Powers, Duties and Liabilities of Directors under the Companies Act 2013

Understand Powers, Duties and Liabilities of Directors

Key rules to remember

General power of the Board (Section 179(1))

Board powers = all powers the company can exercise, minus what the Act, memorandum, articles or regulations reserve to the general meeting

The Board is subject to the Act, memorandum, articles and regulations made in general meeting. It cannot do what must be done in general meeting.

Powers exercised only by Board resolution at a meeting (Section 179(3))

Calls on shares; buy-back; issue of securities; borrowing; investing funds; loans, guarantee or security; approving financial statement and Board's report; diversifying business; approving amalgamation, merger or reconstruction; takeover or acquiring controlling or substantial stake; other prescribed matters

These must be exercised by resolutions passed at Board meetings, and not by any single director. Only the powers in clauses (d) to (f) can be delegated.

Delegable powers (proviso to Section 179(3))

Clauses (d) to (f): borrow money, invest funds, grant loans or give guarantee or security

Delegation is by a Board resolution passed at a meeting, to a committee, the MD, the manager or another principal officer, on specified conditions.

Special resolution needed (Section 180(1))

Sale, lease or disposal of an undertaking; investing merger or amalgamation compensation otherwise than in trust securities (the Act says: to invest otherwise in trust securities the compensation received); borrowing above paid-up capital + free reserves + securities premium; remitting a director's debt

Temporary loans from bankers in the ordinary course are outside the borrowing limit. Temporary loans are repayable on demand or within six months.

Undertaking tests (Section 180(1)(a) Explanation)

Undertaking: investment > 20% of net worth, or generates 20% of total income. Substantially the whole: 20% or more of the value of the undertaking

Net worth and value are taken from the audited balance sheet of the preceding financial year. Income is of the previous financial year.

Borrowing limit (Section 180(1)(c))

Money to be borrowed + money already borrowed > paid-up share capital + free reserves + securities premium

If this is exceeded, a special resolution is needed. It must specify the total amount up to which the Board may borrow (Section 180(2)).

Penalty for breach of duties (Section 166(7))

Fine: minimum ₹1,00,000, maximum ₹5,00,000

Under Section 166(5), a director guilty of undue gain must also pay the company an amount equal to that gain.

How to solve Powers, Duties and Liabilities of Directors questions

1. 1Read the facts and identify what the question is about: a power of the Board, a restriction, a duty, or liability.
2. 2If it is about power, first ask whether the act is one the Board can do under Section 179(1), then check if it is in the Section 179(3) list that needs a Board resolution at a meeting.
3. 3Check whether Section 180(1) applies. Test the thresholds with the figures given: 20% tests for an undertaking, or the borrowing limit with paid-up capital, free reserves and securities premium.
4. 4If it is about duty, match the facts to the correct sub-section of Section 166: articles, good faith, care and independent judgment, conflict of interest, undue gain, or assignment of office.
5. 5State the rule in plain words and cite the section number.
6. 6Apply the rule to the facts using the numbers and names given. Do a short calculation where needed.
7. 7State the consequence: valid or void, special resolution required, fine of ₹1,00,000 to ₹5,00,000, or liability to pay the gain to the company.
8. 8Write a one-line conclusion that answers the exact question asked.

Quickest way: Section triage in 30 seconds

Common mistakes in Powers, Duties and Liabilities of Directors

• Saying all Board powers can be delegated to the managing director.

  Students remember that delegation is allowed and forget the limit.

  Fix: Only clauses (d) to (f) of Section 179(3) can be delegated: borrowing, investing and loans or guarantees. Delegation must be by a resolution at a Board meeting.

• Leaving out securities premium in the borrowing limit.

  Older notes say 'paid-up capital and free reserves'.

  Fix: Use the current text: paid-up share capital, free reserves and securities premium. Section 180(1)(c) was amended in 2018 to include securities premium.

• Saying Section 180 needs an ordinary resolution.

  Students mix up the resolutions for different matters.

  Fix: Section 180(1) says the Board acts only with the consent of the company by a special resolution. Write 'special resolution' every time.

• Treating independent judgment and due care as the same as loyalty duties.

  The sub-sections are read together without separating them.

  Fix: Separate them. Due care, skill, diligence and independent judgment are in Section 166(3). Good faith, conflict of interest and undue gain are in Section 166(2), (4) and (5).

• Writing the penalty for Section 166 as a fine only up to ₹5,00,000.

  Students forget the minimum fine.

  Fix: The fine is not less than ₹1,00,000 and may extend to ₹5,00,000. Add that the director repays any undue gain to the company.

• Saying a loan above the Section 180 limit is always void.

  Students stop reading at the rule.

  Fix: Under Section 180(5), the excess debt is not valid unless the lender proves it advanced the loan in good faith and without knowledge that the limit was exceeded.

Worked examples