What duties does section 166 place on a director?
Section 166 requires a director to act according to the articles, in good faith to promote the objects of the company for the benefit of its members as a whole, and with due and reasonable care, skill, diligence, and independent judgment. The director must not take an undue gain, and must not assign the office.
No. A whole-time director or a managing director may also be an employee under a contract of service. An ordinary director is not an employee only because of the office.
What does the section require?
The director follows the articles and the Act. In acting for the members as a whole, the director also has regard to the company’s employees, the shareholders, the community, and the protection of the environment. Care and skill are those reasonably expected of a person carrying out the functions of a director of that company. The board may delegate a task. Delegation does not erase the duty of the director who keeps the office.
A director who contravenes section 166 is punishable with a fine of not less than ₹1 lakh, which may extend to ₹5 lakh. Who holds the office is on the director page.
What is a conflict of interest?
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. That includes a personal profit from the company’s property, information, or opportunity, even if the company itself does not take the opportunity. A contract with a related party has its own approval route. An interest is also disclosed to the board. Disclosure does not, by itself, cure a conflict that section 166 forbids.
Is every director elected by the shareholders?
No. The first directors may be named in the articles. The board may appoint an additional director. A nominee may be appointed under a contract the Act allows. An appointment at a general meeting is the ordinary route, not the only one. A whole-time director can be an employee under a separate contract. The office of director is not itself a contract of employment.
The members may remove a director by an ordinary resolution. That process is on the removal page. Vacation of office for disqualification is a different list, on the disqualification page. An independent director has further conditions, on the independent-director page.
Frequently asked questions
Four questions cover employment, assignment of the office, removal, and an independent director.
Is a director automatically an employee?
No. A whole-time director or a managing director may also be an employee under a contract of service. An ordinary director is not an employee only because of the office.
Can a director assign the office?
No. Section 166 says a director shall not assign the office. Any assignment is void.
Does a breach of section 166 remove the director?
Not by itself. The section provides a fine. Removal by the members is a separate ordinary resolution. Disqualification is a separate list.
Do these duties apply only to an independent director?
No. Section 166 applies to every director. An independent director has additional conditions, which are on that page.
Sources
The duties are section 166 of the Companies Act, 2013. The fine is section 166(7). Who a director is, and how one is removed, are separate pages.