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DIRECTORS[1]

Table of Contents

QUESTION BANK

Q.1 Define position of director in a company.

Q.2 What do you mean by Director as a fiduciary agent of a company?

Q.3 Explain the appointment of Director.

Q.4 “Directors are not only agents but are also in some sense trustee of the company”-discuss

Q.4 Discuss whether the directors are agents, trustees, members or governors of a company or the watch dog of the company.

Q.5. Discuss in detail the appointment of directors. Is it mandatory to directors to obtain qualification shares?

Q.6. Explain in detail the legal position of directors under Indian companies Act 2013.

SHORT NOTES

(1) Director as a trustee of a company.

(2) Qualification and disqualification of Director.

(3) IndependentDirector.

I] GENERAL:-

As we know, a company is an artificial person; it needs a natural person to manage its affairs. The Board of Directors is the chief managerial body of the company. The Directors play an important role in the corporate sector. They occupy an important position in corporate governance. Directors are from the members; technical experts may also be appointed as a director. Their role in the governance of the company is very important.

Sometimes, the Director is called or considered an ‘agent’ or, at other times, a ‘trustee’ of a company.

II] DEFINITION:-

It is very difficult to define the term, Director. The definition of Director under the Company Act is not satisfactory.

(i) According to S. 2(34), “Directors” means “a director appointed to the Board of a Company’’.

(ii) According to S. 2 (10)-“Board of Directors” or “Board”, in relation to the company, means the collective body of the directors of the company.

(iii) In Maynard v. Firemen’s Fund, Inc. Co., the Court defined the term Director as “The selected body of the persons who run the business of the company and upon whom the responsibility of the management of the company lies, and they are to direct, control, manage, supervise the affairs of the company- is called as Director.”

In Score Information Technology Ltd. v. Gr. Infra Projects Ltd.

Laws (DLH) 2021-1-26

The Delhi High Court observed that the definition of “Board of Directors” or “Board” shows that the company is to be run by the directors collectively.

III] NUMBER OF DIRECTORS (S. 149):-

(i) Every public company[2] shall have at least three Directors, and

(ii) Every private company[3] shall have at least two Directors.

(iii) One director in the case of a one-person company.

The maximum number of directors shall be fifteen in all cases. However, the company may appoint over fifteen directors after passing a special resolution. In some prescribed classes of companies, a company shall have at least one woman director. Moreover, every company shall have at least one director who has stayed in India for a total period of not less than one hundred and eighty days in a previous calendar year.

IV] Position of Directors:-

It is very difficult to define the exact position of the Director. The Directors are sometimes considered agents, trustees, and managing partners of a company, but each expression does not exhaust their power or responsibility correctly.

It should be noted that the Directors are not servants or employees of the company. The position of Directors is discussed as under –

1) Directors as an Agent:-

Directors are sometimes described as agents of the company. Their relationship with the company is governed by the general law of the agency. When the directors enter into a contract in the name of and on behalf of the company, they bind the company. The important functions of the directors as agents of the company are to enter into contracts, create negotiable instruments, and borrow money on behalf of the company.

It is to be noted that if the directors exceed the powers conferred on them by the memorandum or articles, they shall be liable for breach of warranty or authority. If their act is found to be within the company’s power, the company may ratify it in a general meeting.

Ferguson V/s Wilson[4]

Facts –The directors allotted certain shares to the plaintiff. But, the company has exhausted its shares and failed to give effect to the allotment. The plaintiff sued the director for damages.

It was held that directors are not liable because they are merely company agents.

In Indian Case – T. R. Pratt (Bombay) Ltd. V/s M. S. Ltd.[5]

It was held that the notice to the director should amount to notice to the company in the same manner as a notice to an agent, which is the notice to the principal.

2) Director as a Trustee:-

Directors are sometimes described as trustees for the companies’ money and property and the powers entrusted to them.

Directors are trustees of the company’s assets that have come into their hands or are under their control. They are trustees with regard to their power to apply the company’s funds, and if they misuse this power, they may be rendered liable as trustees.

In Joint Stock Discount Company V/s Brown[6]

Held—The directors had committed a breach of the trust by misapplying the company’s funds; they were held liable as trustees.

3) Directors as an Organ of the Company:-

A company is a legal or artificial person in the eyes of the law. It operates through the Board of Directors. The Board of Directors is the brain, and the company can, act only through them.

H.L. Botton Engineering Co. Ltd. V/s T. J. Graham and Sons

Denning J. has observed that the directors and managers represent the directing mind or will of the company.

V] APPOINTMENT OF DIRECTORS (S. 152):-

The Act lays down the following requirements for an appointment of directors, viz.[7].

1) As per provisions of Articles:-

If the names of the first directors are mentioned in the Articles of Association, they shall be considered the first directors of the company.

2) Subscribers to the Memorandum:-

If there is no provision for the appointment of Directors in the Articles, the subscribers to the memorandum, i.e. the shareholders, shall be deemed to be the first directors of the company until the directors are duly appointed;

3) To be appointed in the General Meeting:-

Every director is to be appointed in the General Meeting.

4) Necessity of Identification Number:-

No person shall be appointed as a director of a company unless he has been allotted the Director Identification Number. The Central Government allots the Director Identification number on application by a person intending to be a company director. (Discussed in detail in ‘short note’).

5) Consent to act as a Director:-

The proposed director should give consent to act as a director, and he should also submit such consent to the Registrar.

6) Retirement of Directors by Rotation:-

Unless the articles provide for the retirement of all directors at every annual general meeting, not less than two-thirds of the total number of directors of a public company shall be liable to determination by retirement by rotation.

The present Companies Act does not lay down any provision for the requirement of any number of qualification shares to become a director.

VI] CATEGORIES OF DIRECTORS:-

There are the following categories of directors, viz.

1. Resident Director[8] (S. 149):-

The new Company Act 2013 introduced the concept of a resident director. As per S. 149, the Board of Directors of a company shall have at least one resident director, i.e., a person who lived not less than 182 days in India in the previous calendar year. The provision also mandates that all companies comply with it within the year.

2. Woman Director:-

The concept of a woman director is also newly introduced. According to the provision, certain categories of companies should have at least one woman director. Such companies are- (1) any listed company,

(2) any public company having-

(a) paid-up capital of Rs. 100 crores or more, or

(b) turnover of Rs. 300 crores or more.

3. Independent Director (S. 149 (4)):-

(a) Number of Independent Directors:-

Every listed public Company shall have at least one-third of the total number of directors as independent directors, and the Central Government may prescribe the minimum number of independent directors in case of any class or classes of public companies.

(b) Definition of “Independent Director” S. 149 (6)):-

An “Independent Director” means a director other than a Managing Director, a whole-time director, or a nominee director, and

(i) Person of integrity:-

Who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;

(ii) No promoter or relative of the promoter or director:-

Who is or was not a promoter or related to a promoter or director in the company or its holding, subsidiary or associated company?

(iii) No pecuniary relationship:-

Who has or whose relatives have or had no pecuniary relationship with the company, its holding, subsidiary or associate company or their promoters, or directors during the two immediately preceding financial years or during the current financial year.

(iv) Holds no key managerial post:-

Neither he nor his relatives have held a key managerial post or are or have been employees of the company or its holding, subsidiary, or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed.

(v) No employee, proprietor or partner:-

Neither he nor any of his relatives have been an employee, proprietor, partner of a firm of auditors, legal consultants, etc., in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed.

(vi) Does not hold two or more per cent of voting power:-

Neither he nor his relatives hold together with his relatives two per cent or more of the company’s total voting power.

(vii ) No Chief Executive or Director of any nonprofit organizations:-

Neither he nor his relatives are a Chief Executive or director, by whatever name called, of any nonprofit organization that receives twenty-five per cent or more of its receipts from the company.

(viii) Such other qualification as prescribed:-

Who possesses other qualifications that may be prescribed?

Such appointment of independent directors has also to be approved by the shareholders.

(c) Declaration of Independent Director (S. 149 (7):-

Every independent director shall at-

(i). the first meeting of the Board of Directors (in which he participates as a director), and

(ii). thereafter at the first meeting of the Board of Directors in every financial year, or

(iii). where there is any change in the circumstances which may affect the status of an independent director,

-give a declaration that he meets the criteria of independence as provided.

(d) Tenure of Independent Director (S. 149 (10)):-

Every independent director shall hold office for up to five consecutive years. However, he may be eligible for re-appointment by passing a special resolution by the company.

(e) Selection of Independent Director (S. 150):-

An Independent Director may be selected from a data bank containing names, addresses and qualifications of persons eligible and willing to act as independent directors, maintained by anybody, institute, or association, which the Central Government may notify.

4) Additional Directors[9] (S. 161 (1)):-

The company’s articles of Association may confer the power on the Board of Directors to appoint any person as an additional director, except a person who fails to get appointed as a director in a general meeting.

The tenure of an additional director shall be up to the date of the next annual general meeting or the last date on which the annual general meeting should have been held, whichever is earlier.

5) Alternate Director[10] (S. 161 (2)):-

The concept of alternate director has also been newly inserted in the Companies Act 2013. An alternate Director may be appointed for a director during his absence for a period of not less than three months in India by a company if the articles confer such power or a resolution to that effect is passed in the annual general meeting. However, such a person should not be holding any other alternate directorship.

No person shall be appointed as an alternate director or an independent director unless he is qualified to be appointed as an independent director. Moreover, an alternate director shall not hold office for a period longer than that permissible to the director in whose place he has been appointed. The additional director shall vacate the office when the director in whose place he has been appointed returns to India.

6) Nominee Director[11] (S. 161 (3)):-

Subject to the company’s articles, the Board may appoint any person as a director nominated by (i) any institution in pursuance of the provisions of any law for the time being in force or of any agreement or (ii) by the Central Government or the State Government by virtue of its shareholding in a Government company.

Thus, the Nominee director is appointed to protect the interest of such an institution or concerned government.

VII] Disqualification of Directors (S. 164):-

A person shall not be capable of being appointed as a Director of a company in the following cases –

If he has been found to be of unsound mind by a court.
If he is an un-discharged insolvent.
If he has applied to be adjudicated as insolvent, his application is pending.
If he has been convicted of any offence involving moral turpitude and sentenced to at least 6 months imprisonment, and a period of 5 years has not elapsed from the date of the expiry of the sentence or convicted of an offence for a ‘related party transaction’.
If he has failed to pay any calls in respect of shares of the company held by him for 6 months of the due payment of the calls.
If he has been disqualified from appointment as a director by a court of tribunal,
if such a person is a Director of another public company which –

(a) has not filed the annual accounts and annual returns for any continuous 3 years or

(b) has failed to repay its deposit or interest thereon on the due date or redeem debentures on the due date or pay a dividend, and such failure continues for one year or more.

If not furnished, Director Identification Number.

Budda Naga Sarat Chandra v. Union of India

(Laws (APH) 2021-3-45)

Facts: The director’s DIN number was deactivated, and they were disqualified for not filing their income tax returns. However, the action was taken without giving them notice.

Andhra Pradesh High Court held the action invalid and ordered the restoration of the DIN number of the directors.

VI] Powers, duties and liabilities of Directors (S. 179):-

The powers available to the Directors are exercisable at its Board meeting. A Director as an individual cannot exercise the powers except where the Board of Directors have delegated its power to him. The powers of the directors are as under-

1) General Powers of Management:-

The Board of Directors is entitled to exercise all such powers and to do all such acts as the company is authorised to exercise. In exercising its powers, the Board is subject to the provisions of the Companies Act, the memorandum, the articles, and any regulations not inconsistent with them.

Thus, if the general powers of management are vested in the Directors, the shareholders cannot direct them to bring an action against a particular individual, sell the company’s assets, or declare a dividend, except in exceptional circumstances.

However, a company is an institution owned and controlled by its shareholders; therefore, in the following exceptional cases, the general meeting is competent to act even in the matters delegated to the Board.

a) Deadlock[12]:-

The occasion for the shareholders to intervene would be when the Directors are unwilling to act on account of deadlock.

b) Board Incompetent[13]:-

The powers vested in the Board of Directors are to be exercised by the majority of the shareholders if all the Directors on the Board have become incompetent to act or exercise the powers.

E.g., where the power to fill casual vacancies in the office of Directors is given to the Board of Directors, but at the material time no Director is found validly in the office, the shareholders in general meeting may fill the casual vacancies.

c) Malafide[14]:-

When the Directors are themselves wrongdoers and have acted malafide when their personal interest conflicts with their duty in such a way that they cannot and will not take steps to seek redress for the wrong done to the company, the majority shareholders may take steps to redress the wrong.

d) Residuary Powers[15]:-

The company’s inherent, residuary and ultimate powers lay with the shareholders’ general meeting.

2) Power of allotment and issue of securities:-

The board of directors generally has the power to allot securities. The power is required to be exercised by the Board in conformity with the provisions of the Companies Act. This is a fiduciary power and, therefore, requires it to be exercised by the Directors bona-fide for the benefit of the company. It should be noted that the allotment of shares by Directors to themselves is not unlawful, but an interested Director shall not vote on a resolution allotting shares in his favour, and if he votes, his vote should not be counted.

3) Power to make Calls on Shares[16]:-

This is one of the most important powers of the Directors. If the whole value of the share is paid at the time of allotment, nothing remains to be called, and the shareholder’s liability ends; however, if the whole value of the share is not paid, calls may be made for the payment of an unpaid value of the share held by him.

The Directors can make such calls in the manner provided by the company’s articles. The calls shall be made under a proper resolution of the Board of Directors and for the company’s benefit.

4) Power to Forfeit Shares[17]:-

If the call made on the share is not paid, the company or the Board of Directors (if Articles so provide) may forfeit the shares.

However, the following conditions are necessary for a valid forfeiture of shares-

(a) It has been exercised in good faith in the interest of the company.

(b) such power of forfeiture should be conferred by the Article of the company.

(d) a resolution declaring forfeiture is to be passed at the meeting of the Board of Directors.

5) Power to make contracts, create negotiable instruments and borrow money on behalf of the company:-

A Director may be considered an agent of the company. Therefore, a Director can (when so empowered) make a contract and borrow money on behalf of the company, making the company liable for the latter.

6) Power to recommend the declaration of dividend:-

A Board of Directors can recommend the declaration of a dividend at a particular rate. An annual general meeting of a company can approve the declaration of dividends at the recommended rate.

7) Power to inspect books of accounts:-

The Directors can inspect the books of account.

8) Power to make an investment:-

The Board of Directors can invest the funds of the Company.

9) Power relating to the appointment of Directors:-

The Board of Directors may also appoint Directors in certain circumstances. The Board of Directors can appoint additional Directors if empowered by the company’s Article.

10) To take over another company:-

The Board of Directors can take over a company or acquire a controlling or substantial stake in another company.

11)Power to borrow money within the limit prescribed.

12) To diversify the business of the company.

13) To approve amalgamation, merger or reconstruction;

14) To grant loans, give guarantees, or provide security regarding loans.

15) To contribute to the national defence fund (S. 183).

IX] Duties and Liabilities of the Directors (S. 166):-

Law tries to regulate the exercise of powers by imposing upon Directors the following duties –

(1) To act according to the Article:-

The director’s foremost duty is to act according to the company’s Articles of Association.

(2) Duty of Good Faith (Liability for Breach of Trust):-

Being fiduciary agents of the company, the director’s first and foremost duty is to act honestly.

Cook V/s Deeks[18]

Facts –The company directors carrying on the business of railway construction contracts obtained a contract in their own names to the exclusion of the company. They subsequently passed a resolution at a general meeting of the shareholders that the company had no interest in the contract.

The Privy Council Held that the benefit of the contract belongs to the company, and the Directors could not validly use their voting power to vest it in themselves.

In Score Information Technology Ltd. v. Gr. Infra Projects Ltd.

(Laws (DLH) 2021-1-26)

The Delhi High Court observed that the director must always act in good faith to promote the company’s objectives and in the best interest of its employees and shareholders. A director shall not be involved in a situation in which he may have a direct or indirect interest that conflicts with the company’s interest.

(3) Duty of Care and Skill (Liability for Negligence):-

A Director is required to perform his duties with reasonable care and caution. In discharging his duties, the director shall exercise some degree of skill and diligence.

(4) Duty to attend Board Meeting:-

A Director is not bound to attend all the meetings of the Board, though he ought to attend in the circumstances he is reasonably able to do so. However, the office of a director will be vacated if he absents himself from three consecutive meetings of the Board or all the meetings of the Board for a continuous period of 4 months, whichever is longer, without obtaining leave of absence from the Board.

(5) Duty to Disclose Interest (S. 184):-

A Director has a fiduciary relationship with his company; he cannot place himself in a position in which there is a conflict between his duties to the company and his personal interest. Because of this principle, a Director is required to disclose his interest in any company transaction.

Every Director interested in any company transaction can disclose their interest to the Board at its meeting. A Director cannot participate or vote in discussion at the Board meeting on any contract or arrangement in which he is interested.

(6) Duty not to delegate his work:-

Since Directors are a company’s agents, the principle of “delegates non-protest delegare” applies to them. This principle states that Directors should perform their duties personally and not delegate their office. However, regarding the business’s necessities, the directors may distribute the work among themselves.

Dovey V/s Cory[19]

Facts –A banking company sustained losses due to improper advances made to its customers. The irregular nature of the advances was concealed by a fraudulent balance sheet prepared by the manager and the chairman.

The House of Lords held that the other Directors were not liable for having discovered the fraud, as they were not, in the absence of circumstances of suspicion, bound to examine entries in the company’s books to see that the balance sheet was incorrect.

(7) Duty not to compute with the company:-

Directors are not permitted to enter into a competing business with the company of which he is the director or gain any advantage to themselves or their relatives. If they are found guilty of violating the said provision, they shall be liable to pay an amount equal to the gain he has received (Held by Delhi High Court in Rajeev Saumitra V/s Neetu Singh decided in I.A 17545/2015).

X] CONCLUSION:-

The whole edifice of a company stands on a fiduciary relationship between the company and its directors. However, the directors are neither purely agents nor trustees of the company. They should exercise their powers bona fide in the interest of the company and for the purposes for which the powers are entrusted to them.

* * * * *

[1]संचालक

[2] As per S. 2 (71) a Public Company means a company which-

is not a private company.
Has a minimum paid-up share capital of five lakh rupees or such higher paid-up capital, as may be prescribed.

Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company n its articles.

[3] As per S. 2 (68) Private Company means a company having a minimum paid-up share capital of one lakh rupees or such higher aid-up share capital as may be prescribed, and which by its articles,

restricts the right to transfer its shares;
except in case of One Person Company, limits the number of its members to two hundred;

Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as single member;

Provided further that-

persons who are in the employment of the company, and
persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and

prohibits any invitation to the public to subscribe for any securities of the company.

[4] (1860, 2 CH 77)

[5] (1938, AIR P.C. 159)

[6] ((1869) 8 EQ 376, 381)

[7]namely

[8] भारतात राहणारा संचालक [भारत मे निवासी संचालक]

[9] जादाचा संचालक [अतिरिक्त संचालक]

[10] बदली संचालक [वैकल्पिक संचालक]

[11] नामित संचालक [नामनिर्देषित संचालक]

[12] कोंडी [गतिरोध]

[13] अपात्र संचालक मंडळ [अक्षम मंडल]

[14] दुर्भावना पूर्ण

[15] शिल्लक/उर्वरीत अधिकार [अवशिष्ट शक्तियां]

[16] भागांवरील षिल्लक रककम मागणी/बोलावणी [शेयरों पर कॉल करने की शक्ति]

[17] भाग जप्त करण्याचा अधिकार [शेयरों को जब्त करने की शक्ति]

[18] ((1961) 1 AC 554 (PC))

[19] (1908, AC 477)