11 Directors, Their Appointment, Qualifications, Positions, Powers, Duties And Liabilities

Dr.Ashish Kumar Srivastav

 

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1.1 Introduction

 

The company is legal person which is physically not in existence so it needs limbs and organs which may mobilize it and make it functional. The organs and limbs of the company are directors. The directors of the company are like ship of the captain which steer it in right direction to maximize the profit and make the company beneficial for all its stakeholders. The directors of the company are the most important persons in corporate governance who do almost everything related with affairs of the company. If they are best the company shall be the best despite of all its resources but if they are not so good company cannot perform better in spite of all its resources. The Board of Directors is an amalgam which includes various types of directors like executive directors, independent directors, minority directors, deemed directors, first directors, shadow directors, nominee directors, additional directors, whole-time directors, retirable directors, celebrity directors, women’s directors, employees’ directors, alternate directors, Managing director, chief managing director etc. The corporate and securities laws provide detailed provisions regarding regulating his working pattern in corporate governance. In this module we shall essentially see definition, meaning, types, appointment, qualifications, removal, powers, liabilities and duties of directors.

 

1.2 Learning Outcome

 

At the end of this module one shall be able to understand the following:

 

1.3 Director: Meaning and Definition

 

A company is a legal entity and does not have any physical existence. Lord Reid held that, “A living person has a mind which can have knowledge or intention and he has hands to carry out his intention. A corporation has none of these it must act through living persons1.” It can act only through natural persons. The person, acting on its behalf, is called Director. A Director is any person, occupying the position of Director, by whatever name called2. Now there is slight change in the definition and it is defined in section 2(34)3 as “director” means a director appointed to the Board of a company. They are professional men, hired by the company to direct its affairs. But, they are not the servants of the company. They are rather the officers of the company. Only individual can be appointed as directors in company4. Supreme Court 5 pointed out reason as why it is necessary that a director must be an individual. It said that office of director is office of trust and in case of failure to carry out this trust someone should be held responsible. It simply means a firm, company or other legal persons cannot be directors of company but in earlier days a firm used to direct a company and it was knows as managing partners or managing trustees. Directors are public institution while companies are social institutions6.

 

It is not the name by which a person is called but the position he occupies and the functions and duties which he discharges that determine whether in fact he is a Director or not. So long as a person is duly, appointed by the company to control the company’s business and, authorized by the Articles to contract in the company’s name and, on its behalf, he functions as a Director. The Articles of a company may, therefore, designate its Directors as governors, members of the governing council or, the board of management, or give them any other title, but so far as the law is concerned, they are simple Directors7.

 

1.4 Position of Directors

 

The directors are agents of company. They are trustees of company and they are also officer of company. They are professional men hired by the company to direct its affairs yet they are not servant of company8. But by a separate service agreement he can offer his professional services to company as Lee was doing in his company of which he was sole employee and sole director9. The companies Act, 2013 is silent about their position in the company. Bowen LJ clarifies his position in the company and he says that, “Directors are described sometimes as agents, sometimes as trustees and sometimes as managing directors. But each of these expressions is used not as 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 considered10.”

 

1.4.1 Directors As Agents of Company

 

Lord Cairns observed that, “What is the position of the directors of a public company? They are merely agents of a company. The company itself cannot act in its person for it has no person; it act only through directors and the case is as regards those directors, merely the ordinary case of principal and agent11.”

 

In agency a person is employed to establish, maintain and annul a relationship of principal with third parties and he has necessary authority for the same and directors also enjoy the same authority in terms of company and third parties. This authority they get from memorandum and articles of the company and if their act is beyond it, it is ultra vires. Directors can bind the company as agents only when they act collectively as a Board of directors12. However the directors do not fit in the role of agents as they are selected not employed with authority and powers of directors are wide and independent in comparison to agents.

 

1.4.2 Directors as Trustees of Company

 

In trust an author creates a trust for the beneficiary which is managed by a trustee. Lindley LJ on the basis of analogy observed that, “Although directors are not properly speaking trustees, yet they have always been considered and treated as trustees of company which comes to their hand or which is actually under their control and ever since joint stock companies were invented, directors have been held liable to make good moneys whey have misapplied upon the same footing as if they were trustees13.”

 

Being trustee of the company, they are custodian of the assets of the company and they should apply the funds in best interest of company. If they misapply, misappropriate or divert the use of fund for their own vested interests they must be held liable. In Percival v. Wright14 the directors were not held liable for buying shares from shareholders who were not disclosed about a pending transaction of sale of an asset of the company. But if they would have induced the shareholders to sell their shares to them concealing the fact that they were going to merge the company to another company at a profit, they would have become trustees of this profit to the individual shareholders. Supreme Court held that, “The directors of companies have been variously described as agents, trustees or representatives but one thing is certain that the director’s action on behalf of a company is in a fiduciary capacity and their acts and deeds have to be exercised for the benefit of the company. They are agents of the company to the extent they have been authorized to perform certain acts on behalf of company. In a limited sense they are also trustees for the shareholders of company15.”

 

The directors must exercise all his powers in utmost good faith of the company as they stand in fiduciary capacity to the company. However the directors are not trustees as strictu senso as there is no author of a trust all agreements are singed on behalf of company by the directors.

 

1.4.3 Directors as organ or Officer of Company

 

Directors are limbs and organs of the company as Calcutta High Court observed that, “We should treat certain officials as organs of the company, for whose action the company is to be held liable just as a natural person is for the action of his limbs16.” The director is a vital organ of company absence of which may paralyze the company.

 

The companies Act 2013 in section 2(59) treats them as officer of company. It says that, “officer” includes any director, manager or key managerial personnel or any person in accordance with whose directions or instructions the Board of Directors or any one or more of the directors is or are accustomed to act”. Section 2 (60) keeps the directors in category of ‘officer in default’ and the Companies Act, 2013 at several places punishes him as ‘officer in default’ for non-compliance of its provisions. Apart from being officer, they can serve to any post in official capacity so they can also be employee of company17. They are also taken as managing partners when they are having personal liabilities and golden shares i.e. qualification share. In such cases all the good decisions made by them shall fetch them more money in form of dividends. The directors also can be employees of company. It was held that, “Directors are elected representatives of the shareholders engaged in directing the affairs of the company in its behalf. As such directors are agents of the company but they are not employees or servants of company. However there is nothing in law to prevent a director from accepting employment under the company under a special contract which he may enter in to with the company18.”

 

1.5 Number of Directors and Inter-company Directorship

 

A public company shall have minimum three and private company shall have minimum two directors and every company may have maximum 15 directors which can be raised by passing special resolution and one of such directors shall be a woman19. Every company has to have at least one Indian resident director20 and 1/3rd directors must be independent directors who essentially are not connected with company and officers of company like promoters and directors.

 

Section 165 provides that no person, after the commencement of this Act, shall hold office as a director, including any alternate directorship, in more than twenty companies at the same time. The maximum number of public companies in which a person can be appointed as a director shall not exceed ten. If a person is appointed as director he may resign from one company or chose his option and intimate the concerned company. It also explains that for reckoning the limits of public companies in which a person can be appointed as director, directorship in private companies that are either holding or subsidiary company of a public company shall be included. Earlier there was no limit for private companies and this limitation did not apply to subsidiary companies and alternate directorship but now even those are included. Charitable companies and unlimited companies may exceed this limit.

 

1.6. Qualification & Disqualification of Directors

1.6.1 Qualification of Directors

 

As we know that a director is highly important person in corporate affairs so he must be very qualified but Companies Act does not lay down any academic qualification for directorship which seems logical being right to trade as a fundamental right it must be available to everyone. The companies Act in order to weed out dishonest persons from running companies lays down many requirements. These requirements or qualifications are following:

 

The people may take help of director database21 to get the name of people who can work as independent directors.

 

The person who intends to work as a director shall apply to central government for Director Identification Number (DIN) which shall be allotted to him once only22.

 

Now the requirement of qualification shares is not there in the new Act under section 270 of the old Act which provided that a director shall have to acquire the qualification share within two months otherwise he shall be punished. One must be mindful that this was earlier also not a provision of companies Act but if company wanted to have this they could have by a provision in the Articles of Company. But now new Act does not provide anything about qualification shares. One must be mindful that qualification shares bring sense of responsibility and develops belongingness to the company of the director. A company even now may have it provided this does not contravene the provisions of Companies Act, 201323.

 

1.6.2 Disqualifications

 

Besides aforementioned qualifications a director needs following things in negative. These are disqualifications. Section 164 provides for disqualifications of directors. According to it, “A person shall not be eligible for appointment as a director of a company, if : (a) He is of unsound mind and stands so declared by a competent court;

 

(b) He is an undischarged insolvent;

(c) He has applied to be adjudicated as an insolvent and his application is pending;

(d) He has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the date of 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;

 

(e) An order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force;

 

(f) 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;

 

(g) 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

 

(h) He has not complied with sub-section (3) of section 152 and has not obtained DIN.

 

Apart from these requirements a person must not be director, including the company in which he intends to be appointed as director, in more than 20 companies24. Section 164(2) provides for an additional disqualification which says that no person shall be re-appointed in a company or appointed in another company as a director if a company of which he has been director has failed to file financial statement or annual returns for three consecutive financial years or has failed to return the interest on public deposit etc for one year or more.

 

All these qualification needs a little bit explanation. Unsoundness of mind is related with contractual capacity which is related with cause-effect theory. If a person is capable to form a rationale judgment about what is he doing and what is the effect of his doing he is of sound mind. Insolvency again is related with contractual capacity. Moral turpitude offences are essentially white collar crimes i.e socio-economic offences. Punjab High Court held that conviction on a criminal charge is also a moral turpitude offence. It said that moral turpitude is, “Anything done contrary to justice, honesty, principle or good morals, an act of baseness, vileness or depravity in the private and social duties which a man owes to his fellow men or society in general contrary to accepted and customary rule of right and duty between man and man25.”

 

In such cases appointment is possible after cooling off period (5 years). But in conviction for serious offences no appointment is possible and this proviso has been added for first time to keep perpetrators out of corporate governance. Related party transaction means siphoning off the money of corporation by related party transaction.

 

If a person has been a director in company which defaults in filing annual return or does not repay public deposits, he cannot be appointed as director in another company. It was challenged earlier in Supreme Court26 which upheld the constitutionality of provision. It held that, “The judgment while dismissing the petition held that bringing in of section 274(1) (g) of the Act was to serve a larger public interest and did not violate the fundamental rights or any other rights of the petitioner. The provision is no punishment on the company, it only renders directors of the defaulting company incapable of acting as directors of the defaulting company incapable of acting as directors for a certain period.

 

1.7 Appointment of Directors

 

There are various methods to appoint various types of directors in various types of companies. Some of such methods are following:

1.7.1 First Directors/Deemed Directors/Shadow Directors/Promoters as Directors

 

Generally Articles of the company provides for such directors27. But if the Articles are silent about it then subscribers of Memorandum are deemed to be first directors of company. They shall hold office till first AGM when the directors are finally appointed. As the section 149 requires the directors to be appointed within one year of incorporation so the same must be done as soon as possible. No person shall be appointed as a director of a company unless he has been allotted the Director Identification Number under section 154 and a declaration that he is not disqualified to become a director under this Act. A person appointed as a director shall not act as a director unless he gives his consent to hold the office as director and such consent has been filed with the Registrar within thirty days of his appointment.

 

1.7.2 By Shareholders in General Meeting

 

Shareholders in Annual General Meeting appoint minority director, rotational directors, independent directors. Section 151 provides that a listed company may have one director elected by such small shareholders. Section 152 provides that every director shall be appointed by the company in general meeting. In a public company 2/3rd of such directors shall be persons whose period of office is liable to determination by retirement of directors by rotation. Others 1/3rd shall be whole time directors. Section 149(4) provides that every listed public company shall have at least one-third of the total number of directors as independent directors.

 

At the subsequent AGM the directors to retire by rotation at every annual general meeting shall be those who have been longest in office since their last appointment, but as between persons who became directors on the same day, those who are to retire shall, in default of and subject to any agreement among themselves, be determined by lot. The maximum size of board is fifteen and in counting the total number of directors independent directors are not counted. In public company every director is appointed by a single resolution while in a private company all directors may be appointed by a single resolution.

 

If the vacancy of the retiring director is not so filled-up and the meeting has not expressly resolved not to fill the vacancy, the meeting shall stand adjourned till the same day in the next week, at the same time and place, or if that day is a national holiday, till the next succeeding day which is not a holiday, at the same time and place.28 If at the adjourned meeting also, the vacancy of the retiring director is not filled up and that meeting also has not expressly resolved not to fill the vacancy, the retiring director shall be deemed to have been re-appointed at the adjourned meeting.

 

1.7.3 By Board of Directors

 

According to section 161the articles of a company may confer on its Board of Directors the power to appoint any person, other than a person who fails to get appointed as a director in a general meeting, as an ‘Additional Director’ at any time who shall hold office up to the date of the next annual general meeting or the last date on which the annual general meeting should have been held, whichever is earlier. Likewise for temporary absent of three months of a director from India can be filled by ‘Alternate Director’. If the office of any director appointed by the company in general meeting is vacated before his term of office expires in the normal course, the resulting casual vacancy may, in default of and subject to any regulations in the articles of the company, be filled by the Board of Directors at a meeting of the Board. Such directors are termed as ‘Casual Director’. The provision of additional and alternate director is a periodic arrangement and cannot bypass the general process of appointment by shareholders in general meetings by remaining on board for years29.

 

1.7.4 By Central Government/National Company Law Tribunal

 

Section 161(3) provides that subject to the articles of a company, 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 of any agreement or by the Central Government or the State Government by virtue of its shareholding in a Government company. The power under section 408 of old Act has now been deleted where Central Government in case of oppression and mismanagement could appoint its nominee directors on the board now such power has been conferred upon National Company Law Tribunal under section 242.

 

1.7.5 By Third Parties

 

The Articles of the company may authorize the third parties to appoint persons on the Board of Directors as their nominee to protect their interests. They can be directors nominated by debenture holders, creditors and bankers etc. the idea behind such directors is to ensure meticulous application of money lent by creditors so the repayment could be secured.

 

1.8 Vacancy & Removal

 

1.8.1 Vacancy

 

Section 167 provides that the office of a director shall become vacant in following cases:

 

(a) He incurs any of the disqualifications specified in section 164 for example unsoundness of mind, insolvency, conviction for moral turpitude offences etc.

(b) He absents himself from all the meetings of the Board of Directors held during a period of twelve months with or without seeking leave of absence of the Board;

(c) He acts in contravention of the provisions of section 184 relating to entering into contracts or arrangements in which he is directly or indirectly interested;

(d) He fails to disclose his interest in any contract or arrangement in which he is directly or indirectly interested, in contravention of the provisions of section 184; (e) He becomes disqualified by an order of a court or the Tribunal;

(f) He is convicted by a court of any offence, whether involving moral turpitude or otherwise and sentenced in respect thereof to imprisonment for not less than six months:

 

Provided that the office shall be vacated by the director even if he has filed an appeal against the order of such court;

 

(g) He is removed in pursuance of the provisions of this Act;

(h) He, having been appointed a director by virtue of his holding any office or other employment in the holding, subsidiary or associate company, ceases to hold such office or other employment in that company.

 

A private company may, by its articles, provide any other ground for the vacation of the office of a director in addition to those specified in section 167(1).

 

If a person, functions as a director even when he knows that the office of director held by him has become vacant on account of any of the disqualifications specified in 167(1), he shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both. All such vacancies on account of disqualifications shall be filled by promoter or central Government.

 

1.8.2 Retirement & Resignation

 

The usual tenure of a rotation director is five years. As we know that 2/3rd of directors shall retire in each AGM by rotation after completion of their tenure. Section 168 provides that a director may resign from his office by giving a notice in writing to the company and the Board. His vacancy shall also be filled by promoter or central Government

 

1.8.3 Removal

 

According to section 169 National Company Law Tribunal under section 242 and shareholders under section 169 can remove a director before expiry of his term by giving him opportunity of hearing. It can be done by ordinary resolution passed in AGM. This section provides for detailed protection to such person affirming the principles of natural justice and principle of Audi Altrem Partem which means hear the other side. Such vacancy shall be filled in the same manner as the casual vacancies are filled. Though no grounds of removal are mentioned in the section however where the shareholders feel the policies pursued by directors or any of them are not to their liking, they have the option to remove the directors by passing an ordinary resolution. Directors can be removed on grounds of fraud, misfeasance, persistent negligence in carrying out the duties, avoidance of sound principles of prudent commercial practices, serious injury to interest of trade, industry or business, defrauding creditors etc. Sound business principles include proper business accounts, clear balance sheet, integrity, fair dealings, and efficient services.

 

Shareholders cannot remove a director who has been appointed by NCLT.

 

Apart from statutory provision of section 169 the Articles of a company may also provide for removal of directors. Delhi High Court held that, “Where Articles confer power on Board to remove a director such power is not affected by provision of section 284(now sec. 169). The Articles are in nature of an agreement between the shareholders who are the joint owners of the company. If some specific methodology is devised by consent nothing precludes the members from doing so30.”

 

1.9 Powers of Directors

 

The directors steer the company for maximization of profit. The Board of directors gets its powers from Articles, Memorandum and provisions of Companies Act, 2013. Certain powers of Board can be exercised by individual directors to further the routine affairs as per allocation but certain powers shall be exercised by the board collectively.

 

 

1.9.1 General Powers of Directors (Routine)

 

Section 179 says that the Board of Directors 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. But in exercising such power or doing such act or thing, the Board shall be subject to the provisions contained in that behalf in this Act, or in the memorandum or articles, or in any regulations not inconsistent therewith and duly made there under, including regulations made by the company in general meeting.

 

The Board shall not exercise any power or do any act or thing which is directed or required, whether under this Act or by the memorandum or articles of the company or otherwise, to be exercised or done by the company in general meeting as mentioned in section 180.

 

1.9.2 Collective Powers of Board (Substantial)

 

The Board of Directors of a company shall exercise the following powers collectively on behalf of the company by means of resolutions passed at meetings of the Board, namely: (a) To make calls on shareholders in respect of money unpaid on their shares;

 

(b) To authorise buy-back of securities under section 68;

(c) To issue securities, including debentures, whether in or outside India; (d) To borrow monies;

(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) To take over a company or acquire a controlling or substantial stake in another company; (k) Any other matter which may be prescribed:

 

Out of these powers the powers mentioned under clauses (a) to (c) can be delegated to a committee of directors but other powers related with borrowing, merger, amalgamation, diversification which are substantial in nature cannot be delegated.

 

The aforementioned powers of board shall not be deemed to affect the right of the company in general meeting to impose restrictions and conditions on the exercise by the Board of any of the powers specified in this section. Within the limits laid down by the Act, the powers of board of directors are supreme and the shareholders cannot alter or restrict their powers by passing a unanimous resolution. They can remove unscrupulous directors.

 

In following cases shareholders of company can restrict or interfere with powers of board:

  1. Where directors are acting mala fide or against the interests of company;
  2. Where the board is interested in a transaction so they shall be incompetent to work;
  3. Where there is complete deadlock in management.

 

Supreme Court held that, “A company is a juristic person and it acts through its directors who are collectively referred as Board of directors. An individual director has no power to act on behalf of company of which he is director unless by some resolution of Board of the company, specific powers are given to him. Whatever decisions are taken regarding running the affairs of the company, they are taken by the board of directors31.”

 

1.9.3 Powers of Board to be Exercised In General Meetings

 

Certain powers can be exercised by board with sanction in meetings of shareholders only. Section 180 discusses about such powers. It provides that the Board of Directors of company shall exercise the following powers only with the consent of the company by a special resolution, namely:

 

(a) To sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company or where the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings.

(b) To invest otherwise in trust securities the amount of compensation received by it as a result of any merger or amalgamation;

(c) To borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share capital and free reserves, apart from temporary loans obtained from the company’s bankers in the ordinary course of business;

(d) To remit, or give time for the repayment of, any debt due from a director.

 

Restriction in such classes shall not affect the rights of bonafide transferee or such companies where the ordinary business of the company consists of, or comprises, such selling or leasing. 1.9.4 Managerial Powers of Directors

 

The directors as are limbs of company so they have all power for better and effective management of company including the following:

 

1.9.5 Other Restrictions on Directors

1.9.5.1 Restrictions on Political Contributions

 

Section 182 provides that a company, other than a Government company and a company which has been in existence for less than three financial years, may contribute any amount directly or indirectly to any political party. The aggregate of the amount which may be so contributed by the company in any financial year shall not exceed seven and a half per cent of its average net profits during the three immediately preceding financial year.

 

Every company shall disclose in its profit and loss account any amount or amounts contributed by it to any political party. If a company makes any contribution in contravention of the provisions of this section, the company shall be punishable with fine which may extend to five times the amount so contributed and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months and with fine which may extend to five times the amount so contributed.

 

1.9.5.2 Interested Directors

 

Section 184 provides that an interested director shall disclose his interest to in the first meeting of Board. If a director of the company contravenes the provisions of 184, such director shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than fifty thousand rupees but which may extend to one lakh rupees, or with both.

 

1.9.5.3 Restrictions Related with Loan

 

Section 185 provides that no company shall, directly or indirectly, advance any loan, including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person. But this restriction does not apply to managing and whole time directors who is being extended such loan being resolved by special resolution in AGM for recognition of his services or to a company the business of which is financing. If any loan is advanced or a guarantee or security is given or provided in contravention of the provisions of section 185(1), the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, and the director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.

 

1.10 Duties of Directors

1.10.1 General Duties of a Director

 

The directors are very important persons in the corporate affairs. They derive their duties wowing to the position and role that they have in the company. Their duties also ooze out from their fiduciary capacity. Generally a director is expected to show great amount of skill and care in the all transaction where he is representing the company to the world. A director has to conduct the affairs of company in such a manner that all the decisions taken by them may serve the interests of company and all its stakeholders. He should not run the company in autocratic way. Generally powers of substantial nature are not exercised by the directors alone and they are subject to final confirmation of general body of company. Substantial powers are exercised by board in board’s meetings.

 

Generally for better internal management of the corporate affairs, the Articles of the company details out the role, responsibilities and duties of directors in routine and extraordinary business of company. He must be meticulous especially in financial transaction, account keeping and auditing of books of account. Though doctrine of indoor management is a relic of past but on the basis of it the third party may bind the company for reckless transactions done by reckless directors, therefore in performance of duties, great amount of care and skill is expected from directors. He in general sense has following duties:

 

Now these duties have been given statutory recognition categorically under section 166 which provides that a director of a company shall act in accordance with the articles of the company. A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment. A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment. 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. 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. A director of a company shall not assign his office and any assignment so made shall be void. If a director of the company contravenes the provisions of this section such director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

 

1.10.2 Statutory Duties of Directors

 

The companies Act, 2013 at various places describes about so many duties of directors out of which few may be seen as following:

 

i. Duty not to mislead by offer document; (sec. 34& 35)

 

ii. Duty not to induce investors for share subscription; (Sec. 36)

 

iii. Duty not to issue irredeemable preference shares; (sec. 55)

 

iv. Duty to file annual return to Registrar; (sec. 92)

 

v. Duty to hold statutory meetings of company; (sec 96)

 

vi. Duty to maintain books and auditing of the books, appoint auditors; (sec. 128)

 

vii. Duty to ensure planning and execution of Corporate Social Responsibility initiatives; (sec. 135)

 

viii. Duty to get DIN (sec. 156 & 159)

 

ix. Duty to perform certain things as enumerated in section 166.

 

x. Duty to attend board’s meetings; (sec. 173)

 

xi. Duty not to make political contribution in contravention of provision; (sec. 182)

 

xii. Duty to disclose his interest in transaction; (184)

 

xiii. Duty not to receive loan from company;(sec. 185)

 

xiv. Duty to receive remuneration in confirmation of provisions; (sec. 197)

 

xv. Duty to make declaration of solvency in winding up of the company; (sec. 305).

 

1.11 Liability of Director

 

The liability of a Director to the company may arise from his breach of fiduciary duty. He can be made liable to shareholders, outsiders, company and co-directors. Where a Director acts dishonestly to the interest of the company, he will be held liable for breach of fiduciary duty. Most of the powers of Directors are powers in trust and, therefore, should be exercised in the interest of the company and, not in the interest of the Directors or, any section of members.

 

1.11.1 Ultra vires Acts

 

The object clause of memorandum defines as well as confines the powers of company. Any act done beyond such objects shall be ultra vires32. Though doctrine of ultra vires has now become diluted however it is still relevant to save the company from unwarranted reckless transactions done by the directors for personal and vested interests in the garb of contracts done on account of company by the directors. For ultra vires acts directors shall be held personally liable. This doctrine aims at protecting the interests of shareholders of company.

 

1.11.2 Negligence

 

The directors as we know various statutory and non-statutory duties to various stakeholders. If they breach such duty then resultantly they would be held negligent in performance of the duties. For negligence of such duties directors may be held liable under tortuous liability and they cannot be exonerated from their liabilities by Articles and general body of the company.

 

1.11.3 Mala Fide Acts

 

As we have discussed that directors are agents, trustees and officers of the company and they stand in fiduciary position in relation to the company, therefore they should utilize the resources, money and property of the company in the best interests of company with due care and diligence. If the want of care is shown then the acts shall be mala fide acts for which the 32Ashbury Railway Carriage & Iron Co. Ltd. v. Riche (1875) LR 7 HL 653, A.L. Mudaliar v. LIC, AIR 1963 SC 1185.

 

directors shall be liable for breach of trust and, may be required to make good the loss or damage, suffered by the company by reason of such mala fide acts and in such situations shareholders can intervene33. Since the directors are holding a confidential and powerful position so they have access to information about the assets of the company and if they apply the corporate funds for vested interests they can be held liable for torts like malfeasance and misfeasance and conversion of property. They are equally liable for diversion of money for personal use in criminal laws as a case of criminal breach of trust, criminal misappropriation of property etc. In such cases the court may requisition him to return and restore such money personally.

 

1.11.4 Liability for Co-Directors?

 

The directors do not act in isolation. They are jointly and severally liable for the acts of company. All the directors are agents of each other. They sink and swim together. A director owes vicarious liability for other directors. If a particular act is to be done by the board of directors and the same is done by single directors on behalf of all such directors, then in case of liabilities he can seek contribution from all his co-directors.

 

1.11.5 Criminal Liability of Directors

 

Directors in so many cases incur criminal liability for their acts and omissions; some of them are following:

 

i. Non-compliance of incorporation formalities (sec. 8);

 

ii. Misstatement in prospectus (sec. 35);

 

iii. Fraudulent Inducement for share-subscription (sec. 36);

 

iv. Failure to return application money;

 

v. Criminal liability regarding issuance of bonus shares, discounted shares, irredeemable preference share and calling and falsification of share certificates;

 

vi. Failure to file annual return; (sec. 92)

 

vii. Failure to hold AGM;33Satya Charan Lal v. Rameshwar Prasad Bajoria, AIR 1950 FC 133.

 

viii. Grant of loan in contravention of Companies Act (sec. 185);

 

ix. Failure to maintain proper books of accounts;

 

x. Failure to distribute dividends (sec. 127);

 

xi. Failure to file annual financial statement (sec. 129)

 

xii. Failure to get DIN (sec. 159);

 

xiii. Failure to exceed maxim limit of inter-corporate directorship (sec. 165);

 

xiv. Failure to comply with statutory duties (sec. 166);

 

xv. Accepting deposit in contravention of provisions of companies Act;

 

xvi. Failure to disclose interest (sec. 184);

 

xvii. Criminal liability for fraud, false evidence etc. (sec. 339, 447, 449 & 450)

 

1.12. Meetings of Board of Directors

 

The board often is found to be either an amalgam where people do not meet and if they meet they do not conduct the affairs of company. Therefore the companies Act is very much particular of meeting of directors so the business of the company may be negotiated and furthered. Section 173 provides that every company shall hold the first meeting of the Board of Directors within thirty days of the date of its incorporation and thereafter hold a minimum number of four meetings of its Board of Directors every year in such a manner that not more than one hundred and twenty days shall intervene between two consecutive meetings of the Board. Central Government may exempt smaller companies from such requirements. The participation of directors in a meeting of the Board may be either in person or through video conferencing or other audio visual means, as may be prescribed, which are capable of recording and recognising the participation of the directors and of recording and storing the proceedings of such meetings along with date and time. A seven days notice is must for such notice by post or electronic mails.

 

Section174 provides that the quorum for a meeting of the Board of Directors of a company shall be one third of its total strength or two directors, whichever is higher. Where a meeting of the Board could not be held for want of quorum, then, unless the articles of the company otherwise provide, the meeting shall automatically stand adjourned to the same day at the same time and place in the next week or if that day is a national holiday, till the next succeeding day, which is not a national holiday, at the same time and place. It is essential that all business of such board’s meetings should be recorded in a book called minute book. Minutes of every meeting must be signed as passed in the next meeting.

 

1.13 Summary

 

Company is contemplation in the eye of law and gets its locomotion and function through its directors. Collective compendium of directors is known as ‘Board of Directors’. Board is responsible for directing the affairs of company in such a manner which may prove beneficial to all stakeholders. The legal position of directors is very interesting. He stands in fiduciary capacity to company. He is trustee, agents and officer of company.

 

A public company must have three and a private company must have two directors. The maximum strength of the board can be fifteen. A person may be directors of maximum twenty companies. Only an Individual can be appointed as director. The directors need to have contractual capacity, unscrupulous conduct and fair dealer in financial matters. He must have director identification number. Articles of company may provide for golden or qualification shares. A person of unsound mind, insolvent, convicted for moral turpitude and serious offences involving punishment up to seven years are disqualified to work as a director.

 

Directors may be appointed by memorandum, articles, shareholders, National Company Law Tribunal in general meeting. They may resign and retire. They may also be removed by shareholders. There can be vacancy on account of incurring disqualifications as mentioned in the Act after appointment as director. All such vacancies shall be filled by Board and shareholders.

 

The powers of board are of two categories i.e. general powers and collective powers. The board can exercise the less important powers without shareholders but substantial powers can only be exercised by shareholders in general meetings only. The directors owe general and statutory duties pertaining to wide aspects of corporate affairs.

 

The directors are liable for misconduct, ultra vires acts, malfeasance, misfeasance, negligence, breach of trust, siphoning off money etc. In several matters they owe criminal liability for acts and omissions cause substantial loss to corporate affairs of the company.

 

Group decisions are always welcomed in corporate governance process and now board has to meet at least four times in one financial year. They can use electronic mail and video conferencing now for meeting so as to further the cause of maximization of profit by company.

 

you can view video on Directors, Their Appointment, Qualifications, Positions, Powers, Duties And Liabilities

 

References:-

 

1) Majumdar, A.K., Kapoor, G.K., Company Law and Practice, (Taxman Pub. Pvt. Ltd., New Delhi,) pg. 614-763
2) John Birds & A.J.Boyle, Boyle & Birds Company Law, Universal Law Publication Co. Ltd., Delhi.
3) Denis Fox &Michel Bown, The Law of Private Companies, Sweet &Maxwell,London.

4) Mayson,French &Rayon, Company Law, Oxford University Press,Oxford.

5) Nicholas Bourne, Principles of Company Law, Cavandish Publications Ltd.,London.

6) Corporate Governance Modules (ICSI, New Delhi, 2007)

7) Sethana, Jehangir M, Indian Company Law, (Modern Law Publication, New Delhi,

8) Ramaiya, Guide to Companies Act, Lexis Nexis Wadhwa, Nagpur.

9) Davis Paul. L. , Gower’s Principles of Modern Company Law, Sweet and Maxwell, London.

10) Robert R. Penington, Company Law, Oxford University Press, New Delhi.

11) K.S. Anantharaman, Lectures on Company Law and Competition Act, LexisNexis, Nagpur.

 

Web-links:

 

1) www.nism.ac.in

2) www.sebi.gov.in

3) www.mca.gov.in

4) www.bse.com

5) www.investopoedia.com

6) www.opsi.gov.uk

7) www.baiili.org