Legal Position of Director

LEGAL POSITION OF DIRECTOR

Directors are the persons duly appointed by the Company to lead and manage its affairs and their legal position. At times they have to act as agents, managing partner, trustees, Employee, and Officer.

Directors as Agents: A company as an artificial person, acts through directors who are elected representatives of the shareholders and who execute decision made for the benefit of shareholders. Hence directors share a relationship of an agent and a principal with the company.

Example  1: XYZ is Chennai based private limited Company which has two directors, Agi and Logu. The company wants to start its business operation in state of Karnataka and for that they need an office accommodation. Agi goes to Karnataka and buys a property in Bangalore to house the office. Although the purchase has been made by Agi the property belongs to the company. Agi has just acted as an agent of the company.

Directors are appointed to lead the company in relation to third parties. They can enjoy the rights and privileges of an agent. There is no personal liability on any contracts entered by them, if it is within the powers stated in the memorandum and articles of the company. If it is not so they have personal liability.

It is also considered that directors are not a full fledged agents of the company because they are elected person but agents are appointed persons.

Directors as Managing Partners

The management of company is vested in the hands of many executives. So, the directors are virtuals managing partners and the Directors elected by shareholders are like partners to the shareholders. However, substantial powers may be entrusted with the directors or to an outsider, such a person has to act under the superintendence, control and direction of the board of Directors. Therefore, unlike in a partnership firm, no power can be delegated to a single director as a managing partner.

Example  2: The same company due to negligence of its Directors fails to pay sales tax to the government. The government files a case against the directors for the recovery of tax payable by the company. As the fault is that of the directors, they are personally liable for the payment of the taxes.

Directors as trustees

Directors are trustees of the company’s money and property and they have to safeguard them and use them for the sake of the company and on behalf of the company. According to Law of trust, the equitable ownership of the trust property is vested with the beneficiary only, Hence directors cannot act as a full-fledged trustee.

Example  3: Eswar Company has two directors Deepa and Mani. The directors issue 1,000 shares to the public and receive Rs.100 each per share from the shareholders as share application, share allotment and share first call money. However they themselves do not pay Rs.100 for each of the shares taken by them. This amounts to breach of trust and hence they are required to pay Rs.100 each for the shares held by them.

Directors as employees

Directors are professionals who manage the company for the benefit of themselves and for the benefit of the shareholders. However, if a director accepts employment in the same company under a separate contract of service, then, in addition to the directorship, he is also treated as an employee or servant of the company. In other words, when the director is appointed as whole time employee of the company, then that particular director shall be considered as employee director or whole time director.\

Example  4: Gunalan is a director of a company who has also taken an extra charge to act as a manager of the company. But as per the contract of service as a manager he is entitled to receive a remuneration. Hence he is a director who also happens to be an employee of the company.

Directors as officers

“Officer” includes any director, manager or key managerial personnel or any person in accordance with the directions or instructions the Board of Directors or any one or more of the directors who is or are accustomed to act. Therefore Director is treated as officers of an company. Sometimes, they may be also liable for punishments in form of penalties, under Companies Act, when the provisions of the Act are not strictly complied with.