What are the Fiduciary Duties of Directors in Indian Private Limited Companies?

With great benefits, every important office brings duties that are to be rightfully fulfilled. This article will give a clear picture of the fiduciary duties of directors in a private limited company.

Who is a Director?

A registered company is treated as a judicial person. To act on behalf of this person, a set of people or directors are appointed. These directors are usually appointed by the shareholders to perform on behalf of the company. Fiduciary Duties of Directors in Indian pvt ltd company.

How Many Directors Can a Private Limited Company Have?

A Private limited company has to have a minimum of 2 directors and can have a maximum of 15 directors, which can be increased by a special resolution. These directors are collectively said to be the ‘Board of Directors (BODs)’. An individual director cannot operate the company or make important decisions on his own unless such power is given to him through a special resolution.

What Is a Fiduciary Relationship?

It is a relationship of trust, confidence, and assurance between two parties. Some fiduciary relationships are  like those between a principal and agent, business partner and co-partners, and trustee and beneficiary.

What Are the Fiduciary Duties of Directors in an Indian Private Limited Company?

Before the enactment of the Companies Act, 2013 there was an absence of Codified law with duties of directors. The only exception was Section 291 which laid down the general powers of the Board of Directors. There was uncertainty over the cases and judgments involving the duties of directors. The Act codified duties of directors under Section 166 of the new Act as follows for private limited company registration:

1. Duty of loyalty

1. 1. The directors are obligated to make decisions and policies that are valuable to the company and are in the best interests of all the stakeholders.
   2. The director cannot delegate or assign his office to another person. Such delegated office shall be void.
   3. He has to act within the power bestowed upon him.

2. Duty of care and diligence:

1. 1. 1. The directors are to take utmost care while making decisions for the company.
      2. He has to perform his duties with skill and care.
      3. Their personal agenda or any other bias should not urge a conflict of interest while arriving at an important decision.  In other words, the decision made by him/her has to be upon independent judgment.
      4. They are to act with diligence while working on behalf of the company.
      5. There must always be careful scrutiny of the decisions made.

3. Duty of disclosure:

1. 1. The directors of a private limited company are supposed to reveal or disclose all their information.
   2. If the director has acted in accordance with his personal interest, he has to give full disclosure of the same to other stakeholders. Such information allows other shareholders, and directors to make the right vote and sue if necessary.
   3. The director must not attempt to achieve any undue gain or advantage to himself, or his friends and relatives. If found guilty, the director will be liable to pay an amount equal to that gain to the company after the company registration in india.

4. Duty to be vigilant:

1. 1. As the directors are the ones working on behalf of the entire company, they are expected to be responsible and cautious. Even the smallest mistakes committed by them could seem disastrous for the well-being of the organisation and its stakeholders.
   2. The director even after being retired from his directorship, must not reveal any private information outside.

What Happens if the Director Contravenes These Written Duties?

If a director of a private limited company acts opposite to the above-mentioned duties, he/she shall be punishable with a fine, not less than one Lakh Rupees up to five Lakh Rupees.

Conclusion:

As we all know that with great powers, come great responsibilities. A director while enjoying the powers of a higher office, must perform his fiduciary duties in full faith.