Page 306 - DMGT407Corporate and Business Laws

Unit 12: Management of Companies

Some other duties are: to convene statutory, annual general meeting and also extraordinary Notes
general meeting general meeting when required by the shareholders of the company; to prepare
and place at the AGM along with the balance sheet and profit and loss account a report on the
company’s affairs; to make a declaration of solvency in the case of a Member’s voluntary winding
up.
The duties of the directors are usually regulated by the company’s articles. While performing
their duties, they must display reasonable care, honesty, good faith, skill and diligence. As they
stand in a fiduciary relationship to the company and they are agents and trustees in certain
respects, they are bound to exercise in the performance of their duties a reasonable degree of
skill and care.

12.5.1 Liabilities of Directors

The liabilities of directors may be considered under the heads: (1) Liability to the company.
(2) Liability to third parties. (3) Liability for breach of statutory duties. (4) Liability for acts of
co-directors. (5) Criminal Liability.
Liability to the company. The liability to the company may arise from: (a) breach of fiduciary
duty; (b) ultra-vires acts; (c) negligence; and (d) breach of trust and misfeasance.
(a) Breach of fiduciary duty. Where a director acts dishonestly in disregard to the interests of
the company, he will be held liable for breach of fiduciary duty. Most of the powers of
directors are ‘powers in trust’ and therefore, should be exercised in the interest of the
company and not in the interest of the directors or any section of members. Thus, where
the directors, in order to forestall a takeover bid, transferred the unissued shares of the
company to trustees to be held for the benefit of the employees and an interest-free loan
from the company was advanced to the trustees to enable them to pay for the shares, it was
held to be a wrongful exercise of the fiduciary powers of the directors [Hogg v. Cramphorn
Ltd. (1966) 3 All ER 420].
(b) Ultra-vires acts. Directors are supposed to act within the parameters of the provisions of the
Companies Act, Memorandum and Articles of Association since these lay down the limits to
the activities of the company and accordingly to the powers of the Board of Directors. The
directors shall be held personally liable for acts beyond the aforesaid limits, being ultra-
vires. Thus, where the directors pay dividends or interest out of capital, they will be liable
to indemnify the company for any loss or damage suffered due to such act.
(c) Negligence. The directors shall be deemed to have acted negligently in discharge of their
duties and consequently liable for any loss or damage resulting therefrom where they fail
to exercise reasonable care, skill and diligence. However, error of judgement will not be
deemed as negligence. It may be noted that the directors cannot be absolved of the liability
for negligence by any provision in the Articles (s.201). The court may award relief to
directors against such liability under s.633.

(d) Breach of trust and misfeasance. Directors are the trustees for the money and property of
the company handled by them, as well as the exercise of the powers vested in them. If they
act dishonestly or mala fide in the exercise of their powers and performance of their
duties, they will be liable for breach of trust and may be required to make good the loss or
damage suffered by the company by reason of such mala fide acts. They are also accountable
to the company for any secret profits they might have made in transactions on behalf of
the company.
Directors can also be held liable for their acts of ‘misfeasance’, i.e., misconduct or willful misuse
of powers. However, misconduct which is not willful shall not amount to ‘misfeasance’. Moreover,
the directors are entitled to relief against liability for breach of trust or misfeasance under s.633.

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