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Board of Directors: Function, Duties and Liabilities

(Chapter 6, section 86 to 104 of Nepalese Company Act)

  • A board of directors is a body of elected or appointed person who jointly oversee the activities of a company or organization. Oversee in the sense of monitor, control and guide through policy formulation and directives.
  • The body has different name BOD, board of trustees, board of governors, board of managers or executive board etc.
  • It is often simply referred as “the board”
  • Board activities are determined by the powers, duty and responsibilities delegated to it by authorities General Meetings & other regulators.
  • The powers, duties and responsibilities are typically detailed in companies buy laws.(MOA,AOA or others internal rules)
  • The buy laws commonly also specify the numbers of board members, how they are to be chosen, when and how they are to meet and function.
  • Section 2(Y) of Nepalese Companies Act ‘director’ means any director of a company this term includes any alternate directors.
  • Section 2(z) ‘board of directors’ means the board of directors of a company.
  • Section 2(z1) ‘Managing Director’ means a managing director of a company.
  • CEO is popular and now in use.
  • Director is a person occupying a position of a director.
  • A director is a person who performs the duty of directors.
  • Directors are the persons who are responsible for direction, control and management of the affairs of a company.
  • Since company is an artificial person, it is the directors who exercise the powers, and functions of company.
  • The board of such directors is the board or BOD.

Powers and function of Board of Directors
(Section 95 of Nepalese Company Act)

  • Governing the organization by fulfilling the objectives.
  • Selecting, appointing supporting and reviewing the performance of the CEO or manager or managing director.
  • Insuring the availability of the adequate financial resources.
  • Preparing and approving the annual budget.
  • Typically, the board chooses one of directors to be chair or chairperson of the board of directors.
  • Theoretically, the control of a company is divided between two bodies;
  • BOD
  • General Meeting

Practically, it depends on the nature of company.

In small private company, the directors and shareholders will normally be the same people.There is no division of power.

In Large public limited company

  • The board tends to exercise more of supervisory role. There may be; professional directors (such as a finance director a marketing directors).
  • The board tends to have more de facto power.

Responsibility & Duties of Board of Director
(Section 99 of Nepalese Companies Act)

A board of director is a group of people elected by the owners of a corporation or a company who have;

  • Decision making authority
  • Voting authority (in Meeting)
  • Specific responsibility is to distinct and separate from the owners (shareholders) or members of company or business entity. (Divorce between ownership and management)
  • Directors must be individuals.
  • Directors can be owners, managers or any other individuals elected by business entity.
  • Some time in exception, board of directors are compared with advisory board or board of advisors.
  • An advisory board is group of people selected (but not elected) by the person wanting advice.
  • Advisory board- No decision making authority no responsibilities.
  • Role and responsibility is also power and duty.
  • The role and responsibility depends upon the business entity.
  • House of Lord observed that unless the directors are acting contrary to law or provisions of articles, the powers of conducting the management and affairs of the company are vested in them. (Quinn and Artens v. Salmon (1909) A 442 )
  • In most legal system, the appointment and removal of directors is voted.

Directors are removed;

  • By expiry of tenure
  • By resignation
  • By resolution of remaining directors only by any cause
  • By removing by the G.M.

Exercise of Powers by BoD

  • The exercise of powers by the board usually occurs in meeting. (Section 97 of Nepalese Company Act).
  • Sufficient notice has to be given to all directors of these meetings in most legal system.
  • Quorum must be present before taking decision.
  • In most legal system the power of board of directors is vested in a board as a whole not only in the individual.
  • Decision is based on majority basis, but minority can claim regarding their interest.
  • Power must be used by the individual directors by virtue of ostensible authority.
  • Director exercise control and management of the company, but company are run for the benefit of the shareholders (in theory at least)
  • The law imposes strict duties on the directors.
  • Generally, the duties imposed to the directors are fiduciary duties.
  • Typically, there are two important points in relation to director’s duties.
  • The directors’ duties are several which must be done jointly.
  • The duties are automatically associated with company. But it does not mean that director can never stand fiduciary relationship to the individual shareholders.

Fiduciary Duties (on the basis of Court Developed Principles)

  • Acting in bona fide
  • Directors must act honestly and in bona fide, not mala fide.
  • Directors must act in good faith what they consider.
  • Proper purpose
  • Directors must exercise their power for proper purpose.
  • Purpose of company
  • Whether the purpose is serving the purpose of company or not.
  • Unfettered Discretion
  • Duty to avoid conflict of interest
  • Transaction with company conflict
  • Use of corporate property & opportunity and company.
  • Duties of care and skill

(Section 93, 94,95,99,100 & 103etc. of Nepalese Companies Act 2063 BS)

Duties of Directors
Fiduciary duties & Statutory Duty

Fiduciary Duty
Fiduciary means power is entrusted for the benefit of others.

Acting in bona fide

  • Directors must act honestly and bona fide
  • They must act in utmost good faith what they consider
  • They should act in the interest of the company

Directors are not required by the law to live in a unreal region of detached altruism and to act in a vague mood of ideal abstraction from obvious facts which must be present to mind in any honest and intelligent man when he exercise his powers as a directors. (Mills v Mills 1938, 60 CIR 150 an Australian case)

Sometime distribution of dividend may be considered as the act not bona fide act Improper distribution of dividend may reduce the wealth of company but sometime this is considered as honest , not breach of fiduciary duty.

Acting for proper purpose

  • Directors must use power for proper purpose of company.
  • Providing opportunity to their close relative may not be for the purpose of company.
  • Banks strictly prohibits providing loan for their close relative.
  • The powers must be exercised within the ambit of authority of company.
  • They cannot use their power for improper purpose.

Unfettered Discretion

  • Not to fetter
  • The discretionary powers or responsibility conferred upon the directors must not be delegated to others.
  • Section 95(6) of Nepalese company Act the matters which cannot be exercised by the decision of board of directors.
  • Directors cannot without the consent of company, fetter their discretion in relation to exercise of their powers.
  • Directors cannot delegate the power of vote in meeting to other or they cannot say that I am not going to vote.

Duty to avoid conflict of Interest

  • Directors must avoid the conflict of interest between them and company. Good faith must not only be done but must manifestly be seen to be done.
  • As a fiduciaries, the directors may not put themselves in the position where their interest and duties conflict.
  • Section 89 (1), ( f )of the Nepalese Company Acts – directors cannot compete directly with the company.
  • They should not act as the directors of competing company,
  • When directors himself enters into a transaction with a company, there is a conflict between the director’s interest and duty with company’s interest.
  • If director falls under such transaction he/she must ensure that the company gets as much out of the transaction but that is very difficult to prove.
  • Directors must not enter in a transaction which create problem.
  • Directors must avoid his /her transaction with companies,
  • Director must disclose and avoid close relative’s direct involvement or any kind of interest in transaction with company.

Duty of care and skill

  • A director must show reasonable care & skill.
  • Responsible care & skill.
  • A director need not exhibit in performance of his duties a greater degree of skill than may responsibly be expected from a person of his knowledge and experience.
  • Such care & skill should be a responsible care & skill of an ordinary man that might be expected to take on his own behalf.

Statutory Duties of BoD

  • Duty to disclose interest – Section 92 & 100 of Nepalese Company Act.
  • Interest in Transaction.
  • Any kind of interest in appointment of MD/ company secretory or officer of the company.
  • If he is director of another company.
  • Transaction on securities of company.

Duty to exercise corporate power

  • Section 95(1) of Nepalese Company Act – The directors shall use the corporate power according to company law, article of association, and decision of general meeting.

Duty to manage transaction and exercise of power

  • Section 95(1) of Nepalese Company Act –The directors shall manage all transactions, exercise the power and perform the duties of company through the board of directors collectively.
  • To present in meeting personally, not through the (proxy).
  • The directors must be present in person not the proxy, (Section 97 of Nepalese Company Act.)

To participate in general meetings as far as possible.

  • Section 68 of Nepalese Company Act; Directors required to be present in general meeting as far as possible.

  • Not to participate and vote which is going to decide his obligation of his misconduct etc. (Section 70(2) of Nepalese Company Act)

To prepare and submit annual account and report as mentioned by law – Section 78,80,109 of Nepalese Company Act.

Duty not to receive remuneration of the directors without decision of G.M.

  • The director cannot obtain any remuneration or other facilities or incentive without decision of general meeting.

Duty not delegate authority on; – (Section 95 (6) of Nepalese Company Act)

  • The power to make calls on shareholders in respect of money unpaid on their share.
  • The power to issue debenture.
  • The power to borrow the loan.
  • The power to invest funds of company.
  • The power to make loan.

Duty and power to appoint MD/CEO (Section 96)

Duty not to take personal benefit, to take oath of secrecy and honesty, (Section 99 of Nepalese Company Act).

Duty to discharge duty on good faith. (Section 99(4) of Nepalese Company Act).

Duty to disclose about securities. (Section 100 of Nepalese Company Act).

Remedies for Breach of Duties

  1. Injunction or declaration
    • Section 138 & 139 of Nepalese Company Act provides remedy of injunction also.
  2. Recovery for Damages
    • Section 140 of Nepalese Company Act -If any director has caused loss to company while acting contrary to the Act, MOA, AOA or consensus Agreement Company or aggrieved party may demand the recovery of such loss.( need to read whole clauses of this section 140)
  3. Restoration of company’s property
    • Section 163 of Nepalese Company Act speaks about realization of amount loss.
  4. Recession of relevant contract
    • If a director has concluded a contract beyond the scope of his authority or working scope of company any shareholders may make an application to rescind from implement and avoid the contractual liability.
  5. Summary Dismissal
    • Section 89(3) (b) of Nepalese Company Act states that if the general meeting possess a resolution to remove from the post, the director shall not continue to hold the office of director.

Directors’ Liabilities, Immunities and Limitation

  • The authority of directors is usually determined by the MoA AOA and decision of general meeting (Section 95(1) of Nepalese Company Act)
  • If all the acts have been performed in good faith within the scope of authority, the directors cannot be held liable personally for such loss or damages.
  • But if the director fails to perform good faith, the director is liable for such consequences.

Independent Directors

  • Public company should appoint independent directors under section 86(3) –if 7 directors-1 independent director, if more than 7 - 2 independent directors.
  • The independent directors should have qualification prescribed in AOA and also have knowledge of and experiences of business of company
  • The shareholders cannot be appointed as independent director.

Share Qualification of Director

  • Section 88 of Nepalese Company Act, if AoA specifies the number of shares as a requirement.

Disqualification of Directors – See; Section 89(1) of Nepalese Company Act.

Term of Office of the Directors (See; Section 90 of Nepalese Company Act).

Meeting of Directors

  • Section 97 of Nepalese Company Act.

  • Private company as per provision of AOA

  • For public company shall be at least six times in a year.

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