ROLE AND RESPONSIBILITIES OF A COMPANY DIRECTOR UNDER INDIAN LAW

This article is written by Tinku Singh Deora, studying at Jagannath University, B.A. L.L.B. 5^th Year during his internship at LeDroit India.

Scope of this article to examine roles, classification, duties, and liabilities of company directors under the Companies Act, 2013, emphasizing their significance in corporate governance and statutory compliance. It outlines key concepts such as the Board of Directors, types of directors, their appointment, powers, and fiduciary duties. The article also highlights directors’ responsibilities under Section 166, their limitations under Sections 179 and 180, and their accountability through civil and criminal liabilities. Overall, it underscores the directors’ vital role in maintaining ethical, transparent, and responsible corporate management.

KEYWORDS

Corporate Governance; Fiduciary Duty; Director’s Liability; Companies Act, 2013; Board of Directors; Statutory Compliance

1. ABSTRACT

This paper explores the evolving framework of Corporate Governance in India, focusing on the Fiduciary Duty and Director’s Liability as outlined under the Companies Act, 2013. It highlights how the Board of Directors functions as the central governing body responsible for policy-making, Statutory Compliance, and ethical management. Directors, acting as fiduciaries, are entrusted with ensuring transparency, accountability, and the lawful operation of corporate affairs.

The study further examines the statutory provisions regulating their appointment, duties, and limitations of power, along with distinctions between civil and criminal liabilities for breaches or misconduct. It also discusses how judicial interpretations have reinforced the principle that directors are custodians of corporate integrity and must act within the scope of their authority and in good faith. Ultimately, the paper emphasizes that effective corporate leadership, grounded in legal compliance and fiduciary responsibility, is vital for maintaining trust and sustainability in modern business governance.

INTRODUCTION

In recent years, organizations have placed more importance on creating a healthy and transparent working environment by guiding their operations with corporate governance principles. Company law is the foundation for maintaining this framework, as it regulates every aspect of a company’s existence, including its formation, organizational structure, management, and internal affairs. While the law recognizes a company as a separate legal entity, or juristic person, it’s important to remember that this entity is purely artificial and exists only as a legal concept.

A company cannot think, decide, or act on its own; it relies completely on human involvement to operate and achieve its goals. Although a corporation has a separate legal personality, it does not have a physical presence or natural will. To carry out its duties, exercise rights, and meet obligations, it must act through people. These responsibilities are usually given to the company’s directors, who serve as its agents and represent the corporation’s intentions and decisions in all operational and managerial activities.

Let’s start with the basics before we dive into how directors are appointed, what qualifies or disqualifies them, and what they’re liable for under Indian company law. You really have to understand a few key terms—director, board of directors, and board meetings—because they’re at the core of how a company runs.

3. DIRECTOR

At its heart, a director is the top executive in a company, responsible for managing how things work day-to-day. Usually, you won’t see just one director running the show. Instead, companies have a group—a board of directors—who work together, make big calls, and supervise everything. Directors aren’t just figureheads; they’re meant to look out for shareholders and anyone else who’s invested in the company’s success.

The whole idea behind having a board is simple: the company should be run by people who are trustworthy and know what they’re doing. Directors are there to help the company reach its goals and make sure everything stays above board, legally and ethically. It’s important to remember, directors usually act as a team—not as lone wolves. Unless the board has specifically given a director certain powers, one director acting alone can’t really bind the company. This teamwork keeps everyone accountable and stops rash decisions.

The Companies Act, 2013 (Section 2(34)) keeps its definition short: a director is just someone appointed to the board. The old Companies Act, 1956, put it a bit differently, saying a director is “any person occupying the position of director by whatever name called.” Not much detail, but the idea is the same. There’ve been other legal takes on the word “director.”

For example, the now-gone Small Coins (Offences) Act, 1971, said a director in a firm is basically a partner. And in a society or association, it’s whoever’s got the job of managing things. The Supreme Court, in Agrawal Trading Corporation v. Collector of Customs (1972), made it clear: in a firm, a director is just a partner who’s in charge.

So, when you get down to it, a director is someone legally put in charge to run, oversee, and direct a company’s business. People often call directors the “brain” of the company—they’re at the center of every big decision. Whether it’s a board or committee meeting, directors are the ones debating and setting the course for the business. And, of course, everything they do has to line up with the 2013 Act and the rules of corporate responsibility.

4. BOARD OF DIRECTORS

Since a company isn’t a real, living person, it needs actual humans to act for it. Enter the directors. Together, they make up the Board of Directors. Section 2(10) of the Companies Act, 2013, nails down the definition: the board is just all the company’s directors acting together. These folks are in charge of setting company policies, making the big decisions, and making sure the company follows the law and looks after everyone’s interests.

5. CLASSIFICATION OF DIRECTORS UNDER THE COMPANIES ACT, 2013

Under the Companies Act, 2013, directors may broadly be classified into two primary categories managing directors and Whole-time Directors. A Managing Director is one who has substantial authority over the management and administration of the company’s affairs, exercising executive control over decision-making and policy implementation. In contrast, a Whole-time Director is a person engaged in the company’s full-time employment, devoting their professional capacity exclusively to its business operations and strategic supervision.

Beyond these, directors can be further categorized based on their appointment procedure, functions, powers, and tenure, which may be classified as follows:

5.1. First Directors

The First Directors are those individuals who initially assume charge of the company’s management upon its incorporation. As per the company’s Articles of Association (AoA), the persons who have subscribed to the Memorandum of Association (MoA) are deemed to be its first directors until the company formally appoints new directors in its first annual general meeting (AGM). These directors play a foundational role in establishing the company’s governance framework, setting policies, and initiating business operations in accordance with statutory requirements. Their tenure continues until successors are duly appointed by the shareholders.

5.2. Directors Appointed to Fill Casual Vacancies

When a position on the Board becomes vacant due to resignation, death, disqualification, or any other unforeseen circumstance, a Casual Vacancy Director may be appointed. Such appointments ensure the continuity of corporate governance and prevent managerial disruption. The newly appointed director holds office only until the term of the outgoing director would have ordinarily expired. This provision reflects the legislature’s intent to maintain administrative stability and uninterrupted functioning of the Board’s decision-making process.

5.3. Additional Directors

The Board of Directors, if expressly authorized by the Articles of Association, may appoint one or more Additional Directors whenever it deems necessary in the interest of the company. These directors are appointed to strengthen managerial oversight or bring in specialized expertise. Their term extends up to the next annual general meeting, where shareholders may either confirm or discontinue their appointment. This mechanism provides flexibility to the Board to adapt to the evolving business needs without waiting for shareholder approval at every instance.

5.4. Alternate Directors

An Alternate Director is appointed by the Board to act in place of another director who is absent from India for a continuous period of not less than three months. The appointment is generally made through a board resolution, ensuring that the company’s affairs remain properly supervised in the director’s absence. The alternate director exercises the same powers and performs the same duties as the original director during the period of substitution. However, the position ceases automatically upon the return of the original director or at the expiry of the original director’s tenure.

5.5. Shadow Directors

A Shadow Director refers to an individual who, though not formally appointed to the Board, exerts influence over its decisions and whose directions or instructions the Board habitually follows. The Companies Act, 2013 recognizes such individuals as de facto participants in company management and may hold them accountable as officers in default in cases of statutory non-compliance. However, professionals such as legal advisors or consultants offering advice in their professional capacity are exempt from such classification. The inclusion of shadow directors within the scope of liability ensures that persons exercising real control cannot escape responsibility merely due to the absence of formal designation.

5.6. De Facto Directors

A De Facto Director is a person who, without formal appointment, acts in the capacity of a director and is recognized as such by the company or third parties. They participate in board meetings, influence company decisions, and are perceived by others as members of the Board. The law treats de facto directors on par with formally appointed ones regarding fiduciary obligations and statutory liabilities. This doctrine prevents individuals from evading responsibility for corporate decisions made under their direction or authority.

5.7. Rotational Directors

In accordance with Section 152(6) of the Companies Act, 2013, in the case of a public company—or a private company that is a subsidiary of a public company—at least two-thirds of the directors must retire by rotation. These directors, known as Rotational Directors, are eligible for reappointment at the general meeting if the shareholders so decide. This rotation mechanism ensures periodic renewal of the Board, fosters accountability, and allows shareholders to evaluate directors’ performance before extending their tenure. It serves as an important democratic check on long-term concentration of power within corporate management.

5.8. Nominee Directors

Nominee Directors are individuals appointed by specific stakeholders such as financial institutions, investors, or contractual parties to safeguard their interests in the company. Their appointment is typically governed by agreements or statutory provisions. While they represent particular constituencies, nominee directors must act in good faith and in the best interests of the company as a whole, rather than serving sectional interests. Their presence on the Board enhances transparency and ensures that significant stakeholders have a voice in strategic and financial decisions impacting their investment.

6. ROLE AND RESPONSIBILITIES OF COMPANY DIRECTORS UNDER INDIAN LAW

Directors are the guiding force behind the functioning and governance of a company. They act as the brain and will of the corporate entity, entrusted with the task of steering its affairs in accordance with the law, the company’s constitution, and the principles of sound management. Under the Companies Act, 2013, directors play a crucial role in ensuring transparency, accountability, and compliance in corporate functioning. They are not merely figureheads but fiduciaries who must exercise their powers in the best interests of the company, its shareholders, and other stakeholders.

6.1. Statutory Basis and Appointment of Directors

The framework governing directors in India is primarily laid down in the Companies Act, 2013. Section 2(34) of the Act defines a “director” as a person appointed to the Board of a company. Section 149 mandates that every company must have a Board of Directors, with a minimum of three directors in the case of a public company, two in a private company, and one in a one-person company.

The maximum number of directors a company can have is fifteen, though this limit can be exceeded by passing a special resolution. Directors are appointed as per Section 152 of the Act, generally by shareholders in the general meeting, and their appointment, qualifications, and tenure are governed by the company’s Articles of Association.

6.2. General Role and Fiduciary Position

The role of directors extends beyond mere administrative control; they serve as trustees and agents of the company. They are expected to exercise their powers honestly, in good faith, and for the benefit of the company as a whole. Directors stand in a fiduciary relationship with the company, implying duties of loyalty, care, and diligence. Their primary obligation is to ensure that the company’s affairs are conducted in compliance with statutory requirements, maintaining the integrity and reputation of the organization.

7. DUTIES AND RESPONSIBILITIES OF DIRECTORS 

Section 166 of the Companies Act, 2013 expressly enumerates the duties of directors. These include the duty to act in good faith to promote the objects of the company, to exercise independent judgment, and to avoid conflicts of interest. Directors must also ensure that their actions do not result in undue gain to themselves or others. If found guilty of breaching these duties, they can be held liable to repay or compensate the company for any such gain. Furthermore, directors are required to exercise due and reasonable care, skill, and diligence in performing their roles.

They are also responsible for ensuring compliance with statutory filings, maintenance of proper books of accounts, timely convening of board and general meetings, and adherence to corporate governance norms. Non-compliance or negligence in these areas can attract penalties, disqualification, or even criminal liability under the Act. Directors are expected to oversee financial statements and ensure that they present a true and fair view of the company’s financial position, as stipulated under Section 134.

7.1. Executive and Non-Executive Directors

Indian corporate law distinguishes between executive and non-executive directors. Executive directors, including managing and whole-time directors, are involved in the day-to-day management of the company, whereas non-executive and independent directors provide strategic oversight and ensure accountability. The Companies Act mandates the appointment of independent directors in certain classes of companies to strengthen corporate governance and prevent managerial abuse of power. Independent directors play a vital role in safeguarding minority shareholders’ interests and ensuring that decisions are taken objectively.

7.2. Corporate Governance and Ethical Responsibility

In the modern business environment, the role of directors extends beyond legal compliance to encompass ethical and social responsibilities. They must ensure that the company conducts business in an environmentally sustainable, socially responsible, and transparent manner. The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 further reinforce directors’ responsibility to maintain high standards of governance, disclosure, and accountability.

7.3. Liabilities and Accountability

With authority comes accountability. Directors may be held personally liable for acts of omission or commission that result in losses to the company or violate statutory provisions. Under various sections of the Companies Act — such as Sections 447 (fraud), 449 (false statements), and 450 (general penalty) — directors can face fines or imprisonment for defaults or fraudulent conduct. Civil liability may also arise where directors misuse company assets, act beyond their authority, or fail to exercise due care.

8. STATUTORY FRAMEWORK: THE COMPANIES ACT, 2013

Directors get their authority mainly from the company’s Articles of Association (AoA). These articles lay out exactly what directors can and can’t do. Once the board has those powers, only they can use them. Shareholders can’t step in and tell the board how to act, as long as the board stays within the rules set by the company’s constitution and the law.

8.1. General Powers under Section 179

Section 179 of the Companies Act, 2013, gives the Board of Directors pretty much all the powers the company itself has. The board runs the show, making decisions and managing the business to meet the company’s goals. But the board doesn’t have free rein. Their powers come with limits—they have to follow the company’s memorandum and articles, and keep within the law. In general, directors can do anything the company can, unless the law or the company’s constitution says only shareholders in a general meeting can do it.

8.2. Limits on Directors’ Powers

• The board can’t do things that only shareholders in a general meeting can do by law.
• The board has to stick to what the company’s memorandum and articles allow.
• Individual directors only have the powers the company’s constitution or the board gives them—nothing more.

8.3. When Shareholders Can Step In

Normally, the board runs the company without interference. But sometimes, shareholders can step in at a general meeting—for example:

• If the directors act in bad faith or against the company’s interests
• If the board can’t function because of issues like disqualification, resignation, or a deadlock
• If directors refuse to act or there’s a stalemate
• If there are leftover powers that belong to the shareholders in a general meeting

8.4. Powers That Need Shareholders’ Approval (Section 180)

Section 180 of the Companies Act, 2013 sets out certain powers that the board can’t use unless shareholders approve them at a general meeting. These include:

• Selling, leasing, or otherwise getting rid of all or most of the company’s business
• Investing compensation money in anything other than trust securities
• Borrowing more money than the company’s paid-up share capital, free reserves, and securities premium combined
• Giving a director more time to pay back a debt, or deciding not to enforce repayment

If a director goes beyond these limits, any deals made may be invalid—unless the other party acted in good faith and checked things out properly. That said, this rule doesn’t apply to companies whose usual business is selling or leasing property.

8.5. Power to Set Up Committees

(a) Audit Committee (Section 177)

Section 177 lets the board set up an Audit Committee. This committee needs at least three directors, and most of them must be independent. The chairperson and members have to understand financial statements. The committee works according to written rules set by the board, and its key for keeping an eye on financial reporting and internal controls.

(b) Nomination and Remuneration Committee & Stakeholders’ Relationship Committee (Section 178)

Under Section 178, the board can create a Nomination and Remuneration Committee with three or more non-executive directors, at least half of whom are independent. This committee finds candidates for directorships and sets pay policies. If the company has over a thousand shareholders, debenture-holders, or other security holders, the board must also set up a Stakeholders’ Relationship Committee to handle their complaints and issues.

9. LIABILITY OF DIRECTORS UNDER THE COMPANIES ACT, 2013

Directors occupy a fiduciary position within a company and are entrusted with the responsibility to act in good faith and within the bounds of authority granted by the company. When they act beyond this authority, they may be held personally liable for such actions. These acts, when performed without proper authorization, are termed ultra vires acts. Even if the act falls within the company’s powers (intra vires), directors can still be held personally accountable if it exceeds their individual scope of authority and remains unratified by the company. Broadly, the liability of directors may be classified into two categories — criminal liability and civil liability.

1.  Criminal Liability of Directors

Directors can be held criminally accountable for any contravention of the provisions of the Companies Act, 2013, committed in their official capacity. Besides offences explicitly mentioned in the Act, they may also face prosecution for offences under the Indian Penal Code, 1860 (IPC), such as fraud, falsification of accounts, embezzlement, misappropriation, or perjury.

The Companies Act contains several provisions imposing penalties or imprisonment on a company’s officers for non-compliance. The expression “officer who is in default” under Section 2(60) of the Act includes:

• Whole-time directors;
• Key managerial personnel;
• In the absence of key managerial personnel, any director or directors authorized by the Board;
• Individuals under the authority of the Board or key managerial personnel responsible for specific duties who knowingly permit or fail to prevent defaults;
• Persons whose directions or advice the Board customarily acts upon;
• Directors who wilfully contravene provisions of the Act; and
• Agents, registrars, or merchant bankers involved in the issue or transfer of shares.

It is important to note that the element of mens rea (guilty intention) is generally required to establish criminal liability, except where the law expressly provides otherwise. Section 450 of the Companies Act further stipulates a general penalty where no specific punishment is prescribed — a fine up to ₹10,000 and, in case of continuing default, an additional ₹1,000 for each day during which the contravention continues. Moreover, if a director of a company under winding up destroys or falsifies company records, he may face imprisonment for up to seven years and a fine.

9.2. Civil Liability of Directors

In addition to criminal responsibility, directors may also incur civil liability for actions undertaken outside the powers of the company as laid out in its Memorandum of Association. Misapplication or misuse of company funds can render directors personally liable to restore such funds. Examples include unauthorized payments of dividends or bonuses, acquisition of property beyond the company’s powers, repayment of capital without proper authorization, or other actions inconsistent with the company’s objectives.

If a director acts dishonestly or abuses the powers entrusted to him, he breaches his fiduciary duty and becomes liable for damages. Similarly, negligence that results in financial loss to the company can also attract civil liability. Directors are also liable under the doctrine of unjust enrichment — when they gain personal profit by exploiting their position, they must compensate the company for such benefit.

Ordinarily, directors are not personally liable to third parties for transactions executed on behalf of the company. However, exceptions arise in situations where:

• Directors enter into contracts in their own names without disclosing their representative capacity;
• They engage in fraudulent conduct or collusion with third parties;
• They issue a prospectus containing false or misleading statements;
• They perform acts beyond their lawful authority; or
• They misuse the company’s seal or signature without proper authorization.

In all such cases, directors may be required to pay compensation equivalent to the loss sustained due to their misconduct. The quantum of damages depends on the extent of loss or injury suffered.

In essence, directors are custodians of corporate governance and bear both criminal and civil responsibility for their actions. Their duties extend beyond mere compliance; they must uphold integrity, transparency, and diligence in managing corporate affairs to protect the interests of the company, its shareholders, and the public at large.

10. LANDMARK JUDGEMENTS AND ILLUSTRATION

Official Liquidator, Supreme Bank Ltd. v. P.A Tendolkar (Dead) By Lrs And Others (AIR 1964 MYS 75)

Hon’ble court stated as a general principle, even to cases involving breaches of fiduciary duties or where the personal conduct of the deceased Director has been fully enquired into, and the only question for determination, on an appeal, is the extent of the liability incurred by the deceased Director. Such liability must necessarily be confined to the assets or estate left by the deceased in the hands of the successors. Insofar as an heir or legal representative has an interest in the assets of the deceased and represents the estate, and the liquidator represents the interests of the Company, the heirs as well as the liquidator should, in equity, be able to question a decision which affects the interests represented.

Sanjay Dutt & Others v. State of Haryana & Another (2025 INSC 34) 

The Hon’ble Supreme Court of India elucidated the contours of criminal liability of company directors, with particular emphasis on the principle of vicarious liability for offences committed by a corporate entity. The matter originated from allegations leveled against the directors of Tata Realty and Infrastructure Limited and Tata Housing Development Company Limited in connection with the alleged unlawful felling of 256 trees in Gurugram, constituting a purported violation of the provisions of the Punjab Land Preservation Act, 1900 (PLPA).

Tata Consultancy Services Limited v. Cyrus Investments Private Limited and Ors (2021) Civil Appeal Nos. 440-441

The SC stated “the fact that the removal of CPM was the Executive Chairmanship and not the Directorship of the company as on the date of filing of the petition and the fact that in law, even the removal from Directorship can never be held to be an oppressive or prejudicial conduct was sufficient to throw the petition under Section 241 of Companies Act, 2013 out, especially since NCLAT choose not to interfere with the findings of fact on certain business decisions.”

CONCLUSION

The Companies Act, 2013 establishes a comprehensive framework defining the Corporate Governance structure, duties, and Director’s Liability within an organization. Directors, as members of the Board of Directors, hold a position of trust and are bound by their Fiduciary Duty to act in good faith, ensure Statutory Compliance, and uphold the interests of shareholders and stakeholders alike. Their role extends beyond management to fostering accountability, ethical decision-making, and long-term corporate sustainability. Ultimately, responsible directorship is the cornerstone of sound governance and corporate integrity in India’s evolving business landscape.

The office of a director is one of great trust and responsibility within the corporate framework. In recognition of their critical role, the Companies Act, 2013 confers extensive powers upon directors, enabling them to make informed and effective decisions in pursuit of the company’s goals. These powers, however, are not absolute. They are granted to be exercised prudently, honestly, and within the boundaries defined by law and the company’s constitutional documents. Directors are expected to utilize these powers to further the legitimate objectives of the enterprise, always acting in good faith and in the best interests of the company and its stakeholders.

In essence, directors are both the driving force and the custodians of the company’s integrity and growth. Their leadership, guided by prudence and compliance with the Companies Act, 2013, ensures that the company operates efficiently, lawfully, and in alignment with its long-term objectives.