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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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Board of Directors

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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.

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?

What is a Board of Directors?

Minimum and Maximum number of directors

As per Section 149 of the Companies Act, 2013:

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

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

Appointment of directors

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

Retirement of directors 

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

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:

  1. 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.
  2. On receipt of the notice, the company will inform its members of the candidature of a person for the office of director.
  3. 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.
  4. 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.
  5. Before the general meeting, it is a mandatory requirement for the individual to obtain DIN (Director Identification Number).
  6. The consent form and the declaration to act as the director shall be obtained in form DIR (Director) -2.
  7. The motion to appoint a person other than a retiring director will be taken up.
  8. 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.
  9. When the director is appointed by the company, the company shall refund INR 1 lakh to the director.
  10. 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.
  11. 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:

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

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)

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:

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:

  1. DIN is found to be duplicated.
  2. DIN obtained either in a wrongful manner or by fraudulent means.
  3. The applicant who has obtained DIN dies.
  4. The applicant has been declared by the competent court as lunatic or unsound mind.
  5. 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:

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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