This article is written by Shriya Singh. It seeks to discuss in detail the various types of directors the Companies Act of 2013 provides a corporate entity with. It describes the functions and duties of various directors, along with their disqualification criteria, as well as discusses how the vacancy in the office could be filled. The article also provides for case laws pertaining to such directors and their appointments.
Introduction
A director is an individual who is a member of the board of directors of a company and has diverse skill sets and experience to effectively guide and govern the corporate organisation. He participates in the important decision-making of a company, which affects its overall growth and development, both in terms of its financial and long-term success.
They are under the obligation of meeting both the regulatory and legal requirements for the company under the various laws and guidelines. They also play a very prominent role in maintaining good corporate governance practices for the company, as they monitor performance, set policies, and comply with the ethical standards provided within the organisation.
As important as the individual seems, so are his duties, appointments, removal, or resignation, as well as welfare. If he works right with full dedication, the company does nothing but shine. However, if he runs south, the company sees a downfall.
Who is a director
The Companies Act of 2013 does not define the term director, but Section 2(34) of the Companies Act of 2013 provides that a director means a director that is appointed to the board of directors of the company. The role of the directors of a company is very crucial in nature, as they are directly responsible for its success or failure.
Bowen, L J., described that directors act as agents, sometimes as trustees, and sometimes even as managing directors.
A company cannot act through itself. It can only act through persons, and the persons it acts through are known as directors. Thus, embarking on a relationship of principal and agent between the company and those persons. The above-mentioned relationship has also been held up in a number of judicial pronouncements such as Himachal Pradesh State Electricity Board v. Shivalik Casting Pvt. Ltd (2004).
And as a lot of provisions of the memorandum of association and articles of association give vast powers of management to the directors, they act as the supreme decision-making body, which is why they fit right into the spheres of managing partners.
What is the role/ function of directors in a company
Section 166 of the same Act, 2013 provides for the duties to be carried out by all the directors, given as below:
- He must always act in accordance with the articles of association of the company.
- He shall always act in good faith and must promote the objectives of the company according to the interest of the company, benefiting its members, employees, shareholders, and community, and also in light of the protection of the environment.
- He must never be careless in exercising his duty with due diligence, reasonable care, skill, and independent, prudent judgement.
- He must refrain from indulging in a situation in which he might have a direct or indirect interest, as it may conflict with the interest of the company in one way or another.
- He must never intend to achieve any undue gain or advantage and must never even attempt to achieve the same, for himself, for his relatives, or for his partners or associates. On being found guilty, he shall be punished with the penalty amount, which equals to that gain to the company.
- He is not allowed to assign his office, and if he ever does so, that shall be held void.
- If any director of the company contravenes this particular section, then he shall be punishable with a fine which will not be less than Rs. 1 lakh and may extend up to Rs. 5 lakh.
Director Identification Number
To be a director in a company, there is one prerequisite of the Director Identification Number (DIN) as per Section 153 of the Act, 2013, without the allotment of which no person shall be appointed as a director of any company, and one can apply for DIN at https://www.mca.gov.in/MinistryV2/applyfordin.html.
The requirement has been laid down by the Companies (Appointment and Qualification of Directors) Amendment Rules, 2018, which requires every applicant to make an application electronically in the required form to the central government for the allotment of its DIN.
Types of directors as per Companies Act, 2013
In a company, there can be various directors based on their roles, responsibilities, and functions within the corporate organisation.
Some of the types of directors are listed below:
First directors
First directors are the directors whose names are expressly provided in the articles of association of a company. If the article of association of a company is silent, then the promoters will appoint the first directors of the company and if the promoters do not appoint them, then the individual subscribers to the memorandum of association are deemed to be the first directors of the company.
The first directors enjoy the term of being so until the directors are finally appointed by the company.
Executive directors
Executive directors are directors who operate for the firm on a full-time basis and take an active role in its ongoing day-to-day management and operations. They actively participate in decision-making, the execution of strategies, and the management of several affairs within the company. Operations, finances, and administration are frequently handled by executive directors. In addition to their usual fixed income, they may also get bonuses and other incentive payments based on performance. The financial statements of the company include information pertaining to their remuneration.
Non-executive directors
Non-executive directors are the individuals who serve on the board of directors of a company but aren’t actively participating in the everyday affairs or management of the organisation as a whole. In order to offer unbiased and objective opinions on the issues of a company, some independent non-executive directors are appointed. They have the potential to enhance corporate governance and add an impartial viewpoint to the board’s deliberations. Independent and non-executive directors commonly serve as expert consultants to the board and management of the company. They might contribute to strategy remarks, attend board meetings, and offer advice based on their expertise. They are in charge of regulating the executive directors and the company’s management’s operations. They are essential in making sure that rules, laws, and moral guidelines are followed within the company. The remuneration for non-executive directors’ services tends to be determined by the stockholders of the company.
Rotational directors
Section 152(6) of the Companies Act 2013 states that a company must have a minimum of two-thirds of its total directors as rotational directors. However, the articles of association of the company can provide for a much higher limit for the same.
Also, here, total directors do not include independent directors and nominee directors if appointed by financial institutions under any special Act.
Out of the two-thirds of such rotational directors, one-third must compulsorily retire by rotation in the annual general meeting of the company.
The term for the rotational directors is not fixed.
The retirement would be based on which director was for the longest time in the office. If the directors were appointed on the same day, then they could mutually decide who would retire, and if they couldn’t come to a decision, then the lot system would come to the rescue.
There are three ways in which the vacancy that arises from the retirement of such directors at every annual general meeting can be dealt with:
- The retired director could be reappointed or
- The vacancy could be fully filled by making a new appointment of a director, or
- A resolution could be passed to keep such a vacancy alive.
If the company cannot do the above-mentioned things, then the meeting shall be adjourned, and in the subsequent meeting, it would be expected that the vacancy would be filled by using the chosen method from the above 3 categories. If no appointment happens at the subsequent meeting, then there will be an automatic reappointment of the retired director.
But such an automatic reappointment would not happen if
- The director shows his unwillingness to be appointed again.
- He becomes disqualified to be a director of the company.
- A resolution has been put up with the company for his re-appointment, but it was not successful.
- The articles of association of the company state that resolution would be required for such re-appointment of the director retiring at the annual general meeting.
Exemption
The provision of rotational directors does not apply to
- Private company
- Unlisted government company or its subsidiary company
Non-rotational directors
Section 152(7) of the Companies Act of 2013 states that the names of the non-rotational directors would be provided under the article of association of the company. The term for such non-rotational directors would be fixed, and they should be a maximum of one-third of the total directors of the company.
Like rotational directors, here too, total directors do not include independent directors and nominee directors if appointed by financial institutions under any special Act.
Exemption
The provision for non-rotational directors does not apply to
- Private company
- Unlisted government company or its subsidiary company
Additional directors
Section 161 of the Companies Act of 2013 states that if the articles of association of a company provide for the clause of additional directors, then the board of directors can appoint them just by passing a board resolution.
The term for an additional director is either till the conclusion of the annual general meeting or, in cases where the same is delayed, the last date of the annual general meeting, or if the postponement of the annual general meeting has been in accordance with the permission of the registrar of the company, then on a such date.
A director would not be eligible to become an additional director if his appointment had been rejected at the general meeting.
Alternate directors
For the appointment of an alternate director, the first requirement is authorisation by the article of association of the company.
It is only then that an alternate director can be appointed if the original director has gone outside India for a time period of 3 months or more.
The power to appoint alternate directors vests with the board of directors of a company. The existing directors of a company cannot be the alternate directors of the same company.
It is pertinent to note that one person can be an alternate director for only one director in one company. For different companies, the same person can be an alternate director.
For example, A is a director of X Ltd. as well as Y Ltd. For the treatment of his family members, he is required to stay outside India for roughly four or five months. At the same time, B, a director of X Ltd., also had to go outside India for personal reasons for 3 months. When the alternate director is appointed it would be in such a manner that Section 161 of the Companies Act of 2023 is not compromised. Suppose C is appointed as an alternate director in place of A at X Ltd., Now, C cannot be appointed as an alternate director for B in X Ltd but C can be appointed as an alternate director for A in Y Ltd.
An alternate director also has to fulfil all the conditions of an independent director if the original director whose place he would be taking is an independent director.
The term for an alternate director is limited to when the original director comes back or at the expiration of the term of the original director, whichever event occurs earlier.
Casual vacancy directors
In the event of the death of a director appointed by shareholders, his resignation, his removal, or his disqualification, a casual vacancy director can be appointed in place by the board of directors of a company as per Section 161 of the Companies Act of 2013. To nominate a casual vacancy director, a board meeting has to be taken up to pass board resolution as such an appointment cannot be made by circulation. In the subsequent general meeting, the ordinary resolution to the effect is also a necessity for the appointment of a casual vacancy director.
Resident directors
A resident director is a director who has stayed for 182 days or more in India in the past one year. And if the company so incorporated has not surpassed 1 year since its commencement, then the requirement would be seen proportionately.
For example, if only 9 months have passed for the company to be in existence, then the requirement for resident directors would be seen for 141 days (182 x 9/12).
Independent director
Section 149(6) of the Companies Act of 2013 states that an independent director means a director other than a managing director, a whole-time director, or a nominee director with regard to a company. The Securities Exchange Board of India (Listing Obligations and Disclosure Requirements), 2015 adds to it by stating that an independent director is a non-executive director, which in simple terms means that he would not have the power to make executive decisions but would act like a watchdog.
It states that the company and independent directors must abide by the provisions of the code of conduct that is provided in Schedule IV.
The schedule acts as a guide for conduct to be carried out by independent directors. It lays down the required standards to be followed in regard to professional conduct, roles and functions, duties, manner of appointment, re-appointment, meetings, resignation, and removal.
Requirement of independent directors
Section 149(2) of the Companies Act of 2013 states that every listed company must have one-third of its total directors as independent directors. For this purpose, any fraction contained in such a one-third number must be rounded off as one.
It further states that the Central Government may prescribe a minimum number of independent directors for any class or class of public companies.
In addition, it must be noted that every unlisted company having paid-up share capital of Rs.10 crore or more, turnover of Rs.100 crore or more, or outstanding loans, debentures or deposits of Rs.50 crore. or more, must have two of its directors as independent directors.
SEBI (LODR) Regulations, 2015 also has its own limits in this regard, to be read in consonance. It states that for every listed company coming under SEBI (LODR), 2015, the limits stand as given under
- If the chairman of the company is an executive director, then at least 50% must be independent directors.
- If the chairman is a non-executive director, then the independent directors must be one-third of the total directors.
- If the chairman is a non-independent director but is related to a promoter or promoter group, then the independent directors must constitute 50%.
- If the chairman has outstanding superior voting rights shares, then there must be at least 50% independent directors out of the total directors.
Required qualifications of an independent director
- He must be a person of integrity and avoid irrelevant expertise and experiences.
- He must not be the promoter of the company, even of its holding, subsidiary or associate company.
- He must not be related to the promoters or directors in the company, even of its holding, subsidiary, or associate company.
- He must only be interested in his remuneration as a director and must neither possess nor possess any pecuniary relationship in the company, even in its holding, subsidiary, or associate company, during the current financial year and during the two immediately preceding financial years. Such kind of transactions with such companies amounting to 10% of his total income is allowed.
(Note: relatives will include mother-father, brother-sister, son-daughter, son’s wife, daughter’s husband, stepmother-father-brother, and spouse.)
However, they’re allowed to hold the lower of the two:
- 2% of the paid-up share capital, or
- Face value of Rs. 50 lakh
- (i). During the two immediately preceding financial years or in the current financial year, none of his relatives cumulatively or individually should be a security holder of the company even of its holding, subsidiary, or associate company.
(ii). The relatives must not be indicated to the company and to even its holding, subsidiary, or associate company, even to its promoters or directors, in excess of Rs. 50 lakh, during the two immediately preceding financial years or in the current financial year.
(iii). The relative is not a guarantee for the loan given to a third party by the company in excess of Rs. 50 lakh during the two immediately preceding financial years or in the current financial year.
(iv). No relative shall have a unary relationship with the company, its holding, subsidiary or associate company, equivalent to 2% or more of the gross turnover or total income, either solely or in combination with other aforementioned points.
- Neither he nor his relative should hold opposition to key managerial personnel or have been an employee in the current year or previous three years of the company it’s holding, its associate, or its subsidiary company. However, if the relative is an employee, the restriction for the previous three years would not apply.
- If a firm of practising chartered accountants, practising company secretaries, practising cost accountants gives service to the company, and in that firm either he or his relative are partner, proprietor, or employee, then he or she cannot be an independent director in the company.
- Similarly, for a legal or consultancy firm whose 10% of gross turnover is from any company, subsidiary company, or associate company in which he or his relative is a partner, proprietor or employee, then he cannot be an independent director in the company such a firm gives its services to.
- If he himself or his relatives hold a maximum of 2% or more of the voting rights of a company, he can’t be an independent director there.
- If he or his relative is a chief executive of any NGO, either in which more than or equal to 25% of the donation is done by the company or the NGO holds more than or equal to 2% of voting rights in such a company, he or she can’t be an independent director in such a company.
Data bank
The Ministry of Corporate Affairs launched the Independent Directors’ Data Bank in order to keep up with good corporate governance. The database preserves the data of all the independent directors who are willing to take a post as such in a company. It is a great help in the selection process, as it acts as an aid to the company. It is available online on the website of the Indian Institute of Corporate Affairs, which has been authorised by the central government for the creation and maintenance of the data bank of independent directors.
As per the Companies (Creation and Maintenance of Databank of Independent Directors) Rules, 2019, the below mentioned details are required by the Data Bank:
- DIN
- full name
- PAN
- father’s name
- date of birth
- gender
- nationality
- occupation
- present address with a pin code
- permanent address with a pin code
- phone number
- email ID
- educational qualification
- professional qualification
- detail of experience, if any
- any pending criminal proceeding
- details of the limited liability partnership of which he is a part
- details of the company of which he is a part
The institute is required to provide data upon the payment of the prescribed fees by the company. Also, the institute would be immune from any responsibility for the lack of accuracy of any information, as it is the responsibility of the company to conduct its due diligence on whoever it goes ahead and appoints as its independent director.
Duties
The duties of an independent director, as provided, are under:
- He must keep on evolving and updating his skills and knowledge, along with the similarities with the company.
- Appropriate clarification about information, and whenever it is necessary he must seek professional advice from outside experts at the expense of the company.
- He must be sincere enough to attend all meetings of the board of directors and of the board committee of which he serves as a member.
- In each and every committee of the board, he is a member or chairperson; he must be actively participating in it and be constructive throughout.
- He must keep himself updated about the external environment the company is functioning in.
- He must maintain confidentiality and not disclose any such information, including commercial secrets for advertising and sales promotion plans or even any information that is unpublished, unless such closure is expressly provided by the board or law.
- He must always assist to protect the interests of the company, its shareholders, and its employees.
- He must be attentive enough to report concerns regarding unethical behaviour, suspected fraud, or a violation of the code of conduct or ethics of the company.
- He must ensure his sufficient attention whenever the related party transactions are approved and must be assured that the same has been done in the interest of the company.
Section 149(12) of the Companies Act of 2013 gives immunity to the independent director, not being promoter or key managerial personnel, as it states that they shall be held liable only and only where the acts of omission or commission by a company occur to be in his knowledge or by his consent or where he has not exercised his due diligence properly.
Woman director
In light of the promotion of both women empowerment and gender equality, there is a requirement of at least one compulsory women director, by virtue of the second proviso to Section 149(1) of the Companies Act of 2013, in
- Every listed company, and
- Every unlisted company either has a paid-up share capital of 100 crores or more or, a turnover of 300 crores or more.
If the vacancy of a woman director is created, then it has to be filled within 3 months or by the next board meeting; whichever event occurs later would be the limiting period.
Furthermore, in the top 1000 companies, one independent director is required to be a woman.
Nominee directors
In a company, a nominee director can be appointed by the board of directors, and you can also be nominated by either the financial institution or bank, etc., if it has been expressed in agreement between the company and such institution.
The nominee director who is nominated by the bank or financial institution would protect the interests of such a financial institution, and the board of directors cannot reject such a nomination.
Even a third party can appoint a nominee director if there is any agreement in the same light with such a company.
Small shareholder directors
Every company that is listed on the recognised stock exchange is required to have one small shareholder director whose whole and sole intention would be to protect the interests of small shareholders.
A small shareholder director can be appointed in two ways
- A company can suo-moto appoint such a director, or
- A small shareholders director can be appointed on account of an application by 1000 small shareholders or one-tenth of total small shareholders, whichever is lower between the two.
A notice has to be sent to the company before 14 days, along with a declaration that the potential small shareholder director is not disqualified and his director identification number.
He is required to be, in terms of qualification, eligible to become an independent director of a company.
His term is 3 years, and there is a restriction imposed on him that once the three years come to an end for the subsequent 3 years, he won’t be allowed to be associated with that specific company, obliging to the cooling period requirement.
A small shareholder director can be appointed to a maximum of two companies, provided that the second company is not in any sort of competition with the first one.
A small shareholder director ceases to be such a director in circumstances where he gets disqualified or removed or has unfortunately become of unsound mind, and also when the company no longer has small shareholders.
Directorship
Although a person can be a director of one company or more, there are certain restrictions for different forms of companies in the name of regulation and fair practice.
The requirement is stated under Section 165(1) of the Companies Act, 2013. They are:
- For a one-person company, there can be a minimum of one director and a maximum of 15 directors.
- For a private company, there can be a minimum of two directors and a maximum of 15 directors.
- For a public company, the minimum requirement of the director is 3, which can be extended to a maximum of 15.
However, more than 15 directors can be appointed to a company if a special resolution is passed in this regard.
One person can be a director of 20 companies.
Among these 20 companies, there can be a maximum of 10 public companies, which includes private companies that are held by public companies as well and out of these 10 public companies, a maximum number of seven companies can be listed.
These 20 companies exclude:
- Formation of companies with charitable objects, etc. as mentioned in Section 8, and
- Dormant companies
Appointment of new directors
Section 160 of the Companies Act of 2013 provides for the appointment of new directors.
The provision states that if a person intends to be a director of any company, he will have to serve a notice to that company at least 14 days before the meeting. Along with it, he is required to give a deposit of Rs. 100,000 and his consent in the prescribed form to act as a director of the company. An independent director or the director who has been recommended by the nomination and remuneration committee or the board of directors would not be required to give any such deposit.
Upon receipt of such notice, the company will send a notice to all its members at least 7 days before the meeting, either individually or by advertisement in two newspapers.
Then the company will hold a meeting and decide upon such an appointment by passing an ordinary resolution for the appointed directors.
If the director gets appointed or secures more than 25% of the votes in the meeting, then the deposit he submitted would be refunded to him.
Non-applicability
The provisions of Section 160 of the Companies Act 2013 do not apply to
- The private companies
- The Section 8 companies
- 100% government companies and their subsidiary companies
Disqualification of directors
A director in a company will always be an individual. It is such a person’s responsibility to make strategic decisions in a company. A director must have his director identification number, it is even compulsory for a person of foreign national but if the government allows such a person’s national identification card number to be acceptable in place of it, then there would be no compulsory requirement of director identification number for any foreign national intending to be a director in any company. Section 164 of the Companies Act, 2013 under subsections 1 and 2 envisages the circumstances where a director becomes disqualified to be one, in a company.
Disqualification due to the director’s fault
Section 164(1) of the Companies Act of 2013 lays down the disqualification of an individual from being a director of a company. The provided disqualifications are mentioned below:
- When a director becomes a person of unsound mind, he becomes disqualified to be a director of a company.
- When a director is undischarged and insolvent, he ceases his qualification as a director of a company.
- When a director has applied to be declared insolvent and his application is pending, his qualification to stand as a director ends.
- If he is convicted of imprisonment for up to 6 months or more by the court for offences involving moral turpitude, then, up to 5 years from the expiry of his sentence, he is disqualified to be a director in any company. After the completion of 5 years, he becomes eligible for his appointment as a director of a company. If the director has been convicted with imprisonment of 7 years or for a lifetime, he cannot be the director of any company, and even if he files an appeal, during that period it would be considered that his default continues.
- When a director fails to pay the call money for 6 months from the due date or has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others, in any company, he is disqualified to be a director in a company.
- Most importantly, if the director does not have a director identification number, which is valid for a lifetime until it is cancelled or surrendered, then he is not qualified to be a director in any company.
- If a director is disqualified by the National Company Law Tribunal, the court or by any other order in force, he would not be qualified to be a director in any company. This qualification would continue even for the period in which he has applied for an appeal against such disqualification.
- If, during the last 5 years, a director is convicted under Section 188 of the Companies Act, 2013 for related party transactions, even then his qualification of being a director in a company comes to an end, and such disqualification continues even if he files an appeal against it.
- Also, as per Section 152(3) of the Companies Act, 2013, a person is not eligible to serve as a director of a company without having first obtained a Director Identification Number under Section 154 or another identification number that may be prescribed under Section 153.
- If a director has not complied with the provisions of Section 165(1) of the Companies Act, 2013, he does not qualify to be one.
Disqualification due to the company’s default
Section 164 (2) of the Companies Act 2013 gives circumstances where all the directors of a company become disqualified due to the default made by the company itself.
Such cases of disqualification are given below:
- If the company has failed to file its audit report, financial statement or both for a continuous period of 3 years, then all the directors of such a company would be disqualified.
- When a company fails to pay declared dividends or interest on debentures or has failed to repay the accepted deposits or interest thereon, the directors of the company become disqualified, for 5 years from the expiry of the sentence, to be a directors in the company if such failure continues for one year or more.
Such directors disqualified would not be appointed as directors in any new company. shall be qualified to serve as a director of that company thereafter or to serve in the same capacity in another company for a duration of five years commencing from the date that the said company fails to do so.
There would be no reappointments of directors in the company that has defaulted. However, the disqualified directors of such a defaulting company continue to be the directors of the very same company, and if any new director of such a company is taken in, he would stay qualified for 6 months because it is believed that he would try to reverse the default of such a company as he is new and was not at all linked to the company when the default happened. But it is also believed that 6 months are enough for him to show his interest in rectifying the defaults of the company; if he does not do so within the given time period, he would also become a disqualified director of such a defaulting company.
Exception
If the company is a government company and it has filed its financial statements and audit report on time, the disqualification provided under Section 164 of the Companies Act of 2013 will not apply.
Vacation of the director’s office
Section 167(1) of the Companies Act of 2013 lays down the grounds on which the director’s office in the company gets vacated. They are listed below:
- If the director becomes disqualified under Section 164 of the Companies Act then his office is said to have become vacant. In the event that he loses his eligibility under Section 164(2), the director role at all companies other than the company that is in default under that section shall become vacant.
- If the director has been absent from all the board meetings for the past 12 months then his office is said to be vacant in the company.
- If the director has defaulted in disclosing his interest as per Section 184 of the Companies Act, even then his office is said to have been vacated.
- Also, when a director contravenes the provisions of Section 184 of the Companies Act 2013, his office becomes vacant.
- Whenever the director is disqualified by the court or tribunal, his office ceases to exist.
- It also happens when a director is convicted for an offence that involves moral turpitude or otherwise and has been convicted for six months or more of imprisonment.
Provided that for the above points, if the director has within 30 days appealed against such disqualification by the court or tribunal or such conviction, then his office would continue till further order, and if the higher authority also disqualifies him, then he gets seven days to appeal. Once his appeal has begun until the order comes, the office of the director cannot be made vacant. However, if he does not appeal against it, then once the time frame that is provided for an aggrieved person to appeal expires, the office of such director would become vacant.
- Also, the director’s office becomes vacant if he is removed under Section 169 of the Companies Act 2013.
- If a director ceases to be a director of the holding company, he immediately ceases to be a director of any other company.
Removal of directors
Section 169 of the Companies Act, 2013 talks about the removal of directors. It states that all the members having one percent of voting powers in the company or 5 lakh paid-up share capital can send a special notice to the company 14 days prior to the date of the meeting in which they intend to remove the director.
The company would then forward the notice to the concerned director so that he gets a fair opportunity to represent himself. Upon receiving such concerned directors’ representation, the company sends a notice along with the representation to the members before 7 days of the meeting, and if the representation comes on such a day that the seven-days prior notice becomes impossible, then the same representation must be read out in the meeting.
Then the company shall hold its meeting, and if the ordinary resolution is passed, then the director is removed, but if the resolution is not passed, then the director would continue his term in the company.
If the independent director is being removed, then, for his removal in his first term, an ordinary resolution is required, but for his removal in his second term, a special resolution becomes a requirement.
Resignation of directors
If a director wishes to resign from his office in the company, he has to give notice in writing according to Section 168 of the Companies Act of 2013.
Then the director has to inform the registrars of the company within 30 days about such a resignation along with his reason for it. Even the companies are required to inform the registrars of the company within 30 days about such notice.
The effective date of resignation would be either of the later dates;
- The date on which the notice was served, or
- The date that is mentioned by the director resigning in his notice
However, the liabilities of the resigning director do not end with his resignation. Even after the director has resigned, he will continue to be liable for all the misdeeds prior to his resignation.
Landmark case laws
Raj Shekhar Agrawal and Anr. v. Union of India and Anr. (2015)
Facts of the case
In this case, the petitioners sought direction from the registrar of companies for uploading the digital signatures to the website.
Such upload of digital signatures on the website would have enabled them to file and upload the annual returns in the financial statements of the concerned company for the financial year 2014-15.
Issues raised
In the case, it was argued that the three directors of the concerned company had ceased to be legitimate directors under Section 164 of the Companies Act of 2013 as they had failed to file the statutory requirements of the company for the past three consecutive financial years.
Also, when these appointments of directors were made under Section 167 of the Companies Act of 2013, the petitioner, who was the promoter of the company and held 23.1% shares, found it competent under the provision to do so.
Judgement by the court
The honourable Court held that Section 167 of the Companies Act 2013 is not provided as a mode of appointment of director, in contrast with the provisions provided anywhere else in the same Companies Act 2013. Therefore, the court disposed of the petition.
Raghunath Swarup Mathur v. Dr. Raghuraj Bahadur Mathur (1966)
Facts of the case
In the concerned case, an appeal was made against the acquittal of the respondents who were sentenced by the magistrate to pay a fine under Section 629A of the Companies Act of 1956, which is regarding the breach of provisions of the act when more remedies are available in other provisions.
Issues raised
The issue in the case was that there was a contravention of Section 263(1) of the act as there was a proposal for the names of four persons to be read and elected as directors of the company under a single resolution.
Judgement by the court
The honourable court held that the contravention that was alleged of the provisions of the Companies Act was of a technical nature, which is why the benefit of the doubt must be given to the accused. So, the court dismissed the appeal against acquittal and stated that the matter involved breach and contravention of the concerned provision, which was highly controversial in giving the benefit to the accused.
Mother Care (India) Ltd. v. Prof. Ramaswamy P. Aiyar (2003)
Facts of the case
In this case, several applications were filed under the old Companies Act of 1956. The applications were filed against three directors of the company which was under liquidation for non-compliance with the provisions of the said Act.
One of the respondents, namely, Professor Ramaswamy P. Aiyar sought deletion of his name from the application and also asked to drop all proceedings that were initiated against him.
Issues raised
The issue that came up was that the concerned respondent had resigned from the company before the winding-up order had come, due to which he was not obligated to comply with the statutory requirements.
Judgement by the court
The honourable Karnataka High Court held that once a letter of resignation is submitted to the board of the company, the date on which the intention to relinquish is communicated to the board becomes the date from which the director ceases to be the director of the company. The court held that since the respondent had resigned before the winding-up order had come, he was not a director of the company, which is why he was not required to comply with any statutory requirements. The court ordered that the name of the respondent be deleted from the applications and it posted this responsibility on the official liquidator of the company.
Tristar Consultants v. Vcustomer Services India Pvt. Ltd. (2007)
Facts of the case
It is a case in which a suit was filed alleging breach of contract by the company, and its director, Dinesh Mirchandani, was the defendant.
Issues raised
The issue in the case that was argued by the petitioner was that every director acted as an agent of the company, which is why he should be personally liable if he acted on behalf of the company.
Judgement by the court
The Honourable Delhi High Court held that the directors of a company cannot be treated as acting as agents of the company in the conventional sense of an agent with respect to a third party. Relying on the Indian Contract Act of 1872, the court stated that unless an agent personally binds himself, he cannot be personally liable for contracts entered into by him on behalf of his principal, in the present case being the company.
The court further held that the directors of a company are bound by no fiduciary or contractual duties to the third party who deals with the company.
Finding no merit in the claims of the petitioners, the court dismissed the suit.
M/S. Daewoo Motors India Ltd. v. Wg Cdr (Retd.) H.D. Talwani (2012)
Facts of the case
In this case, the petitioner, M/S Daewoo Motors India Ltd., had filed an application to seek discharge in a complaint that was filed against Ms. Radhika S. Minocha, who was summoned under Section 454 of the old Companies Act 1956 for not filing her statement of affairs.
Ms. Radhika S. Minocha was an employee of ICICI Bank Ltd., and she had been appointed as a nominee director on the Board of M/S Daewoo Motors India Ltd.
Issues raised
The issue raised was that Ms. Radhika S. Minocha contended that she had resigned from the company in 1999 and had migrated to the United States of America. She claimed that since then she was not the director of the relevant company and had no access to its records, which is why no criminal liability could be imposed on her.
Judgement by the court
The honourable court stated that the statements of affairs are a very important document for the official liquidator in order to ascertain the assets and liabilities of any company. The court held that being a nominee director does not automatically absolve the applicant from all liability. The Court considered the argument that the applicant had no knowledge of the company’s affairs and had left the company a long time ago and held that since the applicant had no access to the records of the company and had not signed any documents on behalf of the company, therefore, the court allowed her prayer for discharge.
Conclusion
Since directors have the responsibility of directing and supervising the organisation’s operations, strategy, and governance, they play a vital role in a firm. They are essential in determining the present and future of the organisation. By providing the public and shareholders with pertinent information, they encourage openness and transparency. The company gains credibility and trust as a result of this transparency. They additionally play the role of promoting a collaborative environment within the company at large. They make choices to encourage development and competitiveness by allocating resources, establishing priorities, and implementing actions.
The responsibility of ensuring a company’s expansion, sustainability, and ethical conduct relies on directors, who act as the guardians of its success. Their decisions and actions have far-reaching impacts on those who work, shareholders, communities, and the whole economy. Directors are crucial in order to deal with the complex challenges of today’s corporate environment and lead organisations towards profitability while maintaining the highest standards of governance and ethics.
Frequently Asked Questions (FAQs)
Can the director identification number be cancelled?
The north regional director has the whole and sole power to cancel the director identification number if:
- It is obtained by a director in a wrongful manner.
- It is found to be a duplicate identification number of a director,
- Events such as death, insanity, insolvency, etc., of a director.
What happens when all the directors of a company have vacated their offices?
In the case of all the directors being vacated from their offices in a company, the promoter of the company shall appoint new directors for such a company.
In cases where there are no promoters, then the central government would appoint the new directors, and such directors would continue their offices until the new directors were eventually appointed at the general meeting of the company.
What is the online proficiency self-assessment test?
The online proficiency self-assessment test is an examination that has to be cleared in order to have one’s name added to the data bank, which is prepared by the Indian Institute of Corporate Affairs, a department of the Ministry of Corporate Affairs, and which lists out the eligible directors to be appointed as independent directors.
At least 60% of marks have to be scored in such a test in order to have one’s name listed in the Data Bank of Independent Directors.
Who are the directors that cannot be removed?
Some directors are out of the purview of Section 169 of the Companies Act 2013, which provides for the removal of directors.
The directors that can’t be removed under the said section are:
- The directors that are appointed by the National Company Law Tribunal,
- The directors that are appointed by the principal of proportional representation, and
- The nominee directors that are appointed on the nomination of the financial institution that is established under any special act
What is the Vigil Mechanism?
A vigil mechanism in a company is a department that solves the problems of the company. It is a place where complaints against the members, directors, etc., of the company are welcomed. Information regarding the vigil mechanism of a company should be mentioned on its website.
References
- G.K. Kapoor and Sanjay Dhamija, Company Law- A Comprehensive Text Book on Companies Act 2012 331(Taxmann Publications(P.)Ltd, Haryana India, 22nd edition, August 2019)
- https://www.icsi.edu/media/portals/0/APPOINTMENT%20AND%20QUALIFICATIONS.pdf
- https://www.icsi.edu/media/webmodules/CompanyLaw.pdf
