Directors Directors | Company Law - CLAT PG PDF Download

Introduction

The Companies Act 2013 provides a framework for the definition and role of directors within a company. While it does not offer a comprehensive definition of a "director," it does outline key aspects related to their appointment and the structure of the Board of Directors.

Definition of Director and Board of Directors

• According to Section 2(34) of the Companies Act 2013, a "director" refers to an individual appointed to the Board of a company.
• Section 2(10) defines the "Board of Directors" or "Board" as the collective body of directors responsible for directing, controlling, and supervising the company's affairs.

Composition and Restrictions

• As per Section 149, the Board of Directors must consist solely of individuals; no body corporate, association, or firm can be appointed as a director.
• Section 166(6) prohibits the assignment of a director's office to another person, rendering any such assignment void.

Appointment Process and Director Identification Number (DIN)

• Section 153 mandates that individuals intending to become directors must apply electronically in Form DIR-3 for a Director Identification Number (DIN) from the Central Government, along with the prescribed fees.
• For new companies, DINs for the proposed first directors must be applied for through SPICe forms, subject to a ceiling of three new DINs.

Types of Directors

Directors can be classified as executive or non-executive based on their roles and responsibilities within the company.

Executive Director

• An executive director is involved in the day-to-day operations of the company.
• There are two main types of executive directors:
• Whole-time Director: A whole-time director dedicates their entire working hours to the company and has a significant personal interest in it as their primary source of income.
• Managing Director: A managing director is employed by the company and has substantial management powers over the company's affairs, subject to the Board's supervision.
• Executive directors are responsible for overseeing the administration, programs, and strategic plans of the organization.
• Key duties include fundraising, marketing, and community outreach.
• They report directly to the Board of Directors.

Non-Executive Director

• A non-executive director is not involved in the day-to-day management of the company.
• They provide independent oversight and contribute to the Board's decision-making process.

Appointment of Directors

Directors can be appointed in various ways as per the Companies Act, 2013:

First Director

• If the Articles of Association do not specify the appointment of first directors, the subscribers to the memorandum who are individuals are deemed to be the first directors until others are appointed.

Resident Director

• Every company must have at least one director who has stayed in India for a minimum of 182 days during the financial year.
• For newly incorporated companies, this requirement applies proportionately at the end of the financial year in which they are incorporated.

Women Director

• Certain classes of companies must have at least one women director, including:
• All listed companies
• Public companies with paid-up capital of ₹100 crore or more or with a turnover of ₹300 crore or more
• For listed entities, SEBI regulations require at least one independent women director on the board by specific deadlines based on market capitalization.

Alternate Director

• The Board can appoint an alternate director to act in the absence of an original director for a period of not less than three months from India, if authorized by the articles or a resolution passed by the company in a general meeting.

Additional Director

• The articles of a company may grant the Board the power to appoint an additional director, who holds office until the next annual general meeting or the last date by 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 an additional director.

Small Shareholder Director

• Every listed company may have one director elected by small shareholders, defined as shareholders holding shares of nominal value not exceeding ₹20,000 or such other sum as prescribed.
• Small shareholders can elect a director upon notice from a specified number of small shareholders.
• A listed company may voluntarily appoint a small shareholders' director without requiring notice from small shareholders.

Nominee Director

• The Board may appoint a nominee director as per the articles of the company, based on nominations by institutions, agreements, or government entities due to their shareholding in a government company.

Casual Vacancy

• If a director appointed by shareholders in a general meeting vacates their position before the end of their term due to death or resignation, the Board can appoint a director to fill the vacancy.
• The appointed director holds office only until the term of the original director they replaced.
• In a public company, if a director appointed by the company in a general meeting vacates their office before their term expires, the casual vacancy may be filled by the Board, subject to the articles of the company.
• The person appointed by the Board holds office only until the day the original director would have held office if they had not vacated.
• If a person appointed by the Board vacates their office, it is not considered a casual vacancy and cannot be filled by the Board.

Independent Director

• Companies must have a specified number of independent directors on their boards as per the Companies Act, 2013, and the Companies (Appointment and Qualification of Directors) Rules, 2014.

Independent Directors in Public Companies

All listed public companies must have at least one-third of their total directors as independent directors. Other public companies with:

• Paid-up capital of ₹10 crore or more
• Turnover of ₹100 crore or more
• Outstanding loans, debentures, and deposits of ₹50 crore or more

Should have at least two independent directors.

Exemptions for Certain Unlisted Public Companies

• Joint ventures
• Wholly owned subsidiaries
• Dormant companies as per section 455 of the Act

Companies required to appoint a higher number of independent directors due to audit committee composition must do so. If there is a vacancy for an independent director, the board of directors must fill it within three months or by the next board meeting, whichever is later.

Companies that no longer meet the criteria for three consecutive years are exempt from these provisions until they meet the conditions again. The definition of independent directors is outlined in section 149(6).

Disqualifications for Appointment of Director (Section 164)

• A person is not eligible for appointment as a director of a company if:
• He is of unsound mind and declared so by a competent court.
• He is an undischarged insolvent.
• He has applied to be adjudicated as an insolvent, and the application is pending.
• He has been convicted by a court of any offence and sentenced to imprisonment for not less than six months, and five years have not elapsed since the expiry of the sentence. If the sentence is seven years or more, he is disqualified from being a director in any company.
• An order disqualifying him from appointment as a director is in force.
• He has not paid any calls on shares of the company held by him, and six months have elapsed from the last day fixed for payment.
• He has been convicted of an offence related to related party transactions under section 188 in the last five years.
• He has not complied with subsection (3) of section 152.
• If he accepts directorships exceeding the maximum number allowed in section 165.

Filing Form DIR-9

• When a company fails to file financial statements or annual returns, or fails to repay deposits, interest, dividend, or redeem debentures, as specified in subsection (2) of section 164, it must file Form DIR-9 with the Registrar. This form includes the names and addresses of all directors of the company during the relevant financial years.
• If the company fails to file Form DIR-9 within thirty days of the failure that triggers disqualification under subsection (2) of section 164, the officers specified in clause (60) of section 2 of the Act are considered officers in default.
• Upon receiving Form DIR-9, the Registrar registers the document and makes it available for public inspection.

Removal of Director Disqualification

• Applications for removal of disqualification of directors are made in Form DIR-10.
• A private company may specify additional disqualifications for appointment as a director in its articles, beyond those in subsections (1) and (2).
• Disqualifications in clauses (d), (e), and (g) of subsection (1) apply even if an appeal or petition against the conviction or disqualification order is filed.

Removal of Directors

According to section 169 of the Companies Act, a company can remove a director before their term ends through an ordinary resolution. This applies regardless of how the director was appointed and despite what the company's articles or any agreement with the director states.

Rights and Duties of Directors

1. Duty to Act as per the Articles of the Company

• A director must act in accordance with the company's articles of association.

2. Duty to Act in Good Faith

• A director should act in good faith to promote the company's objectives for the benefit of all members, considering the interests of employees, shareholders, the community, and the environment.

3. Duty to Exercise Due Care

• Directors must perform their duties with care, skill, diligence, and independent judgment.

4. Duty to Avoid Conflict of Interest

• Directors should avoid situations where their interests conflict with those of the company.

5. Duty Not to Make Undue Gain

• Directors must not seek undue gains for themselves or their associates. If they do, they must repay the company the amount gained.

6. Duty Not to Assign Office

• Directors cannot assign their office, and any such assignment is void.