Directors of a Company – Appointment and Legal Relationship

By Ashish Kumar Chandahe, HNLU, Raipur

Editor’s Note: Directors of a company are individuals that are elected as, or elected to act as, representatives of the stockholders to establish corporate management related policies and to make decisions on major company issues. They act on the basis of resolutions made at directors’ meetings, and derive their powers from the corporate legislation and from the company’s AOA.

The success of the company depends, to a very large extent, upon the competence and integrity of its directors. As the company’s agents, they can bind the company with valid contracts entered into with third-parties such as buyerslenders, and suppliers. They are the trustees for the firm and whether appointed validly or not, they are individually and collectively liable for the acts and/or negligence of the firm. Unlike stockholders, directors cannot vote by proxy and, unlike employees, they cannot absolve themselves of their responsibility for the delegated duties. It is, therefore, necessary that management of companies should be in proper hands. The appointment of directors is accordingly strictly regulated by the act. There are now special provisions for preventing management by undesirable persons.

Research Methodology

 This project is based upon doctrinal method of research. This project has been done after  a thorough research based upon intrinsic and extrinsic aspects of the project.

 Sources of Data:

 The following secondary sources of data have been used in the project-

  1. Books
  2. Websites

Method of Writing:

The method of writing followed in the course of this research project is primarily analytical and based on secondary source of data.

Research Questions

 1) Explain  the various provision of appointment of Directors under Companies Act 1956 and 2013 ?

2) Discuss the legal relationship of Directors with Company  ?

3) What are the distinctive points of appointment of directors in Companies Act 1956 and 2013?

Objectives

 1) To discuss about procedure of appointment of Directors.

2) To analysis the new provisions of Companies Act 2013

3) To know the Legal relationship of Director with company.

Review of Literature

Directors have been described as a company’s ‘directing mind and will’. They are the human agents of a company tasked with its management. Although the office they hold also resembles that of a trustee or a managing partner, directors remain creatures of statute, occupying a position ‘peculiar to themselves’.( M S Blackman Commentary onthe Companies Act (2002) at 8-11; P M Meskin (ed) Henochsberg on the Companies Act (5 ed 1994) at 393).

 “ Only individual should be appointed as directors does not extend to deemed directors coming within the provision of section 7 of the Companies Act , for instance , a holding company will be deemed to be director for purpose of section 7 , where all or the majority of the directors of a subsidiary company are accustomed to act according to its direction.”

.( A.Ramaiya- Guide to the Companies Act,11th edition)

 A.M. Chakraborti is of the opinion that individual subscribers of the memorandum shall be deemed to be the directors even though they do not hold qualification shares and the articles of the company require that qualification shares must be held in order to be appointed as directors . This is because qualification shares are required to be held only for being appointed as director and not for being deemed to be director.[i]

I.  INTRODUCTION

“A corporation is an artificial being, invisible, intangible and existing only in contemplation of law.”[ii] “It has neither a mind nor a body of its own.”[iii]  “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 persons.”[iv] This makes it necessary that the company’s business should  be entrusted to some human agents. Hence the necessity of directors. Section 252 of the Act, therefore, requires that “every public company  shall have at least three directors and every private company shall have at least two directors”.  By an amendment of the section by Amendment Act, 2000 it has been provided that a public company having a paid up share capital of rupees five crore or more and one thousand or more small shareholders, should have a director elected by the small shareholders. The manner of such election is to be presented. A small shareholder for this purpose means having shares of the nominal value of twenty thousand rupees or less m a public company.

 Section 2(13) of the Companies Act, 1956 defines a ‘director’ as including “any person occupying the  position of a director by whatever name called “. Thus, 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. In Re, Forest of Dean Coal Mining Co. it was stated that function is everything; name matters  nothing. So long as a person is duly appointed by the company to control the company’s business and authorised by the articles to contract in the company’s name and on its behalf , he functions as a director. A company is Indeed a person but  juridical person and the directors as a body endow the juridical person with human face that can act and react.

 Section 303(1) of the Companies Act ( through for the limited purpose of maintenance of Register of directors, etc.) provides that any person with whose directions or instructions the Board of Directors is accustomed to act is also deemed to be a director.

A manager or any other managerial personnel ,is however, not a director.[v] According to section 2(30) of the 1956 act, the definition of an  ‘officer’ includes a director as well as any person under whose directions or instructions the Board or any one or more of the directors are accustomed to act.

II. Appointment of Directors

The success of the company depends, to a very large extent , upon the competence and integrity of its directors. It is , therefore , necessary that management of companies should be in proper hands.[vi] The appointment of directors is accordingly strictly regulated by the act. There are now special provisions for preventing management by undesirable persons.

One evil which has been abolished by the Act is that of a company or a firm acting as a director of another company. Now, according to Section 253 , only an individual can be the director of a company. No company or firm or association can be appointed as a director. A proviso has been added to the section by the amendments of 2006 which says that no company is to appoint or appoint individual as a director unless he has been allotted a Director Identification Number under S.266-B.

Appointment of first directors

The first directors are usually appointed by name in the articles or in the manner provided therein. Where the articles do not  provide for the appointment of first directors, the subscribers to the memorandum, who are individuals, shall be deemed to be the first directors of the company subject to the regulations of the company’s articles. The first directors can hold office until the directors are duly appointed in accordance with the provisions of section 235) (Section 254). It may, however, be noted that in case of a public company, a list of persons who are  to be the first directors of a company along with their consent in writing must be delivered to the Registrar of Companies.

Thus, where the articles of the company name the first directors, the provisions of section 254 deeming the subscribers as directors would not apply Where, for any reason, for example, death, the persons named in the list of first directors do not assume office, it will be necessary for the subscribers of the Memorandum (who will then be the only members) to convene a meeting for the appointment of directors. To the extent to which the articles do not make any other provisions in that behalf, subscribers who would be entitled to requisition a meeting may call the meeting. Notice of the meeting must be served on every subscriber in the manner in which notices are required to be served by the Act[vii].

Appointment of directors at general meeting

According to section 255, the director must  be appointed  by the company in general meeting. In the case of a public company or of a private company which is a subsidiary of a public company, unless the articles provide for the retirement of all directors at every annual general meeting, at least two-third of total number of directors must be persons whose period of office is liable to determination by rotation. In other words, only one third  of the total number of directors can be non-rotational directors.

Appointment of directors in case of a private company which is not a subsidiary of a public company-In case of a private company, which is not a subsidiary of a public company, if the articles are silent as to the appointment of directors, or do not specifically provide for appointment of directors otherwise than in a general meeting, then the directors are to be appointed in general meeting by the shareholders[Section 255(2)] as interpreted by the Calcutta High Court in the case of Swapan Das Gupta v. Navin Chand Suchiantij .

 Section 256 provides that one-third of the directors subject to retirement by rotation must retire at an annual general meeting. It follows that all such directors must retire in the course of three years, one-third of them retinring in each year. The directors to retire by rotation at every annual general meeting shall be those who have been longest in office since their last appointment. As between persons appointed on the same day, retirement is to be determined by mutual consent and in case of default, by lots [Section 256(2)]. If the directors do not hold a general meeting in time, can they continue till the meeting is held? The Delhi High Court in B.R. Kundra V. Motion Picture Association   held that directors cannot prolong their tenure by not holding a meeting in time . The directors due to retire by rotation must vacate office at the latest on the last day on which an annual general meeting ought to have been held. Retiring directors are,however, eligible for re-election.

Deemed re-appointment of a retiring director [Sec. 256]- The vacancy caused by the retirement of a director by rotation should be filled up at the same meeting or at an adjourned meeting. If it is not so done, the retiring director shall be deemed to have been appointed at such adjourned meeting except in the following cases :

  1. At any previous meeting, a resolution for his re-appointment was put to vote, but was lost; or
  2. the retiring director has, in writing, expressed his unwillingness to continue, or
  3. he is not qualified or is disqualified for appointment; or
  4. a special or ordinary resolution is necessary for his appointment or re­appointment by virtue of any provisions of the Companies Act; or
  5. it is resolved not tofill the vacancy; or
  6. it is resolved to fill two or more vacancies by a single resolution (Sec. 263).

Appointment of a director other than a retiring director [Sec. 257]-

Section 257 provides for the procedure of appointment of a person other than retiring director. If any person other than the retiring director wishes to stand for directorship or any  member proposes a person for directorship, he must signify his intention to do so by giving 14 days’ notice to the company before the general meeting and the company must inform the members not later than seven days before the general meeting either by individual notices or by advertisement of this fact in at least two newspapers circulating in the place where its registered office is located of which one must be in English and the other in the regional language of that place. Also, the candidate or the member who intends to propose him as  director has to deposit a sum of Rs. 500 which shall be refunded to such person or the member , as the case may be, if the candidate succeeds is being elected . In case such person is not elected as director, he or the memner, as the case may be , will not  be entitle to the refund of Rs. 500 and the amount deposited shall stand forfeited by the company.

Consent of a director to be filed with the Company and the Registrar –

Section_264 requires every person proposed as a candidate for the office of the director to sign and file with the company his consent to act as a director, if appointed. Further, sub­section (2) of section 264 requires a person appointed as a director to sign and file with the. Registrar his consent in writing to act as such director. The consent with the Registrar must be filed within 30 days of his appointment. However, the consent with the Registrar shall not be required to be filed in the case of :

  •  a director re-appointed after retirement by rotation or immediately on the expiry of his term of office; or
  • an additional or alternate director, or a person filling a casual vacancy in the office of a director under section 262, appointed as a director or re-appointed as an additional or alternate director, immediately on the expiry of his term of office; or
  • a person named as director of the company under its articles as first registered.

Appointment by Board of directors

The Board of directors can exercise the power to appoint directors in the following three cases :

  1. Additional Directors (Section 260)
  2. Filling up the Casual Vacancy (Section 262)
  3. Alternate Directors (Section 313).

APPOINTMENT OF ADDITIONAL DIRECTORS – If the Articles authorise, the Board may appoint additional directors. Such additional director together with the directors constituting the Board should not exceed the maximum number fixed by the articles. Also, the additional directors are entitled to hold office only up to the date of the next annual general meeting of the company (Section 260),

The provision for an additional director is one which is meant to enable the companies to have the benefit of the services of a person, who otherwise is suitable for serving on the board, and whose presence In the board is desirable in the interests of the company , till the time the next AGM is held. That provision is not meant to enable the company to keep on its board a person as additional director for an indefinite period of time ny not holding the AGM, Section260, therefore , must necessary be read with section 166 which stipulate that the AGM be held every year and not more than fifteen months shall lapse between the date of one AGM and the next- P. Natarajan V. Central Government[viii].

In Krishna Pd. Pilani V. Colaba Land and Mills , it was held that a director appointed as

an additional director vacates his office, at the latest, on the last day on which the annual meeting could have been called as requires by section 166 or could not be called within the time prescribed by that section.

It may thus be noted that without a power given by the Articles, the Board cannot appoint additional directors. The section applies to all companies, public as well as private – Needle Industries  (India) Ltd. V. Needle Industries Newey (India) Holdings Ltc[ix].

Filling Up Casual Vacancy –

Section 262 empowers the Board to fill casual vacancies in the case of a public company or a private company which is a subsidiary of a public company. A casual vacancy is one that arises otherwise than by retirement or the expiration of the time fixed for an appointment. Thus , 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, subject to any regulation in the articles of the company , be filled by the Board of Directors at a meeting of the Board.

Filling of casual vacancy by a private company– Section 262 does not apply to a private company which is not a subsidiary of a public company. Such a company will fill casual vacancies as provided by its own articles and/or section 255(2) that is in a General Meeting. It need not follow the provisions of section 262.

ALTERNATE DIRECTOR (SECTION 313) – The Board of directors of a company may, if so authorised by its articles or by a reaction passed by the company in general meeting, appoint an alternate director to act for a director during his absence for a period of not less than three months from the State in which meetings of the Board are ordinarily held.

The alternate director merely fills a temporary vacancy in the office of a director which already exists and no new office of director is created by his appointment. Many provisions  of this Act do not apply to. the alternate director. For instance. appointment of an alternate director is not considered as an increase in the strength of the Board of directors. Likewise, alternate directorship held by a person cannot be counted towards maximum number of

directorships which a person can hold. An alternate director is not required to hold any qualification shares. However, the alternate director is subject to the same liability and supposed to perform the same duties as any other director.

It is the prerogative of the Board of Directors to  appoint an alternate director. The article of the company or a resolution passed by the shareholders must give an enabling power to the Board to appoint an alternate director. Neither the shareholders of the company nor any other person can exercise the power to appoint alternate director. alternate director is not an agent of the original director.

Appointment directors by proportional representation [Section 265]

Ordinarily, directors are appointed by simple majority vote on the resolutions moved for their appointment. As a result majority shareholders controlling 51 per cent or more votes may elect all directors and a substantial minority, as high as 49 per cent, may find no representation on the Board. In order to enable the minority shareholders to have a proportionate representation on the Board, section 265 of the Companies Act gives an option to companies to appoint directors through a system of proportional representation. The section provides that a company may provide in its Articles for the appointment of not less than 2/3rd of the total directors according to the principle of proportional representation by single transferable vote or some system of cumulative voting or otherwise. Such appointment shall be made once in every three years (Section 265).

Appointment of directors by the Central Government( Section 408)

The Central Government has been empowered to appoint directors on an order passed by the Company Law Board . CLB may so order either on a reference by the Central Government or on the application of not less than 100 member of the company or of members holding not less than 1/10th of the total voting power. Such appointments shall be so ordered by the CLB where it finds that the affairs of the Company have been conducted in a manner oppressive to any member of the company or in a manner prejudicial to the interests of the company or to the public interest . Such a director may be appoint for any term but not exceeding three year.In lieu of passing an order as aforesaid , the CLB may directs the company to amend  its article so as to provide for election of directors by the system of proportional representation. It may also direct that until new directors are appointed in pursuance of the order aforesaid, such number of persons as it may specify as being necessary to effectively safeguard the interest of the company or its shareholders or the public interest shall hold office as additional directors of the company( Section 408[2]).

Appointment of Directors by third parties (Nominee Directors)

There may be occasions when directors represent certain third parties in the Board. This usually happens when the Government, foreign collaborators, holding companies, financial institutions or other lenders,  etc, nominate a director to represent their interest on the Board. The phenomenon of nominee directors has become an important feature of the modem Indian corporate scenario. It is primarily because of the role of the various lending institutions like banks, mutual funds, public financial institutions, State financial corporations, etc. These

lending institutions, in the modem corporate world have assumed a pivotal role in financing the various projects of the companies. Because of their heavy commitments, such providers of money naturally desire to safeguard their interests. Besides, they will also like to ensure that the money is invested in the stipulated purposes only. The right to nominate the directors on the Boards of financed companies is usually contained in the contract itself. However, the special legislations governing certain public finan­cial institutions and State financial corporations envisage the appointment of certain directors on the Boards of borrowing companies and such n provision has an overriding applicability in spite of the normal regulatory provisions of the Companies Act, the Memorandum of Association and the Articles of Association.

Except where a statute provides for nomination of directors on the Board of a company, nominee directors can be appointed only if a provision to that effect exists in the Memorandum of Association or Articles of Association of the company. It should be ensured that the total number of non-rotational directors does not exceed 1/3rd of the total strength of the Board.

Restriction on appointment of directors:

A person shall not be capable of being appointed a director by the articles or named as a director or proposed director of the company or intended company in a prospectus or statement in lieu of prospectus unless he or his agent in writing has signed and filed with the registrar consent in writing to act as such director and has:

(a) Signed the memorandum for his qualification shares; or

(b) Taken his qualification shares from the company and paid or agreed to pay for them; or

(c) Signed and filed with the registrar an undertaking in writing to take from the company his qualification shares and pay for them; or

(d) Field with the registrar an affidavit that his qualification share, if any, are registered in his name.

The provisions of section 266 do not apply to a private company

III.  Appointment of Directors Under Companies Act 2013

ONLY INDIVIDUALS TO BE DIRECTORS

Object of section 253 of the 1956 Act [corresponding to section 149 of the 2013 Act] – The idea behind the section is that as the office of a director is to some extent an office of trust, there should be somebody readily available who can be held responsible for the failure to carry out the trust and it might be difficult to fix that responsibility if the director was a corporation or an association of persons. – Oriental Metal Pressing Works (P.) Ltd v. Bhaskar Kashmath Thakoor[x].

Under section 253 of the 1956 Act [corresponding to section 149 of the 2013 Act] bar is on firm or a corporate; their representatives can, however, be elected – The bar is, on the firm or a body corporate being appointed as director. There is, however, no bar in permitting their duly authorised representatives to stand for election to the executive committee. – Motion Pictures Association, In re[xi].

Appointment of Directors

  • Director to be approved in general meeting [Section 152(2)]–

Save as otherwise expressly provided in this act, every director shall be appointed by the Company in General Meeting.

  • DIN mandatory for appointment as director[152(3)]

Company shall not appoint a person as a director unless he has been allotted a Director Identification Number under Section 154.

  • Person proposed to be appointed as director to furnish DIN and a declaration [Section152(4)]

Every person proposed to be appointed as a director of a company shall furnish to it his DIN. He shall also furnish a declaration to the company that he is not disqualified j to become a director of the company.

  • Consent to act as director to be given to the company[sec.152(5)]

A person appointed as a director of a company shall not act as a director! unless he has given to the company his consent to hold the office as such director.

  • Filling of consent with the Registrar[Sec.152(5)]

The person appointed as a director shall file his consent as above with the Registrar of Companies within thirty days of his appointment and in such manner as may be prescribed.

Appointment of Additional Director , Alternate Director and Nominee Director-

Nominee director 161(3)

If the articles of a company authorize, the Board of Directors of a company 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 the State Government by virtue of its shareholding in a Government Company.

Additional Director [Section 161]–

A conjoint reading of section 260 and 262 of the Act 1956 0 and Section 161 of  2013 Act shows that it enables the board of the company to appoint the additional director . Such additional director holds office only  up to the date of next annual meeting . In the instant case the appointment of additional director in the board meeting to complete the quorum was , thus, valid being permissible and in accordance with Section 260 of 1956 Act and Section 161  of 2013 Act- Maharashtra Power Development Corporation Ltd. V. Dabhol Power Co.[xii]

Alternate Director (Section 161)

Ross Porter V. Pioneer Sed Co. Ltd[xiii], held that a temporary injunction was to be granted in plaintiff’s favour though it was true that under section 313 of the 1956 Act{ corresponding to section 161 of 2013 Act} it had not been made mandatory that the board of directors of the company were bound to accept  nomination of alternate director . However, irreparable harm was likely to be caused to the plaintiff if he was not allowed to nominate an alternate director as he might cease to be a director on his not attending the board meeting for three months. Indian Companies act provides for service of notice  of the board of directors. So , keeping all these facts in view, the interest of justice required that a temporary injunction should be granted in favour of the plaintiff .

Appointment of director by Proportional representation( Section 163)-

A company may appoint its director by Proportional representation-

  1. If its articles provide for the appointment of not less than two-third of the total number of directors in accordance with the principle of proportional representation.
  2. The proportional representation may be by the single transferable vote or by a system of cumulative voting or otherwise.
  3. Such appointments being made once in every three days.
  4. Casual vacancies of such directors shall be filled as per section 161(4) .

Independent Director

An Independent Director in relation to a company , means a director other than a managing director or a whole time director or a nominee director-

  1. Who, in the opinion of Board , is a person of integrity and possesses relevant expertise and experience;
  2. who is or was not a promoter of the company or its holding, subsidiary or association company;
  3. who is not relate to promoters or directors in the company, its holding, subsidiary or associate company.

Under the Act, 2013, strict eligibility criteria have been laid down for the appointment of an ID for example; an ID should not be related to the company or its holding or its subsidiary or its associate company, he himself or his relatives should not have or had any pecuniary relationship or transaction with the company or its holding or its subsidiary or its associate company during the current financial year. He also has to declare to the board that he is independent at the time of his appointment and also whenever there is a change that may affect his independence. Both the company and the ID shall abide by the provisions of the act5. Also the appointment of ID shall be approved at the meeting of the shareholders and the explanatory statement attached to the notice of the meeting for approving the appointment of an ID shall include a statement that in the opinion of the Board, the ID’s proposed to be appointed fulfils the conditions specified in the Act, 2013 and the Rules and the proposed director is independent of the management. An ID shall hold the office for a term up to five consecutive years, but shall be eligible for re-appointment on passing of a special resolution by the company and disclosure of such appointment in the board’s report. He is not entitled to any stock option or any remuneration, but he may receive sitting fee and any profit related commission as approved by members.

The Act, 2013 has described the manner or procedure for selection of ID’s under section 150. This section says that selection of an ID shall be done from a Data Bank maintained by anybody, institute or association, as may be notified by the Central Government, containing names, addresses and qualifications of persons who are eligible and willing to act as ID. It also says that the appointment of an ID shall be approved by the company in general meeting and the explanatory statement indicating the justification behind appointing such person, attached with the notice of general meeting.

Woman director on the Board

 For the purposes of second proviso to sub-section (1) of section 149 the following class of companies shall appoint at least one woman director within the period indicated against each of them, as under:-

(i) every listed company – within one year from the commencement of second proviso to sub-section (1) of section 149;

(ii) every other company having a paid–up share capital of one hundred crore rupees or more – within three years from the commencement of second proviso to sub-section (1) of section 149;

IV.   Legal relationship of Director with company

It is difficult to define the exact legal position of the directors of a company. The Companies Act makes no effort to define their position. They have at various been described by judges as agents, trustees or managing partners. In the words of  Bowen, LJ.:

“Directors are described sometimes as agents, sometimes as trustees and sometimes as managing partners. But each of these expressions is used not as exhaustive oi their powers and

responsibilities but as indicating useful points of view from which they may tor the moment and for the particular purpose be considered.”

  • Directors as agents –

Directors may correctly be described as agents of the company. Cairns, LJ. observed: “The company itself cannot act in its own person; it can only act through directors, and the case is, as regards those directors, merely the ordinary case of principal and agent”. The ordinary rules of agency will, therefor  apply to any contract or transaction made bv them on behalf of the company. Where the directors contract in the name and on behalf of the company it is

the company which is liable on it and not the directors. Thus, where chief executive of company executed promissory note and borrowed amount for company’s sake, it could not be said that amount was borrowed by him in his personal capacity – Kirlampudi Sugar Mills Ltd. v, G, Venkata Rao[xiv]But, where surety was furnished by directors in their personal capacities and not for and on behalf of company, company could not be sued for amount of surety – fip State Electricity Board v. Shivalik Casting (P.) Ltd[xv],

Directors as agents make the company liable even for contempt of court [Vineet Kumar Mathur v. Union of Jndia[xvi]. However, directors incur a personal liability in the following circumstances :

  1. where they contract in their own names;
  2. where they use the company’s name incorrectly, g., by omitting the word ‘Limited*;
  3. where the contract is signed in such a way that it is not clear whether it is the principal (the company) or the agent who is signing; and
  4. where they exceed their authority, g., where they borrow in excess of the limits imposed upon them – Weeks v. Propert[xvii].

Directors as trustees

A trustee is a person in whom is vested the legal  ownership of the assets which he administers for the benefit of another or other. Directors are regarded as trustees of the company’s assets, and of the powers that in them because they administer those assets and perform duties in the interest company and not for their own personal advantage. In Brahnmyya & Co.[xviii], the Madras High Court held that “ The

directors of a company are trustee  for the company, and with reference to their  power of  applying funds of the company and tor misuse of the power they could rendered liable as trustees and on their death the cause of action survives against their legal representatives.

Besides, almost all the powers of director  e.g. allotting share, making call , forfeiting share, accepting or rejecting transfers  etc  are powers in trust. They have been made liable to make good money which they have misapplied, upon the same footing as if they were trustees.” fiduciary capacity, within which directors have to act, enjoins upon them a duty to get on behalf of a company with utmost good faith, utmost care and skill and due diligence and in interest of company they represent – Dale & Carrington Investment (p j Ltd v. P.K. Prathapan [xix].

Directors as managing partners

The persons holding this view consider a company as large partnership, directors being charged with the responsibility of managing the affairs. The other shareholders are virtually dormant partners. By virtue of the various provisions in the Memorandum and Articles, they enjoy vast powers of management and act as the supreme policy and decision making body.

Director as employee

Ordinarily, a director is elected by the shareholders in general meeting, and once so elected, he enjoys well-defined rights and powers under the Act or the articles. Even the shareholders who elect them cannot interfere with their rights or powers except under certain circumstances. An employee appointed by the company under a contract of service is a servant of the company. He does not enjoy any powers other than those vested in him by the employer, who can always direct his actions and interfere in his work.

In Lee Behrens & Co., Re[xx], it was observed that directors are elected representatives of the shareholders engaged in directing the affairs of the company on its behalf. As such directors are agents of the company but they are not employees or servants of the 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 into with the company – R.R. Kothandaraman v. CIT (1957).

Accordingly, where a director accepts employment under the company under a separate contract of service, in addition to the directorship, he is also treated as an employee or servant of the

company. He shall, in such a case, be entitled to remuneration and other benefits admissible to employees, in addition to his remune­ration as Director under the Act. Besides, directors are also treated as officers of the company for certain matters and are bracketed with the manager, secretary, etc. for this purpose. As ‘officers in default’, they are liable to certain penalties for failure to comply with the provisions of the Act.

To sum up, we may quote Jessel, M.R., in Forest of Dean Coal Mining Co., Re[xxi], who observed : “Directors have sometimes been called as trustees or commercial trustees, and sometimes they have been called managing partners; it does not matter much what you call them so long as you understand what their real Position is, which is that they are really commercial men managing a trading concern for the benefit of themselves and of all the shareholders in it. They stand in a fiduciary position towards the company in respect of their powers and capital under their control.”

  • Director as “Officer” • “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.
  • Director as KMP “key managerial personnel”, in relation to a company, means— (i) the Chief Executive Officer or the managing director or the manager; (ii) the company secretary; (iii) the whole-time director; (iv) the Chief Financial Officer; and (v) such other officer as may be prescribed;
  • Director as “Officer in default”-

 “Officer who is in default”, for the purpose of any provision in this Act which enacts that an officer of the company who is in default shall be liable to any penalty or punishment by way of imprisonment, fine or otherwise, means any of the following officers of a company, namely:— (i) whole-time director; (ii) key managerial personnel; (iii) where there is no key managerial personnel, such director or directors as specified by the Board in this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified; (iv) any person who, under the immediate authority of the Board or any key managerial personnel, is charged with any

responsibility including maintenance, filing or distribution of accounts or records, authorises, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent, any default; (v) any person in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act, other than a person who gives advice to the Board in a professional capacity; (vi) every director, in respect of a contravention of any of the provisions of this Act, who is aware of such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings without objecting to the same, or where such contravention had taken place with his consent or connivance; (vii) in respect of the issue or transfer of any shares of a company, the share transfer agents, registrars and merchant bankers to the issue or transfer.

Conclusion

  1. The 1956 Act provided that the limit for maximum number of directors be based on its articles or  twelve whichever is lower. The 2013 Act provides  that the company shall have a maximum of fifteen directors on the Board of Directors (‘Board’) and  appointing more than fifteen directors would require  approval of shareholders through a special
  2. The 1956 Act did not prescribe any academic or professional qualifications for directors. The 2013 Act provides that majority of members of Audit  Committee including its Chairperson shall be  persons with ability to read and understand the  financial statements.
  3. The 2013 Act provides for appointment of at least  one woman director on the Board for such class or  classes of companies as may be prescribed. A  transitional period of one year has been prescribed  to companies for the compliance with this provision. The 2013 Act provides that a company should have  at least one director who has stayed in India for a  total period of not less than hundred and eighty two days in the previous calendar year.
  4. Companies must put in place a mechanism to assess and periodically monitor foreign travel of its directors so as to ensure that at least one director meets the hundred and eighty two days criterion for being considered as a resident in India.
  5. Companies should actively start looking for a woman director considering they have only a short period to comply with this requirements of the 2013 Act
  6. The 1956 Act required that a public company can have one director elected by small shareholders;  however, as per the 2013 Act, this provision is  applicable for listed companies only.
  7. Under 1956 Act, there was no requirement to have Independent Directors. However, under the Listing Agreement, the Board of listed entities having non-executive chairman and executive chairman should comprise  of at least one-third and one-half of the Board as ID respectively. The 2013 Act proposes that the Board of listed entities should comprise at least one-third  of the Board as ID.

References

 Books:

  • C R Datta on the Company Law ( edition 6th , year 2008 ) LexisnexisButterworths
  • Palmer’s Company Law by Clive M . Schmitthoff ( edition 23rd)
  • Taxmaan’s Companies Act 2013, Volume 2
  • Guide to the Companies Act (Part I – III ) by A . Ramaiya ( 16th edition ) Wadhwa and Company Nagpur
  • M S Blackman Commentary on the Companies Act (2002)

Web Sources: 

  • http://www.caclubindia.com/experts/appointment-of-director–1034284.asp#.Uz62TKiSz54
  • http://www.isrj.net/Article.aspx?ArticleID=4040
  • jstor.com

Edited by Kanchi Kaushik

[i] A.M. Chakraborti, Company Law 1994 Edition

[ii] Marshall J in Trustee of Dartmouth College V. Woodward(1819)17US 518,636. Cited in Laski, The Personality of Association , 29 Harv LR 404

[iii] Haldane LC in Lennard’s Carrying Co. V. Asiatic Petroleum Co., 1915 AC 705 at p. (1914-15) All ER Rep. 280:113 LT 195

[iv] Tesco Supermarkets Ltd. V. Nattrass, 1977 AC 153 at p. 170, per Lord Reid.

[v] Deen dayalu V. Sri B.P. Reddy(1984) 2 Comp. LJ 396.

[vi] Indian States Bank Ltd. V. Kunwar Sardar Singh

[vii] A. Ramaiya , Guide to the Companies Act, 12th Edition , Page 1215

[viii] [2004] 51 SCL 76 Mad.

[ix] AIR 1981 SC 1298

[x] [1961] 31 Comp. Cas. 143 (SC).

[xi]  [1984] 55 Comp. Cas. 375 (Delhi).

[xii]  [2004] 52 SCL 224(Bom.)

[xiii] .[1989] 66 Comp.Cas.363(Delhi)

[xiv] [2003)42 SCI 798 (AP).

[xv]  [2003] 115 Comp. Cas. 310

[xvi] [ 1996] 20 CLA 213 (SC)]

[xvii] [1873] LR 8 CP 427

[xviii] . [ 1966] 1 Comp. LJ 107 (Mad.)

[xix] [2004] 54 SCL 601 (SC).

[xx]  [1932] 2 Comp. Cas. 588

[xxi] [ 1878] 10 Ch. D. 450

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