Appointment and Qualification of Directors
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This article is written by Madhuri Pilania, a first-year student pursuing BBA.LLB. from Symbiosis Law School, Noida. This is an exhaustive article dealing with the appointment and qualification of directors under the Companies Act, 2013 with the latest amendments of 2014 rules and 2018.

Table of Contents

Introduction

A school comprises of students and teachers and in the same way a company comprises of shareholders, directors, and employees. Directors play a major role in the functioning of a company. What are the responsibilities of a director? How do they get appointed? And a lot more questions inspire us to gain information about directors and shareholders of a company. This article will give you a glance of how directors are appointed, why are they important for the company and all the associated information. Amendments of the previous years are also mentioned. A director serves several duties like to avoid conflict of interest, not to accept benefits from third parties and to exercise reasonable skill and diligence.

Organs of the Company

The Board of Directors is the primary organ of any company. The directors and the managers direct and control the company. 

Board of Directors

Every company is required to have a Board of Directors that consists of individuals as directors and should have- 

  • A minimum number of three directors if it is a public company and two directors in the case of a private company and one director in case of a One person company;
  • maximum of fifteen directors are required.

A company can appoint more than fifteen directors after passing a resolution. Such a class of companies shall have at least one woman director.

Every independent director is required to be in the first meeting of the Board in which he is participating as a director. After that, the director may attend the meetings every year or whenever there is any change in the circumstances which may affect his status as an independent director. 

The Board of Directors of a company may exercise the following powers on behalf of the company by the resolutions passed at meetings of the Board which are-

(a) to make calls on shareholders for money unpaid on their shares;

(b) to authorize buy-back of securities under Section 68;

(c) to issue securities, including debentures, whether in or outside India;

(d) to borrow monies; 

(e) to invest the funds of the company;

(f)) to approve financial statement and the Board‘s report;

(g) to diversify the business of the company;

(i) to approve amalgamation, merger or reconstruction; 

(j) to take over a company or acquire a controlling or substantial stake in another company; 

The Board of Directors of a company may contribute to bona fide charitable and other funds. 

Directors

A director is not a servant of any master, they are rather the officers of the company. A director is, in fact, a director or controller of a company and he manages all the affairs of the company. However, a director can work as an employee in a different capacity. For instance, Lee v. Lee’s Air Farming Ltd.

Directors are basically registered under the companies act and are duly appointed by the company to direct and manage the business of the company. They are sometimes described as agents, as trustees and sometimes as managing partners.

Position of directors

Directors as agents

In the eyes of law, directors are termed as the agents of the company. It was recognized in the case Ferguson v. Wilson, 1886. In this case, F(plaintiff) had an option to subscribe for some shares of the company and therefore he applied for them. The directors of the company allotted the whole of the shares that are authorized capital to other people including themselves. Later on, the option which was given to F was of no worth and he sued W who was one of the company’s directors to transfer some of his shares to him and pay damages. However, the claim of F failed because the directors were only acting as agents of the company and are not responsible for personal liability. 

However, the directors are not completely like agents as agents are appointed but directors are elected. Directors are more like managing partners.

The court said that the company is not a person, it acts through directors and in regards to this it is the case of principal and agent. 

Directors are the agents of the company and he conducts the business. They act on behalf of the company and he makes the company liable not himself. In other words, directors cannot be held personally liable for any default of the company. The responsibility of an agent compels the directors to conduct the business of the company in the same way as agents do. They should handle the work with care, skill, and diligence. They are accountable for all the assets of the company that is under their control and the profits from the company’s assets.

Directors cannot deal with the company’s affairs on their own and they are required to disclose their personal interest if they have any in the transactions of the company. Directors represent the shareholders to conduct the business of the company on their behalf. Directors perform many roles in a company like allotment of shares, raising of loans and investment of funds in the company.

But, directors cannot bind other shareholders unlike partners.They are elected and can also retire.

Directors as trustees

Directors are also described as trustees of the company. They must account for all the money over which they have control. Directors must act and deal with the benefit of the company. They should exercise with honesty and it should be in the interest of the company as they occupy a fiduciary position. They are trustees of-

  • Money and property of the company that are under their control.
  • The powers that are entrusted to them.

Directors are the trustees of the company and not of individual shareholders. This principal came in the case of Percival v. Wright, 1902.

In this case, the directors purchased the shares of the company but before this company’s sale was undergoing without disclosing this. The plaintiff claimed that this non-disclosure was a breach of contract and fiduciary trust. It was held by the court that no fiduciary duty exists. Hence, the directors were not bound to disclose.

A trustee is the owner of the property and deals with it as principal. He also deals as an owner and a master. On the other hand, the director is not the owner of the property and is only the agent of the company.

Directors as organs

The board of directors is also recognized as the primary organ of the company. Example, Bath v. Standard Land Co.

Personal liability of the organ

According to the Companies Act, 2013 a director is liable for any loss, damages or costs suffered by the company either direct or indirect consequence, he or she will be liable if they have breached certain provisions of the company.

Appointment 

Casual vacancies 

A casual vacancy occurs when the director’s office is vacated before the expiry of the term of the director. Such a vacancy can be filled by the procedure or the process prescribed by the articles. If any clause is absent in the articles then the power is given to the directors so that he can fill the vacancy at the board meeting. The person who has been appointed by this procedure, hold the office until the expiry of the period for which the outgoing director would have held the office.

Additional directors 

Considering the powers of the directors, additional directors can be appointed by the board. There can be an addition to directors but total members of the directors should not exceed the maximum limit as mentioned in the articles. If the strength of directors is below the minimum limit of the members then the addition of directors is valid.

However, the additional directors can hold the office only up to the date of the next meeting which is held annually. The additional director is exempted to fulfill the requirement of consent under Section 264.

Appointment by Central Government

The central government has the power to appoint directors for the purpose to prevent mismanagement under Section 408. This power is applied when a petition has been filed to the National Company Law Tribunal to prevent mismanagement.

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Consent to act as directors 

Every person who has appointed as director shall furnish a consent in writing to the company as such in Form DIR-2. The director must submit such consent with the registrar in Form DIR-12 within thirty days(30 days) of the appointment of the director.

Qualifications of directors

Share qualification

The articles of the company provides that every director should hold a certain number of shares. Such shares are known as qualification shares. A director must obtain the required number within two months of the appointment. If a director is not appointed as a director he cannot be compelled to obtain qualification shares. Also within a period shorter than two months of the appointment, he cannot be compelled to obtain the qualification of shares. The value of the qualification shares cannot be more than five thousand rupees except when the nominal value of the share is more than the amount of the share. A director can hold only shares and not share warrants. A director may suffer if he fails to obtain his qualification shares as advised. He can suffer in two ways:

  • His office can fall vacant.
  • He will be liable to pay a penalty if he continues to act as a director. The director is required to hold the shares in his own right.

Disqualifications 

The minimum requirements for the eligibility of members are laid down in Section 274. A person is not capable of being appointed as a director in some cases that follow:

  • When the person is of unsound mind and he is certified by the court.
  • A person who is unable to pay his debts and it cannot be covered by his assets and he(director) has initiated proceedings against him.
  • When the director is adjudicated as insolvent.
  • When the director has been sentenced to imprisonment of at least six months for the offense that involves morally wicked behavior and five years have not passed from the date of expiry of the sentence.
  • When he has not paid for call of his shares for six months.
  • Where he has been disqualified for preventing fraudulent persons under Section 203.

If a private company is not a subsidiary of a public company can further add to disqualifications. In other words of the Supreme Court, a public company and its subsidiaries cannot add or increase any other disqualifications.

Vacation of office 

The director shall vacate the office in case-

  • He sustains any disqualifications that are specified in Section 164;
  • If the director absents himself from all the meetings of the Board of Directors that are held during a period of twelve months without obtaining leave of absence by the Board;
  • If the director fails to disclose his interest in any contract that is in violation of the provisions of Section 184;
  • If the director becomes disqualified because of the order of court or tribunal;
  • If the court convicts the director for any offense for which he is imprisoned for not less than six months;
  • If he is removed because of the provisions of the Act.

Removal of directors

A company may remove a director who is not a director appointed by the tribunal under Section 242, before the expiry of the period of his office. But it is important to hear his side to give a reasonable opportunity. A special resolution is required to remove a director under the section or to appoint any other director in place of the director so removed.

Removal by shareholders

As per Section 242, a company can remove a director before the expiration of his period of office. A special resolution is required to remove a director under the section or to appoint any other director in place of the director so removed. 

Removal by Central Government 

A director can be removed by the Central Government, Companies Act enables the Central Government to remove managerial personnel from office on the recommendation of the Company Law Board. The Government can make a reference to the Company Law Board when needed. The power of Central Government can be exercised in removal of directors if:

  • The managerial personnel is guilty of fraud, misfeasance or persistent negligence in carrying out legal obligations or breach of trust. 
  • The business of the company is not conducted in agreement with sound business principles.
  • If the person has conducted business with the intention to defraud or the purpose is unlawful subject to public interest. 

Removal by Company Law Board 

When an application is sent to Company Law Board to prevent mismanagement it may terminate or set aside any agreement of the company with a director or managing director.

Resignation

The provisions of resignation in a company is mentioned in Section 318 in which no director is entitled to compensation if he resigns his office. If there is a provision for resignation in the articles but if there is no provision resignation will take effect in agreement with terms. Notice can be oral or written. A director can effectively resign even if no other director is in office but a director cannot evade his obligations even if he has resigned.

Once a director has given the notice of resignation to the company he cannot be entitled to withdraw that notice. But withdrawing the notice must be with the consent of the company exercised by the managers. 

Powers of directors 

Section 291 says the board of directors of a company is entitled to exercise all the powers as the company is authorized to do. The powers of the directors are co-extensive with those of the company mentioned in the memorandum and articles of the company. The director has almost all the power once he is elected for the operations of the company until he is removed. However, there are two important restrictions on the powers of the directors. 

  1. When the board is not competent to do what the act, memorandum, and articles require that is done by the shareholders in general meeting. 
  2. The directors are required to act according to Act, memorandum, articles and other regulations that are consistent with the general meeting.

When shareholders can interfere

Malafide 

Directors of the company are the persons who conduct litigation in the name of the company but when they themselves are the wrongdoer, they have said to be acted malafide. In such cases, conflict between their personal interest and duty arises in which they cannot take steps to redress for the wrong done to the company. 

For example, Marshall’s Valve Gear Co Ltd v Manning Wardley & Co Ltd. The duty of the court is confined to honesty, Integrity, and fairness for the conduct of the director.

For instance, there were two parties. A and three other people were the four directors of a company M. They had subscribed to the whole capital. A was the majority shareholder but less than three fourth of the shares. Another company was N who was infringing the trademark of company M and three other directors.

The company M declined to sanction any proceeding against company N. A in a general meeting of the shareholders resolved the infringement. The other three directors applied for striking down the name of the company. It was held that the majority of the shareholders had the right to control the actions of the directors.

Board incompetent

The majority of the shareholders can exercise a power vested in the board when for some reason directors have become incompetent to act. One situation is when all the directors are interested in a transaction of the company. Example, Viswanathan v Tiffins B. A. & P. Ltd. In this case the power to fill delegated to the board. The appointments made by the shareholders were held to be valid as at that time no director was validly in the office. The circumstances were such that a valid board could not be constituted and the majority of the shareholders acted to protect the interest of the company. Hence they could conduct the defense by company in a pending suit against it.

Deadlock 

A third occasion for the shareholders is that when directors are unwilling to act on account of deadlock. Deadlock means in a company where two directors owe fifty percent may not agree with each other at every level. So in the legal sense when the directors do not agree with each other, it is said that the company is deadlocked. This deadlock generally hinders the performance of the company. For example, Barron v Potter, in this case, there were two directors on the board of a company where one director refused to act with another. There are no provisions in the articles to reduce or increase the number of directors in the company. If there is a deadlock in the administration, as a result, the directors become unwilling to act and exercise their powers.

The company has the inherent power to take steps to ensure the working of the company and to appoint additional directors for the purpose.

Residuary powers

The residuary powers of a company reside in the general meeting of shareholders. The power to allot shares is conferred by the articles of a company on its directors. If they act in excess of that power a residuary power remains in the company for the allotment in a general meeting.

Statutory provisions

Under statutory provisions, company is an artificial legal person having a legal and independent existence in the eyes of law. Being an artificial person, it has no mind and cannot act on its own.

Audit Committee 

A public company with share capital is required with not less than five crores rupees. It is required to constitute a committee of the board of directors is known as the Audit Committee. Membership- Not less than three directors and such number of other directors as the board may determine. Two-thirds of the members must be directors other than the whole time managing directors. The committee is required to act in accordance with the terms specified by the board in writing. The members need to elect a chairman from the committee itself.

The internal auditors and the director in charge of the finance department shall attend and participate in meetings of the audit committee but they do not have the right to vote. The committee is required to discuss with auditors on a regular basis about internal control systems. The committee observes and reviews half-yearly and annual financial statements before they submit to the board. 

Board’s sanction for contracts in which directors interested

Powers of individual directors are restricted under Section 297. The company deals with sales, purchase, and supply of materials and or services or underwriting of shares and debentures with directors or firms. When such a director is a member, the consent of the board of directors must be obtained. However, in some cases consent is not necessary.

  • When the contract is made for made at the prevailing market prices.
  • The transactions of a banking or insurance company.
  • When the contract is related to goods in which the company does not exceed the value of five thousand rupees in any year.

 However, such contracts can be made in case of emergency beyond five thousand rupees but approval of the board must be obtained within three months. If the approval is not obtained or it is refused the contract will be voidable at the option of the board.

In 1974 there was an amendment that extended the restriction to contracts for underwriting the subscription of shares or debentures of the company. The amendment further provides that in case the company has paid share capital of rupees one crore or more, contracts of this nature shall not be entered except when the central government has given the approval.

Power to make political contributions 

Earlier companies were not permitted to make contributions for political purposes before the Amendment Act, 1985. Now there is no such restriction except in cases of Government companies and the companies which have been in existence for less than three years. All the companies except them have the permit to contribute money to any political party or any other person for political purposes. However, the amount of money should not exceed five percent of the company’s net profit during the three preceding financial years. Remember these three years must be immediately preceding. A donation is given as a support for the political party and it would also be considered as a contribution for publication of souvenir, brochure or pamphlet. The amount of money given should be recorded in the annual accounts. If a company is in default it will be punishable with three times that amount. The defaulting officers can also be fined and imprisoned which can be extended to three years.

Contributions to National Defence Fund etc. 

  1. The Board of Directors of any company or any person or authority exercising the powers of the Board of Directors of a company, or of the company in general meeting, may, notwithstanding anything contained in Sections 180, 181 and Section 182 or any other provision of this Act or in the memorandum, Articles or any other instrument relating to the company, contribute such amount as it thinks fit to the National Defence Fund or any other Fund approved by the Central Government for the purpose of national defense.
  2. Every company shall disclose in its profit and loss account the total amount or amounts contributed by it to the Fund referred to in Sub-section (1) during the financial year to which the amount relates.

Duties of directors

The powers vested with the directors should be regulated not only for public good but also for the protection of the investors. 

Duty of good faith

Directors must act honestly, without negligence and in good faith in the bona fide best interests of the company. The presumption is that a Director, acting within his or her authority, has acted in good faith.

Liability for breach of trust

Initially, the duties of directors were not enacted by the statute. They were inherited from the common laws which mean developed through cases. But now legislation of companies of some countries have taken steps to remove this tradition. In a company the director stands in a fiduciary relationship towards the company and should have utmost good faith towards the company. The company demands that the directors should act honestly and with the greatest good faith in their duty. When a director earns a bonus from the other company by providing a business facility to the company, the director can be held liable for the profits although the company could not have earned the bonus.

Trading in corporate control

In the case of Regal (Hastings) Ltd v Gulliver, the plaintiff company was the owner of a cinema in Hastings. The directors wanted to acquire two more cinemas in Hastings. After acquiring cinemas, they would sell the whole property. The purpose was to acquire new cinemas and offered a lease of two cinemas. The landlords required a guarantee of rent by the directors. The intention was that the plaintiff company should hold all the shares in the subsidiary. 

It was held that the directors other than chairman were in a fiduciary relationship and therefore liable to repay the profit they have made on the shares. The solicitor was not liable because he was not in a fiduciary relationship.

The plaintiff company had to establish two things:

  • The directors were related to the affairs of the company and said to be in course of management and in the utilization of their opportunities and special knowledge as directors. 
  • What they did should result in profit for themselves.

Misuse of corporate information

If the director exploits any unpublished and confidential information of the company, it is a breach of duty and the company can ask the director to make good its loss. Any knowledge generated by the company is the company’s property commonly known as intellectual property. Profit margins, turnover of the business, list of customers and any personal use of such knowledge equivalent to misappropriation of property. The use of the company’s information can be restrained by an injunction.

Competition by directors

As such, there is no competition amongst the directors.

Duty of care

Duty of care refers to a fiduciary responsibility held by company directors which requires them to live up to a certain standard of care. This duty—which is both ethical and legal requires them to make decisions in good faith and in a reasonably prudent manner.

  • Duty of care is a fiduciary responsibility held by company directors which requires them to live up to a certain standard of care.
  • The duty requires them to make decisions in good faith and in a reasonably prudent manner.
  • The duty of care also applies to other roles within the financial industry including accountants, auditors, and manufacturers.
  • Failure to uphold the duty of care may result in legal action by shareholders or clients.

Liability for Negligence

The faithful director alone is not enough. A director has to perform his functions with reasonable care. The work assigned to the director should be attended with due diligence and caution. Every director should exercise the powers and discharge the duties of his work honestly, good faith and in the best interests of the company.

Duty to attend board meetings

Directors are under an obligation to attend the board meetings under the articles or the chairman of the board.

Liability for non-attendance

Duties of directors are not of continuous nature to be performed. In other words, they are not bound to pay continuous attention to the affairs of the company. A director is not bound to attend all the meetings of the company although he is under the obligation to attend in some circumstances that are reasonable.

According to Section 283(g), a director can be vacated if he absents himself from three consecutive meetings of the company or from all the meetings of the board, for three months whichever is longer without the leave of absence. The habitual absence of the director can become evidence of negligence on his part. 

Duty not to delegate

Liability for co-directors defaults

A director has to perform his functions personally, they are bound by the maxim “ delegatus non-potest delegare”. A delegation can be made to the extent to which it is authorized by the Act or articles of association of the company. There should be certain duties which have exigencies of business and left to some other officials. A proper degree of delegation and division of responsibility is permissible but total responsibility cannot be delegated as this would undermine the responsibility of the board of directors that is important for corporate governance. 

Duty to disclose interest

Every agent here director occupies a fiduciary position towards his principal. It is his duty to see that his personal interest and duty to principal do not conflict. For efficient productivity, the director should be free from any conflicting interests. The conflict arises when a director is personally interested in a transaction of the company. In the case of Aberdeen Railway Ltd v Blaikie, Blaikie had a conflict of interest as a director and chairman of the company of the firm supplied office furniture to the company. Despite the fact that the price paid by the company for furniture was fair, the company was entitled to set the contract aside.

Meetings of directors

The directors of the company have the right to exercise most of their powers at periodical meetings of the board. In section 285 it is mentioned that the directors shall attend the meeting of the board of directors at least once every three months at least four meetings in a year. Notice of every board meeting has to be given in writing to directors who are present in India. 

Quorum 

Quorum means the strength of members, so quorum of the board is one-third of its total strength or two directors whichever is high. When this quorum cannot be formed, then the number of directors who are not interested (not less than two) shall be the quorum. If the quorum is not fulfilled in any meeting then it stands adjourned till the same day next week. However, if the day is a public holiday, the meeting will be held at the next succeeding day which is not a public holiday. The quorum cannot be dispensed because one of the directors is abroad. A meeting attended by one director is held not to be valid.

For example, A company’s articles provided that the total number of directors was fifteen but at the material time only six directors were in office, it was held that quorum meant only one-third of six directors and therefore a meeting attended by two directors only was also considered valid. 

Register of directors

Every company should keep a register that contains particulars of the directors and managerial personnel. The register will include the details of securities or bonds held by each company. A return of the particulars and documents of the directors can be filed with the registrar within thirty days(30 days) from the appointment of the director. 

Register of directors 

The first important register that is maintained is known as the Register of Directors. Every company needs to maintain the registered office a register of directors, managing director, managing agents, secretaries and treasurers, manager, and secretary. The register needs to maintain the following particulars:

  • The full name of the director and such details with the father’s name, and address. A married woman, her husbands’ name, nationality of origin, his business and particulars of any office held by the director in any other company and his date of birth.
  • In case any of the above offices are held by a body corporate then its corporate name and registered office and details are required specified in the clause. The details of each of the directors is necessary if the same body corporate holds the office in some other company. 
  • If any of the above offices are held by a firm then the name of the firm should be given and also the details specified in the clause, of each partner in the company. 
  • If any of the directors have been nominated by a corporate body, the name of such a company should be given and the particulars of each of its directors.

If any director has been nominated by a firm, the particulars of such a firm should be given.

A duplicate copy of the prescribed form of the contents of the register shall be sent to the registrar within a period of thirty days of the appointment of the first directors. If any change occurs in the managerial personnel, a notification of the change should be sent within thirty days from the date of the change. 

Shareholders have the right to do an inspection of the register without any charge and any member of the public who pays one rupee for each inspection. The general meeting or the articles of shareholders can impose reasonable restrictions on hours of inspection but it should not be less than two on each day. 

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Register of directors’ shareholding

For the information of shareholders and the general public, companies are required to maintain a register of the shares held by the directors. The number of shares or debentures that directors hold should be specified and his holdings in the company should be shown. Also, his other subsidiaries need to be specified. The register should give the details of the shares held by the director. A director can request that the nature and extent of his interest over the shares should also be recorded. The register inspects the members subject to reasonable restrictions which may be imposed by the company. The register must remain open during the period of fourteen days before and three days after the annual general meeting for the inspection of shareholders during business hours not less than two hours a day. If any company does not allow inspection, the Central government or tribunal may compel can order for an immediate inspection of the register. 

Register of contracts, etc. 

The company also requires to maintain a register of such contracts in which a director is interested and of contracts with companies or firms in which the director may be interested. The register maintains particulars regarding the date of the contract, the name of the parties, important terms and conditions of the contract and the date on which it was put before the board of directors. It also contains the names of the directors who were neutral or the ones who voted for or against the contract. 

Loan to directors 

The act of lending of money by a company to the directors is now strictly regulated. Loans to directors are not allowed except in some cases:

  • Loans to the director of the company or holding company or to any partner or relative of any director.
  • Loans to a firm in which the director or his relative is a partner.
  • If the director is a member or director of a private company it can take loans. 
  • Any corporate body in which the directors’ control twenty-five percent voting in the general meeting can take loans.
  • Any company whose board or other managers are usual to act in agreement with the instructions of the board of directors can take loans. 

Section 301 prohibits direct lending of money by a company to its directors and also giving of any guarantee for loan taken by the director from any other person and providing security for any such loan. It also prohibits providing any guarantee or security for a loan given by a director to any person. For example, the sale of a flat of the company to a director who paid half the price at once and rest in installments was held that it is not a loan.

Remuneration of directors

The remuneration of directors is regulated because of several reasons like the prevention of diversion of corporate funds for personal use. Section 309 says that remuneration payable to directors should be determined either by the articles of association of the company or by a resolution in general meeting. Here resolution means a firm decision taken by the company regarding remuneration. It can be ordinary or special as required by the article. The amount or mode of payment will be subject to the provisions of Sections 198 and 309.

Section 198 lays down the overall maximum remuneration that can be paid by a public company or a subsidiary of a public company. The managerial remuneration payable to directors in a financial year should not exceed eleven percent of the net profits of the company. Sometimes the company does not make adequate profits but this does not mean that directors will remain unpaid, in this case, the company will minimum remuneration authorized by the central government.

In the case of a public company or its subsidiaries, the remuneration of directors cannot be increased in any way without the approval of the Central Government.

Compensation for loss of office 

A company can make payment to a managing director or a director holding the office of manager by way of compensation for loss of office or as consideration for retirement from office. No other director is entitled to compensation. No compensation is payable in the following cases:

  • When the director resigns his office in view of the merger of the company and he is appointed in the company resulting from the merger. 
  • When the director resigns for a reason. 
  • When the director vacates the office under Section 203. This section empowers the court to restrain fraudulent persons from managing companies. 
  • When the company is winding up and this is due to the negligence or default of the director. 
  • When the director is guilty of fraud or breach of trust or negligence in the affairs of the company.

Director with unlimited liability 

A director’s liability can be unlimited even if the liability of the company is limited. 

Prevention of management by undesirable persons 

An undischarged insolvent person is someone who cannot pay his debts have insolvency proceedings initiated against him. So a person who is undischarged insolvent is disqualified from being appointed to any managerial office. Section 203 provides the power to restrain fraudulent persons from managing companies. 

Prohibition of assignment 

A director cannot assign his office to anyone else. Any such assignment is void. For instance, a person formed a private company and transferred his business to it. He became the first managing director and had a right to appoint a successor by his will. He died and his nominee assumed office. The other members challenged the appointment. The Bombay High Court held that the word assignment should mean appointment. 

Irregular appointment and validity of Acts 

Section 290 contains provisions for the validation of acts and directors. This section says that acts done by a person as a director will be valid. The provision does not cover acts that have been done after the defect in appointment. An example of this is Dawnson v African Consolidated Land Co

Alternate director

An alternate director is a person who is appointed to attend a board meeting on behalf of the director of a company. In other words, if the director is absent for a period of three months or more then an alternate director is appointed. The alternate director holds the office only for a period for which the original director would have been in office. He vacates the office on the expiry of such a period and when the original director returns to the state.

Appointment to place of profit

The persons that can be appointed to a place of profit under the company in the following cases:

  • Any director of the company.
  • Any partner or relative of such director.
  • Any firm in which such a director or relative is a partner. 
  • If remuneration exceeds a director or a manager of a private company. 

Gobind Pritamdas Malkani v Amarendra Nath Sircar, (1980)

A company known as National Cash Registers Co. earlier known as N.C.R. Corporation was incorporated with limited liability in the U.S.A. The company had its registered office in the USA. and was carrying on business in India within the jurisdiction of Calcutta court at Madras, New Delhi. The company then was known as American Company and was importing and marketing in India of various accounting and other machines. The plaintiff, Gobind Pritamdas Malkani was employed in the company as the manager of the Bombay branch of the company. 

An agreement was signed on 6 February 1974 between the American company and the defendants. The American Company had agreed to sell and transfer the business to the defendants. The American Company was a going concern with effect and will all benefits, assets, properties, losses, book debts and liabilities that were equivalent to two lakhs rupees.

According to the agreement, the transfer of the company should be completed on or before the 1st of June 1974. All had to be done after the consent and approval of the Reserve Bank Of India under the provisions of the “Foreign Exchange Regulation Act”. The vendee (he is the buyer) will take over but the employment will remain like the staff, employees, workmen, and other personnel who were employed by the American company. The terms and conditions of the services by the employees of the American company would remain the same. Also, the Indian company would allow the employees to participate in the share capital of the company to the extent of fifteen percent.

The defendants who were the first directors incorporated another defendant director in Cash Register Co. India Private Ltd. under the Companies Act 1956. The defendants one, two and three were known as the first directors of the company under articles of association. They will be the first directors until one of them voluntarily retired because of personal reasons. None of the directors are liable to retire by rotation. 

Some of the articles which were involved are as follows: 

  • Article 62 provides that unless it is determined by the company in general meeting, the directors are not required to hold more than one share in the share capital of the company as qualification for his or her eligibility as a director. 
  • Article 60 provides that it is necessary for directors that the number of directors shall be not less than two or more than seven in the general meeting. 
  • In Article 68 it is provided that the office of the director should be vacated ”ipso facto”( by that very fact) if he ceases to hold the qualifying shares. 
  • In Article 71 it is provided that in the general meeting of the company, new directors can be appointed from time to time and may impose, increase or reduce share qualification of any type for the eligibility of the directors. 
  • Article 1 provides the rules and regulations contained in table A in the First Schedule of the Companies Act, 1956 will be applied to the company. 
  • As specified by the American Company and order of the Reserve bank of India, all the employees including Mr. Malkani were taken over by the Indian Company under the same terms and conditions and Mr. Malkani continues as the branch manager at Bombay. 

The Indian Company was satisfied with the work of Mr. Malkani, the petitioner and offered him to be the fourth director. As per the agreement, he would have equal rights as the other three had in respect of shareholding, rights, and responsibilities in terms of articles of association. Mr. Malkani would be the working partner or director of the company at a remuneration decided after the business of the American Company is transferred to the Indian Company. 

The company announced to the employees to participate in the shareholding but did not show him as a director of the company. On the other hand, defendant number one wrongfully and illegally alleged that Mr. Malkani was only a tentative director. Soon after that the plaintiff, Mr. Malkani filed a suit against the other directors. The petitioner filed an application for injunction to restrain the defendants for interfering with his position as director and removing his services as a branch manager.

Necessary orders were passed considerably so that the other employees are not affected by the dispute amongst the directors.

The judges referred to the case Ram Sadan Biswas v. Mathura Mohan Hazra and submitted that the power of the court is not limited to grant injunction in case of provisions of the Specific Relief Act. The article of the association has been amended and it says that it is no longer necessary for a director to hold any qualification shares and he is not disqualified from acting and holding himself as a director of the company.

In Section 303 of the Companies Act, it is necessary for the company to maintain a register that contains the names of its directors, managing directors, secretary, and other particulars. The court said in this case the company has not produced such a register to show the actual position of the director. “ No injunction can be granted for the specific performance of a contract which is determinable at the will of the parties”.

From the above facts, it appeared that under the terms of the contract of service the plaintiff’s or the petitioner’s service was terminable at the will of the employer by giving him three months’ notice or salary in lieu of three months notice. The court held that the plaintiff is not entitled to get injunction under specific performance of the contract of personal service nor is he entitled to get a permanent injunction restraining the respondent from authorized with his services or terminating his services. In this case, the plaintiff would get compensation as damages only and not the injunction. Under the articles of association of the company, it is a company that has the right to take in a new director at a general meeting of the company and the directors are not entitled under the articles of association of the company to take any new director. Moreover, the directors have no right to enter into any agreement where the company is not a party to it to bind the company with such an agreement. Whether there was such a valid agreement or not would be the subject-matter of this suit but at the moment certain factors are important for the purpose of a decision for granting an interim relief pending the disposal of the suit. It is an admitted case that Mr. Malkani, although required to take a qualification share of Rupees hundred, failed to do so in terms of the articles of association of the company.

A R Sundarasanam v Madras PHJS Nidhi Limited (1985)

After reading the case a provision revealed that two prohibitions can be anticipated, one is regarding the director and the other one about the relative of the director. The prohibition says that a director cannot hold any office or place of profit except the special resolution. According to the consent of the company, it is passed at the general meeting of the company held for the first time after the holding of such office or place of profit. The second is that no relative of director will hold any office or place of profit carrying a total monthly remuneration of five hundred rupees or more until the consent of the company was obtained either in the general meeting of the company held for the first time. This would happen after the holding of such office or place of profit or within three months from the date of appointment, whichever happens later. Pointing out the second provision which provided further that where a relative of director or a firm in which such relative is a partner, is appointed to an office or place of profit under the company without the knowledge of the director, the consent of the company may be obtained either in the general meeting as said or within three months from the date of the appointment, whichever is later the counsel submitted that in so far as there is no emphasis as “such director” in that provision, even if a relative of any director of the company, he is liable to vacate office as provided in s. 314(2). 314(1)(b) is restricted to a relative of such director, meaning thereby the director holding any office or place of profit referred to in s. 314(1)(a) but not any ordinary director. The deeming vacation of the office of the director visualized under s. 314(1)(a) will apply to a director who holds any office or place of profit without obtaining the consent referred to above.

It was held that a relative of any ordinary director cannot hold office or place of profit of even a sum of five hundred rupees under Section 314(1)(a) but a relative of a director who holds office or place of profit. In this case, the applicant did not succeed in establishing that the third defendant was a relative of such a director holding any office or place of profit. It is true that the third respondent is the son of the second defendant, but then the second respondent is only an ordinary director, but no one holding any office or place of profit as defined in section 314(1)(3) of the Act. If that is so, there can be no violation of Section 314(1)(b) of the Act. The result is, the application failed and was dismissed but without costs.

The Companies (Appointment and Qualification of Directors) Rules, 2014

Meetings of Board through video conferencing or other visual means- a company can conduct the Board meetings through video conferencing or any other audiovisual means. 

  • The chairperson of the meeting and the company secretary should take reasonable care. 
  • Storing and safekeeping the electronic recordings as a part of the records of the company before the completion of audit if that year. 
  • To ensure that no person other than the director has access to the proceedings of the meeting that is done through video conferencing or any other mode. 
  • To ensure that the audio is clear and participants are able to hear everything. 
  • The notice of the meeting should be sent to all the directors in agreement with provisions of the act. 
  • If the director has not informed anything before it will be assumed that the director will attend the meeting. 

Women director on Board- Every listed company, any public company having paid-up share capital of one hundred crore rupees or more and a public company of turnover three hundred crore rupees or more should appoint at least one woman director. 

Number of Independent director- The companies should have at least two directors as independent directors. Such companies shall have:

  • The public companies who have paid-up share capital of ten crore rupees or more;
  • The public companies who have a turnover of one hundred crore rupees or more;
  • The public companies having aggregate, outstanding loans, debentures and deposits that exceed fifty crore rupees.

In case a company is covered under this rule it is required to appoint a higher number of independent directors because of its framework of the audit committee. The public company who are not listed will not be covered under the sub-rule and three of them are-

  1. A joint venture;
  2. A subsidiary which is wholly owned;
  3. An inactive or dormant company is defined under Section 455 of the Act.

Qualification of Independent- Under this an independent director should possess the appropriate skills, experience, and knowledge in subjects like finance, law, sales, administration, marketing, research and any other fields related to the business. 

It is given that relatives of independent director will not be-

  • Indebted to the company or holding or associate company or directors;
  • He or she has given a guarantee or provided any security in connection with the indebtedness of any third person to the concerned company. 

The relatives of the director will not be liable for an amount of fifty lakhs rupees during two financial years or during the current financial year. 

Conformity required by a person who is eligible and willing to be appointed as an independent director-

  1. Any individual who has been appointed as an independent director in a company, should within a period of three months in the amendment rule from such commencement;
  2. Any individual who wants to get appointed as an independent director of a company either after the commencement or before the commencement.

Consent to act as director- Every person who is appointed to hold the office of a director should give his or her consent in writing to act as in form DIR-2 either before the appointment or on the appointment. The company should file a consent with the registrar in Form DIR-2 within thirty days of appointment along with the fees. 

KYC of directors- Every person who is holding a Director Identification Number (DIN) is required to submit an e-form DIR-3-KYC as per the rules in the financial year to the Central government. The director shall already have been allotted the DIN. 

Copy of resignation by the director- A director is required to submit a copy of his resignation to the Registrar, within a period of thirty days from the date of resignation along with the reasons of resignation in Form DIR-11. 

Disqualification of directors under sub-section of section 164- Every director is required to inform the concerned company about his disqualification in Form-8 before he is appointed.

Allotment of DIN- A Direction Identification Number is required to be generated on the submission of the Form DIR-3 and the payment is to be done online. After paying the fees, a provisional DIN is generated by the system automatically which should not be used until the DIN is confirmed by the Central government. 

A document Signed by DIR-2, Appointment Letter of Director and MBP-1 as declaration for Interest in other Entities.

Notice for Appointment

Copy of PAN (Permanent Account Number) and Address Proof is to be submitted to the board.

Digital Signature of Director for Appointment or Resignation

Director Identification Number of Appointee Director (if not available same can be made available for rupees two thousand extra for DIN and DSC).

Rupees one lakh for becoming a Director (to be refunded to the director after he is regularized), only in case of a public company.

The Companies (Appointment and Qualification of Directors) Amendment Rules, 2018

 

The Ministry of Corporate Affairs has notified the Companies (Appointment and Qualification of Directors) Amendment Rules, 2018. The process of allotment of Director Identification Number has been revised and now the DIN should be allotted through a SPICe form for a maximum of three directors. It should be done at the time of the appointment of a director. Form DIR-3 and DIR-6 has been amended.

Under Sections 149 and 168 with Section 469 of the Companies Act, 2013 the Central government has made some rules further to amend the Companies (Appointment and Qualification of Directors) Rules, 2014.

Form NO. DIR 6- Indication of change in particulars of Director or designated partner is to be given to the Central government.

It must be noted that Form DIR-3 which is an application for Director Identification Number is used only by the existing companies for the appointment of new directors who do not have their Director Identification Number. The persons who incorporate a new company and do not have DIN can apply for the same through SPICe(INC-32). It can be done for a maximum of three directors and for more directors, a separate application is to be submitted in Form DIR-12. 

Conclusion 

As we have seen earlier that directors play the role of trustees, agents, and managing partners but they are not agents or trustees of managing partners completely. The position of directors is a combination of all three and more than that. Directors have a fiduciary relationship with the company as well as the shareholders. Director Identification Number is the amendment that came in 2014 and it was further amended in 2018. Directors have the power and the Act is suitably amended so that there are checks and balances so that the director’s office does not become absolute. The rules that came in 2014 enforces that women as directors should be given opportunities. Director Identification Number acts as a proof of identity so that the rate of any crime or malpractices are reduced.

References


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