Powers and Duties of Directors (Section 166)

The general powers of management of a company are vested in its Board of Directors collectively by Section 179 of the Companies Act, 2013, subject to the memorandum, the articles, and any regulations made by the company in general meeting, and subject also to specific matters the Act reserves for the Board acting only by resolution at a meeting (such as approving financial statements, approving a Board's report, diversifying the business, or approving related-party transactions above prescribed limits) or for the shareholders acting in general meeting (such as amending the Articles, or approving specified transactions under Section 180 that exceed the Board's own authority, like selling substantially the whole of the company's undertaking).

While powers are stated in general terms across the Act, the duties of directors were, for the first time in Indian company law, codified in one place by Section 166 of the Companies Act, 2013 — a significant reform, since earlier company law left directors' duties largely to case law built up over many decades. Section 166 lays down seven connected obligations. A director must act in accordance with the company's Articles of Association (sub-section 1). A director must 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 the environment (sub-section 2) — a notably wide formulation that extends a director's duty of good faith beyond shareholders alone to a broader set of stakeholders. A director must exercise his duties with due and reasonable care, skill, and diligence, and must exercise independent judgment (sub-section 3). A director must not involve himself 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 (sub-section 4). A director must not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates, and if he is found guilty of making any undue gain, he is liable to pay an amount equal to that gain to the company (sub-section 5). A director must not assign his office to any other person, and any assignment so made is void (sub-section 6). Finally, sub-section 7 fixes the penalty for contravention of Section 166 at a fine which may extend from one lakh rupees up to five lakh rupees. …