DIRECTORS

MEANING, LEGAL POSITION, DISQUALIFICATION, APPOINTMENT,

REMOVAL, POWERS, DUTIES AND TYPES
Meaning of Directors
Directors are the persons appointed to direct and supervise the affairs of a company.
As per section 2(34) of the Companies Act 2013 director means a director appointed to the board
of a company.
Section 149 of the Companies Act states that every company shall have a Board of Directors
consisting of individuals as directors and shall have-
(a) a minimum number of 3 directors in the case of a public company, 2 directors in the case of a
private company, and one director in the case of a One Person Company
(b) a maximum of 15 directors. A company may appoint more than 15 directors after passing a
special resolution.
(c) Such class or classes of companies as may be prescribed, shall have at least one woman director.
(d) Every company shall have at least one director who has stayed in India for a total period of not
less than 182 days in the previous calendar year.
(e) Every listed public company shall have at least one-third of the total number of directors as
independent directors and the Central Government may prescribe the minimum number of
independent
directors in case of any class or classes of public companies.

Legal Position of Directors

Directors are the persons duly appointed by the company to direct and manage the affairs of the
company. Their legal position is sometimes described as agents, sometimes as trustees, and
sometimes as managing
partners. But each of these is not exhaustive of their powers and responsibilities, but as indicating
useful points of view from which they may for the moment and for the particular purpose be
considered. So, the
different points of view of legal position of directors are as follows:

Directors as Agents
Directors are viewed as agents of the company for the conduct of its business. A company cannot
act by itself; it acts only through its directors. Directors act on behalf of the company and acting
on behalf of the company make the company liable on it and not themselves. The directors cannot
be held personally liable for any default of the company. Like agents, directors should conduct
business of the company with care, skill and diligence possessed by them. They are accountable
for all of company’s assets under their control, and the profits from assets of the company.
Directors cannot deal on their own, and are required to disclose their personal interest, if any, in
any transaction of the company.

Directors as Trustees
Directors are also described as trustees of the company. They must account for all the moneys over
which they exercise control. Their acts and dealings must be for the benefit of the company. They
must exercise
their powers honestly in the interest of the company and all the shareholders, and not their own
sectional interest. The directors of a company are trustees for the company with reference to their
power of applying funds of the company. For misuse of the power they could be liable as trustees.
“Directors are the persons selected to manage the affairs of the company for the benefit of
shareholders. It is an office of trust, which it is their duty to perform fully and entirely.”1 Directors
cannot exercise their powers of management against the interests of the company.

Directors as Managing Partners

Directors represent the shareholders to conduct the business of the company on their behalf. They
enjoy vast power of management over the company and perform many functions which are in the
nature of the proprietary, for example allotment of shares, raising of loans, investment of funds of
the company. This gives the impression of directors being the active partners and the shareholders
appointing them as dormant partners. The very fact that most of the times, directors themselves
are the significant shareholders in the company strengthens the argument that directors are the
managing partners of the company. But this may be true only partially as unlike partners directors
cannot bind other shareholders by their dealing, and dissimilar to partners directors are elected and
are subject to retirement also.

Disqualifications of Directors

Following persons cannot be appointed as directors of a company (Sec. 164):

(i) A person found by a court to be of unsound mind and the finding is in force.
(ii) An undischarged insolvent.
(iii) a person who has applied to be adjudged as insolvent and his application is pending.
(iv) A person who has been convicted by a court, whether in India or elsewhere, of an
offence involving moral turpitude and sentenced to six months’ imprisonment and a
period of five years has not passed from the date of the expiry of the sentence. Provided
that if a person has been convicted of any offence and sentenced in respect thereof to
imprisonment for a period of seven years or more, he shall not be eligible to be
appointed as a director in any company;
(v) an order disqualifying him for appointment as a director has been passed by a court or
Tribunal and the order is in force;
 (vi) he has not paid any calls in respect of any shares of the company held by him, whether
alone or jointly with others, and six months have elapsed from the last day fixed for the
payment of the call;
(vii) he has been convicted of the offence dealing with related party transactions under
section 188 at any time during the last preceding five years; or he has not complied
with sub-section (3) of section 152.
(viii) A person who is already a director of a public company which: — has not filed the
annual accounts and annual returns for any continuous 3 financial years commencing
on and after the first day of April, 1999; or — has failed to repay its deposit or interest
thereon on due date or redeem its debentures on due date or pay dividend and such
failure continues for one year or more. A private company may by its articles provide
for more grounds, in addition to those referred above, on account of which a person
shall not be appointed as director of the company. But in case of public companies and
their subsidiaries provisions on additional dis-qualifications will be invalid.

Who may be appointed as a Director?

(i) No body corporate, association or firm shall be appointed director of a company, and
only individual shall be so appointed; and
(ii) who has been allotted a Director Identity Number (DIN).

Appointment of Directors

The appointment of directors is made in the following manner:

1. Appointment of First Directors
2. Appointment of Directors by Members.
3. Appointment of Directors by the Board.
4. Appointment of Directors by the Tribunal
5. Appointment of Directors by the Central Government
6. Appointment of Directors by Proportional Representation.

Removal of Directors

A director can be removed from his office by:

1. Shareholders under section 169

(i) A company may, by ordinary resolution, remove a director, not being a director
appointed by the Tribunal under section 242, before the expiry of the period of his
office after giving him a reasonable opportunity of being heard.
 (ii) However, a company cannot remove those where not less than two thirds of the
total number of directors has been appointed according to the principle of
proportional representation under section 163.

2. Tribunal under section 402.

Where an application is made to the Tribunal under section 241 for relief against oppression
and mismanagement of a company’s affairs, the Tribunal may, if satisfied, order for the
removal of any of the directors of the company (Section 242). The Tribunal may also pass
the order for the termination or setting aside of an agreement which the company might
have made with its directors. The effect of such order will be removal of such director or
directors from his or their office. Such a director (including managing director) shall not
be entitled to serve as a manager, managing director or director of any company for a period
of 5 years from the date of the Tribunal’s order terminating or setting aside his contract
with the company.

Powers of Directors

(a)to make calls on shareholders in respect of money unpaid on their shares;

(b)to authorise buy-back of securities;
(c)to issue securities, including debentures, whether in or outside India;
(d)to borrow money;
(e)to invest the funds of the company;
(f)to grant loans or give guarantee or provide security in respect of loans;
(g)to approve financial statement and the Board’s report;
(h)to diversify the business of the company;
(i)to approve amalgamation, merger or reconstruction
(j)The power to fill casual vacancies in the Board.
(k) Sanctioning of a contract in which a director is interested

Duties of Directors

(1) To Act in accordance with the Articles of Association of the Company

(2) To Act in Good Faith: Directors must act honestly and diligently in the interests of the company.
They must exercise their powers bona fide i.e. in what they consider, is in the interests of company
and not for any collateral purpose.
(3) Duty of reasonable care
(4)A director of a company shall not involve in a situation in which he may have a direct or indirect
interest that conflicts, or possibly may conflict, with the interest of the company.
(5)A director of a company shall not achieve or attempt to achieve any undue gain or advantage
either to himself or to his relatives, partners, or associates and if such director is found guilty of
making any undue gain, he shall be liable to pay an amount equal to that gain to the company.
(6) A director of a company shall not assign his office and any assignment so made shall be void.
Directors should perform the entire duties place upon them by the Act and Articles, personally.

TYPES OF DIRECTORS

Independent Director {U/S 149(2)}

Independent directors are non-executive directors of a company and help the company to improve
corporate credibility and enhance the governance standards. In other words, an independent
director is a non-executive director without a relationship with a company which might influence
the independence of his judgment.

The tenure of the independent directors is five consecutive years; however, they shall be entitled
to reappointment by passing a special resolution with the disclosure in the Board’s report. Every
listed public company must have at least one-third of a total number of directors as independent
directors. Following unlisted public companies need to appoint at the least two independent
directors:

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

Public Companies with Turnover of Rs.100 Crores or more,
Public Companies with total outstanding loans, deposits, and debenture of Rs.50 Crores or more.

Independent Director Qualifications

• The person should possess appropriate experience, skills and knowledge in one or more
fields of law, finance, management, marketing, sales, research, administration, technical
operations, corporate governance, or other disciplines related to the company’s business.

• relatives of an independent director should not -be indebted to the company, its subsidiary,
holding or associate company or their director or promoters have given a guarantee or
security in connection with the indebtedness of a third person to the company, its
subsidiary, holding or associate company or their directors or promoters of such holding
company, for an amount of Rs.50 lakhs, at any time during the two immediately preceding
financial years or during the current financial year.

• The person is not:

A promoter of the company or its subsidiary, holding or associate companies. Related to
the directors or promoters in the company, or any of its subsidiary, holding or associate
companies. The person should not have any financial relationship (other than remuneration
 as a director or having transaction not exceeding 10% of the total income) with company
or any of its subsidiary, holding or associate companies or their directors or promoters,
during the current financial year or the last two immediately preceding financial years.

• The person or his/her relatives should not: Held or holds the position of Key Managerial
Personnel (KMP) or has been the employee of the company or any of its subsidiary, holding
or associate companies in any of three financial years immediately preceding the financial
year in which such person is proposed to be appointed.

• Be or has been and employee, proprietor or a partner in any three financial years
immediately preceding the financial year in which such person is proposed to be appointed
– as an auditor firm, cost auditor, legal consultant or company secretary of the company or
any of its subsidiary, holding or associate companies. Holds together with relatives a total
voting power exceeding 2% in the company.

• Be a Chief Executive or director of any non-profit organisation that receives 25% or more
of its receipts from the company, any of its promoters or directors or its subsidiary, holding
or associate companies or that holds 2% or more of the total voting power of the company.

Small Shareholders Directors

According to section 151 of the Act every listed company may have one director elected by such
small shareholders. For the purpose of this section, “small shareholder” means a shareholder
holding shares of nominal value of not more than twenty thousand rupees or such other sum as
may be prescribed. Terms & Conditions for Small Shareholders’ Director Rule 7 laid down the
following terms and conditions for appointment of small shareholder’s director, which are as
under:
i. A listed company, may upon notice of not less than 1000 or one-tenth of the total
number of small shareholders, whichever is lower, have a small shareholders’ director
elected by the small shareholders. A listed company may suo moto opt to have a director
representing small shareholders.
ii. The small shareholders intending to propose a person as a candidate for the post of
small shareholder’s director shall leave a signed notice of their intention with the
company at least 14 days before the meeting specifying the their details and proposed
director’s details. The details include name, address, shares held and folio number etc.
If the proposer does not hold any shares in the company, the details of shares held and
folio number need not be specified in the notice.

Women Director
Every listed company shall appoint at least one woman director within one year from the
commencement of the second proviso to Section 149(1) of the Act. Every other public company
having paid up share capital of Rs. 100 crores or more or turnover of Rs. 300 crore or more as on
the last date of latest audited financial statements, shall also appoint at least one woman director
within 1 years from the commencement of
second proviso to Section 149(1) of the Act.

A period of six months from the date of company’s incorporation, has been provided to enable the
companies incorporated under Companies Act, 2013 to comply with this requirement. It is better
to say that existing companies (under the previous companies act) has to comply the above
requirements within one year and new companies (under the new companies act) has to comply
within 6 months from the date of its incorporation. Further if there is any intermittent vacancy of
a woman director then it shall be filled up by the board of directors within 3 months from the date
of such vacancy or not later than immediate next board meeting, whichever is later.

Additional Director
The board of directors can appoint additional directors, if such power is conferred on them by the
articles of association. Such additional directors hold office only upto the date of next annual
general meeting or the last date on which the annual general meeting should have been held,
whichever is earlier. A person who fails to get appointed as a director in a general meeting cannot
be appointed as Additional Director.

Alternate Director
Section 161(2) of the Act allowed the followings:
(i) The Board of Directors of a company must be authorised by its articles or by a
resolution passed by the company in general meeting for appointment of alternate
director.
(ii) The person in whose place the Alternate Director is being appointed should be absent
for a period of not less than 3 months from India.
(iii) The person to be appointed as the Alternate Director shall be the person other than the
person holding any alternate directorship for any other Director in the Company.
(iv) If it is proposed to appoint an Alternate Director to an Independent Director, it must be
ensured that the proposed appointee also satisfies the criteria for Independent Directors.
(v) An alternate director shall not hold office for a period longer than that permissible to
the director in whose place he has been appointed and shall vacate the office if and
when the director in whose place he has been appointed returns to India.
(vi) If the term of office of the original director is determined before he so returns to India,
any provision for the automatic reappointment of retiring directors in default of another
appointment shall apply to the original, and not to the alternate director.

Adhoc Director
Causal / Ad-hoc Director: In case any there is a vacancy in the director's office due to reasons like
death, resignation, insolvency, or the disqualification of a director, a casual/ad-hoc director shall
be selected by the company's Board.