Power of Directors under Companies Act, 2013

The Companies Act, 2013 is an important act under legislation as it governs corporate affairs in India. It lays out the roles and powers of the directors of the company. Directors, under this act, hold crucial responsibilities while guiding the company’s course. The Companies Act 2013 focuses on the fiduciary duties of directors. It implies that the directors must act with honesty and in the best interest of the company. Directors are expected to work with the utmost care, skill, and commitment while keeping the company’s well-being in mind. These roles and duties are the guiding principles to ensure that directors prioritize what’s best for the company and its stakeholders. But to perform the duties, directors must also possess some of the powers.

Geeky Takeaways:

• Directors are the leaders of the company and enjoy the right to hire and manage top managers.
• Directors can influence the stakeholders to ensure the growth and success of the company.
• They are the guardians who provide a roadmap for the company as to where it should go and how.
• Directors shape the rules, values, mission, and vision of the company.
• They are the protectors of shareholders’ interests, making sure that the company stays on the right track.

What are the Power of Directors under Companies Act, 2013?

One of the most important powers of directors is their ability to appoint key executives. Directors are responsible for selecting and supervising top management, including roles like the managing director. This authority is essential in ensuring that the right individuals are leading the company and making day-to-day operational decisions. In simple terms, the power of directors under the Companies Act 2013 is accepted as being the decision-makers, protectors of the company’s best interests, and supervisors of the employees running the company. They are very crucial in pushing the company towards success while adhering to legal and ethical standards, making sure the company stays on the right course in the dynamic business sea.

According to Section 179, of the Companies Act 2013, the Powers of the Directors are as follows.

• The Board of Directors can exercise all such powers for which the company is authorized.
• The Board of Directors can take all actions on matters in which the company has authority.

The Companies Act 2013 is the fundamental act in corporate governance that imposes necessary regulations that directors must take into consideration. At the same time, the Memorandum of Association defines the company’s objective and boundaries within which the board must exercise its power. In addition to MOA, the Article of Association also governs the board’s functions by providing them with some related internal regulations. So, the Companies Act 2013, the Memorandum of Association, the Article of Association, and shareholder resolutions in totality serve as fundamental guiding principles to ensure that the Board of Directors (BOD) works within the prescribed boundaries and for the best interest of the company and it’s shareholders.

Power of Directors and the Board

The power of directors and the board serves as a foundation in corporate governance. The Companies Act, 2013 lays significant authority in the Board of Directors (BOD) which allows them to make crucial decisions that direct every activity of the company. This authority is, however, subject to various provisions within the act to ensure transparency, accountability, and the protection of stakeholders’ interests. The act provides authority to the board to make decisions on matters starting from financial policies and strategic planning to the appointment of key executives. It is required that the whole board with their intelligence decide on the mission and vision of the company. Directors, as fiduciaries, are required to perform in the best interests of the company, exercising carefulness and loyalty in their decision-making.

In addition to the general powers of the board under Section 179 of the Companies Act 2013, there are specific persons provided under Section 179 (3). The following are such powers which can be exercised by the board on the behalf of the company:

• the power to make calls to shareholders for the money unpaid on their shares.
• the power to borrow money.
• the power to make loans or to provide guarantees for the loan.
• the power to make investments on behalf of the company.
• the power to authorize buy-back of securities under Section 68.
• the power to issue securities including debentures, whether in India or outside India.
• the power to give consent for amalgamation, merger, or reconstruction.
• the power to approve the board’s report and financial statements of the company.
• the power to diversify the business activities of the company.
• the power to take over a company or take a substantial stake in another company.
• any other matter prescribed.

In addition to this, Rule 8 of the Companies Act 2013 has given more powers to the board. The following resolutions can be made at board meetings:

• To make political donations.
• Appointing or removing Key Managerial Personnel (KMPs).
• Appointing internal auditors and secretarial auditors.

Power Exercised by the Company in General Meeting

While the board possesses crucial powers, the Companies Act 2013 acknowledges the authority of the company in general meetings. Certain decisions which are of utmost importance, are reserved for the shareholders and their intelligence. These decisions consist of moderations related to the capital structure of the company, any changes in the Memorandum of Association (MoA) and Articles of Association (AoA), and anything crucial to financial statements.

The general meeting provides an equal chance for every shareholder to vote on key aspects affecting the company. It is to make sure that the major decisions are in support of the broader interests of the stakeholders, as they are the real owners of the company.

Power Exercised by Passing Resolution at Board Meetings

Within the framework of the act, the board exercises its powers primarily through resolutions passed at Board Meetings. These resolutions cover a wide range of matters which include approval of financial statements, appointment of directors, declaring dividends, and adopting policies. The act provides directions related to the composition and other requirements of a quorum and how resolutions are to be passed.

Section 180 of the Companies Act 2013 allows the Board of Directors of a company to exercise a few powers only when there is proper consent by the company passed through a special resolution. The following are such powers:

• The board can invest the compensation received through any mergers and amalgamations into trust securities.
• To sell, lease, or dispose of the whole or substantially whole of the undertaking of the company or when the company has more than one undertaking, to sell, lease, or dispose of the whole or substantially whole of that respective undertaking.
• To borrow the money, where the money which can be borrowed and already borrowed money exceeds the aggregate of its paid-up share capital, free reserves, and securities premium besides the temporary loans already received from bankers of the company in the normal course of action.

Delegation of Powers of the Board

No board can run a business single-handedly. Keeping this in mind, the Companies Act 2013 allows for the delegation of certain powers by the board to committees, managing directors, or other executives. However, such delegation is not assumed to be an absolute transfer of responsibility; the board remains accountable for all the decisions made by those to whom powers are being delegated.

Delegation of powers can be performed by creating committees, such as the audit committee or remuneration committee, which focus on specific issues relating to governance. Delegation of authority allows the board to efficiently handle complex issues while ensuring that experts are busy with specialized matters.

Restriction of Powers of the Board

While directors and the board possess major powers, the Companies Act 2013 places certain restrictions to prevent misuse and protect stakeholders. These restrictions are in place to maintain checks and balances, aligning with principles of good corporate governance. One significant restriction is the requirement for board approval in certain transactions. For example, transactions involving related parties necessitate approval from the board, and in some cases, approval from the shareholders. This ensures that transactions that have some potential conflicts of interest are observed thoroughly, preventing directors from using their positions for personal gain. Additionally, the Act imposes restrictions on the powers of the board concerning certain managerial decisions. For example, matters like the appointment and removal of auditors require approval from the shareholder. So it adds up an extra eye to ensure the independence and integrity of the audit process.

Conclusion

The Companies Act 2013 precisely directs the powers and limitations of directors and the board, aiming to maintain a balance between autonomy and accountability. The act recognizes the importance of shareholder democracy in major decisions, imposes formalities on decision-making processes, allows for efficient delegation, and places restrictions to prevent misuse of power. This regulatory framework is a foundation to encourage transparent, ethical, and responsible corporate governance in India. Furthermore, the act limits the powers of the board in matters related to borrowings. Some borrowing requires approval from the shareholders, and the board is restricted from exceeding certain limits without such approval. This protects the company’s financial health and prevents excessive debt liabilities.

Power of Directors under Companies Act, 2013- FAQs

Can Directors act independently?

While directors have individual responsibilities, major decisions are usually made collectively in board meetings. Independence is balanced with the need for collaboration.

Are there limitations to the power of directors?

Yes, the powers of directors are subject to the company’s articles of association, relevant laws, and any restrictions imposed by shareholders.

Can the board delegate its powers?

Yes, the board can delegate specific powers to committees or individual officers. However, ultimate responsibility remains with the board.

What provisions limit the power of the board?

Various legal and regulatory frameworks, as well as the company’s articles of association, set limits on the board’s powers. Shareholders may also impose restrictions.

Are there limitations on the delegation of powers?

The board must delegate powers within the bounds of the law, and the company’s articles, and ensure that essential decisions are not entirely delegated away.