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A Brief Description of Company Directors from a Historical and the Legal Perspective of Bangladesh

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INTRODUCTION

Although company is regarded as a legal person yet it cannot manage itself like a natural person. Companies are managed by the directors. During the course of their duty, managers are bound to follow specific rules regulations and perform specific duties. A company’s progress greatly depends on how efficiently the directors are handling its various affairs. And for this reason, directors are referred to as the brain of a company.[1] So, they have immense duty and responsibilities regarding governing a company and their failure to do so causes devastating consequences for a company.  In this paper, an overview has been made on the historical development of the concept of directors, the nature of their duties and analysis has been made based on the various criticisms of the concept in the context of Bangladesh.

ORIGIN AND DEVELOPMENT

The existence of directors can be traced back to Dutch East India Companies. Gradually, countries around the world followed the Dutch model of an independent panel of directors to oversee companies.[2] Although, till the nineteenth century, general meeting was regarded as the supreme forum of company decisions, the notion drastically changed after the decision of the case Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch 34 where it was held that if the article of association permits, then board of directors could be the highest decision-making organ of a company. Although such a new notion failed to receive general approval at first but things started to change when the House of Lords accepted such a view in the case Quin & Axtens v Salmon [1909] AC 442. Gradually legal systems around the world started following this decision and thus started the ascent of the board of directors in the decision-making process. However, the modern concept of supremacy of the board of directors was expressed in John Shaw & Sons (Salford) Ltd v Shaw [1935]2 KB 113 where the supremacy of article of association was established over the supremacy of shareholders and the trend of governing company through board members got approved. However, in the U.S.A, the concept was first introduced through the New York stock exchange in 1811 and gradually various banks and institutions started following it. Bangladesh inherited the concept from the British legal system. However, after the 1990’s we have observed a trend to incorporate various American norms in the management process of the board of directors and so is still followed today.

DIRECTORS

Directors are the members of a panel that is appointed to manage and govern the company and to represent the shareholders. They are generally professional men hired to direct company affairs. However, they are not the servant of the company rather they are the officers. However, in the Lee v Lee’s Air Farming Ltd. Case it was held that a director is entitled to work as an employee. Also, directors are regarded as agents of the company in the 1866 case of Ferguson v Wilson. The general principle of agency is therefore applicable regarding the relationship of the directors with the company. Also, directors work as a trustee of the institution and he is responsible for a community system comprise of various interest groups like labour, consumers, the general public and the state. The directors constitute the brain of a company and in Fancton v Denville it was held that when the brain (directors) functions, the corporate is said to function.

In Bangladesh, The Companies Act, 1994 provides that only natural persons can be appointed as directors. It also provides the obligation of having at least three directors for a public company and two for a private company. However, the act does not provide the duties of the director but from analysing various provisions and case laws along with principles of company law we could identify so.

DUTIES OF DIRECTORS
The various duties of directors can be classified into two categories:  i) Statutory duties; ii) Duties of general nature.

Statutory Duties:

The statutory duties of directors begin from the date of incorporation and ends when the company is liquidated. The Companies Act, 1994 provides in section 96 that every director has to attend the board meeting. Also, section 97 states the duty of directors to uphold qualification share. In the case of Bankruptcy, a director must leave his office under section 99. Furthermore, it is a director’s duty not to enter selling contracts of company goods and materials without the approval of the board of directors. Managing directors have a duty not to act as managing directors of more than one company. Also, they have to maintain a term not exceeding five years. Also, section 114 suggests that directors have a duty not to take any compensation for his loss of office due to the transfer of all or any shares. Section 111 to 113 provides instances when the director cannot take money indirectly. Again, if a director has any interest in case of entering any contract on behalf of the company, he must disclose so under section 130. Also, section 131 provides his duty not to vote in favour of any contract that might be good for his interest. The director must ensure the delivery of prospectus to the registrar for registration. Directors have also the duty to prepare and send a copy of the statutory report to every shareholder 21 days before the statutory report. Section 39 also make it the duty of a director to deliver share certificate of all the shares within 90 days of allotment. Calling an extra-ordinary general meeting is another duty of a director under section 87. Ensuring payment of dividends and making a declaration of solvency also constitutes the statutory duty of the directors.[3]

Duties of general nature

The general duties of directors include those which has been created by various case laws and the principle of company law. It includes the fiduciary relation of directors with the company. In the Avaling Barford v Perion Ltd case duty not to breach trust has been regarded as one of the duties of directors. Again, not to do any personal gain causing pecuniary losses of the company is another general duty of a director established in Albion Steel and wire Co. v Martin case. Furthermore, the directors while in office have a duty not to engage in trading in corporate control and earn profit. Also, he has a duty not to misuse corporate information. In the 1925 case of City Equitable Fire Insurance Co the duty of directors to:

  1. Act honestly,
  2. Exercising reasonable diligence,
  3. Liability of mere errors of judgement,
  4. Attending board meetings.

Joint Stock Discount Co. v Brown case also provided the duty of directors not to be negligent. Cobb v Becke case provides the “delegate non protest delegate” principle which means directors have a duty not to delegate their duties to other officials. Furthermore, in case of fraud by any director, such director shall be personally liable for his default. In Aberdeen Railway Ltd v Blaikie disclosing any interest in any transaction has been held as a duty of a director. The benefit gained in the case of non-disclosure can be claimed by the company. So, directors have a huge amount of duty in a company.

ANALYSIS

Despite having so many duties regarding maintaining a company, the role of directors is not free from scrutiny. Firstly, critics often indicate the overshadowing of general shareholders by the directors. The shareholders are supposed to be the owner of the company. So, theoretically, they should have enough power to express their mind regarding governing the company. However, the directors are more involved in doing so thus making the shareholder a mere titular owner.[4] Again, directors are some of the highest-paid persons in the job market. It creates an imbalanced capitalistic situation which greatly contributes toward disparity. There are reported incidents around the world where the wage of the worker does not get a raise very often but the directors are bagging more and more every year.[5] Also, often there are incidents of dishonesty and corruption by the directors that not just only affects the company but also affects the country and economy in great. We have seen so in various cases of corruption by the various banks in Bangladesh.

CONCLUSION

Although, the directors are not above criticisms their role in respect of managing and governing the company cannot be undermined in today’s world. Directors are the most efficient persons to run a company as they have technical knowledge and skills regarding so in contrast to the shareholders. Furthermore, various legal and institutional mechanisms are there to prevent any kind of irregularities on part of the directors. That’s why the directors are here for centuries to

manage the companies and they are doing so with utmost efficiency. Therefore, it can be said that the directors play the most vital role in respect of managing and governing companies in today’s world and there is no alternative to them.

Writer: Mashrur Rahman Mahin, 4th Year, LL.B (Hons’), Department of Law & Justice, Jahangirnagar University

Endnote:

[1] John Pearce and Shaker Zahra, ‘The Relative Power of CEOs and Boards of Directors: Associations with Corporate Performance’ [1991] 12(2) Strategic Management Journal 135-153

[2] S. Arasaratnam, ‘The Dutch East India Company and Its Coromandel Trade 1700–1740’ [1967] 123(3) Strategic Management JournalBijdragen tot de Taal-, Land- en Volkenkunde 325

[3] Saidul Islam, ‘The Doctrine of Capital Maintenance and its Statutory Developments: An Analysis’ [2013] 4(1) The Northern University Journal of Law 47-55

[4] Boltburdon, ‘Shareholders v Directors – who wins?’ (Boltburdon, 2018) <https://www.boltburdon.co.uk/blogs/shareholdersvdirectorswins /> accessed 9 July 2021

[5] Jeff Cox, ‘CEOs see pay grow 1,000% in the last 40 years, now make 278 times the average worker’ (CNBC, 16 August 2019) <https://www.cnbc.com/2019/08/16/ceosseepaygrow1000percentandnowmake278timestheaverageworker.html> accessed 9 July 2021

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