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Duties & Liabilities of Directors ⚖️

Directors have power, but with power comes responsibility and liability.

Fiduciary Duties (Trust-Based) 🤝

"Fiduciary" means: In a position of trust.

Directors must act in good faith and in the best interest of company.

Key Fiduciary Duties:

  1. Act in Good Faith: Honest intentions.
  2. Exercise Independent Judgment: Not influenced by personal interests.
  3. Avoid Conflict of Interest: Personal interest vs Company interest.
  4. Not to Derive Undue Advantage: No secret profits, no self-dealing.
  5. Account for Profits: If made profit using company info, give it to company.

Example of Breach:

  • Director buys property for ₹10 Lakhs and immediately sells to company for ₹50 Lakhs.
  • This is self-dealing. Director must give ₹40 Lakhs profit to company.

Statutory Duties (Section 166) 📜

Under Companies Act, 2013:

  1. Act within Powers: As per Articles of Association and for lawful purposes only.
  2. Promote Success of Company: Act in interest of company, shareholders, employees, environment.
  3. Exercise Reasonable Care, Skill & Diligence: Be competent. Don't be negligent.
  4. Not to Achieve Unrelated Objects: Use company funds only for company purposes (not personal).
  5. Disclose Interest: If director has interest in a contract, must disclose to Board.
Business Judgment Rule

If a director makes a genuine business decision (not fraud), even if it results in loss, director is NOT liable.

Reason: Business involves risks. If directors fear liability for every loss, they will never take bold decisions.

Condition: Decision was made in good faith, with due care, and in company's interest.

Liabilities of Directors 💼

1. Criminal Liability

  • Fraud: Imprisonment + Fine.
  • Insider Trading: Using confidential company info to trade shares.
  • Falsification of Books: Cooking accounts.

2. Civil Liability

  • Breach of Duty: Company/shareholders can sue for damages.
  • Ultra Vires Acts: Acting beyond company's powers (director personally liable).

3. Specific Liabilities

BreachLiability
Not calling AGMFine ₹1 Lakh + ₹5000/day default
Not filing returnsFine + Disqualification
Misleading ProspectusCompensation to investors
Wrongful Trading (continuing when insolvent)Personal liability for debts

Protection for Directors 🛡️

1. Indemnity (Section 197):

  • Company can protect directors from liability if they acted in good faith.
  • Cannot protect from fraud, willful neglect, or breach of trust.

2. Directors & Officers (D&O) Insurance:

  • Company can buy insurance to cover directors' legal costs.

Quiz Time! 🎯

Test Your Knowledge

Question 1 of 5

1. Fiduciary duty means:

Duty to make profit
Duty of trust and good faith
Duty to attend meetings
None

💡 Final Wisdom: "Great power, great responsibility. Directors must balance profit-making with ethical conduct!" 🦸‍♂️

Next up: Loans to Directors - Can company lend money to directors? 💰

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