Section 166: duties of directors

Introduction

A director must act in accordance with the articles and in good faith to promote the company's objects for the benefit of its members as a whole. The duty also extends to the best interests of the company, its employees, the shareholders, the community and the protection of the environment.

A director must use due and reasonable care, skill and diligence and exercise independent judgment. They must avoid situations of conflicting interest and must not seek undue gain. Any undue gain must be paid to the company. Any assignment of the office is void. A contravention is punishable with a fine of one lakh to five lakh rupees.

Key takeaways

Act within the articles and in good faith

Subject to the Act, a director must follow the company's articles. Under subsection (2), a director must act in good faith to promote the company's objects for the benefit of its members as a whole. The director must also act in the best interests of the company, its employees, the shareholders, the community and the protection of the environment.

• India Code — consolidated Companies Act, 2013, section 166
• eGazette — MCA notification S.O. 902(E), 26 March 2014 (commencement from 1 April 2014)

Exercise care, skill and independent judgment

Subsection (3) requires due and reasonable care, skill and diligence and independent judgment. In practice, this means reading Board papers, asking questions, and recording the basis for decisions.

Avoid conflicts and undue gain

A director must not get into a situation in which they may have a direct or indirect interest that conflicts, or may conflict, with the company's interest. A director must not achieve or attempt to achieve any undue gain or advantage for themselves or their relatives, partners or associates. A director found guilty of making an undue gain must pay the company an amount equal to that gain. Disclosure obligations under section 184 operate alongside these duties.

No assignment and the penalty

A director cannot assign their office; any such assignment is void. A director who contravenes section 166 is punishable with a fine of not less than one lakh rupees, which may extend to five lakh rupees.

Practical preparation

Read the articles; record the reasons for significant decisions; identify and disclose potential conflicts; check that no related person receives an undue advantage; never purport to transfer your office to another person.

Practical checklist

Glossary

Undue gain

A gain or advantage a director must not achieve or attempt to achieve. If found guilty of making it, the director must pay an equal amount to the company.

Independent judgment

Section 166(3) requires each director to exercise their own judgment.

Frequently asked questions