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Education for directors
August, 17th 2006
What is meant by the fiduciary duty of the directors? "Directors are trustees of the assets of the company and they must not misapply them," begins the answer to the question, in 501 Questions & Answers for Company Directors and Company Secretaries, by Roger Mason, from Viva (www.vivagroupindia.com). Misapplication of trust can happen in a variety of ways, ranging from theft, at the one extreme, to `borrowing assets without permission and not declaring a conflict of interest'. Being in the position of trust, directors must act "in what they consider to be the best interests of members," explains Mason. "A court will normally accept a genuine attempt to do this by directors. It will not second-guess the directors and substitute its own judgment of the best interests of members." Though answered in the UK context, the principles may well apply closer home too. Some key questions Here are a few questions, from the remaining 500, in the book: What are the possible consequences if directors act beyond the limit of their powers? Can a board meeting be held without all the directors being informed? Can a formal board meeting ratify the business done at an informal meeting? May a person who is not a director be allowed to attend a board meeting? Are matters at a board meeting settled by a majority vote? Can a shareholder waive a dividend? Of current relevance should be this poser, `Are there any limits to the number of directorships that I can hold?' Mason elucidates the UK law: "There are no limits imposed by statute. There may be a restriction, or indeed a ban, imposed by a service contract but, unless this is the case, you are free to go ahead." However, there are two `possible limiting factors,' disclosure of any possible conflict of interest, and the duty of care. On the latter, Mason cautions directors that it could be a breach of duty to take on too many directorships. "You should not take on more duties than you can reasonably expect to fulfil in a satisfactory way." He cites the example of Robert Maxwell, who was `a director of more than 200 companies'! In India, though, the limit is 15, not counting, inter alia, directorship in private and Section 25 companies. Do we need a more liberal regime? From the basics The book does not presuppose any knowledge on the part of the readers, and therefore begins with the basics, opening with the question, `What is a company?' A practical poser frets, "I am an officer of the company and it all sounds rather worrying. How worried should I be?" You may remember that the definition of `officer' in Section 2(30) of our Companies Act, 1956 includes director; and that Section 2(31) defines `officer in default'. What is Mason's counsel to the worried director? "You should certainly take your responsibilities seriously but perhaps you should not worry too much. The great majority of officers manage without too many problems. You might take comfort from the fact that a fine or penalty can only be imposed if the officer acted `knowingly and wilfully'," writes Mason. But don't bank much on that UK escape route to work here. Because Indian courts have held in many instances, especially after the 1988 amendment to the Companies Act, that mens rea is not an essential ingredient for establishing the offence. A book that offers a quick exposure to a comparable company law.
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