Duties of Directors

In one line

The Act now writes down what a director owes his company: obey the articles, act in good faith for everybody's benefit, use care and independent judgment, avoid conflicts, take no secret gain, and never hand the job to somebody else.

In exam wording: section 166 codifies the duties of a director. He shall act in accordance with the articles; act in good faith to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of the environment; exercise his duties with due and reasonable care, skill and diligence and independent judgment; avoid conflicts of interest; make no undue gain; and not assign his office.

Why the law has this at all

Before 2013 a director's duties in India came from decided cases. They were real, but they were scattered, they had to be extracted from judgments about particular facts, and a director who wanted to know what was expected of him had nowhere to look.

Section 166 puts them in one place, and that is its main achievement. It also does three things the old law did not.

It widens who the director must consider. Sub-section (2) names the employees, the community and the environment alongside the members. That is a deliberate move away from the pure shareholder model, and it is the most discussed sentence in the section.

It requires independent judgment. Sub-section (3) means a director cannot simply follow the managing director or the person who nominated him. A nominee director owes his duties to the company, not to his nominator, and that is where sub-section (3) bites hardest.

And it attaches a money remedy to secret profit. Sub-section (5) does not merely prohibit an undue gain: it makes the director liable to pay an amount equal to that gain to the company, which is a restitutionary remedy written into the statute.

Some words this chapter uses

Good faith means honestly and for the proper purpose. Independent judgment means forming one's own view rather than adopting another's. A conflict of interest is a situation where a person's own interest may pull against his duty. Undue gain is a benefit obtained without justification. To assign an office is to transfer it to somebody else. Relatives are defined in section 2(77).

The seven duties: section 166

(1) Act in accordance with the articles

Subject to the provisions of this Act, a director of a company shall act in accordance with the articles of the company.

Two limits in one sentence. The articles are the director's instructions, and he must follow them. But the duty is subject to the provisions of this Act, so an article that conflicts with the Act gives him no authority, which is what section 6 already provides.