Under general law, a director’s relationship with the company is regarded as fiduciary in nature. Consequently, directors owe a duty of loyalty and care in performing their responsibilities on behalf of the company. These duties are owed to the company meaning generally the shareholders collectively, both present and future, not the shareholders at a given point in time.
These are enforceable by the company, although derivative actions may be brought by individual shareholders on behalf of the company in certain limited circumstances. A breach of these equitable obligations gives rise to liability to account for improper profits and to pay equitable compensation for improper loss of company assets. Besides the statutory duties, the general duties of the directors are as follows:
(1) Duty of good faith:
Directors must act honestly and diligently in the interests of the company. They must exercise their powers bona fide i.e. in what they consider, is in the interests of company and not for any collateral purpose.
Image Source: btnet.com.tr
ADVERTISEMENTS:
It is expected from them to behave as honest men of business may be expected to act. They may be held liable for breach of duty if they have acted in their own interests or that of some third party without considering whether it was also in the interest of the company though they might not have acted with any conscious dishonesty.
The directors have to look after the interest of the company. Interest of the company implies the interests of present and future members of the company. On the footing that the company would be continued as a going concern, they have to balance a long-term view against the short-term interests of present members.
Good faith also requires that directors should not make any secret profit from their dealings with the company nor they should make any profit by corporate opportunities.
(2) Duty of reasonable care:
ADVERTISEMENTS:
A director is bound to observe reasonable care in the performance of his duties. He is expected to act with that much of skill and diligence which an ordinary man would take in his own case.
A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience.
He cannot be held liable for mere errors of judgment. “If directors act within their powers, if they act with such care as is to be reasonably expected of them having regard to their knowledge and experience and if they act honestly for the benefit of the company they represent, they discharge both their equitable as well as legal duty to the company.”
The directors’ duty of care has been explained by Roamer J. in Re. City Equitable Fire Insurance Co.:
ADVERTISEMENTS:
(i) A director need not exhibit in the performance of his duties a greater degree of skill than may be reasonably expected from a person of his knowledge and experience.
(ii) A director is not bound to give continuous attention to the affairs of his company. His duties are of an intermittent nature, to be performed at periodical board meetings, at any meetings of any committees of the board, upon which he happens to be placed. He is however, not bound to attend all such meetings, though he ought to attend whenever, in the circumstances he is reasonably able to do so.
(iii) In respect of all duties that, having regard to the exigencies of business and the Articles of Association, may properly be left to some other official, a director is in the absence of grounds of suspicion, justified in trusting that official to perform such duties honestly.
(3) Duty to attend board meetings:
Meetings of the board of directors are held from time to time to exercise the company’s powers. Each director should attend such meetings. Of course, a director is not bound to give continuous attention to the affairs of the company nor he is bound to attend all the meetings of the Board, but, in case he fails to attend three consecutive meetings of the Board or if he absents himself from all the meetings of the Board for a consecutive period of three months (whichever is longer) without obtaining the leave of absence from the Board, he will be deemed to have vacated his office.
(4) Personal attendance:
Directors should perform the entire duties place upon them by the Act and Articles, personally. They can, however, delegate their certain functions to the extent to which the Articles of the company permit or according to the demand of exigencies of business. Directors shall be justified in the absence of grounds of suspicion, in trusting the old and trusted servants of the company.
(5) Duty to disclose interest:
According to Section 299, a director interested in a contract with the company must disclose the nature of his interest at the Board’s meeting. A director stands in a fiduciary capacity with the company and he must not place himself in a position in which his personal interest conflicts with his duty.
He must not vote as a director on any contract or arrangement in which he is directly or indirectly interested, unless authorised by the company’s articles. If he votes in such a case, his vote would not be counted and his presence would not be counted towards the quorum. There is no ban on company entering into a contract in which a director is interested. The only requirement is that such interest must be disclosed, bona fide and fair.