Directors under Company Law vis a vis Position and Power

A corporation is an artificial being, invisible, intangible and existing only in contemplation of law.” “It has neither a mind nor a body of its own. “A living person has a mind which can have knowledge or intention and he has hands to carry out his intention. A corporation has none of these, it must act through living persons.” This makes it necessary that the company’s business should be entrusted to some human agents. Hence the necessity of directors.

A director means a director appointed to the Board of a company.

 [S. 2(34)] Section 149 of the Act, therefore, requires that “every public company shall have at least three directors and every private company shall have at least two directors”* In the case of one person company, there has to be at least one director. There can be a maximum of 15 directors.

Companies have been permitted to have more than 15 directors by passing a special resolution.

POSITION OF DIRECTORS

Directors are professional men hired by the company to direct its affairs. Yet they are not the servants of the company. They are rather the Officers of the company. “A director is not a servant of any master. He cannot be described as a servant of the company or of anyone.” “A director is in fact a director or controller of the company’s affairs. He is not a servant.

A director may, however, work as an employee in a different capacity.

 For example, in Lee v Lee’s Air Farming Ltd:1961

The principal controller and a director of a company was also working as its pilot. Following his death while acting as a pilot, his widow recovered compensation under the Workmen’s Compensation Act.

Position of Directors can be clarify through following points :

• Directors as agents

It was clearly recognised as early as 1866 in Ferguson v Wilson,” that directors are in the eyes of law, agents of the company. The court said:

The company has no person; it can act only through directors and the case is, as regards those directors, merely the ordinary case of principal and agent.

The general principles of agency, therefore, govern the relations of directors with the company and of persons dealing with the company through its directors. Where the directors contract in the name, and on behalf of the company, it is the company which is liable on it and not the directors.

Thus where the plaintiff supplied certain goods to a company through its Chairman, who promised to issue him a debenture for the price, but never did so and the company went into liquidation, he was held not liable to the plaintiff.15 Similarly, where the directors allotted certain shares to the plaintiff, they were held not liable when the company, having exhausted its shares, failed to give effect to the allotment.

• As Trustees

Directors are trustees of the company’s money, properties and their powers and as such must account for all the moneys over which they exercise control and shall refund any money improperly paid away, and shall exercise their powers honestly in the interest of the company and all the shareholders, and not their own sectional interests.

Although directors are not properly speaking trustees, yet they have always been considered and treated as trustees of money which comes to their hands or which is actually under their control;

In Ramaswamy Iyer v Brahamayya & Co, the Madras High Court observed:

The directors of a company are 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.

Another reason why directors have been described as trustees is the peculiar nature of their office.

The directors are persons selected to manage the affairs of the company for the benefit of the shareholders. It is an office of trust, which if they undertake, it is their duty to perform fully and entirely.”

• DIRECTOR AS ORGANS OF CORPORATE BODY: The organic theory of corporate life “treats certain officials as organs of the company, for whose action the company is held liable just as a natural person is for the action of his limbs17. Thus the modern directors are more than mere agents or trustees.

APPOINTMENT OF DIRECTORS

The success of a 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 s The appointment of directors is accordingly strictly regulated by the Act.

No company is to appoint or appoint any individual as a director unless he has been allotted a Director Identification Number under Section 154. [S. 152(3)]

• Company to have Board of directors [S. 149]

Every company is to have a Board of directors consisting of individuals as directors. A public company is to have a minimum number of three directors and a private company is to have two directors. In the case of one person company, only one director is compulsory. There can be a maximum of 15 directors. A company may appoint more than 15 only after passing a special resolution.

• Independent directors [S. 149(4)]

Every listed public company is to have at least one-third of the total number of directors as independent directors. The Central Government may prescribe the minimum number of independent directors in a class or classes of public companies.

Sub-section (6) provides that an independent director in relation to a company means a director who is not a managing director or a whole-time director or a nominee director

1. who in the opinion of the Board is a person of integrity and possesses relevant expertise and experience;
2. who is or was not a promoter of the company or of its holding, subsidiary or associate company;
3. who has or had no pecuniary relationship with the company, its holding, subsidiary or associate company or their promoters or directors during the immediately preceding two financial years or during the current financial year;
4. none of whose relatives has or had pecuniary relationship or transactions with the company,
5. who neither himself nor any of his relative holds any key managerial position.

• Manner of election of Independent directors and maintenance of Data Bank [S. 150]

Independent directors have to be selected from a data bank which should contain names, addresses and qualifications of persons who are eligible and willing to act as such. This has to be maintained by any body, institute or association as may be notified by the Central Government. A body to be notified should have expertise in creation and maintenance of such data bank and put it on their website for use by the company making the appointment of such directors. The responsibility of exercising due diligence before picking up a person from such data bank is to be that of the company. [S. 150(1)

The appointment has to be approved by the company in general meeting.

The explanatory statement annexed to the notice of general meeting called to consider an appointment has to indicate the justification for choosing the appointee. [Sub-s (2] Data bank has to be maintained in accordance with such rules as may be prescribed. The Central Government may prescribe the manner and procedure of selection of independent directors who fulfil the qualification and requirements stated in Section 149.

• Appointment of directors elected by small shareholders [S. 151]

A listed company may have one director elected by such small shareholders as may be prescribed. For the purposes of this section a small shareholder means a shareholder holding shares of nominal value of not more than Rs 20,000 or such other sum as may be prescribed.

• First directors [S. 152]

The first directors of a company are to be appointed by the subscribers of the memorandum. They are generally listed in the articles of the company.If they do not appoint any, all the subscribers who are individuals become directors. The very fact of incorporation makes them the first directors of the company. The first directors, howsoever appointed, hold office only up to the date of the first annual general meeting of the company and the subsequent directors must be appointed in accordance with the provisions of Section 152.

• Appointment at General Meeting

According to Section 152, directors must be appointed by the company in general meetings.The person to be appointed has to furnish his Director’s Identification Number and a declaration that he is not disqualified to become a director under the Act. [S. 152(4)] The person appointed as director is not to act as such unless he has filed with the company his consent to act as such. He has to file his consent with the Registrar within 30 days of his appointment in the prescribed manner.

• Appointment by nomination

Section 161(3) leaves scope for appointments to be made in accordance with the company’s articles without being routed through the company’s general meeting. An agreement among the shareholders may be imbibed in the articles to the effect that every holder of 10 per cent shares shall have the right to nominate a director on the Board. Lending institutions also insist on putting upon the company’s Board of directors some of their nominees for watching their interest. The phenomenon of nominee directors is now a part of the corporate scenario.

Section 161(3) provides that subject to the Articles of a company, the Board may appoint any person as a director nominated by any institution in pursuance of the provisions of any law for the time being in force or of any agreement or by the Central Government by virtue of its shareholding in a Government company.

• Appointment by voting on individual basis [S. 162]

The appointment of every director is required to be made by voting at the general meeting. The candidates cannot be put to vote en bloc. Rather each candidate has to be voted on individually. [S. 162(1)] Wishes of shareholders in relation to each proposed director should be obtained. If two or more persons are appointed directors by a single resolution, the same is void and non- existent in the eyes of law.

• Appointment by proportional representation [S. 163]

It is apparent from the above provisions that the basic method adopted by the Act for the appointment of directors is election by simple majority. All the directors of a company can, therefore, be appointed by a simple majority of shareholders and a substantial minority cannot succeed in placing even a single director on the Board. “Section 163 was, therefore, enacted by the legislature so that the minority may have an opportunity of placing their representative on the board. This section enables a company to provide in its articles the system of voting by proportional representation for the appointment of directors. This system of voting is devised to make minority votes effective.

• Appointment by Board

While the general power to appoint directors is vested in the general meeting of shareholders, there are at least two cases when the Board can also appoint new directors.

• Firstly, articles may empower the directors to appoint additional directors subject, of course, to the maximum number fixed therein. [S. 161(1)] And,
• secondly, the Act itself by Section 161 authorises the directors to fill casual vacancies.

This may occasionally result in a conflict between the general meeting and the directorate.

 This kind of situation developed in BN Viswanathan vs. Tifins Baryt Asbestos (P) Ltd.

A clause in the articles of a company authorised the directors to fill casual vacancies and also to increase the number of directors within the maximum number fixed in the articles. Some casual vacancies occurred but they were promptly filled at a general meeting of the shareholders. This was challenged on the ground that once the power to appoint was delegated to the Board, it could not have been exercised at a general meeting.

After an extensive review of English authorities, VENKATRAMA IVER J upheld the appointment and said, “The principles can be summed up thus:

A company has inherent power to take all steps to ensure its proper working and that, of course, includes the power to appoint directors. It can delegate this power to the Board and such delegation will be binding upon it,

• Appointment by Tribunal

The Company Law Tribunal has the power to appoint directors for prevention of oppression and mismanagement. [S. 242(j)]

In the case of Rolta India Ltd vs Venire Industries Ltd. 2000.

An agreement between groups of shareholders not to increase the number of director and capital of the company and also not to do anything disturbing the existing pattern of management was held to be not binding on the company so as to prevent it from doing any of those things.

Director Identification Number:

• Application for allotment of number [S. 153]. – Existing directors as well as persons seeking to become directors have to apply to the Central Government for allotment of a number. The application has to be in a prescribed form and has also to be filed in the prescribed manner including electronic filing. Once an application is made, the existing directors can continue in position. The Central Government has to make the allotment within one month in such manner as may be prescribed. [S. 154].
• Prohibition on more than one Identification Number [S. 155].-Once a number has been allotted, the individual concerned cannot seek allotment of any other number. The director has then to inform his companies of the number allotted to him. [S. 156]
• Director to intimate Identification Number IS. 156].-Every existing director, within one month after receiving his Director Identification Number from the Central Government, has to intimate it to the company and also to all the companies in which he is a director.

company to inform the Registrar of the Number [S. 157.– Within 15 days of the receipt of information from the director concerned of his identification  Number, the company has to furnish this information to the Registrar or any other officer or authority as may be specified by the Central Government. The information has to be furnished in prescribed form and manner and also with prescribed fees or additional fee under Section 403 for late filing. Where the company fails to do so even after expiry of the late filing period under Section 403, the company becomes punishable with fine not less than Rs 25,000 but extending up to Rs 1,00,000. Every officer who is in default has to pay a fine of not less than Rs 25,000 extending up to Rs 1,00,000.

• Disqualifications [S. 164]

Section 164 lays down the minimum eligibility requirements. A person is not capable of being appointed a director in the following cases:

1. Where he is of unsound mind, provided that the fact has been certified  by a court of competent jurisdiction and the finding is in force;
2. Where he is an undischarged insolvent,
3. Where he has applied to be adjudicated as an insolvent and his application is pending;
4. Where he has been sentenced to at least six months of or otherwise imprisonment for an offence involving moral turpitude or otherwise and five years have not elapsed from the date of the expiry of the sentence;112 The Proviso to the clause says that if a person has been convicted of any offence and sentenced to imprisonment for a period of seven years or more , he ceases to be eligible for appointment as director in any company
5. an order for disqualifying him for appointment as director has been passed by a court or the Tribunal and the order is still in force;
6. If he has not paid his calls in respect of any shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the date fixed for payment;
7. he has been convicted of an offence dealing with related party transactions under Section 188 at any time during the last preceding five years;
8. he has not complied with the requirement of Director Identification
   Number. [S. 152(3)]

Disqualification on conviction [Proviso to S. 164].- The Proviso contain the following three points about the effect of conviction

The disqualifications stated in clauses (d), (e) and (f) are not to take effect for 30 days from the date of conviction; (it) where an appeal or petition is preferred within such 30 days, until the expiry of seven days from the date on which such appeal or petition is disposed of; or (i) where any further appeal or petition is preferred against the order or sentence within seven days, until such further appeal or petition is disposed of.

Powers of Director :

Board of directors is the biggest authority of the company and is vested with the various powers under section 179 of the companies act 2013. The board of directors holds complete control over the company’s operations, but must act within the limits set by the company’s memorandum and articles and cannot perform acts reserved for shareholders in general meetings.

Section 179(3) of the Act provides that the Board of Directors of a company shall exercise the following powers on behalf of the company by means of resolutions passed at meetings of the Board-

• to make calls on shareholders in respect of money unpaid on their shares;
• to authorise buy-back of securities under section 68;
• to issue securities, including debentures, whether in or outside India;
• to borrow monies;
• to invest the funds of the company;
• to grant loans or give guarantee or provide security in respect of loans;
• to approve financial statement and the Board‘s report;
• to diversify the business of the company;
• to approve amalgamation, merger or reconstruction;
• to take over a company or acquire a controlling or substantial stake in another company;
• any other matter which may be prescribed:

Powers to be exercised with general meeting approval

Section 180 of the Companies Act, 2013 provides certain powers which the Board of Directors of a company shall exercise only with the consent of the company by a special resolution

• To sale, lease or otherwise dispose of the whole or any part of the company’s undertakings;
• To invest otherwise in trust securities;
• To borrow money for the purpose of the company;
• To give time or refrain the director from repayment of any debt.

If the director violates the restrictions imposed by this section, the title of lessee or purchaser is affected. However, if a person has acted in good faith and with due care and diligence, it remains unaffected. This section does not apply to companies whose primary business is the sale of real estate or the leasing of real estate.

Power to constitute audit committee

The board of directors has the authority to constitute the audit committee under Section 177 of the Act. It must have at least three directors, including independent directors. The chairman of the audit committee must be able to read and understand financial statements in order to be appointed. The audit committee shall function in accordance with the terms of reference specified in writing by the board.

Power to constitute nomination and remuneration committee and stakeholder relationship committee

Section 178 of the Companies Act of 2013 empowers the board of directors to form a nomination and remuneration committee as well as a stakeholders’ relationship committee. In the nomination and remuneration committee, there should be three or more non executive directors, out of which half are required to be independent directors. A stakeholder relationship committee can also be formed by a board of more than 1000 shareholders, debenture holders, or other security holders. This committee is responsible for resolving the grievances of shareholders.

Power to make contribution to charitable and other funds

Section 181 of the act allows the board of directors to contribute to a genuine and bonafide cause as a charity. The only condition imposed is that if the contribution exceeds 5% of the company’s net profit, permission is required to be taken in the general meeting.

Power to make a political contribution

Political contributions can be made by companies under Section 182 of the Companies Act of 2013, with exception of a government company or the company which has been in existence for less than 3 years. However companies’ contributions to political parties cannot exceed 7.5% of its average net profits during the three immediately preceding financial years. Any contribution should be approved by the board of directors first.

Power to contribute to National Defence Fund

Section 183 of the Companies Act empowers directors to contribute to the National Defense Fund and any other fund established for the purpose of national defence. Any amount of contribution is acceptable; the only requirement is that the amount contributed should be disclosed in the profit and loss account of that financial year.

Duties Of Director

Section 166 of the Companies Act, 2013 defines the duties of Directors. A Director of a company should perform the following duties-

• A director shall act in accordance with the articles of the company.
• A director shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of the environment.
• A director shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.
• A director shall not be involved in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
• A director shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.
•  A director shall not assign his office and any assignment so made shall be void.

If the director contravenes any provisions of this section, he shall be punishable by a fine of Rs. 1,00,000 or more, which may extend up to Rs. 5,00,000.

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