Director Duties Under the Companies Act 2013 — What Every Startup Founder Must Know

BySirish Tamvada

Editorial note: Originally drafted in January 2026 and published as part of The Tamvada Brief archive.

Most Indian founders sign their first director consent on the day they incorporate the company, and never read the section that tells them what they are signing up for. Section 166 of the Companies Act, 2013 codifies the duties of a director. For 95 years before 2013, those duties lived in scattered judgments, English fiduciary law, and the lawyer’s drawer. Now they sit in seven sub-sections, and getting them wrong is a personal liability matter.

Here is what they actually say, and what they mean for a founder running a 30-person startup in Bangalore.

The seven duties of Section 166

The Companies Act 2013 became law on 12 September 2013. Section 166 — titled “Duties of directors” — applies to every director of every company in India, public or private, listed or unlisted.

The seven duties:

  1. Act in accordance with the company’s articles (Section 166(1))
  2. Act in good faith to promote the objects of the company for the benefit of its members as a whole, and in the best interest of the company, its employees, the shareholders, the community and for the protection of environment (Section 166(2))
  3. Exercise duties with due and reasonable care, skill and diligence and independent judgment (Section 166(3))
  4. Not be involved in a situation of direct or indirect conflict of interest with the company (Section 166(4))
  5. Not achieve or attempt to achieve any undue gain or advantage, either to himself or his relatives, partners, or associates (Section 166(5))
  6. Not assign his office (Section 166(6))
  7. Penalty for contravention — fine of not less than Rs 1 lakh extending to Rs 5 lakh (Section 166(7))

That last provision is what makes this not just a textbook list.

What these mean in operating terms

Duty 2 — “best interest” includes more than shareholders. Read literally, Section 166(2) directs the director to act in the interest of the company, its members, its employees, shareholders, community, and environment. This is broader than the classic Anglo-Indian fiduciary formulation that anchored everything in shareholder benefit. In practice, this gives Indian directors statutory cover to make decisions that are good for employees or community even where short-term shareholder benefit is unclear — but it also means a director cannot defend a decision purely on “we maximised return”.

Duty 3 — “independent judgment”. Section 166(3) imposes both care and diligence and independent judgment. For founder-directors who also represent investors on the board (via shareholder agreements that nominate them), this matters: a nominee director is expected to bring their judgment, not just their nominator’s instructions, to board decisions. The judgment of the Bombay High Court in Globe Motors Ltd v Mehta Teja Singh & Co (1984), and the principles repeated since, is that nominee directors who simply rubber-stamp the nominator’s view breach their independent-judgment duty.

Duty 4 — conflict of interest. Section 166(4) read with Sections 184 (disclosure of interest) and 188 (related-party transactions) creates a layered regime. A director who has any direct or indirect interest in a contract or arrangement must disclose it under Section 184. Related-party transactions need Section 188 board (or shareholder) approval depending on threshold. Founders who run two or three companies — common in early-stage India — must operationalise these disclosures every quarter.

Duty 5 — undue gain. Section 166(5) is broader than the common-law no-profit rule. “Undue gain” includes gains by relatives, partners, and associates. The provision empowers the company to recover the gain. For a founder considering a side-letter or a quiet commercial benefit alongside the company’s transaction, this is a written prohibition.

Duty 7 — the Rs 1 lakh to Rs 5 lakh fine. Personal liability. The Registrar of Companies has the standing to prosecute. So does any member or, in defined cases, the company itself.

Where founder-directors most often slip

In a decade of advising Indian startups, the same five fact patterns produce most Section 166 issues:

  1. Co-founder transactions without 184 disclosure. Two founder-directors agree that the company will license IP from one of them. They sign the contract. They forget to disclose interest at the next board meeting. The transaction is later challenged in a dispute.
  2. Loan-to-founder, undocumented. A founder takes a Rs 50 lakh advance from the company against future salary. The advance is not approved as a Section 185 loan to a director (which has its own conditions). When the company is later acquired, the diligence flags the advance.
  3. Personal expenses through the company. The founder uses the company credit card for personal expenses. Treated as benefit under Section 166(5) and as income in the founder’s hands under tax law.
  4. Nominee director rubber-stamping. An investor-nominated director attends and votes without independent application of mind. In any later dispute about the transaction approved, the nominee’s independent judgment is challenged.
  5. Vendor relationship with the founder’s other company. The startup contracts with a vendor that is, on examination, owned by the founder or a relative. Without disclosure and arm’s-length pricing, this is a Section 166(4) and Section 188 issue at the same time.

Each of these is fixable. Each is much harder to fix retrospectively.

The independent director carve-out (and its limits)

Section 149(12) of the 2013 Act provides that an independent director shall be held liable only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.

This is a partial carve-out, not a blanket immunity. Independent directors who attend meetings, ask questions, and document their dissent on contentious items can usually defend themselves. Independent directors who do not attend, do not read material, and sign minutes without scrutiny cannot.

For founders, the practical implication is that independent directors on your board need to be genuinely briefed before each meeting, and the minutes need to record what they said. A board minutes file that reflects active engagement is the independent director’s strongest defence.

A scenario — the side-contract

A founder-director of an enterprise SaaS startup owns a consulting LLP. The startup hires the LLP for a Rs 25 lakh “implementation services” project. The board approves the contract. The disclosure under Section 184 is not made; the related-party approval under Section 188 is not obtained.

Two years later, in due diligence for a Series A, the investor’s counsel surfaces the LLP-startup contract. The contract is unwound, the founder repays Rs 25 lakh to the startup, the investor lowers the valuation by Rs 75 lakh to reflect governance risk. The Section 166 fine of Rs 5 lakh sits as a remote second-order concern.

The fine is rarely the operational cost. The operational cost is the valuation impact, the dilution, and the trust deficit.

What every founder-director should do this quarter

  1. Read the company’s Articles of Association. Section 166(1) makes this duty 1. Most founders have not.
  2. Set up a quarterly Section 184 disclosure ritual. Standing agenda item: every director declares their interest in any company, firm, or body corporate, and any change since the last meeting.
  3. Map related-party relationships honestly. Family-owned vendors, founder-owned LLPs, spouse-employed consultants. Each is a Section 188 surface.
  4. Document board minutes as evidence, not as compliance. Specific record of who said what on contentious items.
  5. Separate personal and company finances. Cards, accounts, expenses. Pierce no veils.
  6. For nominee directors — be a director, not a courier. Apply independent judgment; record it.
  7. Schedule one Section 166 board session per year. A dedicated agenda item walking through each director’s duties, with counsel. It signals seriousness and creates a record.

The bottom line

Section 166 is one of the most under-read provisions in Indian corporate law. It is short, specific, and personal. The fine is small relative to a startup’s burn, but the operational cost of getting it wrong — in due diligence, in disputes, in regulatory scrutiny — is large and recurring. The fix is mostly procedural, almost free, and rarely done.

Sources & further reading

Primary statute (source: indiacode.nic.in):
– Companies Act, 2013, Section 166 (and related Sections 184, 185, 188, 149(12)) — Act No. 18 of 2013

Regulator portal:
– Ministry of Corporate Affairs — mca.gov.in

Key principles (English fiduciary case law historically anchored Section 166):
– Regal (Hastings) Ltd v Gulliver, [1942] 1 All ER 378 — no-profit rule
– Globe Motors Ltd v Mehta Teja Singh & Co (Bom HC, 1984) — nominee director independent judgment

Paired toolkit CTA: Director duties, board minutes, Section 184 disclosures and Section 188 related-party processes are core to every founder’s startup. The Startup Legal Toolkit Pro gives you the templates and the working calendar.

Book a free consultation on TopMate for a board-level walkthrough.

This blog is informational and educational. It is not legal advice.

Originally published 15 January 2026 · Last updated 12 May 2026.