This article is written by Vishwendra Prashant, a student of BBA LL.B at ICFAI University, Dehradun. This article discusses the different positions of the directors, and the appointment of directors under Section 152 of the Companies Act 2013. It also deals with some important rules that companies must follow for appointing directors, along with case laws.  

This article has been published by Sneha Mahawar.​​

Introduction

Companies are artificial beings, invisible, intangible, and exist only in contemplation of law. They have neither minds nor bodies. However, companies act through living persons as they have knowledge, objectives, and hands. Therefore, human agents must entrust themselves with the company’s business. Such human agents are known as directors. 

In common parlance, directors determine and implement the company’s policies. The Companies Act 2013 does not contain an exhaustive definition of the term ‘director’. 

Who is a director

As per Section 2(34) of the Act, directors are members of the board of directors in the companies. The board of directors means the collective body of directors of the companies [Section 2(10)]. Moreover, Section 149 provides that private companies must have at least three directors, while private companies must have at least two directors. One person companies have at least one director. Companies may have a maximum of 15 directors. Companies have to pass a special resolution in case of more than 15 directors.

A director is a professional individual hired by the company to direct its affairs. But, in the case of Moriarty v. Regent’s Garage Co. (1921), the Court held that directors are not servants of the companies. They are the officers of the companies. 

Position of a director

Directors may act as agents, trustees, and managing partners.

Directors as agents

The landmark judgment in Ferguson v. Wilson (1866) acknowledged that the directors are agents of companies as per law. The Court said that companies are not living persons; only directors can run the companies. Moreover, the relationship between directors and companies is like principals and agents.

When the directors sign on behalf of companies, the companies are liable, not the directors. In the case of Kuriakose v. PKV Group Industries (2002), the director was not liable in a suit against a private chit-fund company. Moreover, attachment of the managing director’s property was not permissible. 

The directors are the agents of companies and not of their individual members.

Directors as trustees

Directors are not exactly trustees, yet they act as trustees because:

1. They are trustees of companies’ money over which they exercise control, properties, and powers. They have to refund any money improperly paid away. Moreover, they are bound to exercise their powers in the interest of companies and shareholders.
2. Directors manage the affairs of the companies for the well-being of shareholders. Their duty is to perform wholly and entirely because the nature of their office is an office of trust.
3. All their powers are powers in trust. They must exercise such powers in good faith for benefit of companies as a whole. These powers are as follows:

1. To make calls;
2. to forfeit shares;
3. to issue further capital;
4. general powers of management;
5. to accept or refuse a transfer of shares.

The case of Percival v. Wright (1902) pointed out that directors are trustees of companies and not shareholders. Moreover, the case of Peskin v. Anderson (2000) reiterated that directors are not agents or trustees of shareholders and have no fiduciary duties to them.

Directors as organs of companies

Directors and companies are like brains and bodies respectively. However, in the case of Bath v. Standard Land Co. Ltd. (1910), the Court held that the board of directors is the brain of the companies and companies act only through them. 

Directors and managers represent the directing minds or wills of the companies. They control the activities of the companies. As per the law, their state of mind is the state of mind of companies. Therefore, the acts or intentions of directors and managers are the acts or intentions of the companies.

Appointment of a director as per Section 152 of the Companies Act 2013

Section 152 of the Companies Act 2013 came into force on 1st April 2014. As far as the appointment is concerned, this Section deals with the following:

1. Appointment of first directors; and
2. appointment of directors at general meetings.

Appointment of first directors

Section 152(1) of the Act provides for the appointment of the first directors of the companies. The first directors hold their offices from the date of formation of the companies.

As per Section 152(1), the Articles of Association of Companies have provisions through which the companies appoint the first directors. Where the articles do not provide such provisions, the companies consider the following persons as first directors:

1. One-Person Companies: Individuals being members.
2. In other circumstances: Individuals who subscribe to the Memorandum of Associations of companies.

The first directors hold their offices until the members appoint directors as per the provisions of Section 152.

Where, for any reason, for example, death, the first directors do not assume their offices, the subscribers of the Memorandum (who will then be only members) have to convene meetings for the appointment of directors.

Appointment of directors at general meetings

According to Section 152(2), the companies appoint directors in general meetings except where the Act provides otherwise.

However, in the case of public companies, shareholders appoint two-thirds of the total number of directors. They appoint the remaining one-third of the members as per the Articles of Association in general meetings.

In the case of Swapan Dasgupta v. Navin Chand Suchanti (1988), the Calcutta High Court held that the Articles of Association of private companies prescribe methods to appoint directors. If the articles do not specify such methods, the shareholders appoint directors in general meetings. 

Applicable Rules

As far as the appointment of directors is concerned, these are the rules that the companies have to follow:

1. Persons who want to be directors of any company must have Director Identification Numbers (DINs). Otherwise, they are not eligible to be directors [Section 152(3)].
2. Companies must follow the Companies (Appointment and Qualification of Directors) Rules, 2014. The Rules of 2014 also provide the procedures for the allotment and revocation of DINs. 
3. All the proposed persons who want to be directors must furnish their DINs and declarations that they are eligible to become directors under the Act. They furnish such information in general meetings. [Section 152(4)]
4. The persons appointed as directors must give consent to hold offices as directors. Otherwise, they are not entitled to act as directors. Moreover, they must file such consent before the Registrars within 30 days of their appointment. [Section 152(5) of the Companies Act, 2013 & Rule 8 of the Companies (Appointment and Qualification of Directors) Rules, 2014]
5. If the companies hold general meetings for the appointment of independent directors, there would be explanatory statements, in addition to the notices of meetings, that the persons fulfill all the conditions given in the Act for such appointment. [Proviso to Section 152(5)]
6. As per Rule 3 of the Companies (Appointment and Qualification of Directors) Rules, 2014, all the listed companies and public companies must appoint at least one woman director.
7. Rule 9 deals with applications for allotment of DINs before appointment in the existing companies.
8. Rule 17 provides that all companies have to keep registers of their directors. These registers must have particulars such as DINs, full names of directors, their parents names, their spouses’ names (if married), etc.

Retirement of directors

According to Section 152(6)(a), the Articles of the Association of Companies prescribe the retirement of all directors at the Annual General Meetings (AGMs). Otherwise, the directors of public companies retire through rotation. At least two-thirds of the total directors (i.e., rotational directors) are liable for retirement. They may be eligible to be directors in general meetings. 

The remaining directors are appointed as per the Articles of Association in general meetings [Section 152(6)(b)].

One-third of the rotational directors retire annually in Annual General Meetings (AGMs). If their number is neither three nor multiple of three, the number nearest to one-third, retire from office. [Section 152(6)(c)]

Examples:

1. Let’s consider that Company ‘X’ has 9 directors. Then, 

Number of directors liable to retire by rotation (rotational directors)= ⅔*9= 6

Number of directors to retire= ⅓*6= 2

2. Let’s consider that Company ‘Z’ has 12 directors. Then,

Number of rotational directors= ⅔*12= 8

Number of directors to retire= ⅓*8= 2.66= 3 (Upper round off) 

3. Let’s consider that Company ‘C’ has 15 directors. Then, 

Number of rotational directors= ⅔*15= 10

Number of directors to retire= ⅓*10= 3.33= 3 (Nearest round off) 

The directors who were appointed first and held their offices for the longest period will retire first in the AGMs. When persons were appointed as directors on the same day, they would retire through mutual agreements or a lot. [Section 152(6)(d)]

Examples:

1. Let’s consider that a company has three directors A, B, and C. ‘A’ was appointed on 30th November 2020. ‘B’ was appointed on 15 December 2020. ‘C’ was appointed on 25th January 2021. Here, director ‘A’ will retire.
2. Let’s consider that there are three directors X, Y, and Z. ‘X’ and ‘Y’ were appointed on 1 March 2022. ‘Z’ was appointed on 4 March 2022. In this case, directors ‘X’ and ‘Y’ will have to decide through mutual agreement or a lot for retirement.

The Delhi High Court in B.R. Kundra v. Motion Pictures Association (1976) held that directors must not prolong their tenures by not holding meetings on time. However, retiring directors are eligible for re-election.

Reappointment of directors

Companies may fill the vacancies by appointing the retiring directors or other persons in the same AGMs where directors retire. [Section 152(6)(e)]

As per Section 152(7)(a), the general meetings may also resolve that the companies would not fill the vacancies. If the meetings do not decide anything, companies have to adjourn the meetings for a week. If a national holiday is on that day, the companies hold meetings the next day.

According to Section 152(7)(b), if the companies do not make appointments at the reassembled meetings also, nor there are resolutions against the same, the companies would re-appoint the retiring directors except in the following cases:

1. Where the companies put to vote for appointing a particular director, but they lost the resolution.
2. Where the retiring directors have, in writing, addressed the companies or its Boards and expressed their unwillingness to continue.
3. Where the retiring directors incur disqualifications.
4. Where specific or ordinary resolutions are necessary for their appointments through any provisions of the Act. 
5. A motion to appoint two or more persons as directors by a single resolution, if passed without unanimous consent, being void under Section 162, shall not have the effect of reappointment of rotated-out directors.

The explanation to sub-section (7) says that for this section and Section 160, retiring directors mean directors retired by rotation.

Disqualifications of directors

According to Section 164 of the Companies Act 2013, a person is incapable of being a director in the following cases:

1. He is of unsound mind. The Court of competent jurisdiction must certify this fact;
2. he is an undischarged insolvent;
3. he has applied for adjudication as an insolvent and his application is pending;
4. he has committed any offences that are against moral values. Or, he is punishable by at least six months of imprisonment. Or, five years must not elapse from the date of the expiry of the sentence. Moreover, if he is punishable by at least seven years of imprisonment, he can not be a director in any company;
5. the Court has passed an order to disqualify him from being a director;
6. he has not paid his calls in respect of any shares of the company held by him, and six months have elapsed from the date fixed for payment;
7. he is a convict of an offence dealing with party transactions under Section 188 during the last five years;
8. he does not comply with the requirement of the Director Identification Number. [Section 152(3)].

Related Case laws

Ramaswamy Iyer v. Brahamayya & Co. (1966) 1 Comp LJ 107

In this case, the Madras High Court held that the directors are trustees for the companies. They are liable as trustees for the following:

1. Power of applying funds of the companies; and
2. misuse of their powers.

Cardamom Mktg Co. v. N. Krishna Iyer, (1982) 52 Comp Cas 299 (Ker.)

In this case, the Court held that the meetings of the companies must be validly constituted.

Vineet Kumar Mathur v. Union of India [1996] 20 CLA 213 (SC)

In this case, the Supreme Court held that directors as agents make the companies liable even for contempt of Court.

Indian Overseas Bank v. RM Mktg (P) Ltd., AIR 2002 Del 344

In this case, the Court held that if the companies take loans and the directors have not given any personal guarantees to the creditors, the directors are not liable.

H.P. State Electricity Board v. Shivalik Casting (P.) Ltd. [2003] 115 Comp Cas 310 (H.P.)

In this case, the Court held that if the directors furnish sureties in their capacities and not for and on behalf of companies, then the companies cannot be sued for amounts of sureties.

Dale & Carrington Investment (P.) Ltd. P.K. Prathapan [2004] 54 SCL 601 (SC)

In this case, the Court held that directors have to act with utmost good faith, care and skill, and due diligence in the interest of the companies.

Usha Chopra v. Chopra Hospital (P) Ltd., (2006) 130 Comp Cas 483 (CLB)

In this case, the Court held that incorporation makes subscribers the first directors of the companies. The first directors, howsoever appointed, hold offices only up to the date of the first Annual General Meetings of the companies.

Raj Shekhar Agrawal v. Union of India, 2015 SCC OnLine Del 12357

In this case, the Court held that there are procedures for appointing directors. Even if directors are not appointed by following such procedures, promoters would have no right to act as directors.

Conclusion

The directors of the companies are like their brains. They play vital roles in the growth and development of companies. However, the success of the companies depends upon the competence and integrity of the directors. Therefore, the management of companies should be in the proper hands.

The companies appoint the directors in the general meetings, and they retire in the Annual General Meetings. In other words, directors retire through rotation or after completion of the stipulated term. Therefore, the companies inform their directors about the retirement process.

However, companies reappoint retiring directors based on their performance. They may reappoint new directors as well to fill vacancies.

Frequently Asked Questions (FAQs)

What are private and public companies?

Section 2(68) of the Companies Act 2013 defines private companies. As per the Section, these companies have a minimum paid-up share capital of Rs 1 Lac. They don’t have the right to transfer shares. Moreover, these companies have a minimum of 2 members and a maximum of 200 members.

Section 2(71) of the Act defines public companies. As per the Section, public companies are those companies that are not private companies. They can transfer shares. Moreover, these companies have a minimum of 7 members, and there is no limit to the maximum number of members.

What are the Articles of Association (AOA) and Memorandum of Association (MOA)?

Section 2(5) defines the articles of the companies. However, Articles of Association are the bylaws or rules and regulations that govern the internal management of the companies. They are like the partnership deed in a partnership. They set out provisions for how companies would run.

Section 2(56) defines the memorandum of the companies. The Memorandum of Association contains the name, address, capital, objects of the companies and liabilities of their members. Therefore, it is the primary document of the companies. It is also called the Charter or Constitution of the companies. 

What do you mean by general meetings? What are the types of general meetings? Explain in brief.

The Companies Act 2013 has no definition of general meetings. However, companies conduct such meetings for transacting lawful businesses, voting, entertainment, etc.

There are two kinds of general meetings:

1. Annual General Meetings

Section 96 of the Act deals with Annual General Meetings (AGMs). All the companies must call at least one meeting of their shareholders each year. The gap between two consecutive AGMs should not be more than 15 months. A failure in this respect would invite consequences under the Act.

The shareholders should come together once a year to review the functioning of the companies. Moreover, some directors would retire and come up for re-election.

2. Extraordinary General Meetings

Section 100 deals with extraordinary general meetings. All general meetings other than AGMs are known as extraordinary general meetings (EGMs). The Board may, whenever it thinks fit, call such meetings. The EGMs also become necessary on requisition.

What are independent directors?

According to Section 149(6), independent directors are directors other than managing directors, whole-time directors, or nominee directors. Such directors don’t have relationships with the company’s directors. They hold offices for five years on the Board. They remain eligible for reappointment when the companies pass special resolutions.

What are rotational and non-rotational directors?

Rotational directors are those directors who retire by rotation in AGMs every year. The companies appoint such directors in the general meetings.

Non-rotational directors are those directors who do not retire by rotation. Independent and nominee directors are non-rotational directors. The companies appoint such directors in the general meetings and according to the AOA.

What are the procedures for the resignation of directors?

The directors who want to resign must give notice to their companies. According to Rule 15 of the Companies (Appointment and Qualification of Directors) Rules, 2014], the companies have to inform the Registrar within 30 days of receipt of the notice. Moreover, the companies have to post the information on their websites.

According to Rule 16, the directors must forward copies of the resignation to the Registrar within 30 days of resignation. The notice of resignation must have reasons for the same.

What are Director Identification Numbers (DINs)? What is the procedure for the allotment of DINs?

Director Identification Numbers (DINs) are the identification numbers allotted to individuals who want to be directors. They have to make applications as stated in Sections 153 and 154 of the Companies Act 2013.

The Central Government allots DINs under Section 154 within one month of receipt of the applications under Section 153.

What is the validity of DINs? How many DIN can a director have?

DINs have lifetime validity. A director can have only one DIN. However, he can become the director of two or more companies. 

References 

• Dr. Avtar Singh, Company Law, 17th Edition, 2018.
• https://blog.ipleaders.in/director-companies-act-2013/.
• Dr. G.K. Kapoor & Dr. Sanjay Dhamija, Taxmann’s Company Law and Practice (A Comprehensive Text Book on Companies Act 2013), 24th Edition, 2019. 
• https://blog.ipleaders.in/legal-position-of-directors-of-a-company/#:~:text=A%20director%20is%20defined%20under,a%20director%20of%20a%20company

---

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

https://t.me/lawyerscommunity

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.