Promotion to the Board of Directors is generally considered to be one of the most rewarding milestones in a career. Nevertheless, the majority of those who assume such a position, consequently, do not realize the extent of the legal obligations that come with it. According to Indian corporate law, being on the board is not simply having the authority but it is being a trustee. This concept is very clear in the first part of Section 166 of the Companies Act 2013, where it is precisely spoken about the obligations the directors have and the moral code they are supposed to follow.
Unlike procedural parts, Section 166 deals with the core of corporate governance. It lays down the rule that directors must be of a certain mindset, must behave in a certain manner, and must make their decisions in a certain way. Any departure from the norm, whether it be deliberate or by negligence, will, be subject to severe ramifications. Consequently, comprehension of Section 166 of the Companies Act 2013 is a must for every director, promoter, and senior executive.
What Is Section 166 of the Companies Act, 2013?
Section 166 of the Companies Act, 2013 outlines the fiduciary duties of directors. It sets the ethical & legal framework within which directors must operate while managing the affairs of a company.
The section applies to all directors, including:
Executive directors
Non-executive directors"
Independent directors
At its core, Section 166 ensures that directors do not misuse their position, do not act negligently, & do not place personal interest above the company’s interest.
In simple terms, the law expects directors to act like responsible custodians, not owners.
Acting in Accordance With the Articles of the Company
One of the most fundamental duties under Section 166 is compliance with the company’s constitutional documents.
The law clearly states that a director of a company shall act in accordance with the articles of the company. This means directors cannot act arbitrarily, even if they believe they are acting in the company’s best interest.
Any decision taken:
Beyond the Articles of Association"
In violation of internal rules
Without required approvals
can be challenged as invalid and may expose directors to liability.
Duty to Act in Good Faith for the Benefit of the Company
Section 166 of Companies Act 2013 requires directors to act in good faith to promote the objects of the company. This duty goes beyond profits.
Directors must consider:
Long-term growth of the company
Interests of shareholders
Welfare of employees
Impact on the community & environment
This stakeholder-centric approach distinguishes modern corporate governance from older, profit-only models.
Duty to Exercise Reasonable Care, Skill, and Diligence
Another critical obligation is the duty to exercise reasonable care, skill & diligence.
This does not mean directors must be experts in every field. However, it does mean:
Attending board meetings regularly
Reviewing documents before approval
Asking questions when something appears unclear
Applying professional judgment
Ignorance is not a defence. Passive directorship is risky under Section 166(3) of Companies Act 2013.
Avoidance of Conflict of Interest
Directors must avoid situations where their personal interest conflicts with the interest of the company.
Under Section 166(4):
Directors must not involve themselves in transactions where conflict exists
Related party interests must be disclosed
Decisions must be taken transparently
Failure to manage conflicts properly is one of the most common governance failures leading to penalties and disqualification.
No Undue Gain or Advantage
Section 166(5) of Companies Act, 2013 prohibits directors from gaining any undue advantage for themselves, their relatives, or associates.
If a director is found guilty:
Any undue gain must be returned to the company
Penalty provisions may apply
This ensures that directors do not exploit insider knowledge or influence for personal benefit.
Penalty Under Section 166 of Companies Act, 2013
Non-compliance with duties under Section 166 is not merely theoretical.
Section 166 of Companies Act 2013 penalty includes:
Monetary penalties imposed on directors
Personal liability in certain cases
Potential impact on disqualification proceedings
This provision reinforces accountability and discourages reckless or dishonest conduct.
Section 166(2) of Companies Act 2013 Explained
Section 166(2) is particularly focused on the requirement that the director must act in good faith and for the benefit of all the stakeholders. Judging from this sub-section, courts are progressively using it as a yardstick when they have to decide on the behaviour of directors in conflicts, insolvency, and shareholder litigation..
It serves as a benchmark for ethical decision-making in boardrooms.
Roles and Responsibilities of Directors Under Companies Act, 2013
The roles and responsibilities of directors Companies Act 2013 extend beyond daily management.
Directors are responsible for:
Strategic direction
Risk management
Compliance oversight
Financial discipline
Section 166 acts as the ethical compass guiding these responsibilities.
Interlinking With Other Key Sections
Section 166 works closely with other governance provisions:
Section 134 of Companies Act 2013 – Board’s report and responsibility statement
Section 177 of Companies Act 2013 – Audit committee oversight
Section 166(7) of Companies Act 2013 – Reinforces accountability
Together, these sections form the backbone of corporate governance in India.
Why Section 166 Matters More Than Ever
In today’s regulatory environment, directors are under greater scrutiny than ever before. Investigations, audits, and shareholder activism often revolve around duties of directors Section 166.
A single poor decision—or failure to act—can have personal legal consequences. Understanding this section is not optional. It is essential.
Final Thoughts: Directorship Is a Responsibility, Not a Title
Section 166 of the Companies Act, 2013 makes it clear that being a director is not about power—it is about responsibility. The law expects integrity, diligence, and fairness.
Directors who understand and respect these duties not only protect themselves legally but also build stronger, more trustworthy companies.
Need expert guidance on directors’ duties, board compliance, or corporate governance under the Companies Act? Visit Callmyca.com for professional advisory and compliance support you can rely on
