Section 182 of the Indian Contracts Act, 1872 says that “An ‘agent’ is a person employed to perform an act for another or to represent another in dealings with a third party. The person who is represented, is called the principal”

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

Dry. 2(13) of the Companies Act 1956 defines that “‘director’ includes any person holding the office of director by any named name”

Thus, a director is a person legally designated to be part of the Board of Directors of a duly constituted company to direct, control and supervise the activities and affairs of a company. The directors of a company are under the watchful eye 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 between the company and its directors. (Somayazula vs. Hope Prodhome & Co. (1963) 2 Year WR 112.)
The agency test is whether the person intends to make 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 shareholders, but the true position of the directors of a company may be that of agents of the company with powers and duties to carry on all of its business, subject to the restrictions imposed by the statutes. A Director or a delegated administrator cannot be a servant of the company; You can be an agent for the company to carry out your business. What it actually is 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 of the corporation, or of its members. Under modern law, all management powers, except those expressly reserved to shareholders at a general meeting, are vested in the board of directors, which has the power to appoint officers who are subject to the supervision and control of the board of directors. Board members are similar to agents in that they act on behalf of others, and are fiduciaries due to duties of loyalty and care. However, these duties are owed to the corporate entity itself and not to the shareholders. An individual director, as such, is even less like an agent than the board as a body. Even though he acts as a member of the board of directors, he does not act as an agent, but as one of the group that oversees the activities of the company. However, he may be appointed agent of the incorporated entity.

Director as agent: The Madras High Court noted that normally a director is not an agent of the Company, but when he acts as director-in-charge and communicates with another party to enter into a contract, he will act as agent. As such, the responsibility lies 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, as a Director of the Company, misuses money controlled by him 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 compensate appropriately for the profits that are supposed to have been obtained. (Wallersteiner v. Moir (1975) 1 All ER 849, 865)
The Supreme Court has thus described the position of Director,
“The Director of a Company is not a server but a proxy to the extent that a company cannot act by itself but only through its directors, who as a Company have a proxy relationship with 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, ITR – 699)
A Chief Executive Officer may have double character. It can be both director and employee. He not only has the personality of a director, but also that of an employee or agent, depending on the conditions of his employment and the statutes of the company. The term ’employee’ is easy enough to cover these two relationships.
An agent, although required to exercise his authority in accordance with 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 instructions of a board of directors, is a servant.

A Director General has two functions and two capacities. As CEO, he has a contract with the company and this contract is an employment contract. More specifically it is a service contract 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 say so specifically. So, when a director did not raise 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 Act do not prohibit a claim against him alone. (Raja Ram Jaiswal vs. Ganesh Parshad, AIR 1959 All 29)

CEO for his own benefit: A CEO appointed for ten years resigned from his position that the company refused to accept and therefore remained in service. While ostensibly on duty, placing orders with company suppliers and dealing with customers was a breach of duty, fidelity and good faith as a Director not to benefit personally from contracts ostensibly entered into on behalf of the company. (Thomas Marshall Exports Ltd. v. Guinde (1978)) A Master is liable for damages to his servant committed in the course of his employment, regardless of whether the master derives any benefit. The function of an agent is to establish relationships on behalf of its principal with third parties. He acts at his discretion and judgment, but within the limits of his authority.

As a company is a legal person and can only contract through its agents, the normal way of signing is to use the words “on behalf of” such and such a company before the signature of the signing agent, and if an agent If you sign so, you will not be held personally liable. The directors are agents of the company to the extent of the authority delegated to them. Therefore, when directors enter into a contract on behalf of the company, or with the intent to bind it, it is the company – the director – who is responsible and not the directors. Directors are not personally liable unless they appear to have taken personal responsibility.

Directors are not personally liable under a lawful contract entered into in the proper exercise of their authority. The directors purchased goods for their company and agreed with the supplier to assign obligations for the price. Before the debentures could be issued, the company went into liquidation. The provider was not required to hold the directors personally liable under the contract (Elkington & Co. v. Hurter, (1982) 2 Ch 452).

In another case, when its directors and majority shareholder appointed an accountant to the company and he, acting as director, subsequently removed the accountant, it was considered that he was not required to indemnify the accountant because he had acted only as an official of the company but was not responsible for the costs and expenses of the accountant’s litigation. This is because the dispute arose solely from his conduct in acting in a high-handed manner (Schouls v. Canadian Meat Processing Corporation, [1980- 1984] LRC (Communication) 778).

Section 226 of the Indian Contracts Act assumes that the agent’s contracts or acts are one which, between the principal and a third person, is binding on the principal. If the contracts are entered into or the act is performed on behalf of the principal and is within the real authority of the agent, there is no difficulty. Regarding contracts and acts that are not really authorized, the principal may be bound by them in principle of estoppel, if they are within the scope of the ostensible authority of the agent; but in no event is he bound by any unauthorized act or transaction with respect to persons having knowledge that royal authority is being exceeded. Therefore, no act performed by an agent in excess of his actual authority binds the principal with respect to persons who have knowledge that the act is unauthorized. An agent who was appointed by a power of attorney borrowed money in reliance on a representation by him that the power of attorney 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 considered to have been aware 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 on the agreement of misrepresentation or fraud by the agent, makes the principal liable for such acts of the agent having the same effect as if the directors had committed the fraud or misrepresentation. But false statements or fraud committed by agents in matters that are not within their competence do not affect their principals.

While 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 Presented By:-
BANSAL STUDY
IV year, BBALL.B
symbiosis Law School,
pune