Your Advocate
This week Your Advocate is Barrister Tanjib-ul Alam Advocate, Supreme Court of Bangladesh. He is the head of the chamber of a renowned law firm, namely, 'Tanjib-ul Alam and Associates ',which has expertise mainly in commercial law, corporate law, admiralty, employment and labor law, land law, banking law, constitutional law, telecom law, energy law, Alternative Dispute Resolution, Intellectual Property Rights and in conducting litigations before courts of different hierarchies.
Query
Dear Sir, after seeing your response last week I came up with my problem which also relates with company matter. X (don't want to disclose the name) is a life insurance company. According to the Articles of association of the company the directors of the company were authorized to make payments towards any charitable or any benevolent object or for any general public or useful object. Subsequently the directors paid a huge amount to a trust named Z which is formed for the purpose of promoting technical and business knowledge. However, due to the lack of proper management the trust did not run properly and accordingly faces loss which ultimately causes loss to the company. Here before doing this, they make a resolution with the ordinary shareholders by a simple majority. In this case whether the directors would be liable to make loss to the company? And another point is that whether the directors can spend company's money to make grants of every kind or not?
Mr. Badiur Rahman
Road no.27 Dhanmondi, Dhaka.
Response
The laws relating to Directors duties provide that the relationship between the company and the Directors is that of a fiduciary relationship. As such, each Director is under an obligation to work for the best interest of the company. A Director may be held personally responsible for the loss caused to the company if it can be established that he acted in breach of his duty. Whether a given transaction, which resulted in a loss to the company, constitutes breach of duty is a matter of fact and needs to be proved before the court. Mere fact that a transaction resulted in loss would not necessarily constitute breach of Director's duty so as to make him personally liable.
In the given scenario, the act of donating fund to a charitable organisation formed by the company would not, in my opinion, constitute a breach of Directors duties due to the fact that the decision of granting donation itself did not cause any loss to the company as the company wanted to donate the money to a charitable organisation and it had done so. Therefore, the expenditure incurred by the company was not a loss to the company. The fact that the donation was approved by the shareholders in a general meeting clearly demonstrate that the Directors had acted with the consent of the shareholders.
It should also be kept in mind that the loss of the charitable organisation does not constitute loss of the company. The company is a separate legal entity as such it cannot be said that loss of the charitable trust amounts to loss of the company.
If the charitable trust has suffered loss due to negligence of the trustees, then appropriate action may be taken against the Trustees under the Trust Act, 1882. The duties of Trustee are prescribed in the Trust Act, 1882 which provide, inter alia, that the Trustees are under a duty to take care of the trust property in such a manner that he would have taken had the property been his own property.
Whether the Director can spend company's money to make grants in any manner they want would depend on the situation. As a matter of general principle, the Directors has the power to spend company's money in a manner which will serve the interest of the company. Therefore, if the Directors genuinely believe that granting donation to a charitable organisation would enhance the image of the company, they may do so. However, the Directors do not have unfettered power to grant money to charitable organisation without any objective basis. Thank you for your query.
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