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A Board of Directors plays an important role in the governance of a company. It has various functions and provides the representation to the various stakeholders in a company. The common understanding is that a public company cannot survive without a Board of Directors, due to the mandation under Section 149(1) of the Companies Act, 2013 regarding the minimum number of directors forming the board of a public company. However, there may arise a peculiar situation where a public company does not have a Board of Directors.
A public company, as defined under Section 2(71) of the Companies Act, 2013 is a company which is not a private company. Its share can be traded to the public. It has the following features-
- It requires a minimum of 7 members or more in the company.
- It requires a minimum share capital of Rupees five lacs.
- The suffix used in the name of such companies is ‘Ltd.’ and not ‘Pvt. Ltd.’
- A minimum of 3 directors are required in the public company.
- There is no restriction on invitation of shares and allows the public to buy shares.
- It may or may not be listed on the stock exchange.
- The shares are freely transferable in case of a public company.
- In the Annual General Meeting, it requires a quorum of-
- 5 members if the total members are not more than 1,000;
- 15 members if the total members are not more than 5,000;
- 30 members if the total members are more than 5,000.
Board of Directors
A director is an individual who provides direction and governance to a company and is elected by the shareholders of the company. A group of directors form the Board of Directors.
As per Section 149(1) of the Companies Act, 2013, the Director requirements for various kinds of companies is as follows-
|One Person Company||Private company||Public Company|
A company can increase the maximum number of directors by passing a special resolution.
There is a limit on the number of directorships a person can partake in as per Section 165 of the Companies Act, 2013, i.e. maximum 20 companies, out of which only 10 can be public companies.
Types of Directors
The following are the types of directors in a company-
- First Director- The persons who are named in the Articles of Association are the first directors. If no person is named, then the individual subscribers of the Articles of Association are the first directors.
- Managing director- As per Section 2(54) of the Companies Act, 2013, a managing director is an individual who is a part of the board of directors and has substantial control over the affairs of the company.
- Additional Director- An additional director can be appointed by the Board of Directors, given that the Articles of Association allow for the same and such person is not otherwise disqualified to be a director. Such an additional director only holds office until the next AGM or when the next AGM is due.
- Alternate Director- An alternate director may be appointed by the Board, where a director is leaving India for more than three months. Such person has the same powers as the original director and holds the office until the return of the original director.
- Casual Vacancy Director- If a director dies or resigns, then the Board of Directors can fill the position by hiring a casual vacancy director. His tenure is equivalent to the unexpired tenure of the original director.
- Independent Director- These directors are not related to the company in any way and have to comply the provisions under Section 149(6) of the Companies Act, 2013. There should be at least one independent director in every listed company. There should be at least 2 independent directors in every public company whose paid up capital in Rupees 10 Crores or more; or whole turnover is equal to Rupees 100 Crores or more; or whose deposits, outstanding loans, debentures in total exceed Rupees 50 Crores.
- Executive Director- They are those directors (including managing director and whole time directors) who partake in day-to-day management of the company and are deeply involved in the company.
- Non-executive director- They are those directors which are not employed nor deeply involved in the company and therefore are unbiased towards the company. For example, professional directors, nominee directors, etc.
- Nominee Director- Those directors which are appointed by financial institutions, banks or government.
- Small Shareholder Director- They are those directors who are appointed by either on the application from 1000 small shareholders or 1/10th of the total small shareholders or on its own. In their appointment, only small shareholders can vote and notice has to be given at least 14 days before the meeting. Such directors have a maximum tenure of 3 years and cannot retire by rotation.
- Resident Director- Every company must have a director which is a member or person who has stayed in India for 182 days in the previous financial year.
- Woman Director- A woman director is mandatorily required for every listed company and any other public company with paid up capital more than or equal to Rupees 100 Crores or turnover of Rupees 300 Crores or more.
Appointment of Directors
Section 160 of the Companies Act, 2013 states the manner of appointment for a director other than a retiring director in an annual general meeting (AGM). The procedure is enumerated below-
- The applicant has to apply for the position of directorship at least 14 days before AGM via sending a notice and also making a deposit of Rupees One Lakh to the company.
- The Applicant can be any person nominating himself or any member nominating himself or any other person (not having artificial legal personality).
- The condition for deposit is not applicable to independent directors and directors nominated by the Nomination Remuneration Committee or Board of Directors. The deposit is refunded if the applicant gets at least 25% votes.
- The company thereafter issues individual notices to all the members or publish a newspaper advertisement at least 7 days before the AGM.
Disqualifications for a director
Section 164 of the Companies Act, 2013 provides for the disqualifications of a director as-
- A person of Unsound mind as declared by the courts;
- An undischarged solvent or an insolvent whose application is pending;
- Has been penalized by the court for an offence with imprisonment of more than 6 months, but less than 7 years, then disqualified for 5 years. If penalized by the court for an offence for more than 7 years, then permanent disqualification;
- An order of the Court or tribunal disqualifying such person;
- A person who has not paid calls or 6 months have elapsed from the last date;
- Violation of Section 188 (approval for transactions)- a disqualification of 5 years;
- A person who does not has a DIN or Director Identification Number; or
- A person who is a director of a company whose company has defaulted in filing or payment. Such failure of payment leads to the disqualification of a person for 5 years.
Duties of Directors
Section 166 of the Companies Act, 2013 prescribes the duties of a director as-
- To act as per the Articles of Association of the company;
- To act in good faith;
- To work for the benefit of the company;
- To not make any undue gains or benefits;
- To not assign the office to another person as per his own wishes.
Retirement, Resignation and Removal of Director
Section 152 of the Companies Act, 2013 provides that at every AGM, a handful of directors have to be removed. The purpose of this provision is to weed out the inefficient directors. It states that a maximum of one-third directors can be non-rotational, others are rotational directors. Of these rotational directors, one-third must retire at every AGM. For this purpose, those who are appointed first are retired first. The independent and nominee directors are not included under this provision. However, under Section 162, a director may be re-appointed.
A Director can resign as per the provisions of Section 168 of the Companies Act, 2013. The Director who wishes to resign has to provide a notice to the company and another notice to the Registrar of Companies within 30 days of resignation. The Company will then also inform the Registrar of Companies within 30 days and disclose the information on the website as well as include this information in the Board’s Report. A director who resigns is only liable for those acts which were done during his or her tenure.
Section 169 provides that a director can only be removed either by the shareholders or by the tribunal. In case of removal by shareholders, an ordinary resolution is passed. In this case, a director appointed by the National Company Law Tribunal or a director appointed under proportional representation cannot be removed. In case of removal by Tribunal, any director, including non-rotational directors can be removed, if any member or creditor applies for the same before the National Company Law Tribunal.
Public company without a Board of Directors
Even though Section 149 of the Companies Act, 2013 mandates the minimum directorship in a public company to be three, a peculiar case of the M/s UB Engineering Company has arisen which did not have a Board of Directors in 2014. This kind of a particular circumstance, where the company does not have a Board of Directors may arise where all the directors resign or vacate their office at the same time. The Companies Act, 2013, by way of Section 168(3), however, provides a remedy to such a situation.
Section 168(3) of the Companies Act, 2013
This section provides that in a situation where all the directors resign or vacate from their offices, the Promoters of the company are liable to hire a new set of directors. In case the company does not have any promoters, the Central Government is empowered to appoint the required number of directors. These newly appointed directors only hold office until new directors are appointed at the Annual General Meeting.
Another issue that arises is the lack of authorised signatory of the company to file the e-form for the new director, as all the old directors have either resigned or vacated their offices. This has been resolved by the Ministry of Corporate Affairs vide a General Circular No. 3/2015 dated 3rd March, 2015. It states that in this particular scenario, the Registrar of Companies is empowered to accept such e-form from one of the resigned directors, given that they comply with the provisions of the Companies Act, 2013.
Case Study of M/s UB Engineering
On 4th August 2014, it was reported by Mint, that M/s UB Engineering Ltd., a Vijay Mallya owned engineering, procurement and construction public company, did not have a Board of Directors. This was due to the fact that all the directors on a 9 member board, other than the managing director, i.e. J.K. Sardana, had resigned from the company. The company reported the resignation of the second last director on the Board three months late. This has resulted in the company being unable to file its financial results, due to the lack of Board meetings. The Vice- President of UB Group reported that three new directors had been nominated and one has already joined. However, the company website did not indicate the same at the time. Therefore, the company remained without a Board of Directors for a few months.
The only way for the company to revive the Board of Directors was by way of Section 168 of the Companies Act, 2013. This section reinforces the principle that a company has perpetual succession, and even if there are no members or Board, the company survives.
Therefore, while a company will survive even if there are no Board of Directors, it cannot survive for long due to the lack of authority to follow various compliances. In such case, a company will necessarily need to appoint a new set of Board of Directors. The appointment of Board of Directors, including independent directors because especially significant in the case of public companies as the public’s capital is at stake, which has an overall effect on the economy. And since, directors play the most critical role in protecting the interest of the investors, public companies requires a diligent Board to look after the affairs of the company.