This article has been written by Diksha Paliwal and Pankhuri Anand. The article provides a comprehensive analysis of everything related to directors under Company law in India. It begins with a discussion relating to the definition of the term director and other relevant terms important for studying the present topic. Further, the article talks about the types of directors under the provisions of company law, prevalent in India, along with the liabilities, appointments, qualifications, and disqualification of directors as per the provisions of the Companies Act, 2013. The article also discusses some of the important judicial pronouncements that have a significant impact on the current topic. It also briefly discusses the role that the directors play in ensuring corporate governance and protecting the rights of shareholders and other members of the company. 

It has been published by Rachit Garg.

Introduction

With the aim of promoting a healthy working environment, companies are now strictly adhering to the norms of corporate governance, wherever possible. To foster a healthy corporate legal environment, company law plays a crucial role. From regulating the provisions relating to the structure of the company to the management, conduct, and affairs of the company, the company law deals with everything. 

One must understand that even though, in law, a company is a separate legal entity and is termed as a juristic person, it is just an artificial person and has its existence only in contemplation of law. A company cannot act on its own. It requires some driving force or human agency that can carry out the business and other affairs of the company. 

From the above discussion, it is clear that a company or a corporation, though a legal entity, does not have a physical or material existence. In order to exercise the functions, duties, rights, and obligations and to have knowledge and intent, the presence of a natural person to handle its affairs is significant. A corporation, not being a natural person, lacks these attributes, and so it acts through a natural person. The affairs of the company or the corporation are delegated to the directors, who in turn act as agents and perform the required functions for the company or the corporation. 

Sir Viscount Haldane L.C., in the case of Lennard’s Carrying Co. Ltd. v. Asiatic Petroleum Company Ltd. (1915), while commenting on the characteristics that a company possesses and the inability of a company to work on its own, opined that “A corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directive will must consequently be sought in the person of somebody who, for some purposes, may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation.”

Meaning and definition of some important terms 

Before starting a discussion about the appointment, qualification, disqualification, liability, etc. of the directors and the relevant provisions under the company law in India, it is of paramount significance to comprehend and develop an understanding of certain terms like directors, board of directors, etc. Let’s have a look at the definitions of these important terms. 

Director 

In simple terms, the ‘director’ is the supreme executive authority in the company, who is entrusted with the management and control of the company’s affairs. Generally, a company has a team of directors, which are ultimately responsible for the entire management of the company’s state of affairs. These teams of directors are collectively known as the ‘Board of Directors’. In ideal corporate governance practice, it is the team of directors that ensures the protection of the stakeholders of the company and of other members of the company. 

This institution of the formulation of a team of members, known as directors, was based on the foundation that a company must have a team of faithful, trustable, and respectable members who work for the betterment of the company. They are appointed to work for the company’s best interests. 

It is pertinent to mention here that the directors do not work in an individual capacity, unless specifically said so, in any board resolution meeting. It means that all the directors have to work collectively. The work done by any director in its individual capacity is not binding on the company. 

The term ‘director’ is defined under Section 2(34) of the Companies Act, 2013 (hereinafter referred to as the 2013 Act). It states that a ‘director’, “means a director appointed to the board of a company.” The definition provided under the 2013 Act is not an exhaustive one. This section corresponds to Section 2(13) of the Companies Act, 1956. It defines a director as “any person occupying the position of director by whatever name called”. 

According to Section 5(2) of the Small Coins (Offences) Act, 1971 (repealed), the term ‘director’ in relation to a firm is said to be the partner of the firm. Whereas, if the term is used in relation to a society or association, it connotes the person who has been conferred with the management and control of the affairs of that particular society or association under the concerned rules. 

In the case of Agrawal Trading Corpn. v. Collector of Customs (1972), it was held by the Apex Court that the meaning of the term ‘director’ in relation to a firm connotes to the partner of that firm. 

In conclusion, the term director connotes a person who has been elected or appointed in accordance with the law and who has been conferred with the task or function of managing and directing the affairs of a company. Directors are often regarded as the brains of a company. They hold a pivotal position in a company’s structure as they make important decisions for the company in board meetings or in special committee meetings organised for certain particular purposes. Also, it is noteworthy that a director has to work in compliance with the provisions of the 2013 Act. 

Board of Directors 

As discussed above, a company, being an artificial person with no mind of its own, cannot function without a human agency. Thus, the persons responsible for managing the affairs of a company are known as directors, and collectively they are termed as ‘Board of Directors’. The definition of the term is provided under Section 2(10) of the 2013 Act. It states that a ‘Board’ or ‘Board of Directors’ of a company refers to a collective body of the directors of the company. 

Board meetings 

In simple layman’s language, as defined under Collin’s dictionary, the term ‘board meeting’ means a meeting held by the board of a company or any organisation. According to Section 173 of the 2013 Act, after the formulation of a company, a meeting of the board of directors should be conducted within thirty days. Also, there should not be a gap of more than 120 days between two consecutive meetings. The mode of conducting such board meetings is enumerated under Section 173(2) of the 2013 Act. 

Classification of directors 

As per the Companies Act 2013, directors can mainly be classified under two subheads, namely, managing directors (one who has substantial powers of management and control of the affairs of the company) and full-time directors (one who is in full-time employment).  

Further, the classification of the directors based on the manner in which they are appointed, the role they play, the duties they have, the powers they possess, etc. can be under the following subheads, namely:

1. First Directors: As per the rules and norms laid down in the Article of Association or any charter or constitution of the company, the ones who have signed the Memorandum of Association of the company are considered to be as first directors, and they hold the office until any other directors are officially appointed by the company in the first annual general meeting.
2. Casual vacancies: The directors who are appointed for a short-term term when any existing directors vacate the office. 
3. Additional Directors: If the Articles expressly provide, the Board of Directors has the authority to appoint additional directors as they deem fit and necessary. These additional directors will serve until the subsequent annual general meeting.
4. Alternate Director: the director who has been appointed by the Board through a special resolution in place of the director who has been absent from his post. 
5. Shadow Director: A person who isn’t officially appointed to the Board but whose advice or directions the Board is accustomed to following is held accountable as a director of the company. It is pertinent to note that this doesn’t apply if the individual is providing advice in a professional capacity. Therefore, such a ‘shadow’ Director could be considered an ‘officer in default’ under the 2013 Act.
6. De Facto Director: A person who has not been officially appointed as a director by the company but acts as a director and is also held out as a director by the company is classified as a ‘de facto director’.
7. Rotational Directors: In a public company or a private company that is a subsidiary of a public company, at least two-thirds of the directors are supposed to retire by rotation, and the ones retiring through such a process are referred to as “rotational directors”. Further, if the articles of the company provide so, they can be reappointed.
8. Nominee Directors: These are the directors who have been appointed by the shareholders, third parties through contract, or other parties as may be prescribed. 

Position of directors : a legal perspective

As discussed above, directors are the key managerial personnel of a company. By far, it is very clear that a company, be it private or public, is required to appoint a director. They are entrusted with the entire management of the affairs of the company, and the same is done in accordance with prevailing laws. The role played by the directors in the corporate governance of a company is very significant and crucial. 

The term ‘director’ has been defined under Section 2(34) of the 2013 Act; however, the definition fails to provide clarity pertaining to the exact meaning of the term, duties, responsibilities, functions, etc. the director is supposed to perform. 

Defining and explaining the position that a director holds is a complex and herculean task. The reasoning is that it varies according to the context and circumstances. There are no precise words that can explain the position that directors hold in any corporate enterprise. However, attempts have been made by various courts to explain the position that a director holds. Let’s take a look at a few important case laws wherein this subject has been dealt with. 

In the case of Imperial Hydropathic Hotel Co. Blackpool v. Hampson (1883), the Court of Appeal opined that the position that a director holds in a corporate body is very versatile. Depending upon the circumstances and context, a director can be regarded as a trustee, an agent, or a managing partner. It is pertinent to note that these terms are entirely indicative of the various legal capacities that a director may hold in relation to a company. 

While explaining the legal position a director holds, Justice Jessel M. R. In Re Forest of Dean Coal Mining Ltd. Co. (1872), opined that “it does not matter much what you call them, so long as you understand what their true position is, which is that they are merely commercial men, managing a trading concern for the benefit of themselves and all other shareholders in it.”

In the case of Albert Judah Judah v. Rampada Gupta And Anr. (1958), it was observed that the directors are the persons appointed to manage the affairs of the companies that are incorporated under the Companies Act. These are the ones whose appointments are done in accordance with the prevailing law. The role that a director plays may vary from that of an agent to that of a managing partner, a trustee, etc. However, one must understand that these expressions are not meant to define the powers, functions, and duties conferred upon them exhaustively. It is restrictive for the purpose of suggesting useful perspectives from which they may be examined. 

Section 152(1) of the 2013 Act provides that, in default and as per the contents of the Articles of the Association of a company, the ones who are the subscribers of the Memorandum of Association (provided they are individuals and not an association, enterprise, etc.) shall be termed as directors. However, this shall only be applicable until the directors are duly appointed according to the prevalent provisions and procedures provided in the Companies Act. 

Thus, from the above discussion, it is clear that the directors may sometimes act as an agent of a company, whereas sometimes they act as trustees or managing partners. But one clear thing is that they are indispensable organs of the company, responsible for the management of affairs of the company. 

A brief explanation of the various legal positions that a director may hold is as under;

Director as an agent

Put simply, a company is an artificial person, and thus it cannot function and work on its own. Thus, a company needs someone to work for it and manage its affairs. So in this sense, the director acts as the agent of the company for which they work. Hence, pursuant to this proposition, the relationship between the director and the company is governed by the principles of the law of agency. 

The fact that directors also act as the agents of the company was also recognised by the Scottish Court of Session in the case of Ferguson v. Wilson (1904). The court acknowledged the fact that a corporation or a company, being an artificial person, cannot act on its own, and hence the directors act as the agents of the company and manage the affairs of the company. While considering this duty that a director is entrusted with, the court opined that the relationship between a director and company is akin to the relationship that exists between a principal and agent. 

It is pertinent to note that, just as a director does not act as the trustee of the shareholders but that of a company, similarly, the directors are not the agents of individual members but of the institution as a whole. 

The High Court of Delhi, in the case of Indian Overseas Bank v. RM Marketing (2001), held that if a director has not given surety for a loan taken by the company in his personal capacity, he cannot be solely held liable merely because he holds the directorship. 

Director as trustee

It is pertinent to note that the directors are the trustees of the money of the company, which they are duty-bound to handle as they act as agents in the transactions that are carried out on behalf of the company. As the directors are entirely in control of the company’s funds in the official capacity, which they are obligated to utilise and administer for the benefit and profit of the company, in this sense, they can be regarded as the trustees of the company. 

In a strictly literal interpretation, the directors have not been deemed trustees per se; however, they are regarded as trustees of the company’s properties, which have been entrusted to their hands. A similar proposition was laid down by the High Court of Madras in the case of Ramaswamy Iyer v. Brahamayya & Co. (1965). In the aforesaid case, the court held that directors can be held liable as trustees if they misuse the power conferred upon them or if they disregard the power of applying the company’s funds. The court further went on to say that even after the death of the accused director, the cause of action remains with the legal representatives of the director.

It is pertinent to note that the reason behind treating directors as trustees is often due to the nature of their office and the responsibilities that come with it. From the discussion we had in previous paragraphs, one thing that is crystal clear is that the directors are bestowed with the duty to manage and control the affairs of the company. However, it is noteworthy that the directors are the company’s paid officers. They work for the benefit of the shareholders of the company; they are not trustees in a literal sense. For instance, a trustee of a will or marriage is entirely different from the role that the director plays as a trustee. 

The Court of Justice, England, in the case of Percival v. Wright (1902), made it very clear that the directors are the trustees of the company and not of the shareholders. This principle was reiterated in the case of Bruce Peskin and another v. John Anderson (2000) by the Court of Appeal of England and Wales. The court clarified that the directors hold no fiduciary duty to the shareholders. Thus, even though the ultimate profit that a company makes goes to the shareholders, it cannot be said that the directors are the trustees of the shareholders. They owe their duty as trustees to the company.

Director as a managing partner

As the terms suggest, managing partner in a literal sense connotes the person who is responsible for or who manages the day-to-day running of a company, enterprise, etc. Further, as we have discussed, a director, before everything else, is the person responsible for the management of the affairs of the company. Thus, his role as a managing partner needs no explanation. 

Furthermore, the shareholders’ will and their needs are entirely taken care of by the directors of the company. They act as the agents of the shareholders’ and pursue their objectives. Also, one must note that a director possesses extensive powers and exercises many proprietary functions. The Article of the Association as well as the Memorandum of Association bestow on the board of directors the ultimate authority to formulate policies and decisions for the welfare of the company in accordance with the law. 

Directors as an organ of the company

The transformation and evolution of the roles and responsibilities of modern-day corporate entities, with time, have led to the emergence of a new theory called the ‘organic theory of corporate life’. In terms of this theory, certain officials of the company are treated as the organs of the company. As per this theory, the company is held liable for the actions of these organs in a manner similar to the one where a natural person is held accountable for the actions of his limbs. Put simply, in the modern era, the directors are much more than just agents or trustees; they are often regarded as the organs of the company. Almost the entire work of the corporate entities and companies is conducted by the directors and their managerial personnel. They are conferred with enormous powers through the regulations embodied in the Articles of Association. The courts in various judgements have opined that the directors function like the brain of the company, and it is through the directors that the company acts. The same observation was laid down by the Hon’ble Apex Court in the case of the State Trading Corporation of India Ltd. and ors  v. Commercial Tax Officer, Visakhapatnam and ors. (1963). 

Appointment of directors

The crucial role that the directors play in the management of the affairs of the companies is unquestionable. Thus, the persons appointed to the post of director hold desirable qualities and integrity. The 2013 Act has an ample body of provisions that deal with the appointment of various directors in a very elaborate manner. 

According to Section 149 of the 2013 Act, every company is required to have a Board of Directors. The board shall have individuals as directors. Further, it provides the minimum number of directors that a company is required to have, i.e., for a public company, the minimum number is three, and for a private company, the minimum number is two. In the case of a one-person company, the minimum number is one. Furthermore, the provision also provides for a maximum number of directors, i.e., fifteen. 

The proviso clause provides that a company can also appoint more than fifteen directors by passing a special resolution. Also, having one woman director is an essential requirement. 

Section 149(3) mandates the presence of at least one director who stays in India for a total of 182 days during the financial year. Whereas, sub-section 4 provides that every listed company is to have at least one-third of the total independent directors. For public companies, the Central Government may prescribe a limit on the minimum number of independent directors. 

Section 152 provides for the appointment of directors. Let’s have a brief overview of how different classes of directors are appointed. 

Appointment of the first directors

Generally, the first directors are appointed by the subscribers of the Memorandum of Association (Section 152(1) of the 2013 Act). In case the appointments are not done in the aforementioned way, the individual subscribers and signatories of the MOA become the directors. Further, it is important to note that the first directors only hold the office until the new ones are appointed in the first annual general meeting. 

It is pertinent to note that no person shall be capable of being appointed as a director of a public company (that has a share capital) unless he fulfils the below-mentioned points:

1. Allotment of a Director Identification Number (DIN) as per the provisions of Section 154 of the 2013 Act. 
2. The First Director has signed and filed a consent in writing for the appointment with the Registrar of Companies (ROC). Provided this must be done within thirty days of the appointment of the director. 
3. He has signed the memorandum for his qualification shares, if any. 
4. A written undertaking to the ROC if he has taken any qualification shares from the company. He must also pay for that qualification share. Further, an affidavit is also required to this effect, specifying that shares have been registered in his name. 
5. In cases of independent directors appointed in the general meeting, it is mandatory that an explanatory statement by the board be provided for such an appointment. The statement must mention that the director fulfils the requirements as per the 2013 Act. 

Section 162: Voting on the appointment of director

It is important to note that the appointment of every director in a public company or its subsidiary and the passing of an ordinary resolution in this context in the general meeting are mandatory. According to Section 162 of the 2013 Act, it is mandatory that each candidate must be voted individually. Thus, if two or more directors are appointed by a single resolution, then it will be invalid and void in the eyes of the law. However, if in the meeting it has been unanimously decided, more than one director can be appointed by a single resolution. Further, if such an appointment is made, it is necessary that first a resolution is passed which authorises such an appointment. 

One must note that this provision does not apply to private companies that are not subsidiaries of public companies. 

Appointment by proportional representation

The basic or traditional method for appointment is an election by a simple majority of the shareholders. However, it has been observed that this method of appointment frequently fails to appoint even a single director on the board. Thus, Section 163 of the Companies 2013 Act allows the minority to place their representative and enables minority shareholders to appoint directors through the method of proportional representation. The very purpose of enumerating this provision of voting through proportional representation is to amplify the method of minority voting. This method can be followed by different methods, namely, a single transferable vote, voting by way of cumulative voting or any other means. This system of appointment by way of proportional representation is also called a ‘cumulative voting system’. Put simply, this provision allows companies to appoint directors through the method of proportional representation. One must note that this method can only be adopted if the Articles of Association (AOA) provide for it. 

Rights of the persons to stand for directorship apart from the retiring directors

Section 160(1) of the 2013 Act provides that a person who is not retiring from the post of director (appointed as per Section 152 of the 2013 Act) is eligible to be appointed a director, provided he fulfils all the requirements of the 2013 Act.

Appointment of directors by the board

As per the provisions of the 2013 Act, the board has the power to appoint any person as director if he fulfils the requirements in a general meeting. As per Section 162 of the 2013 Act, the following directors can be appointed by the board, namely:

1. Additional director (Section 161(1) of the 2013 Act)
2. Alternate director (Section 161(2) of the 2013 Act)
3. Nominee director (Section 161(3) of the 2013 Act)
4. To fill in vacancies of directors (Section 161(4) of the 2013 Act)

Appointment by tribunal

The Company Law Tribunal has been given the power to appoint directors, and the provision for the same has been enumerated under Section 242(j) of the 2013 Act. 

Appointment of directors through election by small shareholders

As enunciated under Section 151 of the 2013 Act, it is mandatory that at least one director should be elected by small shareholders. The term ‘small shareholders’ connotes those shareholders who possess a maximum of Rs. 20,000 shares in the company. 

Independent directors and their appointments 

The provisions pertaining to the independent directors are laid down under Section 149(4) of the 2013 Act. It enumerates that at least one-third of the total number of directors in every listed company should be independent directors. However, as far as the public companies are concerned, the central government has the power to prescribe the minimum number of independent directors. 

Who is an independent director?

Section 149(6) of the 2013 Act provides for the definition of an independent director. It states that an independent director is a director other than a managing director, a whole-time director, or a nominee director. It further lays down certain characteristics and other circumstances that must be fulfilled in order to be an independent director. The following are the points that need to be considered: 

1. A person with integrity who has the desired expertise and experience.
2. A person who has never been a promoter of the company, its subsidiary or any other holding company in the past or present. 
3. A person who does not have a pecuniary relationship with the company, its subsidiary, or any other holding company, directors, or promoters. 
4. A person whose relative or he himself does not hold any post of key managerial personnel. Further, he must also not be an employee of the company. 

It is pertinent to note that every independent director is required to clarify and declare his independence at the very first board meeting and shall continue to do so every year at the first board meeting of every financial year. It is to be noted that an independent director holds the office of directorship for a period of five years. Also, an independent director can be reappointed, provided the same shall be done after the passing of a special resolution. However, an independent director can only hold office for two consecutive terms. 

Selection of Independent Directors

Section 150 of the 2013 Act provides for the manner in which independent directors are to be appointed. Further, it also provides for keeping and maintaining a data bank for the independent directors. As per the aforesaid provision, the independent directors are to be selected from the data bank, which comprises pertinent information stating the name, address, and qualifications of the individuals who have the eligibility to become independent directors and who are willing to serve as independent directors. This data bank is maintained by any body, institute, or association that has expertise in such matters and that has been officially recognised by the Central Government. It is pertinent to note that the company making such an appointment from a databank must practise due diligence under the provisions of the 2013 Act and the requirements for appointing a director. 

One must note that the appointment of an independent director must be approved in a general meeting. Also, the manner and procedure as laid down under Section 149 of the 2013 Act must be complied with. 

Disqualifications 

Section 164 of the 2013 Act provides for the eligibility criteria for the directors of the company. Under the following circumstances, a person will not be eligible for the appointment of director if, 

• He is of unsound mind and has been declared as a person of unsound mind by the competent court.
• He is an undischarged insolvent.
• A person who has applied to be adjudicated as an insolvent or whose application for adjudicating him as an insolvent is pending. 
• A person charged for any offence, whether involving moral turpitude or otherwise and has been sentenced for that offence to imprisonment for not less than 6 months, and a maximum of 5 years has not been passed after that imprisonment. Provided that if a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of seven years or more, he shall not be eligible to be appointed as a director in any company. 
• If he has been disqualified by any tribunal for the concerned position. Provided that if a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of seven years or more, he shall not be eligible to be appointed as a director in any company. 
• A person who has been convicted of the offence dealing with related party transactions under Section 188 at any time during the last preceding five years.
• The concerned person has not made any calls relating to the shares of the company he holds. 
• If he has not complied with the provisions of Section 152(3) and Section 165(1) of the 2013 Act. 

Further, if the person who has been previously appointed as a director has not a filed financial statement and paid returns for up to 3 financial years, continuously failed to repay the accepted deposits, payment of interest, or pay any declared dividend, he or she shall not be eligible to be re-appointed as director in any other company for a period of 5 years. 

Apart from this, a private company may provide in its Articles of Association for any disqualifications along with the ones provided in the aforementioned provision. 

Removal of director

Section 169 of the 2013 Act, provides for the removal of the director. As per the said provision, a director can be removed from his office by any of the two below-mentioned authorities;

1. Company
2. Tribunal 

Removal by company

Section 169(1) of the 2013 Act provides that a person can be removed from his directorship prior to the expiration of the term of his office by passing an ordinary resolution. However, the aforesaid section does not apply to the below-mentioned circumstances. 

1. If the director is appointed by the tribunal in pursuance of Section 242.
2. If the company has adopted the system of electing two-thirds of its directors by the method of proportional representation.

In order to remove a person from his directorship, furnishing him with a special notice is mandatory. In the aforesaid notice, an intimation regarding the intention to remove the director must be there. Further, it should be served at least 14 days prior to such a meeting. 

As soon as the company receives such notice, a copy of such notice is furnished to the director concerned. Then the concerned director has the right to make a presentation against the resolution at the general meeting. If a director makes a representation, then its copy needs to be circulated among the members.

Removal by the Tribunal 

Clause (h) of Section 242(2) confers the power to remove a managing director, manager, or any other director of the company. When an application is made to the tribunal for relief from oppression or mismanagement, it may terminate any agreement of the company that has been made with a director. When the appointment of a director is terminated, he cannot serve the managerial position of any company for five years without leave of the Tribunal.

Resignation by the director 

The provision for resignation by the director is provided under Section 168 of the 2013 Act. A director of a company may resign from the position of directorship as per the norms or rules or in the manner provided in the Articles of Association of the company. In case the articles do not contain any rules or provisions in this respect, then the director may give his resignation after providing a notice for the same to the board and the company. Further, the company, after taking notice of the resignation, is required to inform the Registrar of Companies in the manner and within the time as prescribed. The report of such resignation by the director should also be placed forward in the general meeting of the company. 

As per the proviso to Section 168(1) of the 2013 Act, the director may also forward a copy of his resignation within thirty days to the registrar, along with mentioning the reasons for the same. Further, as per Section 168(2), the resignation shall be effective as soon as the company receives the intimation of the same by the notice or on any specific date as provided in the notice. Section 168(3) of the 2013 Act provides that if all the directors vacate their offices under Section 167, then, for the time being, the promoters or the Central Government, in the absence of any promoter, shall appoint the required number of directors, who shall hold office till the directors are appointed by the company in a general meeting. 

In the case of Mother Care (India) Pvt. Ltd. v. Ramaswamy P. Aiyar (2003), the Karnataka High Court held that the resignation of a director would be effective even if he was the only director in the office.

It is important to note that even after resignation, the director can be held liable for any wrong associated with him or that has been done in his personal capacity during the period in which he served as the director.

Liability of directors

The directors can be held liable for the acts done by them without the company’s authority. Such acts may also be called ultra vires acts. Furthermore, they can also be held liable, in their personal capacity, for the acts that are intra vires the company; however, those acts are beyond a director’s scope or power, provided they are not ratified by the company. The liability of directors can be divided into two subheads, namely, criminal and civil liability.

Below is a detailed explanation of each of the classifications. 

Criminal liability

If the directors perform any act in an official capacity that is not in compliance with the provisions of the Companies Act, they can be held criminally liable for default or breach of certain provisions of the Companies Act, apart from being held liable for the offences enumerated in the Indian Penal Code, 1860 (hereinafter referred to as IPC). As far as the offences under IPC are concerned, a director can be held liable for fraud, perjury, misappropriation of funds, embezzlement of funds, etc. 

Apart from the sections in the Companies Act that expressly deal with the imposition of penalty on a director by holding him liable, many sections or provisions in the 2013 Act impose a fine or imprisonment, or as the case may be, on the company and every officer who is in default. So first, let’s understand exactly what the term ‘officer who is in default’ means. 

As per Section 2(60) of the 2013 Act, the term ‘officer who is in default’ means: 

1. A whole-time director;
2. Key managerial personnel of the company;
3. In the absence of any key managerial personnel, the director or directors who have been appointed by the Board itself;
4. Any person who has been authorised by the Board and who is under the immediate authority of the Board or any key managerial and is given any responsibility like maintenance, filing, or any other thing, knowingly allows or actively participates, or knowingly fails to take appropriate steps to prevent any default;
5. Any person on whose advice the directors or the board of directors of the company are supposed to act; 
6. Any director who willingly contravenes the provisions of the 2013 Act;
7. In relation to the issue or transfer of shares, any registrar, agent, merchant banker, etc. 

Further, it is pertinent to note that mens rea (intention) is an essential ingredient to hold somebody liable unless the statute expressly or impliedly states otherwise.

Furthermore, Section 450 of the 2013 Act provides for punishment where no specific provision is provided. It provides that if a director or any other officer of the company is in default of any provision of the 2013 Act or the rules made thereunder, shall be punishable with a fine, which may extend up to Rs. 10,000/- or if the contravention is done repeatedly, Rs. 1000/- for every day. Also, if a director of the company, which is being wound up, destroys, falsifies, or alters any books or any other valuable documents relevant to the company, he shall be liable for imprisonment, which may extend up to 7 years, along with a fine. 

Civil liability

Apart from the above-discussed criminal liability, directors can also be held liable for acts done by them that are outside the powers of the company as defined in the Memorandum of Association. For instance, a director can be held liable if there is any misapplication of the funds of the company, and in such a case, he may be obligated to replace such funds. A director may be asked to replace the funds by buying up shares of the company (Section 337 of the 2013 Act), payment of dividends out of the capital, payment of bonuses to the promoters, buying a property in which the company had no power to purchase, and returning the capital without reducing.

One must understand that if a director acts malafidely and misuses the powers conferred upon him by the company, he will incur civil liability for breaching warranty. 

Also, negligence on the part of the director, if it causes loss to the company in his individual capacity, will attract civil liability. If a director makes personal gains from the company, he will be asked to pay damages to the company. In such a case, the liability arises from the principle called ‘unjust enrichment’. It refers to a situation where a director enriches himself unjustly by abusing or misusing his fiduciary position. 

Generally, a director is not held liable to third parties for transactions that they enter on behalf of the company; however, in certain situations, they are held liable. Some of these are mentioned below.

1. When directors have entered into a contract knowingly and expressly in their name, have willingly hidden the fact that they are acting on behalf of the company. 
2. In a situation where directors have acted fraudulently in collusion with third parties.
3. In case of the issuance of a prospectus that does not fulfil the statutory requirements. 
4. Acts that are outside the authority of the director. 
5. Directors who make use of the company’s official seal or signature on a document without the knowledge of the company and without mentioning the name of the company. 

In the above-mentioned cases, the directors are supposed to pay damages. The amount of damages that is required to be paid depends upon the losses suffered in each of the cases. 

Powers of directors

Generally, the powers conferred upon the directors are expressly or otherwise outlined in the Articles of Association of the company. Once these powers mentioned in articles are delegated and vested in the Board of Directors, only they can exercise them. It is pertinent to note that the shareholders cannot order or direct the board as to how the powers are to be exercised. Provided, the board exercises these powers within the prescribed scope. 

General powers vested under Section 179

Section 179 of the 2013 Act provides that the Board of Directors will be entrusted with all the powers conferred upon them by the company. The board is entitled to exercise all the powers that the company has authorised. However, it is pertinent to note that these powers are subject to certain restrictions. 

The powers of directors are co-extensive with the powers of the company itself. The director, once appointed, has almost total power over the operations of the company.

There are two limitations on the exercise of the power of directors, which are as follows:

1. The board of directors is not competent to do the acts that the shareholders are required to do in general meetings.
2. The powers of directors are to be exercised in accordance with the memorandum and articles.

The individual directors have powers only as prescribed by memorandum and articles.

The intervention of shareholders in exceptional cases

In the following exceptional situations, the general meeting is competent to act on matters delegated to the board:

1. When directors have acted malafide.
2. When directors have due to some valid reason become incompetent to act.
3. The shareholders can intervene when directors are unwilling to act or there is a situation of deadlock.
4. The general meetings of shareholders have the residuary powers of a company.

Powers to be exercised with general meeting approval

Section 180 of the 2013 Act mentions certain powers that can be exercised by the Board only when they are approved in the general meeting:

1. To sell, lease, or otherwise dispose of the whole or any part of the company’s undertakings.
2. To invest otherwise in trust securities.
3. To borrow money for the purpose of the company
4. To give time or refrain the director from repayment of any debt.

When the director has breached the restrictions imposed under the sections, the title of lessee or purchaser is affected unless he has acted in good faith along with due care and diligence. This section does not apply to companies whose ordinary business involves the sale of property or putting a property on lease.

Power to constitute an audit committee

Section 177 of the 2013 Act provides power to the board of directors to formulate an audit committee. It is to be noted that the committee should be constituted of at least three directors, including independent directors. Further, it is mandatory that the committee should have independent directors in the majority. The chairperson and members of the audit committee should be persons with the ability to read and understand the financial statements.

The audit committee is required to act in accordance with the terms of reference specified by the board in writing.

Power to constitute nomination and remuneration committees and stakeholder relationship committee

The Board of Directors can constitute the Nomination and Remuneration Committee and Stakeholder Relationship Committee under Section 178 of the 2013 Act. The Nomination and Remuneration Committee should consist of three or more non-executive directors out of which one-half are required to be independent directors.

The Board can also constitute the Stakeholders Relationship Committee, where the board of directors consists of more than one thousand shareholders, debenture holders, or any other security holders. The grievances of the shareholders are required to be considered and resolved by this committee.

Power to make a contribution to charitable or other funds

The Board of Directors of the company is empowered under Section 181 to contribute to bona fide charitable and other funds. The prior permission of the company in a general meeting is required when the aggregate amount of contribution, in any case, exceeds 5% of the average net profit of the company for the immediately preceding financial years.

Power to make a political contribution

Under Section 182 of the 2013 Act, the companies can make a political contribution. The company making a political contribution should not be other than a government company or a company that has been in existence for less than three years.

Also, the amount of contribution should not exceed 7.5% of the company’s net profit in the three immediately preceding financial years. The contribution needs to be sanctioned by a resolution passed by the Board of Directors.

Power to contribute to the national defence fund

The Board of Directors is empowered to make contributions to the national defence Fund or any other fund approved by the Central Government for the purpose of National Defence under Section 183 of the 2013 Act. The amount of contribution can be the amount as much as the company thinks fit. This total amount of contribution made is mandated to be revealed in the profit and loss statement during the financial year to which it pertains.

Restrictions on powers under the statutory provision

The Companies Act 2013 also lays out the manner in which the powers of the company are to be exercised. There are certain powers that can be exercised only when their resolution has been passed at the board’s meetings. Those powers, such as the power:

1. To make calls.
2. To borrow money.
3. To issue funds for the company.
4. To grant loans or give guarantees.
5. To approve financial statements.
6. To diversify the business of the company.
7. To apply for amalgamation, merger, or reconstruction.
8. To take over a company or to acquire a controlling interest in another company.

The shareholders in a general meeting may impose restrictions on the exercise of these powers.

Conclusion

From the above discussion, it is clear that the directors are the most significant and supreme controlling authority responsible for the management of the affairs of the company. The directors together are collectively known as the Board of Directors. The directors of the company serve as the supreme executive authority, or, we may say, the cerebral entity, playing a significant role in the management and control of the company’s affairs. Their ultimate goal is to make the company progress. The position of director is considered to be a post of great responsibility within the corporate structure. In order to work for the benefit of the company, they have been conferred with enormous powers according to the provisions enshrined in the Companies Act, 2013. They have been equipped with these powers in order to work for the fulfilment of the corporation’s or any enterprise’s objectives. Further, it is clear that even though the directors are bestowed with enormous powers, they cannot go beyond the scope of their powers, and their actions should not be in contravention of the provisions of the 2013 Act.

Frequently Asked Questions (FAQs)

Are directors the servants of a company?

No, directors are professional personnel engaged by the corporate enterprise to direct their affairs. In the case of S. Gururaja Rao v. State of Karnataka (1979), the Karnataka High Court held that a director cannot be regarded as a servant of a company. In fact, they cannot even be called employees of a company. They are the officers of the company who have direct control over the management and affairs of the company.

Can a director enjoy a salary or hold a salaried office?

Yes, a director can hold a salaried office and can also work as an employee of the concerned company along with his or her directorship. In the case of Catherine Lee v. Lee’s Air Farming Ltd. (1961), it was held by the Privy Council that directors are not prevented from being employees of the company in relation to the workmen’s compensation legislation. 

Are there any restrictions on the number of directorships as per the provisions of the Companies Act, 2013?

Yes, Section 165 of the 2013 Act provides that no person, after coming into force of the 2013 Act, shall hold the office of director in more than 20 public companies at a time. 

What are the deemed or implied conditions under which a person holding the post of director shall be deemed to have vacated his office?

Section 167 of the 2013 Act lays down the circumstances under which a director will be deemed to have vacated the office he is holding. 

Sub-section (1) of the aforesaid provision provides that a director will be deemed to have vacated the office if,  

• he has been disqualified as per any of the conditions embodied under Section 164 of the 2013 Act;
• he has been absent from the board meetings for a continuous 12 months (with or without seeking leave);
• any of his acts are in contravention of the conditions embodied under Section 184 of the 2013 Act; 
• if he does not disclose his interest in connection with Section 184;
• if he has been disqualified by any court or tribunal;
• if he has been charged for any offence (involving moral turpitude or otherwise) and has been sentenced for that offence to imprisonment not less than 6 months. 

Which provision under the Companies Act, 2013 provides for the furnishing of compensation or damages to the director for loss of office?

Section 202 of the 2013 Act provides that a company may pay compensation to any director or managing director who holds the office of a manager or is a full-time employee of the company for the loss of their office. 

Can a director hold any other office or place of profit as per the provisions of the Companies Act 2013?

Section 188 of the 2013 Act provides that until and unless expressly contented by the company by way of any resolution, no director can hold any other office of profit. 

Recovery of remuneration under certain circumstances is provided under which provision of the 2013 Act?

Section 199 of the 2013 Act provides for the recovery of remuneration by any director if there has been any fraud or non-compliance by the director. However, it is important that this be done in compliance with the provisions of the 2013 Act or any other related rules made thereunder. 

References

• https://www.icsi.edu/media/portals/0/APPOINTMENT%20AND%20QUALIFICATIONS.pdf 
• https://taxguru.in/company-law/position-appointment-powers-directors-companies-act-2013.html#:~:text=Directors%20can%20be%20appointed%20by,be%20selected%20as%20a%20director.
• https://thefactfactor.com/tag/imperial-hydropathic-hotel-co-v-hampson/
• https://deliverypdf.ssrn.com/delivery.php?ID=428101121103107025094067090073092111015069058086095042085123118113111083124095122108004117037031126012054127116118124113070064102029022089006119124098088114090102121049050055085102111021003107083079013108122122122113102086086086077082066089118118087101&EXT=pdf&INDEX=TRUE 
• https://enhelion.com/blogs/2022/07/08/role-of-director-under-the-companies-act-2013/ 
• Company Law, 16th Edition (2015), Eastern Book Company, by Avtar Singh,

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