Director’s Duties and Current Relevance in India

Listen to this article!

During the debates preceding Companies Act (CA), 2013, the Corporate affairs Minister Mr. Pilot termed the bill as ‘historic feat’ that will ensure ‘more compliance and less regulation.’ This was especially correct when section 166 of ‘The Companies act, 2013 was taken under consideration. The CA, 1956 did not explicitly stipulate any directors’ duties. Notably, both the UK and the Singapore have recently codified their company law provisions and brought in Directors’ duties statutorily and India following pursuit through a change. In this backdrop, I will argue that even though the Directors Duties have been expanded in 2013 act and explicitly brought to fore, there is still an element of irrelevancy in some duties. I will also put forth plausible enforceability mechanism advocating for governance strategies instead of regulatory strategies.

Bare reading of the text reveals that there are two kinds of duties on the directors as stipulated under section 166.

The first one is the typical, well-known duty of directors towards the company. There is no need to ponder over this because various case laws have already established the principles governing the field.

The second one is enumerated in Sec 166 (2) which advocates for duties towards environment, employees, and other stakeholders (assume them as minority shareholders for this paper and creditors). The magnanimity of the usage of the words ‘in good faith and in the interest of the shareholders and stakeholder’ might suggest to some that there are two duties on the directors. First is to promote objects of the company and the shareholders in good faith and second is that in good faith promote the interest of stakeholders. This could tempt us to conclude that the duties in recent decades have expanded to cover the stakeholders. This mistake can be done on plain reading of 166 (2). But this is not true because of the manner in which the courts have interpretated the directors’ duties. This is apparent because if all the duties were on the same pedestal and treated equally, we would not be grappling with the relevance of duties. The model that India adopts is more like ESV (Enlightened Shareholder Value) model of section 172 of the UK act 2006. In ESV model, there is a hierarchy according to which shareholders are given preference over the other stakeholders. So now we see there are three levels of duties: – towards company that is most serious, towards shareholders that is indirect, towards other stakeholders such as creditors and public interest in the form of towards environment that is still in nascent stage.

With respect to the duty towards environment, the goal of corporate entities is increasingly thought of as that of increasing overall social welfare by advancing welfare of stakeholders and shareholders.

Kraakman believes that the corporate arena could become a means to promote general welfare. But ESG (Environmental, Social, and Governance duty), at the end of the day imposes cost on the stakeholders and the company. The principal must bear cost of CSR (Corporate Social responsibility)/ESG decisions taken by the agents. This is not profitable (based on the Friedman doctrine) for the company. The CA read with the EPA (Environment Protection Act) yields no significant liability on the directors. There is no case where the directors were directly held responsible for the breach of vague environmental duties. The issue is taken so trivially that a report revealed that 37 large companies of India have not even revealed environment impact assessment. On the flip side, in UK in 2017 companies paid more than 1.5 million euros and some of the directors had to face criminal cases.

Even though as the case may be, I am not personally inclined to make the directors liable for the violation of ESG and CSR norms. It not only curtails their freedom, but also raises extremely complex questions such as, are the companies really the right entities on which this burden should be shifted? They are no expert and are neither interested in this responsibility. These duties are still there because of various economic, political, and other considerations that goes into formation of corporate laws. But the downside of passing essential functions of the state to the companies is that it would be popularly used by the directors as a tactic to appease everyone and make their products seem attractive to assuage populist movement. The government has tried to bring some relevance by introducing a CSR committee by 2020 amendment and giving more power to NGT (National Green Tribunal). Yet, I am also not inclined to hold a director responsible for breach of some duty that is not clear from text and is so general to include vague ideals. As Winfield note, “… where there is no [limited, identifiable] class, it is inherently unlikely that Parliament would have intended a duty, sounding in damages, to the public as a whole in the absence of plain words…”

Moving on to the creditors, the duties owed could become real when the company is in the vicinity of insolvency. In such a scenario, it seems that the directors’ duties extend to that of protection of creditors interest. This is satisfactory in my opinion because creditors come to the picture only when a default by the company takes place. It can easily be rectified by either getting a traditional remedy of secured creditor or through an insurance regime or a guarantor.

Now moving to the most relevant part of directors’ duties i.e., towards shareholders. Various case laws, provisions in CA 2013 (section 179), LODR (Listing Obligation and Disclosure Requirement, 2015)  rules may suggest that the duties owe an enforceable duty against the shareholders. If the company is doing good and the director is fulfilling his role, it is assumed that the shareholders are fine. But an extension of this argument is that the duty is often synonymous with the furtherance of the objects of company.  Owing to the controlled shareholding system in India, there is an agency cost between the controlling shareholders and the non-controlling shareholders. There is squeezing out and tunnelling as well that suggests that in India, equating company interests with shareholders interest can be problematic.

Now, the majority shareholders having controlling shares generally have sway on the decision-making capacity of the directors. Minority shareholders’ only recourse is to go to the court to get their rights enforced. The major inefficiency for any company arises between the principal and the agent known as the ‘agency cost.’ Whenever the shareholders approach courts, the transaction costs increase which also increase this agency cost. The recent trend is a post-crisis liability surge (example of recent plethora of cases such as Tata-Mistry debacle) and making directors personally liable for any damage caused. But the argumentation in courts is in terms of harm to the company and therefore to the shareholders. There is no direct breach in duty that the minority shareholders could allege against the directors to make them accountable.

This can be rectified either by using governance strategies or by using regulatory strategies. The methods already popular are all regulatory strategies.

Governance strategies can be agent constraining. One widely used strategy is the appointment of independent directors and nominated directors on the board. There is incentive/reward strategy in this whereby it is assumed that the profits these people make while being on the board will outweigh the personal or contractual benefits they aim at. Till they are properly compensated, their conscience will compel them to work for the benefit nominator and by using independent judgement, bring transparency and all interests of the shareholders. The shortfall of this strategy is that it has limited applicability. This emerges from the, firstly, case of Tata Consultancy Services Limited v. Cyrus Investments Pvt. Ltd, The judges there have withered down the capacity of independent directors. According to them, the aim of furthering the object of company is superior and in conflict as against shareholders interest, will always prevail.  Unequivocally, they held that since independent directors already are obligated under sec 149 to exercise independent judgment, non-independent directors’ duties under 166 (3) can be seen as present on lower threshold.

Secondly, in a recent survey it was noted that 65% of the shareholders have a distrust towards the independent directors.

Thirdly, these independent directors renumeration etc is paid up according to the decision taken by majority shareholders appointed directors. This can set off the benefit accrued by the incentive/reward strategy.

To make the duty of independent director more serious, we should consider UK type of model. Any appointment of such director must be voted separately for majority and minority shareholders. Then making these directors responsible for scrutinising the transactions. Mandatory disclosure, voting rights, decisions making rights etc can all be other strategies to make these directors more responsible towards the shareholders.

A drastic change can be in the form Netherlands newly introduced ‘structure regime’ and ‘two-tier board structure.’ There will be two boards of directors- Independent supervisory board and Affiliated supervisory board. Both these boards will be constituted according to the type of stake and relation the directors have with the company. One of the boards will consist of directors to carry audits and ensure informational symmetry for the benefit of the shareholders. The two-tier structure will ensure that there are at least two different deliberations and audits would be carried out on 2 fora. These methods could be successful governance strategies to make the directors directly liable to the minority shareholders.

Notably, we are grappling with a central issue in all these cases. It is that the whole idea of entitlement is to decide which side’s interest ought to be favoured. We do not want the might to be the right. But even after the enactment of section 166, the idea of might is right is tacitly recognised by the states. As Calabresi and Melamand argue that mere providing of entitlement to does not solve this problem. There should be protectional/ second order rules that has to be brought in section 166. If that is so, there should be proper remedy for all kinds of breaches. The personal remedy can be increased from Rs. 5 Lakhs and a proprietary remedy can be introduced. It will dissuade a director to take risk of breaching these duties.

There could be problem of over or underestimating the negotiation value if we bring in property regime. Hence, we should stick with the liability model. The idea of implementing it practically in current framework of 2013 act is given by Khanna and Varotill. The presence of two-tier board and independent directors will increase the Kaldor-hicks efficiency in every transaction and make the directors more liable and the duties more relevant.

To demonstrate this, let’s say there is a firm that invests 75 million to make a gain of 25 million in a deal where the controlling director’s (51% stakes) 18 million are invested in terms of time and money. For the controller it is a loss of 5.5 million which then would incentivise him to make up by breaching the duties owed towards stakeholders. The stringent liability rule (where the shareholders themselves are involved in decision making by statutorily mandated system) advocated for in this paper will deter the controlling director from breaching any duty. The result would be gain in the pie for the company and the shareholders and the director can make good his loss in the capacity of a majority shareholder or from subsequent transactions.


Satyarth k. Srivastava

Satyarth is a third-year (BA LLB, Hons.) student at National Law School of India University, Bangalore Karnataka. He has a keen interest in the corporate and the criminal world and is currently aiming to contribute more in these two areas. He is also the editor of the International Journal on Consumer Law and  Practice (IJCLP), currently the second Indian law journal to be indexed on Scopus.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

Create a website or blog at

%d bloggers like this: