DIRECTORS OF A COMPANY

“DIRECTORS OF A COMPANY”

i
 DIRECTORS OF A COMPANY

TABLE OF CONTENTS

REVIEW OF
LITERATURE……..………………………………………………………….……….vii-viii

RESEARCH
METHODOLOGY……………………………………………………………....................ix

 CHAPTER 1 INTRODUCTION……………………………………………………1
 CHAPTER 2 WHO IS A
DIRECTOR……………………………………………………………………........2
 CHAPTER 3 PROCEDURE FOR APPOINTMENT OF
DIRECTORS……………………………………………………………………..3- 4
 CHAPTER 4 APPOINTMENT OF
DIRECTORS……………………………………………………………………..5-11
 CHAPTER 5 LEGAL POSITION OF
DIRECTORS……………………………………………………………………12- 13

CONCLUSION……………………………………………………………………………..14

BIBLOGRAPHY……………………………………………………………………….15 - 16

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 DIRECTORS OF A COMPANY

REVIEW OF LITERATURE

 Appointment and Qualifications of Directors of a Company by Bijoy P Pulipra

Board of Directors of a Company is the front runners of the organization and they are the
flag-ship holders for driving the company towards the right direction. Hence it is very
important to understand the provisions related to appointment and qualifications of
directors.

In this session he detailed about the various important aspect related to appointment,
qualification etc. of Directors of a Company and also describing the related provisions1

 Directors have been described as a company’s ‘directing mind and will’. They are the
human agents of a company tasked with its management. Although the office they hold
also resembles that of a trustee or a managing partner, directors remain creatures of
statute, occupying a position ‘peculiar to themselves’.( M S Blackman Commentary on
the Companies Act (2002) at 8-11; P M Meskin (ed) Henochsberg on the Companies
Act (5 ed 1994) at 393). 2

1
http://www.destinationbangalore.in/appointment-and-qualifications-of-directors-of-a-company/

2
http://www.onlinejournal.in/IJIRV2I11/315.pdf

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 DIRECTORS OF A COMPANY

 A.M. Chakraborti is of the opinion that individual subscribers of the memorandum shall
be deemed to be the directors even though they do not hold qualification shares and the
articles of the company require that qualification shares must be held in order to be
appointed as directors . This is because qualification shares are required to be held only
for being appointed as director and not for being deemed to be director.3

3
https://www.scribd.com/document/135217310/Project-2

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 DIRECTORS OF A COMPANY

RESEARCH METHODOLOGY

Aims and Objectives:

The aim of the project is to present a detailed study of the topic “DIRECTORS OF A
COMPANY” forming a concrete informative capsule of the same with an insight into its
relevance in the today’s world .

1) To discuss about procedure of appointment of Directors.

2) To analysis the new provisions of Companies Act 2013

3) To know the Legal relationship of Director with company.

Research Plan

The researchers have followed Doctrinal method.

Sources of Data:

The following secondary sources of data have been used in the project-

 Websites
 Case Laws
 Books

Method of Writing:

The method of writing followed in the course of this research project is primarily
analytical and based on secondary source of data . The researcher has followed Uniform
method of citation throughout the course of this research project.

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 DIRECTORS OF A COMPANY

CHAPTER 1 - INTRODUCTION

Directors are officers of the company who are responsible for managing the company and
making the decisions as to its operation on a day to day basis, for the benefit of the shareholders.
A private company must have at least one director and a PLC must have at least two. As from
April 2016 only natural persons may be directors and corporate directors may not be appointed.

Certain important decisions, eg to change the company's name have to be made by the
shareholders at a General Meeting, however most decisions will be made by the directors.

Directors have to abide by a number of duties which are set out in sec171-177 CA 2006, and
include duties such as to 'promote the success of the company', and 'exercise reasonable care,
skill and diligence'. Other responsibilities which directors have include responsibility for
notifying Companies House of certain changes, eg to registered office, appointment of directors
etc., and for registering the annual return and accounts.

The same person can be both a director and a shareholder, and this is usually the case in private
companies. On the other hand, a director need not be a shareholder or vice versa.4

4
http://www.companylawclub.co.uk/directors-legal-duties

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 DIRECTORS OF A COMPANY

CHAPTER – 2 WHO IS A DIRECTOR5

 An appointed or elected member of the board of directors of a company.

 He has the responsibility for determining and implementing the company’s policy.

 A company director need not

-to be a shareholder or

-an employee, and

-may hold only the office of director under the provisions of the Act.

 Directors derive their powers emanating from board resolutions

 Unlike shareholders, directors cannot participate through proxy.

 Unlike employees, cannot absolve themselves of their responsibility for the delegated
duties.

Section 2(34) of the Companies Act, 2013 defines a director as – “director” means a director
appointed to the Board of a company.

5
http://taxguru.in/company-law/roles-responsibilities-directors-companies-act-
2013.html#sthash.6gkHjAVs.dpuf

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 DIRECTORS OF A COMPANY

CHAPTER 3- PROCEDURE FOR APPOINTMENT OF DIRECTORS

Section 152 of the New Act governs the appointment of directors. Certain specific requirements
for appointment of director as laid down in the New Act are-

 Section 149 of the companies act provides that only an individual can be appointed as
a director. Thud ,no body corporate , association or firm can be appointed director of a
company.
 If there is no provision for appointment of Director in the Articles (AoA), the
subscribers to the memorandum, i.e. the shareholders, who are individuals shall be
deemed to be the first directors of the company until the directors are duly appointed;
 Director to be appointed in a general meeting. If it is so done, an explanatory statement
for such appointment, annexed to the notice for the general meeting, shall include a
statement that in the opinion of the Board, he fulfills the conditions specified in this Act
for such an appointment;
 The proposed Director has to furnish his DIN (Director Identification Number)
mandatorily. DIN is allotted by the Central Government on application by a person
intending to be the Director of a company. DIN can be obtained in pursuance of section
153 and 154;
 No individual who has already been allotted a director identification no. under section
154 , shall apply for, obtain or possess another director identification no.
 The proposed Director has to also furnish a declaration stating that he is not disqualified
to be a director.
 Furthermore, such appointment should be with his consent. Earlier such consent was
not mandatory for private companies . Consent implies that being appointed a director
and taking the charge of the office are two different things;
 Consent has to be filed with the Registrar of Companies within 30 days of appointment

The provisions for optional proportionate representation which was earlier mandated only for
public companies and the private companies which are subsidies of a public company, has now
been extended to all private companies also (section 163 of the Companies Act, 2013). Also,
the disqualifications for appointment and reappointment of directors have been made

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applicable to the private companies. Therefore, prior to appointing a director, a company must
tick off the various disqualifications for appointment as director under Section 164 of the New
Act6.

Number of Directors

The New Act, by adding 149 (1) (b), has also increased the maximum number of directors that
a company can have from twelve to fifteen. The number can be further increased by passing a
special resolution instead of requiring approval from Central Government as was under the Old
Act.

Maximum number of Directorships7

Ass per section 165 of CA 2013, an individual can be appointed as Director in a maximum of
20 (twenty) companies at a time. The maximum number of public companies in which a person
can be Director is 10(ten) only.

6
https://indiancaselaws.wordpress.com/2014/06/29/appointment-of-directors-under-the-new-companies-act-
2013-2/

7
http://www.destinationbangalore.in/appointment-and-qualifications-of-directors-of-a-company/

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 DIRECTORS OF A COMPANY

CHAPTER 4 -APPOINTMENT OF DIRECTORS8

The success of the company depends, to a very large extent, upon the competence and integrity
of its directors. It is, therefore, necessary that management of companies should be in proper
hands. The appointment of directors is accordingly strictly regulated by the act. There are now
special provisions for preventing management by undesirable persons.

One evil which has been abolished by the Act is that of a company or a firm acting as a director
of another company. Now, according to Section 253 , only an individual can be the director of
a company. No company or firm or association can be appointed as a director. A proviso has
been added to the section by the amendments of 2006 which says that no company is to appoint
or appoint individual as a director unless he has been allotted a Director Identification Number
under S.266-B.

Appointment of first directors –

The first directors are usually appointed by name in the articles or in the manner provided
therein. Where the articles do not provide for the appointment of first directors, the subscribers
to the memorandum, who are individuals, shall be deemed to be the first directors of the
company subject to the regulations of the company’s articles.

The first directors can hold office until the directors are duly appointed in accordance with the
provisions of (Section 254). It may, however, be noted that in case of a public company, a list
of persons who are to be the first directors of a company along with their consent in writing
must be delivered to the Registrar of Companies.

Appointment of directors at general meeting –

According to section 255, the director must be appointed by the company in general meeting.
In the case of a public company or of a private company which is a subsidiary of a public

8
Dr. G.K. Kapoor and Sanjay Dhamija, Company Law- A comprehensive text book on Companies act 2013,
(New Delhi, Taxman Publication Pvt. Ltd. , 2015) , 315.

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 DIRECTORS OF A COMPANY

company, unless the articles provide for the retirement of all directors at every annual general
meeting, at least two-third of total number of directors must be persons whose period of office
is liable to determination by rotation. In other words, only one third of the total number of
directors can be non-rotational directors. The directors are to be appointed in general meeting
by the shareholders [Section 255(2)] as interpreted by the Calcutta High Court in the case of
Swapan Das Gupta v. Navin Chand Suchiantij .

Appointment of a director other than a retiring director [Sec. 257]-

Section 257 provides for the procedure of appointment of a person other than retiring director.
If any person other than the retiring director wishes to stand for directorship or any member
proposes a person for directorship, he must signify his intention to do so by giving 14 days’
notice to the company before the general meeting and the company must inform the members
not later than seven days before the general meeting either by individual notices or by
advertisement of this fact in at least two newspapers circulating in the place where its registered
office is located of which one must be in English and the other in the regional language of that
place. Also, the candidate or the member who intends to propose him as director has to deposit
a sum of Rs. 500 which shall be refunded to such person or the member , as the case may be,
if the candidate succeeds is being elected . In case such person is not elected as director, he or
she the member, as the case may be , will not be entitle to the refund of Rs. 500 and the amount
deposited shall stand forfeited by the company.

Appointment by Board of directors –

The Board of directors can exercise the power to appoint directors in the following three cases
:

1. Additional Directors (Section 260)

2. Filling up the Casual Vacancy (Section 262)
3. Alternate Directors (Section 313).

APPOINTMENT OF ADDITIONAL DIRECTORS – If the Articles authorise, the Board may

appoint additional directors. Such additional director together with the directors constituting
the Board should not exceed the maximum number fixed by the articles. Also, the additional

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 DIRECTORS OF A COMPANY

directors are entitled to hold office only up to the date of the next annual general meeting of
the company

FILLING UP CASUAL VACANCY – Section 262 empowers the Board to fill casual
vacancies in the case of a public company or a private company which is a subsidiary of a
public company. A casual vacancy is one that arises otherwise than by retirement or the
expiration of the time fixed for an appointment. Thus , if the office of any director appointed
by the company in general meeting is vacated before his term of office expires in the normal
course, the resulting casual vacancy may, subject to any regulation in the articles of the
company , be filled by the Board of Directors at a meeting of the Board.

ALTERNATE DIRECTOR– The Board of directors of a company may, if so authorised by its

articles or by a reaction passed by the company in general meeting, appoint an alternate director
to act for a director during his absence for a period of not less than three months from the State
in which meetings of the Board are ordinarily held.

The alternate director merely fills a temporary vacancy in the office of a director which already
exists and no new office of director is created by his appointment.

Appointment directors by proportional representation [Section 265]

Ordinarily, directors are appointed by simple majority vote on the resolutions moved for their
appointment. As a result majority shareholders controlling 51 per cent or more votes may elect
all directors and a substantial minority, as high as 49 per cent, may find no representation on
the Board. In order to enable the minority shareholders to have a proportionate representation
on the Board, section 265 of the Companies Act gives an option to companies to appoint
directors through a system of proportional representation. The section provides that a company
may provide in its Articles for the appointment of not less than 2/3rd of the total directors
according to the principle of proportional representation by single transferable vote or some
system of cumulative voting or otherwise. Such appointment shall be made once in every three
years (Section 265).

Appointment of directors by the Central Government( Section 408)

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 DIRECTORS OF A COMPANY

The Central Government has been empowered to appoint directors on an order passed by the
Company Law Board . CLB may so order either on a reference by the Central Government or
on the application of not less than 100 member of the company or of members holding not less
than 1/10th of the total voting power. Such appointments shall be so ordered by the CLB where
it finds that the affairs of the Company have been conducted in a manner oppressive to any
member of the company or in a manner prejudicial to the interests of the company or to the
public interest . Such a director may be appoint for any term but not exceeding three year. In
lieu of passing an order as aforesaid, the CLB may directs the company to amend its article so
as to provide for election of directors by the system of proportional representation. It may also
direct that until new directors are appointed in pursuance of the order aforesaid, such number
of persons as it may specify as being necessary to effectively safeguard the interest of the
company or its shareholders or the public interest shall hold office as additional directors of
the company

Appointment of directors under companies act 2013

Resident Director: The new Act has made certain important changes in the earlier regime,
particularly in respect of the appointment of directors. For instance, as per Section 149 of the
New Act, Board of Directors of a company, must have at least one resident director 9, i.e. a
person who has lived not less than 182 days in India in the previous calendar year. The second
proviso added to section 149 in the New Act requires all companies to comply with section 149
within a year.

Woman Director: Similarly, a new provision is introduced under section 149, which requires
certain categories of companies to have at least one woman director on the board. Such
companies are any listed company, and any public company having-

paid up capital of Rs. 100 cr. or more, or

9
Under FEMA, 1999, Such Person is Called “Resident In India”.

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turnover of Rs. 300 cr. or more.

Independent Director: Independent Director is for the first time introduced in the New Act,
and has been clearly defined as “any director other than a managing director, a whole time
director, and a nominee director.” Such a director not having any significant pecuniary
relationship with the company is more efficient. Section 149 (4) requires that one third of the
directors should be independent directors. Section 149(6) lists in detail the specific
qualifications for an independent director-

Qualifications of independent director.- An independent director shall possess appropriate

skills, experience and knowledge in one or more fields of finance, law, management, sales,
marketing, administration, research, corporate governance, technical operations or other
disciplines related to the company’s business10.

 Person of integrity and relevant experience Is not a promoter, nor has any relation with
the promoters or directors of the company, its holding, subsidiary or associate
company;

 Has no pecuniary relationship with company, its holding, subsidiary or associate

company, its promoters or directors in the preceding two years of his appointment

 Has no relatives who have pecuniary relationship with company, its holding,
subsidiary or associate company, its promoters or directors, amounting to two percent
in the preceding two years of his appointment

10
http://perry4law.org/clii/wp-content/uploads/2014/03/Companies-Appointment-and-Qualification-of-
Directors-Rules-2014.pdf

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 DIRECTORS OF A COMPANY

 Neither he, nor any of his relatives have held a key managerial personnel or is or has
been employee of the company or its holding, subsidiary or associate company in any
of the three financial years immediately preceding the financial year in which he is
proposed to be appointed.

 Neither he nor any of his relatives have been an employee or proprietor or a partner, in
any of the three financial years immediately preceding the financial year in which he is
proposed to be appointed, of (a) a firm of auditors or company secretaries in practice or
cost auditors of the company or its holding, subsidiary or associate company; or (b) any
legal or a consulting firm that has or had any transaction with the company, its holding,
subsidiary or associate company amounting to ten per cent. or more of the gross
turnover of such firm;

 Neither he nor any of his relatives hold together with his relatives two per cent. or more
of the total voting power of the company; or

 Neither he nor any of his relatives is a Chief Executive or director, by whatever name
called, of any nonprofit organization that receives twenty-five per cent. or more of its
receipts from the company, any of its promoters, directors or its holding, subsidiary or
associate company or that holds two per cent. or more of the total voting power of the
company; or who possesses such other qualifications as may be prescribed.
 The appointment of independent directors has to also be approved by the shareholders.

Nominee director 161(3):- If the articles of a company authorize, the Board of Directors
of a company may appoint any person as a director nominated by any institution in pursu-
ance of the provisions of any law for the time being in force or of any agreement or by the
Central Government the State Government by virtue of its shareholding in a Government
Company.

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Additional Directors: Additional Directors may be appointed by a company under section 161
of the New Act. The article should confer such power on the Board of Directors of the
Company. A provision further added in 2013 with regards to such appointment is that the
proposed person should not have failed to get appointed as a Director in a General Meeting.

Alternate Directors: Alternate Directors, under section 161(2) of Companies Act, 2013, may
be appointed by a company if the articles confer such power or a decision is passed by a
resolution if an independent Director is absent from India for not less than three months. He
must be qualified to become an independent director, but should not hold any Directorship. An
alternate Director cannot hold the office longer than the term of the Director in whose place he
has been appointed. Additionally, he will have to vacate the office, if and when the original
Director returns to India. Any alteration in the term of office made during the absence of the
original Director will apply to the original Director and not to the Alternate Director.

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 DIRECTORS OF A COMPANY

CHAPTER 5 - LEGAL POSITION OF DIRECTOR

a) Directors as Agents:

A company as an artificial person, acts through directors who are elected representatives of the
shareholders and who execute decision making for the benefit of shareholders . The
ordinary rules of agency will therefore applies to any contract or transaction made by them on
behalf of the company, it is the company which is liable and not the directors.

Thus, where chief executive of company executed promissory note and borrowed amount for
company’s sake, it could not be said that amount was borrowed by him in his personal
capacity.11

Directors as agents make the company liable even for contempt of court 12

b) Directors as employees

When the director is appointed as whole time employee of the company then that particular
directors shall be considered as employee director or whole time director. It was observed that
directors are elected representatives of the shareholders engaged in directing the affairs of the
company on its behalf. As such directors are agents of the company but they are not employees
or servants of the company.13

c) Directors as officers14

Director treated as officers of a company. They are liable to certain penalties if the provisions
of the companies act are not strictly complied with.

d) Director as trustees:

11
Kirlampudi Sugar Mills Ltd V. G. Venkata Rao {2003}42 SCL 798(AP)
12
Vineet Kumar mother v. union of India {1996}20 CLA 213 (SC)
13
Lee Behrens & Co., In Re {1932} 2 Comp. Case 588

14
http://taxguru.in/company-law/roles-responsibilities-directors-companies-act-
2013.html#sthash.EOxq47Xw.dpuf

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 DIRECTORS OF A COMPANY

Director is treated as trustees of the company, money and property: and of the powers entrusted
to and vested in them because they administer those assets and perform duties in the interest of
the company and not for their own personal advantage.

The Madras HC held that the directors of a company and trustees for the company, and with
reference to their power of applying funds of the company and for misuse of the power they
could be rendered liable as trustees and on their death the cause of action survives against their
legal representatives.15

15
Ramaswamy Iyer V. Brahmayya & Co. {1966}1 Comp. LJ 107(Mad.)

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CONCLUSION

CA 2013 introduces significant changes to the composition of the boards of directors.

 Every company is required to appoint 1 (one) resident director on its board.

 Nominee directors shall no longer be treated as independent directors.

 Listed companies and specified classes of public companies are required to appoint
independent directors and women directors on their boards.

 CA 2013 for the first time codifies the duties of directors.

 SEBI amends the Listing Agreement (with prospective effect from October 01, 2014)
to align it with CA 2013.

The Government of India has recently notified Companies Act, 2013 ("CA 2013"), which
replaces the erstwhile Companies Act, 1956 ("CA 1956"). In our series of updates on the CA
2013 ("NDA CA 2013 Series"), we are analyzing the key changes and their major implications
for stakeholders, by setting out the practical impact of the changes introduced by CA 2013.16

16
http://www.mondaq.com/india/x/319480/Corporate+Governance/Companies+Act+2013+Greater+Emphasis+
On+Governance+Through+The+Board+And+Board+Processes

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 DIRECTORS OF A COMPANY

BIBLOGRAPHY

BOOKS:-

 Kapoor G.K. and Dhamija Sanjay, Company Law- A comprehensive text book on
Companies act 2013, (New Delhi, Taxman Publication Pvt. Ltd. , 2015) , 315.

CASE LIST:-

 Ramaswamy Iyer V. Brahmayya & Co. {1966}1 Comp. LJ 107(Mad.)

 Kirlampudi Sugar Mills Ltd V. G. Venkata Rao {2003}42 SCL 798(AP)
 Vineet Kumar mother v. Union of India {1996}20 CLA 213 (SC)
 Lee Behrens & Co., In Re {1932} 2 Comp. Case 588

WEBSITES:-

 http://www.companylawclub.co.uk/
 http://taxguru.in/company-law/roles-responsibilities-directors-companies-act-
2013.html#sthash.EOxq47Xw.dpuf

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 DIRECTORS OF A COMPANY

 http://perry4law.org/clii/wp-content/uploads/2014/03/Companies-Appointment-and-
Qualification-of-Directors-Rules-2014.pdf
 http://taxguru.in/company-law/roles-responsibilities-directors-companies-act-
2013.html#sthash.EOxq47Xw.dpuf
 https://indiancaselaws.wordpress.com/2014/06/29/appointment-of-directors-under-
the-new-companies-act-2013-2/
 http://www.destinationbangalore.in/appointment-and-qualifications-of-directors-of-a-
company/ (imp)
 http://www.mondaq.com/india/x/319480/Corporate+Governance/Companies+Act+20
13+Greater+Emphasis+On+Governance+Through+The+Board+And+Board+Process
es

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