Directors’ role and responsibilities
A company acts through its two aspects – shareholders and the board of directors. The board of directors of a company oversees the management of the company and the company’s business. The board of directors of a company is vested with a plethora of roles and responsibilities in functioning of a company. However, the basic outline of directors’ role could be deduced as to determine and implement the company’s policy which is why directors are also referred to as the trustees for the company but not to the individual shareholders.
As legislated by section 95 of the Companies’ Act, 2063 (hereinafter referred to as the “Act”), the director(s) shall manage all transaction, exercise powers and perform duties of the company through the board collectively, subject to the provisions laid down in the Act, company’s AOA, company’s general meeting and the resolutions made at directors’ meeting.
The role and responsibilities vested upon the director(s) of a company, under the Act, can be labelled under following subjects:
- Duty towards company:
As is widely known, the directors have a fiduciary duty towards the company. Under the duty towards the company, they are vested with the authority to carry out day-to-day affairs of the company. Every director is required to discharge their duties honestly and in good faith, keeping the interest and benefit of the company as the prime concern. Directors are required to exercise reasonable care, skill and diligence in disposal of their duties.
However, in the course of conducting business of the company, no director shall do anything to derive personal benefit through the company. Nonetheless, as per section 95 of the Act, for a public company, director(s) may yield personal benefit through the company upon the decision of the general meeting. In case of a private company, however, the company may make a reasonable provision for the benefit that may be derived through the company, as accorded by the memorandum of association and articles of association or consensus agreement.
In order to avoid conflict of interest, the director(s) of the company are required to make certain disclosure to the company pertaining to section 92 of the Act.
It spells out the matters to be disclosed by the directors within 15 days of assuming the office, in addition to disclosure of shares under section 94. The disclosure is to be made in following matters:
- If s/he or her/his close relative has direct involvement or any kind of personal interest in the sale and purchase of the company or on any other contract related with the transactions of the company;
- If s/he has any interest or concern in the appointment of the managing director, company secretary, officer of the company;
- If s/he is a director of any other company;
- If s/he has made any dealing in the shares or debentures of the company or in its holding or subsidiary company, matters of such dealing.
Section 72 of the Act provides that no director or her/his partner or proxy shall be entitled to vote on any discussion to be held at any general meeting in respect to any matter related to the director which involves the director’s interest or concern.
The Act extends as to make directors liable in case of the loss of net worth of the company, under said circumstances. Section 60 of the Act enunciates that if it is held that the net worth of the company is reduced as an aftermath of any mala fide intention or malicious recklessness of any director(s), such director(s) shall be made liable to pay compensation for the same. Similarly, in the event where the net worth of a public company is reduced to half the paid-up capital or less, the directors are required to prepare an appropriate strategy addressing the interest of the company and the shareholders within 35 days of the knowledge of the matter. Plus, the directors are required to present a separate resolution thereon at the general meeting held after the knowledge of such matter. If an approval of the general meeting is required to implement such strategy, the directors shall call an extra-ordinary general meeting promptly.
The chairperson of the board is authorized to chair the general meeting of the company, and in the absence of the chairperson, the person nominated by the directors from amongst themselves, shall chair the meeting. For a public company, the directors shall present the audited annual financial statements, auditor’s report and director’s report at the annual general meeting. Likewise, the board of directors may convene an extraordinary general meeting of the company, if need be.
As per the Act, the director(s) who have signed the prospectus of the company shall be liable for the matters laid down in that prospectus. If any published prospectus contains false statement(s) made maliciously or deliberately and any person sustains any loss or damage by reason of his/her subscription of securities on the faith of that prospectus, the directors who have signed that prospectus shall be personally liable to pay compensation for the actual loss or damage so sustained .
- Duty towards shareholders:
Although the board specifically works as per the best interest of the company, it has few duties towards the shareholders as well. Regarding the alteration of the rights of the shareholders of a particular class under section 30 of the Act, the board shall submit a proposed resolution to the general meeting of the shareholders of such class upon the approval of the shareholders of such class.
In the given circumstances under Section 182 of the Act regarding the distribution of interim dividend, the board of directors may distribute interim dividend to the shareholders out of the profits for the previous financial year.
- Duty towards regulating authority:
The Act elucidates the compliance duties of director(s) to the regulating authorities. As per section 99 of the Act, it is mandatory for every director to comply with the Act, memorandum of association, article of association of the company and the consensus agreement.
Similarly, in reducing the share capital of the company as per section 58 of the Act, the director shall be required to submit the court the true list of creditors of the company, if any, setting out their information as required, at the commencement of hearing of the petition for reduction of the company capital. The list thus submitted if is found to contain any false statement or omission, such director shall be made liable to punishment.
Correspondingly, the director(s) is required to provide a true and complete financial statement on the amount of loan or claim or liability to the court in the course of capital reduction.
In case of a public company, as provisioned by section 78 of the Act, the board of directors is required to approve the report submitted by the company to the Office of company registrar. As laid down under section 80 of the Act, the board of every public company is required to submit the director’s report to the Office within 30 days of the holding of the annual general meeting, in addition to the annual financial statement, auditor’s report and the resolution adopted by the meeting.
In submission of the inventory of shares, debentures to the Office under section 51 of the Act, such inventory shall be signed by at least one director of the company.
Upon the call of Office for any explanation pertaining to the documents submitted by the company, the management of the company i.e. the board shall send appropriate replies within the specified period of time.
To sum up, directors who are effectively considered as the agents of the company, shall have the first and foremost requirement to address the interest and concerns of the company. And, in correspondence of above laid duties of director towards the company, shareholders and the regulatory authorities, the Act provides for the personal liability to be borne by the director in case of failure in execution of the duties.