As companies grow, diversify into newer ventures, and get involved in growing number of deals, their operations tend to become increasingly complex and versatile. This creates a conundrum for the board of directors, who have enormous responsibilities towards the well-being of their companies.

Directors are not only responsible to their companies but also answerable to shareholders and governmental agencies for their decisions and actions. However, in large multidimensional companies, the diversity of operations requires more than just the collective brains of a limited number of directors. The decision-making and execution process is often delegated to special committees set up under the board of directors, as provided in the Articles of Association of such companies. This delegation is meant not only to reduce excessive workload on the board, but also to allot the decision-making process to more competent people within the company.

The concern that arises upon such delegation is of the circumstances which may give rise to civil or criminal liability on the part of company directors for actions of the committees and hence, the need for necessary measures for preventing the cause of such liabilities.

The various powers extended to the board of directors emanate from the Companies Act, 1956, and the Articles of Association of the particular company. Section 291 of the Companies Act, 1956 gives broad powers to the board to do all such acts to run the company.

Pursuant to section 291, the power of the board to set up and direct committees is usually provided for in the Articles of Association of the company. The same, if provided for in the Memorandum of Association, is not valid.

In the present days of corporate management, it may not be possible for the board to take each and every decision by itself. Therefore, the need for delegation of powers to committees is witnessing a gradual increase. However, in Re City Equitable Fire Insurance Co. Ltd., it has been held that a board of directors of a company cannot transfer materially or substantially, their entire powers to a committee and it must continue to exercise a proper supervision. Nor can a board delegate any power conferred upon it by shareholders, which would not otherwise have had.

The term ‘delegation’ has been defined as ‘the grant of authority to a person to act on behalf of one or more others for agreed purposes’ in the Oxford Dictionary of Law (Ed. 2008). The word ‘delegation’, as generally used, does not imply parting with the power or authority, which is the subject matter of delegation. It merely implies that the person, whom the power is delegated, has the authority to do those tasks, which the person delegating may do himself. Therefore, when the board delegates its powers to committees, it grants the committees the power to act on behalf of itself. The actions taken by the committees are therefore those which may be deemed to have been taken on behalf of the board, thereby making the board vicariously liable for the actions of the committees. However, there are limitations to what can create a civil or criminal liability.

The legal position of directors is merely as a company’s agents. They are special and not general agents. Therefore, they have a fiduciary duty toward their companies. A breach of this duty shall make the directors liable. However, mere incompetence is not a breach of a director’s fiduciary duty. If a director acts in such a manner, which he thinks will benefit the company and later establishes the same in the court of law, then there will not be any breach of his fiduciary duty. However, in case of gross negligence or incompetence, a claim of breach of a duty of care or breach of contract may become applicable.

When the board grants authority to a committee to act on its behalf, the committee is expected to maintain the same level of competence as the board and be knowledgeable of the fiduciary duty expected of the directors that comprises the board.

In such an event, the care displayed in choosing the members of the committee, since the same is done by the board, is of paramount importance. It is the duty of the board to select such persons, who will benefit the company and not cause any undue harm to the company’s interests. The directions and restrictions imposed upon the committee by the board are meant to regulate the activities of the committee, and it may be presumed that the board has taken a reasoned decision in setting up the committee and nominating the persons, who form a part of such committees.

In the United Kingdom, in the case of Cohen v. Selby, the Court of Appeal held that if the delegation to a particular delegate was wrongful, it was important to determine if the delegate was an unsuitable person to be entrusted with the powers given to him and if the director was aware of it or had failed to consider the question of such competence at all.

The responsibility of the board of directors towards committees goes beyond the initial nomination of members. The board is also expected to employ a reasonable level of supervision on the proceedings of the committees to ensure that the actions taken by the latter are in the interest of the company and its shareholders.

However, at the same time, the law does not require that the director must distrust and constantly supervise the committee and its actions. In the often cited case of Dovey v. Corey, the Earl of Halsbury LC famously observed that “the business of life could not go on, if people could not trust those, who are put into a position of trust for the express purpose of attending to details of management.” Therefore, the board of directors need to ensure that a competent person has been appointed in such a position as is in consonance with his capabilities and competencies as a delegate, and that there are no apparent grounds to suspect that anything is amiss.

While a reasonable level of supervision is expected of the board towards the committees, a lack of supervision will not absolve the board of directors of their liabilities. Any action by the committees, which is proven to have been detrimental to the interests of the company, should have reasonably known in advance to the board.

In the South African case of Fisheries Development Corporation of South Africa Ltd. v. Jorgensen, it has been held that directors cannot be shielded from liability because of lack of knowledge of wrongdoing, if such lack of knowledge is a result of gross inattention. This concept has been further explained in the case of Govind v. Ranganath wherein the Bombay High Court held that wilfully shutting the eyes towards the acts of recklessness or fraud of those, who have been delegated powers by the board of directors, will not absolve the directors of their liability.

We are thereby led to two principal circumstances wherein actions of the committees will create civil or criminal liabilities on the board of directors of a company.

The board of directors shall be liable for all actions of the committees that are detrimental to the company or its interests or that of the shareholders wherein the delegation of powers by the board could be proved to be rongful for the reason that the board was aware of the incompetencies of the members constituting the committees that it had set up, and such incompetencies are the direct cause of such detriment to the company’s interests. Since the board delegates essential powers to the committees, it is expected to select such responsible and able members, who will act competently and not cause any detriment to the well-being of the company and its shareholders.

The board of directors shall also be liable for all acts of incompetence or fraudulent actions of the committees should it have deliberately failed to notice and address such issues or taken adequate actions to prevent or mitigate such issues.

It must be reiterated that actions taken by the board of directors or committees that are bona fide and are taken bearing in mind the wel-being of the company, will not make the directors or the board liable. If it can be proven that the actions were taken in the best interest of the company with due care and diligence and that there was no gross incompetence on part of the board involved, the board will not be held liable.