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Role of Directors In Companies In India, USA and UAE

By: Shubham Mathur

INTRODUCTION

For the smooth running of the company, the role and duty of a director is essentially significant. Stipulating and clarifying the roles and obligations of the company’s directors helps to enhance corporate governance and stability, contributing to increased development and prosperity in the corporate sector.

INDIA

In the Companies Act, 2013, the position of director was properly laid down. In this aspect, the former company law of India, i.e. the Companies Act, 1956, was deficient. A groundbreaking piece of legislation in this regard is considered to be the new Companies Act, 2014. The roles and obligations of the directors comprising the independent directors are properly and clearly specified and explained. This guarantees greater and flawless corporate governance and governance. It helps and empowers beneficiaries, regulators and courts to judge and control more critically and efficiently the directors’ activities and obligations.

With updated corporate governance principles, i.e. the Updated and New Clause 49 of the Listing Agreement of the Securities and Exchange Board of India[1], the new Companies Act, 2013 must be read. This will bring the corporate governance requirements of SEBI into near alignment and compliance with the provisions of the Companies Act in relation to the companies listed. The updated provisions of the Act relating to the duties of directors were made effective as of April 1, 2014, but the updated corporate governance principles of the SEBI were made effective as of October 1, 2014.

Directors are considered to be key managers in a business that is of particular interest to the companies mentioned. They may hold several senior and responsible roles in companies, such as Managing Director, Manager, Whole Time Director, or Independent Director.[2] Thus, the effective, flawless, and very progressive management of an organisation, and the desired growth and profitability of its companies, are certainly largely dependent on the competence and trustworthiness of its directors. A director means a director appointed to the board of directors of a corporation, which is the collective body of its directors.

DUTIES OF DIRECTORS UNDER THE COMPANIES ACT, 2013

The roles and duties of directors set out in the Indian Companies Act of 2013 can be broadly divided into the following two categories:

  1. The functions and obligations that promote and encourage the sincere investment of managers’ best efforts in effective and prudent corporate management, the elegant and rapid resolution of various business-related concerns, including those raised by red flags, and the complete sophistication and wisdom of decisions to avoid unnecessary organisational risks.
  2. Trust duties that ensure and ensure that company directors always maintain, over and above their own personal interests, the interests of the company and its stakeholders.

The following duties and obligations have been levied on the directors of companies under Section 166 of the Indian Companies Act of 2013-[3]

  • In accordance with its Articles of Association (AOA), a director of the organisation has to act.
  • A director must always behave in good faith to support the company’s objects, which will support the company’s objects. This will support the business as a whole and protect the best interests of the company’s stakeholders.
  • With proper and fair consideration, ability and diligence, a director must exercise his duties and exercise independent judgement.
  • A director of a corporation shall not be involved in a situation in which he may have a direct or indirect interest that contradicts the interests of the company or may conflict with them.
  • A company director shall not receive or attempt to obtain any undue benefit or profit either for himself or his family, partners or associates and shall be responsible for paying the company an amount equal to that benefit if such director is found guilty of making any undue gain.A business director shall not allocate his office and any appointment so rendered shall be invalid.
  • If the company director violates the provisions of this section, a fine of not less than one Lakh Rupee may be levied on the company director, which may be extended to five Lac Rupees.

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INDEPENDENT DIRECTORS

The CA-2013 liability regime not only imposes on the directors of Indian companies the above-mentioned duties and responsibilities, but also encourages the independence and equity of a company’s board of directors. Therefore, the new Indian Companies Act of 2013 also lays down the roles, duties and responsibilities of independent directors. An Independent Director is a member of the board of directors of a company that does not have a financial agreement (with the exception of sitting fees) with the company or is entitled to own shares in the company. In the earlier Indian Companies Act of 1956, there were no clear provisions for independent directors and only the old clause 49 of the SEBI listing agreement contained requirements for the induction of independent directors to the listed companies.

The new Indian Companies Act of 2013 specifies that, as independent directors, all listed companies must constitute at least one third of the total size of their directors, and also empowers the Government of India to include other categories of companies within the scope of that provision or requirement (Section 149 of the CA-2013).[4] To strictly comply with this mandatory provision, public limited companies composed in compliance with the former CA-1956 shall be granted a grace period of one year. Again, for more than two consecutive terms, independent directors are not eligible to hold office for a period of five years.

Under the current structure, the roles and duties of independent directors have been significantly expanded, and several new areas have been addressed prudently. Broadly, the highly responsible role of arbitrators within the business among various constituencies is intelligently assigned to them. Therefore, the latest rules for independent directors of limited companies are certainly very positive for transparent and sound corporate governance and are highly favourable for the company and all its shareholders. Some of the most relevant functions, duties and liabilities of independent directors are the following (as per Schedule IV of the CA-2013)-

  • An independent director must assist in providing the board with equitable and independent judgement.
  • An independent director needs to protect the interests of all stakeholders and support them. In that direction, all his / her acts should be.
  • An independent director needs to conciliate and reconcile the shareholders’ competing interests.
  • An independent director must attend and participate regularly in the meetings of the committee board.
  • In an objective and unbiased manner, an independent director must report. He should be ethical and not break the code of ethics in the business or commit any fraud.

UNITED ARAB EMIRATES

Directors’ duties and responsibilities in the United Arab Emirates (UAE) come from various legislative sources and there is no consolidated legislative structure addressing the duties and responsibilities of directors under the law of the UAE. The terms’ manager ‘and’ director ‘are used interchangeably in UAE law. The rules and regulations affecting directors are taken from different sources in the UAE, including-

  • UAE Federal Law No. 2 of 2015 concerning Commercial Companies (“Company Law“).
  • Federal Law No. 5 of 1985 on Civil Transactions (“Civil Code“).
  • Federal Law No. 3 of 1987 Promulgating the Penal Code (“Penal Code“).
  • UAE Federal Law No. 18 of 1993 on Commercial Transactions (“Commercial Transactions Law“).

DUTIES OF DIRECTORS UNDER UAE COMPANY LAW

In the performance of a prudent person in the performance of his duties, a director must always act. The acts performed by a director must always be in order to promote the mission and powers of the company given to him by the shareholders. There are situations where the director is expected to behave in compliance with the internal regulations and supervision of the company, including the application of particular authorities provided in the sense of the company’s memorandum of association or by internal resolution or by the power of attorney. Accordingly, it is important for the director to understand and operate only within the jurisdiction of the powers bestowed by the organisation.[5] It is important, in view of the above, that managers ensure that the necessary internal approvals have been obtained before any contractual arrangement is reached for the company.

In addition, the Companies Law provides that any scheme seeking to relieve the director of personal responsibility resulting from the mismanagement or unauthorised use by the company of the powers vested on the director by the company shall be void.[6] When read together, the above clauses may be interpreted as meaning that the director will not be relieved of personal liability on the part of the director as a result of any misuse of the powers conferred by the company or of actions performed by the director in violation of the law in force.[7] There is no restriction against a company receiving directors’ liability insurance for a director or compensating a director for actions validly taken by a director in the normal course.

Other duties of the directors’ are-

  • The Director is responsible for the planning and authenticity of the Annual Reports.
  • Conflict of Interest-Unless accepted by the shareholders of the company, a director has to fulfil his duties with the business line of the company.
  • Confidentiality- A director should not disclose the secret of the company or damage the business of the company.
  • Resignation Timing- A director may only resign at a time that does not cause harm to the company, according to the Civil Code.
  • Liability to others- If the director is found to have committed fraudulent actions, a liability claims against him or her can be brought by the corporation and/or the shareholders; the director is therefore liable to third parties.

In the Commercial Transactions Law and Penal Code, there are several provisions as to how courts should treat insolvent companies and their directors. In this regard, Article 882 of the Commercial Transactions Law, which states that directors may be liable to a custodial sentence in the event that they are imprisoned, is of particular importance.

  • They also failed to provide adequate details in the financial books and records of the company to reflect the true financial condition of the company.
  • They do not have information requested by the court or trustee in bankruptcy or whether they are providing false information knowingly.
  • Where the assets of the company have been sold at less than their value in an effort to prolong the suspension of payment of debts or the company’s declaration of bankruptcy, or where any illegal action has been taken by the directors to acquire credit or funds in order to achieve the above.
  • If, at a time when the company is no longer in a position to cover its debts, the director’s bargain with all of the assets of the company in order to retain those assets outside the creditors’ control.

The roles and duties of a director in the UAE were these. The study of the company’s risks requires due consideration.

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UNITED STATES OF AMERICA

In essence, US public corporations have a unitary board structure, which implies a framework of one tier. This is governed by Section 141 of the DGCL.[8] Section 141(b) of the DGCL specifies that there be one or more members on the board. The number of directors is determined by the certificate of incorporation of the company or by other bylaws. The optimal size of a board is between 9 and 12 directors, and a corporation must have no less than 6 and no more than 15 directors.

DIRECTORS DUTIES AND LIABILITIES

Directors owe the company and its shareholders a fiduciary duty of care and allegiance.

  • Duty of care-The duty of care requires directors to act in a similar role with the degree of care that an ordinarily conscientious person would use in similar circumstances. The duty of care allows directors to act on an informed basis, after fair inquiry and deliberation. Directors are expected to rely on management and experts, where it is reasonable to do so.
  • The duty to act in good faith is a secondary function of the duty of allegiance. Generally speaking, the obligation requires administrators to act fairly and truthfully, in the best interests of the organisation, and in a way that is not knowingly unethical or contrary to public policy. The following are the liabilities of the directors under the US Law-
  • Directors are subject to liability for their acts and inactions, but stringent provisions of liability generally apply. In general, the rule of business judgement may be enforced by the courts, which demands that directors and officers act informedly, in good faith and in the best interest of the corporation. The court would not discuss the merits of the judgement of the underlying board if the presumption is not settled by the complainant.[9]
  • In certain situations (such as the sale of a company), a different standard of judicial review can apply. Document provisions governing protection from liability, compensation and creation of expenses, as well as insurance for directors and officers, are usually covered by directors.

CONCLUSION

Taking into account the people and the world in which they reside, the laws of the three listed countries are created. There are some loopholes in the legislation which can be amended. Given the Indian angle, it is very clear that CA-2013 genuinely seeks to make corporate management and governance in India very successful, fully accountable, transparent and maximally beneficial to all stakeholders and related professionals through this intelligent legislation on the duties and responsibilities of managers in Indian companies.

[1] Clause 49 of the Listing Agreement of the Securities and Exchange Board of India

[2]Ministry of Corporate Affairs, Management And Board Governance http://www.mca.gov.in/MinistryV2/management+and+board+governance.html

[3] Section 166 of Companies Act, 2013

[4] Section 149 of Companies Act, 2013

[5] Douglas G. Smith, Mark Gilligan,Duties and Liabilities of Directors in the United Arab Emirate, Squire Patton, https://www.esquireglobalcrossings.com/wp-content/uploads/sites/21/2016/02/duties-of-directors-in-the-uae-alert.pdf

[6] Ibid

[7] Mojaged Al Sebae, Nadim Al Jisr, Managers’ and directors’ duties and liabilities under the UAE law, https://mena.thomsonreuters.com/content/dam/openweb/documents/pdf/mena/white-paper/managers-and-directors-duties-and%20liabilities-under-the-uae-law.PDF

[8] Section 141 of Delaware General Corporation Law

[9]  Robert Treuhold, Corporate governance and directors’ duties in the United States: overview Stephen Giove, https://uk.practicallaw.thomsonreuters.com/9-502-3346?transitionType=Default&contextData=(sc.Default)

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