Companies-Act

This article is written by Amrit Kaur, a student of Dr. B.R. Ambedkar National Law University, RAI, Sonepat. The article gives an overview of the directors of companies under the Companies Act 2013.

Introduction

The well-being of a company lies in the hands of the directors, who are also accountable for the firm’s and the shareholders’ interests. Directors are fundamentally fiduciary agents who owe responsibilities to the company. Directors are hired by the company’s shareholders to administer the company’s operations in the best interests of the shareholders. Furthermore, no company can achieve success without having excellent and honest directors, therefore corporate success can only be reached if the company’s directors fulfill their obligations and completely enforce the director’s duties. As a result, directors play a critical role in every corporate governance mechanism. The general obligations of the director are founded on certain common law norms and equitable principles.

Modern shareholders are more conscious of their obligations than ever before and they wield more influence than anybody can imagine. With the arrival of the Shareholders Revolution, there has been a democracy in business matters in which the shareholders are the supreme power that selects its cabinet in the form of directors to run the show and create money for them. The directors are given the appropriate authority, but also additional responsibilities, during the process. The Companies Act of 2013 has guaranteed that this balance of power and duties is preserved to the greatest degree possible for the benefit of the shareholders and to ensure corporate governance. It employs both regulatory and punitive measures, including rigorous judicial measures, to guarantee that regulations are effectively obeyed and to avoid any mishaps in corporate governance, as well as to protect the organization’s legal integrity.

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Corporate governance

Corporate governance refers to a collection of principles, ethics, values, morals, rules, laws, and processes, among other things. Corporate governance provides a structure in which directors of a company are charged with the tasks and responsibilities pertaining to the management of the company’s activities.

The term “governance” denotes “control,” as in “controlling a company, an institution, etc.,” or “corporate governance,” as in “governing or controlling corporate entities,” such as ethics, values, principles, and morals. To have excellent corporate governance, the director must satisfactorily perform his/her duties towards the company’s owners (shareholders), creditors, staff, clients, government, and society at large. Corporate governance aids in the establishment of a system in which a director is entrusted with the tasks and obligations of the company’s operations. For successful corporate governance, its rules must be such that the company’s directors do not abuse their authority, but rather understand their obligations and responsibilities towards the company and act in the best interests of the firm in the largest context.

The idea of ‘corporate governance’ is not a goal in itself; it is only the beginning of a company’s growth for long-term profitability.

Directors and the board of directors in a company

The term “director” is defined under Section 2 (34) of the Companies Act 2013 as “a director appointed to the Board of a company,” where “Board of Directors” or “Board” in relation to a Company refers to the collective body of the firm’s directors. According to Chapter XI, Section 149 of the Companies Act 2013, every company must have a Board of directors, the composition of which should be as follows:

  1. Public Company: A minimum of three and a maximum of fifteen directors should be appointed. Also, at least one-third of the directors must be independent.
  2. Private Company: Minimum of two and a maximum of fifteen directors are required for a private company.
  3. One Person Company (OPC): A minimum of one director must be appointed.

In every Company format, a maximum of 15 directors can be appointed (OPC, Public, Private). By passing a special resolution in the company, the number of directors can be increased above 15. Out of all the appointed directors, one must have resided for more than 182 days in India in the preceding calendar year. Also, at least one of the directors among all the directors should be a woman director.

The Companies Act of 2013 recognizes the concept of an independent director, which was previously solely part of the listing agreement. It refers to a director who is not a full-time director, the Managing director, or a nominee director and meets the qualifications outlined in Section 149 of the Act.

According to sections 266A and 266B of the Companies Act of 1956, a Director Identification Number (DIN) is a one-of-a-kind identification number assigned to existing and/or future directors of any incorporated company. According to the requirements of the Companies Act, every director shall be selected by the company in general meetings, provided they have been assigned the Director Identification Number (DIN) and have submitted a statement that he/she is not disqualified to become a director.

The Board of Directors appoints an additional director to serve until the next general meeting using the Board’s inherent power. The Board of Directors may designate an alternate director to function as a director in absence for a term of not less than three months and not more than the allowed period for the director who is being replaced.

The Board may appoint as a director any individual nominated by any institution in accordance with the terms of any extant legislation or other government regulation or shareholdings, such directors are known as nominated directors.

As per Principle of Proportional, representation the articles of a company may allow for the appointment of not less than two-thirds of the total number of directors of a company, and such appointments may be made once every three years and casual vacancies of such directors shall be addressed as specified in sub-section (4) of Section 161.

Responsibilities of the board of directors

A company’s board of directors is largely responsible for:

  • Formulating the company’s strategic goals and policies;
  • Tracking progress toward attaining goals and policies;
  • Designating the senior management; and
  • Accounting for the company’s actions to appropriate parties, such as shareholders.

Powers of the directors of a company

Most corporations have not included a separate article or passed a resolution stating that directors do not have the authority to conduct certain tasks. However, the Act requires a resolution at a general meeting to specify this sort of power. The following decisions should be taken by the directors, but generally also requires  shareholder approval through a resolution:

  • Loans to the directors
  • Fixed-term employment contracts of directors for more than two years.
  • Significant property transactions in which the directors have a personal stake.
  • The issuance of the shares.

The directors are granted the above-mentioned powers collectively. Actually, the board is to delegate authority to the concerned director in order to do this. This is permitted by both the Model Articles and Table A of the Act.

Types of directors

Residential director

According to Section 149(3) of the Companies Act of 2013, every company must have one director who has spent at least 182 days in India in the previous calendar year.

Independent director

According to Section 149(6), an independent director with reference to a company is one who is not a managing director, whole-time director, or nominee director. Companies that must appoint an independent director are mentioned in Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014. The following companies must nominate at least two independent directors:

  • Public Companies with Paid-up Share Capital of Rs.10 Crores or more;
  • Public Companies with a turnover of Rs.100 crores or more;
  • Public companies having total outstanding loans, debentures and deposits of Rs. 50 crores or more.

Individuals qualified for independent directorship:

  1. Who, in the board’s viewpoint, is a person of integrity and possesses appropriate expertise and experience;
  2. 1.  Who is or was a promoter of the Company or any of its Holding, Subsidiary, or Associate Companies (HSA Companies);

2.  Who is not connected to the company’s promoters or directors, or its HSA companies;

  1. Who has or has not had a Pecuniary (Money) relationship with the company and its HSA company, or their promoters or directors, during the two most immediately preceding fiscal years or the current fiscal year;
  2. None of whose relatives has or has had a financial relationship with the company, its HSA company, or their Promoters, directors, amounting to 2% or more of the firm’s gross turnover or total income, or fifty lakhs, or such greater amount as may be prescribed, whichever is less, during the two most recent preceding fiscal years or during the current fiscal year.
  3. Who, neither he nor any of his relatives-
  1. Holds or has held the post of Key Managerial Personnel (KMP) or has worked for the Company or its HSA companies in any of the three fiscal years;
  2. He or any of his relatives has an employee or owner or a partner in any of the three fiscal years immediately preceding the fiscal year in which he is suggested to be hired, as an auditor in the firm, Company Secretary in practice, Cost Auditor, Legal Consultant of the company or its HSA companies;
  3. Holds along with his relatives 2 per cent or more of the Company’s total voting power;
  4. He or she has not been the Chief Executive or director of any Non-Profit Organization that receives 25% of its revenue from the Company or HSA Companies or its Promoters or directors, or that NGO owns 2% or more of the Company’s total voting power.

      F.   Who holds any other qualifications that may be needed.

Some general points:

  • Tenure of an independent director

An independent director can serve for up to 5 consecutive years. He is also eligible for reappointment by passing a special resolution, and this requires his reappointment in the Board’s Report. However, he may not hold office for more than two consecutive terms, and he shall be ineligible to be appointed after three years after ceasing to be an independent director.

  • Independent director’s remuneration

According to Section 149(9) of the Act, an independent director is not eligible for stock options. They may, however, be remunerated in the form of a fee as per Section 197(5) of the Act. Sitting fees for Board of Directors and other committee meetings must not exceed Rs. 1,00,000 per meeting.

Small shareholders directors

A single director can be appointed by small shareholders in a listed company.  However, this action requires an appropriate procedure, such as issuing a notice to at least 1000 shareholders, or one-tenth of the total shareholders.

Women director

According to Section 149 (1) (a) second proviso, certain kinds of corporations must have at least one female director on their board. Such companies include any listed company and any public company, having:

  1. Paid-up capital of at least Rs. 100 crore, or more,
  2. Turnover of Rs. 300 crore or higher.

Additional directors

Section 161(1) of the 2013 Act allows a company to designate any individual as an additional director.

Alternate directors

According to Section 161(2), a company may appoint an alternate director if the Articles of Incorporation grant such authority to the company or if a resolution is approved. An alternate director is appointed if one of the company’s directors is abroad from India for at least three months and in his/her absence, the alternate director is appointed.

  • The tenure of an alternate director cannot be longer than the term of the director in whose place he has been appointed.
  • Furthermore, he will be required to vacate the post if and when the original director returns to India.
  • Any changes to the term of office made during the absence of the original director will only affect the original director and not the alternate director.

Shadow director 

A person who is not appointed to the Board but whose instructions the Board is accustomed to act is responsible as a director of the company unless he or she is offering advice in his or her professional role.

Nominee directors

They can be nominated by certain shareholders, third parties via contracts, lending public financial institutions or banks, or the Central Government in cases of tyranny or mismanagement.

Difference between the executive and non-executive director

An executive director of a company can be either a whole-time director (one who devotes his whole working hours to the company and has a significant personal interest in the company as his source of income) or a managing director (i.e., one who is employed by the company as such and has substantial powers of management over the affairs of the company subject to the superintendence, direction, and control of the Board). A non-executive director, on the other hand, is a director who is neither a whole-time director nor a managing director.

Duties of a company’s directors under the Companies Act, 2013

Section 166 of the Companies Act 2013 stipulates the following duties of the directors of a Company:

  1. A director must function in line with the company’s Articles of Association.
  2. A director must act in the best interests of the company’s stakeholders, in good faith and promote the company’s objectives. 
  3. A director shall use independent judgment in carrying out his responsibilities with due care, skill and diligence.
  4. A director should constantly be aware of potential conflicts of interest and endeavour to avoid them in the best interests of the firm.
  5. Before authorizing related party transactions, the director must verify that appropriate considerations have taken place and that the transactions are in the company’s best interests.
  6. To assure that the company’s vigilance mechanism and users are not prejudicially affected on such use.
  7. Confidentiality of sensitive proprietary information, trade secrets, technology, and undisclosed prices must be protected and should not be released unless the board has approved it or the law requires it.
  8. A company’s director may not assign his or her office, and any such assignment shall be invalid.
  9. If a corporate director violates the terms of this section, he or she will be fined not less than one lakh rupees but not more than five lakh rupees.

The Companies Act of 2013 additionally assigns specific obligations to independent directors in order to ensure the Board’s independence and fairness. An independent director is a member of the Board of Directors who does not own any shares in the company and has no financial ties to it other than receiving the sitting fees. According to the Companies Act of 2013, Schedule IV, an independent director should:

  1. Protect and support the interests of all stakeholders, particularly minority stakeholders.
  2. In the event of a conflict of interest among the stakeholders, then he/she should act as a mediator in that situation.
  3. Provide assistance in delivering an impartial and fair decision to the Board of Directors.
  4. Should pay adequate care to transactions involving related parties.
  5. To honestly and impartially report any unethical behaviour, violation of code of conduct or any suspected fraud in the company.

Liability of directors

For any and all acts harmful to the company’s interests, the directors might be held jointly or collectively liable. Despite the fact that the director and the Company are different entities, the director may be held responsible on behalf of the Company in the following situations:

  • Tax Liability: Unless a director or a past director can show that the non-recovery or non-payment of taxes is due to gross negligence or breach of duty, then any present or past director (during the defaulter’s time period) will be responsible to pay the tax deficit as well as any related penalties.
  • Refunding a share application or excess portion of a share application amount.
  • To pay the expenses of qualification shares.
  • In the event of a misrepresentation in the prospectus, there lies a  civil liability.
  • Fraudulent Business Conduct and all connected debts and contracts signed.
  • Failing in providing disclosures as stipulated under SEBI (Acquisition of Shares & Takeovers) Regulations, 1997 and SEBI (Prohibition of Insider Trading) Regulations, 1992 by the directors might lead to legal proceedings by the Securities and Exchange Board of India (SEBI).

Disqualification for appointment of the directors of a company

A person is ineligible to be appointed as a director of a corporation if:

  • He is mentally unstable and has been proclaimed such by a competent court.
  • He is insolvent without being discharged.
  • He has applied for his insolvency adjudication but his application is pending.
  • He was found guilty and imprisoned for at least six months in jail and five years from the expiry of his term are still remaining.
  • He was found guilty and sentenced to a minimum of seven years or more in prison.
  • A court or tribunal has issued an order disqualifying him from serving as a director and the order is still in effect.
  • He has not paid any calls in respect of any of the company’s shares that he owns and six months have passed from the last day fixed for payment of the call.
  • He has been convicted of the offence of related party transactions under Section 188 at any point in the previous five years.
  • He does not have a DIN number.
  • A person who is a director of a firm that has not submitted financial statements or annual returns for five years in a row, until the five-year period from the date of default expires.
  • A director of a business that has failed to repay deposits, debentures, or to distribute dividends for a period of one year, until the expiration of five years from the date of default
  • Additional disqualifications might be included in the Articles of  private companies.

Evolution of directors from Companies Act of 1956 to 2013

  • Under the Companies Act, 1956, the maximum number of directors in a company was 12 and appointing extra directors required the consent of the central government. Whereas the Companies Act, 2013 allows for a maximum of 15 directors and additional directors can be appointed by approving a special resolution in a meeting, as stipulated for in Section 149(1) of the Act. As a result, it is clear that the permission of the central government is not required under the current legislative framework.
  • There were no provisions in the 1956 Act mandating the appointment of a female director. Whereas Section 149(1) of the Companies Act, 2013 states that one woman director must be appointed in a prescribed class or classes of companies.
  • Under the Companies Act, 1956, there was no requirement for a Resident director, however, under Section 149(3) of the Companies Act, 2013, every company must have at least one director who has resided in India for a total of not less than 182 days in the preceding calendar year.
  • There was no provision in the Companies Act, 1956 that required independent directors, whereas under Section 149(4) of the Companies Act, 2013, every listed public company must have at least one-third of its total number of directors as independent directors, and the Central Government may recommend the minimum number of independent directors in the case of any class or classes of public companies.
  • The duties of a director were not stipulated in the 1956 Act, however, they are explicitly stated in Section 166 of the Companies Act, 2013.
  • The maximum number of directorships under the 1956 Act was 15, but under the Act of 2013, the maximum number of directorships is 20, of which 10 can be public companies. Furthermore, the new statute includes alternate directorship, which was not previously included in the 1956 Act.
  • The Companies Act, 1956 had no specific provision for a director’s resignation, but Section 168 of the Companies Act, 2013 allows a director to resign by presenting a resignation letter. He must also provide a copy of his resignation letter to the Registrar of Companies within 30 days to guarantee transparency.

Important judgments 

Re: City Equitable Fire Insurance Company Ltd (1925)

It is a case involving the responsibilities of directors of a company in which it was discovered that the directors of the insurance company had delegated almost entirely the administration of the company’s operations onto the chairman of the company, which was the primary cause for the commission of frauds. It was thus decided that in the course of their work, the directors of the firm must observe the duties of care and skill required.

Regal (Hastings) Ltd v. Gulliver (1942)

In this case, the Court held that directors are liable to the company if it can be proven:

  • That what the directors did was related to the company’s affairs to such an extent that it could be said to have been done in the course of their management and in the use of their opportunities and special knowledge obtained by them by virtue of being directors.
  • That they made a profit as a result of their actions.

Weeks v. Propet (1873)

The firm borrowed money in excess of its borrowing capacity, resulting in ultra vires debts. The directors were found to have breached their warranty. When the directors made an ultra vires contract with a connected person and the members failed to rectify the same, the directors were held responsible. Such a contract was not held to bind the company and such a connected individual was given the liberty to sue the directors for breach of warranty.

Bates v. Standard Land Co. (1911)

The main issue in this case, was, when presented before a court, was there a distinction between a person’s personality and that of a company. It was therefore held that the board of directors was the corporation’s only brain and that the company could only act via them. Nonetheless, the company could be a legal person like a natural person, in many instances. It has the ability to engage in contracts and sue or be sued in its name, either by its members or by outsiders. However, it is not a citizen who may enjoy the Fundamental Rights guaranteed by the Indian Constitution.

Conclusion

An analysis of the provisions of the 2013 Companies Act reveals that the 2013 law is effective in addressing the gaps left by the preceding legislation, the 1956 Act. Though the 2013 Act was implemented in a phase-wise manner, and it wasn’t until 2019 that the 1956 Act was entirely abolished. The 2013 Act has effectively modernized India’s corporate law framework, putting it on par with corporate regulation throughout the world. Moreover, the 2013 Act’s provisions relating to the directors of a company are more clear and evident when compared to those of the 1956 Act.

References

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