Discuss the Legal Position of Directors.
Legal position of Directors:
It is difficult to define the exact legal position of the directors of a company. In various judgments, directors of a company have been described as agents, trustees or managing partners.
The company being an artificial person, has to act through some human agency and directors act as that necessary agency. So the
relationship between the company and its directors is that of the principal and agent. In the case of Ferguson vs. Wilson, this position of directors was described as follows : The company is no person. it can act only through its directors. it is an ordinary case of principal and agent. Wherever an agent is liable, these directors are liable and wherever the principal is liable, the liability is of the company. As agents, directors must conduct business with reasonable care abiding by the company’s Memorandum of Association and Articles of Association.
Whatever they do, ultimately binds the company. They enter into contract and wherever , they put their signatures, they do so only on behalf of the company. But directors are not completely like agents. Agents are appointed by the principal but the directors are elected by the shareholders. Again agents get commission for the work done but the directors are expended to work without reward. Further, an agent may not disclose’ the name of his principal but a director has to do so. Thus, the directors are not the agents in the true sense.
In certain respects, the directors are the trustees of the company. They are the guardians or custodians of the money and properties of the company. They stand in a fiduciary capacity to protect the interests of the company. Moreover, almost all the powers of directors are like powers in trust. The power to make call, to forfeit shares, to issue further capital, the general powers of management and the power to accept or refuse a transfer of shares, are all powers in trust .which have to be exercised in good faith for the benefit of the company as a whole. The directors are trustees of the company and not of individual shareholders of the company.
Directors are not also trustees for third parties who have made contracts with the company. They are not trustees for the creditors of the company. But, directors are not trustees in the true sense because the ownership of the property held in trust by them does not vest in them as in case of an ordinary trust. Further, unlike a trustee, they, enter into contracts in the name of the company.
As Managing Partners:
The directors, who manage the company, do so for themselves as well as for the benefits of others. They are also elected representatives. Thus, their position is similar to that of a managing partner because they are appointed to their posts by an arrangement between them and all the shareholders. Being important shareholders, they are partners with shareholders. But their liability is restricted to the amount unpaid on their shares. A director cannot bind another director like partners in a firm, unless he has been expressly authorized to do so.
There is no mutual agency amongst directors as in the case of partners. To sum up, we can say that the directors are neither agents nor trustees or managing partners in the strict sense of the term. They combine in themselves all these positions. They stand in a fiduciary position towards the company in respect of their powers and capital under their control.