Appointment of Board of Directors of a Company

Introduction

A Company needs Board of directors to perform functions on its behalf and take decisions since the company does not have a mind of its own. Though a company is a separate legal entity, it is an artificial or a legal person as well, thus there is a need for directors in the company. The directors collectively form aboard and take decisions on the company’s behalf. This article discusses the definition of a director and then further highlights the methods of appointment of a director. The article further throws light on the method of removal of directors, his resignation and retirement. It will also discuss the duties of s director along with the factors that disqualify a person from becoming a director.

Who is a director?

He is a person who is responsible for managing the functions and affairs of the company. The purpose behind appointing a director is to ensure that the duties in respect of managing functions ofcompany in accordance with the provisions under the Companies Act, 2013 are duly performed. The directors of a company, collectively, are known as the board of directors, and they have to take decisions on matters that are extremely crucial and important for the company and its shareholders. The growth of a company, to a great extent, depends on the competency of its directors. They are the ones who directly control the policymaking and decision making of the company. They hold the top administrative positions in company, and the company fully operates through its directors. They have the power of entering into contracts with the third party in the name ofcompany. They can make allotment of company’s shares, make forfeiture and maketransfer ofcompany’s shares. They supervise and control the work of their subordinates in company’s structures. They have to issue the instructions to ensure the efficient functioning of Company’s business.[1]

Composition of the Board of Directors

Section 149 of Companies Act, 2013 specifies the composition of the board of directors in a company. In a listed company the board of directors need to consist of a combination of the executive and non-executive directors, and at least one director has to be woman director, and at the same time, the non-executive directors shall be comprising of not less than 50% of the board. An executive director is a person who has joined the company as a director plus he has a whole-time employment, on the other hand, a non-executive director means a person who has joined the company as a director but only in part-time employment and is not concerned with the day to day affairs of the company. The ratio of executive to non-executive directors in a company has to be specified in the Articles of Association of the company. There is not much difference between the functions of the two kinds of directors, the only difference is in respect of full-time and part-time employment. [2]

Section 149 also specifies that in case if the chairperson of the board of directors is a non-executive director, then in that case at least one-third of the board should consist of independent directors. If in case the chairperson is not the non-executive director, the requirement of independent director increases to at least half the board of directors. As per the proviso clause, an exception to the provision is that if the non-executive chairperson is a promoter or in any way related to the promoter or manging positions, then the requirement of the number of independent directors is at least 50% of the board.[3] Independent director refers to a person who is not connected with the company in any manner, he must possess integrity, not be a promoter, he should not be in relation to any promoter or director, should not have any pecuniary interest, nor should any of his relative have a pecuniary interest with the company and he should not be holding any key managerial position.[4]

Appointment of Board of Director

There are various ways in which a director can be appointed in a company. The first method is by way of the Articles of Association of the company

BY ARTICLES OF ASSOCIATION- Articles of Association refers to the document which provides certain rights and powers to those who are a part of the company and lays down the guidelines for internal functioning of the company and at the same time also specifies that how the company seeks to achieve the objective specified in the Memorandum of Association. The Articles of Association may provide for the way of appointing the first director in the company, along with the procedure for the same. In case if there are no provisions specified in the Articles of Association then the persons who subscribe to the Memorandum of Association at the time of registration or incorporation of the company, will take up the position of first directors of the company, but the rule is that they can hold this position only till the 1st Annual General Meeting. [5]
BY GENERAL MEETING OF THE SHAREHOLDERS- The directors, generally are appointed by the shareholders through a meeting held annually. All the interested persons have to make an application at least 14 days before the general meeting is conducted and the company serves a notice to all such individuals who have applied, at least seven days before meeting either through the electronic mode or through the post. However, this provision is not mandatory when a common declaration has been made in a newspaper, in local language as well as in English about the same, at least seven days before the meeting. The candidate who is making an application is also required to submit a sum of Rs. 100000 or more as prescribed by the company. However, this amount will be refunded upon selection of such candidate or in case if he gets more than 25% of the votes.

Also Read Harshad Mehta Scam

This provision is not applicable to the directors who have been appointed by the board or are independent directors. Independent director refers to a person who is not connected with the company in any manner, he must possess integrity, not be a promoter, he should not be in relation to any promoter or director, should not have any pecuniary interest, nor should any of his relative have a pecuniary interest with the company and he should not be holding any key managerial position.

Also Read Functions of the Board of Directors in a Company

Every person who is proposed as a director needs to obtain and thereby submit his Director identification number. The method of obtaining the Director identification number is stated in Section 154 of Companies Act, 2013. According to the provision, a person can obtain his Director identification number by applying to the Central Government along with the required amount of fees. The Director identification number is then provided to such person within a period of one month. Such a director is required to file a letter of consent as well as required by section 152 of Companies Act, 2013.

As per section 152 of Companies Act, 2013, the directors who are appointed through this method have to retire on rotation. It means that the person who is appointed has to retire on rotation. Section 152 sub-section 6 states that the provisions regarding the retirement by rotation explicitly. [6]

BY THE BOARD OF DIRECTORS- Basically, the board of directors can appoint four kinds of directors- 1) Additional Director 2) Alternate Director 3) Nominee director 4) To fill the vacancy. They are not required to submit the fees for being appointed as the director. In normal circumstances, the directors can be appointed only by the shareholders in a general meeting. The appointment of the directors through the board is merely an exception, and it depends on the Articles of Association of the company. Thus, if the Articles of Association of the company do not permit the board to make an appointment of the directors, then the board cannot, in any case, make the appointment.

The persons who had made an application regarding their appointment as the director, but they were not selected by the shareholders. Then such persons cannot be appointed by the board as directors. The ones who were rejected from being directors by the shareholders in the general meeting cannot become Additional directors.

In case of absence of any director of the company, at least for a period of 3 months from India, the Board of Director can make an appointment of an Alternate Director in place of the absent director, and he will hold the position only till the original director returns.

When the financial institutions lend funds to the company, then they may also enter into an agreement with the company to have one of their nominees as a director in the board. The financial institutions appoint their member as a director in the board so that he can keep a check on the activities of the company and day to day affairs.

To fill the vacancy– At times, a vacancy might be caused in the board because of death, retirement or resignation of a director, such vacancy can be filled by the board, but the tenure of such director will be dependent on obtaining the approval of shareholders in next general meeting. Only if the approval of shareholders is obtained, the director so appointed by the board can continue his term for the entire tenure of the previous director who vacated his office. Otherwise, his term will end on the day of the general meeting.[7]

BY NATIONAL COMPANY LAW TRIBUNAL- If the business of the company is being conducted in a fraudulent manner that is opposed to the interests of its members or interest of the public in general or against company’s interests, then the tribunal is empowered by section 242 of Companies Act, 2013 to appoint the required number of directors.[8]
BY PROMOTERS- As per section 168 of Companies Act, 2013, if all the directors of the company have either vacated their office or have resigned from their positions, then, in this case, the promoters and in their absence the Central Government have the right to make an appointment of the required number of directors in the company.
BY SMALL SHAREHOLDERS- Small shareholders are the shareholders who hold shares amounting to Rs. 20,000 or more. They often feel that because they hold a small number or portion of shares; thus, they are not being heard by the company that is not taking care of their interests. In this case, the small shareholders, at least 1000, can make an application to the company asking for the appointment of their representative into the board of directors. The representative so appointed will be called a small shareholder director. [9]

Also Read Barron v Potter, [1914] 1 Ch 895

Valid appointment of a director can take place only if such person is not disqualified from being a director. Section 164 of Companies Act, 2013 lays down the disqualification of a director.

Disqualifications

The person being appointed as the director should not be of an unsound mind.
He should not be an undischarged insolvent to qualify as a director of a company.
If a person has applied to be adjudicated as an insolvent, then he is also disqualified.
If he has been convicted for an offence at least for six months, then he cannot be a director for the next five years from the date of conviction. But, in case if the punishment is extending for a period of 7 years or more then such a person cannot become a director for his entire life.
If a shareholder has failed to pay for his shareholdings in the company, then such person is disqualified.
If such person has failed to submit his Director Identification Number.
If a person has been convicted u/s 188 for committing the offence of non-disclosure of his interest with respect to a related party transaction with the company.

Duties of a Board of Director

There are two kinds of duties performed by the directors, 1) Statutory 2) General

Statutory duties are as follows-

To file the return of allotment of shares.
To make a disclosure about interest in the transaction with the company as per Section 184 of Companies Act, 2013.
To disclose any receipt from the transfer of property as per Section 191 of Companies Act, 2013
The directors also have been imposed with a duty to attend all the board meetings as per Section 167 of Companies Act, 2013.
They have a duty to call the Annual General Meeting and Extraordinary General Meeting as per section 96 and 100 of Companies Act, 2013.

General duties are as follows laid down u/s 166 of Companies Act, 2013-

To follow the provisions that have been laid down in the Articles of Association of the company.
To act in good faith.
To take reasonable care while taking any decisions on the part of the company.
He must ensure that he works towards the general benefit of the company rather than fulfilling his personal interest.
He should ensure that he does not derive any undue profit or gain from the company.[10]

Removal of Directors

A Shareholder has invested his money in the company. Thus, he wishes to exercise his control of the company. This can be done either by appointing the directors or through the removal of directors. The shareholders are not required to show any cause to remove the director. The directors can be removed simply in the same way of their appointment. A simple resolution needs to be passed for the purpose with a special notice. On the passing of such resolution, the company will serve a notice to the concerned director with an opportunity to represent his case, the representation made by such director will be given to each shareholder or read out in the meeting due to lack of time. The provision for such removal of directors is not applicable on directors appointed by the tribunal or through proportional representation as specified under section 163 of Companies Act, 2013.[11]

Resignation of Board of Directors

According to section 168 sub-section a director can give resignation from his position, for the same purpose he has to give a notice in writing to the company. After receiving the notice of resignation. The company has a duty to make an intimation to the registrar of companies. The facts of such resignation have to be laid before the shareholders in the next general meeting.[12]

Conclusion

There are various ways in which the director of a company can be appointed. The article has discussed various provisions that relate to the appointment of board members of the company. Every company needs to abide by these provisions in order to make a valid appointment or removal of directors. The qualifications that a person needs to satisfy to be a director also need to be kept in mind by the companies. When the directors are appointed by the shareholders, they have an expectation from them. Thus, the shareholders also need to fulfil the duties that are imposed on them by Company Law.

References:

[1] Avtar Singh, Company Law (17th ed. Eastern Book Company, 2018).

[2] P.P.S. Gogna, Textbook of Company Law 158 (11th ed. S. Chand & Co, 2015).

[3] Avtar Singh, Supra, 95.

[4] Dr. G.K. Kapoor; Dr. Sanjay Dhamija, Company Law-A Comprehensive Text Book on Companies Act 2013 148 (22nd ed. Taxmann, 2019).

[5] Avtar Singh, Supra, 97.

[6] Dr. G.K. Kapoor; Dr. Sanjay Dhamija, supra, 130.

[7] Avtar Singh, Supra, 97.

[8] B.K. Goyal, Company Law 89 (13th ed. Singhal Law Publications, 2018).

[9] Avtar Singh, Supra, 319

[10] B.K. Goyal, Supra, 118.

[11]Komplett Advisory LLP, Change in Directors of A Private Limited Company, Taxguru Complete tax solutions (20 December 2017), https://taxguru.in/company-law/change-directors-private-limited-company.html.

[12]Abhutpurv Shukla, Resignation of Director under Companies Act, 2013, Taxguru Complete tax solutions (22 June 2019), https://taxguru.in/company-law/resignation-director-companies-act-2013.html.