DIRECTORS’ CARE AND DUTY IN CASE OF BREACH
By V. Karthyaeni,
Gujarat National Law University
Nature of Responsibility for Liability of Corporations
Responsibility is an elusive term. It has many equally plausible definitions and the values it expresses differ from time to time, place to place. Indeed, it has been described so integral a part of human relationships that it, in its various meanings and shadings, serves as a synonym for every important political word.
In the context of corporate liability, an oft-cited opinion is the 18th century expression of Baron Edward Thurlow L.C. that corporations have no soul to be damned and no body to be kicked.
While the corporation is legally separate and distinct from its members, it is ultimately an artificial creation and it acts through its servants or agents. The decisions of a majority of its members in general meetings are regarded as the acts of the corporation. The Board of Directors, as a whole, is generally delegated all powers of the management and it may sub-delegate any of these powers to individuals directors or other servants and managers. There is a relationship akin to agency between the corporation and its board as well as the servants or agents that are delegated with specific responsibilities.
Traditional Approach to Corporate Liability- Directing Mind Theory
Traditionally, the approaches through which corporations may be said to incur liability for the acts of its directors or other employees are vicarious liability, agency and directing mind theory.
There were decisions like that of Lennard’s and Tesco Supermarkets which held that personal liability may be established against corporations where the reprehensible conduct or state of knowledge of an alleged infringement or wrongdoing was found in an individual or individuals who were identified as its ‘directing mind and will’ or alter ego. The essence of the traditional directing mind theory is that it is necessary for those individuals, whose position or function in the corporation are such that they are deemed to be its directing mind, to have committed the acts or possessed the requisite knowledge in order for it to incur personal liability.
Development of the Directing Mind Theory and the Principles of Attribution
The expression ‘principles of attribution’ has come to be associated with the decision of the Privy Council in Meridian Global Funds Management Asia Ltd v. Securities Commission. The notion of attribution is not a completely new concept. It is essentially a derivation of the traditional directing mind theory that was established in the cases of Lennard’s and Tesco Supermarkets. The idea is to identify the individual or individuals in a corporation whose conduct or state of knowledge is attributable to it where they are deemed to be the corporation whose conduct itself- its alter ego. It seeks to address the same principles as that of the directing mind theory i.e to enable to finding of the liability against the corporations, especially where the proof of which requires corporations to have acted reprehensively or entertained a particular state of mind.
The question of attribution is fundamental to company law, as a corporation can neither act nor think on its own. The damages and losses that result from the infringements or wrongdoings associated with corporations also reinforce the need to determine whether a corporation can undertake a prohibited action or entertain a culpable state of mind. At the same it is necessary to avoid the injustice of attributing to the corporation every act or omission of its servants or agents. Under the traditional directing mind theory and principles of attribution, it is through identifying the relevant individuals in the corporation whose conduct or knowledge are attributed to it in order for corporate liability to be established. Nevertheless, it is here that the similarity ends.
The difference with the principles of attribution, as expounded by Lord Hoffman in the Meridian case, is that they seek to provide a more systematic and coherent approach to determining liability of corporations. The Meridian case should be read with the cases of Lennard’s, Tesco Supermarkets, El Ajou and Ready Mixed Concrete cases where the principles of attribution were laid down.
Firstly, they recognize corporations as legal abstractions involving references to rules that determine its existence, powers and obligations.
Secondly, it is governed by its organs (the board of directors and shareholders in general meetings).
Thirdly, the fact that the corporation acts through its servants or agents does not mean that the conduct or state of knowledge of those individuals should be attributed to it in every circumstance. The nature of criminal and regulatory offences as well as civil infringements or wrongdoings also advances the need for rules to ascertain the instances where the corporation may be charged with personal responsibility. This is especially so since the claimant to satisfy the court that the corporation had caused a certain event or responsibility should be attributed to it for the existence of a certain state of affairs, and it had a defined state of mind in relation to the causing of the event or the existence of the state of affairs.
Therefore the directing mind theory and the attributive principles focus directors and officers running an enterprise making them liable for their acts. Hence the concept of directors liability is of ongoing interest in corporate circles.
2. Director of a Company
expression "director" includes any person occupying the position of
director, by whatever name called.[S.2(13)].
The Articles of a company may, therefore, designate its Directors as governors, members of the governing council or, the board of management, or give them any other title. However, so far as the law is concerned, they are simple Directors.
Corporate executives today are possessed of “immense power which must be regulated not only for public good but also for the protection of those whose investments are involved.” Directorships will always be susceptible to abuse. The law therefore, imposes upon them certain duties, which when, properly enforced, will, without driving away from the field competent men, materially reduce the chances of abuse.
2.1 BONA FIDES DOCTRINE
The English and Australian Courts long considered the bona fides doctrine and were geared more or less to arrest dishonesty or mala fides , but well entrenched of a reluctance to interfere with the internal management of companies acting within their powers. That the courts should develop such a reluctance to interfere in the exercise of director’s powers is not surprising for this was an area in which it was felt that the shareholders were seized of control, and that such matters were really for them. And so provided that directors of British and Australian companies acted bona fide in the interests of the company as a whole, it was felt that the shareholders had little cause for complaint.
2.2 PROPER PURPOSES DOCTRINE
The proper purpose test or as it is also referred as, the collateral purposes test allows directors acts to be reviewed by the courts upon a more objective basis than that which has been traditionally applied in relation to bona fides. Notwithstanding that the directors may have acted honestly in what they believe to be in the company’s interests, they may nevertheless be liable to the company if they have exercised their powers for purposes different from that for which the powers were conferred upon them. Strict adherence of the bona fides doctrine can permit too much of subjectivity in the directors’ decision-making process. The attractiveness of the proper purposes doctrine is that it introduces an objective element into the equation absent statutory interference. It is significant that the proper purposes doctrine has application where directors’ good faith is not challenged. 
It is however necessary to distinguish between an excess of authority and an act which pima facie is within the powers delegated to directors of British companies, but which they have abused by exercising for an improper purpose. Ascertainment of that purpose is a question of fact and the relevant question is whether the challenged power, ‘would have been exercised but for the presence of the impermissible purpose.
2.3 DEVELOPMENT OF THE PROPER PURPOSES DOCTRINE: AN ENGLISH PERSPECTIVE
The proper purposes doctrine, it must now be recognized as having evolved into a separate test to be applied in circumstances where prima facie the power complained of is within the scope of the directors’ authority, but which they have abused by exercising for an improper purpose; often, so as to manipulate control.
The following cases highlight how the proper purposes doctrine has evolved under the general law. The first is Fraser v. Whalley. The essential facts appear within the following extract from Page Wood VC’s Judgment:
“The directors are informed that at the next general meeting they are likely to be removed and therefore, on the very verge of a general meeting, they, without giving notice to anyone, with this indecent haste and scramble which is shown by the times at which the meetings were held, resolve that shares are, on the faith of this obsolete power entrusted to them for a different purpose, to be issued for the very purpose of controlling the ensuing general meeting.”
However, the case which probably more than any other gave recognition to a separate test over and above the traditional bona fides test was, Hogg v Cramphorn Ltd . In the case, the directors had issued shares with special voting rights to the trustees of a scheme set up for the benefit of the company employees in an attempt to forestall a takeover bid. While Buckley J, had accepted that the directors had acted in good faith, and they honestly believed that what they had done would benefit the company, his Lordship observed nonetheless that, ‘an essential element of the scheme, and indeed its primary purpose was to ensure control of the company by the directors and those whom they could confidently regard as their supporters. Buckley J, formed the view that the power to issue shares was fiduciary and if it was, ‘exercised for an improper motive, the issue of these shares is liable to be set aside.’ The issue of shares was accordingly declared invalid. However, since the directors’ breach of duty rendered their action voidable rather than void, it was capable of ratification by the shareholders in general meeting. The action was stood over and the allotment was later ratified. This decision had excited a measure of controversy in English and Australian Law.
It is well established that the onus of showing that a director has not acted honestly in the exercise of his or her powers and the discharge of his or her office is upon the aggrieved party. The point is well established in Hindle v. John Cotton Ltd where the House of Lords were asked to declare a resolution of the board void. Although the articles gave literal power to do what had been done, the House of Lords nonetheless granted the order sought. In doing so, Viscount Finlay outlined the nature of the task that the court must undertake as the following passage from his celebrated speech to the House of Lords demonstrates:
“Where the question is one of abuse of powers, the state of mind of those who acted, and the motive on which they acted , are all important and you may go into the question of what their intention was, collecting from the surrounding circumstances all the material which genuinely throw light upon that question of the state of mind of directors so as to show whether they were honestly acting in discharge of their powers in the interests of the company or were acting from some bye-motive, possibly of personal advantage, or for any other reason.”
Although isolated cases can be found where the bona fides test has been applied, the latter day English Courts have tended to promote, in preference, the proper purposes doctrine which found very clear favor with the Privy Council in Howard Smith Ltd v. Ampol Petroleum Ltd. In delivering its opinion in Howard Smith, the Privy Council reaffirmed the judiciary’s reluctance to interfere with, or even supervise, the merits of decisions within the powers of management honestly arrived at. But the Privy Council nonetheless considered that a court ‘is entitled to look at the situation objectively in order to estimate how critical or pressing or substantial or per contra, insubstantial an alleged requirement may have been.
The application of the proper purposes test in this manner therefore enables the directors’ decision-making to be challenged without necessarily condemning their motives for so deciding. That in turn, permits judges, of a more robust interventionist disposition, to consider the decision itself rather than simply the decision-making process; thus giving rise to the review of business judgments of business men, long considered anathema to the English and the Australian judiciary.
3.1 Duties of Skill and Care
Unless the Articles of the Company provide otherwise, the directors are responsible for the management of the company. They should exercise skill and care in carrying out their managerial functions. However, a mere error of judgment will not amount to a breach of the duty of care which a director owes to a company. A professionally qualified or expert person who is a director must however exercise his expert skill and knowledge for the company.
3.1.1 A Brief History of Duty of Care
In an oft-cited article, Professor Bishop wrote that “the search for cases in which directors of industrial corporations have been held liable in derivative suits for negligence uncomplicated by self-dealing is a search for a very small number of needles in a very large haystack." Up to that point (May 1968), he had found only four such cases. A more recent count (December 1983) brought the total to seven. By any reckoning, reported cases holding directors liable for purely "honest mistakes" are rare indeed.
One reason for the duty of care doctrine's twilight existence is that its greatest strength is also its greatest weakness: the enormous coverage of its negligence standard and then the application of “gross negligence” rule. Another manifestation of this judicial avoidance is the liberal application of the business judgment rule. It is well-noted that judges are very reluctant to interfere with the business judgments of directors. The business judgment rule has virtually en-gulfed the duty of care doctrine.
3.1.2 Liability for negligence
Fidelity alone is not enough. A director has to perform his functions with reasonable care. He has to attend with due diligence and caution the work assigned to him.
An early example is Overend Gurney & Co v Gibb where a company was formed to take over a private bank. Without investigating the value of the bank’s assets and the extent of its liabilities and with knowledge that the bank was in a state of insolvency, the directors paid ₤50,000 for goodwill. Still holding them not liable, the House of Lords laid down that there should be violation of either the Act or the memorandum or the transaction was such that no man of ordinary prudence would have entered into.
Directors may not know the nature of the company’s trade, because all that the law expects from them is that if they know they must use the knowledge for the benefit of the company. Accordingly the directors were held guilty of negligence when they participated in a transaction without trying to know whether the transaction was really for the purposes of the company or they were authorized by the Board in that respect, and it was no defence for any director to show that he believed that he was bound to sign because the other directors wanted it or that he joined under protest or that even without his joining, the other directors were determined to carry out the transaction.
Directors were also held liable where they released the company’s funds for paying the debt without trying to know whether anything was really due and for purchasing the assets without knowing whether there was any real transfer of those assets.
Liability for negligence also followed where without any board resolution being properly passed a single member was allowed to manage a part of the company’s business and he misconducted himself.
3.1.3 Exclusion of liability now not allowed [S.201] –
ROMER J’s formulation of directors’ duties in City Equitable Fire Insurance Company, Re
“His duties will depend upon the nature of the company’s business and the manner in which the work of the company is distributed between the directors and other officials of the company. In discharging these duties a director must exercise some degree of skill and diligence. But he does not owe to his company the duty to take all possible care to act with best care. Indeed, he need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience, or in other words, directors are not liable for mere errors of judgment.
In the above case one B was the director of City Equitable fire Insurance Co. the company was ordered to be wound up. A searching investigation of the affairs of the company was then made and this investigation showed a shortage of funds which the company should have been possessed of over ₤12,00,000. The collapse of the company was due to bad investments, bad debts and misappropriation. All the losses were due to B’s instrumentality. He was accordingly convicted for his funds.
But the question of whether during the period covered by B’s nefarious activities the other directors were properly discharging their duties to the company. But there was exemption clause in the articles to which the directors were liable only for gross negligence. The facts of the case did not disclose that the degree of negligence and, therefore, the case of the official receiver against B’s co-director failed.
S.201 renders void any provision in the company’s articles or in any agreement which excludes liability for negligence, default, misfeasance, breach of duty or breach of trust.
3.1.4 Standard and degree of care and skill-
The above ROMER J formulation is largely subjective, as a director has to use only such “skill as may reasonably be expected from a person of his knowledge and experience.” Traditionally, only gross negligence the directors used to be made liable. But the current trend is towards objectivity.
In the words of Justice CARDOZO”
“The diligent director is the one who exhibits in the performance of his trust the same degree of care and prudence that men prompted by self interest generally exercise on their own affairs.”
This standard demands reasonable business prudence form the managers.
Payment of ₤4000 without legal advice, as compensation to a director for retirement when, in fact, he was entitled to no compensation was, an act which could not be regarded as reasonable.
The directors of a company manufacturing car components were held liable because they failed to ensure that their company had established an efficient production system before commencing production and caused loss by paying wages, salaries and general overheads which were not matched by output.
Directors would decidedly be liable for omitting to do what they could have done in the circumstances. Where the president of an investment company improvidently invested in companies in which he was interested and caused loss, his fellow directors were held liable because they had left the investment of the company’s funds to the president’s unfettered discretion and exercised no supervision over him.
What seems to be now the leading case on director’s duty of care is the New York South Wales Court of Appeal decision in Daniels v Anderson wherein it was observed that the old cases, with their notions of subjective tests and gross negligence have become outdated. “The idea that the shareholders were ultimately responsible for the unwise appointment of directors led to the duty of care, skill and diligence, which a director owed to a company being characterized as remarkably low.”
One must look to see whether there are reasons of policy for saying that a director does not owe a duty of care to the company. The concept of negligence which depends ultimately upon a general public sentiment of moral wrongdoing for which the offender must pay can be adopted to measure appropriately in the given case whether the acts or omission of an entrepreneur are negligent.
The New Zealand Companies Act, imposes a new duty on the directors, not to engage in reckless trading. This expression is defined in the act as agreeing to cause or allowing conduct likely to create a substantial risk of serious loss to the company’s creditors.
The director is not liable for the misapplication of a cheque properly drawn, but before a director signs a cheque he should satisfy himself that a resolution of the director or of a committee of the directors has authorized such a payment. A director is not liable for omitting to claim a debt to the company, or to enforce a liability incurred before he joined the Board.
3.1.5 Special Statutory Protection against Liability [S.633]-
S.633 extends special protection against a liability that may have been incurred in good faith. Where it appears to the court that the director sued, “has acted honestly and reasonably, and that having regard to all the circumstances of the case….he ought to fairly to be excused, the court may relieve him either wholly or partly from his liability on such terms as it may think fit. Three circumstances must be shown to exist. The position must be such that the person to be excused is shown to have acted honestly, secondly, reasonably, and thirdly, having regard to all the circumstances he ought fairly to be excused. In Claridge’s Patent Ashphalt Co, Re,  a company was formed for the production of certain compositions of cement for making roads. Owing to great increase in motor traffic there was a profitable future in making roads and it was proposed that the company should embark upon this new business. After consulting the company’s solicitors, who advised that the scheme was not ultra vires, the directors applied the company’s capital, but the new business proved a failure.
They were sued for misapplication of funds but the court granted relief.
Similarly, in a case before the Orissa High Court, where the annual general meeting of a company could not be held in time on account of the dissolution at the material time of the Company’s Board of Directors by a court order, the court granted relief against liability for default.
Where a statement in the prospectus was that the company had 25 years of experience in its line of business, whereas the experience was that of the partnership which was taken over by the company and the business was commenced a bit late than what was stated in the prospectus, the directors were held not guilty of misrepresentation. Relief against prosecution was granted.
Relief was allowed where the directors could not hold AGMs and file annual returns, the failure being due to the takeover of the company by the Government and the matter being beyond their control.
The totality of the circumstances have to be examined for considering whether relief is to be allowed or not.
3.1.6 Duty to attend Board Meetings
Negligence by non-attendance-
If some persons are guilty of gross non-attendance, and leave the management entirely to others, they may be guilty by this means if breaches of trust are committed by others.
The defendants were directors of a trust company whose by-laws required monthly directors' meetings. A meeting was omitted because of the absence of several directors upon vacations. Losses resulted to the trust company which would have been prevented had the directors met and exercised proper supervision over certain loans. Held, that the directors are accountable to the trust company for such losses.
3.2 Fiduciary Duties
The common law, the Quebec Civil Code and
corporate statutes impose duties on corporate directors. One of these is a
fiduciary duty for directors not to place themselves in a position where their
duty to act in the best interests of the corporation conflicts with their
personal interests. This principle has been adopted by the Indian Courts wherein the directors are required to
act in the best interests of the company. They should not act in a way which
could result in a conflict between their own interests and those of the
company. Should such a conflict arise the director should make full disclosure to
and, in certain circumstances, obtain the approval of the shareholders in
general meeting. If this is not done, any profits made by the director in
breach of his fiduciary duty will be held on trust for the company, and are
recoverable by it.
By virtue of his position a company director will have control over the company's assets, so a director could also be in breach of his fiduciary duty if:
(a) he uses for his own benefit
information which he acquires in his capacity as director;
(b) if he disposes of corporate assets at an undervalue for purposes other than for the benefit of the company;
(c) if he diverts contracts to himself which had been offered to the company. Again there will usually be a liability to account to the company for any gain or, as the case may be, to indemnify it against any loss.
3.2.1 Liability for Breach of Trust-
Traditionally, the duties of directors fashioned out of common law as developed through the cases.
Good faith requires that all their endeavors must be directed to the benefit of the company. Thus where a director of a company, being also the member of another company, earned business from the other company by providing some business facility of his company, he was held liable to account for such profits, although the company had itself not lost anything and also could not have earned the bonus. Where a director was aware of the fact that the company’s property was being sold for ₤350,000 when its real value stood at ₤650,000, this was a breach of the fiduciary duty.
3.2.2 Business Opportunities-
A Director should not exploit his own use the corporate opportunities. In Cook v. Deeks the directors of a company diverted a contract opportunity of the company to themselves and by their votes as holders of three-fourth majority resolved that the company had no interest in the contract. It was held that the benefits of the contract belonged in equity to the company and the directors could not validly use their voting power to vest it in themselves.
On the same principle, where a director is instructed to purchase some property for the company, and he purchases the same for himself and then sell it to the company at a profit, he is clearly liable to account for the profit so made. As he was under an obligation to acquire the property for the company, the belonged in equity to the company from the moment he purchased it and could not have made a profit on its resale.
Supposing now he is not under any direction to purchase the property for the company, but purchases the property on his own account which is subsequently sold to the company at a profit. The Judicial Committee in Burland v. Earle answered that the company is entitled to claim for the profit.
A similar case in Thomas Marshall (Exports) Ltd v. Guinle, a company was importing foreign goods for resale in U.K. Its managing director formed a new import company and solicited orders on its behalf from the U.K. buyers. He imported goods from those very firms with whom he had established contact while acting for the company. He was restrained from this course of conduct. It was breach of service contract and also of the fiduciary duty.
In Fine Industrial Commodities Ltd v. Powling the demand for the company’s product had fallen. The director of the company knew of an alternative product for which there was demand and he also knew of the modification of the company’s plant and machinery which was necessary for that purpose. But, instead of doing that, he created a new company and obtained a patent of the new product in the name of his new company. He was held accountable for the profits. His knowledge of the product in demand and of the fact that the company’s plant and machinery could be modified for that purpose was considered by the court to be company’s knowledge.
Another parallel case is Cranleigh Precision Engineering Ltd v. Bryant, a director after resigning from directorship, formed a company with another person and embarked upon manufacturing a product which embodied his own earlier invention made by him while working for the company. He and his company were restrained from doing so.
3.2.3 When Director may make personal use of company’s opportunity-
“Where the corporation is insolvent and defunct, its officers are free to act for themselves, since such condition is ascertainable and not easily feigned. Where the opportunity is outside the scope of corporate business, or where the corporation has shown no interest in the property, an officer may buy for himself.”
3.2.4 Position on cessation of Directorship-
Industrial Development Consultants ltd v. Cooley, the Managing Director tried to get from the Gas Board a Government contract for the company. But the Gas Board plainly told him that the Government will not allow the contract to the company, but was willing to deal with him personally. He therefore, reigned from the company under the pretence of ill-health and then promptly obtained the contract for himself. Having earned a handsome profit, he had to face an action from the company to account for it.
The court held that the managing director had acted in breach of his duty and therefore, must account for it because the company grealt desired the contract and employed Cooley only in a bid to obtain it.
In contrast to this, in Peso Silver Mines case, a new venture was offered to the company and its directors bona fide come to the conclusion that it is not an investment that the company ought to make, the individual directors who subsequently buy the same do not violate any duty to the company even though they have consulted the company’s geologist. The directors here in good faith had rejected the opportunity to acquire the adjacent mines and then some directors used the opportunity.
3.2.5 Competition by Directors-
There is no breach of duty if a director competes with his company or olds some interest in the rival company or is a director in a competing company. But accountability will chase a director if he uses the company’s assets for the benefit of the rival concern and this includes its business connection, goodwill, trade assets and the list of customers.
If a company had given special training to a director, he may be restrained by the company from using those special skills for the benefit of the rival company.
3.2.6 Trading in Corporate Control –
“A director who acquires property while in office will, however, be liable to account for his profit upon resale if two elements are present. He must have acquired property only by reason of the fact that he was a director and in the course of the exercise of the office of director.”
3.2.7 Misuse of Corporate Information-
Exploitation of unpublished and confidential information belonging to the company is a breach of duty and the company can ask the director in question to make good its loss, if any. Any knowledge or information generated by the company is the property of the company, commonly known as intellectual property. Turn over of business, profit margins, list of customers, future plans, any personal use of such knowledge is equivalent to misappropriation of property. Use of such information can be restrained by means of an injunction. Any gain made by the use of inside information has to be accounted for to the company.
22.214.171.124 SEBI (Insider Trading) Regulations, 1992-
The Securities and Exchange Board of India has formulated Regulations for preventing and punishing the use of price sensitive unpublished inside information in dealings with the company’s securities.
Directors dealing with their own company’s shares is not illegal. It is considered desirable that the directors of listed companies should hold the shares of their companies. As apart the remuneration package, directors are often given share options which enable them to acquire shares in their company, which they may afterwards sell. When director decide to sell their shares however acquired or to buy more shares, their trading comes to be governed by the legislation on insider trading.. “If the director has access to unpublished price sensitive information, such as information on future earnings, figures, security issues, assets disposal and purchases, etc., which if it were made public would have a significant effect on the share prices, it is illegal for them to trade on such information.”
3.3. Tortious Liability of Directors: -
Directors as such are not liable for the torts or civil wrongs of their company. To make a person liable for a tort, e.g. for negligence, trespass, nuisance or defamation it must be shown that he was himself the wrongdoer or that he was the employer or principal of the wrongdoer in relation to the act complained of, or that the tort was committed on his instructions.
3.4. Statutory Liability: -
3.4.1 Misleading Prospectus-
A director is liable to compensate a person who has subscribed shares on the faith of a prospectus, which contained untrue statement. The Director should compensate every such subscriber for any loss or damage he may have sustained by reason of such untrue statement in an action in tort and also under section 62 of the Act to pay compensate. If the Director discovers a mistake in the prospectus, it is his duty to specifically point it out. The Director may also have to face criminal prosecution for untrue statement in the prospectus. He may be imprisoned for two years and fined Rs.5000.
3.4.2 Inducement to invest-
The Directors are liable to criminal prosecution for inducing or attempting to induce a person by statement or even forecast which is false or misleading to enter into or to offer to enter into any agreement to buy shares of the company. They shall be punishable with imprisonment for a term which may extend to five years, or with fine which may extend to Rs.10,000, or with both.
3.4.3 Maintenance of proper books of
Where directors manage a company then each director shall be responsible (if there is no managing director) that the company should maintain and keep proper books of account. Default or non-compliance will make the Director punishable with imprisonment for a term not exceeding six months or fine of Rs.100 or both. In the event of winding up, failing to keep proper accounts will make him punishable with one-year imprisonment and for falsification of book imprisonment for eight years.
3.4. Liability for Unauthorised Contracts
Whatever the extent to which either the company's Memorandum and Articles of Association or resolutions of the shareholders may seek to impose limitations on a director's powers, the directors can bind the company, or authorise others to do so, by entering into a contract with a bona fide third party.
The contract will (almost always) be binding on the company. To balance this, the directors may be held personally liable for any loss caused to the company as a result of the unauthorised transaction. The directors' actions can be ratified by a separate, special resolution of the shareholders, which will relieve the directors from liability.
If a director is actually a party or associated with a party to a contract with the company, and the directors have exceeded their powers, the company can avoid the contract, and require the director to account for his gain or indemnify the company for any loss it has suffered. Any director who authorised the transaction (whether or not a party to the contract) will be so liable.
3.5 Liability of Directors for Corporate Trustees for Breach of Trust
In First Trust Co. of Lincoln v. Carlsen, the defendants were officers and directors of the Lincoln Trust Company, which was acting as trustee for the holders of certain bonds secured by a mortgage. Among other things, the trust instrument provided that the Trust Company should foreclose whenever a breach of the conditions of the mortgage should occur. The mortgagors defaulted on interest payments, but the Trust Company nevertheless advanced the amount of the interest to the bondholders without notifying them that the mortgagors had defaulted, the concealment being apparently for the purpose of maintaining the market value of the bonds. In an action brought by the successor trustee against the officers of the original trustee (the original trustee itself being insolvent), heldy defendants were liable for damages for breach of trust in not foreclosing the mortgage and in not giving notice of the default.
The instant case presents a problem worthy of consideration in view of the growing use of corporations as trustees. A natural person acting as trustee is normally expected to perform the duties of the trust himself, and the law has placed rather stringent limitations upon any delegation of his duties.1 But in the case of the corporate trustee, it is obvious that all duties must be performed by the agents of the corporation. Thus, although there are problems as to liability of the agent where a natural person is permitted to delegate some of his duties as trustee, these problems become more acute in the case of a corporate trustee.
It might be well to begin the discussion of the liability of officers of a corporate trustee with a consideration of some fundamental principles of agency. It is well recognized that in a tort action an agent cannot set up his agency as a defense, as his principal cannot authorize him to do a tortious act. The agent will, therefore, be held liable whether or not his principal did in fact direct him to do the act. In case he did the act at the command of the principal, or in the ordinary course of his employment, the principal will be held liable along with the agent. But where the agent is acting outside the scope of his authority, and the principal used due care in the selection of his agent, the principal will not be held liable. The question then arises as to how these principles fit in with the corporate trustee picture. In the first place, it is important to note that an officer of a corporation is something more than an agent.
It has been said that when a corporation is acting through an officer, such officer "acts directly and in chief, and not by delegation." A federal judge has described the officers as "the moving force itself of the corporation." However that may be, the officers of a corporation occupy the position of agents so far as third parties are concerned, and may in general be treated as agents for the purpose of this discussion. It would seem, then, that the ordinary liabilities of an agent will attach to the officers of a corporation.
But added to the ordinary liabilities of an agent there are certain other claims of liability that arise by virtue of the fact that the agents here are not only corporate officers and therefore a very special kind of agent, but also are agents of a trustee. Since a trust relationship is involved here, there are certain duties of the corporation to the beneficiaries of the trust, for breach of which the corporation will be held liable.9 But are the officers as individuals liable for the corporate act?
We may start with the maxim of trust law that all who participate in a breach of trust are liable therefore. Since a corporation is an intangible being, it is inconceivable that it can act otherwise than through some human being. The acts of a corporate trustee, then, are those which its officers and directors say shall be the acts of the corporation. Thus, when the corporation converts to its own use funds held in trust by it or commits some other act in breach of trust, it must have done so because its officers and directors have so determined. Since the breach could not have occurred except through their connivance, it follows that the officers and directors have participated in a breach of trust, and are therefore liable under the aforesaid rule of trust law imposing liability upon those who so participate. Such is the rationale of the rule of liability of officers and directors of a corporate trustee, as shown by the decided cases.
The action of the officers in advancing the corporation's money to the bondholders with the purpose of deceiving them was affirmative and willful and in utter disregard of the interests of the bondholders.
The court has found in the instant case that the defendants acted fraudulently, that the purpose of their act was to promote the selfish interests of the corporation by maintaining a market for its bonds.
But from the authorities it would appear that the defendants would have been liable even if they had acted without fraudulent intent. Such is the direct holding of the Kansas court in Sweet v. Montfelier Savings Bank &Trust Co. In that case the trust company collected a note and
mortgage for the plaintiff and retained the amount so collected as a part of its own funds, using the money for its own purposes. The defendants, officers of the trust company, offered as a defense that they did not intend to keep the funds permanently for the use of the corporation, but intended to return them on demand, and they excepted to an instruction which failed to present to the jury the question of intent to defraud. 
Thus far the discussion has been confined to cases where the breach of trust by the corporation was committed through the connivance of the officers. What, then, is the liability of the officers if they do not actually participate in the breach of trust?
Suppose the officers know of a breach of trust by the corporation, but do not actually take part in it. Or suppose they know nothing about the breach, but could have discovered it had they exercised ordinary diligence. Or suppose they did not know about the breach and could not have discovered it even in the exercise of ordinary diligence. The Kansas court, in the first hearing of Sweet v. Montpelier Savings Bank & Trust Co., went into some detail in discussion of these problems. In that case the instruction was given that if subordinate employees committed acts of conversion of trust funds, the officers would be held personally liable, even in the absence of actual knowledge of the misappropriation, on the theory that they could have ascertained the fact of this misappropriation by the exercise of ordinary diligence. This instruction was held to be error. The court admitted that the officers would be liable for the conversion if the subordinate employees misappropriated with the knowledge of the officers, but refused to extend the rule to make the officers liable for mere negligence.
As to misappropriation with the knowledge of the officers, it is clear that the court was correct in holding that the officers should be liable. In principle, this situation is indistinguishable from actual participation by the officers. If the basis of the rule of liability is participation in breach of trust, it might be argued that the officers, not having participated, are therefore not liable. Such argument, however, loses sight of the basic consideration that the officers are in direct control of the corporation. The corporation, in this situation, is sitting idly by and watching funds held by it in trust be converted by its agents.
The officers had not actually, affirmatively, participated in the breach of trust, but having knowledge of the conversion and being in a position to prevent it, by virtue of their dominating position in the corporation, they may be deemed, by their failure to prevent the conversion, to have consented to it. They have given their consent to an unlawful act, to which they have no authority to consent. It is but one more step, then, to say that they are deemed to have participated in the breach.
From an examination of the cases, then, these
conclusions may be drawn as to the liability of officers of a corporate trustee
for breach of trust: (i) for a willful breach to the use of the corporation the
officers are clearly liable, on a basis of participation in breach of trust,
and because of their dominant position of control over the trustee corporation;
(2) their liability is not restricted merely to cases of misappropriation of
trust funds, but extends to all acts ordinarily treated as breaches of trust;
(3) that the officers did not intend to defraud the
cestui que trust is not a defence; (4) that a breach by other officers or employees with the knowledge of the defendant officers imposes the same liability upon the defendants as a breach in which they willfully participate; (5) that a breach by other officers or employees which is unknown to defendant officers but could have been discovered and prevented by due diligence may in some states impose liability upon the officers, but in the majority of states does not; (6) that a breach by other officers or employees unknown to defendant officers and which they could not have prevented by due diligence will not impose liability
upon the officers.
3.6. Other Forms of
A director may incur personal liability towards the company if:
(a) he acquires non-cash assets of the company
or the company acquires such assets from him (exceeding in value either
£100,000 or the equivalent of 10% of the company's assets), without also
obtaining the approval of the shareholders. The contract may be set aside, and
the company may recover any of its loss, or his gain, from the director;
(b) the company of which he is a director makes a loan to him (which is generally prohibited, although there are some exceptions). The transaction will be voidable and, again, the company may recover any of its loss or his gain (if any, arising out of any transaction for which the loan was used) from the director;
(c) the company makes a payment by way of compensation to a director for loss of office without details of it being disclosed to and approved by the shareholders. The payment is unlawful, and as such can be recovered from the director;
(d) a payment is made to him (by the company or some third party) on the transfer of the whole or any part of its undertaking by way of compensation for loss of office or in consideration of his retirement, again without shareholder approval. The payment is held on trust for the company and as such can be recovered from him.
3.6.1 Personal Liability of Directors for Corporate Mismanagement
The theory behind the imposition of directors’ personal liability is that the risk of being found liable will make directors more attentive to their legal obligations in managing the corporation. It is felt directors will be prompted to become more active in monitoring corporate compliance with the statutory requirements. Moreover, where a corporation has violated a statutory requirement, the liability of directors provides a means of punishing that violation.
The directors of a company incur a personal liability in the following circumstances:
Express liability will usually arise only when a director has personally guaranteed the performance of a contract. Implied liability will arise when a director signs a contract for the Company or mentioning the name but failing to add the vital word "limited" or its abbreviation. This rule rests on the ordinary principle of agency that where an agent enters into a contract without disclosing that he is acting as agent he accepts personal liability. In the case of Penrose v. Martyr a bill was addressed to a company and omitted the word "Limited" in describing it. The defendant (Secretary to the Co.) signed the acceptance and was held to be personally liable by the Court of Exchequer Chamber.
The extent to which a personal responsibility will be imposed upon directors is a matter of vital importance to the prospective director, the courts, and the investing public.
Directors are liable for fraud or gross dereliction of duty is an obvious consequence of the quasi trusteeship assumed. It is, however, in those "twilight zone" cases, where directors, being guilty of no fraud or gross negligence, have wrecked the corporation through their honest but reckless and, from a business standpoint, absurd mistakes of judgment that courts have divided.
The leading case in America on the liability of directors for mismanagement is Spering's Appeal, in which the opinion is by Justice Sharswood. In that case the financial depression after the Civil War, caused the failure of the National Safety Insurance Trust Company, a Philadelphia bank. The directors, in their effort to save the institution consumed the funds of the company in reckless and improvident investments; loans were made at usurious rates of interest in anticipation of large profits; collateral was sacrificed in a vain attempt to sustain credit; and, in the failure of the directors to assign at a time when a great part of the assets could have been saved, there was a lack of that reasonable business judgment on the part of the directors on which stockholders rely. An action was brought against the directors to recover damages resulting from the improvident investments sanctioned by the board. The court denied relief holding that directors are merely gratuitous mandatories and are to be held responsible to the corporation only where their breach of trust is of such a character as to warrant the imputation of fraud or gross negligence amounting to fraud.
In Spering's Appeal, so long as the directors act in good faith, and within the scope of their authority, they cannot be held responsible to the corporation "for honest mistakes of judgment no matter how reckless and absurd, when measured by the standard of reasonable prudence and ordinary business judgment.
The case of Hun v. Cary stands in dramatic contradiction to the rule laid down by Justice Sharswood in Spering's Appeal.
In Hun v. Cary,the trustees of an insolvent savings bank voted the purchase of an expensive lot in New York City as a site for a new bank building, hoping thereby to induce confidence in the financial standing of the institution and increase its deposits. The insolvent condition of the bank was known to the trustees at the time of the purchase, but there was no suggestion of bad faith on the part of the trustees, their purpose in making the purchase being the mistaken belief as to what constituted the best interests of the corporation. The charter empowered the corporation to purchase a lot requisite for the transaction of the banking business. The purchase was intra vires.
The court held that the facts justified a finding that the case was not one of mere error or mistake of judgment on the part of the trustees, but of improvident and reckless extravagance and that the trustees should be held liable for the loss occasioned by such action on their part. 
In both cases the improvident investment was made in the interest of the corporation; in both cases there was no suggestion of fraud; in both cases the act of the directors was within the powers conferred by the charter; but in Hun v. Cary the court held that honest but reckless improvidence in an intra vires transaction is the foundation of liability
In both cases the improvident investment was made in the interest of the corporation; in both cases there was no suggestion of fraud; in both cases the act of the directors was within the powers conferred by the charter; but in Hun v. Cary the court held that honest but
reckless improvidence in an intra vires transaction is the foundation of liability
Justice Potter speaking for the court, holding:
"Directors are trustees or quasi trustees of the capital of the company, and liable as trustees for any breach of duty with respect to the application of it. . . .
growing conception that directors occupy a fiduciary position with reference to the corporation,and that their liability is to be judged by standards applicable to express trusteeship.
Hopkins & Johnson's Appeal  where it was held that directors could not use their knowledge as to the solvency of the corporation to obtain a preference over other creditors, even though their debts were valid.
The rule precluding a director from obtaining any advantage or secret
profit as a result of his position is fundamental.
The rule of due care, referred to in Hun v. Gary, supra, should be applied to all directorate action and should be the measure of directorate liability whether the act complained of is intra vires or ultra vires, whether affirmative action, or the reckless and absurd exercise of judgment.
While a director owes fiduciary duties to the company, he owes no such duty to the shareholders. He does, however, owe to the shareholders - collectively, not individually. They could be liable for improper use of corporate assets that exist for the benefit of all shareholders or for favoring one group of shareholders over another in a takeover battle.
4.1 Liability for Infringement of Personal Rights
If the directors override the rights which the company's Articles confer upon the shareholders, by causing the company to act in a manner inconsistent with those rights, they will incur a liability, in damages, to the shareholders for procuring a breach of contract.
4.2 Statutory Liabilities
A director may incur liability for losses suffered by shareholders resulting from non-compliance with legislation. Examples include
(a) where shares are issued in breach of
the statutory pre-emption rights of the existing shareholders. Any director
responsible will be liable to pay compensation to any person suffering a loss;
(b) where there has been a misrepresentation in a prospectus inviting subscriptions for the company's shares. Any director responsible will, again, be liable to pay compensation;
(c) if, on a takeover, a payment is made to a director (by the company or a third party) for loss of office of in consideration of his retirement, without shareholder approval, any sum received by that director will be held on trust for the former shareholders, and as such recoverable by them.
(d) for any dishonest disclosure to the shareholders before they vote on a resolution.
4.3 Shareholder Derivative Suits
Securities class action suits—filed by shareholders when alleged negligence or fraud by a company's directors or officers leads to a loss of shareholder value. Suits against companies such as Enron and WorldCom have dominated the headlines, but virtually any public company can find itself targeted by disgruntled shareholders and their attorneys. a similar type of suit known as a shareholder derivative suit or derivative action. Derivative suits are filed by shareholders on behalf of a company. They allege that the company's directors or
officers violated one or more fiduciary duties owed to the company and its shareholders. Typically, plaintiffs don’t seek to extract monetary damages, but rather they seek to protect their long-term interest in the company by imposing corporate governance and management
changes. If there is a monetary recovery, it runs to the firm, not to the individual plaintiffs.
4.3.1 The Basis of Liability in Shareholder Derivative Actions
There are two broad categories of breach of fiduciary duty that underlie derivative actions: duty of loyalty and duty of care. Breach of duty of loyalty is typically easier to prove. Basically, duty of loyalty means that a director or officer may not profit at the expense of the company, but instead must put the company's interests first. Suits seeking relief under the duty of care theory allege that a company's directors or officers failed to manage corporate affairs honestly and in good faith. In either case, the burden is on the plaintiff to demonstrate a violation has occurred.
4.4.Directors Liability to Minority Shareholders
Directors who are investment bankers, venture capitalists, CEOs or CFOs should be aware that they may be called to a higher standard of “good faith” in reviewing a transaction’s economic fairness to minority holders where their financial
expertise gives them a unique ability to evaluate, and advocate against, unfair elements of the transaction.
The Delaware Court of Chancery, in its decision in the case In Re Emerging Communications, Inc., effectively raised the bar for a showing of good faith director conduct that will be sufficient to avoid director liability. The case also makes clear that a director with the financial expertise to know that a transaction is unfair may not rely on a fairness opinion alone to carry the burden of showing that the director acted in good faith.
Jeffrey Prosser indirectly held majority control of Emerging Communications, Inc. (ECM). He proposed a two-step going private transaction, resulting in a cash-out of ECM’s minority holders for $10.25 per share. Stockholders challenged the fair value of the merger in an appraisal proceeding and sought recovery based on a breach of fiduciary duty by the ECM directors. A special committee of ECM’s board had approved the transaction following limited negotiations and receipt of a fairness opinion from Houlihan Lokey Howard & Zukin (Houlihan), the committee’s financial advisor. The court reviewed the transaction for “entire fairness,” looking to the fairness of the price and whether Prosser and his affiliates had engaged in fair dealing with the committee and minority stockholders. The court determined that neither the price nor the course of dealings was fair. The court found that directors breached their duty of care and that Prosser and his affiliates, including his personal attorney (and ECM board member) John Raynor, had breached their duty of loyalty through self-dealing and failures to disclose. The court also found that ECM director Salvatore Muoio, an investment banker with “specialized expertise or knowledge” that was on par with that of Houlihan, had breached his duty of good faith because he “knew or had strong reasons to believe” that the proposed deal value was unfair, yet he failed to vote against the deal, make his concerns known to other directors on the record, or advocate that the Board reject the deal. Accordingly, the court ruled in favor of the plaintiffs in the appraisal proceeding (awarding them $38.05 per share plus interest) and found that Prosser, Raynor and Muoio were jointly and severally obligated to pay the minority stockholders approximately $77 million, representing the difference between the fair value of ECM determined by the court of $38.05 per share and the $10.25 cash-out merger price.
In the recent McMullin v. Beran, the recognized that the Board has special obligations to minority shareholders. The court stated that, in the absence of a majority shareholder, directors considering the sale of the corporation must diligently pursue the transaction offering the best value reasonably available for all shareholders. When a sale proposal instead comes at the behest of a majority shareholder, the duty of the directors is essentially the same — i.e., value maximization for all shareholders — but with a special obligation to protect the interests of the minority shareholders. The court held that, even though ARCO’s voting power made the outcome a forgone conclusion, the Chemical directors were required to perform a full analysis of the sale to determine whether the proposal would result in maximum value for the minority shareholders.
5.1 Liability on Contracts
Where the directors enter into a contract on behalf of the company, in the unlikely event of the company itself not being bound by that contract, the director may incur liability to the other party.
A director may likewise be liable under a contract made by him on behalf of the company: (a) where the contract was entered into pre-incorporation, or
(b) in respect of a transaction where the company's name has not been properly disclosed on the stationery relevant to that transaction e.g a cheque.
5.2 Potential Liability of Directors
for the Breach of Fiduciary Duty to Creditors
The primary duties of the directors of a solvent company are the duties of care and loyalty to the company and its shareholders. When the directors fulfill these duties, they are usually protected from personal liability. However, officers and directors of an insolvent company also owe fiduciary duties to creditors, and are under a heightened duty to maximize value in connection with the inevitable break up of the company. Although there are several different tests to determine insolvency, it is often hard to pinpoint when fiduciary duties to creditors arise. The conservative approach to complying with fiduciary duties to creditors is to assume that a company is in the zone of insolvency if there is any substantial doubt.
Once it is determined that a company is in the zone of insolvency, officers and directors are charged with a fiduciary responsibility of protecting the interests of creditors based on an "informed business judgment" standard of care. This usually involves taking appropriate actions designed to maximize payment of the company's outstanding creditors. Directors who fail to carry out this responsibility may be subject to liability for breach of fiduciary duty. For example, a claim of breach of fiduciary duty may arise when directors favor the interests of shareholders over creditors, engage in insider transactions, prefer one creditor over another creditor with an equally valid claim (make a "preferential payment"), or continue the business longer than is justified, thereby "wasting" the remaining corporate assets.
The directors of the A corporation, without giving notice to creditors, transferred all the corporate assets to the B corporation, which contracted to pay the debts of the A corporation. Later, the plaintiff recovered a judgment against the A corporation and, execution being returned unsatisfied, brought suit against the directors. Held, that the directors are liable. Directors, who have directly caused such a fraudulent conveyance without making proper provision for creditors, should be held responsible to the parties prejudiced thereby.
5.3 The Liability of Directors arising
on Corporate Insolvency
When a company goes into insolvent liquidation a director of the company may be exposed to a risk of personal liability.
Generally, in the event of liquidation, the liquidator has a duty to realise the assets of the company, but to do this he will have to investigate the affairs of the company, including the actions of the directors. If there has been any breach of statutory duty or there have been unlawful payments such as loans or compensation, the liquidator will claim against the director.
Specifically, there are a number of provisions in the Insolvency Act 1986 which provide for the potential liability of directors, both in the period leading up to liquidation and during the liquidation itself. These include the following matters.
(a) Fraud, etc in anticipation of
It is a criminal offence to conceal or destroy the company's property, books, records and the like within 12 months before insolvent liquidation (or up to 5 years if done with intent to defraud the creditors). The court may also order repayment, restitution or the payment of compensation by the directors;
(b) Concealment from, and failure to co-operate with, the liquidator.
It is a criminal offence not to hand over property, books, etc to the liquidator, or deliberately to make a false Statement of Affairs;
(c) Fraudulent trading.
If a liquidator proves that a company carried on its business with the intent to defraud creditors, the court may order the directors responsible to contribute to the assets of the company. This is also a criminal offence.
A director may be held criminally liable for any offence committed by the company, where he has aided, abetted, counselled, or procured the commission of the offence.
Just as individuals owe a duty not to harm or injure others in society without justification, so do companies owe a duty not to poison our water and food, not to pollute our rivers, beaches and air, not to allow their workplaces to endanger the lives and safety of their employees and the public, and not to sell commodities, or provide transport, that will kill or injure people.
On 19th July, 2005 the Supreme Court of India ordered the government to pay a remaining $325.5 million (15.03 billion rupees) due to Bhopal gas tragedy victims. The U.S. based Union Carbide Company, now owned by Dow Chemical Co., paid $470 million in compensation to victims in 1989. But distribution of most of that money was held up by bureaucratic disputes over the categorization of victims. At last on 19th July the victims or their representatives got justice 20 years after the tragedy took place.
In 2003 Supreme Court in Assistant Commissioner, Assessment-ll, Banglore & Ors. v. Velliappa Textiles Ltd & Anr. took the view that since an artificial person like a company could not be physically punished to a term of imprisonment, such a section, which makes it mandatory to impose minimum term of imprisonment, cannot apply to the case of artificial person. However, Supreme Court in 2005 in Standard Charted Bank v. Directorate Of Enforcement in majority decision of 3:2 expressly overruled the Velliapa Textiles case on this issue.
Charted Bank v. Directorate Of Enforcementt, appellant filed a writ petition before High Court Of
Bombay challenging various notices issued under section 50 read with section 51
of Foreign Exchange Regulation Act, 1973 & contended that the appellant
company was not liable to be prosecuted for an offence under section 56 of FERA
against the decision of High Court appellant filed a special leave before Supreme Court, contended that no criminal proceeding can be initiated against appellant company under section 56(1) of FERA Act, 1973 as the minimum punishment prescribed under section 6(1) (i) is imprisonment for a term which shall not be less than six months and with fine. Section 56 of FERA Act, 1973 read as follow:
56. Offences and prosecutions (1) Without prejudice to any award of penalty by the adjudicating officer under this Act, if any person contravenes any of the provisions of this Act (other than section 13, clause (a) of subsection (1) of section 18, section 18A, clause (a) of subsection (1) of section 19, sub-section (2) of section 44 and sections 57 and 58, or of any rule, direction or order made thereunder, he shall, upon conviction by a court, be punishable, -
(i) In the case of an offence the amount or value involved in which exceeds one lac of rupees, with imprisonment for a tern not less than six months, but which may extend to seven years and with fine:
Provided that the court may, for any adequate and special reasons to be mentioned in the Judgment, impose a sentence of imprisonment for a term of less than six months.
The question for consideration before court was:
Whether a company or a corporation being a juristic person, can be prosecuted for an offence for which mandatory punishment prescribed is imprisonment & fine
Prosecution is pre-requisite for inflicting any punishment. But it is natural when no punishment can be inflicted, no prosecution can be launched. So it is clear from Standard Charted case that prosecution can be initiated and fine can be imposed even when imprisonment is given as mandatory punishment with fine.
6.2 Law Commission Report
Law commission in its 41st report suggested amendment to section 62 of the Indian penal code by adding the following lines:
In every case in which
the offence is only punishable with imprisonment or imprisonment and fine and
the offender is the company or other body corporate or an association of
individuals, it shall be competent to the court to sentence such offender to
This recommendation got no response from the parliament and again in the 47th report, the law commission in paragraph 8(3) made again the above recommendation.
U.S. Supreme Court in
New York Central and Hudson River Rail Road Co. v. U.N  clearly held that a
corporation is liable for crimes of intent.
A director is not the agent of his
co-directors and the other officers of the company are not the agents of the
directors. Therefore, the fact that a particular director is liable to the
company for breach of duty does not itself render liable any other director of
the company. In the absence of negligence, a director is not liable for the
breach of duty by other directors of which he was ignorant.
However, where a director is under a duty of care, imposed by his contract or by the general law, to supervise the activities of another director and he fails to do so, or where he knowingly participates to some degree in or sanctions conduct which constitutes a breach of duty, he will be just as liable for those wrongful acts as the other director. A relatively slight degree of participation will suffice. 
The Act or Articles of Association of the Company may make a delegation of functions to the extent to which it is authorized. Also, there are certain duties, which may, having regard to the exigencies of business, properly be left to some other officials. A proper degree of delegation and division of responsibility is permissible but not a total abrogation of responsibility. A director might be in breach of duty if he left to others the matters to which the Board as a whole had to take responsibility. Directors are responsible for the management of the company and cannot divest themselves of their responsibility by delegating the whole management to agent and abstaining from all enquiries. If the latter proves unfaithful, the liability is that of the directors as if they themselves had been unfaithful.
incur liability, he must either be a party to the wrongful act or later
acquiesce (consent) to it. Thus, the absence of a director from meeting of the
Board does not make him liable for the fraudulent act of a co-director on the
ground that he ought to have discovered the fraud, except where he had the
knowledge or he was a party to confirm that action. The exception is set out in
Section 58AA(10)[inserted by the Companies (Amendment) Act,2000] which provides
if there is contravention of Section 58AA, all the directors and the company
shall be deemed to be guilty of the offence and liable to be prosecuted and
Where a director is made liable for the acts of a co-director, he is entitled to contribution from the other directors or co-directors who were a party to the wrongful act. However, where the director seeking contribution alone benefited from the wrongful act, he is not entitled to contribution.
Generally, a director has to perform his functions personally. He is bound by the maxim delegates non-potest delegare. Shareholders have appointed him because of their faith in his skill, competence and integrity and they may not have the same faith in another person. However, delegation is proper and valid in two cases;
Firstly, a delegation of functions may be made to the extent to which it is authorized by the Act or Articles of Association of the company.
Secondly, there are certain duties which may, having regard to the exigencies of business, properly be left to some other officials.
Directors must be able to entrust details of the management to the sub-ordinates or else the business cannot be carried on.however a total abrogation of responsibility is not permissible since this would the collective responsibility of the Board of Directors.
Now if a co-director or other official to whom a function is so delegated commits a fraud and the company suffers a loss, the extent to which the other directors are liable came up before the House of Lords in the leading case of Dovey v.Corey 
There are a number of ways in which a
director may be relieved from liability which would otherwise be incurred for
breach of duty.
8.1 Ratification by the Shareholders
Some breaches may be remedied through the director's conduct being disclosed to a general meeting and being ratified by the shareholders passing an Ordinary Resolution.
However, the following breaches of duty cannot thus be ratified:
(a) Any breach involving a failure of honesty
on the director's part;
(b) Any breach of duty which results in the company performing an act which it cannot lawfully do e.g by reason of some prohibition imposed by statute or the general law;
(c) Any breach of duty which results in the company performing an act not in adherence with the company's articles;
(d) A breach of duty bearing directly upon the personal rights of the individual shareholders;
(e) A breach of duty involving "fraud on the minority".
8.2 Ratification by Consent of all
The common law principle of unanimous approval by all the shareholders is effective in relieving a director from liability for any breach of duty, provided only that the breach does not involve fraud on its creditors and (probably) is not ultra vires the company, so far as that doctrine still exists.
8.3 Contractual Relief
Any contract between the directors and the company, or any similar provision in the Articles which attempts to exempt the directors from liability for negligence, default or breach of trust towards the company is void.
However, directors may exclude their liability to third parties by means of an express contractual provision or a disclaimer.
8.4 Judicial Relief
The court has power to relieve a director from some civil or criminal liabilities for negligence, default or breach of trust if it is satisfied that the director has acted honestly and reasonably and in all the circumstances he ought fairly to be excused.
This is not however available in respect of all defaults, in particular it is not available in a case of wrongful trading.
9.1 Limited Indemnity
The company can, in the following circumstances, indemnify a director in respect of his legal costs. This indemnity may be ex gratia, or it may be contained in the director's service contract or in the Articles.
The power to indemnify is limited to the following: (a) costs incurred by the director in successfully applying for judicial relief generally;
(b) costs incurred by the director in successfully applying for judicial relief re non-payment for shares by a nominee of the company.
However, the indemnification statutes cannot help outside directors in two respects. First, smaller corporations could not afford to indemnify their directors. Second, indemnification statutes did not relieve a director from personal liability for a breach of duty of care, even if the director otherwise had acted in good faith.
9.2 Be a Whistle Blower
For an independent director, the best way out before landing in a legal mess, of course, is to be a whistle-blower. To point out the minutest of irregularities and make sure they are recorded in the minutes of the meetings.
9.3 Liability Insurance for Directors
A director can obtain insurance to cover certain of his personal liabilities, including the costs of litigation in which he becomes involved in or arising out of his office. A company is permitted to pay the director's premiums on this type of policy.
Policies such as "Directors & Officers Policies", however, often exclude a number of important potential claims including claims arising from the director's breach of duty; claims arising out of intentional breach of contract on the part of a director; claims caused by the director's dishonesty; claims for bodily injury or property damage; claims arising from libel or slander; and any claims made by one director against another (although possibly not claims by the company against the director, depending on the policy).
It may in some cases be more effective for a director to obtain cover limited to legal expenses (not limited to successful defences).
9.4 Business Judgment Rule
Directors have historically been protected from personal liability against them by a legal principal known as the Business Judgment Rule. This legal principal shields corporate directors & officers by applying the rule for mistakes in judgment (i.e. second-guessing). As long as the director or officers has acted according to the duties of loyalty, obedience and diligence, then the director or officer may be protected by the Business Judgment Rule.
Judiciary had always been reluctant in intervening with “business judgment decisions” of directors. An example of this judicial distaste for "hindsight" adjudication of good faith business decisions is Kamin v. American Express Company. In Kamin, the defendant company had made a disastrous investment in another company, which could have resulted in a capital loss of $25 million had the shares in the target company been sold on the open market. Such a sale, however, would have resulted in an $8 million tax savings. Instead, the board of directors declared a "special dividend" pursuant to which the shares in the target company would be distributed in kind. The plaintiff shareholders challenged this distribution. The court, however, declared that "[t]he directors' room rather than the courtroom is the appropriate forum for thrashing out purely business questions. . . ,”
According to Delaware law, the business judgment rule provides a presumption that in making a decision directors were informed, acted in good faith and honestly believed that the decision was in the best interests of the corporation. Under this rule, the court will defer to the directors' decision and will not make a second-guessing about the decision.
In McMullin v. Beran, a minority shareholder of ARCO Chemical Company (Chemical) claimed that Chemical’s directors improperly delegated to the majority shareholder, Atlantic Richfield Company (ARCO), the responsibility for negotiating Chemical’s sale. The suit alleged that by failing to put in place certain procedural safeguards — such as asking the ARCO-related directors to rescue themselves — the Chemical directors did not adequately protect the interests of the minority shareholders. The Delaware Supreme Court found that the lower court improperly dismissed the complaint because the plaintiff had alleged facts that, if true, would rebut the "business judgment rule" presumption that generally protects corporate directors from liability.
The standard applied by the court was the business judgment rule, a legal presumption that corporate directors have acted on an informed basis, in good faith, and with the honest belief that they are acting in the best interests of the corporation. A plaintiff shareholder in a case against corporate directors must initially meet the burden of rebutting the presumption by providing evidence that the directors breached any of their fiduciary duties of due care, loyalty, and good faith. If the plaintiff fails to do so, the business judgment rule attaches and protects the directors from individual liability for the board’s actions. However, if the plaintiff shareholder succeeds in getting past this initial hurdle, the case against the directors may proceed with the burden shifting to the directors to prove the "entire fairness" of the transaction.
McMullin asserted that the Chemical board failed to exercise due care by allowing ARCO to negotiate without procedural safeguards in place to protect the interests of the minority shareholders, and by permitting ARCO to place its own restrictions through a cash-only offer requirement. Furthermore, the Chemical board met only once to consider the proposed transaction, and approved it based on representations made chiefly by ARCO’s financial advisor. As a result, McMullin alleges that the Chemical directors "rubber stamped" a transaction that sacrificed value that the minority might otherwise have realized. The court held that McMullin’s claims "suggest that the directors of Chemical breached their duty of care by approving the merger … without adequately informing themselves about the transaction and without determining whether the merger consideration equaled or exceeded Chemical’s appraisal value as a going concern."
Regarding the directors’ duty of loyalty to the corporation, the business judgment rule presumption is rebutted upon a showing of improper influence on the directors that compromised their ability to independently evaluate the proposed sale. The court held that the Chemical directors owed an uncompromising duty of loyalty to the minority shareholders and that "[t]here is no dilution of that obligation in a parent subsidiary context for the individuals who acted in a dual capacity as officers or designees of ARCO and as directors of Chemical." The plaintiff shareholder claimed that six of the twelve directors were employed by ARCO and two others had former affiliations with ARCO, and none of these conflicted directors abstained from the vote regarding the sale. The court held that the directors should be required to answer the well-pled loyalty allegations regarding the effects of the ARCO-related conflicts.
The court further found that due care, loyalty and good faith obligated the Chemical directors to disclose to the shareholders all information material to the proposed Lyondell transaction. Because McMullin’s allegations of significant omissions in the shareholder communications justify a detailed factual inquiry to determine their merit, the court held, the case was improperly dismissed.
9.4.1 Do we need a Business Judgment Rule?
There was a call from the business community of several countries for the enactment of the Business Judgment Rule. There was a considerable confusion on the exact nature of such a rule but the work of the American Law Institute on its Principles of Corporate Governance provided some clarification of the concept. This formulated the basic Business Judgment Rule
Such a rule exists under the case law of the various United States jurisdictions and has been codified in some of the States. In the ALI formulation the rule gives an immunity to the directors satisfy the three prerequisites.
There however had been growing pressures on the Courts to expect more of company directors. A few courts like Australia have begun to recognize the legitimacy of some degree of risk taking in business judgment.
Consistent with their view of the duty as a common law duty, their Honours thought that the law of negligence could accommodate differing degrees of duty subject to the ultimate test resting ‘upon a general public sentiment of moral wrong doing for which the offender must pay.’
The recent trend in the Antipodean case law in the insolvent trading cases has been increasingly rigorous and many of the cases have contained general statements which have been used by the courts in tightening the law on the duty of care. Such a rigour is in fact inconsistent with an increased recognition of the legitimacy of risk taking and United States style of Business Judgment Rule. On the other hand, judging by the United States experience, the introduction of the Business Judgment Rule without the tightening up of disclosure requirements and the effective policing of self-interested transactions could be disastrous for investors.
10. SEBI’s Clause 49 of Listed Companies
On January 1 2006, when India embraces SEBI's Clause 49 for listed compaanies, independent directors will come under the purview of a host of liabilities and governance parameters. What must they guard against?
• About 8.3 lakh Worldcom investors will get back $6.1 billion from investment banks, auditing firms and former WorldCom directors in settlements.
• Cendant Corp, the US travel and real estate service provider, paid $2.83 billion in investor settlement for unspecified accounting irregularities. Ernst & Young, the former auditor of CUC International, Inc., also agreed to settle allegations for $335 million.
• Time Warner will pay $2.4 billion and reserve another $600 million to settle investor claims in the failed merger with Internet firm America Online.
• Morgan Stanley will pay $188.9 million to Parmalat Finanziaria SpA. It spent $140 million on legal matters in Q2 2005, mostly on settlement negotiations
• Bank of America Corp. and FleetBoston Financial Corp. reached a record $675 million settlement with the Securities and Exchange Commission and New York Attorney General Eliot Spitzer over illegal mutual fund trading.
These are instances of only some of the corporate settlements in cases filed against company directors and companies worldwide. As India embraces its most stringent corporate governance norms till date for listed companies under Clause 49 on January 1, 2006, those planning to occupy the “independent director” position on company boards will face greater scrutiny and accountability.
While ringing in stricter corporate governance norms for Indian industry, Clause 49 also has major ramifications for senior management. Greater personal accountability, deemed knowledge of violations, distinct role of each director as against collective functionality of the Board, stricter monitoring and supervision required on the part of non-executive / independent directors are just some of them. The clause also widens the scope of claimants of corporate governance from shareholders and Investors to all stakeholders, including employees and regulators.
Independent directors are to play an active role in various committees to be set up by a company to ensure good governance. For instance, listed companies are required to set up audit committees of a minimum three directors, on which, two thirds should be independent directors. The audit committee, chaired by an independent director, shall inspect the company's financial statements and can also recommend replacement of the statutory auditor.
Directors & officers will be held liable for a host of reasons including misuse of corporate funds, false statements to government agencies, irregularities in securities issues, breach of duty to minority shareholders, imprudent expansion leading to erosion of shareholder wealth, employment irregularities/harassment, mergers &
acquisition, among others.
Says JJ Irani, chairman JJ Irani committee on corporate governance: “Under Clause 49, at present an independent director can even be held liable to the bouncing of a cheque. We are working on changing an independent director's liability to be restricted to that which is stated in the minutes of the meeting.”
But close association with a company's day to day functioning is not always possible for an independent director. He may be a member of more than one board and may also be running his own business or have other professional liabilities. Says Richard Elias, chairman, Hyperion insurance group, “outside directors are most vulnerable since they are not involved with the day to day running of the company. Unfortunately, if a suit is filed against them, they can be in trouble. For instance, the defense costs alone in the Equitable Life case ran to $ 40 million.” What more, with the Indian companies inviting foreign capital, listing on foreign exchanges and investing in foreign companies abroad, the independent directors may also be liable under laws of different countries. Says Praveen Vashishta, CEO and MD Howden India: “According to a US law, as soon as the total number of employees for a foreign company in the US crosses 300, the employees are treated as investors and they can avail of all investor rights. They can then sue the Indian board of directors for a breach, if any. This is just one of the instances of a director's liability in a rapidly globalising world order.”
11. Directors and Officers Liability vis-à-vis Adequacy of Protection under the Provisions of The Companies Act,
The introduction of clause 49 in the Stock Exchange Listing Agreement based on Corporate Governance Philosophy, the legislative changes in various enactments like SEBI Act, SEBI (Disclosure and Investor Protection) Guidelines and some recent landmark judgments by the High Courts and the Supreme Court based on the above have cast onerous responsibilities on the corporate functionaries, especially the Directors and key officers of the company. If one looks at the number of enactments under which a director of a company, executive and non-Executive alike, can be held directly liable for any act of negligence or default, he will find that the number is not less than 50. Apart from these statutory liabilities, a company director/officer can also be held liable for contractual obligations undertaken by the Company having his active involvement and for any tortuous liability.
So simply swap the role of the investor or dealer and step into the shoes of a Corporate Executive/Director and you will realize that in today’s era there is much more pressure on a Director or a key executive than what it used to be may be a decade earlier. Interestingly, the independent directors who otherwise used to enjoy substantial immunity under the pretext of being non-wholetime Director and being only a general advisor to the management on certain policy decisions, can no longer enjoy the same immunity under the modern corporate regime because of the exposure they face today. They can be sued even for certain defaults committed by the Company. In such eventualities their personal assets can be threatened. Add to this the continued media attention which any corporate litigation gets nowadays and one can really sense the complexity and gravity of the situation.
To understand this in a better perspective, let us refer to Section 292(1) (c) of the Companies Act, 1956 (hereinafter the “Act”) which confers borrowing powers on the Board of Directors of a Company. Subject to the provisions of the Memorandum and Articles of Association of the Company, the said powers can be delegated to individual Directors and also to agents other than Directors. Thus, generally speaking, whether the Director of a Company who incurs debts on behalf of the Company (even when the Company is in financial difficulty) can be held personally liable for such debts, would hinge mainly on the following :
(a) whether the Director in question has acted in good faith and in a bona fide manner in the interests of the company ;
(b) whether the Director has acted in accordance with his powers i.e. whether he was empowered to incur debts on behalf of the Company; and finally
(c) whether he has acted negligently in the exercise of his
Hence, if a Director has acted with due care, in a bona fide manner and within the bounds of his authority, he cannot be held personally liable for his acts. Where however, the debt has been incurred by a Director acting negligently, or in a mala fide manner, or even outside the scope of his authority, the Director may be held personally liable for such debt. Thus in the case of Weeks v. Propert it was held that a Director is liable if he negotiates a loan on behalf of his Company which results in the company exceeding the limits of his borrowing powers as fixed by the Memorandum of Association. Similarly, it was held in the case of Kundan Singh v. Moga Transport Co. Pvt. Ltd. that though there is no specific provision in the Companies Act making a Managing Director of a Company liable for company’s debts, such liability may be attributed to a Director by the application of agency principles to the transaction in question. There are several such sections under the Companies Act or in other Acts, where such liabilities can be fixed on the head of the
company and/or the director in question. The question thus arises is that whether there is any protection available to the Directors under the Act or elsewhere to guard the individual Director?
A careful reading of S.2(30) and S.5 suggests that in the absence of a specification of some Director or Directors as Officers responsible for the affairs of the Company, all the ordinary Directors are deemed to be “Officers in Default” in the event of failure to comply with statutorily prescribed obligations e.g. if no Director is specifically appointed as an “Occupier” under the provisions of the Factories Act, then any/all Directors, who are directly responsible for any particular offense under that act, can be dragged into litigation, if default is committed by the Company under the said act.
“Mens Rea” requires the prosecution to prove that the accused had guilty mind in committing an offence. However after the Companies (Amendment) Act, 1988, various provisions of the Companies Act, 1956 were amended and ‘mens rea’ no longer forms the part of the definition of the “Officer in Default”. Therefore ‘mens rea’ is no more an essential ingredient for establishing the offence in question and when there is a failure to comply with the statutory obligations, the failure is punishable summarily. That means prosecution need not prove that there was:
a) guilty mind
b) mala fide intention on part of the accused and c) the default was committed by the accused knowingly or willfully.
There are still a number of sections under the Act, which do not have the words “Officer in Default”, where guilty mind needs to be established. Besides the provision of “Officer who is in Default” several other Acts contain identical provisions for offences committed by the Companies. Interestingly, while deciding the cases for determining the liability, modern day courts award not the actual damages incurred by the aggrieved party but they take into consideration the ability of the Company to pay for such damages. Similarly all reasonable steps are taken to avoid the occurrence/claim is no longer a valid ground for escaping the liability. This is a paradigm shift from the earlier position.
PROTECTION UNDER THE COMPANIES ACT, 1956
There are certain sections under the Companies Act which provides some kind of protection/immunity to the Directors and Officers.
ADEQUACY OF SUCH PROTECTION
Although it appears from a general reading of these sections that protection and cover is provided to the Directors under the Act, how much adequate it will be under a peculiar situation when a particular Director passes through rough waters is to be seen. The main reason is that in all such circumstances the ‘onus’ or the ‘burden of proof’ for proving ‘innocence’ is always on that particular Director. If a Director/Officer is not provided adequate financial cover by the Company his personal assets will be at stake and this may tend to his becoming non-committal, non-functional as he will avoid taking any risk associated with his decision making, his advise and where his actions for which he will be made accountable or directly responsible are exposed to such risk. Now is the financial cover provided by the provisions of section 201, adequate? Facts suggest that the answer is “No”, primarily for the following reasons.
1. The Proviso to this section is relating to “indemnification” i.e. to enable the Company to indemnify against liability incurred in defense of any of its Directors/Officers only in the event of his having been found innocent or acted bona fide by the competent court and not in any other cases;
2. It would also appear that the Company cannot spend its own funds or give financial help to any Officer for defending him in any civil or criminal proceedings. It can only indemnify him is cases where he is successful in defending
action against him;
3. Although the definition of ‘Officer’ is an inclusive definition and includes in its purview, Directors, key executives (i.e. employees who have been charged with a particular responsibility), from the Company and auditors or authorized agents of the Company, it excludes such class as shareholders, creditors, third parties etc.
EXTERNAL PROVISIONS FOR PROTECTION
How does the Director/Officer protect himself or how does the Company assure him of his financial protection to achieve desired contribution from him? The answer to this lies in two things. First and foremost is adherence to the highest level of corporate governance and secondly the Directors and Officers Liability Insurance (D&O cover). Interestingly enough, Section 201 of the Act nowhere prevents the company from insuring its Directors/ Officers against potential liabilities undertaken by them and any loss likely to be incurred on that account. This fact itself is suggestive that the indemnity factor provided in the section is limited only to the successful defense of the action and as such it is not all pervasive.
How does the company or the Director ensure good corporate governance?
Apart from simply monitoring the Corporate Governance standards through disclosures made by the company, pursuant to Clause 49 of the listing agreement or otherwise, following 10 point programme would help a better governance and reduction of risk:
Continuously visit the corporate governance practices and to treat this as a continuous improvement area;
Make the maximum use of the Independent Directors in decision making process;
Hold meetings of Independent Directors without management’s presence;
Review and evaluate the performance of every individual Director on the Board, at least annually;
Set up a nomination committee for nomination of Director on the Board;
Increase the frequency of the meetings of audit committee, remuneration committee, nomination committee;
Investigate any warning sign;
Create/preserve a record supporting the investigation and generally helpful for the cause e.g. minutes of meetings,
important documents etc. ;
Provide for indemnification for every individual Director/Officer who is actively involved in the decision making process; Provide for D&O cover.
How does this help the Company and its Directors?
The insurance companies which provides the D&O cover, rate companies having the highest Corporate Governance standards, higher for providing the cover as it views such companies as less risky and accordingly the premium is on a lower side. This way the company is financially benefited. Courts in India also have taken liberal views while viewing allegations against Directors of such Companies, where they observe highest corporate governance standards.
DIRECTORS AND OFFICERS LIABILITY INSURANCE COVER
A standard D&O policy, apart from the regular features has following insuring clauses :
(a) The D&O section indemnifies the Directors and Officers for their wrong doings like wrongful acts, errors of judgment, negligence and ;
(b) The Company reimbursement section pays the Company for any money it has settled on behalf of the Directors and Officers. The coverage includes the damages awarded against the Directors and Officers and expenses incurred by the Company on litigation. A cover can be taken on ‘Occurrence’ basis or ‘Claims made’ basis.
An all inclusive D&O cover, covers subsidiary/associate/group Companies also.
The premium for this policy is dependant on the size, turnover, business activity, risk involved (e.g. as narrated above a Company following good corporate governance practice will attract lesser premium), ongoing litigations, nature of cover, add-on cover, riders so on and so forth.
To give an indicative example, ideally, a manufacturing Company, having operations mainly in India, following good Corporate Governance Practices and having a turnover in the range of Rs. 100 cr. to 250 cr. per annum, can take out a policy for its Directors and Officers carrying a cover of Rs. 5 cr., by paying an annual premium in the range of Rs. 2-3 lacs.
While summing up, it can thus be seen that while the modern day era burdens the Director/Officer of the Company with rigorous responsibilities, the Company of which he is a Director/Officer, with judicious planning and policy making, can relieve him of his financial and mental obligations to a greater extent by adhering to good corporate Governance Practices and protection of insurance cover.
A MORE INTERVENTIONIST APPROACH BY THE COURTS?
Indian companies are following the increased responsibilities and accountability on the part of the directors as that of the British companies. In the light of this the following concerns recently identified by the learned editor of The Company Lawyer are increasingly likely to be met:
“That high standards of directors should be enforced by the law we accept as fundamental. If an individual accepts that office and if there is then a failure in those standards, the office of director should not be available to that individual. Accordingly, it is important to ensure that those who become directors understand that they contribute to major decisions, are obliged to take an overview and are obliged to receive and have regard to information in enable them to take decisions”.
In such circumstances, and for such reasons, challenges are now being made to the English Judiciary’s traditional approach of non-intervention with the internal management of the companies. It is considered that today’s judges should be more alert for ulterior purposes of private advantage than were their predecessors. They should be prepared to intervene and interdict by reference to the real purposes which primarily motivate directors’ actions. Statements by directors of British companies about their subjective intention, whilst relevant, are no longer conclusive of their bona fides or of the purposes for which they acted as they did. It is suggested that the day when then the directors could shield themselves from scrutiny by asserting that they acted honestly and with good intention are gone.
Kirty P in Darvall v North Sydney Brick & Title Co Ltd (No.2)put the proposition in this way:
“Directors of corporations cannot immune themselves from a scrutiny of their purposes by asserting that they acted honestly and with good intention for this or that legitimate purpose. The purpose may be scrutinized by a court to see if this assertion should be accepted. The directors, cannot by dooming blinkers, ignore the plain facts disclosed to them and then assert that they acted bona fide in the best interests of the company. A more rigorous standard of conduct is required by law.
While the pre-eminence of the proper purpose doctrine, and its current resurgence with popularity with the English Courts, it is considered likely that the judiciary will become more vigilant and more involved in reviewing directors’ decision-making in order to determine whether in fact decisions which directors assert on oath, as having been made bona fide in the interests of the company as a whole, accord with a strict application of the proper purposes doctrine. Mere assertion of subjective honesty will no longer be considered enough to hold the day.
Although the cases are replete with caveats reminding judges not to second guess business decisions, when faced with allegations that those business decisions are improper, more and more are today’s judges obliged to test those decisions against objective criteria. It is inevitable that that will require the directors directors’ of British companies whose decisions are under attack to give evidence of their subjective intention in this regard. That in turn obliges the judges to step upon dangerous ground for proper purposes focuses upon the decision itself and ‘calls for a more interventionist line, reviewing the business judgments of business men.’
But as Ipp J in Permanent Building Society v Wheeler reminded us, the issue is, ‘not whether a management decision was good or bad: it is whether the directors acted in breach of their fiduciary duties. That involves an inquiry into, and a determination of, whether but for the improper purpose the directors would have performed the act impugned, it is suggested that tomorrow’s English courts will be increasingly prepared to conduct such an inquiry.
1. Companies Act, 1956
2. SEBI Clause 49 of Listed Companies
1. Rider,A.K,Barry., ‘The Realm of Company Law,’ A Collection of Papers in Honour of Professor Leonard Sealy, Kluwer Law International, The Hague, Netherlands.
2. Cheong-Ann Png., ‘Corporate Liability-A Study in the Principles of Attribution,’ Vol 13, Kluwer Law International, The Hague, Netherlands, 2001.
3. Arthur A.Pinto, Gustavo Visentini, ‘The Legal Basis of Corporate Governance in Publicly Held Corporations- A Comparative Approach,’ Vol 1, Kluwer Law International, The Hague, Netherlands, 1998
4. Demetra Arsalidou, ‘The Impact of Modern Influences on the Traditional Duties of Care, Skill and Diligence of Company Directors’ Vol 14, Kluwer Law International, The Hague, Netherlands, 2001
5. Bruce S.Butcher, ‘Directors’ Duties-A New Milennium, A New Approach?’,
Vol 7, Kluwer Law International, The Hague, Netherlands, 2000.
6. Halsbury’s Laws of England, 3rd Edn, Vol 6.
7. A.Ramaiya, ‘Guide to the Companies Act,’ Part 1, 16th Edn, Wadhwa &Company, Nagpur, 2006.
8. Pennington’s Company Law, 8th Edn, Oxford University Press, New Delhi, 2006.
9. Paul.L.Davies, Gower & Davies, ‘Principles of Modern Company Law’, 7th Edn, Sweet & Maxwell, London, 2003.
10. L V V Iyer, ‘Guide to Company Directors’ Powers, Rights, Duties & Liabilities’, 2nd Edn, Wadhwa & Company, Nagpur, 2003.
11. Avtar Singh, ‘Company Law,’ 14th Edn, Eastern Book Company, Lucknow, 2005.
12. A.K.Majumdar, Dr.G.K.Kapoor, ‘Company Law’, 9th Edn, Taxmann Publications (Pvt) Ltd, New Delhi, 2005.
1. “Corporations. Duties of Directors. Neglect Resulting from Absence upon Vacations” Harvard Law Review, Vol. 23, No. 4. (Feb., 1910), p. 309.
2. Corporations: Liability of Officers of Corporate Trustee for Breach of Trust, Michigan Law Review, Vol. 34, No. 6. (Apr., 1936), pp. 867-875.
3. Carter G. Bishop, ‘A Good Faith Revival of Duty of Care Liability in Business Organization Law’, Legal Studies Research Paper Series Research Paper 07-02 January 24, 2007
4. Aubrey L. Diamond, ‘Lifting the Veil?,’ The Modern Law Review, Vol. 38, No. 2. (Mar., 1975), pp. 198-200.
5. Thomas C. Lee, ‘Limiting Corporate Directors' Liability: Delaware's Section 102(b)(7) and the Erosion of the Directors' Duty of Care,’ University of Pennsylvania Law Review, Vol. 136, No. 1. (Nov., 1987), pp. 239-280.
6. Ross Grantham; Charles Rickett, ‘Directors' 'Tortious' Liability: Contract, Tort or Company Law?,’ The Modern Law Review, Vol. 62, No. 1. (Jan., 1999), pp. 133-139.
7. C. Brewster Rhoads, ‘Personal Liability of Directors for Corporate Mismanagement,’ University of Pennsylvania Law Review and American Law Register, Vol. 65, No. 2. (Dec., 1916), pp. 128-144.
8. Margaret Smith, ‘Directors Liability,’ Canadian Law and Government Division, 29 February 2000
9. Simon Johnson; Rafael La Porta; Florencio Lopez-de-Silanes; Andrei Shleifer, ‘Tunneling,’ The American Economic Review, Vol. 90, No. 2, Papers and Proceedings of the One Hundred Twelfth Annual Meeting of the American Economic Association. (May, 2000), pp. 22-27.
10. Marilyn R. Kaplan; J. Richard Harrison, ‘Defusing the Director Liability Crisis: The Strategic Management of Legal Threats,’ Organization Science, Vol. 4, No. 3, Focused Issue: The Legalistic Organization. (Aug., 1993), pp. 412-432.
C. TABLE OF CASES
1. Lennard’s Carrying Co.Ltd v.Asiatic Petroleum Co.Ltd: (1915) A.C.705, p.713
2. Tesco Supermarkets Ltd v. Nattrass. (1972) A.C. 153
3. Meridian Global Funds Management Asia Ltd v. Securities Commission (1995) 2 A.C. 705
4. Brlande v.Earle  AC 83
5. Clemens v.Clemens Bros Ltd  2 All ER 268
6. Darvell vs. North Sydney Brick & Title Co Ltd (No.2) (1989) 7 ACLC 659 at 676
7. Permanent Building Society v. Wheeler (1993-1994) 11 WAR 187 at 193.
8. Fraser v. Whalley (1864) 2 H&M 10
9. Hogg v. Cramphorn Ltd  Ch 254
10. Punt v. Symons & Company Ltd  2 Ch 506
11. Piercy v. S.Mills & Company Ltd 2 Ch 77 at 84.
12. Hindle v. John Cotton Ltd (1919) 56 Sc LR 625
13. Howard Smith Ltd v. Ampol Petroleum Ltd  AC 821
14. Brazilian Rubber Plantations and Estates Ltd, Re  1 Ch 425” 103 LT 697.
15. Selangor United Rubber Estates v. Cradock (No.3), 2 All ER 1073
16. Land Credit Co of Ireland v. Lord Fermay (1869) LR 3 Eq 7: (1850) 5 Ch App 763.
17. City Equitable Ins Co, Re, 1925 Ch 407
18. People v. Mancuso, 255 GY 463, 469.
19. Duomatic Ltd, Re  2 WLR 114 233 NY 103 USA.
20. Barnes v. Andrews, (1924) 298 F 614, USA.
21. Kavanangh v. Common Wealth Trust Co, (1918
22. Daniels v Anderson (1995) 16 ACSR 607
23. Claridge’s Patent Ashphalt Co, Re,  1 Ch 543: 125 LT 255.
24. S.L.Kapoor v. ROC,  1 Comp LJ 211 Ori
25. Progressive Aluminium Ltd v ROC, (1999) 95 Comp Cas 138 AP.
26. Gautam Kanoria v. Asst ROC, (2002) 108 Comp Cas 260 Bom
27. Charitable Corpn v Sutton, (1742) 26 ER 642
28. Official Liquidator vs. PA Tendulkar.
29. Bostan Drep Sea Fishing & Ice Co. v.Ansell, (1888) 39 Ch D 339
30. Cook v. Deeks  1 AC 554: [1916-17] ALL ER Rep 285
31. Burland v. Earle 1902 AC 83 : [1900-3] ALL ER Rep Ext 1452.
32. Thomas Marshall (Exports) Ltd v. Guinle 1979 Ch 227.
33. Fine Industrial Commodities Ltd v. Powling (1954) 71 RPC 253
34. Cranleigh Precision Engineering Ltd v. Bryant  3 ALL ER 289.
35. Peso Silver Mines Ltd v. Cropper, (1966) 58 DLR (2d) I.
36. London and Mashonaland ExplorationCo. V. New Mashonaland Exploration Co, 1891 WN 185.
37. Bell v. Lever Bros Ltd, 1932 AC 161
38. Industrial Development Consultants ltd v. Cooley  I WLR 443:  2 ALL ER 162.
39. Hivac Ltd v. Park Scientific Investments Ltd, 1946 Ch 169.
40. Regal Hastings Ltd v. Gulliver  1 All ER 378.
41. Boardman v. Phipps,  2 AC 46.
42. Salman Engg Co. Ltd v. Campbell Engg Co.Ltd, 1948 PRC 203
43. Trevor Ivory Ltd v Anderson [ 1992] 2 NZLR 517
44. First Trust Co. of Lincoln v. Carlsen (Neb. 1935) 261 N. W. 333.
45. Sweet v. Montfelier Savings Bank &Trust Co 73 Kan. 47, 84 P. 542 (1906)
46. R.K. Dalmia and others v. The Delhi Administration
47. Spering's Appeal ubi supra, at p. 24. '38 L J., Ch. 639 (1869). 82 N.Y. 65 (1880).
48. Turquard v. Marshall7
49. Hun v. Cary 78 Pa. 370 (1875).
50. Watt's Appeal,
51. Hopkins & Johnson's Appeal 90 Pa. 69 (1879).
52. John Crowther Group plc v Carpets International plc  BCLC 460).
53. In Re Emerging Communications, Inc.,
54. McMullin v. Beran 2000 WL 1741717 (Del. Supr. Nov. 20, 2000),
55. Darcy v. Brooklyn New York Ferry Co., 89 N. E. 461 (N. Y.).
56. Assistant Commissioner, Assessment-ll, Banglore & Ors. v. Velliappa Textiles Ltd & Anr. AIR 2004 SC 86
57. Standard Charted Bank v. Directorate Of Enforcement (2005) 4 SCC 50
58. H.L BOLTON (engg.) co. ltd v. T.J Graham and sons.
59. J.K. Industries v. Chief Inspector of Factories
60. Kamin v. American Express Company 2000 WL 1741717 (Del. Supr. Nov. 20, 2000),
61. Weeks v. Property (1873) LR 8 CP 427
62. Kundan Singh v. Moga Transport Co. Pvt. Ltd (1987) 62 Com Cases 600 (P&H)
D. ELECTRONIC DATA
 A.Widavsky, Responsibilities are Allocated by Cultures (1986), p.1
 The expression has become commonly associated with the intricacies of corporate accountability following the discussion in J.C.Coffee, ‘No Soul to Damn, No Body to Kick- An Unscandalised Inquiry into the Problem of Corporate Punishment’ (1981)
 The traditional directing mind theory is generally traced to the judgment of Viscount Haldane L.C’s in Lennard’s Carrying Co.Ltd v.Asiatic Petroleum Co.Ltd:
“A corporation has no mind of its own than it has a body of its own; its active and directing mind musy consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and the centre of the personality of the corporation. That person may be under the direction of the shareholders under the general meetings; that person may be the Board of Directors given to him under the articles of association, and is appointed by the general meeting of the company, and can only be removed by the general meeting of the company.” (1915) A.C.705, p.713
 The traditional directing mind theory was subsequently considered and approved by the House of Lords in Tesco Supermarkets Ltd v. Nattrass. (1972) A.C. 153
 (1995) 2 A.C. 705
 In Re, Forest of Dean Coal Mining Co, it was stated that ''function is everything; the name matters nothing.'' So long as a person is duly appointed by the company to control the company's business and is authorized by the Articles to contract in the company's name and, on its behalf, he functions as a Director
 William C.Douglas, Directors who do not Direct, (1934) 47 Harv LR 1305, 1307
 Brlande v.Earle  AC 83
 Justice Foster in Clemens v.Clemens Bros Ltd considered that a director must not only act within the powers but must also exercise them bona fide in what he believes to be the interests of the company.  2 All ER 268 at 280; Prentice D.D, ‘Restraints on the Exercise of Majority Shareholder Power’(1976) 92 LQR 502.
 Darvell vs. North Sydney Brick & Title Co Ltd (No.2) (1989) 7 ACLC 659 at 676; Permanent Building Society v. Wheeler (1993-1994) 11 WAR 187 at 193.
 Fraser v. Whalley (1864) 2 H&M 10
 The Law Commission in the recent report entitled Company Directors: Regulating Conflicts of Interests and Formulating a Statement of Duties,HMSO, London, Cm 4436, 1999 at para 5.19 is in favor of a dual objective/subjective test based on that enacted in Insolvency Act 1986 (UK) s214(4). In expressing its preference for the codification of such an objective/subjective standard, the Law Commission considers it important that regard should be had to the functions of the particular directors and the circumstances of their particular company. In this respect the Law Commission recommended that:
(1) a director’s duty of care and skill and diligence to his company should be set out in statute; (2) the standard should be set by a twofold objective/subjective test; and (3) regard should be had to the functions of the particular director and the circumstances (including size and type) of the company.
 Hogg v. Cramphorn Ltd  Ch 254
 Improper in the sense of, ‘beyond the scope of or not justified by the instrument creating the power.’ Vatcher v. Paull (1915) AC 372 at 378 per Lord Parker
 Darvell vs. North Sydney Brick & Title Co Ltd (No.2) (1989) 6 ACLC 154 at 174 per Hodgson J
 Wedderburn K.W., ‘Shareholders’ Control of Directors’ Powers: A Judicial Innovation?’ (1967) 30 MLR 77 at 83
 (1864) 2 H&M 10; Birds J R., ‘Proper Purposes as a Head of Directors Duties’ (1974) 37 MLR 580 at 586
 In Punt v. Symons & Company Ltd where the directors had issued shares with the object of creating a sufficient majority to enable to pass a special resolution depriving other shareholders of special rights conferred on them by the articles. In determining that the directors had acted improperly, Bryne J., had reaffirmed that directors must exercise their powers for company’s benefit. Although the power in question was primarily for the purpose of raising capital, his Lordships have recognized that there might be occasions where the directors could fairly and properly issue shares for other reasons. However, a limited issue of shares to secure the necessary statutory majority in a particular interest is not a ‘fair or bona fide exercise of the power.  2 Ch 506; Sealy L S, ‘Company Directors Powers- Proper Motive but Improper Purpose’
Similarly in Piercy v. S.Mills & Company Ltd, Peterson J, held that directors are not entitled to use their powers of issuing shares merely for the purpose of maintaining control or defeating the wishes of the existing majority of shareholders.  2 Ch 77 at 84.
  Ch 254
 Buckley J’s recognition in Hogg that subjective honesty of purpose was not always sufficient, launched proper purposes as a separate test. The Court of Appeal in Bramford v Bramford relied upon Hogg as an accurate statement of the law;  Ch 212; (1974) 48 ALJ 319 at 321.
 (1919) 56 Sc LR 625
 (1919) 56 Sc LR 625 at 630-631.
  AC 821. There the Privy Council was asked to consider whether or not the allotment and issue of shares to Howard Smith Ltd was to satisfy the need for capital or whether the directors’ primary purpose was to destroy the majority shareholding of Ampol Petroleum Ltd and another.
 The Nigerian Act set provisions on this aspect of directors duties:
“A Director shall act at all times in what he believes to be the best interests of the company as a whole so as to preserve the assets, further its business and promote the purposes for which it is formed and in such manner as a faithful, diligent, careful and ordinarily skilful director would act in the circumstances.” Section 279 (1) of the Companies and Allied Matters Act, 1990.
 (1872) LR 5 HL 480
 Brazilian Rubber Plantations and Estates Ltd, Re  1 Ch 425” 103 LT 697.
 Land Credit Co of Ireland v. Lord Fermay (1869) LR 3 Eq 7: (1850) 5 Ch App 763.
 Selangor United Rubber Estates v. Cradock (No.3), 2 All ER 1073
 City Equitable Ins Co, Re, 1925 Ch 407.
  Ch 407
 Supra note 21; directors are not liable for ignorance of trade practices.
 M.J.Trebilock, Liability of Directors for Negligence, (1969) 32 Mod LR 409.
 People v. Mancuso, 255 GY 463, 469.
 Duomatic Ltd, Re  2 WLR 114.
 Barnes v. Andrews, (1924) 298 F 614, USA.
 Kavanangh v. Common Wealth Trust Co, (1918) 233 NY 103 USA.
 (1995) 16 ACSR 607.
 S.M.Watson, Directors Duties in New Zealand, 1998 JBL 495 at 502.
 “The taking of business risks and allowing directors a wide discretion in matters in business judgment requires a sober assessment by directors as to the company’s likely future income stream. Given current economic conditions, did the directors make reasonable assumption in their forecasts of future revenue? Creditors are likely to suffer serious losses if future outflows of cash exceed the cash inflows for the same period. If there is no profit margin on the goods being sold or services provided the company will reach a stage where the shareholders’ risk capital has been exhausted and directors are instead using resources otherwise available to meet all creditors’ claims. In those circumstances, the company should have stopped trading. To continue trading is to risk creditors’ money.” Ross.M, Directors Liability and Company Insolvencies-the New Companies Act,  Commerce Clearing House, 98.
  1 Ch 543: 125 LT 255.
 S.L.Kapoor v. ROC,  1 Comp LJ 211 Ori
 Progressive Aluminium Ltd v ROC, (1999) 95 Comp Cas 138 AP.
 Gautam Kanoria v. Asst ROC, (2002) 108 Comp Cas 260 Bom
 Charitable Corpn v Sutton, (1742) 26 ER 642
 Kavanaugh v. Commonwealth Trust Co., 118 N. Y. Supp. 758 (Sup. Ct.).
 Our Supreme Court has considered this issue of fiduciary liability. It has been observed in Official Liquidator vs. PA Tendulkar.
 The Nigerian Act contains the following provisions on the point:
“A Director of a company stands in a fiduciary relationship with the company and shall observe the utmost good faith towards the company in any transaction with it or on in itself.”
 Bostan Drep Sea Fishing & Ice Co. v.Ansell, (1888) 39 Ch D 339
  1 AC 554: [1916-17] ALL ER Rep 285.
 1902 AC 83 : [1900-3] ALL ER Rep Ext 1452.
 Ibid; “It is one thing if a director sells a property to the company which in equity as well as at law is his own. It would be quite another thing if the director had originally acquired the property which he sold to the company under the circumstances which made it in equity the property of the company.”
 1979 Ch 227.
 (1954) 71 RPC 253
  3 ALL ER 289.
 Peso Silver Mines Ltd v. Cropper, (1966) 58 DLR (2d) I.
  I WLR 443:  2 ALL ER 162.
 Supra, note 10
 London and Mashonaland ExplorationCo. V. New Mashonaland Exploration Co, 1891 WN 185.
 Bell v. Lever Bros Ltd, 1932 AC 161
 Hivac Ltd v. Park Scientific Investments Ltd, 1946 Ch 169.
In Charlesworth and Cain, COMPANY LAW, 406 (13th Edn 19987):
“Under the general law, apart from the case where a director has a service contract with the company which requires him to serve only the company, there is authority to the effect that he may become the director of a rival company, i.e., in this way he may compete with the first company, provided that he does not disclose to the second company any confidential information obtained by him as a director of the first company and that what he may do for the second company, he may do it for himself or for the rival firm….He must not subordinate the interests of the first company to those of the second…”
 Regal Hastings Ltd v. Gulliver  1 All ER 378. It was held that the directors were in a fiduciary relation to the company and liable, therefore, to repay to it the profit they had made on the shares.
 Boardman v. Phipps,  2 AC 46.
 Salman Engg Co. Ltd v. Campbell Engg Co.Ltd, 1948 PRC 203.
 David Heller and Andrew Marshall, The Timings of Directors’ Trade in the United Kingdom and the Model Code, 1998 JBL 454.
 In Trevor Ivory Ltd v Anderson. In his Honour's view, a director is not personally liable for torts committed on behalf of the company because of the combined effect of the company's separate existence and the doctrinal process by which the company acts. While directors may act as the agents of the company, in appropriate circumstances the directors' actions, knowledge and intention will be directly attributed to the company and treated as if they were the acts, knowledge and intention of the company itself. The special treatment of directors thus arises because the tortious act is not that of the director, but of the company itself. [ 1992] 2 NZLR 517, 526-527.J. Farrar, The Personal Liability of Directors for Corporate Torts' (1997) 9 Bond LR 102, 108; R. Grantham, 'Company Directors and Tortious Liability' (1997) CLJ 259, 262.
 (Neb. 1935) 261 N. W. 333.
 The court, through Graves, J., said:
"When the managing agents of a trust company mingle money collected for another with the current funds of the company, for use in its business, in violation of the express directions of the owner to remit, or knowingly permit their subordinates so to do, and the fund is thereby lost, such agents will be personally liable to the owner therefor, although at the time of such misappropriation it was the intent of such managing agents to account for and return the money to the owner upon demand.
". . . The rapidly increasing volume of important business transacted between persons widely separated from each other, wherein trust companies and similar agencies are necessarily employed, demands that the officers of such agencies be held to a strict performance of the duties confided to them...."
 73 Kan. 47, 84 P. 542 (1906) ; this case is a
rehearing of 69 Kan. 641, 77 P.
 The court, discussing the rule as to liability for negligence, said:
"It is a well-known fact that much of the business of this day and age is transacted by corporations, many of them employing numerous persons in the various departments of the work in which they are engaged. Large amounts of money and property are daily handled by the employees of such corporations. The instruction complained of casts upon the executive officers and managing agents of such corporations an unreasonable degree of liability. It would be a great hardship to hold them liable for acts of misappropriation of money or property by subordinates of which they had no actual knowledge. ..."
 In R.K. Dalmia and others v. The Delhi Administration it was held that "A director will be personally liable on a company contract when he has accepted personal liability either expressly or impliedly. Directors are the agents or the trustees of a Company."
 Spering's Appeal ubi supra, at p. 24. '38 L J., Ch. 639 (1869). •82 N.Y. 65 (1880).
The court, speaking through Mr. Justice Sharswood, concluded that
"While directors are personally responsible to the stockholders for any losses resulting from fraud, embezzlement or wilful misconduct or breach of trust for their own benefit and not for the benefit of the stockholders, for gross inattention and negligence by which such fraud and misconduct has been perpetrated by agents, officers or co-directors, yet they are not liable for mistakes of judgment, even though they may be so gross as to appear to us absurd and ridiculous, provided they are honest and provided they are fairly within the scope of the powers and discretion confided to the managing body."
In the course of the opinion the famous English case of Turquard v. Marshall7 is cited with approval. In that case Lord Hatherly, speaking of a loan by the directors of a corporation without security, says:
"It was within the power of the deed to lend to a brother director, and, however foolish the loan might have been, so long as it was within the power of the directors, the court could not interfere and make them liable. They were entrusted with full powers of lending the money. It was part of the business of the concern to trust people with money, and their trusting to an undue extent is not a matter with which they could be fixed, unless there was something more than that alleged, namely, that it was done fraudulently and improperly and not merely by a default of judgment. Whatever may have been the amount lent to anybody, however ridiculous and absurd it would seem, it is a misfortune for the company that they chose such unwise directors; but as long as they kept within the powers of the deed, I could not interfere with the discretion exercised by them."
 82 N.Y 65 (1880)
 Hun v. Cary, but its soundness squarely denied. In referring to that case he says:
"In Spering's Appeal, Justice Sharswood said that directors 'are not liable for mistakes of judgment, even though they may be so gross as to appear to us absurd and ridiculous, provided they were honest, and provided they are fairly within the scope of the powers and discretion confided to the managing body.' As I understand this language I cannot assent to it as properly defining to any extent the nature of a director's responsibility. Like a mandatory, to whom he has been likened, he is bound not only to exercise proper care and diligence, but ordinary skill and judgment. As he is bound to exercise ordinary skill and judgment he cannot set up that he does not possess them."
 78 Pa. 370 (1875).
 90 Pa. 69 (1879).
 This principle does not prevent a director from
enforcing his security or issuing execution
where his preference was not the result of an advantage due to his position
and the transaction was fair.
 2000 WL 1741717 (Del. Supr. Nov. 20, 2000),
 "Under the circumstances presented in this case, although the Chemical board could not effectively seek an alternative to the proposed Lyondell sale by auction or agreement, and had no fiduciary responsibility to engage in either futile exercise, its ultimate statutory duties … and attendant fiduciary obligations remained inviolable,"
 Darcy v. Brooklyn b° New York Ferry Co., 89 N. E. 461 (N. Y.).
 ] JT 2005 (5) SC 267; (2005) 4 SCC 50
Balkrishanan J. in majority opinion held:We hold that there is no
immunity to the companies from prosecution merely because the prosecution is in
of offences for which punishment prescribed is mandatory imprisonment. We overrule the views expressed by the majority in Velliappa Textiles on this point. At p. 293 JT 2005 (5) SC 267; (2005) 4 SCC 50
In H.L BOLTON (engg.) co. ltd v. T.J
Graham and sons. Lord Dening Observed:
A company may in many ways be likened to a human body. They have a brain and a nerve centre, which controls what they do. They also have hands, which hold the tools and act in accordance with directions from the centre. Some of the people in the company are mere servants and agents who are nothing more than hands to do the work and cannot be said to represent the mind or will. Others are directors and managers who represent the directing mind and will of the company and control what
they do. The state of mind of these managers is state of mind of company and it treated by law as such. So you will find that in case where the law requires personal fault as a condition of liability in tort, the fault of the manager will be the personal fault of company.
 It was held in the case of J.K. Industries v. Chief Inspector of Factories that the directors being in control of the company’s affairs cannot get rid of their managerial responsibility by nominating a person as the occupier of the factory. The rule is, however, not inflexible
 1901 AC 477
 The doctrine of indemnification is well reflected in Section 145 of the DGCL, which authorizes Delaware corporations to indemnify directors, and persons serving in such capacity for other entities at the request of the corporation. The law distinguishes between indemnification in third party actions and stockholder derivative actions. Based on that, the law also distinguishes between mandatory indemnification and permissive indemnification. In either type of suit, if the director is "successful on the merits or otherwise in defense of any action, suit or proceeding," section 145(c) requires that the corporation indemnify him.
 According to industry figures, India has only about 300 D&O (directors & officers) policies at present. Says Tata-AIG's Verma, only 5 to 7 % of all listed companies have D&O liability at present. Compare this to US where D&O claims form 70 % of the total claims posted in the US. In Israel this figure lies in the 50 to 70 % region while UK has 50 % of all claims as D&O claims. The respective figure for India is just 3%. Says Vinayak Chatterjee, independent director on SRF Limited board: “I have bought the policy as all other directors were buying it. There were no other reasons or risk perception when I was purchasing the cover.”
 The Delaware model of D&O insurance is followed by most jurisdictions. The model declares: "A corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director…whether or not the corporation would have the power to indemnify him against such liability under this section."
Under the US law, it is against public policy to insure a director against liability for his own intentional wrongdoing. D&O insurance policies are not obtainable for anything more serious than negligent misconduct. In this respect, it is not different from other insurance such as doctors' and lawyers' malpractice insurance.
 2000 WL 1741717 (Del. Supr. Nov. 20, 2000),
 Farrar,J.H, ‘Corporate Governance, Business Judgment and the Professionalism of Directors’ , 1993, 6, p.1
 Principles of Corporate Governance: Analysis and Recommendations, Final Report, Part IV
 ‘A Director or officer who makes a business judgment in good faith fulfils the duty under this section if the director or officer (1) is not interested in the subject of the business judgment; (2) is informed with respect of the subject of the business judgment to the extent to the director or officer reasonably believes to be appropriate under the circumstances; and (3) rationally believes that the business judgment is in the best interest of the corporation’.
 In the words of the majority in Daniels v. AWA Ltd, ‘the courts have recognized that the directors must be allowed to make business judgments and the business decisions in the spirit of enterprise untrammeled by the concerns of a conservative investment trustee. Any entrepreneur will rely upon variety of talents in deciding whether to invest in a business venture. These may include legitimate but ephemeral, political insights, a feel for future economic trends, trust in the capacity of other human beings. Great risks must be taken in the hope of commensurate rewards. If such ventures fail, how is the undertaking of it to be judged against an allegation of negligence by the entrepreneur…?’
 Debroh A.De Mott, ‘Directors’ Duty of Care and the Business Judgment Rule, Bond LR, 1992.
 (1873) LR 8 CP 427
 (1987) 62 Com Cases 600 (P&H)
 Section 2(30) provides that the term “Officer” shall include any “Director, Manager or Secretary or any other person in accordance with whose directions, the Board of Directors or any one or more of the directors is or are accustomed to act”.
 Section 5 prescribes who is an “Officer who is in default” for the purpose of other provisions under the Act. The said section stipulates that an “Officer who is in Default” means all of the following Officers :
1. Managing Director/s
2. Whole time Director/s ;
4. Company Secretary ;
5. Any person according to whose direction/instruction the Board is accustomed to act ;
6. Any person charged by the Board with the responsibility with that provision and that person have given his consent.
7. Where there are no Managing Director and Whole time Director or Manager, any Director specified by the Board, or if not so named then all the Directors
 S.201Avoidance of provisions relieving liability of Officers and Auditors of the Company : Section 201 (1) “Save as provided in this section, any provision, whether contained in the articles of a Company or in an agreement with a Company or in any other instrument, for exempting any Officer of the Company or any person employed by the Company as auditor from, or indemnifying him against, any liability which, by virtue of any rule of law, would otherwise attach to him in respect of any negligence, default, misfeasance, breach of duty or breach of trust of which he may be guilty in relation to the Company, shall be void ;
Provided that a Company may, in pursuance of any such provision as aforesaid, indemnify any such Officer or auditor against any liability incurred by him in defending any proceedings, whether civil or criminal, in which judgment is given in his favour or in
which he is acquitted or discharged or in connection with any application under section 633 in which relief is granted to him by the Court”.
 Section 633
(1) “If in any proceeding for negligence, default, breach of duty, misfeasance or breach of trust against an Officer of a Company, it appears to the Court hearing the case that he is or may be liable in respect of the negligence, default, breach of duty, misfeasance or breach of trust, but that he has acted honestly and reasonably, and that having regard to all the circumstances of the case, including those connected with his appointment, he ought fairly to be excused, the Court may relieve him, either
wholly or partly, from his liability on such terms as it may think fit:
Provided that in a criminal proceeding under this sub-section, the Court shall have no power to grant relief from any civil liability which may attach to an Officer in respect of such negligence, default, breach of duty, misfeasance or breach of trust.
(2) Where any such Officer has reason to apprehend that any proceeding will or might be brought against him in respect of any negligence, default, breach of duty, misfeasance or breach of trust, he may apply to the High Court for relief and the High Court on such application shall have the same power to relieve him as it would have had if it had been a Court before which a proceeding against that Officer for negligence, default, breach of duty, misfeasance or breach of trust had been brought under sub-section(1).
(3) No Court shall grant any relief to any Officer under sub-section (1) or sub-section (2) unless it has, by notice served in the manner specified by it, required the Registrar and such other person, if any, as it thinks necessary, to show cause why such relief should not be granted”.
 Section 635A “No suit, prosecution or other legal proceeding shall lie against the Government or any Officer of Government or any other person in respect of anything which is in good faith done or intended to be done in pursuance of this Act or any rules or orders made thereunder, or in respect of the publication by or under the authority of the Government or such Officer of any report, paper or proceedings”.
 Editorial Comment, ‘Directors-true or false?’ (1997) 18 Co Law 129 at 129.
 Carlen v.Drury (1812) 1 V & B 154 at 158
 Permanent Building Society v. Wheeler (1993-1994) 11 WAR 187 at 218.
 (1989) 7 ACLC 659 at 679.
 Kokotivich Constructions Pty Ltd v Wallington (1995) 13 ACLC 1113 at 1125.
 (1993-1994) 11 WAR 187 at 218