Directors under Company Law in India

This article studies the statutory provisions regarding the meaning, power, appointment, disqualification of Directors of a Company.
Estimated Reading Time: 12 minutes

Introduction

The Board of directors of a company is a nucleus, selected according to the procedure prescribed in the Act and the Articles of Association. Members of the Board of directors are known as directors, who unless especially authorized by the Board of directors of the Company, do not possess any power of management of the affairs of the company. The Board of Directors oversees how the management serves and protects the long-term interests of all the stakeholders of the company. The institution of Board of Directors is based on the premise that a group of trustworthy people look after the interests of the large number of shareholders who are not directly involved in the management of the company.

The position of board of directors is that of trust as the board is entrusted with the responsibility to act in the best interests of the company. Acting collectively as a Board of directors, they can exercise all the powers of the company except those, which are prescribed by the Act to be specifically exercised by the company in general meeting. The Board formulates policies and establishes organizational set up for implementing those policies and to achieve the objectives contained in the Memorandum, muster resources for achieving the company objectives and control, guide, direct and manage the affairs of the company.[1]

Powers of Board

Section 179 of the Act deals with the powers of the board; all powers to do such acts and things for which the company is authorized is vested with board of directors. But the board can act or do the things for which powers are vested with them and not with general meeting. The following powers of the Board of directors shall be exercised only by means of resolutions passed at meetings of the Board, namely:

  • Making calls on shareholders in respect of money unpaid on their shares; authorizing buy-back of securities;
  • borrowing monies;
  • investing the funds of the company;
  • granting loans or give guarantee or provide security in respect of loans;
  • approving financial statement and the Board’s report; diversifying the business of the company;
  • approving amalgamation, merger or reconstruction;
  • taking over a company or acquire a controlling or substantial stake in another company.

About Directors

Section 2(34) of the Companies Act 2013 Act prescribed that “director” means a director appointed to the Board of a company. A company’s director is appointed to a limited company to manage day-to-day business activities and finances, ensuring all statutory filing obligations are met and that the company is run in accordance with the Companies Act 2006, the articles of association, and the shareholders’ agreement

Directors are supposed to act within the parameters of the provisions of the Companies Act, Memorandum and Articles of Association, since these lay down the limits to the activities of the company and, consequently, to the powers of the Board of Directors. Further, the powers of the Directors may be limited in terms of specific restrictions, contained in the Articles of Association. The Directors shall be held, personally, liable for acts beyond the aforesaid limits, being ultra vires the company or the Directors. Thus, where the Directors pay dividends or interest out of capital, they will be liable to indemnify the company for any loss or damage, suffered due to such act. As long as the

Directors act within their powers with reasonable skill and care, as expected of them as prudent businessmen, they discharge their duties to the company. But, where they fail to exercise reasonable care, skill, and diligence, they shall be deemed to have acted, negligently, in discharge of their duties and, consequently, shall be liable for any loss or damage, resulting there from. However, error of judgment will not be deemed as negligence. The Directors cannot be absolved of their liability for negligence by any provisions in the Articles of Association. Directors are the trustees for the money and property of the company, handled by them, as well as for exercise of the powers, vested in them.

If they dishonestly or in a mala fide manner, exercise their powers and perform their duties, they will be liable for breach of trust and, may be required to make good the loss or damage, suffered by the company by reason of such mala fide acts. They are also accountable to the company for any secret profits they might have made in course of their performance of duties on behalf of the company. Directors can also be held liable for their acts of misconduct.

Types of Directors

A director so appointed may either be executive director or non-executive director. An Executive Director can be either a Whole-time Director of the company (i.e., one who devotes his whole time of working hours to the company and has a significant personal interest in the company as his source of income), or a Managing Director (i.e., one who is employed by the company as such and has substantial powers of management over the affairs of the company subject to the superintendence, direction, and control of the Board). They are generally responsible for overseeing the administration, programs, and strategic plan of the organization. Other key duties include fund raising, marketing, and community outreach. The position reports directly to the Board of Directors. In contrast, a non-executive Director is a Director who is neither a Whole-time Director nor a Managing Director.

 A director to the Board may be appointed as:

  • First Director;            
  • Resident Director;
  • Women Director;
  • Independent Director;
  • Alternate Director;
  • Additional Director;
  • Small Shareholder Director and
  • Nominee Director.

General Provisions Regarding the Appointment

Except as provided in the Act, every Director shall be appointed by the company in general meeting. DIN is compulsory for appointment as a Director. The person to be appointed as a Director shall submit a declaration to the effect that he is not disqualified to act as a director. A consent to act as Director shall be filed in form DIR 2, in physical form with the company. The company shall file form DIR 12, with the ROC intimating the appointment of Director within 30 days from the date of appointment along with form DIR 2.[2] However, a specified IFSC public company shall file such consent in sixty days. Unless the articles specifically provide, at every AGM of a public limited company, two third of the total number of Directors shall be persons, whose period of office shall be liable to determination by retirement by rotation.

One third of such number of Directors is liable to retire by rotation and is eligible for reappointment. However, if there number is neither 3 nor a multiple of 3, then the number nearest to 1/3rd shall retire from office. The Directors whose term is longest in office shall retire first. Independent directors shall not be included for the computation of total number of directors.  The above provisions relating to retirement and reappointment shall not apply to a wholly owned government company or a subsidiary of a wholly owned government company.[3]

Appointment of Directors

According to Section 165 of the Companies Act, 2013, no person shall hold office as a director, including any alternate directorship, in more than twenty companies at the same time. The maximum number of public companies in which a person can be appointed as a director shall not exceed ten. For reckoning the limit of public companies in which a person can be appointed as director, directorship in private companies that are either holding or subsidiary company of a public company shall be included. For reckoning the limit of directorships of twenty companies, the directorship in a dormant company shall not be included.

Appointment of First Director

The first directors of most of the companies are named in their articles. If they are not so named in the articles of a company, then subscribers to the memorandum who are individuals shall be deemed to be the first directors of the company until the directors are duly appointed. In the case of a One Person Company, an individual being a member shall be deemed to be its first director until the director(s) are duly appointed by the member in accordance with the provisions of Section 152. Section 152(1) of the Act is applicable to all companies, whether public or private.

Appointment of Directors by Members at General Meeting

A person appointed as director shall not act as director unless he gives his consent to hold office of director and such consent in Form DIR – 2 has been filed with the registrar within thirty days of his appointment. The company shall within thirty days of appointment of a director, file such consent with the Registrar in form DIR-12. However, a specified IFSC public company shall file such consent in sixty days. According to Section 152, every director shall be appointed by the company in general meeting. 

Under Section 152(6), articles of a company may provide that all directors of the company shall be retiring by rotation. Where article does not provide for retirement by rotation for all directors, not less than two – thirds of total number of directors of a public company shall be liable to be retired by rotation and be appointed by company in general meeting. At the first annual general meeting of a public company held next after the date of the general meeting at which the first directors are appointed and at every subsequent annual general meeting, one-third of such of the directors for the time being as are liable to retire by rotation, or if their number is neither three nor a multiple of three, then, the number nearest to one-third, shall retire from office.

The directors to retire by rotation at every annual general meeting shall be those who have been longest in office since their last appointment, but as between persons who became directors on the same day, those who are to retire shall, in default of and subject to any agreement among themselves, be determined by lot. 

Appointment of Directors by Board

In the following cases, the Board of Directors may appoint the directors:

Additional Directors:

Section 260 of the Companies Act empowers the Board to appoint additional directors and Articles of every company also confer this power to the Board. But the additional director shall hold his office up to the next annual general meeting. The number of directors including the additional director should in no case exceed the maximum number of directors as determined by the articles of the company.

Casual Director:

The Companies Act empowers the Board to appoint the casual director subject to any regulation in the Articles. The casual vacancy in the office of the director may exist due to retirement, resignation, insolvency, or any other reason. The casual director may hold his office only up to the period to which the original director would have his office if he had not vacated.

Alternate Director:

This Board may appoint the alternate director if the article authorizes. The Board is empowered to appoint the alternate director if the original director remains absent for more than three months from the date on which the meeting is ordinarily held. Such alternate director shall hold office only for the period till the original director returns.[4]

Disqualifications of a Director

According to section 164 (1), followings are the grounds for disqualification of director:

  • He is of unsound mind and stands so declared by a competent court;
  • He is an undercharged insolvent;
  • He has been convicted by the court of an offence whether involving moral turpitude or otherwise sentenced in respect thereof to imprisonment;
  • An order disqualifying him for appointment as a Director has been passed by a Court or Tribunal and this order is in force;
  • He has not paid calls in respect of shares held by him whether alone or jointly & 6 months have elapsed from the last day fixed for the payment of call;
  • He has not got the DIN; 
  • He accepted directorships exceeding the maximum number of directorships provided in section 165.

Vacation of Office of Director

Provisions regarding vacancy are stated under section 167 of Companies Act, 2013. These are:

  • A director incurs any of the disqualifications under Sec. 164. Provided that where he incurs disqualification under sub-section (2) of section 164, the office of the director shall become vacant in all the companies, other than the company which is in default under that sub-section;
  • He absents himself from “ALL” the meetings of board of directors held during a period of 12 months with or without seeking leave of absence from the board;
  • He contravenes the provisions of sec 184 i.e. related party transactions;
  • He fails to disclose his interest in any contract or arrangement in which he is directly or indirectly interested;
  • He becomes disqualified by an order of the Court or Tribunal;
  • He is convicted of an offense whether involving moral turpitude or otherwise sentenced in respect thereof to imprisonment for not less than 6 months;
  • He is removed in pursuance of the provisions of this Act; or
  • He having been appointed a Director by virtue of his holding any office or other employment in that holding, subsidiary or associate company, ceases to hold such office or other employment in that company.[5]
  • A private company may by its articles, provide any other ground for the vacation of the office of a Director, in addition to those specified above. If a person, functions as a director even when he knows that the office of director held by him has become vacant on account of any of the disqualifications specified above, he shall be punishable with imprisonment for a term which may extend to 1 year or with fine which shall not be less than Rs. 1, 00,000 but which may extend to Rs. 5, 00,000 or with both. [6]

Resignation of Director

According to section 168, a Director may resign from his office by giving a notice in writing. Within 30 days of receipt of such notice, the Board shall intimate the registrar of such resignation in Form DIR 12. It shall also be the responsibility of the Board to place the fact of such resignation in its Directors Report of the subsequent general meeting and shall also place the same on its website. The notice shall become effective from the date on which it is received by the company or any date specified by the Director in the notice, whichever is later. The Director may forward a copy of resignation in Form DIR 11, within 30 days from the date of resignation.

In case a company has already filed Form DIR-12 with the Registrar, a foreign director of such company resigning from his office may authorize in writing a practicing-chartered accountant or cost accountant in practice or company secretary in practice or any other resident director of the company to sign Form DIR-11 and file the same on his behalf intimating the reasons for the resignation.

When all the Directors resign at the same time under section 167, in such case the required number of directors are to be appointed by the promoter or, the Central Government. The Directors so appointed shall hold office till the Directors are appointed by the company in annual general meeting.

Removal of Directors

Under Section 169, a company may remove a Director except a Director appointed by NCLT (National Company Law Tribunal), before the expiry of his period of office after giving him an opportunity of being heard by passing an ordinary resolution.

To remove a Director, a special notice is required to be served to the company. On receipt of such notice, a copy thereof shall be sent to the concerned Director who is proposed to be removed. The Director concerned shall either on receipt of such notice send a copy of the representation to the members of the company or if sufficient time is not available, he shall have a right to be orally heard at the meeting. After such representation, shareholders shall decide by way of an ordinary resolution, removal of such Director. The company has to file particulars of director in Form DIR – 12 with the Registrar of Companies within thirty days of the removal after paying the requisite fee electronically.

Duties of Directors

For the first time, duties of directors have been defined in the Act. According to Section 167, a director of a company shall:

1. Act in accordance with the articles of the company.

2. Act in good faith in order to promote the objects of the company.

3. Exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.

4. Not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.

5. Not achieve any undue advantage either to himself or to his relatives, partners, or associates.

6. Not assign his office and any assignment so made shall be void. If a director of the company contravenes the provisions of this section such director shall be punishable with fine which shall not be less than Rs. 1,00,000 but which may extend to Rs. 5,00,000.

Conclusion

From the above monograph, the concept of a board in company and directors are clear. A board can appoint a director under provisions constituted by Companies Act, 2013. The appointment, disqualification, vacation, and duties of directors are well stated above.


[1] WWW.ICSI.EDU/PORTALS

[2] WWW.ICSI.EDU/PORTALS

[3] COMPANIES (INCORPORATION) RULES, 2014

[4] SECTION 260,262,313, COMPANIES ACT,2013

[5] WWW.IIM-EDU.IN/WHITEPAPERS

[6] WWW.MCA.GOV.IN/MANAGEMENT+BOARDGOVERN

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