This article has been written by Nimisha Dublish of the Vivekananda Institute of Professional Studies (VIPS), GGSIPU, New Delhi. The article discusses the legal position of a director in a company as per the Companies Act, 2013. In this article, we will go through the various roles of directors along with their duties and responsibilities to a company.
It has been published by Rachit Garg.
Table of Contents
Introduction
Have you ever wondered how a corporation or company makes decisions? How does an artificial person make decisions and put them into action? The brain behind all the ideation, plans and decisions made by the company is the board of directors. Directors are the ones to make any decisions related to the company. He is the person who has the required knowledge and the intention to run a company. Since an artificial person cannot have all these characteristics, directors are appointed and entrusted with the concerned business. Directors are hired by a company to take care of the company’s affairs. The team of directors is known as the Board of Directors. The Board of Directors is entrusted with the company’s management and well-being. The Board of Directors is the supreme executive authority responsible for controlling the managerial affairs of the company. They are the Key Managerial Personnel (KMP) of the company and are given importance in a company. Key Managerial Personnel (KMP) refers to the full-time employees of the company who are vested with the most important roles and responsibilities. They are responsible for multi-tasking and making tough decisions as well. They are basically a group of people who are trusted with the interests of the company and its shareholders.
There are several roles played by the directors in a company, which we will be discussing in this article. Since a company is an artificial person in the eyes of the law, it has no physical existence. Neither a sole nor a body of its own. So there has to be some agency of humans to control and manage it. People who do so and constitute an agency are known as the Board of Directors. They are in charge of the affair management. The position of directors has always remained complicated because of its nature. Now we know that a company is basically managed and controlled by the directors, the next question that arises in our minds is that if directors govern the company, then who governs and manages the directors? Is there a law? To whom are they liable and what legal position do they hold in a company? Well, all these questions and their answers will be discussed in this article itself.
Who is a company director
A company director is a professional person hired by the company to manage and run its business. A director is defined under Section 2(34) of the Companies Act, 2013 as a person (director) appointed to the Board of a company. No artificial person or entity can be selected for the position of director in a company. Only an individual person can be appointed as a director of a company.
If we think of a company as a separate legal entity, then we can see that the directors are basically termed as the mind and will of the company. This is because they control the actions and behaviour of the company in the business environment. To work in an efficient and effective manner, directors have to work in different capacities many times.
The Companies Act, 2013 makes an attempt to elucidate the duties and responsibilities of the directors of a company. The provisions of the Act clarify the roles, conduct, powers, responsibilities, and duties of a director. Section 149 of Chapter XI of the Companies Act, 2013 discusses some legal requirements of a director in a company. They are as follows-
- Public company- A minimum of 3 and a maximum of 15 directors shall be appointed (out of which at least one-third of the number has to be independent).
- Private company- A minimum of 2 and a maximum of 15 directors shall be appointed.
- One person company- A minimum of only 1 director shall be there.
- There should be at least 1 woman director and a minimum of 1 director must have stayed in India for a minimum period of 182 days in the previous calendar year.
- As per the first proviso of Section 149(1) of the Companies Act, 2013, the number of directors can be increased in certain cases by passing a special resolution.
- As per the notification by the Ministry of Corporate Affairs (MCA) dated 05/06/2015 issued under Section 462 of the Companies Act, 2013, the maximum limit of 15 directors on a board shall not apply to government companies.
- As per the notification by MCA dated 05/06/2015 (amended 13/06/2017) issued under Section 462 of the Companies Act, 2013, the maximum limit of 15 directors is not applicable to licensed non-profit companies which come under Section 8 of the Act.
As per the Companies Act, 2013, the Board of Directors is the primary agent of the company. They are also trustees for the properties and assets held by the company in its possession. This shows that the directors have to play multi-facet roles in the company’s growth and welfare. Generally, the Board of Directors has to act on behalf of the company on all related matters except if it is stated otherwise (in the cases specifically reserved for the company).
Journey of ‘directors’ from Companies Act, 1956 to the Companies Act, 2013
| S. No. | Companies Act, 1956 | Companies Act, 2013 |
| 1. | A maximum of 12 directors can be appointed, whereas the consent of the central government is required to appoint an extra director. | A maximum of 15 directors can be appointed and no consent from the central government is required. Passing a mere special resolution in the board meeting allows the company to appoint additional directors. |
| 2. | Appointing a female director was not mandatory and there were no specific provisions for the same. | Provisions are mentioned that direct a certain class of companies to appoint at least 1 female director (Section 149(1)). |
| 3. | There is no requirement for a director to be a resident of India. | At least 1 director should be a resident of India for a minimum period of 182 days in the previous calendar year (Section 149(3)). |
| 4. | There are no provisions for the appointment of independent directors in the Act. | A minimum of one-third of the total number of directors shall be appointed as independent directors in the case of a public listed company, as per Section 149(4) of the Act. |
| 5. | There are no provisions for the resignation of the director. | The director must give a resignation letter in advance and also provide a copy to the Registrar of Companies within 30 days in order to ensure transparency (Section 168). |
Who can be a director : qualifications and disqualifications
A person can only be appointed as a director if he/she is issued a Director Identification Number (DIN) or any other number as prescribed by Section 153 of the Companies Act, 2013. As per the amendment made in the year 2017, the Central Government may give an identification number to a person which shall be treated as DIN for the purposes of this Act.
An application for allotment of DIN to the Central Government shall be made by a person who intends to be the director of a company as per Section 153 of the Companies Act, 2013. A person who wants to become the director of the company should visit the official website (MCA Portal) to know the procedure.
There have been no professional qualifications prescribed in the Companies Act. Unless it is mentioned in the AOA of the company, a director need not be a shareholder unless he wishes to be one voluntarily. The Act imposes no share qualifications on the directors. In a general scenario, the articles do provide for a minimum number of share qualifications.
As per Section 164(1) of the Companies Act, 2013, a person shall not be eligible for the position of director in a company if-
- He is declared of unsound mind by a competent court.
- He is an undischarged insolvent. An insolvent is a person who is unable to repay his debts and as long as he remains in that position, he is an undischarged insolvent. That is, as long as he has not discharged his debts, he is an “undischarged insolvent.”
- He has applied to be adjudicated as insolvent but the application remains pending.
- He is convicted by a court for any offence. This applies up to 5 years from the date of expiry of the punishment. If a person is imprisoned for 7 years or more than that, then he stands disqualified and is not eligible to be appointed to the post of director in a company.
- If a court or tribunal passes an order directing that he shall not be appointed as a director of a company and the order is still in force.
- If six months have elapsed from the last day fixed for the payment of the calls in respect to any shares, then the person stands disqualified from the post of director in a company.
- Conviction under Section 188 of the Act indulging in any offence dealing with related party transaction at any time during the preceding 5 years.
- He has not complied with Section 152(3) or Section 165(1) of the Companies Act.
- A private company may provide for additional disqualifications in its Articles of Association (AOA) that have not been mentioned above.
Types of directors in a company
Shadow director
A ‘shadow director’ is a director who strongly influences the decisions of the company’s Board of Directors. He does this secretly and acts in the background. He is not formally appointed as a director but has a high influence over the decisions made by the company.
De-facto director
Some people are disqualified from being appointed as directors of a company. In certain cases, these are not formally appointed as a director of a company but performs the functions of a director even though they lack the authority and right to act.
First director
Promoters are the persons who incorporate a company. They appoint certain people as directors of that company, who come to be known as the first directors of the company. The same is evident from the term ‘first directors’ as well.
Additional directors
A person who is appointed as an additional director can hold the office up to the date of the next AGM (Annual General Meeting) or the last date on which the AGM should have been held (whichever is earlier). However, a person who fails to be appointed as a director in an AGM cannot be appointed as an additional director. The Articles of Association (AOA) give the power to appoint a person as an additional director at any time.
Ad-hoc director
In case of any vacancies that may arise due to death, resignation, or any other unforeseen circumstance of a director, an As-hoc director may be appointed by the board of directors. These ad-hoc directors can assume the office until the term of the original director.
Alternative director
If a director remains absent for more than 3 months from the meetings held by the boards, an alternative director is appointed by the board of directors in his place. The alternative director holds the office either till the date of expiry of the tenure or till the original director returns. The difference here between ad-hoc and alternative director is that the position of alternative director is temporary till the original director returns, whereas the position of ad-hoc director remains permanent.
Executive directors
The directors who participate in the day-to-day management of the company. They are also the whole-time directors of the company. These can be found in the roles of finance directors, marketing directors, etc.
Non-executive directors
The directors who do not participate and are not involved in day-to-day management are the non-executive directors of a company. They don’t hold any executive positions in the company and bring an independent voice along with their own perspective to the board of directors.
Rotational directors
The directors retire by rotation from the company’s board, but they may be reappointed after their retirement.
Woman director
There shall be at least one woman director in a company as prescribed by the Companies Act 2013. This is limited to certain classes of companies as per Section 149(1) of the Act. As per Section 149(2), the companies are given a time period of one year from the date of commencement of the act to comply with the mentioned provisions. In the event of a violation of the same, the company is liable under Section 172 of the Companies Act. The requirements of a female director are given in Rule 3 of the Companies (Appointment and Qualification of Directors) Rules, 2014.
Independent directors
Every listed company shall have at least one-third of its total number of directors as an independent director as per Section 149(4) Companies Act 2013. There have been certain provisions and requirements mentioned in Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014. Companies covered by this rule are required to appoint a higher number of independent directors. This is because of its audit committee composition. Independent directors are not entitled to remuneration. They are given only sitting fees and reimbursement of expenses for participation in the board meetings and profit-related commissions. In order to take an unbiased decision, the concept of independent directors was introduced. Independent directors bring stability and accountability to the boarding process.
Legal position of directors
It is really difficult to explain as to what is the exact legal position of directors in a company. There are certain explanations given by the judges for defining directors, sometimes as agents, sometimes as trustees, and sometimes as managing partners. They are the persons who are duly appointed by the company for the purpose of directing and managing the company’s affairs. All the expressions to which directors are referred, like agents, trustees, etc., are not exhaustive of their powers and responsibilities. It was observed in the case of Ram Chand & Sons Sugar Mills Pvt. Ltd. v. Kanhayalal Bhargava(1966), that it is really difficult to exactly explain the legal position of directors in a company. Judges have summarised it as a multi-dimensional position which is held in the capacities of an agent, trustee, or manager, even though these terms don’t hold the same meaning in a true legal sense.
Directors as an agent
As discussed, a company cannot act by itself in its own capacity. It would always need someone to act on its behalf. A company can only act through directors, and this hence makes it a principal and agent relationship. This relationship gives the directors the power to act and make decisions on behalf of the company. Any contract or transaction made on behalf of the company makes the company liable and not the directors. No liability occurs upon the directors, they only sign and make contracts on the company’s behalf.
In the case of Ferguson v. Wilson (1904), it was established that the directors are the agents of the company. This was established in the eyes of the law that a company cannot work as an artificial person in its own capacity that’s why it needs an agent to operate. In the case of Ray Cylinders & Containers v. Hindustan General Industries Limited (1998), it was noticed that directors are the agents of the company but not of the members of the company. This means that the directors are the agents of the company and not its individual members, except in the case where the relationship between the two arises out of special facts. A company is a different legal entity apart from its members, i.e., shareholders.
In the case of Kirlampudi Sugar Mills Ltd. v. G. Venkata Rao [2003], it was noticed that if the CEO of the company executes a promissory note and borrows money from outside for the company’s use, it cannot be said that he has borrowed money for himself. Even if the company fails to pay the amount promised, there shall incur no liability on the one who borrowed money as an agent of the company. However, in the case of H.P. State Electricity Board v. Shivalik Casting (P.) Ltd. [2003], it was established that if a director gives surety in his own capacity/personal capacity and not for and/or on behalf of the company, then the company cannot be sued for the amount of surety. There were some circumstances that were pointed out in the case of Vineet Kumar Mathur v. Union of India [1996] in which the directors incurred liability on themselves-
- In cases where directors contract in their own names rather than the company.
- In cases where directors omit or use the company’s name incorrectly.
- In cases where directors sign the contracts or agreements in such a manner that it is not evident whether it is the company (principal) or the director (agent) who is signing and who shall be liable for future circumstances.
- In cases where directors exceed the allowed limit and borrow in excess of funds.
There are ways in which unauthorised actions can be ratified. In Bhajekar v. Shinkar [1933], it was mentioned that if a transaction made by the director exceeds the power given to him but falls within the ambit of the power held by the company, then it can be ratified by passing a resolution of the company. However, if the company has been struck off by the registrar and dissolved, then it cannot ratify its actions. This is because a non-existent entity cannot initiate action in the first place.
Director as a trustee
In a company, a director is regarded as a trustee as well. A director is known as a trustee because he administers the assets and works toward the interests of the company. A trustee is someone who can be entrusted with the company’s assets and performs towards achieving the company’s goals rather than for their personal advantage. Besides these, a trustee is given powers like allotment of shares, making calls, accepting or rejecting transfers, etc., which are known as powers in trust. In the case of Dale & Carrington Investment (P.) Ltd. v. P.K. Prathapan [2004], it was noticed that the directors have to act within their fiduciary capacity, which means that they have a duty to act on behalf of the company with the utmost care, skill, good faith, and due diligence, most importantly towards the interests of the company that they are representing.
As observed by the Madras High Court in the landmark case of V.S. Ramaswami Iyer v. Brahmayya and Co. (1966), the directors can be rendered liable as trustees with reference to their power to apply funds of the company. A director may misuse these in many ways. Due to this, if legal action is taken against a director with reference to the mentioned offence, then the cause of action will survive even after the death of the director against his legal representative. In both the cases of Percival v. Wright (1902) and Peskin v. Anderson (2001), it was held that the directors of a company owe their duty to the company as a whole, and are not trustees for individual shareholders or owe them a fiduciary duty merely by virtue of their offices. They may purchase their shares without disclosing pending negotiations for the sale of the company’s undertaking.
Director as a managing partner
The directors of a company represent the shareholders’ will and wants. They tend to act on behalf of the shareholders and their goals. Due to this, they enjoy vast powers and can perform many functions that are proprietary in nature. Due to the provisions mentioned in the MOA and AOA of the companies, the board of directors acts as the supreme policy and decision-making authority.
Director as an employee/officer
Shareholders elect directors in a general meeting held by the company. Once the director is elected, he then enjoys the rights and powers that are given to him as per the Act. These powers and rights cannot be taken away by the shareholders and they cannot interfere in the decision-making of the directors as such. Since directors possess such powers and rights, they cannot be termed employees of the company. This is because employees have limited authority vested in them and always work under the directions of the employer and cannot interfere in the employer’s decision-making.
In the case of Lee Behrens & Co., Re [1932], it was seen that it is the shareholders who elect their representatives who shall engage in directing the affairs of the company on their behalf. This means that they are acting in the capacity of an agent in this scenario. It can also be seen that they are not the employees or servants of the company. However, in the case of R.R. Kothandaraman v. CIT (1957), was held by the Madras High Court that since there is nothing mentioned in the law, no one can prevent the director from accepting his position as an employee under a special contract made with the company.
Directors are also treated as an officer in a company for certain matters. They can be held liable for penalties for failure to comply with the law. To summarize the legal position of directors in a company, Jessel M.R can be quoted from Forest of Dean Coal Mining Co., Re [1878], “Directors have sometimes been called as trustees or commercial trustees, and sometimes they have been called managing partners; it does not matter much what you call them so long as you understand what their real position is, which is that they are really commercial men managing a trading concern for the benefit of themselves and of all the shareholders in it. They stand in a fiduciary position towards the company in respect of their powers and capital under their control.”
Conclusion
Directors are the persons who are bound by the law to act in a fair and reasonable manner while fulfilling their duties and company goals. A director acts as an agent and also has a fiduciary relationship with the company. All these roles of the director go hand in hand. There has not been much clarity upon the exact legal position of directors but they are bound by required law if they exceed or misuse their powers. However, directors do have their own independent powers in certain cases, unlike agents who only have to act on the instructions as given by the principal. The directors are also entrusted with the company’s assets and their administration. They must use their powers judiciously and must act in good faith and in the interest of the company.
In the end, it can also be said that the directors have an identity of their own as well. It is just that they possess certain characteristics of agents, trustees, and managing partners, but they are not the whole of it. Hence, it can be said that they are neither agents, trustees nor managing partners of the company. The director’s duties and responsibilities have been clearly defined in the Companies Act of 2013.
Frequently Asked Questions (FAQs)
How many directors can be appointed according to Section 149 of the Companies Act, 2013?
A maximum of 15 directors can be appointed as per Section 149 of the Companies Act, 2013.
In how many companies can a person become a director?
A person cannot be a director in more than 20 companies at a time. In the case of a public company, a person can be a director of a maximum of 10 companies. Section 165 of the Companies Act, 2013 discusses this matter.
Are both shareholders and directors the owners of the company?
Both shareholders and directors have different roles to play. Shareholders are the member/owner of the company, whereas the directors manage the company and its functions.
Is an independent director an employee of the company?
An independent director cannot be an employee, proprietor, or partner of the company in the preceding 3 financial years.
Do private companies need independent directors?
The provisions of independent directors don’t apply to private companies. Companies like joint ventures, wholly-owned subsidiaries, and dormant companies are exempted from the requirement of appointing an independent director.
References
- https://cleartax.in/s/disqualification-of-directors#:~:text=Under%20company%20law%2C%20a%20director,declared%20so%20by%20the%20court.&text=However%2C%20if%20a%20person%20has,a%20director%20in%20any%20company
- https://taxguru.in/company-law/appointment-directors-section-152-companies-act-2013.html
- https://www.taxmann.com/post/blog/6595/all-about-the-directors-of-a-company/
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