Director’s Duty towards Creditors

INTRODUCTION

There are duties of directors which are mentioned under the guidelines of the company’s memorandum.[1] The director of the companies discharges their duties as a trustee, an administrator and as an agent of the company. The duties of the director are based on the trust. Directors of the company have the highest standard of care towards his principal and therefore he must not unjustify his personal interest before duty.[2]

STATUTORY DUTIES OF A DIRECTOR

There are the duties of the director which has been stated under Section 166[3] of the Companies Act, 2013. Duties of directors, hitherto, were largely laid down by courts by looking at common law principles. And although the law regarding this had evolved over time through judicial decisions, there was great degree of uncertainty. The absence of statutory law coupled with the lack of cases on directors’ duties and liabilities, posed a problematic scenario. To alleviate this situation, an attempt has been made for the first time ever in India to codify the duties of directors through section 166 of the new Act.^[4] India has thus emulated other common law jurisdictions, like the United Kingdom, through codification of directors’ duties.

The J.J. Irani Committee set up by the ministry of corporate affairs, recognized the importance of inclusion of duties of director into codified law.^[5] The committee was all for the codifying general duties of directors such as; “duty of care and diligence”, “exercise of powers in good faith”, “duty to have regard to the best interest of the employees”, etc.^[6] Section 166 as it reads today first featured in the Companies Bill, 2011.

Section 184 of the Companies Act, 2013 states that a director can mandate to disclose his concern or interest in the company or the bodies are the Institutions or the corporate, firms or any other Association of individuals.[7] The provision states that it is the primary responsibility of the directors for maintaining the transparency in order to avoid any conflict of interest.

OTHER DUTIES OF DIRECTORS

There are few more duties of the directors other than statutory duties. In the case Of Harinagar Sugar Mills Limited Vs Shyam Sunder Jhunjhunwala and Ors[8], it was held that “the action of the directors must be set aside if the same was done oppressively, capriciously, corruptly or in some other way mala-fide”. Whereas in the case of Bajaj Auto Limited Vs N.K. Firodia and Anr. It was held that test of the directors and the benefit of the company as a whole must be assigned by the directors related to the things which has been stated below-

• “whether the directors acted in the interest of the company
• whether the directors acted on a wrong principle
• Whether the directors acted on a wrong principle; and, (iii) whether they acted with an oblique motive or for a collateral purpose.”[9]

In the case of National Textile Workers Union and Ors Vs P.R. Ramakrishan and Ors,[10] it was stated by the Supreme Court of India that the memorandum of association of the company contains some of the basic procedures which can be altered. There are the Articles of Association contains the term which can also be altered by passing of resolution. Any action of the company which is beyond the two documents is considered as ultra vires. There is disadvantage in the case of creditors especially when winding up of proceedings are there. This has been mentioned under Section 272(a) of the Companies Act, 2013.[11] The directors must act in a good faith during the winding up of proceedings of the company. Section 293 (2) of the Companies Act 2013 states that “Any creditor or contributory may, subject to the control of the Tribunal, inspect any such books, personally or through his agent.”[12] Whereas Section 292 (2) of the Companies Act 2013 states that “any directions given by the creditors or contributories at any general meeting shall, in case of conflict, be deemed to override any directions given by the advisory committee”.[13] This shows that the intention of the Legislature and Judiciary must be to protect the interest of the creditors from any manipulation.

References

[1] Sneha Bhawani, What Are The Duty Of The Directors Towards Creditors In The Company (2016), https://blog.ipleaders.in/what-are-the-duty-of-the-directors-towards-creditors-in-a-company/ (last visited Jun 25, 2017).

[2] Duties and role of director of a company, (2015), https://blog.ipleaders.in/duties-and-role-of-director-of-a-company/ (last visited Jun 25, 2017).

[3]  Duties of directors.

1. Subject to the provisions of this Act, a director of a company shall act in accordance with the articles of the company.
2. A director of a company shall act in good faith in order 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 environment.
3. A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.
4. A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
5. A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.
6. A director of a company shall not assign his office and any assignment so made shall be void.
7. If a director of the company contravenes the provisions of this section such director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

[4] A Guide to Board Evaluation, The Companies Act, 2013 Series, ICSI Available at https://www.icsi.edu/portals/0/guide_to_board.pdf

[5] Report of the Expert Committee on Company Law, May 2005 (‘Irani Committee’): (2006) 1 Comp LJ 25 (Journal)

[6] Report of the Expert Committee on Company Law, May 2005 Part 3, para 18.3, p 44

[7] Siddharth Raja, India: Duties To Be Discharged By Directors (2011), http://www.mondaq.com/india/x/153824/Directors Officers Executives Shareholders/Duties to be Discharged by Directors (last visited Jun 25, 2017).

[8] Harinagar Sugar Mills Limited Vs Shyam Sunder Jhunjhunwala and Ors 1961 AIR 1669, 1962 SCR (2) 339.

[9] Bajaj Auto Limited Vs N.K. Firodia and Anr 1971 AIR 321, 1971 SCR (2) 40.

[10] National Textile Workers Union and Ors Vs P.R. Ramakrishan and Ors 1983 AIR 750, 1983 SCR (3) 12.

[11]  Subject to the provisions of this section, a petition to the Tribunal for the winding up of a company shall be presented by—

1. the company;
2. any creditor or creditors, including any contingent or prospective creditor or creditors;
3. any contributory or contributories;
4. all or any of the persons specified in clauses (a), (b) and (c) together;
5. the Registrar;
6. any person authorised by the Central Government in that behalf; or
7. in a case falling under clause (c) of sub-section (1) of section 271, by the Central Government or a State Government.

[12] Section 293 (2) of the Companies Act, 2013

[13] Section 292 (2) of the Companies Act, 2013.