Director as Agent – Contract Obligations Act – 1872

Section 182 of the Indian Contract Act 1872 says that “An ‘agent’ is a person employed to perform an act on behalf of another or to represent another in dealings with a third person. Represented, is called the principal “

When one hires another to perform an act on his behalf or to represent him in dealings with third parties, the person thus employed is called an agent. In the theory of English law, the agent is a connecting line between the principal and the third parties. It is an intermediary that has the power to create legal relationships between the principal and third parties.

Dried. 2 (13) of the Companies Act 1956 defines that “‘director’ includes any person holding the position of director by whatever name is called”

Thus, a director is a person legally appointed to the Board of Directors of a company who is duly constituted to direct, control and supervise the activities and affairs of a company. The directors of a company are in the eyes of the legal agents of the company for which they act and the general principles of the principal and agent law regulate in most aspects the relationship of the company and its directors. (Somayazula v. Hope Prodhome & Co. (1963) 2 An WR 112.)

The agency’s test is whether the person intends to carry out a transaction on behalf of the principal or not. To form an agency, it is not necessary to have a formal agreement.

A director of a company is not necessarily the agent of the company or its shareholder, but the true position of the directors of a company may be that of agents of the company with powers and duties to carry out the totality of its business, subject to the restrictions imposed by the Bylaws. A director or a managing director cannot be a servant of the company; You can be an agent of the company to carry out your business activities. What it is in fact will depend on the facts and circumstances of each case. Generally speaking, neither the board of directors nor an individual director is, as such, an agent of the company, nor of the corporation, nor of its members. Under modern law, all management powers, except those expressly reserved to shareholders at the general meeting, correspond to the board of directors, which has powers to appoint officials who are subject to the supervision and control of the board. Board members resemble agents in that they act on behalf of others and are fiduciaries due to duties of loyalty and care. However, these duties are due to the corporate body itself and not to the shareholders. An individual director, as such, is even less like an agent than the board as a body. Even when he acts as a member of the board, he does not act as an agent, but as a member of the group that oversees the activities of the corporation. However, it may be designated an agent of the incorporated body.

Director as Agent: The Madras High Court observed that normally a director is not an agent of the Company, but when acting as a director in charge and corresponding with another party to carry out a contract, they will act as an agent. As such, the responsibility rests with the company and not with the agent personally. (Puddokottah Textiles Ltd. v. BR Adityan (1975) 88 Mad. LW 688, 790)

The court has the power under its equitable jurisdiction to award interest whenever a person in a fiduciary position, such as a Company Director, misuses the money that he controls in his fiduciary capacity. As long as the transaction in which the money was used was of a commercial nature, the court will presume that it was profitable and the court will give adequate compensation for the profits that are presumed to have been made. (Wallersteiner vs. Moir (1975) 1 All ER 849, 865)

The Supreme Court has described the office of a Director as well,

“The Director of a Company is not a server but an agent insofar as a company cannot act on its own, but only through its directors, who as regards the Company have an agent relationship with the principal” . (Ramprasad Vs. Income Tax Commissioner (1973) A. Sc. 637, 640; Income Tax Commissioner Vs. Man Mohandas (1966) A. Sc. 743; 59, ITR – 699)

A managing director can have a double capacity. It can be both a director and an employee. You have not only the personality of a director, but also the personality of an employee or an agent, depending on the terms of your employment and the Company’s Articles Association. The term “employee” is fairly straightforward to cover both relationships.

An agent, although obliged to exercise his authority in accordance with the legal instructions given to him, is not subject to the direct control and supervision of the principal. A Managing Director of a Company, if he is to act under the direction of a board of directors, is a servant.

A Managing Director has two functions and two capacities. As CEO, you have a contract with the company and this contract is an employment contract. More specifically, it is a service contract and not a service contract.

A director of a company is not necessarily an agent of the company or its shareholders. If you are acting as an agent, you must say so specifically. Therefore, when a director did not make such an allegation in his written statement, he is considered to have acted in his personal capacity. Therefore, sections 230 and 235 of the Contract Law do not prohibit bringing a lawsuit against him alone. (Raja Ram Jaiswal vs. Ganesh Parshad, AIR 1959 All 29)

CEO benefiting himself: A CEO appointed for ten years resigned from his position that the company refused to accept and was therefore still in service. Although he was apparently in service, his orders to the company’s suppliers and his relationships with customers violated his duty and his fidelity and good faith as a Director by not personally benefiting from contracts apparently entered into on behalf of the company. (Thomas Marshall Exports Ltd. v. Guinde (1978)) A Master is liable for the torts of his servant committed during the course of his employment, regardless of whether the master obtains any benefit. The role of an agent is to enter into relationships on behalf of its principal with third parties. It acts at its discretion and judgment, but within the limits of its authority.

As a company is a legal entity and can only contract through its agents, the normal way of signing is to use the words “on behalf of” this or that company before the signing of the signing agent, and if an agent If you sign it, no personal responsibility will be attributed to you. Directors are agents of the company to the extent of the authority delegated to them. Therefore, when the directors enter into a contract on behalf of the company or with the intention of binding it, it is the company, the principal, who is responsible and not the directors. Directors are not personally liable unless they appear to have assumed personal responsibility.

The directors are not personally liable by virtue of a contract that is lawful and that they have entered into in the proper exercise of their authority. The directors bought goods for their company and agreed with the supplier to assign obligations for the price. Before the bonds could be issued, the company went into liquidation. The supplier was not held responsible for holding the directors personally liable under the contract (Elkington & Co. v. Hurter, (1982) 2 Ch 452).

In another case, in which its directors together with the majority shareholder appointed an accountant of the company and, subsequently, the person acting as director dismissed the accountant, he was not held responsible for compensating the accountant because he had only acted as an officer of the company. company, but was responsible for the accountant’s litigation costs and expenses. This is because the litigation was solely due to his conduct in acting despotically (Schouls v. Canadian Meat Processing Corporation, [1980- 1984] LRC (Comm) 778).

Section 226 of the Indian Contract Law presumes that the agent’s contract or act is one which, between the principal and the third person, is binding on the principal. If the contracts are declared or performed on behalf of the principal and are within the scope of the agent’s actual authority, there is no difficulty. With respect to contracts and acts that are not really authorized, the principal may be bound by them by virtue of the preclusion principle, if they are within the scope of the agent’s ostensible authority; but in no case is it bound by any unauthorized act or transaction with respect to persons who have knowledge that royal authority is being exceeded. Therefore, no act performed by an agent in excess of his actual authority is binding on the principal with respect to persons who have knowledge that the act is not authorized. An agent who was appointed by a proxy, borrowed money in the faith of a statement made by him that the proxy gave him full authority to borrow and misapplied it. The agent produced the power of attorney, which did not authorize the loan, but the lender did not read it and made the advance relying on the agent’s representation. It was held that the lender should be deemed to have had knowledge of the terms of the power of attorney and that the principal was not bound by the loan. (Jacobs v. Morris (1902) 1 Ch 816) With respect to Sec. 238 of the same Act, which deals with the effect of an agreement of misrepresentation or fraud on the part of the agent, obliges the principal that such acts of the agent have the same effect as if the principals had committed fraud or misrepresentation. But misrepresentations or fraud committed by agents in matters that are not within their authority do not affect their directors.

When negotiating a contract for his company, a director must make it clear to the other party that the contract will be entered into by the company and not by the director personally. If he does not do so and the other party believes that he is contracting with the director or agent and not with the company, the contract they enter into will be personal and he will be personally responsible for the fulfillment of the promises made. (Bridges & Salmon Ltd. v. The Swan (owners), (1968) 1 Lloyds Rep 5)

Written and sent by: –

STUTI BANSAL

IV year, BBALL.B

Symbiosis Law School,

Pune