CHAPTER 4

MANAGEMENT OF COMPANIES
The management and administration of a company is vested on Board of Directors who are a team
of people elected by the shareholders to represent them.

BOARD & GOVERNANCE

Governance is the process that is designed to ensure accountability, transparency, responsiveness
rule of laws, stability, equity, empowerment and broad based participations. It oversee
management and organisation performance to ensure that the organisation is working in the best
interests of the public.
Company is an artificial person created by law and yet acts as a natural person which cannot be
done by itself and only through some human persons. These persons through whom it acts and by
whom the business of the company is conducted are known as individually DIRECTORS and
collectively as BOARD OF DIRECTORS or the BOARD. The BoD entrust the day to day management
of the company to a professionally qualified Chief Executive who may be Managing Director or
Manager.
According to Sec 149 (1), every company shall have Board of Directors consisting of individuals as
directors and for a public company a minimum of 3 directors and for a private company its 2. In the
case of OPC its only one. All companies may have maximum 15 directors and to appoint more, it
has to pass a special resolution for the same.

DIRECTOR
According to Sec 2 (34), a director means a director appointed to the Board of a company. Hence a
person who is appointed for the management of a company is called as Director which means that
body corporate, association or firm cannot be appointed as a director and only an individual can be
appointed as a director.
As there are a large number of shareholders and all these persons cannot participate in the
management of the company, this duty is delivered to some selected persons known as Directors.
Therefore a director is a person who directs, conducts, manages, supervise and controls the
functioning of a company.

QUALIFICATION OF A DIRECTOR
The companies act does not lay down any particular qualification for a director. But the Articles may
provide that a certain number of shares will have to be held by each director called as Qualification
Shares. The Co’s Act 1956 states that the nominal value of qualification shares as fixed by the
Articles should not exceed Rs. 5000 and if the value exceed this, then the qualification share must
not exceed one. This share must be obtained by him within two months after his appointment as
director. If he does not acquire this share within the prescribed time, he ceases to be the director
and will be punishable with a fine which may extent to Rs. 500 for every day between such expiry
and last day on which he acted as a director.

DISQUALIFICATION OF DIRECTORS
1. A person shall not be capable of being appointed as a director if he has been found of
unsound mind , an undischarged insolvent, applied to be adjudicated as an insolvent and his
application is pending, has been convicted by a court for an office involving moral turpitude
and imprisoned for not less than 6 months, order has been passed by the court disqualifying
him as director, has not paid any call money in respect of shares held by him, has not
allotted the DIN etc.
2. Has failed to repay deposit or interest thereon on due date
 3. A private company may by its Articles provide for any disqualification for appointment as a
director in various circumstances.

LEGAL POSITION OF DIRECTOR / ROLE OF DIRECTORS IN A COMPANY

In the words of Bowen L.J., Directors are described sometimes as agents, sometimes as trustees and
sometimes as managing directors.

DIRECTORS – as Agents - A company is an artificial person created by law and therefore it cannot
do its work by itself. So the directors work on behalf of the company and hence their relation is that
of principal (company) and agent ( Directors). The company can act only through its directors and
therefore the directors would be liable for their act. They must conduct the business of the
company with reasonable care and must abide by the memorandum and articles of the company.
They must enter into contracts and put their signature on behalf of the company like an agent.
But the directors are not agents to individual shareholders rather stand in a fiduciary relationship
with the shareholders of the company.

DIRECTORS - as Trustees - The directors of a company are trustees with reference to their power
of applying funds of the company . Most of the powers of the directors are powers in trust i.e. the
power to make calls, to forfeit shares, to issue further capital, to approve transfer of shares etc.
Again the directors are trustees for the company and not for individual shareholders and to third
parties who have made contracts with the company.
A trustee in the legal sense is one who is the owner of the property but the directors are trustees
only for the wealth, properties and power of the company and not for loans and liabilities.
Therefore they cannot be called as trustees in the real sense.

DIRECTORS – as Managing Partners - They are the elected representatives of the shareholders and
therefore are in a position as Managing Partner. They themselves are the shareholders of the
company which makes them partners to other shareholders. However they are not the managing
partners in the full sense because they are not authorised to bind other directors and shareholders
by their act and they compulsorily retire.

DIRECTORS – as Employees - As directors cannot claim their remuneration in the event of winding
up of the company. But a directors is in service or employment of the company such as secretary,
manager and hence is treated as an employee for which he is entitled to remuneration and other
benefits in addition to his right as director.

APPOINTMENT OF DIRECTORS
The directors are the brain of a company and occupy a very important position whereby only
individuals can be appointed as directors. A director may be appointed in any of the following
ways :-
A. Appointment of first directors – By articles and by subscribing to the MoA. (First Directors)
The first directors are nominated by the promoters of the company and their names are mentioned
in the AoA. If the articles are silent about the first directors, then the subscribers to the
Memorandum who are individuals shall be deemed to be the first directors of the company. They
shall hold office until the Directors are duly appointed in the first annual general meeting. In the
case of OPC, an individual become member who shall be deemed to be its first director.
B. Appointment of Subsequent directors – In General Meeting / by Board of Directors / by
Third parties / by principle of proportional representation / by the Tribunal
  Appointment of Directors by Shareholders in General Meeting – The directors must be
appointed by the shareholders in the general meeting for which the members must be
informed 7 days before the meeting about the candidature of the person as new director.
For this he has to acquire Director Identification Number (DIN) and a declaration that he is
not

disqualified to become a director under this act and must give his consent to act as so. The
company shall then within 30 days of the appointment file the consent with ROC along with
the necessary fees after which the director shall take charge of office.

 Appointment of Directors by the Board - The Board of Directors can appoint the following
types of directors :-
 Additional Director - Based on the Articles, the BoD can appoint additional directors
who shall hold office upto the date of the next annual general meeting.
 Alternate Director - If the Articles confer such power or by a resolution passed by
the company in general meeting, it can appoint alternate director who is appointed
in place of a director who is absent for a period of not less than 3 months from India.
He cannot hold the office longer than the term of the director in whose place he has
been appointed. And in case the original director returns back, he has to vacate the
office.
 Director in a Casual Vacancy - In a public company if a director duly appointed in
general meeting vacates before his term of office expires, then there arises a Casual
Vacancy which as per the articles of the company must be filled by the Board of
Directors in Board Meeting. Such a director will hold office only upto the date which
was applicable to the original director.

 Appointment of Directors by Third Parties ( Nominee Directors) - In accordance with 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.

 Appointment of Directors by Proportional Representation - Generally directors of a

company are appointed by majority of shareholders. The articles of a company may provide
for the appointment of not less than 2/3 of the total number of directors of a company
according to the principle of proportional representation. Such appointment shall be made
once in three years.

 Appointment by Tribunal - If a member of a company complains to the Tribunal that the

affairs of the company have been or are being conducted in a manner against the public
interest or oppressive to members or its running is in a manner which is likely to cause
serious damage to the interest of trade, industry or is to defraud the creditors, then the
Tribunal may appoint such number of persons as directors to report to the Tribunal.

WOMAN DIRECTOR
The following class of companies shall appoint at least one woman director :-
 Every listed company
 Every public company having on the last date of latest audited financial statement a paid up
share capital of Rs. 100 crores or more OR turnover of Rs. 300 crores or more.

INDEPENDENT DIRECTOR
Every listed public company shall have at least 1/3 of the total number of directors as Independent
Directors. The following class of companies shall have at least two directors as independent
directors:-
 Public companies having paid up share capital of Rs. 10 crores or more OR
 Public companies having turnover of Rs. 100 crores or more or
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 Public companies which have aggregate outstanding loans, debentures and deposits
exceeding Rs. 50 crores.

NUMBER OF DIRECTORSHIP
A person can act as a director to 20 companies at the same time. The maximum number of
directorship in public companies is limited to 10. Any person holding office as directors in companies
more than the limits set by the Act shall choose the companies in which he wish to continue to hold
the office, shall resign his office as director from the remaining companies and intimate the choice to
each company and registrar.
If a person accepts his appointment as a director in contravention of the above provisions, he shall
be punishable with fine which shall not be less than Rs. 5000 and may extend to Rs. 25000 for every
day after the first day during which the contravention continues.

RETIREMENT OF DIRECTORS
Articles of a company lay down the provisions relating to retirement of directors. If not provided
then not less than 2/3 of total number of directors of a public company shall retire by rotation. For
computing the total number of directors, the independent directors are excluded.
The directors who retire by rotation shall be those who have been longest in office since their last
appointment. If the vacancy of the retiring director is not filled up and meeting has not resolved to
fill the vacancy, then the meeting shall stand adjourned till the same day in the next week at the
same time and place.
If vacancy is not filled up in the adjourned meeting also, then the retiring director shall be deemed to
have been re-appointed unless in the following cases - if retiring director express his unwillingness
to be so re-appointed / if he is not qualified or is disqualified for appointment / if a resolution is
required for his appointment etc.

PUNISHMENT FOR CONTRAVENTION

If any individual or director of a company does not obtain DIN or fails to intimate it, then he shall be
punishable with imprisonment for a term of 6 months or fine of Rs. 50,000. If the default still
continues, then a further fine which may extend to Rs. 5000 for every day after the first day during
which the contravention continues.

REMOVAL OF DIRECTORS
A director may be removed before the expiry of his period in the following ways :-
1. BY THE SHAREHOLDERS - The shareholders of a company by passing an ordinary resolution
at their general meeting remove a director before the expiry of his period of office. But
they cannot remove a director appointed by the Tribunal or elected by proportional
representation. For removing a director, a special notice is required for a resolution and the
company shall send a copy of the same to the member as well as the director concerned
who is to be heard on the resolution at the general meeting and will give in writing his
representations and request to the members of the company. The company will send a copy
of this representations to every members . In case the representation could not be sent as
was received too late or because of the company’s default, then the company must read it
out in the meeting. If he is removed, then the vacancy may be filled at the same meeting
and the director so appointed shall hold office until the date upto which the removed
 director would have held. The director removed can claim compensation or damages
against the company.
2. BY THE TRIBUNAL - Any member who complains that the affairs of the company have been
or are being conducted in a manner which is injurious to public interest or interest of the

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company, oppressive to members or injurious to trade, industry or business or to defraud its
creditors or members, then can apply to the Tribunal for an order. The tribunal in such case
may provide an order for removal of MD, Manager or any Director of the company.
3. BY THE CENTRAL GOVERNMENT - The Central Government if of the opinion that the affairs
of the company are being conducted in a manner prejudicial to public interest, it may apply
to Tribunal for an order who in turn will order for removal of the director concerned.

VACATION OF OFFICE OF DIRECTORS

The office of a director shall become vacant if he :-
 Incurs any of the disqualifications
 Absents himself from the meetings of the BoD during the period of 12 months with or
without seeking leave of absence of the Board
 Does not disclose his interest in any contracts in which he is directly or indirectly interested.
 Becomes disqualified by the order of the Tribunal
 Is convicted for an offence involving moral turpitude and sentenced to imprisonment for a
period of not less than 6 months.

If a person continue to function as a director knowing that the office held by him has become vacant
on account of the disqualification mentioned, he shall be punishable with imprisonment for a term
of one year or fine of not less than Rs. 1 lakh to Rs. 5 lakhs or both.

RESIGNATION OF DIRECTOR
A director may resign from his office by giving a notice in writing to the company and the board on
which the Company will intimate the same to ROC in a prescribed form within a period of 30 days of
receipt of notice and post the information in the Website of the company. The matter of such
resignation should be placed in the report of directors laid in the immediately following general
meeting of the company.
The director also should forward a copy of the resignation along with the reason for resignation to
ROC within 30 days in the prescribed manner.

DIRECTOR IDENTIFICATION NUMBER

Every person intending to be appointed as director of a company shall make an application to the
Central Government electronically for allotment of DIN in the prescribed manner and along with the
necessary fees. The Central Government on receipt of such application within a period of 1 month
allot DIN to the applicant in the prescribed manner. The director should then within a period of 1
month on receipt of DIN intimate the same to the companies of which he is a director. A person will
be allotted a single DIN only.

The company on receipt of intimation of DIN furnished by all the Directors shall within 15 days
inform the ROC or any authority specified by the Central Government with such fees or additional
fees as may be prescribed
If the company fails to furnish DIN before the expiry of the period specified, then the company and
all officers in default shall be punishable with fine of not less than Rs. 25000 which can extend to Rs.
1 lakh.
REGISTER OF DIRECTORS AND KEY MANAGERIAL PERSONNEL
Every company shall keep at its registered office a register containing the particulars of directors and
key managerial personnel . This register shall be kept open for inspection during business hours and
at every annual general meeting of the company and be accessible to any person attending the

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meeting. In case inspection is refused or copy is not send within 30 days to ROC, then ROC on an
application made to him order immediate inspection and supply of copies required.
A return containing he particulars of appointment of director or key managerial personnel be filed
Registrar along with the required fees within 30 days of such appointment.

POWER OF DIRECTORS (POWERS OF BOARD)

Subject to provisions of Co’s Act, MoA and AoA, the Board of Directors are entitled to exercise all
such powers and do all such acts and things the company is authorised to exercise. However the
following powers can be exercised on behalf of the company by means of resolution passed :-
 To make calls on shares for unpaid money
 To authorise buy back of securities
 Issue securities including debentures in or outside India
 Borrow monies
 Invest funds of the company
 Grant loans and approve financial statement
 To diversify the business of the company
 To approve amalgamation, merger or reconstruction.

For performing the following powers, the sanction of the shareholders are to be obtained through a
resolution passed at a general meeting :-
 To lease, sell or dispose the whole or part of the undertaking of the company
 To remit or allow more time for the payment of any debt due by a director
 To borrow in excess of the paid up capital and free reserves of the company
 To invest money received in respect of compensation received as a result of merger or
amalgamation.
 To donate to a charitable purpose an amount exceeding 5 % of average net profit of the
company for the last 3 years.

DIRECTORS DUTIES AND RESPONSIBILITIES

The duties of a director is divided into two –
A. STATUTORY DUTIES - namely
 Verify the truthness of a prospectus issued by the company
 To determine the amount of minimum subscription
 To see that shares are not allotted until minimum subscription has been obtained
and all monies are deposited in a separate account with scheduled bank
 To see that application money received from those to whom shares are not allotted
is refunded.
 To purchase and pay for qualification shares within the specified time
 To see that proper accounts and register of members are kept
 To send to ROC notice of conversion of shares into stock and copies of special, extra
ordinary resolution, register of directors, secretary etc.
 To convene AGM and extra ordinary general meeting
 To see that share certificate and share warrants are kept for delivery
 To keep register of mortgages and charges and give necessary information and
explanation to the auditors during course of audit.
  To submit statement of affairs during the winding up of the company.

B. GENERAL DUTIES - namely

o Act in good faith to promote the objects of the company and for the benefit of
members as a whole.
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o Exercise his duties with due and reasonable care, skill and deligence
o Shall not involve in a situation in which he may have a direct or indirect interest that
conflict with the interest of the company
o Shall not achieve or attempt to achieve any undue gain or advantage either for
himself or for his relations
o Shall not assign his office and any assignment made shall be void

If a director contravenes the provisions of this section, such director shall be punishable with fine of
not less than Rs. 1 lakh and may extend to Rs. 5 lakhs.

In addition to the above mentioned duties, the directors are also responsible for various obligations
like :-

1. To lay the financial statements for approval and adoption at the annual general meeting of
the share holder.
2. Ensure that a proper system with regard to the provisions of laws are operating effectively.
3. Ensure that all activities are included in Corporate Social Responsibility of the company.
4. Disclose his interest in a contract with the company
5. Prohibited from engaging on forward dealings in securities of the company
6. Responsible for appointment of whole time managerial personnel of a company, auditors
and issuance of notice in connection with holding board meeting and general meeting .

DIRECTOR’S RIGHTS

The rights of a directors are :-

a. Right to access to a company’s statutory registers, minutes and accounting records and
inspect and if required take copy of all relevant documents.
b. To claim reimbursement of all reasonable, legitimate expenses incurred on company
business and get remuneration.
c. Discharge their duties without interference from co-directors ad participate in strategic
management of the company.
d. To receive reasonable notice of meetings
e. Right to remain in office until he resigns or is properly removed.
f. Right to hold any number of directorships subject to the limit fixed by Articles and Act.
g. Has the right to delegate only certain powers but the responsibility is still with him
h. All directors have equal rights to attend board meetings and with equal weight with regard
to votes.
i. Can insist that the board meeting be held in a reasonably convenient manner.

LIABILITY OF DIRECTORS
The directors must act in good faith and must be intravires the Companies Act, MoA and AoA. But
under certain circumstances the directors may be held personally responsible for acts done by him,
namely

A. LIABILITY TO OUTSIDERS
1. AS AN AGENT - Ddirectors act as agents of the company and may be held liable to outsiders
if he enter into any contract with an outsider in his personal name and knowingly enter into
ultravires contract.

2. MIS LEADING PROSPECTUS - Director is liable to compensate a person who has subscribed
shares in good faith of prospectus which contained untrue statement. In such a case he has
compensate such subscriber for any loss or damage.
3. WITH REGARD TO ALLOTMENT - Director incur personal liability if
 Irregular allotment happens – allotment before minimum subscription is received
whereby they are held responsible to refund the money paid by the applicant.
 Minimum subscription is not received and failure to repay the application monies
within a period of 15 days from closure of issue.
 Commits a default in complying with the provisions of Sec. 40 regarding the
securities to be dealt within Stock Exchange on which Company is punishable with
find of Rs. 5 lakhs to Rs. 50 lakhs and every officer is punishable with imprisonment
for a term of 1 year or find of Rs. 50,000 to Rs. 3 lakhs or both.

B. LIABILITY TO THE COMPANY

1. ULTRA VIRES ACTS - Directors are supposed to act within the parameters of Co’s Act, MoA
and AoA. If they enter into any contract against these powers and company suffers any loss,
then the directors will be held responsible to make good the loss of the company.
2. BREACH OF FIDUCIARY DUTY - When a director acts dishonestly to the interest of the
company he is liable for breach of trust.
3. NEGLIGENCE - Directors are required to act with reasonable skill and care and if they fail to
do so, it shall be deemed to have acted negligently in discharge of their duties and hence is
liable for any loss or damage resulting therefrom.
4. Malafide Acts - Directors are trustees for the moneys and property of the company handled
by them and exercise their powers. If they dishonestly or in a malafide manner exercise
their powers and perform their duties, they will be liable for breach of trust and can be
asked to make good the loss or damage suffered by the company.

C. CRIMINAL LIABILITY

The below mentioned are the circumstances where the directors shall be criminally liable :-
 If prospectus contains and untrue statement
 Share Application money is not deposited in a scheduled bank and return of allotment is
not filed with ROC
 Register of members and debenture holders is not maintained.
 Default in filing with ROC the particulars of any charge created by the company
 Annual General Meeting is not called within specified time and annual accounts is not
placed before the company at every AGM
 Failure to obtain DIN and in case of existing director to intimate the company within one
month of its receipt.
 Allotment of shares without obtaining minimum subscription
 Disobeying the directions issued by Registrar and not providing required information
and explanation to the auditors of the company during audit.
  Continuing to act as director after his removal by the Tribunal and any false declaration
of the solvency of the company is made
 Holding office of a director in more than 20 company and in the case of public
companies more than ten.

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RESTRICTIONS ON DIRECTORS
A. AGE LIMIT - There is no prescribed age limit on a person to become a director.
B. NUMBER OF DIRECTORSHIP - The maximum number of directorship is limited to twenty
company companies and in the case of a public company to ten.
C. ASSIGNMENT OF OFFICE - Assignment or transfer of office by a director to another person
is prohibited.
D. DISCLOSURE OF INTEREST - If a director is having any interest in any contract entered into
or to be entered on behalf of the company, he is bound to disclose his interest through a
notice to the board of directors.
E. LOAN - Loan to directors and giving any guarantee for a loan taken by a director from any
person or providing of any security for such loan is strictly prohibited and regulated by the
act.

KEY MANAGERIAL PERSONNEL

The Co’s Act, 2013 give due importance to key managerial personnel who are :-

1. The Chief Executive Officer or the Managing Director or the Manager

2. The Company Secretary
3. The Whole Time Director
4. The Chief Financial Officer

DEFINITIONS:-

CHIEF EXECUTIVE OFFICER - Sec. 2 (18) – CEO means an officer of a company who has been
designed as such by it.

CHIEF FINANCIAL OFFICER - Sec. 2 (19) – CFO means a person appointed as the Chief Financial
Officer of a Company.

COMPANY SECRETARY - Company Secretary means a company Secretary as defined in Clause ( C )

of Sub Section (1) of Sec. 2 of the Company Secretaries Act.

MANAGING DIRECTOR
MD is the key managerial personal who is the head of the company in its decision making
mechanism.
U/S 2 (54), MD is defined as “A director who by virtue of the articles of a company or an agreement
with the company or a resolution passed in its general meeting is entrusted with substantial powers
of management of the affairs of the company and includes a director occupying the position of
managing director by whatever name called”. The companies Act instruct that a managing director
shall exercise his powers and control and directs the Board of Directors.

The AoA shall empower the BoD to appoint any of the directors of the company as MD by a
resolution passed at the Board meeting. An MD must be a director enjoying the powers of the
management and full time executive of the company He is both a director and manager of the
company.
But the power to do acts of routine nature like to affix the common seal of the company on any
document, to endorse any cheque, to endorse any negotiable instrument or to sign ay certificate of
share etc shall not be deemed to be included in his powers.

RIGHTS AND DUTIES OF A MANAGING DIRECTOR

The MD is the most senior manager of the company heading the organisation and is in leadership
role and fulfil motivational role for the workforce. He has to perform two types of duties - one as a
director
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and other as a chief executive of a company. Also must assist the board in formulating policy of the
organisation. The Memorandum and Articles of Association of a company mentions the powers of
the MD and further power he derives from the service agreement which takes place between him
and the company.

WHOLE TIME DIRECTOR

Whole time director is a person in whole time employment of the company i.e. a person in whole
time employment of the company and is not entrusted with the substantial powers of management.
If a director is appointed as Finance Director, he may be termed as Whole Time Director. The
provisions relating to appointment, re-appointment and remuneration is same as that applicable to
MD.

DIFFERENCE BETWEEN MANAGING DIRECTOR AND WHOLE TIME DIRECTOr

1. An MD is entrusted with substantial powers of management whereas a whole time director

is merely an employee of the company and does not have substantial powers of
management.
2. A MD and a manager cannot exist simultaneously in any company . But a company can have
a MD and a Whole Time Director at the same time.
3. A person can be MD of another company at a time bus a person cannot be a whole time
director of more than one company as being a wholetime employee of the company.

MANAGER
A manager means an individual who subject to superintendence, control and director of the Board
of Directors has management of the whole or substantially the whole of the affairs of a company and
includes a director or any other person occupying the position of a manager by whatever name
called. A Manager is an individual and is the Chief Executive Officer of the company.

APPOINTMENT OF KEY MANAGERIAL PERSONNEL