Topics Covered in this article
This article deals with the concept of directors and their role in a company. Further, the article discusses the first directors of the company. A company comes into existence when it is registered with the Registrar of Company by submitting all the necessary documents like Memorandum of Association (hereinafter referred as ‘MOA’), Article of Association (hereinafter referred as ‘AOA’), etc. After it is registered it is given the status of a separate legal person. When a company becomes a legal person it acts on its own name. But the company needs people who can act on its behalf. The human capital which exists in a company plays a key role in the company. The act done by such individuals within his/her legal capacity binds the company. In India, a company is regulated by the Companies Act, 2013 (hereinafter referred as ‘the Act’). A company is a legal entity which is formed to pursue some business for which it enters into transactions with various individuals. A company needs assistance from its human resources to perform in the best manner possible. Human capital involves the knowledge and skills of an individual that the company can use to promote its objectives.
Brief overview of Directors
A directors manages the company and acts on behalf of the members of the company. Directors control the affairs of the company and make certain decisions on behalf of the company and the members. The Act establishes the minimum number of directors which must exist in different types of company. In a public company there must be at least 3 directors, in private company there must be at least 2 directors and in One Person Company there must be at least 1 director. The directors collectively are referred to as Board or Board in the company. At the centre of the corporate administration, practice is the Board which supervises how the executives serve and secures the long haul interests of all the partners of the Company. The foundation of Board is depended on the reason that a gathering of reliable and decent individuals should take care of the interests of the enormous number of shareholders who are not directly associated with the administration of the organization. The position of directors is that of trust as the board is vested with the duty to act to the greatest advantage of the organization.
The Act does not contain a comprehensive meaning of the expression “director”. Section 2 (34) of the Act defines the term director as a person appointed to the Board of the company. In other words, a person who is appointed to perform the duties and functions of a director as prescribed in the Act is a director.
A company, however, a lawful entity according to law, is an artificial person, existing just in consideration of the law. It has no physical presence. It has neither soul nor body of its own. Thus, it can’t act on its own. It can do as such just through some human being. The people who are accountable for the administration of the undertakings of a company are named as directors. They are on the whole known as Board of Directors or the Board. The directors are the core members of a company. They involve a significant position in the structure of the company. Directors take decisions concerning the management of a company on the whole in their gatherings known as Board Meetings or at the gatherings of their advisory groups comprised for certain particular purposes. Section 2(10) of the Act defines the term Board of Directors or Board. The Act further provides for different types of directors such as additional director, alternative director, nominal director, independent director, etc.
The powers which can be exercised by the Board by passing a resolution in the general meeting are:
- The power to make calls on shares for the unpaid amount of money.
- The power to authorize the lack of shares.
- They can issue debentures either within or outside India.
- They have the power to invest in funds.
- The directors can borrow money other than issuing debentures.
- They have the power to give loans but no such resolution for giving loan in a banking company is required.
- They have the power to approve the company’s financial statement and the board’s report.
- They can diversify the business.
- They can approve the decision of amalgamation, merger and reconstruction.
- They have the power to take over another company or to acquire a stake in another company.
- They can fill the casual vacancy of the directors.
- They have the power to appoint the first auditor of the company.
- They can make a certain contribution towards political matters.
- They can appoint an alternative director for the company.
- They can appoint an additional director for the company.
- They have the power to declare an interim dividend of the shareholders.
- They can appoint or remove any key managerial person.
- They can declare the company’s solvency, where the company winds up voluntarily.
- They can recommend the rate of dividend on the shares which is further subjected to the approval of the shareholders.
In addition to this, there are certain other powers as well which can be exercised by the Board after a resolution has been passed which authorizes them to exercise such powers. Some managerial powers vested with the directors are:
- They can enter into a contract with the third party.
- They can recommend the dividend of the shareholders.
- They can allot, forfeit and transfer the shares of the company.
- The terms and conditions concerning the issue of debentures are decided by the Directors.
- For the efficient running of the business, they can form policies and issue instructions.
- They have the power to appoint the Managing Director, Manager and Secretary of the Company.
- They can control and supervise the work of their subordinates.
The duties of the directors are provided in Section 166 of the Act. The general duties of the directors are to act in good faith, not to gain any undue advantage or gain, to act in accordance with the AOA of the Company, to perform his duties diligently with reasonable and due care, to form committee and delegate power to them when authorized, etc. In addition to this the Director must disclose his shareholding in the company and interest in any contract. They must disclose their details such as name, address, etc and must acquire qualification shares within the period of two months. They have the duty to call the statutory and annual general meeting. They must decide the minimum subscription and issue prospectus which must not include any false or misleading statement. They must sign the prospectus before it is delivered to the Registrar of Companies. The directors are entrusted with various other duties in addition to these duties to ensure the smooth functioning of the business.
First directors of the Company
The first directors of the majority of the organizations are named in their AOA. If in any case the directors are not named in the AOA, then the subscribers of the MOA are considered as the directors until proper directors are appointed.
On account of a One Person Company, an individual being a part will be considered to be its first director until the director(s) are properly selected by the part as per the provisions of Section 152 of the Act.
Appointment of First Directors in a Company:
The company can make provision in the AOA for the appointment of first director. The one who is named as director in the AOA will act as director of the company until another person is appointed as director in the General Meeting. If the AOA does not provide for the name of the first director than the subscribers of the MOA will act as director of the company. In such case, in the next General Meeting of the Company the director is appointed by the members of the company.
Persons not eligible to be appointed as First director in a Company
The following persons are not eligible to be a director in the Company as provided under Section 164 of the Act:
- When a person is of unsound mind and a competent court has declared him so.
- When a person is an undischarged insolvent.
- When a person has made an application before the court to discharge him/her as insolvent and such application is pending before the court.
- When a person has been convicted for any offence which may or may not include moral turpitude. The period of imprisonment must not be less than six months and 5 years must not have passed from the date of expiry of his sentence. If a person is convicted for any offence wherein his/her period of imprisonment is for seven years or more, than he/she will not be eligible to be a director.
- Where an order has been passed by a competent or tribunal which disqualifies his appointment as a director and such order is still in force.
- When a person has not paid call money on the shares owned by him completely or jointly and a period of six months has passed from the date on which the call money is to be paid.
- When a person has been convicted for an offence provided in Section 188 of the Act and a period of five has not passed from the date of expiry of the sentence.
- When a person does not have a Director Identification Number (hereinafter referred as ‘DIN’), has not made an application to the Central Government for allotment of DIN, or has not furnished DIN to the Company.
Further the Section 164 provides that failure on the part of the director to file financial statement or annual returns to the Registrar of Companies for a period of three continuous financial years or fails to pay dividends, interest, etc. or fails to redeem the dividend on the due date, he/she shall not be eligible to be appointed as the director for a period of five years. Further, a private company can provide for additional grounds for disqualification in its AOA.
General provisions concerning the appointment of directors
- Except as gave in the Act, each director will be selected by the company in general meeting.
- DIN is mandatory for the appointment of a director of a company.
- Each individual proposed to be named as a director will disclose his/her DIN and provide a declaration that he/she isn’t excluded to be appointed as a director under the Act.
- An individual named as a director will before the appointment must agree to hold the workplace of director in physical structure.
Retirement of Directors
AOA of the company may give the provisions relating to the retirement of all directors. In case no guideline is provided in the AOA, at that point at the very least two-third of the complete number of directors of a public company will be people whose period of office will end by retirement on a rotational basis and such person is qualified to be reappointed at the yearly general meeting. Further, independent directors will not be incorporated for the calculation of all outnumber of directors. At the yearly general meeting of a public company, one-third of such of the directors for the time being as are obligated to resign by rotation, or if their number is neither three nor a multiple of three, at that point, the number closest to one-third, will resign from office. The directors to resign by rotation at each yearly general meeting will be the individuals who have been longest in office since their last appointment.
Filling the vacancy of the Retiring Director
At the yearly general meeting at which a director resigns as previously mentioned, the company may fill the vacancy by re-appointing the resigning director or some other individual thereto. In the event that the vacancy of the resigning director isn’t filled and the meeting has not explicitly settled not to fill the vacancy, the meeting will stand dismissed till that day in the following week, at the same time and place, or if that day is a national holiday, till the following succeeding day which isn’t a holiday, at the same time and place. If in the postponed meeting, the vacancy of the resigning director isn’t filled and that meeting likewise has not explicitly settled not to fill the opening, the resigning director will be qualified to be re-appointed at the postponed meeting, except if-
- a resolution for the re-appointment of such director has been put to the meeting and lost;
- the resigning director has communicated his reluctance to be so re-appointed;
- he isn’t qualified or is disqualified for appointment;
- a resolution, regardless of whether special or ordinary, is required for his appointment or re-appointment under the Act; or
- Section 162, i.e., the appointment of directors to be voted individually is applicable in any case.
Director Identification Number
Every individual who has been appointed as the director of a company must make an application to the Central Government for allotment of DIN. The DIN allotted by the Central Government in case the application is not rejected must be communicated to the applicant. The director after receiving the DIN must inform the company or companies within one month in which he is a director of his DIN. Further, the DIN must be conveyed to the Registrar of Companies by the company within a period of fifteen days. Every individual must hold only one DIN which is valid for his lifetime and must not make an application to obtain another DIN. In case of failure on the part of the company to furnish DIN before the expiry of 270 days from the date on which it must be furnished with an additional fee, will make the company liable of fine which must not be less than Rs. 25000 but may extend to Rs. 100000 and every defaulting officer will be liable to a fine of at least Rs. 25,000 which may extend to Rs. 1,00,000.
In a company, directors play a very crucial role. They are the one through whom the smooth functioning of the company is ensured. The Act has made provisions regarding the first director of the company. It provides that the person named as the director in the AOA submitted to Registrar of Companies will act as the first director of the company. If the AOA does not provide for any name then the subscribers of the MOA will act as the directors of the company. Such directors can be changed when the General Meeting of the Company is held. Further, it provides that in the case of One Person Company the person establishing such a company will act as the director until another person is appointed as the director. Further Section 149 of the Act provides for basic requirements which a company need to fulfill in relation to its director. Section 152 of the Act deals with the procedure for appointment of directors. Section 153, Section 154, Section155 and Section 156 of the Act deal with the requirements relating to DIN which has to be fulfilled by the Directors. A director has to make an application to the Central Government for allotment of DIN and one Director must possess only one DIN immaterial of the fact that he/she is a director in more than one company. The director must inform about such DIN to the company and the company further has to inform the Registrar of Companies about the DIN within the prescribed time. Further Section 164 of the Act deals with the grounds on which a person can be disqualified to be a director in the company. Further, Section 165 of the Act sets the limit of the number of directorships which a person can possess in different types of companies. Section 166 lays the duties which are to be fulfilled by the directors. Section 167 provides the manner in which vacancy created in a director’s office is dealt with. Section 168 deals with the resignation of the directors and Section 169 deals with the removal of directors from their office. Section 179 prescribes the power of the Board and how the power must be exercised. However, Section 170 lays down the limitation on the power of the Board..
The Act has provided every detail regarding a director as well as the Board. The areas which have not been dealt with by the Act have been dealt with by the Rules framed in this regard. The directors are entrusted with the management of the company due to which their active participation becomes necessary. They control the affairs of the company and ensure proper running of the business. The shareholders invest money in the business but directors ensure proper usage of the funds invested by the shareholders and therefore protects the interest of the shareholders. The presence of directors in a company is compulsory. The members of the company cannot take part in each minute matter of the Company. Therefore only those directors are appointed in the company who can act on behalf of the Company and can protect its interest. The nature of the business may be different in different companies but their objective is usually the same, i.e., to make a profit. But a company can only make a profit with the help of its human resources. The day to day activities of the company are to be closely supervised by the directors of the company to ensure that nothing wrong is going on in the company. They also need to take quick action when there is any problem faced in the company or by the company. They have to play various roles in a company due to which they must be competent enough to perform all such tasks. The company can through them accomplish its goals and objectives.
 The Companies Act S. 2 (34) (2013).
 The Companies Act S. 2 (10) (2013).
 The Companies Act S. 166 (2013).
 The Companies Act S. 152 (2013).
 The Companies Act S. 162 (2013).