Sec 182.of the Indian Contract Act, 1872 says that “An ‘agent’ is a person employed to do an act for another or to represent another in dealings with third person. The person for whom such act is done, or who is so represented, is called the principal”
Where one employs another to do an act for him or to represent him in dealings with third parties, the person so employed is called an agent. In the theory of the English law, the agent is a connecting line between the principal & third parties. He is an intermediary who has the power to create legal relationships between the principal and the third parties.
Sec. 2(13) of the Companies Act, 1956 defines that “‘director’ includes any person occupying the position of a director by whatever name called”
Thus, director is an individual lawfully appointed to the Board of Directors of a company which is duly constituted to direct, control and supervise the activities and affairs of a company. Directors of a company are in the eye of law agents of the company for which they act and the general principles of the law of principal and agent regulate in most respects the relationship of the company and its directors. (Somayazula vs. Hope Prodhome & Co. (1963) 2 An W.R. 112.)
The test of agency is whether the person is purporting to enter into transaction on behalf of the principal or not. In order to constitute 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 of its shareholder, but the true position of the directors of a company may that be of agents for the company with powers and duties of carrying on the whole of its business, subject to the restrictions imposed by the Articles of Association. A Director or a managing director may not be a servant of the company; he may be an agent of the company for carrying on its business. What he 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, or the corporation, or its members. Under modern legislation, all powers of management, except those expressly reserved to the shareholders in general meeting, are vested in the board of directors, who have powers to appoint officers who are subject to the supervision and control of the board. Members of the board resemble agents in that they act on behalf of others, and are fiduciaries owing to the duties of loyalty and care. However, these duties are owed to the corporate body itself rather than to the shareholders. An individual director, as such, has still less resemblance to an agent than has the board as a body. Even when he acts as member of the board, he does not act as an agent, but as one of the group which supervises the activities of the corporation. However, he may be appointed an agent of the incorporated body.
Director as an agent: The Madras High Court observed that normally a director is not an agent of the Company but where he acts as a director- in- charge and corresponds with another party to bring about a contract he will act as an agent. As such the liability is of the company and not the agent personally. (Puddokottah Textiles Ltd. vs. B.R. Adityan (1975) 88 Mad. L. W. 688, 790)
The court has power under its equitable jurisdiction to award interest whenever a person in a fiduciary position, such as Director of Company, misuses money that he controls in his fiduciary capacity. Whenever the transaction in which the money used was of a commercial nature the court will presume that it was profitable and the court will give adequate compensation for the profits assumed to have been made. (Wallersteiner vs. Moir (1975) 1 All E.R. 849, 865)
The Supreme Court has described the office of a Director thus,
“The Director of a Company is not a servant but an agent inasmuch as a company cannot act in its own person but only through its directors, who qua the Company have a relationship of an agent to the principal.” (Ramprasad Vs. Commissioner of Income Tax (1973) A. Sc. 637, 640; Commissioner of Income Tax Vs. Man Mohandas (1966) A. Sc. 743; 59, I.T.R. – 699)
A managing Director may have a dual capacity. He may both be a director and an employee. He has not only the persona of a director but also the persona of an employee or an agent depending on terms of his employment and the Company’s Articles Association. The term ’employee’ is facile enough to cover both these relationships.
An agent though bound to exercise his authority in accordance with lawful 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 directions of a board of Directors is a servant.
A Managing Director has two functions and two capacities. As a Managing director he is under a contract with the company and this contract is contract of employment. More specifically it is a contract of service and not for service.
A Director of a Company is not necessarily an agent of the company or its shareholders. If he acts as an agent he must specifically say so. So where in his written statement a director did not raise such a plea, he is deemed to have acted on his personal capacity. So a suit against him alone is not barred by Sections 230 and 235 of the Contract Act. (Raja Ram Jaiswal vs. Ganesh Parshad, AIR 1959 All 29)
Managing Director benefiting himself: A Managing Director appointed for ten years resigned his post which the company refused to accept and therefore he was still in service. While being ostensibly in service his placing orders with the company’s suppliers and dealings with customers, was breach of his duty and fidelity and good faith as Director not to benefit personally by contracts ostensibly 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 irrespective of the master deriving any benefit. An agent’s function is to enter into relations on behalf of his principal with third persons. He acts at his discretion and judgment but within the limits of his authority.
As a company is an artificial person and can only contract through its agents, the normal mode of signing is to use the words “on behalf of” so and so company before the signature of the agent signing, and if an agent so signs, no personal liability will attach to him. Directors are agents of the company to the extent of the authority delegated to them. Hence, where directors make a contract in the name of, or purporting to bind the company, it is the company- the principal- which is liable on it and not the directors. The directors are not personally liable unless it appears that they took personal liability.
Directors are not personally liable under a contract which is lawful and which they have made in the proper exercise of their authority. Directors purchased goods for their company and agreed with the supplier to allot him debentures for the price. Before the debentures could be issued, the company went into liquidation. The supplier was held not liable to make the directors personally liable under the contract (Elkington & Co. vs. Hurter, (1982) 2 Ch 452) .
In another case, where its directors cum majority shareholder appointed an accountant for the company and he subsequently acting as a director removed the accountant, he was held not liable to compensate the accountant because he had acted only as an officer of the company but he was liable for the accountant’s costs and expenses of litigation. This is because the litigation was solely due to his conduct in acting in a highhanded manner (Schouls vs. Canadian Meat Processing Corporation, [1980- 1984] LRC (Comm) 778) .
Section 226 of the Indian Contract Act assumes that the contracts or act of the agent is one, which, as between the principal and third person, is binding on the principal. If the contracts is entered into, or act done professedly on behalf of the principal and is within the scope of the actual authority of agent, there is no difficulty. With regard to contracts and acts which are not actually authorized, the principal may be bound by them on the principal of estoppel, if they are within the scope of the agent’s ostensible authority; but in no case is he bound by any unauthorized act or transaction with respect to persons having notice that the actual authority is being exceeded. Therefore no act done by an agent in excess of his actual authority is binding on the principal with respect to persons having notice that the act is unauthorized. An agent who was appointed by a power of attorney, borrowed money on the faith of a representation made by him that the power gave him full authority to borrow and misapplied it. The agent produced the power, which did not authorize the loan, but the lender did not read it, and made the advance in reliance on the agent’s representation. It was held that the lender must be taken to have had notice of the terms of the power and that the principal was not bound by the loan. (Jacobs v. Morris (1902) 1 Ch 816) In regard to Sec. 238 of the same Act, which deals with effect on agreement of misrepresentation or fraud by agent, makes the principal bound by such acts of the agent having same effect as though the principals had committed the fraud or misrepresentation. But misrepresentations made or frauds committed by agents in matters that do not fall within their authority do not affect their principals.
While negotiating a contract for his company, a director should 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 this and the other party believes that he is contracting with the director or agent and not the company, the contract they conclude will be a personal one and he will be personally liable for the fulfillment of the promises made. (Bridges & Salmon Ltd. vs. The Swan (Owners), (1968) 1 Lloyds Rep 5)
Written and submitted by: –
STUTI BANSAL
IVth year, B.B.A.LL.B
Symbiosis Law School,
Pune