Duties of Directors under Companies Act: Section 166 Explained

The duties of directors under Companies Act, 2013 are set out in section 166: act according to the articles, act in good faith for the members as a whole and in the best interests of the company, its employees, shareholders, the community and the environment, use due and reasonable care, skill and diligence with independent judgment, avoid conflicts of interest, make no undue gain, and never assign the office. A director who breaches section 166 faces a fine of ₹1 lakh to ₹5 lakh (s.166(7)), must repay any undue gain to the company, and can also be sued for breach of fiduciary duty.

The duties of directors under Companies Act, section by section

1. Follow the articles (s.166(1)). Acting outside the articles of association is a breach.
2. Good faith for all stakeholders (s.166(2)). The director must promote the company’s objects “for the benefit of its members as a whole” and act in the best interests of the company, its employees, the shareholders, the community and for the protection of environment. This is wider than the old shareholder-only view.
3. Care, skill, diligence and independent judgment (s.166(3)). Read board papers, ask questions and do not simply follow the managing director. Good minutes are how a director later proves this duty was met.
4. No conflict of interest (s.166(4)). A director must not be in a situation with a direct or indirect interest that conflicts, or possibly may conflict, with the company’s interest.
5. No undue gain (s.166(5)). No undue gain or advantage for the director or relatives, partners or associates. If found guilty, the director pays an amount equal to the gain to the company.
6. No assignment of office (s.166(6)). Any assignment is void.

Related rules that create personal liability

• Disclosure of interest (s.184): disclose concerns or interests in other companies and firms; do not participate in board discussion of a contract in which you are interested.
• Related party transactions (s.188): board approval, and shareholder approval above the Rule 15 thresholds, unless the deal is in the ordinary course of business and at arm’s length. A director who authorises a non-compliant contract can be made to make good the company’s loss (s.188(3)).
• Officer in default (s.2(60)): this is the definition used by most penalty provisions. It catches whole-time directors, KMP, anyone in charge of a matter who knowingly permits a default, and a director who knew of a contravention through board proceedings and did not object.
• Disqualification (s.164(2)): if a company fails to file financial statements or annual returns for any continuous period of three financial years, its directors cannot be reappointed there or appointed in any other company for five years.
• Cheque dishonour (s.141, NI Act): persons in charge of and responsible for the company’s business when a cheque bounced can be prosecuted with the company.
• Fraud (s.447): remains criminal, though many technical defaults became civil penalties under s.454 after the 2019 and 2020 amendments.

A real-life board meeting example

Ishita, 32, becomes a director of Kaveri Retail Private Limited, Ahmedabad. At her first board meeting, the managing director proposes leasing a warehouse from his brother’s firm at a rent well above market. Ishita does four things:

1. Asks for a market rent comparison from unrelated landlords.
2. Notes that the managing director must disclose his interest and stay out of the discussion (s.184).
3. Asks the company secretary whether the lease needs board and shareholder approval under s.188, since it is with a related party and not at arm’s length.
4. Asks that her questions and any dissent be recorded in the minutes.

If the lease later causes loss, the minutes show she met the duties of directors under Companies Act, especially care and independent judgment under s.166(3).

How a new director can stay safe

• Before joining, read the articles, recent board minutes and financial statements, and ask how the board tracks the duties of directors under Companies Act.
• Attend meetings. A director who stays away from all board meetings for twelve months vacates office (s.167).
• Read papers in advance and record dissent in the minutes.
• Track filings to avoid s.164(2) disqualification.
• Ask whether the company holds directors and officers (D&O) insurance. The company can pay the premium (s.197(13)), but insurance does not cover fraud or criminal fines.
• If you resign, give written notice with reasons and keep proof. The company must inform the Registrar within 30 days, and you may also send a copy with reasons to the Registrar within 30 days (s.168(1)). You stay liable for offences committed during your tenure (s.168(2)).

Frequently asked questions

What are the duties of directors under Companies Act, 2013?

Section 166 requires a director to act according to the articles, act in good faith for the members as a whole and the interests of employees, shareholders, the community and the environment, use due care, skill, diligence and independent judgment, avoid conflicts, make no undue gain and not assign the office.

What is the penalty for breach of section 166?

A fine of not less than ₹1 lakh, which may extend to ₹5 lakh (s.166(7)). A director found guilty of undue gain must also pay an equal amount to the company, and the company or shareholders can bring civil action.

Are independent directors liable for company defaults?

Only in limited cases. Under s.149(12), independent and non-executive directors who are not promoters or KMP are liable for acts of the company that occurred with their knowledge through board processes, with their consent or connivance, or where they did not act diligently.

Does resigning end a director’s liability?

No. Section 168(2) keeps a director liable for offences during their tenure even after resignation. Resign in writing and make sure the Registrar is informed.

Quick quiz

To learn the duties of directors under Companies Act with case studies and checklists, see the Business Law for Managers certificate course.

Sources

• Companies Act, 2013: ss.2(60), 149(12), 164(2), 165, 166, 167, 168, 184, 188, 197(13), 447, 454
• Companies (Meetings of Board and its Powers) Rules, 2014: Rule 15
• Negotiable Instruments Act, 1881: s.141

This page is for education and general information, not legal advice for a specific case. Law as on 31 October 2026.