This post has been contributed by Aindrila Ghosh, Symbiosis Law School, Hyderabad.
Who is a director?
An elected or appointed member of the Board of Directors of a company that, with other directors, is entrusted with the duty of determining and implementing the policies of the company. They act according to the resolutions taken at the directors’ meetings and derive their powers from the corporate legislation and the company’s Articles of Association.
Who can be a director?
According to Section 149 of the Companies Act, 2013, only a natural person can be identified as a director. Thus, no body corporate, association, or firm can be appointed as a director. The first directors of the company are mentioned in the Articles of Association.
What are the qualifications to become a director?
For appointment as a director, the person:
- Should have a DIN (Director Identification Number)
- Should not have any disqualifications as mentioned under Section 164 of the Companies Act, 2013.
- Should give and file his consent with the Registrar of Companies as per Section 152 (5) of the Companies Act, 2013.
How long do the directors serve?
Directors serve from one Annual General Meeting to another Annual General Meeting. Section 152 (6) provides that unless it is mentioned in the Articles of Association that all directors shall retire at the Annual General Meeting, not less than two-third of the total number of directors of a public company shall:
- Be persons whose period of office is liable to determination by retirement of directors by the manner of rotation.
- Be appointed by the company in general meeting.
Manner of Rotation [Section 152 (6)]: This section provides that at the first Annual General Meeting of a public company held next after the date of the general meeting at which the first directors are appointed and at every subsequent Annual General Meeting, one-third of such of the directors for the time-being are liable to retire by rotation. Indirect directors are not taken into consideration for this purpose.
What are the different types of directors?
The Board of Directors can appoint the following types of directors:
- Additional Directors: They have the same power as the other directors and the same tenure, that is, up to the following Annual General Meeting.
- Alternate Directors: When any director is not in a position to continue (for example, the director is not present in India for more than 30 days), an alternate director shall be appointed. He shall not hold office for a period longer than that permissible to the director whose place he has been appointed and shall vacate the office if and when the director returns to India. Alternate director is not an agent of the original director.
- Nominee Directors: They are the representatives of majority shareholders of the company.
- Resident Directors: A company must have a resident director, a director who has stayed in India for not less than 182 days.
- Woman Director: The listed companies or every other public company that have a paid-up share capital of ₹ 100 Crore or more, or turnover of ₹ 300 Crore or more, should have at least one woman director on Board.
- Independent Directors: Section 149(6) defines Independent Directors.
How many directors can be appointed in a company?
The minimum number of directors required are as follows:
- One-person Company: 1
- Private Company: 2
- Public Company: 3
The maximum number of directors of a company is 15.
How many directorships are allowed?
According to Section 165 of the Companies Act, 2013, a person can be a director in maximum 20 companies out of which maximum 10 can be public company.
Independent Directors: Section 149(4) requires every listed public company to have at least one-third of the total number of directors as independent directors. The government may prescribe the required number of independent directors from time to time. At least two independent directors should be present in the following classes of public companies:
- Companies having paid-up share capital of ₹ 10 Crore or more; or,
- Companies having turnover of ₹ 100 Crore or more; or,
- Companies having outstanding loans + debentures + deposits exceeding ₹ 50 Crore.
Section 149(6) defines Independent Directors.According to Section 168(2), even after resignation, a director shall be liable for offences committed during his/her tenure.
Who can become an Independent Director?
As per Section 149(6) of the Companies Act, 2013, the following requirements need to be fulfilled in order to become an independent director of the company:
- A person (say, A) who in the opinion of the Board, is a person of integrity and relevant expertise and experience.
- who is or was not a promoter of holding or subsidiary company of the parent company;
- who is not related to any of the promoters or directors of the subsidiary, associate company, holding company (SACH);
- Who has no pecuniary relation with the company in the last two financial years;
- The relatives of the independent director must not hold any security, or interest in SACH in preceding two financial years. However, the relative may hold security or interest (calculated on the face value) in the company not exceeding ₹ 50 Lakhs or 2% (or as may be prescribed from time to time) of the paid-up capital of the company or its SACH;
- The relatives of A must not have taken loans from SACH;
- Say A’s relative is B. B’s friend is C. C has taken some loan from SACH. If B is standing as a guarantor, then again prescription is given. If it exceeds the prescription, then A cannot be appointed as an independent director;
- A’s relative must not have any other pecuniary relationship with SACH, which, in combination with the aforementioned points or singly, amounts to 2% or more of the gross turnover of the company.
- A or his/her relatives should not hold the position of key managerial personnel in the company in the last three years.
- A or his/her relatives should not be a partner in the auditing firms of the company.
- A or his/her relatives should not have more than 2% voting rights in SACH.
Tenure of Independent Directors: 5 years. After 5 years, he/she can be re-appointed for following 5 years. After this, there has to be a cooling off period of 3 years before re-appointment as an independent director of the same company.
Resignation of Directors:
According to Section 168(1) of the Companies Act, 2013, a director can resign from his office by giving a notice in writing to the company. The company shall notify the Registrar of Companies as prescribed and shall also inform about the same in the next general meeting of the company. The resigning director is also required to forward a copy of his letter of resignation along with detailed reasons with the Registrar of Companies within 30 days of resignation in such manner as prescribed. The resignation takes effect from the date on which the notice is received by the company, or, if any date is mentioned on the letter of resignation, whichever is later.According to Section 168(2), even after resignation, a director shall be liable for offences committed during his/her tenure.
Removal of a Director:
Director can be removed in two ways:
Removal by shareholder: According to Section 169 of the Companies Act, 2013, the shareholders have the right to remove the directors appointed by them. It is not necessary that there has to be proof of misconduct, misfeasance, breach of trust, or, mismanagement. If shareholders are not satisfied by the policies pursued by the directors, they have the option to remove them by passing on ordinary resolution. However, the following classes of directors cannot be removed by the shareholders:
- Directors appointed by the Tribunal.
- Directors appointed under the system of proportional representation.
On receipt of special notice for the removal of director, the company must forthwith send a copy thereof to the director concerned and the director concerned shall be entitled to be heard on the resolution of the meeting.
2. Removal by Tribunal: Where an application has been made to the Tribunal against oppression or mismanagement of the company’s affairs, the Tribunal may order the removal of a director (Section 242). He/ She is not entitled to any compensation and cannot act in the position of manager or managing director or director of the company for the next 5 years.
Powers of the Board of Directors:
Section 179 of the Companies Act, 2013, provides for the general powers of the Board of Directors. The Board of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorised to exercise and do. Thus, the Board can exercise all powers of the company and can do all such acts and things that the company can do except those which are specifically provided to be done or exercised by the company in a general meeting. (as was held in the case of Nibro Ltd. V National Insurance Co. Ltd.)
Do shareholders have the right to intervene?
Shareholders, by amending the Articles of Association, may restrict the powers of the Board. However, generally the shareholders do not have the right to intervene, If the majority of shareholders are dissatisfied with what the directors do, their remedy is to remove them. However, the shareholders can intervene in the following exceptional case:
- Directors acting mala fide.
- Directors are themselves the wrongdoers.
- Incompetency of the Board.
- Deadlock in management.
The Board has the following powers:
- To make calls to shareholders in respect of unpaid money on their shares.
- To issue securities and debentures, whether in, or outside India.
- To borrow monies
- To invest the funds of the company;
- To authorise buy-back of securities;
- To grant loans or give guarantee or security in respect of loans;
- To approve financial statement and the Board’s report;
- To approve amalgamation, merger, or reconstruction;
- To diversify the company’s business;
- To take-over a company or obtain substantial stakes in another company;
- Filling of casual vacancies;
- To make political contributions;
- To appoint a person as a managing director or manager;
- To appoint or remove key managerial personnel;
- To appoint internal auditors and secretarial auditor.
The Board functions by means of various committees and one such important committee is the Audit Committee. The following classes of companies have audit committees:
- Listed Companies
- Public company with paid-up share capital or gross turnover of ₹ 10 Crore or more;
- Companies having aggregate outstanding loan debenture of ₹ 50 Crore or more;
The chairman of the audit committee is an independent director. If there exists an Audit Committee, the Nomination and Remuneration Committee shall also exist.
Powers of Individual Directors:
Section 179 provides for general powers of the Board and not any particular director. Unless otherwise provided in the Articles of Association, the decisions of the Board are taken by majority. “Any director acting individually has no power to act on behalf of the company in respect of any matter except to the extent to which any power or powers of the Board have been delegated to him by the Board subject to limitations imposed by Companies Act, 2013, or any other law.”- as held in Shubh Shanti Services Ltd. v Manjula S. Agarwalla.
Duties of Directors:
Directors have two types of duties- statutory and general duties. Following are the duties of the directors:
- Return of allotment of shares if the minimum subscription has not been reached. If allotment is made even if the minimum subscription is not reached, it is a breach of duty.
- Directors must follow the Memorandum of Association and Articles of Association.
- Directors must ensure that the interests of the company and the shareholders is protected.
- Directors must attend Board meetings. (they can miss maximum 3 meetings following which they must resign).
- They must act with reasonable care and due diligence.
- Must conduct Annual General Meetings and Extraordinary General Meetings.
- To appoint chief managerial personnel.
Liabilities of Directors:
- Liability towards the company (if acting dishonestly/ breach of fiduciary duty and the company suffers losses. In such a case, the shareholders or other directors can file a suit)
- Directors are personally liable for acts committed ultra vires.
- If accused of negligence, the director has to prove that reasonable care was taken.
- Liability towards third party- When the company enters into a contract with a third party. If, during the transaction, any contents of the Articles of Association or Memorandum of Association is violated, directors are held personally liable. But, if all provisions are duly followed, then the company is liable (both, civil and criminal liability based on the nature of breach).
- Liability for acts of co-directors.
Section 2(54) of the Companies Act, 2013, defines Managing Director. He/ She is entrusted with substantial powers of management of affairs of the company. In Employees State Insurance Corporation v Apex Engineering (P) Ltd., the Supreme Court held that the Managing Director has dual identity- employee as well as agent of the company.
The Managing Director is key managerial personnel as defined under Section 2(51) of the Companies Act, 2013.
According to Section 2 (54), Managing Director can be appointed in the following ways:
- By virtue of an agreement with the company.
- By virtue of a resolution passed by the company in its general meeting.
- By virtue of a resolution passed by the Board of Directors.
- By virtue of the Articles of Association.
Tenure: 5 years [as per Section 196 (2)]. No re-appointment shall be made earlier than one year before the expiry of his/ her term.
For appointment as Managing Director, a person must be above 21 years and below 70 years of age. If he/she is more than 70 years old, he or she can be appointed by passing an ordinary resolution at the general meeting of the company and this must be approved by the Board of Directors.
- Above 70 years or below 21 years of age.
- Undischarged insolvent or declared insolvent at any point of time.
- Has at anytime suspended payment to his creditors.
- Has at anytime been convicted by the Court and sentenced for more than 6 months.