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All you need to know about the board of directors and board of governors under the Companies Act, 2013

August 18, 2020

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This article is written by Chandana, from The Tamil Nadu Dr Ambedkar Law University (SOEL). This article deals with the Board of Directors and Board of governors under Companies Act, 2013.

Table of Contents

Introduction

A company is an artificial person which is managed by human beings. The people who run the company are called the Board of Directors. The directors of the company play a significant role in day to day functioning of the company and they are the people who are responsible for the overall performance of the company. The success of the company depends to a large extent upon the competence and integrity of the directors.

Board of Directors under Companies Act, 2013

Who is a Director?

The term Director is defined under Section 2(34) of the Companies Act, 2013.
According to the definition, a director is a person who is appointed by the board.

What is a Board of Directors?

Board of directors is defined under Section 2(10) of the Companies Act, 2013.
It is defined as the collective body of the directors.
They are constituted to direct, control and supervise the affairs of the board.
As per Section 149 of the Companies Act, 2013, only individuals can be appointed as a member of the board.
Thus, no corporate, association or firm shall be appointed as a director.
Any assignment of the office of directors to any other person shall also be declared as void as per Section 166(6) of the Companies Act, 2013.

Minimum and Maximum number of directors

As per Section 149 of the Companies Act, 2013:

In the case of a public company, it shall have three directors.
In the case of a private company, it shall have two directors.
In the case of a one-person company, it shall have one director.

Maximum directors a company can have is fifteen. In case, a company wants to have more than fifteen, it can have by passing a special resolution.

Every company shall have at least one director who has stayed in India for a total period of not less than 182 days in the previous calendar year.

Committees of the board

Following are the mandatory committees under the Companies Act, 2013

Section 177– Audit Committee.
Section 178– Nomination and Remuneration Committee.
Section 178(5)– Stakeholders Relationship Committee.
Section 135– Corporate Social Responsibility Committee.

Appointment of directors

As per Section 152(1) of the Companies Act, 2013:

The first directors are named in the articles of association.
If they are not named in the articles, the subscribers to the memorandum shall be the first directors of the company until they are appointed by the members as per the act.
In the case of One Person Company, an individual who is a member of the company shall be the first director unless appointed by the individual.

Retirement of directors

As per Section 152(6) of the Companies Act, 2013:

All the directors appointed by the company shall retire by rotation.
Not less than two-thirds of the total director of the public company shall retire by rotation and are appointed at every subsequent annual general meeting.
The retiring director shall be the one who:
- served the longest director in the office since their last appointment.
- the director whose period of office is liable to determination by retirement of director by rotation.

Procedure for appointment of a director other than a retiring director at the annual general meeting

The following procedure is applicable in a public company at the time of appointment of director:

The individual who wants to obtain directorship in the company should give notice to the company at least fourteen days before the meeting and shall deposit INR 1 lakh with the company which shall be refunded at the later date.
On receipt of the notice, the company will inform its members of the candidature of a person for the office of director.
Where individual notice is not practicable, it shall publish the notice before seven days in at least two newspapers circulating in the place where the registered office is situated.
In the case of listed companies, the company is obligated to transfer the copies of the notice to stock exchanges where shares of the listed companies are listed.
Before the general meeting, it is a mandatory requirement for the individual to obtain DIN (Director Identification Number).
The consent form and the declaration to act as the director shall be obtained in form DIR (Director) -2.
The motion to appoint a person other than a retiring director will be taken up.
In the case of a listed company, there is an obligation on the company to send notice and copies of proceedings to the stock exchange where the shares of the company are listed.
When the director is appointed by the company, the company shall refund INR 1 lakh to the director.
The company shall fill the particulars of directors in the form DIR (Director)-12 with the registrar of companies within thirty days of his appointment.
The form shall be signed by the managing director/manager/secretary of the company and the same shall be certified by the chartered accountant/company secretary/cost account who is in whole-time practice.

Disqualification for the appointment of directors

According to Section 164 of the Companies Act, 2013, a person shall be disqualified to act as the director if:

declared by the competent court as unsound mind;
an undischarged insolvent;
application is pending before the competent court to be adjudged as an insolvent;
has been convicted of an offence involving moral turpitude or has been sentenced to imprisonment for a term of six months and the period of five years has not been elapsed from the date of expiry of the sentence;
the order of disqualification has been passed by the tribunal;
has not paid any calls which are held by him and six months have been elapsed from the date of payment of the calls;
has been convinced for an offence of related party transactions; or
has accepted directorships in more than twenty companies.

Section 164(2) of the Companies Act, 2013 states a person shall not be a director in the company which:

has not filed any financial statements or annual returns for a continuous period of three years; or
has failed to:
- Repay the deposits accepted by it;
- Pay any interest;
- Redeem any debentures on the due date; or
- Pay dividends declared.

Such failure continues for more than one year. The director of such company shall be eligible for re-appointment or shall be appointed in any other company for a period of five years from the date on which the said company shall fail to do so.

Rights and duties of directors

As per Section 166 of the Companies Act, 2013, the following are the rights and duties of the directors:

Duty to act as per the articles of the company

The directors of the company shall act as per the articles of the company. They shall not abuse their powers while exercising their duties.

Duty to act in good faith

Directors shall act in good faith while promoting the objects of the company for the benefits of its members and they shall also act in the best interest of the company, its employees, shareholders and the community.

Duty to exercise due care

The directors of the company shall exercise reasonable care, skill, diligence and shall exercise independent judgment while exercising their duties.

Duty to avoid conflict of interest

A director may see that while entering into any business interest, and if any business interest which directly or indirectly may possibly result in a conflict he may avoid it.

Duty not to make any undue gain

A director shall not make any undue gain or get any undue advantage either to himself, partners, relatives and associates.

Duty not to assign his office

A director shall not assign his office during the term of employment and any assignment shall be declared void.

Director Identification Number(DIN)

Rule 2(d) of the Companies (Appointment and Qualification of Directors) Rule, 2014 defines Director Identification Number as an identification number which is allotted by the Central Government to any individual, who is intending to be appointed as director or to any existing director of a company for the purpose of identifying as a director of a company.
According to Section 152(3) of the Companies Act, 2013, no director shall be appointed by the company as a director without obtaining the Director Identification Number.
DIN can be obtained from the Central Government by filing an application in form DIR-3.
Before appointing the director, it is mandatory to get the consent of the director to hold office as a director and it shall be filed in the form DIR-2.
No person shall be appointed as a director without obtaining the director identification number.

Procedure for application for allotment of DIN

The procedure for application for allotment of DIN is provided under the Companies Act, 2013 and Rule 9 of the Companies (Appointment and Qualification of Directors) Rules, 2014 is as follows:

Every person who is to be appointed as a director shall make an application in form DIR-3 (Application for allotment of Director Identification Number) to the Central Government for allotment and submit necessary fees.
After MCA (Ministry of Corporate Affairs) accepts the submission of the application, the applicant shall download the form DIR-3 and fill in required details.
The form DIR-3 shall be digitally signed by the applicant and the form shall be verified by:
- The Chartered Accountant/Company Secretary/Cost Account who is in practice; or
- a Company Secretary, who is whole time in practice or either by the Managing Director or Director of the company in which the applicant is to be appointed to be a director.
- Rule 9(4) of the Companies (Appointment and Qualification of Directors) Rules, 2014 states that if the applicant does not have the last name then his or her father’s or grandfather’s surname shall be mentioned in the last name along with the declaration in form DIR-3A.

Cancellation of DIN

Rule 11 of the Companies (Appointment and Qualification of Directors) Rules, 2014 asserts that the power to cancel the DIN vests with the competent authority.

In the following circumstances, DIN may be either cancelled or surrendered or deactivated:

DIN is found to be duplicated.
DIN obtained either in a wrongful manner or by fraudulent means.
The applicant who has obtained DIN dies.
The applicant has been declared by the competent court as lunatic or unsound mind.
The applicant has been adjudicated as an insolvent.

The important thing to note is before cancellation of DIN, an opportunity of being heard is given to the applicant.

Cancellation of DIN can be filed in form DIR-5 and the central government after verifying the records shall deactivate.

Difference between the board of directors and the board of governors

The Board of Governors mainly serves to coordinate volunteer activity and acts as a bridge between communities and the members of the organization, staff and the management of that organization.

There is not much of a difference between the board of directors and the board of governors.

The difference both depends on the bylaws of the institution or organisation.

The responsibility between both is the same, such as:

Hire and fire executive management.
To form company policy on the distribution of dividend.
Adopting required by laws.
To form a company mission and vision.
Overseeing management.
Appropriate use of donation and funding

Case laws governing directors

Industrial Development Consultation Ltd v Cooley (1972)

In this case, the managing director of the company tried to get from a gas board a government contract. The gas board denied and said that the government would not give the contract to the company but it was willing to give the contract to the director personally. The director resigned because of ill health and later obtained the contract for himself. The court held that the managing director had acted in breach of his duty and therefore must account for it.

Trevor Ivory Ltd v Anderson (1992)

In this case, the director of the one-man company advised a client for spraying an insecticide around the fruit trees. The advice was so negligent that the fruit tree perished along with the parasite. The court taking the circumstances into an account held that the director made it clear that he was trading through the company and the company was a legal contracting party to be charged with the liability.

Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd (1915)

The Merchant Shipping Act, 1874 provided that the shipowner will not be liable for any loss or damages that occur without his actual fault. The shipowner, in this case, is an incorporated company and loss had taken place due to the negligence of the managing director. The company was sued for damages and its defence was that the company, being an artificial company, is incapable of committing an actual fault. Rejecting the contention the court held that the company’s fault is the fault of the somebody who is not merely the servant or agent for whose action the company is liable upon but of somebody for whom the company is liable.

Conclusion

The board of directors formulate policies and establish an organisational set up for implementing those policies and they also help in achieving the objectives which are contained in the memorandum. The position of the board is that of the trustee. They are entrusted with the responsibility to act in the best interest of the company. The board of directors, unless authorised by the board, do not possess any power of management over the affairs of the company.

References

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