This article has been written by Pankhuri Anand, a student of Banasthali Vidyapith, Rajasthan. This article discusses the position of Directors in a corporate body, how directors are appointed, and what are the powers of directors under the Companies Act 2013, along with the relevant case laws.
A corporation is an artificial person which is intangible and invisible. For making any decision and to have knowledge and intention, a living person has a mind and hands by which he carries out his actions. But a corporate body being an artificial person has none of these. So it needs to act through a living person. The company’s business is entrusted in the hands of directors.
Section 2(34) of the Companies Act, 2013 defines a director.
Position of Directors
The position held by the directors in any corporate enterprise is a tough subject to explain as held in the case of Ram Chand & Sons Sugar Mills Pvt. Ltd.v. Kanhayalal Bhargava. The position of a director has been cited by Bowen LJ in the case of Imperial Hydropathic Hotel Co Blackpool v. Hampson as a versatile position in a corporate body. Directors are sometimes described as trustees, sometimes as agents and sometimes as managing partners. These expressions are from indicating point by which directors are viewed in particular circumstances.
Are directors servant of the company?
The directors are the professional men of the company who are hired to direct the affairs of the company. They are the officers of a company and not a servant. In the case of Moriarty v. Regent’s Garage Co, it was held that a director is not a servant of the company, but a controller of the affairs of a company.
Directors as agents
In the landmark case of Ferguson v. Wilson, it was clearly recognised that the directors are the agents of a company in the eyes of law. The company being an artificial person can act only through the directors. Regarding this, the relation between the directors and the company is merely like the ordinary relation of principal and agent.
The relation between the directors and the company is similar to the general principle of agency. When a director signs on behalf of the company, it is a company that is held liable and not the director. Also, like agents, they have to declare any personal interest if they have in a transaction of the company.
One of the important points to be noted is that they are not agents of its individual members. They are the agents of the institution.
In the case of Indian Overseas Bank v. RM Marketing, it has been held that the directors of a company could not be made liable merely because he is a director if he has not given any personal guarantee for a loan taken by the company,
Directors as Trustees
In a strict sense, the directors are not the trustees, but they are always considered and treated as trustees of money and properties which comes to their hand or which is under their control. As observed by the Madras High Court in the case of Ramaswamy Iyer v. Brahamayya & Co., regarding their power of applying funds of the company and for the misuse of power, the directors are liable as trustees and after their death, the cause of action survives against their legal representative.
Another reason due to which the directors are described as trustees is because of their nature of the office. Directors are appointed to manage the affairs of the company for the benefit of shareholders. But, the director of a company is not exactly a trustee, as a trustee of will or marriage settlement. He is a paid officer of a company.
As per the principles laid down in the case of Percival v. Wright, directors are not the trustees of the shareholders. They are trustees of the company. The same principle was repeated again in the case of Peskin v. Anderson that the directors are not trustees for shareholders and hold no fiduciary duty to them.
Directors as organs of Corporate body.
In the case of Bath v. Standard Land Co. Ltd., Neville J. stated that the board of directors are the brain of the company and a company does act only through them.
A corporation has no mind or body and its action needs to be done by a person and not merely as an agent or trustee but by someone for whom the company is liable as his action is the action of the company itself. If we consider a company as a human body, the directors are the mind and the will of the company and they control the actions of the company
Appointment of Directors
The appointment of Directors of a company is strictly regulated by the Company’s Act, 2013.
Company to have Board of Directors
Every company is required to have a Board of directors and it should be consisting of individuals as directors and not an artificial person. Section 149 lays down the minimum number of directors required in a company as follows:
- Public Company– At least 3 directors
- Private company- At least 2 directors
- One person company– Minimum 1 director
There can be a maximum of 15 directors. A company may appoint more than 15 directors after passing a special resolution.
The Central Government may prescribe a class or classes of a company have a minimum one women director. Every company is also required to have a minimum of one director who has stayed in India in the previous year for a period of 182 days or more.
The provisions of Independent Directors has been laid down under section 149(4) of the Companies Act, 2013. This section lays down that at least one-third of the total number of directors should be independent directors in every listed company The Central Government may prescribe the minimum number of independent directors in public companies.
Who is an independent director?
Sub-section (6) of section 149, defines that an independent director stands for a director other than a managing director, whole-time director or a nominee director:
- Who is a person with integrity and has relevant expertise and experience.
- Who has not been a promoter of the company, its subsidiary or holding company either in past or present.
- Who himself or his relative has no pecuniary relationship with the company, its holding or subsidiary company, directors or promoters.
- Who himself or his relative, do not hold the position in key managerial personnel, or not an employee of the company.
The independent director has to declare his independence at the first meeting of the Board and subsequently every year at the first meeting of the Board in the financial year.
An independent director holds office for a term of five years on the Board. He is also eligible for being reappointed after passing a special resolution, but no independent director is to hold the office for more than two consecutive terms.
Election of Independent Directors
The independent directors are to be selected from a data bank which contains certain information such as name, address and qualifications of persons who are eligible and willing to act as an independent director. The data bank is maintained by anybody, institute or association with expertise in the creation and maintenance of data bank and notified by the Central Government. A company has to pick up a person with due diligence, as stated in section 150.
The appointment has to be approved by the company in general meeting, and the manner and procedure for selection of independent directors who fulfil the qualification stated under section 149 may be prescribed by the Central Government.
Appointment of directors through election by small shareholders
A listed company is required to have one director who should be elected by small shareholders as per section 151 of the Companies Act, 2013. Small shareholders in this context are referred to shareholders holding shares of the value of maximum Rs. 20,000.
The subscribers of the memorandum appoint the first directors of a company. They are generally listed in the articles of the company. If the first director is not appointed, then all the individuals, who are subscribers become directors. The first director holds the office only up to the date of the first annual general meeting, and the subsequent director is appointed as per the provisions laid down under section 152.
Appointment at the general meeting
Section 152 lays down the provision that directors should be appointed by the company in the General Meetings. The person so appointed is assigned with a director identification number. He also has to make sure in the meeting that he is not disqualified from becoming a director.
The individual appointed has also to file his consent to act as a director within 30 days with the registrar.
The retirement of the directors by annual rotation can be prescribed by the company in the Articles. If not so, only one-third of the directors can be given a permanent appointment. The tenure of the rest of them must be determined by rotation.
At an annual general meeting, one-third of such directors will go out, and the directors who were appointed first and has been in the office for the longest period will retire in the first place. When two or more directors have been in the office for an equal period of time, their retirement will be determined by mutual agreement, or by a lot.
Reappointment [section 152]
The vacancies created should be filled up at the same general meeting. The general meeting may also adjourn the reappointment for a week. When the meeting resembles and no fresh appointment is made neither there is any resolution for the appointment, then the retiring directors are considered to be reappointed.
The exception to this practice is that the retired directors will not be considered to be reappointed when:
- The appointment of that director was put to the vote but lost.
- If the director who is retiring has addressed to the company and its board in writing that he is unwilling to continue.
- If he is disqualified.
- When an ordinary or special resolution is required for his appointment.
- When a motion for appointment of two or more directors by a single resolution is void due to being passed without unanimous consent under section 162.
When it is proposed that a new director should be appointed in the place of retiring director, then the procedure laid down under section 160 of the Companies Act, 2013 is followed:
- A written notice for his appointment as a director should be left at the office of the company at least 14 days prior to the date of the meeting along with a deposit of Rs.1,00,000.
- That amount should be refunded to the person if he is elected as a director, or
- He gets more than 25% of the total valid votes cast.
Appointment by nomination
The appointment of Directors can also be made with respect to the Company’s articles and not only through the general meetings. When an agreement between the shareholders has been included in the articles that entitles every shareholder with more than 10% share to be appointed as a director, then they can be nominated as director.
Also, subject to the articles of the company, the Board can appoint any nominated person by an institution in pursuance of law, as a director.
Appointment by voting on an individual basis
The appointment of a director is made by voting at the general meeting as laid down under section 162 of the Companies Act, 2013. The candidates have to vote individually and the wishes of the shareholders regarding each proposed director are required.
As held in the case of Raghunath Swarup Mathur v. Raghuraj Bahadur Mathur, when two or more directors are appointed on the basis of single resolution and voting then it is considered to be void in the eyes of law.
Appointment by proportional representation
As per section 163 of the Companies Act, 2013, the article of a company can enable the appointment of directors through the system of voting by proportional representation. This system of voting is used to make effective minority votes. This system of proportional representation can be followed by a single transferable vote or by the system of cumulative voting or other means.
Appointment of Directors by Board
Generally, the appointment of the directors is done in the annual general meeting of the shareholders but there are two instances when the Board can also appoint a new director:
- If the article empowers the Board to appoint additional directors along with prescribing the maximum number.
- Section 161 of the Act also authorises the directors to fill casual vacancies.
Appointment by Tribunal
Under section 242(j) of the Companies act 2013, the Company Law Tribunal has the power to appoint directors.
The minimum eligibility requirement for the appointment of directors has been laid down under section 164 of the Companies Act, 2013. The disqualification for a person to be appointed as a director are:
- Unsoundness of mind.
- If he is an undischarged insolvent.
- When is applied to be declared as insolvent and such application is pending.
- When he is sentenced for imprisonment for an offence involving moral turpitude for a period of a minimum of 6 months.
- If the Tribunal or court has passed an order disqualifying him for being appointed as a director.
- If he has not paid his calls in respect to any shares of the company.
- When he is convicted of an offence which deals with related party transaction.
- When he has not complied with the requirements of Director Identification Number.
Removal of directors
The removal of directors takes place by:
- Company Law Tribunal
Removal by Shareholders
Section 169 of the Companies Act 2013 provides that a director can be removed from his office before the expiration of his term of office by an ordinary resolution. This section does not apply when:
- The director is appointed by the tribunal in pursuance of section 242.
- The company has adopted the system of electing two-thirds of his directors by the method of proportional representation.
To remove a director, special notice is required, and such notice should contain the intention to remove the director and the notice should be served at least 14 days prior to such meeting.
As soon as the company receives such notice, the copy of such notice is furnished to the director concerned. Then the concerned director has the right to make a presentation against the resolution in the general meeting. If a director makes a representation, then its copy needs to be circulated among the members.
Removal of Directors by Company Law Tribunal
The removal of directors by the Company Law Tribunal can be done under section 242(2)(h). When an application is made to the tribunal for relief from oppression or mismanagement, then it may terminate any agreement of the company which has been made with a director. When the appointment of a director is terminated then he cannot serve the managerial position of any company for five years without leave of the Tribunal.
Earlier, there was no provision for the resignation that by what procedure a director can resign. The resignation was recognised under the provisions laid down under section 318 of the Companies Act, 1956. Under this section, it was held that when a director resigns his office, he is not entitled to compensation.
If the articles mention the provisions for resignation then it will be followed. In the case of Mother Care (India) Pvt. Ltd. v. Ramaswamy P Aiyar, the court held that the resignation of a director is effective even if he is the only director in the office.
Now, after the Act of 2013, section 168 lays down the provisions that:
- The director can resign from his office by giving written notice to the company.
- On receiving the notice, the board has to take notice of it.
- The registrar needs to be informed by the company within the prescribed time period.
- The fact of resignation needs to be placed by the company in the director’s report in the immediately following general meeting.
- The director has to send his copy of the resignation to the registrar along with the detailed reasons within 30 days of the resignation.
Even after resignation, the director is held responsible for any wrong associated with him and which happened during his tenure.
Powers of Directors
General powers vested under section 179
Section 149 of the Companies Act, 2013 empowers the directors with the general power vested in the Board. The Board of directors is entitled to exercise all the powers and do all required actions which a company is authorised to exercise. But, such action is subject to certain restrictions.
The powers of directors are co-extensive with the powers of the company itself. The director once appointed, they have 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.
- The board of directors are not competent to do the acts which the shareholders are required to do in general meetings.
- 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 following exceptional situations the general meeting is competent to act in matters delegated to the Board:
- When directors have acted mala fide.
- When directors have due to some valid reason become incompetent to act.
- The shareholders can intervene when directors are unwilling to act or there is a situation of deadlock.
- The general meetings of shareholders have residuary powers of a company.
Restrictions on powers under the statutory provision
The Companies Act 2013 also lays the manner in which the powers of the company is to be exercised. There certain powers which can be exercised only when its resolution has been passed at the Board’s meetings. Those powers such as the power:
- To make calls.
- To borrow money.
- To issue funds of the company.
- To grant loans or give guarantees.
- To approve financial statements.
- To diversify the business of the company.
- To apply for amalgamation, merger or reconstruction.
- 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.
Powers to be exercised with general meeting approval
Section 180 of the Companies Act 2013 states certain powers which can be exercised by the Board only when it is approved in the general meeting:
- To sale, lease or otherwise dispose of the whole or any part of the company’s undertakings.
- To invest otherwise in trust securities.
- To borrow money for the purpose of the company
- To give time or refrain the director from repayment of any debt.
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 the companies whose ordinary business involves the selling of property or to put a property on lease.
Power to constitute an Audit committee
The board of directors are empowered under section 177 to constitute an audit committee. It needs to be constituted of at least three directors, including independent directors. In the committee, the independent directors need to be 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 Stakeholders Relationship Committee
The Board of directors can constitute the Nomination and Remuneration Committee and Stakeholders Relationship Committee under section 178. The Nomination and Remuneration Committee should be consisting 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 consist 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 the bona fide charitable and other funds. When the aggregate amount of contribution, in any case, exceeds the 5% of the average net profit of the company for the immediately preceding financial years, then the prior permission of the company in a general meeting is required.
Power to make a political contribution
Under section 182 of the Companies Act 2013, the companies can make a political contribution. The company making a political contribution should be other than a government company or a company which 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 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 Companies Act 2013. The amount of contribution can be the amount as may be thought fit. This total amount of contribution made should be disclosed in the profit and loss account during the financial year which it relates to.
The directors of a company are like its brain. They have a major contribution to a company’s growth and development and their position is very important for the company. They are given certain powers under the Companies Act 2013 so that they can contribute their best to the company. Along with powers, certain restrictions are also imposed on its exercise to avoid any misuse of such powers.
- Ram Chand & Sons Sugar Mills Pvt. Ltd.v. Kanhayalal Bhargava [(1996)AIR 1899 SC]
- Bath v. Standard Land Co. Ltd. [(1910) 2 Ch 408]
- Singh Avtar, Company Law, 16th Edition (2015), Eastern Book Company