organic theory of corporate life "treats certain officials as organs of the company, for whose action the company is held liable just as a natural person is for the action of his limbs. Thus the modern directors are more than mere agents or trustees. The Board is also correctly recognized to be a primary organ of the company. Directors and managers represent the directing mind or will of the company and control what it does held in Bath v. Standard Land co.[footnoteRef:22] The state of mind of these managers is the state of mind of the company and is treated by law as such. The practical effects of these rules are that the directors' personal fault in the business of the company becomes the fault of the company; their reason to believe is attributed to the company and the intention to occupy a premises as expressed by their conduct is the intention of the company. [22: (1910)2 Ch 408 (416)]

The Company and its Director Companies in India can, pursuant to the Companies Act, 2013 (the "Companies Act"), legally organize itself as:a) a private company, orb) a public company,c) One person companyWhether the company -is private or public, it can be organized with limited liability (by shares or by guarantee) or with unlimited liability. In case of a public company, it can choose either to list its shares on a recognized Indian stock exchange or to be an unlisted public company.Public Company vs. Private Company: The primary distinguishing characteristics of a private company vis-a-vis a public company are as follows:a) A private company can be incorporated by a minimum of two (2) members, as against a minimum requirement of seven (7) members for a public company.b) The minimum paid-up capital for a private company is currently one hundred thousand rupees (Rs. 100,000/-), compared to five hundred thousand rupees (Rs. 500,000/-) for a public company.c) The Companies Act regulates a public company more than a private company. These include the requirement for a special resolution to issue shares to nonmembers, a separate certificate for commencement of business and certain provisions relating to statutory meetings and submission of statutory reports.d) The maximum number of members of a private company cannot exceed two hundred (200) while there is no such restriction for a public company.e) A private company cannot raise money from the general public.f) In a private company, the Directors can refuse to register the transfer of shares at their absolute discretion. In a public company, shares are freely transferable.[footnoteRef:23] [23: Bangia R.K, Company Law, Allahbad Law Agency Faridabad, 2006 p.194]

One person company:Any person can create a Private limited Company with only one person as its member. Memorandum of OPC shall indicate the name of a person who shall become member, in the event of death of the single member.Following are the advantages: No requirement for holding an AGM Minimum number of Directors. Minimum one Board Meeting in each half a calendar yearHolding and subsidiary company: Two companies are said to be in a holding-subsidiary relationship, in terms of the Companies Act, if:a) the composition of the board of Directors of company A is controlled by company B; orb) company B holds more than fifty percent (50%) of the nominal value of the company A. Further, if company B is a subsidiary of another company, C (in terms of the above matrix), company A also becomes a subsidiary of company C. If the holding company is a public company incorporated under Indian law and the subsidiary is incorporated and organized as a private company, then the subsidiary will not be a pure private company but a private company, which is a subsidiary of a public company.Further, under the Companies Act, if the holding company is an overseas body corporate, and would be regarded a public company if it were incorporated in India, then the private Indian company being its subsidiary will lose its status as a pure private company and will be subject to various other compliance requirements pursuant to the Companies Act, which are to be met by, as if it were, a private company, which is a subsidiary of a public company. Interestingly, if the private Indian company is a one hundred percent (100%) subsidiary of the overseas body corporate then its status, under the Companies Act, is not changed to that of a subsidiary of a public company. A private company, which is a subsidiary of a public company is required to comply with several provisions of the Companies Act not otherwise ordinarily applicable to pure private companies; in many respects, a private company, which is a subsidiary of a public company represents a halfway house, arising from its shareholding status, as distinct from being incorporated as a public company. [footnoteRef:24] [24: Bangia R.K, Company Law, Allahabad Law Agency Faridabad, 2006 p. 199]

The Companies Act defines a Director as including any person occupying the position of a Director, by whatever name called[footnoteRef:25]. Thus, a person who has been validly appointed or elected to the Board of Directors of the company and on whose behalf the relevant form has been filed with the concerned authorities is considered to occupy the position of a Director, irrespective of any title that may have been agreed to between the company and such person. A Director is a person charged with the conduct and management of the company's activities. The Directors (as a body, the Board of Directors or the Board), act as a team, under the authority of a meeting that is properly convened and is duly quorate, without improper exclusion of any of the Directors. The Board, then, as a team, conducts and regulates the affairs of the company. The Companies Act empowers the Board to do all such activities as the company is authorized to exercise, unless any law or the constitutional documents of the company requires the exercise of the power, or the doing of any act or thing, to be by the company in general meeting. Generally, a Director plays a dual role, (i) as an agent of the company; and (ii) as a person with a fiduciary duty to the company, while discharging his duties. A Director rarely has powers to discharge his duties as an individual Director. It is the Board that has the power and authority to carry on the activities of the company and to meet the business objectives of the company as a team. Acting individually, a Director has no power to act on behalf of the company in any matter, except to the extent to which any power or powers of the Board have been delegated to him by the Board, within the limits prescribed under the Companies Act or any other law. Contracts entered into by a Director are binding on the company only if they are within his actual authority or if the articles of association of the company, or the companys bye-laws or internal rules of management (Articles), provide for the delegation of such power by a Board resolution, whether or not such power has actually been delegated. The exception Director as a person within the Company [25: The Companies Act, 1956]

Role played by a Director within the Company is a Managing Director, who has ostensible authority to enter into contracts on behalf of the company.All contracts entered into by the company, and other documents that need to be signed shall be so signed by a representative of the company duly authorized by the company or its Board. A Director of the company may be duly authorized by the Board to be its authorized signatory. In so doing, it is necessary to highlight that the Director is actually acting on behalf of the company and not personally.This may be done by signing under the seal of the company, and specifically mentioning along with the signature that the individual signing the document is the authorized signatory of the company. For certain transactions, appropriate resolutions may have to be passed by the Board and the shareholders. Directors do not automatically, by virtue only of their position, have the right to enter into contracts on behalf of the company. They need to be duly authorized in this regard by the shareholders or the Board. Under the Companies Act, liability for any default is usually not attributed to all members of the Board. In most instances under the Companies Act, liability is attributed for non-compliance with the provisions of the Companies Act only to an officer in default. The term officer in default can cover the Managing Director, the Whole-time Director, the Manager, the Secretary of the company, or any person in accordance with whose instructions the Board is accustomed to act (oftentimes called a Shadow Director) and any person charged by the Board with responsibility for any such compliance. Where a company does not have a Managing Director, a Whole-time Director or a Manager, any Director specified by the Board, or where no such Director has been specified, all the Directors may be deemed to be officers in default.In certain circumstances, the Companies Act imposes a liability on all Directors. For example, in case of winding up of a company, the Directors must ensure at the books of account of the company are completed and audited up to the date of winding up order and submitted to the concerned court at the cost of the company, failing which.-such Directors shall be liable for punishment for a term of imprisonment not exceeding one (1) year and fine for an amount not exceeding one hundred thousand rupees. (Rs. 100,000/-)Conclusion: Thus, we can say from above following research Director's in the company play many different roles holding one position in the office. Company is a artificial entity and is not having any mind of his own thus it needs a natural human being to run its business and here director play a key role. He is main organ of the company, at same time he is trustee agent, and manager of the company.