CORPORATE LAW

LEGAL POSITION OF DIRECTORS

• Directors are the persons duly appointed by the company to direct and manage the affairs of the company.

• Their legal position is sometimes described as agents, sometimes as managing partners, and sometimes as trustees.

• But each of these is not exhaustive of their powers and responsibilities but as indicating useful points of view from which they may for the moment and for the particular purpose be considered.

Directors are viewed as the agents of the company for the conduct of its business. A company cannot act by itself; it acts only through its directors. Directors act on behalf of the company and acting on behalf of the company make the company liable on it and not themselves. The Directors cannot be held personally liable for any default of the company.

Like agents, directors should conduct business of the company with care, skill and diligence possessed by them. They are accountable for all of company’s assets under their control, and the profits from assets of the company. Directors cannot deal on their own and are required to disclose their personal interest, if any, in any transaction of the company.

DIRECTORS AS AGENTS

This can be explained by the case Ferguson V. Wilson (1866):F had an option to subscribe for some of the company’s shares & hence he applied for some shares. The directors allotted the whole of the authorized capital to other persons including themselves.

Consequently, the option given to F became worthless. He then sued W, one of the company’s director to transfer some of his shares to him and pay damages. However, F’s claim failed on the ground that directors were only the agents of the company and incur no personal liability

But directors are not completely like agents because where as agents are appointed, directors are elected. Hence they are more like managing partners.

DIRECTORS AS MANAGING PARTNERS • Directors represent the shareholders to conduct business of the company

on their behalf.• They enjoy vast power of management over the company and perform

many functions which are in the nature of proprietary, for example, allotment of shares, raising of loans, investment of funds of the company.

• This gives impression of directors being the active partners and the shareholders appointing them as dormant partners. • The very fact that most of the times directors themselves are the significant shareholders in the company strengthens the argument that directors are the managing partners of the company.

But this may be true only partially as unlike partners, directors cannot bind other shareholders by their dealing, and dissimilar to partners, directors are elected and are subject to retirement also.

But why then, a director has no authority to bind other directors and shareholders like partners in a firm ? Why should the question of retirement arise in the case of a proprietor ?Directors are subject to retirement. This shows that they are not managing partners or proprietors in full sense.

DIRECTORS AS TRUSTEES Directors are the persons selected to manage the facts of the company for the benefit of the shareholders. It is an office of trust, which it is their duty to perform fully and entirely. Directors are also described as trustees of the company they must account for all the money over which they exercise control. Their acts and dealings must be for the benefit of the company. They must exercise their powers honestly in the interest of the company and all the share holders, and not their own sectional interest. They occupy a fiduciary position.Directors are trustees of:• The company’s money or property which comes into their hands

or which is actually under their control and;• Of the powers entrusted to them.

Directors are the trustees of the company and not of individual shareholders. This principal was laid down in the case of Percival V. Wright(1902).Negotiations for the sale of a company’s undertaking were on foot and without disclosing this, the directors purchased shares from the plaintiff shareholder.The plaintiff claimed that the non-disclosure was a breach of the fiduciary duty.But the court held that there was no such fiduciary duty towards individual shareholder and therefore, the directors were not bound to disclose negotiations.

However, directors are not like trustees of a will or of a marriage settlement.

A trustee is a person who is the owner of the property, deals with it as principal, as owner and a master,subject only to an equitable obligation to account to some person, to whom he stands in relation of trustee.

A director on the other hand is not the owner of the property but is only an agent of the company.

Thus, he is not like a trustee either.

CONCLUSION In the real sense, the directors are not the agents completely nor

the managing partners nor the trustees. The position of directors combines all the three and more than that also.

Directors are paid agents or officers of the company and conduct business for the company without being the legal owners. In fact the directors are commecial men managing a trading cncern for the benefit of themselves and of all the shareholders in it.

Directors of a company have fudiciary relationship with the company as well as with the shareholders when they act as agents or officers of a company. Being the fudiciary capacity utmost good faith is expected from the directors of a company. The directors have to follow the Articles of Association and acts through meetings of the Board of Directors.

GLOSSARY •Agent - a person who acts on behalf of another in paticular. •Trustees - a person given control or powers of administration of property in trust with a legal obligation to administer it solely for the purposes specified. •Active partner - an invested person who is involved in daily operations of the company. •Dormant partner - a person who is not known to third parties but is entitled to share in profits and is subject to losses. •Fudiciary relationship - a relationship in which one party places special trust, confidence, and reliance in and is influnced by another who has a fudiciary duty to act for the benefit of the party.