1.1 Board of Directors Definition Powers Restrictions Prohibition on Board | unit 1 management of company management of company

ECL 2

UNIT 1

MANAGEMENT OF COMPANY

1.1 Board of Directors- Definition, Powers, Restrictions, Prohibition on Board

MEANING

I. Definition:- As per Section 2(34) of Companies Act 2013 Director means a director appointed to the Board of a company.

II. Responsibility:- The board of directors of a company is primarily responsible for: determining the company’s strategic objectives and policies; monitoring progress towards achieving the objectives and policies; appointing senior management; accounting for the company’s activities to relevant parties, e.g. shareholders.

III. Minimum Directors Required in Company:-

One Person Company:- One Director.

Private Limited Company:- Two Directors.

Public Limited Company:- Three Directors.

Maximum 15 directors can be appointed in any format of Company (OPC, Public, Private). Bypassing Special Resolution Company can increase the number of Directors beyond 15. Out of appointed directors one director should be resident in India for more than 182 days in previous calendar year

Powers of Board

(1) 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: Provided that in exercising such power or doing such act or thing, the Board shall be subject to the provisions contained therein behalf during this Act, or within the memorandum or articles, or in any regulations not inconsistent therewith and duly made thereunder, including regulations made by the company generally meeting: Provided further that 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 generally meeting.

(2) No regulation made by the company generally meeting shall invalidate any prior act of the Board which might are valid if that regulation had not been made.

(3) The Board of Directors of a company shall exercise the subsequent powers 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 authorize buy-back of securities under section 68;

(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) the other matter which can be prescribed: as long as the Board may, by a resolution passed at a gathering , delegate to any committee of directors, the managing director, the manager or the other principal officer of the company or within the case of a branch office of the corporate , the principal officer of the branch office, the powers laid out in clauses (d) to (f) on such conditions because it may specify:

Provided further that the acceptance by a banking company within the ordinary course of its business of deposits of cash from the public repayable on demand or otherwise and withdraw able by cheque, draft, order or otherwise, or the placing of monies on deposit by a banking company with another banking company on such conditions because the Board may prescribe, shall not be deemed to be a borrowing of monies or, because the case could also be , a making of loans by a banking company within the meaning of this section.

(4) Nothing during this section shall be deemed to affect the proper of the company generally meeting to impose restrictions and conditions on the exercise by the Board of any of the powers laid out in this section.

Restrictions on powers of Board

(1) The Board of Directors of a company shall exercise the subsequent powers only with the consent of the company by a special resolution, namely:—

(a) To sell, lease or otherwise eliminate the whole or substantially the whole of the undertaking of the company or where the corporate owns quite one undertaking, of the whole or substantially the whole of any of such undertakings.

Explanation.—For the purposes of this clause,—

(i) “undertaking” shall mean an undertaking during which the investment of the company exceeds twenty per cent. of its net worth as per the audited record of the preceding fiscal year or an undertaking which generates twenty per cent. of the total income of the company during the previous financial year;

(ii) The expression “substantially the entire of the undertaking” in any fiscal year shall mean twenty per cent. or more of the value of the undertaking as per the audited record of the preceding financial year;

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

(c) to borrow money, where the cash to be borrowed, along side the cash already borrowed by the company will exceed aggregate of its paid-up share capital and free reserves, aside from temporary loans obtained from the company’s bankers within the ordinary course of business:

Provided that the acceptance by a banking company, within the ordinary course of its business, of deposits of cash from the public, repayable on demand or otherwise, and withdraw able by cheque, draft, order or otherwise, shall not be deemed to be a borrowing of monies by the banking company within the meaning of this clause.

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

(2) Every special resolution gone by the company generally meeting in reference to the exercise of the powers referred to in clause (c) of sub-section (1) shall specify the entire amount up to which monies could also be borrowed by the Board of Directors.

(3) Nothing contained in clause (a) of sub-section (1) shall affect—

(a) the title of a buyer or other one that buys or takes on lease any property, investment or undertaking as is mentioned therein clause, in good faith; or

(b) The sale or lease of any property of the company where the standard business of the company consists of, or comprises, such selling or leasing.

(4) Any special resolution gone by the company consenting to the transaction as is mentioned in clause (a) of sub-section (1) may stipulate such conditions as could also be laid out in such resolution, including conditions regarding the utilization , disposal or investment of the sale proceeds which can result from the transactions:

Provided that this sub-section shall not be deemed to authorise the company to effect any reduction in its capital except in accordance with the provisions contained during this Act.

(5) No debt incurred by the company in more than the limit imposed by clause (c) of sub-section (1) shall be valid or effectual, unless the lender proves that he advanced the loan in good faith and without knowledge that the limit imposed by that clause had been exceeded.

PROHIBITION ON BOARD

Prohibitions and restrictions regarding political contributions

(1) Notwithstanding anything contained in the other provision of this Act, a company, aside from a Government company and a company which has been alive for fewer than three financial years, may contribute any amount directly or indirectly to any political party:

Provided that the amount mentioned in sub-section (1) or, as the case could also be , the aggregate of the amount which can 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 years:

Provided further that no such contribution shall be made by a company unless a resolution authorizing the making of such contribution is passed at a gathering of the Board of Directors and such resolution shall, subject to the opposite provisions of this section, be deemed to be justification in law for the making and therefore the acceptance of the contribution authorised by it.

(2) Without prejudice to the generality of the provisions of sub-section (1),—

(a) a donation or subscription or payment caused to tend by a company on its behalf or on its account to a person who, to its knowledge, is carrying on any activity which, at the time at which such donation or subscription or payment was given or made, can reasonably be considered likely to affect public support for a party shall even be deemed to be contribution of the amount of such donation, subscription or payment to such person for a political purpose;

(b) the amount of expenditure incurred, directly or indirectly, by a company on an advertisement in any publication, being a publication within the nature of a gift , brochure, tract, pamphlet or the likes of , shall even be deemed,—

(i) Where such publication is by or on behalf of a party , to be a contribution of such amount to such political party, and

(ii) Where such publication isn't by or on behalf of, but for the advantage of a political party, to be a contribution for a political purpose.

(3) Every company shall disclose in its profit and loss account any amount or amounts contributed by it to any party during the fiscal year to which that account relates giving particulars of the entire amount contributed and therefore the name of the party to which such amount has been contributed.

(4) If a company makes any contribution in contravention of the provisions of this section, the company shall be punishable with fine which can reach five times the amount so contributed and each officer of the company who is in default shall be punishable with imprisonment for a term which can reach six months and with fine which can reach five times the amount so contributed.

Explanation.—For the needs of this section, ―political party‖ means a political party registered under section 29A of the Representation of the People Act, 1951 (43 of 1951).

1.2 Director- Meaning and Legal Position of Directors, Types of Directors, Related Party Transactions (Sec. 188)

MEANING:

The directors are the persons elected by the shareholders to direct, conduct, manage or supervise the affairs of the company.

The Companies Act doesn't precisely define the term ‘director’.

But it's been defined under several sections of the Act, within the following manner:

DEFINATION

According to Sec. 2 (13) of the companies Act., “Director includes any person occupying the position of director by whatever name called.” This definition given by the companies Act doesn't give the clear meaning of the word director, but it means a person who performs the duties of a director will be deemed to be a director regardless of the name by which he is called.

Similar view was expressed in Re Forest Dean Coal Mining Co. “It doesn't matter what you call them, as long as you understand what their true position is, what's that they're commercial men managing a trading concern for the advantage of themselves and every one other shareholders in it.”

According to Sec. 2(30), “A director is that the officer of the company.”

According to Sec.303 Explanation (1), “Any person, in accordance with whose directions or instructions, the Board of Directors of the company is accustomed to act, shall be deemed to be director of the company.”

LEGAL POSITION OF DIRECTORS

Legal Position/Status of Directors:

The Act doesn't define the position/status of directors, and it's difficult to define the exact legal position of the directors of a company.

Although, the administrators are referred as the trustees, or the managing partners of the company, but in real sense they're none of them. Directors could also be considered as the agent, trustees or managing partner for a specific moment and for the particular purpose.

Bowen, L.J. observed, “Directors are described sometimes as managing partners. 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'll for the moment and for the particular purpose be considered.”

The legal position of directors can be better explained in the following manner:

1. Position of Directors as Trustees:

(i) Legally a director is not the trustee:

Legally speaking, a director isn't the trustee of the company. within the case Smith vs. Anderson, James L.J. observed, “A trustee is a man who is the owner of property and deals with it as principal, as owner and as master, subject only to an equitable obligation to account to some persons to whom he stands in relation of a trustee. The office of director is that of a paid servant of the company. A director never enters into a contract for himself, but he enters into a contract for his principal i.e., for the company of which he is a director or for whom he is acting.”

From this point of view, directors are not the trustees of the company, because they are not the legal owners of the properties of the company.

(ii) Directors as trustees of the company’s property and money:

Although the directors aren't , properly speaking, the trustees, yet they're trustees of the company’s money and property and that they are sure to affect capital under their control as a trust. they need to act in good faith and exercise their powers within the interest and benefit of the company.

(iii) Directors as trustees to the powers entrusted to them:

The directors are the trustees in respect of powers entrusted to them. they must exercise these powers bonafide and for the benefit of the company as a whole.

Examples of such powers are as follows:

(a) the power of employing the funds of the company;

(b) the power to declare dividend in the general meeting;

(d) The power of forfeiting shares;

(e) The power of receiving payment of call in advance;

(f) The power of approving the transfer of shares;

(g) The power of accepting the surrender of shares;

(h) The power of issuing the unissued shares of the company and making allotments thereof.

(iv)Directors not as trustees to the shareholders:

It should be noted that directors occupy a fiduciary relationship only in relation to the company and not in relation to an individual shareholder. they are not trustees for any particular shareholder.

In case of Percival vs Wright, “The Directors purchased shares from a shareholder when negotiations were being held by them for sale of the company at a very high price. They did not disclose this fact to the shareholder. it was held that the shareholder could not repudiate the contract on that ground.”

(v) Directors not as trustees to the outsiders: the directors aren't as trustees to other persons getting into any contract with the corporate . The position of directors as Trustee is often briefly stated as under:

(i) they're not trustees within the legal sense of the term.

(ii) They occupy a fiduciary position in reference to the company and that they are considered trustees with respect to the company’s property and money.

(iii) They're also trustees as regards powers entrusted to them. they need to exercise these powers bonafide within the interest of the corporate and that they are in charge of secret profits made by them, if any.

(iv) They're not trusted of individual shareholders.

2. Position of Directors as Agents:

The company being a man-made person cannot manage its affairs itself but the management of the company is entrusted to some human agency referred to as directors. they're the selected representatives of the shareholders. They run the business on behalf of the shareholders and may be termed as the agent of the company.

In the case of Forguson vs. Wislon, Cairns L.J. stated the position of the directors as, “They are merely agents of the company. the company itself cannot act in its own persons for it's no person, it can act ‘only through directors’ and therefore the case is, as regards those directors, merely the ordinary case of principal and agent, for whenever an agent is liable, those directors would be liable. Where the liability would attach to the principal and therefore the principal only, the liability is that the liability of the company.”

In Great Eastern Railway vs. Turner, it had been held that the directors are agents within the transaction which they enter into on behalf of the company.

The directors must act within the name of the company and within the scope of their authority. If the directors enter into a contract which is beyond their powers but within the powers of the company, the company, like all other principal, may ratify it.

Where the directors enter into a contract which is ultra virus the company, the company cannot ratify it and neither the company nor the directors are liable thereon . However the directors could also be held responsible for breach of implied warranty of authority.

It is ‘however’ not correct to mention that directors are the agents of the company because agents aren't elected but appointed and second thing that agents haven't any independent power while the administrators have independent powers on certain matters.

3. Position of Directors as Managing Partner:

Directors are described because the managing partners because, on the one hand, they're entrusted with management and control of the affairs of the company, and on the opposite hand, they're usually important shareholders of the company.

However, directors aren't partners within the ordinary partnership law sense in as much as the liability of a partner is unlimited whereas the liability of a director as a member is restricted to the worth of shares held by him (except within the case of unlimited companies). Further unlike a partner, director has no authority to bind the opposite directors and shareholders.

4. Position of Directors as Officers:

Under Sec. 2 (30) of the companies Act, the directors are the officers of the company. As officers, they'll by held liable if the provisions of the companies Act have not been fully complied with by them.

5. Position of Directors as Employees:

The directors could also be considered because the employees of the company also, because they work under a special contract of service with the company and are paid remuneration accordingly.

6. Position of Directors as Organs of the Company:

Directors have also been treated, in judicial decisions, organs of the company for whose action the company is to be held liable even as a natural person is responsible for the actions of his limbs.

In Bath vs. Standard Land Co., Neville J. stated, “The board of directors are the brain and therefore the refore the only brain of the company which is that the body and the company can and does act only through them.”

Considering the above discussion, Gessel said: “Directors are described as trustees, agents or managing partners, not as exhausting their powers or responsibilities, but as indicating useful points of view.”

According to L.J. Bowen, “Directors are described sometimes as agents, sometimes as trustees and sometimes as managing partners but each of this expression is employed not as exhausting of their powers and irresponsibility’s, but as indicating useful points of view which they'll for the moment and for the actual purpose be considered.”

Thus, it's clear from the above discussion that directors are neither the agents, nor the trustees, nor managing partners, nor officers, nor employees of the company but they substitute a fiduciary position towards the company for the powers and company’s property under their control.

TYPES OF DIRECTORS

EXECUTIVE

H/she is that the full-time working director of the company. they have a higher responsibility towards the organization. the company and its employees expect them to be efficient and careful altogether the dealings.

NON-EXECUTIVE DIRECTORS

H/she are non- working directors and aren't involved within the everyday working of the company. they might take part within the planning or policy-making process. They challenge the executive directors to return up with decisions and solutions that are within the best interest of the company.

INDEPENDENT DIRECTOR

Manner of selection of independent directors and maintenance of databank of independent directors

(1) Subject to the provisions contained in sub-section (6) of section 149, an independent director could also be selected from a data bank containing names, addresses and qualifications of persons who are eligible and willing to act as independent directors, maintained by any body, institute or association, as may by notified by the Central Government, having expertise in creation and maintenance of such data bank and placed on their website for the utilization by the company making the appointment of such directors:

Provided that responsibility of exercising due diligence before selecting an individual from the info bank mentioned above, as an independent director shall roll in the hay the company making such appointment.

(2) The appointment of independent director shall be approved by the company generally meeting as provided in sub-section (2) of section 152 and therefore the explanatory statement annexed to the notice of the overall meeting called to think about the said appointment shall indicate the justification for selecting the appointee for appointment as independent director.

(3) The data bank mentioned in sub-section (1), shall create and maintain data of persons willing to act as independent director in accordance with such rules as could also be prescribed.

(4) The Central Government may prescribe the way and procedure of selection of independent directors who fulfil the qualifications and requirements specified under section 149.

ADDITIONAL DIRECTOR

Appointment of additional director, alternate director and nominee director

(1) The articles of a company may confer on its Board of Directors the facility to appoint a person, aside from an individual who fails to urge appointed as a director during a general meeting, as a further director at any time who shall hold office up to the date of subsequent annual general meeting or the last date on which the annual general meeting should are held, whichever is earlier.

(2) The Board of Directors of a company may, if so authorized by its articles or by a resolution passed by the company generally meeting, appoint an individual , not being a person holding any alternate directorship for any other director within the company, to act as an alternate director for a director during his absence for a period of not but three months from India:

Provided that no person shall be appointed as an alternate director for an independent director unless he's qualified to be appointed as an independent director under the provisions of this Act:

Provided further that 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:

Provided also that 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 first , and to not the alternate director.

(3) 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 government by virtue of its shareholding during a Government company.

(4) within 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 within the normal course, the resulting casual vacancy may, in default of and subject to any regulations within the articles of the company, be filled by the Board of Directors at a meeting of the Board:

Provided that 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.

ALTERNATE DIRECTOR

When a director is absent for quite three months; an alternate director comes on board on his behalf. He acts as a director for a temporary period. and can only hold office as permissible to the director whose office this director holds.

INTERESTED DIRECTOR

(1) Every director shall at the first meeting of the Board during which he participates as a director and thereafter at the first meeting of the Board in every fiscal year or whenever there's any change within the disclosures already made, then at the first board meeting held after such change, disclose his concern or interest in any company or companies or bodies corporate, firms, or other association of individuals which shall include the shareholding, in such manner as could also be prescribed.

(2) Every director of a company who is in any way, whether directly or indirectly, concerned or curious about a contract or arrangement or proposed contract or arrangement entered into or to be entered into—

(a) with a body corporate during which such director or such director in association with the other director, holds quite two per cent. shareholding of that body corporate, or may be a promoter, manager, Chief executive officer of that body corporate; or

(b) with a firm or other entity during which , such director may be a partner, owner or member, because the case could also be , shall disclose the character of his concern or interest at the meeting of the Board during which the contract or arrangement is discussed and shall not participate in such meeting:

Provided that where any director who isn't so concerned or interested at the time of getting into such contract or arrangement, he shall, if he becomes concerned or interested after the contract or arrangement is entered into, disclose his concern or interest forthwith when he becomes concerned or interested or at the first meeting of the Board held after he becomes so concerned or interested.

(3) A contract or arrangement entered into by the company without disclosure under sub-section (2) or with participation by a director who is concerned or interested in any way, directly or indirectly, within the contract or arrangement, shall be voidable at the option of the company.

(4) If a director of the company contravenes the provisions of sub-section (1) or subsection (2), such director shall be punishable with imprisonment for a term which can reach one year or with fine which shall not be but fifty thousand rupees but which can reach one lakh rupees, or with both.

(5) Nothing during this section—

(a) shall be taken to prejudice the operation of any rule of law restricting a director of a company from having any concern or interest in any contract or arrangement with the company;

(b) shall apply to any contract or arrangement entered into or to be entered into between two companies where any of the directors of the one company or two or more of them together holds or hold less than two per cent. of the paid-up share capital within the other company.

NOMINEE DIRECTORS

Shareholders, central government or third parties appoint them. Nominee directors come on board when there's grave mismanagement or the board members abuse their powers.

RELATED PARTY TRANSACTION

(1) Except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as may be prescribed, no company shall enter into any contract or arrangement with a related party with respect to—

(a) Sale, purchase or supply of any goods or materials;

(b) Selling or otherwise disposing of, or buying, property of any kind;

(d) Availing or rendering of any services;

(e) Appointment of any agent for purchase or sale of goods, materials, services or property;

(f) Such related party's appointment to any office or place of profit within the company, its subsidiary company or associate company; and

(g) Underwriting the subscription of any securities or derivatives thereof, of the company:

Provided that no contract or arrangement, within the case of a company having a paid-up share capital of not but such amount, or transactions exceeding such sums, as could also be prescribed, shall be entered into except with the prior approval of the company by a

Provided further that no member of the company shall vote on such to approve any contract or arrangement which can be entered into by the company, if such member may be a related party:

Provided also that nothing during this sub-section shall apply to any transactions entered into by the company in its ordinary course of business aside from transactions which aren't on an arm‘s length basis:

Provided also that the need of passing the resolution under first proviso shall not be applicable for transactions entered into between a company and its wholly owned subsidiary whose accounts are consolidated with such company and placed before the shareholders at the overall meeting for approval.

(a) the expression ―office or place of profit‖ means any office or place—

(i) where such office or place is held by a director, if the director holding it receives from the company anything by way of remuneration over and above the remuneration to which he is entitled as director, by way of salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;

(ii) where such office or place is held by an individual other than a director or by any firm, private company or other body corporate, if the individual, firm, private company or body corporate holding it receives from the corporate anything by way of remuneration, salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;

(b) the expression ―arm‘s length transaction‖ means a transaction between two related parties that's conducted as if they were unrelated, so that there is no conflict of interest.

(2) Every contract or arrangement entered into under sub-section (1) shall be referred to within the Board‘s report to the shareholders along with the justification for entering into such contract or arrangement.

(3) Where any contract or arrangement is entered into by a director or the other employee, without obtaining the consent of the Board or approval by a 1 [resolution] within the general meeting under sub-section (1) and if it's not ratified by the Board or, as the case could also be , by the shareholders at a gathering within three months from the date on which such contract or arrangement was entered into, such contract or arrangement shall be voidable at the choice of the Board and if the contract or arrangement is with a related party to any director, or is authorised by the other director, the directors concerned shall indemnify the company against any loss incurred by it.

(4) Without prejudice to anything contained in sub-section (3), it shall be open to the company to proceed against a director or the other employee who had entered into such contract or arrangement in contravention of the provisions of this section for recovery of any loss sustained by it as a results of such contract or arrangement.

(5) Any director or the other employee of a company, who had entered into or authorised the contract or arrangement in violation of the provisions of this section shall,—

(i) just in case of listed company, be punishable with imprisonment for a term which may reach one year or with fine which shall not be but twenty-five thousand rupees but which can reach five lakh rupees, or with both; and

(ii) just in case of the other company, be punishable with fine which shall not be but twenty-five thousand rupees but which can reach five lakh rupees.

1.3 Appointment of Directors, Qualifications and Disqualifications, Powers, Duties, Liabilities of Directors, Loans to Directors, Remuneration of Directors

(1) Where no provision is formed within 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 and just in case of a 1 Person Company a private 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.

(2) Save as otherwise expressly provided during this Act, every director shall be appointed by the company generally meeting.

(3) Nobody shall be appointed as a director of a company unless he has been allotted the Director number under section 154.

(4) Every one proposed to be appointed as a director by the company generally meeting or otherwise, shall furnish his Director number and a declaration that he's not disqualified to become a director under this Act.

(5) An individual appointed as a director shall not act as a director unless he gives his consent to carry the office as director and such consent has been filed with the Registrar within thirty days of his appointment in such manner as could also be prescribed:

Provided that within the case of appointment of an independent director within the general meeting, an explanatory statement for such appointment, annexed to the notice for the overall meeting, shall include a statement that within the opinion of the Board, he fulfils the conditions laid out in this Act for such an appointment.

(6) (a) Unless the articles provide for the retirement of all directors at every annual general meeting, not but two-thirds of the entire number of directors of a public company shall

(i) Be persons whose period of office is liable to determination by retirement of directors by rotation; and

(ii) Save as otherwise expressly provided during this Act, be appointed by the corporate generally meeting.

(b) The remaining directors within the case of any such company shall, in default of, and subject to any regulations within the articles of the company, even be appointed by the company generally meeting.

(c) At the first annual general meeting of a public company held next after the date of the overall meeting at which the primary directors are appointed in accordance with clauses (a) and (b) and at every subsequent annual general meeting, one-third of such of the directors for the nonce as are susceptible to retire by rotation, or if their number is neither three nor a multiple of three, then, the amount nearest to one-third, shall retire from office.

(d) the directors to retire by rotation at every annual general meeting shall be those that are longest in office since their last appointment, but as between persons who became directors on an equivalent day, those that are to retire shall, in default of and subject to any agreement among themselves, be determined by lot.

(e) At the annual general meeting at which a director retires as aforesaid, the company may refill the vacancy by appointing the retiring director or another person thereto.

Explanation.—For the needs of this sub-section, ―total number of directors‖ shall not include independent directors, whether appointed under this Act or the other law for the nonce effective , on the Board of a company.

(7) (a) If the vacancy of the retiring director isn't so filled-up and therefore the meeting has not expressly resolved to not fill the vacancy, the meeting shall stand adjourned till an equivalent day within the next week, at the same time and place, or if that day is a national holiday, till subsequent succeeding day which isn't a holiday, at an equivalent time and place.

(b) If at the adjourned meeting also, the vacancy of the retiring director isn't filled up which meeting also has not expressly resolved to not fill the vacancy, the retiring director shall be deemed to have been re-appointed at the adjourned meeting, unless—

(i) 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;

(ii) 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;

(iii) he is not qualified or is disqualified for appointment;

(iv) a resolution, whether special or ordinary, is required for his appointment or re-appointment by virtue of any provisions of this Act; or

(v) Section 162 is applicable to the case.

Explanation.—For the needs of this section and section 160, the expression ―retiring director‖ means a director retiring by rotation.

QUALIFICATIONS OF DIRECTORS:

The Act doesn't lay down any academic or shareholding qualification for a director. there's a widespread misconception that a director must necessarily be a shareholder of the company. But if it's not so, unless the articles of the company provide otherwise, a director needn't be a shareholder of the company. But usually the articles provide surely qualification shares for the directors.

1. Qualification Shares:

If the articles of the company so provide then as per Sec. 270, the directors must obtain their qualification shares as follows:

(i) the administrators must obtain qualification shares within two months after their appointment unless they already hold shares.

(ii) If any provision within the articles requiring a person to hold the qualification shares before his appointment as a director or to get them within a period shorter than two months shall be void.

(iii) The nominal value of 1 qualification share must not exceed Rs. 5,000.

(iv) Bearer share warrants won't be counted for the needs of qualification shares.

(v) If a director doesn't obtain qualification shares within two months of his appointment or thereafter doesn't possess such shares at any time, he ceases to be a director automatically.

(vi)The director shouldn't obtain shares by way of gift from a promoter. He should make the payment for his qualification shares.

(vii) A director is required to hold qualification shares in his title . it's also sufficient if he holds them as a trustee provided it doesn't appear on the register of members that he's a trustee.

(viii) Unless the articles provide otherwise, a joint holding are going to be sufficient for share qualification.

(ix) a person who acts as a director of a company without holding qualification shares even after the expiry of the period of two months from the date of his appointment shall need to vacate his office as a director and be punishable with a fine extending to Rs. 50 for each day from the date of expiry of the period of two months till the date he continues to act as a director. [Sec. 272]

(x) The above provisions on qualification shares don't apply to a non- subsidiary private company, [Sec. 273]

2. Written Consent:

Every person proposed as a candidate for the office of a director has got to sign and file with the company his consent to act as a director, if appointed (Sec. 264). However, the following persons haven't to file such consent:

(i) a person who is retiring from directorship by rotation or otherwise.

(ii) a person who has given notice of his candidature for directorship at the registered office of the company under Sec. 257.

However, a newly appointed director shall not act as a director unless he has also within 30 days of his appointment signed and filed with the Registrar his consent to act as such director.

Filing of such a consent isn't necessary within the case of following person:

(i) A director reappointed after retirement by rotation or immediately on the expiry of his term of office.

(ii) Additional or alternate director, or a person filling an off-the-cuff vacancy within the office of a director under section 262 or appointed as a director or reappointed as a further or alternate director immediately on the expiry of his term of office.

(iii) a person named as a director under its articles of association as first registered.

It is to be noted that only persons newly seeking appointment as directors have to file their consent to act as such. an individual who is already a director and who is retiring at the annual general meeting but immediately seeking reappointment is exempted from filing the consent. The provisions of this section aren't applicable to an independent private company.

3. Only Individuals: can be Directors:

Nobody corporate, association or a firm can be appointed director of a company. Only individuals are often appointed as directors. [Sec. 253]

DISQUALIFICATIONS OF DIRECTORS:

The circumstances in which a person can't be appointed as a director of a company are enumerated in Section 274. According to this section, an individual can't be appointed as a director of company, if—

(i) He has been found to be of unsound mind by a competent court and the finding is in force;

(ii) he's an undercharged insolvent;

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

(iv) He has been convicted of an offence involving moral turpitude and sentenced to imprisonment for not but six months and a period of 5 years has not elapsed since the expiry of his sentence;

(v) He has not paid any call in respect of shares of the company held by him for a period of six months from the last day fixed for the payment;

(vi) He has been disqualified by an order of the Court under Sec. 203 of an offence in relation to promotion, formation or management of the company or fraud or misfeasance in relation to the company.

The Central Government may by notification within the Official Gazette remove the disqualifications enumerated in clause (iv) and (v) above. [Sec.274(2)]

In addition to the disqualifications mentioned above, there's another disqualification, namely, the person ‘should not be a minor or older person under disability’ but should be one competent to contract.

A private company which isn't a subsidiary of public company may by its Articles provide for extra grounds for disqualification.

Restriction of Number of Directorship:

According to Secs. 275 to 279, a person can't be appointed as a director for quite 20 companies at a time. If any person holds office for 20 companies as a director of a company, then no appointment are often made in the other company unless he vacates his office within fifteen days.

If he doesn't vacate within fifteen days, new appointment shall be void. (Sec. 277) In calculating the number 20, the subsequent shall be excluded

POWERS, DUTIES, LIABILITIES OF DIRECTORS

POWERS OF DIRECTORS

STATUTORY POWERS OF DIRECTORS

Powers must be excised by board of directors in the general meeting of the company by passing a resolution

The power to make call on shares in respect of unpaid money

The power to authorized lack of shares

The power to issue debentures, whether in or outside India

The power to invest in funds

The power to borrow money otherwise on debentures

The power to make loans or give guarantee in respect of loans. But a banking company does not requires any resolution by the board

OTHER POWERS

To fill casual vacancy

Appoint the first auditor of the company

To make political contribution

Appoint additional directors

Appoint alternate director

To declare interim dividend

DUTIES OF DIRECTOR

Major Corporate Debacles of recent times like Kingfisher, Sahara, Satyam etc has again and again proved the lack of Company Act 1956 to be ineffective in upholding Corporate Governance. whenever it's the directors who are responsible in breaking Shareholders expectation and sometimes betraying the emotions of stakeholders under a false veil of charisma, while using the company mechanism to satisfy personal welfare. to satisfy this challenge Companies Act 2013 has been enacted almost 50 years after the last amendment. it's built on the principles of responsibility of the Board, protection of interests of the Shareholders, self- regulation and openness through disclosures. The 2013 amendment has ensured several effective measures through clearly defining liabilities and responsibilities of the directors and penal actions on failure to follow an equivalent .

The Duties of the directors has been ensemble under Section 166 of the 2013 Act and applies to all or any sorts of Directors including Independent Directors. The Duties and Responsibilities are often broadly classified into two categories:

The duties, liabilities and responsibilities which promotes corporate governance through the sincerest efforts of directors in efficient management and swift resolution of critical corporate issues and sincere and mature deciding to avoid unnecessary risks to the corporate entity and its shareholders.

Keeping the interests of company and its stakeholders ahead of personal interests

1. A director must act in accordance with the Articles of Association of the company

2. A director must pursue the best interests of the stake holders of the company, in straightness and to market the objects of the company.

3. A director shall use independent judgement to exercise his duties with due and due care , skill and diligence.

4. A director should remember of conflict of interest situations and will attempt to avoid such conflicts for the interest of the company.

5. Before approving related party transactions the Director must make sure that adequate deliberations are held and such transactions are in interest of the company.

6. to make sure vigil mechanism of the company and the users are not prejudicially affected on account of such use.

7. Confidentiality of sensitive proprietary information, commercial secrets, technologies, unpublished price to be maintained and will not be disclosed unless approved by the board or required by law.

8. A Director of a company shall not assign his office and any assignment so made shall be void.

9. If a director of the company contravenes the provisions of this section such director shall be punishable with fine which shall not be but one Lakh Rupees but which can reach five Lac Rupees.

LIABILITY OF DIRECTORS

The Liability of the directors are often both joint or collective for any and each act prejudicial to the interests of the company. Though the Director and the Company are separate entities, under the subsequent cases the Director could also be held liable on behalf of the Company:

• Tax Liability: Unless a Director or any Past Director can prove that the non-recovery or non-payment of Taxes are attributable as gross neglect or breach of duty, then any present or past Director (pertaining to the time period of defaulter) will be liable to pay the shortfall in tax amount and any penalty associated.

• Refunding of share application or excess in share application money

• To pay for qualification shares

• Civil Liability just in case of misstatement in Prospectus

• Fraudulent Business Conduct and all associated debts and contracts executed

• Failure in making disclosures as stipulated SEBI (Acquisition of Shares & Takeovers) Regulations, 1997 and SEBI (Prohibition of Insider Trading) Regulations, 1992 by the directors may attract legal proceedings by SEBI.

REMEDIES FOR BREACH OF DUTIES

The Companies Act has various penal provisions to make sure proper adherence to the Duties and Responsibilities laid out. In Companies Act 1956, the concept of “Officer in Default” was inclusive of the Board of Directors. Under Section 2 (60) of Companies Act 2013 the thought of “Officer who is in Default” has been stipulated under lapse in duty within the circumstances that the officer is in default for any provision of the act and is part of such contravention either self or participation without objection shall be liable to penalty or punishment including imprisonment. The Director under scrutiny here also can include Nominee Directors. The matter is very sensitive as even if the Director isn't a part of such meeting , but has received the information of contravention in any form is liable and may be held party to such act. Hence it's important that the voice of objection of the Director must be mandatorily recorded to avoid any such implication on innocent person.

The penalty amounts applicable under Companies Act 2013 are more higher in denomination and really stringent compared to the 1956 amendment. The minimum fine applicable is INR 25,00/-, whereas are often even quite INR 25 Crore. Proven Defaulter on Section 166 (codified duties) are often fined anything between 1-5 lakhs. Some examples of violations which may attract penalties of 1 crore and above are violations for provisions under

Section 8 : Not for Profit companies,

Section 42: Subscription of securities on Private Placement

Section 46: Duplication and issuance of share certificates with intent to defraud

Section 74 (3): Failure in repayment of deposits within specified time

Section 195 (2): insider trading

According to Section 149 (12) of Companies Act 2013, an Independent Director is similarly liable for such acts which is attributable through Board processes with the Director’s knowledge and with his consent or where the Director has not taken action diligently. Hence it's extremely important for Independent Directors to offer consent to any Board proposal only with due caution. Although just in case of such act of default is noticed by law the summons are issued irrespective of the category of Director and it lies with the Director to prove its innocence.

Under the companies Act 2013 certain defaulters can attract imprisonment, mostly non-cognizable. However offences connected to fraud or intent to fraud are cognizable (no warrant required for arrest). Like suppressing any material information or furnishing false information is cognizable under Section 7 (6), providing misleading statement within the prospectus under Section 34, inducing fraudulently for investment is cognizable under Section 36, transfer or transmission of shares with intent to defraud under Section 56 and offences associated with reduction of share capital under section 66.

In Companies Act 2013, under Section 245 , Shareholders or group of minimum 100 Shareholders on behalf of all affected parties can bring “class action suit” against the company and therefore the Directors for any wrong doing. this may be taken up by National Company Law Tribunal for expedited resolution for the shareholders. in addition to Companies Act 2013, many other acts are interrelated and may attract penal action based on multiple conflicts. So , the Director must be aware of the interdependencies of various laws and the way they will influence the decisions they're going to implement.

LOAN OF DIRECTORS, REMUNERATION OF DIRECTORS

(1) Save as otherwise provided in this Act, 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:

Provided that nothing contained during this sub-section shall apply to—

(a) the giving of any loan to a managing or whole-time director—

(i) as a part of the conditions of service extended by the company to all or any its employees; or

(ii) pursuant to any scheme approved by the members by a special resolution; or

(b) a company which within the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not but the discount rate declared by the reserve bank of India;

guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company; or

(d) any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company:

Provided that the loans made under clauses (c) and (d) are utilised by the subsidiary company for its principal business activities.

Explanation.—For the needs of this section, the expression ―to the other person in whom director is interested‖ means—

(a) any director of the lending company, or of a company which is its holding company or any partner or relative of any such director;

(b) any firm in which any such director or relative may be a partner;

(d) any body corporate at a general meeting of which not but twenty-five per cent. of the entire voting power could also be exercised or controlled by any such director, or by two or more such directors, together; or

(e) anybody corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.

(2) If any loan is advanced or a guarantee or security is given or provided in contravention of the provisions of sub-section (1), the company shall be punishable with fine which shall not be but five lakh rupees but which can reach twenty-five lakh rupees, and therefore 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 can reach six months or with fine which shall not be but five lakh rupees but which can reach twenty-five lakh rupees, or with both.

1. an unlimited company.

2. a private company which is neither a subsidiary nor a holding company of a public company.

3. An association not carrying on business for profit.

4. Alternate directorship.

If a person holds office for more than 20 companies, he shall be punishable with fine which may reach Rs. 5,000 for each company after the first 20 companies.

REMUNERATION OF DIRECTORS

‘Remuneration’ means any money or its equivalent given to a person for services rendered by him and includes the perquisites mentioned within the Income-tax Act, 1961.

Managerial remuneration in simple words is that the remuneration paid to managerial personals. Here, managerial personals mean directors including managing director and whole-time director, and manager.

What is the permissible managerial remuneration payable under the companies Act 2013?

Total managerial remuneration payable by a public company, to its directors, managing director and whole-time director and its manager in respect of any financial year:

Condition	Max Remuneration in any financial year
Company with one Managing director/whole time director/manager	5% of the net profits of the company
Company with more than one Managing director/whole time director/manager	10% of the net profits of the company
Overall Limit on Managerial Remuneration	11% of the net profits of the company
Remuneration payable to directors who are neither managing directors nor whole-time directors
For directors who are neither managing director or whole-time directors	1% of the net profits of the company if there is a managing director/whole time director
If there is a director who is neither a Managing director/whole time director	3% of the net profits of the company if there is no managing director/whole time director

The percentages displayed above shall be exclusive of any fees payable under section 197(5).

Until now, any managerial remuneration in excess of 11% required government approval. However, now a public company can pay its managerial personnel remuneration in excess of 11% without prior approval of the Central Government. A special resolution approved by the shareholders will be sufficient.

In case a company has defaulted in paying its dues or failed to pay its dues, permission from the lenders will be necessary.

When the company has inadequate profits/no profits: In case a company has inadequate profits/no profits in any financial year, no amount shall be payable by way of remuneration except if these provisions are followed.

Where the effective capital is:	Limits of yearly remuneration
Negative or less than 5 Crores	60 Lakhs
5 crores and above but less than 100 Crores	84 Lakhs
100 Crores and above but less than 250 Crores	120 Lakhs
250 Crores and above	120 Lakhs plus 0.01% of the effective capital in excess of 250 Crores

Please Note:

These restrictions don't apply to the sitting fees of the directors (managing director, whole time director/manager).

• Remuneration in more than the aforementioned limits could also be paid as long as a special resolution is gone by the shareholders.

• Remuneration as per the above limits could also be paid if:

1. A managerial personnel is functioning during a professional capacity

2. The managerial person doesn't have an interest within the capital of the company/holding company/subsidiary company either directly, or indirectly, or through any statutory structures*

3. The managerial person doesn't have a direct/indirect interest or related to the directors /promoters of the company/holding company/subsidiary company any time during the last 2 years either before/on/after the date of appointment

4. He/she is in possession of a graduate level qualification along side expertise and specialized knowledge within the field during which the company mainly operates.

*If any employee holds but 0.5% of the company’s paid-up capital under any scheme (including ESOP) or by way of qualification, for this purpose he/she is considered to not have interest within the share capital of the company.

IMPORTANT POINTERS

Fees to directors: the directors may receive fees for attending meetings and such fees cannot exceed the bounds prescribed. Different fees for various classes of companies could also be as prescribed.

The fees are often paid:

a. Monthly

b. As a Specified Percentage of the net Profits yearly

c. Partly by method (a) and partly by method(b)

Remuneration of independent directors: An Independent director shall be entitled to sitting fees, a reimbursement for participation in meetings and profit related commission as approved by Board. However, he shall not be entitled to ESOP.

Excess Remuneration to be refunded: If any director receives any remuneration in more than the provisions of law, an equivalent shall be refunded to the company or kept in trust for the company. Such recovery shall not be waived unless permitted by the Central Government.

Disclosure by a listed company: Every listed company shall disclose the ratio of the remuneration paid and therefore the median employee’s remuneration alongside other prescribed details.

Insurance: When the company insures its personnel by providing protection against any act done by them thanks to negligence, default, misfeasance, breach of duty, breach of trust, such the premium paid for this insurance shall not be treated as a part of remuneration except if the director is proved guilty.

Any managing director/whole time director receiving commission from the company can also receive a remuneration or commission from the holding or subsidiary of such a company provided the same is disclosed in the board’s report.

References:

‘Company Law’ by Brenda Hannigan

‘Elements of Company’ Law by N. D. Kapoor

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