Fiduciary duties of directors in private limited company

Every private limited company is required to follow the statutory provisions contained in the companies act. The articles of association in relation to increase of capital, issue and allotment of shares and transfer of shares. Here we can see about fiduciary duties of directors in a private limited company.

Issue of further shares

Although section 81 of the companies act, 1956 contains certain requirements in the matter of issue of further capital by a company, does not apply to private limited companies. The directors in a private limited companies are excepted to make a disclosure to the shareholders of such a company when further shares were being issued.

The acts of directors in a private limited company are required to be tested on a much finer scale in order to rule out any misuse of power for personal gains or ulterior motives thus casting a heavier burden on its directors. The director’s acts should not only satisfy the test of bonafides.

Fiduciary of director’s duties of care, diligence and skill

The non-executive directors in a company are required to display such care, diligence and skill as would reasonably be expected of a director who is appointed and who is entrusted with duties pursuant to his special qualification.

Directors not expected to be experts unless appointed as such

Normally, a director is expected to exhibit in the performance of his duties. He need not show the knowledge of an expert. The position was so nicely put in the said case when the judge said that a director in a life insurance company does not guarantee that he has the skill of an actuary or physician.

Directors must exercise reasonable care and judgment but not liable to error of judgment

If directors act within their powers, honestly for the benefit of the company with such care as 50,000 or five per cent of the average net profits computed in terms of section 349 and 350 during the three financial years immediately preceding, whichever is greater?

Other matters which require authorization or approval by general meeting before the board can act

  • Buy-back of shares or other specified securities in excess of 10% of total paid-up equity capital and free reserves shall be first authorized by a special resolution of the company in general meeting.
  • Issue of shares at a discount shall be authorized by a resolution passed by the company in general meeting.
  • Sweat equity shares shall be authorized by a special resolution of general meeting.
  • Issue of further shares by a public limited company to persons whether or not they are existing shareholders to be passed by special resolution.
  • Issue of convertible debentures or loan requires approval of members by special resolution.
  • Alteration to share capital requires prior approval of members and there should be provision in the articles.
  • Also the matters which require the prior approval of the company in general meeting by ordinary or special resolutions.

Fiduciary duties of directors in private limited company

Manner of Exercise of powers by board

It can be said that all the powers of the company are vested with the board as even in respect of powers that are reserved for the general meeting, the initiative to call a general meeting lies with the board. These powers may be exercised by the board in the following manner.

Board meeting

Most of the matters are considered by the board at its periodical meetings.

Delegation to managing director

Where there is a managing director, the board may by resolution or by way of agreement to be entered into with him, entrust to him substantial powers of management. There may also be whole-time directors.

Powers to Committees

The board may also appoint committees, if authorized in the articles and delegate certain matters to the committees for consideration and submission of recommendations to the board or for approval.

Periodicity of meetings

Every company public limited or private limited company shall hold at least one meeting of the board in a period of three months and four meetings in a year. But in a section 25 company the board or the government body may held within six months.

Notice to foreign director

Although it is not incumbent to give notice to a foreign director at the address outside India, sound corporate practice requires notice to be sent to all directors, whether in India or outside. In one case about 88% shares were held by the chief promoter who was a director and who resided abroad. The court observed that although the articles stated that notice need not be sent to a director for the time being not in India, this was applicable only when he was temporarily away from India.

Failure to give notice

Failure to give notice of board meeting will render the resolutions passed at the meeting null and void.

Illustration of agenda for the first board meeting

Increase in share capital is an important item which should be transacted as an agenda item and cannot normally transacted as “other business”.

Illustration of an agenda for the first meeting of the board of directors after company registration

UVW Limited – Registration office

Who can convene a board meeting?

The secretary on the direction of the chairman will call a board meeting and the articles prescribe the procedure.