Directors & Managerial Personnel - 1 | Company Law - B Com PDF Download

Concept of Director

The Board of directors of a company is a nucleus, selected according to the procedure prescribed in the Act and the Articles of Association. Members of the Board of directors are known as directors, who unless especially authorised by the Board of directors of the Company, do not possess any power of management of the affairs of the company. Acting collectively as a Board of directors, they can exercise all the powers of the company except those, which are prescribed by the Act to be specifically exercised by the company in general meeting.

The directors of a company are its eyes, ears, brain, hands, nerves and other essential limbs, upon whose efficient functioning depends the success of the company. The directors formulate policies and establish organisational set up for implementing those policies and to achieve the objectives as contained in the Memorandum, muster resources for achieving the company objectives and control, guide, direct and manage the affairs of the company.

Position of Director

The position that the directors occupy in a corporate enterprise is not easy to explain. They are professional men hired by the company to direct its affairs. Yet they are not the servants of the company. They are rather the officers of the company. 'A director is not a servant of any master. He cannot be described as a servant of the company or of anyone’. 'A director is in fact a director or controller of the company’s affairs’. A director may, however, work as an employee in a different capacity.

The senior management positions mainly consist of manager, whole time director or as a managing director. These occupy the prominent position in the decision making of the company.

But, whether a person is to be regarded as a manager, whole time director or as a managing director of the company would depend on the nature and extent of the duties entrusted to him and that the designation under which the appointment is made would not make any difference in this regard. The duties assigned are the main things behind the position. The Companies Act, 2013 has detailed provisions with regard to these key managerial personnel.

Company to have Board of Directors (Section 149)

This section provides for the provisions for companies to have a duly constituted Board of Directors. According to this section:

Number of Directors

According to section 149 (1) of the Companies Act, 2013, every company shall have a Board of Directors consisting of individuals as directors and shall have:

(a) minimum number of directors

1. In the case of Public company - 3,
2. In the case of Private Company - 2, and
3. In case of One person company (OPC) – 1

(b) maximum number of directors: 15

If the company wants to appoint more than 15 directors, it can do so after passing a special resolution. [Every special resolution is required to be filed in form No. MGT – 14 as per Section 117(3)(a)].

As per the Notification G.S.R. 463(E) dated 5th June, 2015, the limit of maximum of 15 directors and their increase in limit by special resolution shall not apply to Government Company.

Further, as per the Notification G.S.R. 466(E) dated 5th June, 2015, the minimum and maximum limit of number of directors and their increase in limit by special resolution shall not apply to Section 8 companies.

(c) Women director

At least one woman director shall be on the Board of such class or classes of companies as may be prescribed. [Second proviso to section 149(1)]

Rule 3 of the Companies (Appointment and Qualification of Directors) Rules, 2014 provides that the following class of companies shall appoint at least one woman director:

1. Every listed company.
2. Every other public company having.

a) paid–up share capital of one hundred crore rupees or more; or

b) turnover of three hundred crore rupees or more

A company, which has been incorporated under the Act and is covered under provisions of second proviso to sub-section (1) of section 149 shall comply with such provisions within a period of six months from the date of its incorporation.

Further, any intermittent vacancy of a woman director shall be filled-up by the Board at the earliest but not later than immediate next Board meeting or three months from the date of such vacancy whichever is later.

Example: in XYZ Ltd., an intermittent vacancy of the women director arises on 15th June, 2015. Thus, the vacancy shall be filled-up by the Board at the earliest but not later than the date of the next Board meeting or three months from the date of such vacancy whichever is later.

If after the vacancy, the immediate Board meeting was held on 14th August, 2015, then the vacancy shall be filled-up by 14th August, 2015 or by 14th September, 2015 (3 months from the date of such vacancy) whichever is later. In this case it shall be filled up by 14th September, 2015.

If after the vacancy, the immediate Board meeting was held on 14th October, 2015 then the vacancy shall be filled-up by 14th October, 2015 or by 14th September, 2015 whichever is later. In this case it shall be filled up by 14th October, 2015.

Explanation: For the purposes of this rule (woman director on board), it is clarified that the paid up share capital or turnover, as the case may be, as on the last date of latest audited financial statements shall be taken into account. 

(d) Resident Director

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. [Section 149 (3)]

Transition period: Section 149 (5) provides for the transition period of one year from the date of commencement i.e., 1st April, 2014 to comply with section 149 (3).

Section 149 (3) of the Companies Act, 2013 requires every company to 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. The MCA clarified that residency requirement would be reckoned from the date of commencement of section 149 of the Act i.e., 1st April, 2014. The first previous calendar year for compliance with these provisions would, therefore, be calendar year 2014. The period to be taken into account for compliance with these provisions will be the remaining period of calendar year 2014 (i.e., 1st April to 31st December). Therefore, on a proportionate basis, the number of days for which the director(s) would need to be resident in India, during Calendar year 2014, shall exceed 136 days.

Regarding newly incorporated companies it is clarified that companies incorporated between 1st April, 2014 and 30th September, 2014 should have a resident director either at the incorporation stage itself or within six months of their incorporation. Companies incorporated after 30th September, 2014 need to have the resident director from the date of incorporation itself.

(e) Independent Director

Every listed public company shall have at least one-third of the total number of directors as independent directors [Section 149(4)].

The Central Government may prescribe the minimum number of independent directors in case of any class or classes of public companies.

Any fraction contained in such one-third numbers shall be rounded off as one. According to the Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014, the following class or classes of companies shall have at least 2directors as independent directors:

1. The Public Companies having paid up share capital of Rs 10 crore or more, or
2. The Public Companies having turnover of Rs 100 crore or more, or
3. The Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding Rs 50 crore.

However, in case a company covered under the above rule is required to appoint a higher number of independent directors due to composition of its audit committee, such higher number of independent directors shall be applicable to it.

Further, any intermittent vacancy of an independent director shall be filled-up by the Board at the earliest but not later than immediate next Board meeting or three months from the date of such vacancy, whichever is later.

If intermittent vacancy arise in 15^th June, 2015 and the immediate next Board meeting after the vacancy was held on 14th August, 2015, then the vacancy shall be filled-up by 14th August, 2015 or by 14th September, 2015 whichever is later. In this case it shall be filled up by 14th September, 2015. 

If the immediate next Board meeting after the vacancy was held on 14th October, 2015, then the vacancy shall be filled-up by 14th October, 2015 or by 14th Sept. 2015 whichever is later. In this case it shall be filled up by 14th October 2015.

However, where a company ceases to fulfill any of three conditions laid down above for three consecutive years, it shall not be required to comply with these provisions until such time as it meets any of such conditions.

For the purpose of the above assessment, the paid up share capital or turnover or outstanding loans, debentures and deposits, as the case may be, as existing on the last date of latest audited financial statements shall be taken into account.

A company belonging to any class of companies for which a higher number of independent directors has been specified in the law for the time being in force shall comply with the requirements specified in such law.

Appointment of Directors (Section 152)

According to section 152 of the Act:

(a) Appointment of directors

(1) Where no provision is made in the articles of a company for the appointment of the first director, the subscribers to the memorandum who are individuals shall be deemed to be the first directors of the company until the directors are duly appointed. [Section 152 (1)] In case of a One Person Company, an individual being member shall be deemed to be its first director until the director or directors are duly appointed by the member in accordance with the provisions of this section.[Section 152 (1)]

(2) Save as otherwise expressly provided in this Act, every director shall be appointed by the company in general meeting. [Section 152 (2)].

(3) No person shall be appointed as a director of a company unless he has been allotted the Director Identification Number (DIN) under section 154. [Section 152 (3)].

(4) Every person proposed to be appointed as a director by the company in general meeting or otherwise, shall furnish his Director Identification Number (DIN) and a declaration that he is not disqualified to become a director under this Act. [Section 152 (4)].

(5) 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 30 days of his appointment in Form DIR-12 along with the fee as prescribed [Section 152 (5)].

Rule 8 of the Companies (Appointment and Qualification of Directors) Rules, 2014 provides that every person who has been appointed to hold the office of a director shall on or before the appointment furnish to the company consent in writing to act as director in Form DIR-2. Also under Section 164(2), proposed director need to give declaration in Form DIR – 8 to the company.

The proviso to Section 152 (5) states that in case of appointment of an independent director in the general meeting, an explanatory statement for such appointment, annexed to the notice for the general meeting, shall include a statement that in the opinion of the Board, he fulfils the conditions specified in this Act for such an appointment.

(6) The Ministry of Corporate Affairs has clarified via Notification No. 463(E) and 466(E) dated 5th June, 2015, that section 152 (5) shall not apply: 

a) where appointment of such director is done by the Central Government or State Government, as the case may be.

b) to a section 8 company.

(b) Retirement by rotation [Section 152 (6)]

Unless the articles provide for the retirement of all directors at every annual general meeting, not less than two-thirds of the total number of directors of a public company shall:

(a) be persons whose period of office is liable to determination by retirement of directors by rotation, and

(b) save as otherwise expressly provided in this Act, be appointed by the company in general meeting.

(c) The remaining directors in the case of any such company shall, in default of, and subject to any regulations in the articles of the company, also be appointed by the company in general meeting.

(d) 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 as are liable to retire by rotation, or if their number is neither three nor a multiple of three, then, the number nearest to one-third, shall retire from office.

(e) 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.

(f) At the annual general meeting at which a director retires as aforesaid, the company may fill up the vacancy by appointing the retiring director or some other person thereto.

For the purposes of the above provisions: total number of directorsǁ shall not include independent directors, whether appointed under this Act or any other law for the time being in force, on the Board of a company.

(c) Vacancy in case of retiring director [Section 152 (7)]

(a) 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.

(b) 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, unless:

1. At that meeting or at the previous meeting a resolution for the re-appointment of such director has been put to the meeting and lost.
2. The retiring director has, by a notice in writing addressed to the company or its Board of directors, expressed his unwillingness to be so re-appointed.
3. He is not qualified or is disqualified for appointment.
4. A resolution, whether special or ordinary, is required for his appointment or re appointment by virtue of any provisions of this Act, or
5. Section 162 is applicable to the case.

For the purposes of section 152, the retiring director means a director retiring by rotation.

(d) Non applicability of section 152 (6) and 152 (7) 

The Ministry of Corporate Affairs has clarified via Notification No. 463(E) dated 5th June, 2015, that section 152(6) and (7) of the Companies Act, 2013, shall not apply to:

1. A Government company in which the entire paid up share capital is held by the Central Government, or by any State Government or Governments or by the Central Government and one or more State Governments;
2. A subsidiary of a Government company, referred to in (a) above, in which the entire paid up share capital is held by the Government company.

(e) Right of persons other than retiring directors to stand for directorship (Section 160) 

According to this section:

(1) A person who is not a retiring director in terms of section 152 shall, subject to the provisions of this Act, be eligible for appointment to the office of a director at any general meeting, if he, or some member intending to propose him as a director, has, not less than 14 days before the meeting, left at the registered office of the company, a notice in writing under his hand signifying his candidature as a director or, as the case may be, the intention of such member to propose him as a candidate for that office.

(2) Such notice must come along with the deposit of ` 1,00,000 or such higher amount as may be prescribed. Such deposit shall be refunded to such person or, as the case may be, to the member, if the person proposed get selected as a director or gets more than 25% of the total valid votes cast either on show of hands or on poll on such resolution.

(3) The company shall inform its members of the candidature of a person for the office of director (as discussed above) in such manner as may be prescribed.

Notice of candidature of a person for directorship: Rule 13 of the Companies (Appointment and Qualification of Directors) Rules, 2014 lays down the following points for giving notice of candidature of a person for directorship as under:

1. The company shall, at least 7days before the general meeting, inform its members of the candidature of a person for the office of a director or the intention of a member to propose such person as a candidate for that office.
2. By serving individual notices, on the members through electronic mode to such members who have provided their email addresses to the company for communication purposes, and in writing to all other members, and
3. By placing notice of such candidature or intention on the website of the company, if any.
4. However, it shall not be necessary for the company to serve individual notices upon the members as aforesaid, if the company advertises such candidature or intention, not less than 7days before the meeting at least once in a vernacular newspaper in the principal vernacular language of the district in which the registered office of the company is situated, and circulating in that district, and at least once in English language in an English newspaper circulating in that district.

(4) Non-applicability of section 160: The Ministry of Corporate Affairs has clarified via Notifications No. 463(E), 464(E) and 466(E) dated 5th June, 2015, that section 160 of the Companies Act, 2013, shall not apply to: 

1. A Government company in which the entire paid up share capital is held by the Central Government, or by any State Government or Governments or by the Central Government and one or more State Governments.
2. A subsidiary of a Government company, referred to in (a) above, in which the entire paid up share capital is held by the Government company.
3. A Private company
4. Companies whose articles provide for election of directors by ballot.

(f) Appointment of additional director, alternate director and nominee director (Section 161)

(1) Additional Director [Section 161 (1)]

Section 161(1) of the Companies Act, 2013 provides for appointment of additional director. According to this section:

1. The articles of a company may confer on its Board of Directors the power to appoint any person as an additional director at any time.
2. A person, who fails to get appointed as a director in a general meeting, cannot be appointed as an additional director.
3. Additional director 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.

(2) Alternate Director [Section 161 (2)] 

Section 161(2) of the Companies Act, 2013 provides for appointment of Alternate director. According to this section:

1. The Board of Directors of a company may, if so authorised by its articles or by a resolution passed by the company in general meeting, appoint a person to act as an alternate director in place of another director (original director) during his absence for a period of not less than 3 months from India.
2. A person who is holding any alternate directorship for any other director in the company cannot be considered for appointment as above.
3. No person shall be appointed as an alternate director for an independent director unless he is qualified to be appointed as an independent director under the provisions of this Act.
4. An alternate director shall not hold office for a period longer than that permissible to the original director in whose place he has been appointed and shall vacate the office if and when the original director returns to India.
5. If the term of office of the original director is determined before he so returns to India, any provision for the automatic re-appointment of retiring directors in default of another appointment shall apply to the original, and not to the alternate director.

(3) Nominee Director [Section 161 (3)] 

Section 161(3) of the Companies Act, 2013 provides for appointment of Nominee director. According to this section: 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.

(4) Casual Vacancy [Section 161 (4)]

Section 161 (4) of the Companies Act, 2013 provides for appointment of director in casual vacancy. According to this section:

1. In the case of a public company, 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.
2. Any person so appointed shall hold office only up to the date up to which the director in whose place he is appointed would have held office if it had not been vacated.