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Who Are Directors Under Companies Act?

Who Are Directors?

Directors are the persons appointed to direct and supervise the affairs of a company. The company's business is consigned in the hands of directors. Team of directors of the company is collectively known as its Board of Directors, which wields the supreme executive authority controlling the management and affairs of a company. In practice it is the Board of Directors which looks after the management and protects the interests of all the stakeholders of the Company

Basically, Board of Directors is a group of trustworthy and respectable people who looks after the interests of the large number of shareholders who are not directly involved in the management of the company. They are entrusted with the responsibility to act in the best interests of the company. The Companies Act, 2013 does not contain an detailed definition of the term director”. Section 2 (34) of the Act says that director” means a director appointed to the Board of a company. A director is a person appointed to perform the duties and functions of director of a company in conformity with the provisions of the Companies Act, 2013. Directors are at times described as trustees, agents and sometimes as managing partners. Directors are viewed differently according to circumstances.

According to the provisions of Companies Act, 2013 it is mandatory for every company to have minimum 3 directors in case of public limited companies, at least 2 directors in case of private limited companies and 1 director in case of one-person companies. Maximum a company can have 15 directors. In Case the company wishes to appoint more directors, it can do so by passing the special resolution in its general meeting (GM).

Types of Directors:
Residential Director
According to provisions of law, every company needs to appoint a director who has been in India and stayed for at least 182 days in a previous calendar year.

Independent Director
They are non-executive directors of a company and contribute the company by improving corporate credibility and enhancing the governance standards. That is to say, an independent director is a non-executive director without a relationship with a company which can impact the independence of his judgment.

The term of the independent directors is up to 5 consecutive years; however, they are entitled to reappointment by passing a special resolution with the disclosure in the Board's report. Below mentioned are the companies that need to appoint minimum two independent directors:

Public Companies having Paid-up Capital of Rs.10 Crores or more,

Public Companies having annual Turnover of Rs.100 Crores or more,

Public Companies having total outstanding loans, deposits, and debenture of Rs.50 Crores or more.

Small Shareholders Directors
A listed company, can after the notice of at least 1000 small shareholders or 10% of the total number of the small shareholder, whichever is lower, shall have a director which would be elected by small shareholders.

Women Director
As per Section 149 (1) (b) second proviso of the Companies act, it is mandatory for a company, be it a private company or a public company, to appoint at least one woman director in case it satisfies any of the following criteria:

The company is a listed company & its securities are listed on the stock exchange.

The paid-up capital of such company is up to Rs.100 crore or more with a turnover of Rs.300 crores or more.

Additional Director
A person could be appointed as an add. director and can occupy his post until next AGM (Annual General Meeting). In absence of the AGM, such a term would conclude on the date on which such AGM should have been held.

Alternate Director
Alternate director refers to a person appointed by the Board, in order to fill in for a director who might be absent from the country, for the period of more than 3 months.

Nominee Directors
Nominee directors can be appointed by a specified category of shareholders, banks or lending financial institutions, third parties through contracts, or by Central Government in case of oppression or mismanagement.

Appointment of Directors:
According to the provisions of Companies Act 2013, only an individual can be appointed as a member of the board of directors. Usually, the appointment of directors is made by shareholders. A company, a legal firm and an association, with an artificial legal personality can't be appointed as a director. It must to be a real person.

In a company which is public or a private, a total of two-thirds of directors are appointed by the shareholders. The remaining one-third members are appointed with regard to prescribed guidelines in the Article of Association. In case the company is a private company, their Article of Association can authorise the method to appoint any and all of the directors. In case the Articles are silent, the directors have to be mandatorily be appointed by the shareholders. The Companies Act also have a provision that permits a company to appoint two-thirds of the company directors to be appointed through the principle of proportional representation. This happens if the company has accepted this policy.

Nominee directors shall be appointed by third party authorities or the Government to tackle misconduct and mismanagement. It is the primary duty of directors to act honestly, exercise reasonable care and skill while they perform their assigned duties on behalf of the organization.

Appointment of Managing Directors
A Managing director (MD) must be an individual i.e. a real person and s/he can be appointed for a maximum period of five years. A Managing director of a pre-existing company can be appointed as a managing director of another company as long as the board of directors of the first company approve and are aware of this new appointment.

Conditions for Appointing Directors
The Companies Act does not prescribe any qualifications for Directors of any company. An Indian company may, therefore, in its Articles, stipulate qualifications for Directors. However there are certain condition which needs to be fulfilled to appoint directors.

The following conditions needs to be fulfilled while appointing a director:
  1. S/he should not have been sentenced to imprisonment for any period, or a fine imposed under various laws and statutes.
  2. They must not have been detained or convicted for any duration under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974.
  3. S/he must have completed 25 years of age, but should be less than 70 years of age. However, this age limit is not applicable if the appointment is approved by a special resolution passed by the company in GM or the approval of the Union government is obtained.
  4. They should be a managerial person in one or more companies and draws Consideration from one or more companies subject to the limitations specified in Section III of Part II of Schedule XIII.
  5. S/he should be Indian Resident. It means a person who has been staying in India for a continuous period of not less than 12 months immediately preceding the date of his/her appointment as a managerial person and who has come to stay in India for taking up employment in India or for carrying on business or occupation in India.

Powers Of Directors

Corporate body incorporated is artificial person, so it is necessarily needed to be represented by living person. So, the functioning and the business of any company is entrusted in the hands of directors. Office of director is that office of the company who handle all the affairs and daily business of the company.

In the case of Bath vs standard land company limited Neville J held that board of directors are the brain of the company and company acts only in their directions. Though director is such a salient position it is endowed with various powers to handle the business of the company.

A board of directors is the biggest authority of the company and is vested with the various powers under section 179 of the companies act 2013. Directors can make any and all of the decisions and can exercise the power of which the company has authority or is entitled. Directors appointed have all the control over the operations of the company.

All the powers are not absolute, directors can exercise their power independently but are subject to memorandum and articles and also board of director are not competent to do the act which are required to be done by the shareholders in general meetings.

There are certain powers which can be exercised only when resolution has been passed at the board meeting.
Those powers include power to:
  • To make calls
  • To borrow money
  • Issue funds of the company
  • To grant loans are give guarantees
  • To approve financial statements
  • To diversify the business of the company
  • To apply for amalgamation merger or reconstruction.
  • To take over a company or to acquire a controlling interest in another company.
  • Shareholders may impose restrictions on exercise of these powers.

Powers to be exercised with general meeting approval
Section 180 of the Companies Act 2013 provides with those powers which can be exercised only if they approved in general meeting
  • To sale, lease or otherwise dispose of the whole or any part of the company's undertakings
  • To invest otherwise in trust securities
  • To borrow money for the purpose of the company
  • To give time or refrain the director from repayment of any debt.

If restrictions which are imposed by this section are breached by the director, the title of lessee or purchaser is affected. But if person has acted in good faith with due care and diligence then it is not affected. This section does not apply to the companies whose ordinary business involves the selling of property or to put a property on lease.

Power to constitutes audit committee
Under section 177 board of director has power to constitute an audit committee. It needs to be constituted of at least three directors including independent directors. The eligibility of the member of audit committee's chairman is that he or she appointed should be able to read and understand financial statements. It is in accordance with the terms of reference specified by board in writing the audit committee shall function.

Power to constitute nomination and remuneration committee and stakeholder relationship committee
Under section 178 of the companies act 2013, board of directors is empowered to constitute nomination and remuneration committee and stakeholders' relationship committee.

There should be three or more non executive director, out of which half are required to be independent director in nomination and remuneration committee.

Stakeholder relationship committee can also be constituted by board in which there can be more than 1000 shareholders, debenture holders aur any other security holders. This committee shall resolve grievances of the shareholders.

Power to make contribution to charitable and other funds
Board of directors can contribute for the genuine and Bonafide cause as a charity under section 181 of the act. Only condition imposed is that, when contribution is more than 5% of net profit of company, then permission is required to be taken of company in general meeting.

Power to make a political contribution
Under section 182 of companies act 2013, political contributions can be made by companies but company making it should not be government company and which has been in existence for less than 3 years. There is 7.5 % of limit imposed that is companies' contribution to political parties shall not exceed this limit. Any of the contribution should first be sanctioned by board of directors.

Power to contribute to National defence fund
Under section 183 of companies act, directors is empowered to make contribution to National defence fund and to any of the fund which is made for the purpose of National defence. Any amount of contribution should be done as may be fit, the only thing needed to be done is that the amount contributed should be disclosed in the profit and loss account during financial year which it relates to.

Duties Of Director

  • Section 166 of the Companies Act, 2013 defines the duties of Directors. A Director of a company should perform the following duties
  • He should act in accordance with the articles of the company.
  • He should always Act in good faith for promoting the objects of the company and for the benefit of its members and act in the best interests of the company, shareholders, its employees and the community at large.
  • Exercise his duties with due and diligence and should exercise independent judgment.
  • Should not involve in situations which directly or indirectly conflict with the interest of the company.
  • Should not achieve or take undue gain or advantage of his office whether for himself or for his relatives, associates or partners.
If the director contravenes any provisions of this section, he shall be punishable by a fine of Rs. 1,00,000 or more, which may extend up to Rs. 5,00,000.

Resignation Of Director

Resignation could be done by director of the company under section 168 (1) of the companies act 2013. A director has the option to resign from his office by giving notice in writing to the company and board shall on receipt of such notice take note of the same and company shall intimate this to registrar in the manner as prescribed. In the immediately following general meeting by the company, it should be laid down in the reports of director

Within 30 days from the day of resignation. Director shall also forward copy of resignation along with detailed reason of resignation to the registrar of the company. There is no right provided under companies act 2013 to any managerial person to reject the resignation of the director. But if any offence has been committed by director, then he shall be liable even after the resignation.

As per section 168 (2) of companies act 2013 the resignation of director shall take effect from the date on which the ‘notices received' by the company or 'the date if any specified' by director in the notice whichever is later.

Removal Of Director

When we talk about directors of the company, they constituted very important position in the company. Directors are also called brain of the company as they are completely responsible for operating a business of company. But many times, situations come where management has to Suo Moto remove person from the post of director. For example, due to negligence, breach of privacy or any other condition etc. It is section 169 of the companies act 2013 which deals with the removal of directors.

Directors appointed by tribunal cannot be removed from the post of directorship and where the company has availed itself of option to, appoint not less than two third of the total number of directors according to principle of proportional representation as per provision of companies act 2013 then also no removal from post of directorship could be there

Removal by Company Law Board/National Company Law Tribunal
Any of the director of the company is found guilty of misconduct like oppression, harassment, fraud etc then he could be removed by the National company law tribunal or company law board. There is provision that if the director is removed by National company law tribunal then he cannot resume the position of director in any company for the period of next five years

Procedure for Removal of Directors
Firstly, concerned director should be intimated about his removal, board meeting should be done and resolution for removal of director should be passed. Notice of the meeting should be sent before 14 days of the general meeting. In meeting director should be allowed to speak and he should be listened, if it's just and equitable then only the resolution to remove director should be passed. If resolution gets passed then the documents for such removal should be prepared and the concerned department should be intimated if the director is independent director, then the consent of two third members of the meeting is necessary.

Summing Up
Directors of company play indispensable role in the functions of company. There are many types of directors which are appointed by the company and each has it's different functioning. They play vital role in smooth operation of company and that's the reason they are vested with many powers, at the same time there are certain restrictions to avoid misuse of powers.

Written By:
  1. Navneet Jain - B.A.Ll.B. 4th Year Bharati Vidyapeeth New Law College, Pune
  2. Nishkal Jain - B.A.Ll.B. 4th Year Bharati Vidyapeeth New Law College, Pune

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