Amended and updated notes on section 166 of Companies Act 2013. Detail discussion on provisions and rules related to duties of directors.
Chapter XI (Sections 149–172) of the Companies Act, 2013 (CA 2013) deals with the provisions related to appointment and qualifications of directors. Section 166 of CA 2013 provides for duties of directors.
Recently, we have discussed in detail section 165 (Number of directorships) of CA 2013. Today, we learn the provisions of section 166 of Companies Act 2013.
The provisions of section 166 are effective from 1-April-2014. You may refer Notification No. S.O. 902(E) issued dated 27.03.2014. In this article, you will learn detail of the provisions of section 166 of the Companies Act 2013.
There was no provision in the Companies Act, 1956 which laid down the duties of directors. In other words, the provisions related to duties of directors has been defined in the company law for the first time under section 166 of the Companies Act, 2013. That means there is no correspondence section for statutory duties of directors in Old CA 1956 for the provisions of section 166 of the CA 2013.
| Name of Act | The Companies Act 2013 |
|---|---|
| Enacted by | Parliament of India |
| Administered by | Ministry of Corporate Affairs (MCA) |
| Number of Chapters | 29 |
| Number of Sections | 484 (470-43+57) |
| Number of Schedules | 7 |
| You are reading: | |
| Chapter No. | XI |
| Chapter Name | Appointment and Qualifications of Directors |
| Section No. | 166 |
| Section Name | Duties of directors |
| Monthly Updated Edition | Company Law PDF |
Duties of directors of a Company under Section 166
Following are the duties of directors in accordance with the provisions of section 166 of the Companies Act, 2013:
Act as per Articles [Section 166(1)]:
A director of a company shall act in accordance with the Articles of Association (AOA) of the company, subject to the provisions of CA 2013.
Therefore, the company may specify duties of their directors in AOA and directors shall act according to such specified duties in articles of the company. However, the duties specified in AOA must be in pursuance to the Companies Act, 2013 otherwise shall be void.
You may also refer clause (b) of section 6 of the CA 2013 which states that any provision contained in the articles shall to the extent to which it is repugnant to the provisions of CA 2013, become or be void, as the case may be.
Act in Good Faith [Section 166(2)]:
The provisions of sub-section (2) of section 166 of the CA 2013 provides that a director of a company shall act in good faith. Good faith requires that the director should act only for the benefit of the company. In other words, the director shall not act with mala fide motive to harm company.
Such action in good faith shall be taken in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of:
- The company;
- The employees;
- The shareholders; and
- The community.
The action taken by the director of the company shall also be for the protection of environment. We have noticed that both the term members as well as shareholders has been used in section 166(2) of the CA 2013.
Thus, the director shall act in good faith for the benefits of members and in the best interest of the shareholders. The term members have specifically been defined under section 2(55) of the CA 2013 and accordingly, members, in relation to a company, means:
- (i) Subscriber to the Memorandum: the subscriber to the memorandum of the company who shall be deemed to have agreed to become member of the company, and on its registration, shall be entered as member in its register of members;
- (ii) Name in Register: every other person who agrees in writing to become a member of the company and whose name is entered in the register of members of the company;
- (iii) Beneficial Owner: every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository.
Did you know? The term Good Faith has also been used in various sections viz. Section 143(13), Section 178(8) proviso, Section 180(3)(a), Section 180(5), Section 245(4)(a), Section 329, Section 428, and Section 456.
Independent Judgment [Section 166(3)]:
According to section 166(3) of the Companies Act, 2013, a director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.
Conflicts with Interest of Company [Section 166(4)]:
A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
Undue Gain [Section 166(5)]:
A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.
Assignment of Office [Section 166(6)]:
A director of a company shall not assign his office and any assignment so made shall be void.
Contravention of Provisions [Section 166(7)]:
If a director of the company contravenes the provisions of this section such director shall be punishable with fine which shall not be less than ₹1,00,000 but which may extend to ₹5,00,000.
Section 166 of Companies Act 2013: Duties of directors
Section 166 shall come into force on 1st April, 2014 vide Notification No. S.O. 902(E) issued dated 27.03.2014.
(1) Subject to the provisions of this Act, a director of a company shall act in accordance with the articles of the company.
(2) A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.
(3) A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.
(4) A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
(5) A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.
(6) A director of a company shall not assign his office and any assignment so made shall be void.
(7) If a director of the company contravenes the provisions of this section such director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.