Directors’ Duties in India

>> Powers and Duties in India

Duties – Skill and Care

In exercising your powers as a director, you are required to exhibit an appropriate degree of knowledge and understanding of the company to fully discharge your duties as a director.

You must also exercise a degree of care in your actions as a company director. The test of an acceptable level of care is what a reasonable person would do in looking after their own affairs.

Duties – General

As a company’s director you must act in a way which you think is most likely to promote the success of the company.  You need to consider a number of statutory factors relating to corporate requirements, including the long term consequences of your decisions, the company’s reputation and the interests of other stakeholders such as statutory authorities, employees, customers and the community.

In India, a director’s responsibilities are three fold:

  • as an Officer
  • as a Key Managerial Personnel
  • as an Officer-in-default

General duties:

Director’s general responsibilities as defined under Section 166 of the Companies Act 2013, includes:

  • the duty to act in accordance with the articles of association of the company
  • the duty to manage the day to day affairs of the Company
  • the duty to act in good faith to promote the objects of the company
  • the duty to act in the best interests of the company, its employees, the shareholders, the community and for the protection of the environment
  • the duty to exercise duties with due and reasonable care, skill and diligence and to exercise independent judgment
  • the duty to avoid being involved in a situation of direct or indirect with the interests of the Company
  • the duty to avoid achieving any undue gain or advantage
  • the duty to avoid making an undisclosed profit from the position of director, and to account for any profit which they do derive from their position as a director
  • a duty not to assign his office as a Director of the Company

Other Statutory duties

Directors also have administrative considerations that they will be liable for, including:

  • the duty to ensure compliance with the provisions of all applicable laws and to ensure that such systems are adequate and are operating effectively
  • the duty to maintain the proper books of the accounts
  • the duty to prepare the annual accounts
  • the duty to ensure that an annual audit is performed
  • the duty to maintain the statutory registers and other required documentation for the company
  • the duty to hold and convene regular Board Meetings and the general meetings of the company
  • the duty to pay regard to the responsibilities regarding transactions with the company

If a director of the company does not comply with the duties specified, such director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

Duties – Others

There are many other areas of law that impose duties on directors and senior managers.  Matters likely to be of particular relevance, depending upon the nature of the entity and its activities, are set out below:

  • you must comply with all competition law and regulations. This could include not entering into any Anti-competitive Agreement(s) or practices, and not abusing a position of dominance in the market
  • under labour laws, a director is responsible for, amongst other things, providing a clean and safe working environment, ensuring appropriate working hours and the prompt payment of salaries
  • you must ensure certain records are maintained properly. For example, the maintenance of the company’s records is the responsibility of the directors. In addition, the directors are responsible for devising proper systems for internal financial controls and for ensuring compliance with the provisions of all applicable laws
  • the directors have the duties defined in the Act which covers that he shall act in good faith and take all reasonable care for the company and this will imply that it is the responsibility of the Management or officers of the company to maintain the records. However, the Companies Act 2013 clearly makes directors and or officers responsible for maintaining records and data
  • duties to ensure that all tax payments due are paid in a timely manner. Directors will be jointly and severally liable for and taxes due for the previous year which cannot be recovered from the company
  • duty to ensure that no offence of Money Laundering is committed and ensure that no wealth is earned through illegal means which would include the legal income that is concealed from public authorities to evade taxes etc

Under the Prevention of Money Laundering Act, 2000 every banking and financial institution and intermediary shall:

  • maintain a record of all transactions, the nature and value of which may be prescribed, whether such transactions comprise of a single transaction or a series of transactions integrally connected to each other, and where such series of transactions take place within a month
  • furnish information of transactions referred to in clause (a) to the authority within such time as may be prescribed
  • duty to honour all cheques issued by the company – Under Section 138 of the Negotiable Instruments Act, 1881, a director can be held vicariously liable and such offence will be considered as criminal offence, for the dishonour of cheques issued by the Company. Therefore, a director must ensure that there are sufficient funds prior to issuing any cheques to a third party
  • verify and maintain the records of the identity of all its clients, in such a manner as may be prescribed
  • Duty to ensure compliance with the varying provisions of Indian Labour laws – noncompliance of such provisions may have serious consequences for which a director as the officer in default is liable for prosecution. For reference some of the specific applicable legislation has been listed below:
    • Payment of Bonus Act, 1965
    • Payment of Gratuity Act,1972
    • The Maternity Benefit Act, 1961
    • Employees’ State Insurance Act, 1948
    • Employees Provident Funds and Miscellaneous Provisions Act, 1952
    • The Sexual Harassment of Women At Workplaces (Prevention, Prohibition and Redressal) Act, 2013 Section 120 of the Companies Act 2013 and Rules thereof specifies that provisions for the maintenance of the records and responsibility of the Director. A director or officer of the company as the Board may decide shall be responsible for the maintenance and security of electronic records.

Latest version updated 22nd March 2018

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