Concept of Director
Although a company is a separate legal entity (separate from the persons who formed it, separate from the members who invested in it), it cannot work on its own. There must be someone to work on behalf of company, to look after its day to day functions, to execute its documents, to direct company.
Therefore Companies Act, 1956 identifies a term “Director”. In general terms director means a person who direct an organisation/firm/company. Therefore the office of a director is very important for any organisation. And that’s why the term “Director” has been given so much importance under Companies Act, 1956.
Definition of Director
Companies Act, 1956 has given an inclusive and function-based definition of director.
According to Sec- 2(13)
“Director includes any person occupying the position of director by whatever name called”.
Thus according to this definition any person who do acts of a director is a director whether that person is named as a director or not. Thus even a person, who is designated as a secretary or accountant in a company, may be termed as director of that company if that person do work which a director should do.
But in a case “Ram Autar Jalan v. Coal Products Private Ltd.”, honourable Supreme Court held that
“When a question arise whether a person is a director of a company or not, minute books and returns sent to ROC are important evidence, rather than a fact that a person was in fact working as a director.”
According to Section 370(4), a person in accordance with whose directions of instructions BOD are accustomed to act shall be deemed to be a director of a company. But according to section 7, no person shall be deemed to be a director of a company if BOD acts on the advice given by him in his professional capacity.
Who can be a director of a company?
According to Section 253,
No body corporate, association or firm shall be appointed director of a company.
Therefore only an individual shall be appointed as director of a company. This is because the office of a director is very important in any company. There must be someone who can be directly responsible and accountable for the office of director.
Further according to Section 253,
No company shall appoint or re-appoint any individual as director of the company unless he has been allotted a Director Identification Number (DIN).
Minimum number of directors
According to Section 252
Every public company shall have at least three directors and every other company shall have at least two directors.
The directors of a company collectively are referred to in this Act as the "Board of directors" or "Board".
Type of Directors
Generally we can divide directors into 2 categories:
Executive Directors
Non-Executive Directors
Executive Directors/Inside Directors
Those directors who are in the whole-time employment of the company are termed as Executive Directors. Like managing director, whole-time director etc. They are concerned with day to day working of company.
Non-executive Directors/outside Directors
Those directors who are not in the whole-time employment of the company are termed as non-executive Directors. They are not concerned with day to day working of company. They just attend Board meetings and get sitting fees for that.
Non-executive Directors may be further divided into 2 parts:
Independent directors
Non-in dependent directors
Companies Act, 1956 has not defined the term “Independent Director”. The term “Independent director” has relevance for listed companies. Clause 49 of Listing Agreement clause provides for “Composition of BOD”. Accordingly
The Board of directors of the company shall have an optimum combination of executive and non-executive directors with not less than 50% percent of the board of directors comprising of non-executive directors.
Where the Chairman of the Board is a non-executive director, at least one-third of the Board should comprise of independent directors and in case he is an executive director, at least half of the Board should comprise of independent directors.
Further, where the non-executive Chairman is a promoter of the company or is related to any promoter or person occupying management positions at the Board level or at one level below the Board, at least one-half of the Board of the company shall consist of independent directors.
Explanation-
‘Independent director’ shall mean a non-executive director of the company who:
apart from receiving director’s remuneration, does not have any material pecuniary relationships or transactions with the company, its promoters, its directors, its senior management or its holding company, its subsidiaries and associates which may affect independence of the director;
is not related to promoters or persons occupying management positions at the board level or at one level below the board;
has not been an executive of the company in the immediately preceding three financial years;
is not a partner or an executive or was not partner or an executive during the preceding three years, of any of the following:
the statutory audit firm or the internal audit firm that is associated with the company, and
the legal firm(s) and consulting firm(s) that have a material association with the company.
is not a material supplier, service provider or customer or a lessor or lessee of the company, which may affect independence of the director.
is not a substantial shareholder of the company i.e. owning two percent or more of the block of voting shares.
is not less than 21 years of age.
Directors can be further divided as
Interested directors
Non interested directors
According to Section 287,
"Interested director" means any director whose presence cannot, by reason of section 300, count for the purpose of forming a quorum at a meeting of the Board, at the time of the discussion or vote on any matter.
(Section 300 is discussed later in detail)
Further directors can be categorised according to their appointment:
First Directors
Rotational Directors
Additional Directors
Directors appointed to fill casual vacancies
Alternate Directors
Nominee Directors
Directors appointed by Central Government
Directors appointed by small shareholders
(We will discuss them later)
Legal Position of Directors
As company is an artificial person, therefore it can act on its own. There must be someone to act on behalf of company. Directors are the person who act on behalf of company and who direct company. They stand in the fiduciary position towards the company.
Real legal position of a Director is really hard to define because Companies Act, 1956 is salient in this regard. But based on different judicial interpretations, we can say that directors are (to some extent) agents of the company and to other extent trustees of the company.
Director – as an Agent
Directors are the agents of the company with the powers and duties to carry on the business of the company. But directors have to work in the area and parameters prescribed by the AOA, MOA and Companies Act, 1956 along with other relevant acts.
Because directors work on behalf of company and make contracts on behalf of company, they cannot be personally liable as long as they work within their authority area.
Cases where director can be personally liable
When directors fail to exclude their personal liability (like when they enter into contracts in their own name)
When they enter into contracts on behalf of company but fails to use “LTD. Or PVT. LTD.” As the part of the name of the company.
When directors exceeds their powers (like in case of ultra vires to directors). But in that case if an act is not ultra virus to company, than company may rectify the act of director by passing a resolution that effect in the general meeting of company.
It should be noted that it is BOD as a collective body who acts a agent of company; not a single director. Therefore a single director cannot enter into a contract unless that power is specially delegated to him/her by BOD, otherwise director would be personally liable.
Director as the trustee of company
A trustee is a legal owner of the property, which he/she holds in trust for the benefits of the beneficiaries. A trustee enters into a contract with 3rd party in his own name in relation to the trust property. Therefore it cannot be said that directors are trustees in real/full sense. Because directors enter into a contract with 3rd party in the name of company. Further, directors do not hold property of the company in their own name.
But still directors occupies fiduciary position towards the company and therefore there exist a relation of trust B/W them.
Directors are the trustee of the money of company which comes to their hands or which is actually under their control.
Directors are in the position of trustee for the company as regard to their powers and they must exercise their powers in the interest of and for the benefits of company.
Qualifications of Directors
Companies Act, 1956 is silent regarding the qualifications of directors. But it has prescribed disqualifications of directors. According to Section 274:
A person shall not be capable of being appointed director of a company, if—
he has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force;
he is an undischarged insolvent;
he has applied to be adjudicated as an insolvent and his application is pending;
he has been convicted by a Court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months, and a period of five years has not elapsed from the date of expiry of the sentence;
he has not paid any call in respect of shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call; or
an order disqualifying him for appointment as director has been passed by a Court in pursuance of section 203 and is in force, unless the leave of the Court has been obtained for his appointment in pursuance of that section;
such person is already a director of a public company which,—
has not filed the annual accounts and annual returns for any continuous three financial years commencing on and after the first day of April, 1999; or
has failed to repay its deposit or interest thereon on due date or redeem its debentures on due date or pay dividend and such failure continues for one year or more:
Provided that such person shall not be eligible to be appointed as a director of any other public company for a period of five years from the date on which such public company in which he is a director failed to file annual accounts and annual returns under sub-clause (A) or has failed to repay its deposit or interest or redeem its debentures on due date or pay dividend referred to in clause (B).
NOTE:
A private company which is not a subsidiary of a public company may, by its articles, provide any other disqualification in addition to those specified in sub-section (1).
Qualification shares
Qualification shares means minimum no. of shares required to become the director of a company. Companies Act, 1956 does not impose any compulsion regarding qualification shares. But if AOA of a company provides so, than section 270 provides the provisions regarding that. According to section 270:
It shall be the duty of every director (who is required by the articles of the company to hold a specified share qualification and who is not already qualified in that respect), to obtain his qualification within two months after his appointment as director.
Any provision in the articles of the company shall be void in so far as it requires a person to hold the qualification shares before his appointment as a director or to obtain them within a shorter time than two months after his appointment as such.
The nominal value of the qualification shares shall not exceed five thousand rupees, or the nominal value of one share where it exceeds five thousand rupees.
For the purpose of any provision in the articles requiring a director to hold a specified share qualification, the bearer of a share warrant shall not be deemed to be the holder of the shares specified in the warrant.
According to section 272, if, after the expiry of the said period of two months, any person acts as a director of the company when he does not hold the qualification shares referred to in section 270, he shall be punishable with fine which may extend to Rs. 50,000 for every day between such expiry and the last day on which he acted as a director.
According to section 273, section 270 and 272 shall not apply to a private company, unless it is a subsidiary of a public company.
Non applicability of provisions of Qualification shares
section 270 and 272 shall not apply to a private company, unless it is a subsidiary of a public company
A director appointed by CG u/s 408 need not to hold qualification shares.
Nominee directors appointed by financial institutions are not required to hold qualification shares.
Those directors who are not required by AOA of the company to hold qualification shares are not required to hold qualification shares.
Restriction on number of directorships
According to section 275, no person shall hold office, at the same time, as director in more than 15 companies.
Choice by person becoming director of more than fifteen companies
(1) Where a person already holding the office of director in fifteen companies is appointed as a director of any other company, the appointment—
shall not take effect unless such person has, within fifteen days thereof, effectively vacated his office as director in any of the companies in which he was already a director; and
shall become void immediately on the expiry of the fifteen days if he has not, before such expiry, effectively vacated his office as director in any of the other companies aforesaid.
(2) Where a person already holding the office of director in fourteen companies or less is appointed as a director of other companies, making the total number of his directorships more than fifteen, he shall choose the directorships which he wishes to continue to hold or to accept, so however that the total number of the directorships, old and new, held by him shall not exceed fifteen.
None of the new appointments of director shall take effect until such choice is made; and all the new appointments shall become void if the choice is not made within fifteen days of the day on which the last of them was made.
Exclusion of certain directorships for the purposes of sections 275, 276 and 277
According to section 278
(1) In calculating, for the purposes of sections 275, 276 and 277, the number of companies of which a person may be a director, the following companies shall be excluded, namely:—
a private company which is neither a subsidiary nor a holding company of a public company;
an unlimited company;
an association not carrying on business for profit or which prohibits the payment of a dividend (section 25 companies);
a company in which such person is only an alternate director.
Penalty
According to section 279, any person who holds office, or acts, as a director of more than fifteen companies in contravention of the foregoing provisions shall be punishable with fine which may extend to fifty thousand rupees in respect of each of those companies after the first twenty.
Change in number of Directors
According to section 258, a company may, in the general meeting, by ordinary resolution, increase or reduce the number of its directors within the limits fixed in that behalf by its articles.
According to section 259, in the case of a public company or a private company which is a subsidiary of a public company, any increase in the number of its directors shall not have any effect unless approved by the Central Government; and shall become void if, and in so far as, it is disapproved by that Government:
Approval of Central Government is not required in following cases:
(a) in the case of a company which was in existence on the 21st day of July, 1951
an increase which was within the permissible maximum under AOA of company as in force on that date, and
(b) in the case of a company which came or may come into existence after that date,
an increase which is within the permissible maximum under its articles as first registered,
But where such permissible maximum is twelve or less than twelve, no approval of the Central Government shall be required if the increase in the number of its directors does not make the total number of its directors more than twelve.
Appointment of directors
Directors may be appointed in the following ways:
By subscribing to MOA (1st directors – section 254)
By members in general meeting (section 255, 256, 257 and 265)
By BOD (section 250, 262 and 313)
By Central Government (section 408 and 409)
By third parties like financial institutions (nominee directors)
By small shareholders (section 252)
Restrictions on appointment or advertisement of director
According to section 266
A person shall not be capable of being appointed director of a company by the articles, and shall not be named as a director or proposed director of a company in a prospectus issued by or on behalf of the company or as proposed director of an intended company in a prospectus issued in relation to that intended company, or in a statement in lieu of prospectus filed with the Registrar by or on behalf of a company, unless, before the registration of the articles, the publication of the prospectus, or the filing of the statement in lieu of prospectus, as the case may be, he has, by himself or by his agent authorised in writing,—
signed and filed with the Registrar a consent in writing to act as such director; and
either—
signed the memorandum for shares not being less in number or value than that of his qualification shares, if any; or
taken his qualification shares, if any from the company and paid or agreed to pay for them; or
signed and filed with the Registrar an undertaking in writing to take from the company his qualification shares, if any, and pay for them; or
made and filed with the Registrar an affidavit to the effect that shares, not being less in number or value than that of his qualification shares, if any, are registered in his name.
This section shall not apply to—
a company not having a share capital;
a private company;
a company which was a private company before becoming a public company; or
a prospectus issued by or on behalf of a company after the expiry of one year from the date on which the company was entitled to commence business.
Appointment of 1st directors
According to 254, in default of and subject to any regulations in the articles of a company, subscribers of the memorandum who are individuals shall be deemed to be the directors of the company, until the directors are duly appointed in accordance with section 255.
Regulation 64 of Table A
The number of the directors and the names of the first directors shall be determined in writing by the subscribers of the memorandum or a majority of them.
Appointment of directors by members in the general meeting (Appointment of Rotating directors)
Unless the articles provide for the retirement of all directors at every annual general meeting,
not less than two-thirds of the total number of directors of a public company, or of a private company which is a subsidiary of a public company, shall—
be the directors who retire by rotation; and
be appointed by the company in general meeting.
The remaining directors in the case of any such company, and the directors generally in the case of a private company which is not a subsidiary of a public company, shall, in default of and subject to any regulations in the articles of the company, also be appointed by the company in general meeting.
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