Directors under Companies Act, 2013

This article discusses the role, power, and functions of Directors in a Company as per the provisions of the Companies Act 2013. It also elaborates the types and required qualification of a Director. The procedure and requirements of obtaining Directors Identification Number (DIN) is also discussed.
Estimated Reading Time: 11 minutes

Introduction

A company is an entity that does not have its own physical existence, it can only run with individual people coming together for the purpose of running its affairs for a specific purpose goal or set of goals. Director is an agent of the company.  A company is run by professional men, appointed to run the company. 

The definition of director is given in the Companies Act, 2013. It is a post of authority occupied by a person in the company appointed by the Board of Company. The director has the authority to form a contract on behalf of the company. The director is responsible to manage the day to day affairs of the company. He/she sets a particular direction for the company to work in.

Director Identification Number (Din) – Section 153 And 154

In order to be appointed as a director, an individual is needed to obtain a Director Identification Number (DIN) after the approval is granted by the Central Government. It is an 8-digit unique identification number which is valid for a lifetime and is used to maintain the identity of the person in a database. A person who is a director in two or more companies, that person will have to obtain only one DIN. And this DIN would also work if that person switches from one company to the other. 

Whenever any information concerning the company is submitted under law, the director is supposed to mention his DIN under his signature on such information or document. 

Provisions regarding DIN

Section 153 -Application for allotment of Director Identification Number

An individual who has the intention to be appointed as a director of a company may give an application after which DIN will be allotted to the person after the approval of the central government along with the fees in a format as may be prescribed by law. 

Section 154– Time specified for allotment of Director Identification Number    

Within one month of the receipt of the application, DIN must be allotted to the person in the manner as stated in the provisions; the allotment  is to be done within one month of the submission of the application and the fees. The central government approves or rejects the application and conveys the same to the applicant. If it is approved, the DIN is allotted to the applicant within a month. 

Section 155– Prohibition to obtain more than one Director Identification Number.

This section mentions that if a person already has a DIN, he shall not be allowed to possess another DIN

Section 157– Company to inform Director Identification Number to Registrar

This section states that every company must furnish all the DINs of all directors to the registrar or relevant authorities of central government along with the fees within fifteen days of receiving intimation by the director. 

The failure to follow this legal procedure before the expiry of the specified time period shall result in a fine of rupees 25,000 to 1,00,000 for the company. Further, it may lead to the attraction of criminal liability for the officer at default in the form of a fine. 

Procedure for the Application of DIN and relevant forms

SPICe form

Application for the allotment of DINs to those induvial opting to be the first directors in respect of new companies shall be made in SPICe form only. 

DIR-3 form

An individual intending to become a director in an already existing company shall be made through DIR-3 form. 

DIR-6 form

Any changes in the particulars of the directors shall be filed under DIR-6 form. 

After the payment of the application fee and the submission of the application. Central government decides whether to approve or reject the application. If it is approved, the central government will communicate the DIN to the applicant within a month. If the application is rejected. the government will mail the reason for the rejection and the applicant will get 15 days to rectify the reason. If he rectifies such reason, he will be allotted a DIN otherwise the central government will label the application INVALID. 

Within one month of receiving the DIN, the director has the responsibility to intimidate the company where he is the director. The company will then intimate the Registrar of Companies within the next fifteen days. 

Failure in both these legal procedures may result in penalties. 

Cancelling of DIN

The Central Government may cancel the DIN due to certain reasons. that are as follows:

  1. If a duplicate DIN has been issued to the director
  2. DIN obtained by fraudulent means
  3. On the death of the concerned person 
  4. The person is of unsound mind
  5. The person is an insolvent

The director can surrender the DIN through Form DIR-5 that he has to submit with a declaration which states that he has never been appointed as a director in the company and the said DIN has never been used for attesting or filing any document.

Types of Directors

Executive director

The individual acts as a director of the company for the entire time. They are expected to be efficient for the working of the company and systematic. They are expected to be rational decision-makers when it comes to making deals. 

Non-Executive director

These workers are not expected to work the entire day or in the everyday working of the company. The keep a check on the executive directors and try to come up with decisions and solutions that are in the interest of the company. 

Managing directors

They have the authority to make decisions, manage the company and lay down directions for the company to move in. A Public Company or a subsidiary of a Public Company that has a share capital of more than Five Crore rupees must have a Managing Director. They can represent the company in legal proceedings as held in Sarathi Leasing Finance Ltd v. B Narayana Shetty. 

Small Shareholders directors

Every company must have a director that has been elected by small shareholders.  A small shareholder means a shareholder which has shares of nominal value and are not more than rupees 20,000 or the sum prescribed. 

Women directors

It is compulsory to appoint at least one-woman director as a board member in certain types of companies. If this is not followed, then the company is liable to pay a fine of Rs. 10,000 with 1,000 per day for the days this action is continued. 

Additional director

An individual can act as an additional director and can hold his post till the next annual general meeting. 

Alternate director

Alternate director is a person appointed by the board to take the place of the director who might be absent from the country for more than three months. 

Nominee director

A nominee director can be appointed by a third party through contract, the shareholders, financial institutions or by the Union Government in case of oppression and mismanagement. 

Independent Director 

Independent directors are non-executive directors and help the company to improve credibility of the company and enhance the standards of managing and governance. Their main asset is their experience, and they give expert advice to the board when required. Their tenure can be up to 5 consecutive years. For being reappointed, the board shall pass a special resolution with a report.  

Role of Independent Directors

Corporate social responsibility

Continuing commitment and responsibility towards the business to take act in an ethical manner and contribute to economic enhancement and the quality of life and work environment of the workforce along with their families.

Board Meeting

  1. The independent director should give an independent and unbiased judgement on any matter.
  2. Prevention of management from taking decisions that is likely to affect the interest of the shareholders at large. 
  3. To keep in check the board for the prevention of any use of unethical behaviour and fraudulent activities.
  4. To ensure that there should be no violation of the company’s policy.

Separate Meetings

The independent directors summon at least one meeting in a year without the involvement of non-independent directors and members of management. It includes reviewing the performance of non-independent directors and board as a whole, the performance of the chairperson of the company and to assess the quality, quantity, and the smooth flow of information between the management and the board.

Audit Committee

  1. Give recommendation for the appointment, remuneration and terms of appointment of the auditors of the company. 
  2. To review the independence of the auditor and their performance. 
  3. To examine the financial statement of the company and the auditor’s report. 
  4. To examine the financial statements with reference to accounting policies and practices. 

Nomination and Remuneration Committee

  1. Determine the appropriate levels of remuneration of executive directors, management, appointment, and recommendation for removal of executive directors.
  2. Formulation of a plan for efficient corporate governance and stability of the business. 
  3. To ensure the appointment and planning shall be on a merit basis. 

Prevention of Fraud

  1. It is to be assured that the company has an efficient mechanism and does not cause an adverse impact on the company or any person that is a part of the company. 
  2. Report about unethical behaviour or suspected fraud. 
  3. Act within the authority of the person, assist in protecting the interests of the company, shareholders, and its employees. 
  4. Not to disclose confidential information, sales plans, price sensitive information, unless such disclosure is expressly approved by the board required by law.
  5. They are considered especially important in giving individual judgements and act as a bridge between management and the shareholders by encouraging corporate governance. 

Appointment of Directors

According to section 152, directors should be appointed by the company in the general meetings. The person is allotted with the DIN has to make sure that he is not disqualified from holding the office of the director. The person appointed has to grant his consent to act as a director within 30 days with the registrar. 

Appointment by Nomination

A shareholder with more than 10% share can be appointed to be a director after an agreement between the shareholders have been concluded. 

Appointment by voting 

 A director can be appointed by voting at a general meeting as laid down under section 162 of the act. The candidates have to vote individually, and the opinions of shareholders are taken into consideration as well. If two or more directors are appointed on individual basis through voting, it is considered to be void in the eyes of law as held in the case of Raghunath Swarup Mathur v. Raghuraj Bahadur Mathur

Appointment by proportional representation

According to section 163, the director can be appointed through the system of proportional representation. It can be followed by a single transferable vote system and consider effective minority votes. 

Appointment of Directors by Board

The two instances when the board can also appoint a new director:

  1. If the article empowers the board to appoint additional directors along with prescribing the maximum number.
  2. Section 161 authorises the directors to fill casual vacancies. 

The Board of Directors has these powers as it is considered an important entity as held in Bates v Standard Land Co.

Appointment by Tribunal

The company law tribunal has the power to appoint directors under section 242(2)(j) of the Companies Act, 2013.

Disqualifications

A person appointed as a director can be disqualified on the grounds of:

  1. Unsoundness of mind.
  2. If he is an insolvent.
  3. When the individual is to be declared as an insolvent, but such an application is pending.
  4. If he has been sentenced for imprisonment.
  5. If the tribunal passed an order disqualifying him for being appointed as a director.
  6. If he has not paid any calls with respect to the shares of the company. 
  7. Convicted of an offence for non-disclosure of party transactions.
  8. If he has not complied with the requirements of the DIN. 

Removal of directors

Removal by Shareholders

Section 169 states the removal of the director from his office before the expiry of his term, through an ordinary resolution. For the removal of the director, special notice is required, and the notice should be served at least 14 days prior to such meeting.

As soon as the company receives the notice, the copy of such notice is given to the director. Then the director has the right to make a presentation against the notice which is supposed to be circulated among the members. 

Removal by Company Law Tribunal

Section 242 (2) (h) talks about the removal of directors by the company law tribunal. It is made through an application made to the tribunal for relief from oppression or mismanagement and then it may terminate any agreement of the company made with a director.

Resignation 

The resignation of the director is laid down under section 318 of the companies act,1956. It was stated that when a director resigns from his office, he is not entitled to compensation. The resignation of a director is valid and useful even if he is the only director as held in the case Mother Care (India) Pvt. Ltd. v. Ramaswamy P Aiyar

The act of 2013, section 168 lays down the provision that:

  1. The director can resign by giving a notice to his company.
  2. Then the board has to take notice of it.
  3. The registrar needs to be informed by the company within the specified time periods. 
  4. The fact of resignation needs to be placed by the company, in the director’s report in the following general meeting.
  5. The director has to send his reasons of resignation to the registrar along with the detailed reasons within 30 days. 

Duties of Directors

There is not an exhaustive list available that defines the duties of the director. There are certain roles of a person as a director as explained in the beginning. Some general duties are as follows:

The director has a duty to file with the registrar, a return of allotments, stating the specified particulars. Failure to file such return within 30 days makes the director “officer in default”. The director is fined up to Rs 500 per day, till the default continues.

A company cannot issue irredeemable preference shares or preference shares, redeemable beyond 20 years. Those directors that make such may be held liable as ‘officer in default’ and may be subject to a fine up to Rs. 1,000. To disclose interest in a transaction a director is expected to present that idea before the board at the first meeting after the director gains the interest. A director stands in fiduciary capacity with his company and he must not place himself in a situation where his personal interests’ conflict with his duty. 

A company’s power lies in the Board of Directors where they hold meetings from time to time. A director may not be able to attend all the meetings, but, if he fails to attend three consecutive meetings for a period of three months, without the permission of the board, the office of the director shall fall vacant. 

Remuneration of Managerial Personnel

Sec 196 (3) states that a person who has attained the age of 70 years can be appointed as managerial Personnel after a Special Resolution. If, for any reason, no Special Resolution is passed, then such person may be appointed only after an ordinary resolution and with the approval of the Central Government. 

The appointment of Managerial Personnel and remuneration is approved by the Board of Directors followed by Shareholders approval at the next general meeting. Section 197 deals with remuneration payable to directors including Managerial Personnel. The section applies to only Public Companies and hence Private Companies are free to pay remuneration at any rate to directors in case of adequacy and inadequacy or profits. 

Director’s KYC E-Form

As per the Companies (Appointment and Qualification of Directors) Rules 2014, every individual who has been allotted a Director Identification Number (DIN) as on 31st March of a financial year shall submit e-form DIR-3-KYC to the Central Government on or before 30th September of immediately next financial year. Thus, according to the rules, DIR KYC must be filed by persons having DIN every year.

Every person who has already filed DIR 3-KYC will be required to complete their KYC through a simple web-based verification service, with pre-filled data based on the registration records.

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