This article is written by Palak Pitale, pursuing a Diploma in Law Firm Practice: Research, Drafting, Briefing and Client Management from LawSikho. The article has been edited by Tanmaya Sharma (Associate, LawSikho) and Ruchika Mohapatra (Associate, LawSikho).
A company is an artificial person. For a company to carry out its day-to-day business it will need a living person who is in possession of a mind and hands and therefore capable of carrying out its actions. The company can act only through such living persons. These living persons are the directors of a company. The Companies Act, 2013 does not precisely define a director. Section 2 (34) of the Act states that “director” means a director appointed to the Board of a company. The board of a company comprises those people who carry out day-to-day business activities and manage the company. In short, the directors are the ones who look after the business of the company. And that is why the role of a director is the most important role that determines the success of a company.
Let’s put it this way – A good Director is like the captain of a cricket team. He organises the players/resources based on the demand. He performs for his team and not for personal gains. For him, his team comes first so his intentions from his team and company’s perspective are WIN-WIN.
Before we go on to discuss the different types of directors in a company, let us understand the different roles a director plays in a company, the composition of directors in different types of companies, and who is eligible to become a director.
Director’s role : servant, agent, trustee or managing partner of the company
Sometimes directors act as trustees, sometimes as agents, and sometimes as managing partners. A director is not a servant of the company. He is someone who controls the affairs of the company. A company hires a director so that he can look after the company’s business. We can call him the controller of a company’s affairs but not a servant. Directors get hired by the company in a professional capacity so that they can direct the affairs of the company. Thus, they are the officers and not servants of a company.
The landmark case of Ferguson v. Wilson held directors to be the agents of a company. A company is not a real person and can function only through its directors. Thus, the relationship a director shares with his company is like that of a principal and agent. When a director signs on behalf of the company, it is the company that is held liable and not the director.
Directors are sometimes also considered as trustees, since a director is somebody who manages the money and properties that come under his control, he discharges the duties of a trustee.
Section 149 of the Companies Act, 2013 discusses the composition of directors in a company i.e. the composition of a Board of a company should be as follows:
- Public company:
Minimum number of directors – 3 (three) and
Maximum number of directors – 15 (fifteen)
Also, at least 1/3rd (one-third) must be independent.
- Private company:
Minimum number of directors – 2 (two) and
Maximum number of directors – 15 (fifteen)
- One person company (OPC):
Minimum number of directors – 1 (one)
In every company, a maximum of 15 directors can be appointed. And if a company wants to have more than 15 directors then it can be done by passing a special resolution in the company.
Following persons are not eligible to become a director of a company:
- Company auditor,
- A Director who has been banned,
- An individual under the age of 16 years,
- An undischarged bankrupt/insolvent.
- Types of Directors
- Based on functions –
(a) Executive Director– The two types of Executive Directors –
- Managing Director,
- Whole time Director.
(b) Non – Executive Director – The two types of Non- Executive Directors –
- Nominee Director,
- Independent Director.
- Based on appointment –
- Additional Director,
- Alternate Director,
- Casual Vacancy Director.
- Other types –
- Residential Director,
- Women Director,
- Small Shareholders Director,
- Shadow Director.
There are a variety of Directors under the Companies Act, 2013. Let’s discuss each one in detail.
- Executive Director
Executive directors are internal professionals i.e. they are internal to the organization and are involved in the daily functions of the company. Any person who is a full-time employee of the company (i.e. whole-time director) or who is responsible for the day-to-day operations of the company (i.e. managing director) will be called an Executive Director. Thus, an Executive Director can be designated as Managing Director and whole-time Director. Generally, an executive director is paid more than a non-executive director because they are believed to have rich expertise and experience in their field. He is usually responsible for the executive functions in the management and administration of the company. Certain skills are required for a person to be an executive director.
- As defined in Section 2(94) of Companies Act, 2013 – Rule 2(1) (k) of Companies (Specification of Definitions Details) Rules, 2014 – Executive Director means a whole-time director.
They are generally appointed through an appointment agreement and their qualification and remuneration will be discussed in detail before they are appointed as Executive Directors.
- Tenure – Managing director or a whole-time director can be appointed for a maximum period of 5 (five) years. They are eligible for re-appointment. The re-appointment can be done for the next term but not before one year of the expiry of the current term.
- Age limit – The minimum age of a director should be 21 years. And the maximum age should be 70 years. For a person above 70 years, shareholder’s approval in the General meeting is required.
A Company (public or private) cannot appoint a manager along with a managing director but can appoint a whole-time director along with a managing director or manager.
- Managing Director – He is an executive director. When considerable power of managing the affairs of a company is given to a director either by way of –
- Articles of Association of the Company (AOA) or
- An agreement with the Company, or
- A resolution passed in its general meeting, or
- By its Board of Directors.
Then he will be a Managing Director of that Company.
- Whole Time Director – Director + Whole Time Employee of the company = Whole Time Director. As per Clause 2(94) of Companies Act, 2013 – “whole-time director includes a Director in the whole-time employment of the company. He is also an executive director of the company.
- Non-Executive Director
Non-executive directors are external professionals. The Companies Act, 2013 does not define non-executive directors but we can understand the meaning from the definition of executive directors. Directors who are not involved in the day-to-day functions or activities of the Company are called non-executive directors. Despite not being involved in the day-to-day business they are still on the Board. The reason is that the Board needs their inputs in certain areas, or because there may be a legal requirement to have them on the Board. Non-executive directors come to the company only to make certain decisions at the Board meeting.
Two types of Non-executive directors are –
- Independent Director – Directors who have knowledge or network in a particular area or a particular field can be termed as independent directors. Usually, companies hire ex-officials for such roles because they have the industrial expertise and the experience which is required to run a company smoothly. Women directors can also be appointed as independent directors. Independent directors help maintain transparency, which is an especially relevant factor, especially in the corporate regime.
As per Section 149(2) – an independent director is a director other than managing director, whole-time director or nominee director and in the opinion of the Board possesses relevant expertise and experience.
As per Section 149(4) of the Companies Act, 2013 – every listed public company must have at least 1/3rd of the total number of directors as independent directors. This will include companies listed on the SME segment of the stock exchange.
The Central Government also prescribes the minimum number of independent directors in the case of unlisted public companies.
The Central Government vide Rule 4 of Companies (Appointment and Qualification of Directors) Rules, 2014 – states that unlisted public companies must appoint at least 2 (two) directors as independent directors in the following circumstances –
- If the paid-up share capital exceeds Rs. 10 crores.
- If the turnover exceeds Rs. 100 crores.
- If the aggregate of all the outstanding loans, debentures and deposits, exceeds Rs. 50 crores.
A declaration by an independent director that he meets the criteria of independence is a must-
- At the first meeting of the Board in which he participates as a director and
- At the first meeting of the Board in every financial year or
- Whenever there is any change in the circumstances which may affect his status as an independent director
- Qualification – An independent director must have skills, experience and knowledge in one or more fields of law, management, sales, marketing, corporate governance, administration, research, technical operations or other disciplines related to the company’s business.
- Tenure – The term of independent director must not exceed 5 (five) years. They can be elected again for a second term. A cooling period of 3 years is compulsory after the expiry of the second term. Companies are allowed to appoint independent directors for less than 5 years, however a person cannot be appointed for more than 2 (two) terms.
All independent directors should meet at least once a year in the absence of non-independent directors and other members of the company so that they can evaluate the performances of the company’s chairperson, other directors, and the Board. An independent director must comply with the functions and duties mentioned in the Code of Conduct provided under Schedule IV of the Companies Act, 2013. Independent directors are not paid remuneration but are eligible for sitting fees for the meetings they attend. Their nature is independent, they cannot receive any stock option. As per Regulation 25 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 – an independent director cannot be a director of more than 7 (seven) listed companies.
- Nominee Director – Section 149(7) and Section 161(3) of the Companies Act, 2013 deals with a Nominee director. If it is authorized by the Articles of Association (AOA) of a company then the Board may appoint any person as a director nominated by any institution in pursuance of the provisions of any law for the time being in force or any agreement or by the Central Government or the State Government under its shareholding in a Government company. If the Articles of Association of a Company authorizes it, only then can a nominee director be appointed by the Board.
They represent the stakeholders on the board of directors. To put it in simple terms, a nominee director is a representative of the stakeholder who protects the stakeholder’s interest. Their job is to see that the company does not function in a manner detrimental to the interest of the stakeholders they represent.
Appointment – Nominee directors are appointed by an agreement (either Shareholder’s agreement or financing agreement) between the company and the stakeholder. The stakeholders are responsible for the payment of such nominee directors they may appoint. A nominee director must act in good faith and the interest of the company even if they are nominated by the stakeholders.
In the landmark judgment of Tata Consultancy Services Limited v. Cyrus Investments Private Limited & Ors. – It was made clear by the Court that while a nominee director is entitled to take care of the interests of the nominator, he is duty-bound to act in the best interests of the company and not fetter his discretion.
Bhardwaj Thiruvenkata Venkatavaraghavan v. Ashok Arora – the Delhi High Court held that Nominee Directors must act in the best interest of the Company and its shareholders and not only in the interest of their Nominators.
- Additional Director
Provisions of Section 161(1) of the Companies Act, 2013 deal with the Additional Director. Where there is heavy pressure of work on the Board of directors then the Board of directors can appoint an additional director, if authorized by the Articles of Association of that company.
Mode of appointment – Additional directors can be appointed by passing a resolution at the board meeting or through circulation.
Who can appoint? – The power to appoint an additional director rests with the Board of directors and this power is given to the Board by the Company’s Articles of Association (AOA). If the AOA of the company does not confer the powers on the Board then the Board cannot appoint an additional director.
- Tenure – Additional director holds office only up to the date of next Annual General Meeting (AGM) or the last date, on which the annual general meeting should have been held, whichever is earlier. If a person does not get appointed as a director in a general meeting then he cannot be appointed as Additional Director.
An additional director can be a managing or a whole-time director. An additional director can also be considered a rotational director. The powers and rights of the additional directors will be the same as other directors of the Company.
T.M. Paul vs. City hospital Pvt. Ltd (2000) – It was held that an additional director cannot be appointed on extraneous considerations such as strengthening the position of the majority in the Board.
- Alternate Director
Provisions of Section 161(2) of the Companies Act, 2013 deal with Alternate directors. When a director of a company is not in India for more than (3) three months then an alternate director can be appointed on the original director’s behalf. An alternate or an alternative director acts on behalf of the director who is not in the office due to being away for more than 3 months.
Thus, the alternate director exercises his duties for a limited time only i.e. only till the time the principal director returns to his duties. In other words, alternate directors are appointed by the Board as a replacement for a director who is going to be away from India and is unable to attend board meetings. Even though a director can be present through video conferencing, at times the shareholders might find the need to have a physical presence on the Board, which is when an alternate director gets appointed.
If, in the absence of an independent director, an alternate director is to be appointed on his behalf, then that alternate director also needs to be independent. Further, an alternate director cannot be appointed as an alternate director for some other director in the same company.
Tenure – An alternate director will hold office only till the time the original director comes back to India. While in office as an alternate director, he will be responsible for all practical purposes and will be entitled to all notices of the meetings along with the original director. The decisions taken by him in his capacity as an alternate director will be valid.
Mode of appointment – The AOA of the Company must authorize the Board to appoint an alternate director or he can be appointed by passing a resolution in the general meeting or through circulation.
If the original director resigns or is removed then the alternate director will also vacate his office unless the Board appoints him as an additional director. An alternate director can be considered as a rotational director only if the original director is rotational. An alternate director cannot be considered as a proxy of the original director.
An alternate director can be appointed as a managing director because there is no provision in the Companies Act 2013, which will prohibit alternate directors to be appointed as managing directors provided that he must comply with sections 195,196 and schedule V of company act 2013.
- Casual Vacancy Director
Provisions of Section 161(4) of the Companies Act, 2013 deal with a casual vacancy director. Before understanding who is a casual vacancy director, it is important to understand the meaning of casual vacancy. Casual vacancy means a vacancy in the office due to the reasons of death, resignation, disqualification, incapacity, and removal. Thus, a director assuming office due to any of these reasons will be considered as a casual vacancy director. The vacancy arising in the office of the director shall be considered as a casual vacancy if such a director was appointed by a shareholder in a general meeting. Only the shareholder will have to make a valid appointment with such a director. The concept of a casual vacancy director applies only to public companies.
How to fill a casual vacancy?
- The AOA need not authorize the Board to fill the casual vacancy.
- If AOA has prescribed a procedure as to how to fill such a casual vacancy then that procedure needs to be followed.
- If AOA has not mentioned any procedure for such filling of casual vacancy then the Board can pass a resolution in the Board meeting but not by way of circulation.
Thus, even if the AOA is silent on filling in the casual vacancy, the Board has the power to fill such vacancy.
- Appointment – The Board of directors can appoint a casual vacancy director. AOA need not expressly state for filling in the casual vacancy. Such a director needs to be appointed in the Board meeting only.
- Tenure – Casual vacancy director shall hold office only up to the date up to which director in whose place he is appointed would have held office if he had not vacated. The concept of reappointment applies to the original director not to the casual vacancy director.
A casual vacancy director can be appointed as a Managing director but he cannot be considered as a rotational director.
- Residential Director
Provisions of Section 149(3) of the Companies Act, 2013 deals with the residence of a Director. The new Companies Act introduced this concept of Resident Director. The Act makes the residence of a Director in India mandatory.
It states that every Company shall have at least 1 Director who has resided in India for a total period of not less than 182 days in the previous financial/ calendar year. This provision applies to all companies, both private and public.
In the case of Companies that are newly incorporated, the requirement of 182 days shall apply proportionately at the end of the financial year in which it is incorporated – (proviso to section 149(3) inserted w.e.f. 7-5-2018).
Due to the COVID-19 pandemic, the MCA General Circular No. 36/2020 dated 20-10-2020 states that the minimum residency in India for a period of 182 days for the financial year 2020 – 2021 will not apply.
Declaration of a Resident Director is not required. A Resident Director is like any other Director and he is required to attend at least 1 Board Meeting in a year.
- Women Director
The Companies Act, 2013 made it mandatory for certain companies to appoint a woman director. As per the provisions of Section 149(1) of the Act and Rule 3 of the Companies (Appointment & Qualification of Directors) Rules, 2014 – The Companies that need to appoint a women director are as follows –
- Every listed company.
- Every public company having paid-up share capital of Rs. 100 crores or more.
- Every public company which has a minimum turnover of Rs. 300 crores or more.
The time limit for an appointment – The existing Companies (i.e. old companies under the previous Companies Act, 1956) shall appoint women directors within 1 (one) year from their commencement. The new Companies (i.e. under the new Companies Act, 2013) have to appoint women directors within 6 (six) months from the date of their incorporation. If this provision is violated then it is punishable under Section 172 of the Companies Act, 2013.
Case Law – Jalpower Corporation v. ROC (2016) – In this case, there was a delay of 6 months in appointing a woman director. Jalpower Corporation stated that the delay was committed due to unavoidable circumstances and it was not deliberate. While admitting to the offence, it stated that the said offence did not cause any harm to the public interest. Due to this delay, the ROC had issued a show-cause notice to Jalpower Corporation for the non-appointment of a woman director. The Court held that not appointing a woman director was a compoundable offence and punishable under Section 172 of the Companies Act, 2013. A fine of Rs. 50,000/- was imposed as a compounding fee which was to be paid within 3 weeks from the date of receipt of the order.
Tenure – The tenure of women director is till the next Annual General Meeting (AGM) from the date of her appointment. She can resign any time she wishes by giving notice to the Company.
The women director can be appointed during the time of registration of the Company or after the incorporation of the Company by the Board of Directors and the shareholders.
Any intermittent vacancy of a women director shall be filled by the Board of Directors within 3 months from the date of such vacancy, or not later than the immediate next board meeting, whichever is later.
Declaration of a woman director is not required.
- Small Shareholders Director
Any person who holds shares of the nominal value of not more than Rs. 20,000 in a Public Company is called a small shareholder. These small shareholders are allowed to elect a director in a listed company. Thus, directors elected by these small shareholders are called Small shareholders Directors. According to Section 151 of the Companies Act, 2013 every listed company may have 1 (one) director elected by such small shareholders.
Thus, a small shareholder director can be appointed by a Company if –
- The Company is a Public Company;
- The Company has at least 1000 or more small shareholders;
Only if these two criteria exist, the listed company can have one director elected by a small shareholder.
Appointment – The appointment of such a director is optional and that is why there are hardly any companies that have a small shareholder director. The Company can appoint a small shareholder director either on its own or on the application made by a small shareholder.
Rule 7 of Companies (Appointment and Qualification of Directors) Rules, 2014 lays down certain provisions relating to Small Share-Holder Director which are as follows –
- At least 1000 small shareholders, or 1/10th of the small shareholders, whichever is less, should provide a written notice to the Company. But the notice should be provided 14 days before the General Meeting.
- The said notice must contain details of the proposed director. Details such as name, address, folio number, shares held etc.
- The said notice must be signed by the person proposing to be the director.
- The said notice should be accompanied by a statement signed by the proposed director stating that he has a Director Identification Number (DIN), he is not disqualified to be a director and he has given his consent to act as a director.
Other provisions related to a small shareholder director are as follows –
- A small shareholder director is eligible for an independent director as per the provisions of Section 149 (6) & (7) of the Companies Act, 2013.
- A small shareholder director shall not be considered as a retiring director.
- A small shareholder cannot be appointed as a Managing Director or a Whole Time Director.
- A person shall not hold office as a small shareholder director in more than 2 (two) companies at the same time i.e. he is allowed to hold office in 2 companies at the same time but not more than 2.
Tenure – A small shareholder director can be appointed for a maximum period of 3 (three) years. He is not liable to retire by rotation and he is also not eligible for reappointment after the expiry of his tenure. Further, he cannot be associated with the company for 3 (three) years after he has finished his service.
- Shadow Director
A shadow director is nowhere mentioned in the Companies Act, 2013. A shadow director is someone who is not appointed officially as a Director of the company but the Board follows his directions and orders. They are very influential just like any other Director of a company but they manage to avoid the liability that arises thereof. They give orders and their orders are followed but they do not have any managerial position in the company. Such Directors are known as Shadow Directors.
- Example – Mr Ram is not a Director in QPR Ltd. Nor is he an employee nor does he have any contractual association to QPR Ltd. Before taking any major decision, the Board of QPR Ltd., consults Mr Ram. And only after Mr Ram’s directions, QPR Ltd. goes ahead with the business. In this case, Mr Ram will be a Shadow Director of QPR Ltd.
Section 2(59) of the Companies Act, 2013 defines “officer” which is similar to a Shadow Director. It means “any person under whose directions or instructions the Board of Directors or any one or more of the Directors are accustomed to act”. Also, under Section 2(60) (v) – a similar kind of person is mentioned known as an “officer in default”. The Shadow Director can also be an officer in default.
Case Law: Re Hydrodan (Corby) Ltd  is a UK company law case, which explains the meaning of a shadow director. This case laid down a few characteristics of a Shadow Director –
- A person who is not a director in the Company;
- A person who instructs the Board of Directors concerning the management of the Company;
- The Board follows the instructions and directions given by such a person and then acts.
It is important to note that if the Board is acting and following the directions given by a person who is not the director in a company and the Board is doing it continuously and the majority is following those directions only then that person can be referred to as a Shadow Director or Deemed Director.
Thus, the following points need to be established for a person to be called a shadow Director-
- Not in official capacity – Such a person is not a Director in his official capacity.
- Direct involvement – The person is involved directly in the affairs of the company. He is not merely advising but is directly involved in the company’s management.
- Continuity – The Board of Directors are following the instructions of such a person continuously and not just once or twice.
- Majority following – The majority of the members of the company are following the instructions and directions given by such a person.
The famous American Lawyer, Charles Keating once said – “A director’s role is to create an atmosphere where his company can be created.” And rightly so because every director in a company whether it is a residential director, women director, shadow director, independent director, or any other director discussed above, all have a specific role to play and all these types of directors must work in a way that will benefit the company’s growth.
As it has been said, directors are the brain of a company and a company acts only through them. All these directors represent their company and their position is very important for the company. The Companies Act, 2013 has given certain powers to the Directors so that they can contribute their best to the company. Along with these powers, the Act also imposes certain restrictions to avoid any misuse of such powers.
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