Director Duties and Automatic Vacation of Office: Sections 166 and 167

Accepting a board seat can feel ceremonial. The statute treats it as a job description. Section 166 of the Companies Act 2013 sets out six duties, section 166(7) puts a fine on breach, and section 167 lists eight events that empty the chair without anyone passing a removal resolution. If you are setting up a company, read both before you sign the director's consent.

Legal basis: Companies Act 2013, ss.166 and 167, as currently consolidated. Both sections have been amended; this article reads the current text.

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Duty one: act in accordance with the articles, subject to the Act

"Subject to the provisions of this Act, a director of a company shall act in accordance with the articles of the company" (s.166(1), Companies Act 2013). The articles are the company's standing orders for its directors, but the Act comes first. An articles clause that purports to authorise something the Act forbids does not protect anyone, and a board decision that contradicts the articles is open to challenge even if every director voted for it.

Founders who treat the articles as incorporation paperwork rather than operating rules risk breaching this duty from the first meeting. Read them once, properly, before the first board meeting.

Duty two: good faith, for the members as a whole and wider stakeholders

"A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment" (s.166(2)).

The list of people the director must think about is deliberately wide. It is not the shareholder who appointed you, and not the founder who nominated you. It is the members as a whole, and beyond them the company, its employees, the community and the environment. A nominee director who votes as the appointer instructs, against the company's objects, is exposed under this subsection: nomination explains why you are on the board, not whose orders you follow. Where a decision has an environmental or community footprint, such as siting a plant or closing a unit, the minutes should show that these interests were weighed.

Duty three: care, skill, diligence and independent judgment

"A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment" (s.166(3)).

Read this as four separate asks:

• Care: the attention a reasonable person would give the matter.
• Skill: the competence you actually hold. A chartered accountant or an engineer on the board will be measured against what such a person ought to notice.
• Diligence: follow-through, not just turning up.
• Independent judgment: your own view, not one borrowed from a co-founder, an investor or a relative.

Signing financial statements unread, approving a related-party deal on a nod, or voting as told are the usual ways to fail this subsection, even where nobody profits.

Duties four and five: no conflicts, no undue gain

"A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company" (s.166(4)).

The words "possibly may conflict" matter. The bar applies to the situation that could produce harm, before any harm occurs. A founder-director negotiating to lease her own building to the company, or sitting on both sides of a transfer between two group companies, is already inside the subsection. Disclosure under section 184 is the separate mechanism for managing an interest in a contract (see below); the duty in s.166(4) is to keep out of the conflicting situation in the first place.

"A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company" (s.166(5)).

Three points follow from the text:

• An attempt is enough; the gain need not be achieved.
• The prohibition covers gain to relatives, partners and associates, not just to the director.
• The stated consequence of a finding of undue gain is payment of "an amount equal to that gain to the company". The profit goes back to the company. The fine below is separate.

Duty six: the office cannot be assigned

"A director of a company shall not assign his office and any assignment so made shall be void" (s.166(6)).

Directorship is personal. A director cannot hand the seat to a spouse, a colleague or an attorney for the duration of a trip. If you cannot attend, the answer is leave of absence from the board, not delegation of the office.

The price of breach: s.166(7)

"If a director of the company contravenes the provisions of this section such director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees" (s.166(7)). The fine is on the director personally, and it applies to a contravention of any part of section 166.

Section 167: eight events that vacate the office automatically

Section 167(1) opens: "The office of a director shall become vacant in case—". The eight triggers are:

(a) Disqualification under section 164. Section 164(1) lists nine personal bars, covering for example an undischarged insolvent, a person convicted and sentenced to at least six months' imprisonment within the stated look-back, a person disqualified by a court or Tribunal order, a person who has not paid calls on shares for six months, and a person who has breached the directorship cap in section 165(1). Section 164(2) adds a company-default bar for directors of a company that has not filed financial statements or annual returns for any continuous period of three financial years, or has failed to repay deposits, redeem debentures, pay interest or pay a declared dividend for a year or more.

A proviso applies to the section 164(2) bar. Where the director incurs it, "the office of the director shall become vacant in all the companies, other than the company which is in default under that sub-section" (s.167(1)(a) proviso). The defaulting company's board stays in place, because someone must fix the default. The same person loses the seat on every other board.

(b) Absence from every board meeting for twelve months. The office is vacated if "he absents himself from all the meetings of the Board of Directors held during a period of twelve months with or without seeking leave of absence of the Board" (s.167(1)(b)). The words "with or without" mean that leave granted by the board does not save the seat. A director who is regularly granted leave and never attends still loses the office once a full twelve months of board meetings has passed without them.

(c) Contravening section 184 on interested contracts. The office is vacated if the director "acts in contravention of the provisions of section 184 relating to entering into contracts or arrangements in which he is directly or indirectly interested" (s.167(1)(c)).

(d) Failing to disclose an interest. Separately, the office is vacated if the director "fails to disclose his interest in any contract or arrangement in which he is directly or indirectly interested, in contravention of the provisions of section 184" (s.167(1)(d)). Triggers (c) and (d) operate independently of each other.

(e) Disqualification by order of a court or the Tribunal (s.167(1)(e)).

(f) Conviction and a sentence of six months or more. The office is vacated if the director "is convicted by a court of any offence, whether involving moral turpitude or otherwise and sentenced in respect thereof to imprisonment for not less than six months" (s.167(1)(f)).

A proviso postpones vacation for orders under (e) and (f): the office is not vacated "for thirty days from the date of conviction or order of disqualification"; where an appeal or petition is preferred within those thirty days, until seven days after it is disposed of; and where a further appeal or petition is preferred within those seven days, until that is disposed of (s.167(1) proviso, clauses (i) to (iii)).

Two cautions on the appeal window. It delays vacation under section 167; it does not remove the disqualification in section 164. Section 164 states that the disqualifications in its clauses (d), (e) and (g) "shall continue to apply even if the appeal or petition has been filed against the order of conviction or disqualification" (proviso to s.164). Do not read the appeal window as permission to accept a new directorship elsewhere.

(g) Removal under the Act (s.167(1)(g)). The removal procedure sits in a different section and is not covered here.

(h) Ex-officio directors. A person appointed a director "by virtue of his holding any office or other employment in the holding, subsidiary or associate company" vacates the seat when they "cease to hold such office or other employment in that company" (s.167(1)(h)).

A private company can add its own grounds

Section 167(4) provides: "A private company may, by its articles, provide any other ground for the vacation of the office of a director in addition to those specified in sub-section (1)." If you are drafting articles for a private company, this is the place to add, for example, a founder-specific exit event. If you are joining one, read the articles for extra grounds you have not been told about.

Acting after the office has vacated: s.167(2) and (3)

"If a person, functions as a director even when he knows that the office of director held by him has become vacant on account of any of the disqualifications specified in sub-section (1), he shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees" (s.167(2)). The offence needs knowledge: it is acting as a director when you know the office has vacated. The fine is in addition to any exposure under section 166.

If every chair empties at once, section 167(3) supplies a rescue: "the promoter or, in his absence, the Central Government shall appoint the required number of directors who shall hold office till the directors are appointed by the company in the general meeting."

Disclosure under section 184: what it asks of you

Because two of the section 167 triggers depend on section 184, founders should know what it requires.

• General disclosure. Every director must, at the first board meeting in which he participates as a director, and thereafter at the first board meeting in every financial year, or at the first meeting after any change, disclose his concern or interest in any company, body corporate, firm or other association of individuals, including shareholding (s.184(1)).
• Specific contracts. A director who is in any way, directly or indirectly, concerned or interested in a contract or arrangement with a body corporate in which he (alone or with other directors) holds more than two per cent shareholding or is a promoter, manager or Chief Executive Officer, or with a firm or entity in which he is a partner, owner or member, must disclose the nature of the interest at the board meeting where it is discussed and "shall not participate in such meeting" (s.184(2)).
• Consequence for the contract. A contract entered into without that disclosure, or with the participation of an interested director, "shall be voidable at the option of the company" (s.184(3)).
• Penalty. A director who contravenes s.184(1) or (2) is "liable to a penalty of one lakh rupees" (s.184(4)).

What to do now

• Next step: read the company's articles end to end, including any extra vacation grounds a private company may have added (s.167(4)), and give your first s.184(1) disclosure at the first board meeting in which you participate.
• Diary three dates. The first board meeting after any change in your interests (s.184(1)); the twelve-month window in which you must attend at least one board meeting to avoid s.167(1)(b); and, if there is ever a conviction or disqualifying order, the thirty-day period from that date (s.167(1) proviso (i)).
• Consequence of missing them: a fine of one to five lakh rupees under s.166(7); a penalty of one lakh rupees under s.184(4); automatic vacation of office under s.167(1); and, if you keep acting as a director knowing the office has vacated, a fine of one to five lakh rupees under s.167(2).

Have a CA review your facts before you act or file.

FAQ

To whom does a director owe loyalty?
To the members as a whole, and the company, its employees, the shareholders, the community and the environment (s.166(2)), never only to the person who nominated you.

What counts as a conflict?
A situation where you may have a direct or indirect interest that "conflicts, or possibly may conflict" with the company's interest (s.166(4)). The possibility is enough.

What does undue gain cost?
A director found guilty of making undue gain is liable to pay an amount equal to that gain to the company (s.166(5)), and the contravention of section 166 attracts a fine of one to five lakh rupees (s.166(7)).

Does a year of absence vacate the office even if the board granted leave?
Yes. Absence from all board meetings held in twelve months vacates the office "with or without seeking leave of absence of the Board" (s.167(1)(b)).

What if all the directors vacate at the same time?
The promoter, or in his absence the Central Government, appoints the required number of directors until the company appoints directors in general meeting (s.167(3)).

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See Also

• Will CSR ever apply to your startup? Section 135 triggers, the 2% spend and unspent money
• Sweat equity shares: issuing shares for know-how instead of cash (s.54)
• Moving Shares Between Founders? Transfer Deeds, Certificates and Timelines Under Sections 46 and 56