Companies Act- Directors (Position, appointment, qualification, power, duties and liabilities)

Introduction

Great directors make great movies. For example one of the finest crime movie Gangs of Wasseypur was directed by Anurag Kashyap.

 

 

 

On the similar lines directors in Board of Directors play a role in Company. They can take companies to greater heights, or even can sink companies with selfish motives.

 

Directors are the people who overlook day to day activities and finances of the companies. They are crucial in administration of the company. They also look into optimum utilization of resources of the company.

 

In this post we will cover below things

 

1. Who is Director
2. Position of Director
3. Number of Director
4. Appointment and Disqualification
5. Vacancies, Removal, Resignation
6. Power,Duties and Liabilities of Director

Who is Director

Who is director ? "Director is Director..!!". Section 2(13) of the Companies Act 1956 defined director as

Director is any person, occupying the position of Director, by whatever name called.

Modernized definition in Section 2(34) of  Companies Act 2013 goes like this

Director means a director appointed to the board of the company.

New definition is comprehensive. You name a position whatever you want, but if he appointed to Board which takes the decisions about company, He is Director.

 Directors gives the direction to the companies. 

Section 149(1) of Companies Act states that Individuals can be appointed as directors. 

Supreme Court analyzed reasons why directors should be individuals in Oriental Metal Pressing Works Pvt Limited Vs B.K.Thakur, 1961 31 Comp Cas 143. Director is crucial. He has to see that company makes a profit, but at the same time director has moral obligations. Their decision could land a company in a mess and could ruin the wealth of shareholders.

Position of Directors

 What is the position of directors ? Their is position is very high. From corporate law perspective position of directors is as below

1. They are agents of the company
2. They are officers of the company
3. They are trustee of the company.
   

 The directors are included in the definition of "Officer" is Section 2(59) as well as "Officer in Default" is section 2(60). As an officer of the company they have crucial responsibility of compliance.

Is Director and Employee of the company ?

Lee Vs Lee Air Farming gives the answer. Directors can be the employees of the company if it's not prohibited by Articles.

Number of Directors

Minimum there should be 3 directors in public company. The number of minimum directors is 2 in case of private company. In One Person Company, of course the minimum number is 1.

Maximum number of directors is 15 in company act. However this can be increased by special resolution if there is need for large number of directors.

Lean board with small number of directors as large number could lead to conflicts and deadlock. (See our parliament).

Additionaly, Section 149 prescribes that there should be at least ONE woman director on the board of the company, ONE Indian resident, and at least ONE minority shareholder directors.

Every listed company should have at least 1/3rd directors as "Independent directors". What do you mean by "Independent Director" ?

An independent director (also sometimes known as an outside director) is a director (member) of a board of directors who does not have a material or pecuniary relationship with company or related persons, except sitting fees.

 In How many Companies a person can be director? Companies act have restricted that one person can be director at 20 private companies at max. In case of Public companies ONE person can at most be director at 10 companies.

Types of Directors

Interested Director

Nominee Director

Shadow Director

Executive Director

Non-executive Director

Independent Director

Celebrity Director

Additional Director

Casual Director

Alternate Director

Woman Director

Retirable Director

Whole Time Director

Deemed Director

Minority Director

Managing Director

Chief Managing Director

Yeah.. tons of types of director. These different types of directors ensures that different interests are represented in decision making body. i.e BOARD.

Appointment and Disqualification

Director database is maintained by Stock Exchange. Companies can pick and choose Independent directors from there.

 

Each Director have one identification number i.e DIN. Section 153-159 have provision related to DIN. 

In Earlier act there was requirement of Shares for director. But in new act there is no such requirement. However golden shares can be given to directors for attachment(emotional :D) with the company.

Disqualification

Section 164 have provisions related to disqualification.

• If person is declared "person of unsound mind"
• If declared not competent
• If declared insolvent.
• If person is convicted for offence of moral turpitude with more than 6 months of imprisonment and cooling off period of 5 years is not elapsed.
• If person is convicted of serious offence with 7 years of imprisonment
• If person is disqualified by NCLT.
• If he is convicted for related party transaction under Section 188
• If defaulted calls (Payment of shares)
• If person don't have DIN number.
• If person breach inter-directorship limit(20 in private, 10 in public).

 

Section 164(2) have additional disqualification. This section prevents directors of failed companies to be appointed further.

 

If person is director of company which failed to file return for 3 financial years, or failed to return deposit or interests on such deposit, such directors are disqualified from further appointment.

 

Appointment

Appointment by Shareholders

 Shareholders appoint the directors in Annual General Meetings. In Appointments certain reservations has to be taken care of. These are

• 1/3rd of the director should be Independent Director
• 2/3rd directors should be retirable director.

Appointment by Board Of Directors

BOD can appoint Additional Director, Casual Director and Alternate Director for an absentee of 3 months.

 

These appointment can be under Section 161 to deal with certain contingencies. 

Vacancies due to illness, death or inability could be filled by appointing the Casual directors.

Appointment by NCLT

If NCLT finds that there is mismanagement in Board, to control the mess NCLT can appoint some directors. These directors are called as Nominee Directors. (Section 161)

Appointment by Third Parties in AoA

Third parties such as Banks, financial institution which have lent huge sum of money to Company can also appoint the directors to oversee whether fund is used properly or not.

Vacancy, Removal, Resignation

Director can resign by signing a resignation letter. This is simple process.

Section 167 deals with removal of Directors. It states that if director is disqualified as per Section 164. This we have already seen.

If director is absent from meeting of the board for one year, without proper explanation then director can be removed.

If Director is interested director as per section 184, then director is liable to vacate the office.

Article of Association can also have grounds on which director can be removed.

In Case of Shadow director(Appointment in parent company leads to automatic appointment in subsidiary companies), if director is removed from parent company, then he is deemed to removed from subsidiary companies.

As a principle of natural justice, Directors before removal are given a chance to explain their side of story.

Directors are like captain of Ship. If they put into good efforts Ship may sink or remain stagnant. Therefore directors needs to perform his duties diligently. 

There are other grounds for removal such as 

• Fraud
• Misfeasance
• Persistent negligence in carrying out duties
• Avoidance of sound principles of prudent commercial practices 
• Serious injury to interest of trades, industry of business.
• Defaulting the Creditors

Here sound business principles include proper business accounts, clear balance sheet, integrity, fair dealings and efficient services.

Power, Duties and Liabilities

Power

Power given to the directors are routine powers(e.g day to day business) and substantial powers(e.g investment decisions). Routines powers can be exercised by directors without any oversight. However when directors exercise substantial powers, then it should have Board of Directors approval, Shareholder approval etc.

As per Section 179, directors can exercise all general routine powers. General powers is all those powers which company can exercise. This include borrowing powers, contractual powers or proprietary powers.

Section 179(3) talks about collective powers, which are exercised by Board and consented by Shareholders. This include

• To make calls on shareholders in respect of money unpaid on shares
• To authorize buy back of securities under Section 68
• To issue securities including debentures in or outside India
• To borrow money
• To invest in funds of the company
• To grant loans or give guarantee or provide security in respect of loans
• To approve financial statements and the Board's report
• To diversify the business of the company
• To approve amalgamation, merger or restructuring.
• To take over a company or acquire a substantial stake in another company.

To make these power are used in bonafide  way, Section 180 kind of provides oversight. It provides that below power can be exercised with special resolution only. These include

1. to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company or where the company owns more than one undertaking,of the whole or substantially the whole of any of such undertakings.
2. to invest otherwise in trust securities the amount of compensation received by it as a result of any merger or amalgamation;
3.  to borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share capital and free reserves, apart from temporary loans obtained from the company’s bankers in the ordinary course of business
4. to remit, or give time for the repayment of, any debt due from a director.

There are additional restriction provided in Section 182,184 and 185.

Section 182 talks about restriction on Political Contribution. (Electoral Bonds in India. These money mostly received by one Political party who then works for Corporates instead of working for people. You know this political party.!)

Only old companies can contribute to political parties. There is restriction on contribution which is 7.5% of average profit for last 3 years.  Government company cannot contribute to political parties.

Section 184 have stringent provision for interested party transaction. For example if director is having interest in third parties and he deals with such parties of behalf of company where he is director then there is punishment for up to 6 months and fine 5 times the money involved in transactions.

Section 185 put restriction on granting loan. Company cannot advance a loan to it's director. In certain cases loan can be granted to director for his service to the company or under any scheme approved by the special resolution. If company itself is in business of giving loan for repayment, then such company can grant a loan to director, however they need to charge interest rate on such loan.

Duties

Along with powers ,comes the responsibilities and duties. Duties includes

1. Duty of Good Faith
2. Duty of reasonable care
3. Duty not to delegate powers

These are common law duties. There are statutory duties as per Section 166. These are

• Director shall exercise his duties with due and reasonable care, skill and diligence and exercise independent judgment
• Director shall avoid conflict of interest.
• Director should not go for undue gain. If any gain made then he is liable to pay equal amount of that gain to the company.
• Director shall not assign his office and any assignment so made will be void.

For breach of duties there is fine of 1-5 Lakh Rupees.

Other Statutory duties include

• Duties not to misled by Offer document. (Section 34,35)
• Duties not to induce investor for share subscription (Section 36)
• Duty not to issue irredeemable preference shares. (Section 55)
• Duty to file annual return to registrar (Section 92)
• Duty to hold statutory meetings of the company (Section 96)
• Duty to maintain books of the company and auditing, appointment of auditors to the company. (Section 128)
•  Duty to ensure planning and execution of Corporate Social Responsibility initiative.
• Duty to get DIN. (Section 159-160)
• Duty not to perform certain things enumerated in Section 166. (We have enumerated earlier)
• Duty not to make political contribution as per Section 182.
• Duty not to receive loan from a company

Liabilities

Director is in fiduciary relationship with company. If he breaches the fiduciary relationship, then he is liable for certain things.

Director can be held accountable for 

• Ultra vires acts
• Negligent acts
  
• Malafide acts.
• Liability towards co-directors

Directors can be held criminally liable for below things

• For misstatement in prospectus (Section 35)
• For issuence of bonus shares, irredeemable preference shares, discounted shares and falsification of share certificate.
• Failure to file annual return (Section 92)
• Failure to hold Annual General Meeting
• Not distributing dividends. (Section 127) 
• Failure to get DIN
• For exceeding maximum limit of inter-company directorship. (Section 165)

Boards Meetings

Section 173 provides that every company shall hold the first meeting of BOD withing 30 days of the date of it's incorporation and thereafter hold minimum number of four meetings of it's BOD every year in such a manner that not more than 120 days intervene between two consecutive meeting.

 

Conclusion

That's pretty much all about directors, their appointment, qualification, removal, power, duties and liabilities in short.

Director is one of the most crucial entity in corporate administration. Corporate governance largely revolves around directors.

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