Professor Dr.D.

Jayakumar

UNIT 3 (cont.)

DIRECTORS

Who Are Directors?

Directors are the persons appointed to direct and supervise the affairs of a
company. The company's business is consigned in the hands of directors.
Team of directors of the company is collectively known as its Board of
Directors, which wields the supreme executive authority controlling the
management and affairs of a company. In practice it is the Board of
Directors which looks after the management and protects the interests of
all the stakeholders of the Company

Basically, Board of Directors is a group of trustworthy and respectable

people who looks after the interests of the large number of shareholders
who are not directly involved in the management of the company. They are
entrusted with the responsibility to act in the best interests of the
company. The Companies Act, 2013 does not contain an detailed definition
of the term director”. Section 2 (34) of the Act says that director” means a
director appointed to the Board of a company. A director is a person
appointed to perform the duties and functions of director of a company in
conformity with the provisions of the Companies Act, 2013. Directors are at
times described as trustees, agents and sometimes as managing partners.
Directors are viewed differently according to circumstances.
According to the provisions of Companies Act, 2013 it is mandatory for
every company to have minimum 3 directors in case of public limited
companies, at least 2 directors in case of private limited companies and 1
director in case of one-person companies. Maximum a company can have
15 directors. In Case the company wishes to appoint more directors, it can
do so by passing the special resolution in its general meeting (GM).

Types of Directors:

 Residential Director

According to provisions of law, every company needs to appoint a director

who has been in India and stayed for at least 182 days in a previous
calendar year.

 Independent Director

They are non-executive directors of a company and contribute the

company by improving corporate credibility and enhancing the governance
standards. That is to say, an independent director is a non-executive
director without a relationship with a company which can impact the
independence of his judgment.

The term of the independent directors is up to 5 consecutive years;

however, they are entitled to reappointment by passing a special resolution
with the disclosure in the Board's report. Below mentioned are the
companies that need to appoint minimum two independent directors:

Public Companies having Paid-up Capital of Rs.10 Crores or more,

Public Companies having annual Turnover of Rs.100 Crores or more,

Public Companies having total outstanding loans, deposits, and debenture
of Rs.50 Crores or more.

 Small Shareholders Directors

A listed company, can after the notice of at least 1000 small shareholders
or 10% of the total number of the small shareholder, whichever is lower,
shall have a director which would be elected by small shareholders.

 Women Director

As per Section 149 (1) (b) second proviso of the Companies act, it is
mandatory for a company, be it a private company or a public company, to
appoint at least one woman director in case it satisfies any of the following
criteria:

The company is a listed company & its securities are listed on the stock
exchange.

The paid-up capital of such company is up to Rs.100 crore or more with a

turnover of Rs.300 crores or more.

 Additional Director

A person could be appointed as an add. director and can occupy his post
until next AGM (Annual General Meeting). In absence of the AGM, such a
term would conclude on the date on which such AGM should have been
held.

 Alternate Director

Alternate director refers to a person appointed by the Board, in order to fill

in for a director who might be absent from the country, for the period of
more than 3 months.
  Nominee Directors

Nominee directors can be appointed by a specified category of

shareholders, banks or lending financial institutions, third parties through
contracts, or by Central Government in case of oppression or
mismanagement.

 Appointment of Directors:

According to the provisions of Companies Act 2013, only an individual can

be appointed as a member of the board of directors. Usually, the
appointment of directors is made by shareholders. A company, a legal firm
and an association, with an artificial legal personality can't be appointed as
a director. It must to be a real person.

In a company which is public or a private, a total of two-thirds of directors

are appointed by the shareholders. The remaining one-third members are
appointed with regard to prescribed guidelines in the Article of Association.
In case the company is a private company, their Article of Association can
authorise the method to appoint any and all of the directors. In case the
Articles are silent, the directors have to be mandatorily be appointed by the
shareholders. The Companies Act also have a provision that permits a
company to appoint two-thirds of the company directors to be appointed
through the principle of proportional representation. This happens if the
company has accepted this policy.

Nominee directors shall be appointed by third party authorities or the

Government to tackle misconduct and mismanagement. It is the primary
duty of directors to act honestly, exercise reasonable care and skill while
they perform their assigned duties on behalf of the organization.
  Appointment of Managing Directors

A Managing director (MD) must be an individual i.e. a real person and s/he
can be appointed for a maximum period of five years. A Managing director
of a pre-existing company can be appointed as a managing director of
another company as long as the board of directors of the first company
approve and are aware of this new appointment.

 Conditions for Appointing Directors

The Companies Act does not prescribe any qualifications for Directors of
any company. An Indian company may, therefore, in its Articles, stipulate
qualifications for Directors. However there are certain condition which
needs to be fulfilled to appoint directors.

The following conditions needs to be fulfilled while appointing a

director:

S/he should not have been sentenced to imprisonment for any period, or a
fine imposed under various laws and statutes.

They must not have been detained or convicted for any duration under the
Conservation of Foreign Exchange and Prevention of Smuggling Activities
Act, 1974.

S/he must have completed 25 years of age, but should be less than 70
years of age. However, this age limit is not applicable if the appointment is
approved by a special resolution passed by the company in GM or the
approval of the Union government is obtained.

They should be a managerial person in one or more companies and draws

Consideration from one or more companies subject to the limitations
specified in Section III of Part II of Schedule XIII.
S/he should be Indian Resident. It means a person who has been staying
in India for a continuous period of not less than 12 months immediately
preceding the date of his/her appointment as a managerial person and who
has come to stay in India for taking up employment in India or for carrying
on business or occupation in India.

Powers of Directors

Corporate body incorporated is artificial person, so it is necessarily needed

to be represented by living person. So, the functioning and the business of
any company is entrusted in the hands of directors. Office of director is
that office of the company who handle all the affairs and daily business of
the company.

In the case of Bath vs standard land company limited Neville J held that
board of directors are the brain of the company and company acts only in
their directions. Though director is such a salient position it is endowed
with various powers to handle the business of the company.

A board of directors is the biggest authority of the company and is vested

with the various powers under section 179 of the companies act 2013.
Directors can make any and all of the decisions and can exercise the power
of which the company has authority or is entitled. Directors appointed have
all the control over the operations of the company.

All the powers are not absolute, directors can exercise their power
independently but are subject to memorandum and articles and also board
of director are not competent to do the act which are required to be done
by the shareholders in general meetings.
There are certain powers which can be exercised only when resolution has
been passed at the board meeting.

Those powers include power to:

 To make calls
 To borrow money
 Issue funds of the company
 To grant loans are give guarantees
 To approve financial statements
 To diversify the business of the company
 To apply for amalgamation merger or reconstruction.
 To take over a company or to acquire a controlling interest in another
company.

Shareholders may impose restrictions on exercise of these powers.

Powers to be exercised with general meeting approval

Section 180 of the Companies Act 2013 provides with those powers which
can be exercised only if they approved in general meeting

To sale, lease or otherwise dispose of the whole or any part of the

company's undertakings

To invest otherwise in trust securities

To borrow money for the purpose of the company

To give time or refrain the director from repayment of any debt.

If restrictions which are imposed by this section are breached by the

director, the title of lessee or purchaser is affected. But if person has acted
in good faith with due care and diligence then it is not affected. This
section does not apply to the companies whose ordinary business involves
the selling of property or to put a property on lease.
Power to constitutes audit committee

Under section 177 board of director has power to constitute an audit

committee. It needs to be constituted of at least three directors including
independent directors. The eligibility of the member of audit committee's
chairman is that he or she appointed should be able to read and
understand financial statements. It is in accordance with the terms of
reference specified by board in writing the audit committee shall function.

Power to constitute nomination and remuneration committee and

stakeholder relationship committee

Under section 178 of the companies act 2013, board of directors is

empowered to constitute nomination and remuneration committee and
stakeholders' relationship committee.

There should be three or more non executive director, out of which half are
required to be independent director in nomination and remuneration
committee.

Stakeholder relationship committee can also be constituted by board in

which there can be more than 1000 shareholders, debenture holders aur
any other security holders. This committee shall resolve grievances of the
shareholders.

Power to make contribution to charitable and other funds

Board of directors can contribute for the genuine and Bonafide cause as a
charity under section 181 of the act. Only condition imposed is that, when
contribution is more than 5% of net profit of company, then permission is
required to be taken of company in general meeting.
Power to make a political contribution

Under section 182 of companies act 2013, political contributions can be

made by companies but company making it should not be government
company and which has been in existence for less than 3 years. There is
7.5 % of limit imposed that is companies' contribution to political parties
shall not exceed this limit. Any of the contribution should first be
sanctioned by board of directors.

Power to contribute to National defence fund

Under section 183 of companies act, directors is empowered to make

contribution to National defence fund and to any of the fund which is made
for the purpose of National defence. Any amount of contribution should be
done as may be fit, the only thing needed to be done is that the amount
contributed should be disclosed in the profit and loss account during
financial year which it relates to.

Duties of Director

Section 166 of the Companies Act, 2013 defines the duties of Directors. A
Director of a company should perform the following duties

He should act in accordance with the articles of the company.

He should always Act in good faith for promoting the objects of the
company and for the benefit of its members and act in the best interests of
the company, shareholders, its employees and the community at large.

Exercise his duties with due and diligence and should exercise independent
judgment.
Should not involve in situations which directly or indirectly conflict with the
interest of the company.

Should not achieve or take undue gain or advantage of his office whether
for himself or for his relatives, associates or partners.

If the director contravenes any provisions of this section, he shall be

punishable by a fine of Rs. 1,00,000 or more, which may extend up to Rs.
5,00,000.

Resignation of Director

Resignation could be done by director of the company under section 168

(1) of the companies act 2013. A director has the option to resign from his
office by giving notice in writing to the company and board shall on receipt
of such notice take note of the same and company shall intimate this to
registrar in the manner as prescribed. In the immediately following general
meeting by the company, it should be laid down in the reports of director

Within 30 days from the day of resignation. Director shall also forward
copy of resignation along with detailed reason of resignation to the
registrar of the company. There is no right provided under companies act
2013 to any managerial person to reject the resignation of the director. But
if any offence has been committed by director, then he shall be liable even
after the resignation.