Directors

Introduction
• The company is an artificial person and is managed by
the human beings.
• Directors acting collectively are known as Board of
Directors.
• Chapter XI of Companies Act 2013 read with
Companies (Appointment and Qualification of
Directors) Rules 2014 specifies regulatory
prescriptions.
• Maximum Number of Director is 15, which can be
increased by passing a special Resolution.
 Types of Directors
• Full Time Directors – Participate in day to day activities.
• Independent Director – Do not have any material interest in the
company (besides attending the meetings for which they are paid).
• Professional director – Who are retained in the board because of
their expertise in any field.
• Woman Director – At least one women director in board for the
company whose annual turnover is more than 300 crore rupees.
• Nominee Director - is appointed by the financial institution/ bank
who has conferred any loan to the company to safeguard their
interest.
• Alternate director – Fill the temporary vacancy (for not more than
three months).
 Board of Directors
• Goal of the company – objective behind the formation of the company.
• Board is the Nucleus of the company.
• A social unit.
• Minimum/Maximum Number of Directors in a Company- Section 149(1)
• Maximum Number of Director is 15, which can be increased by passing a special
Resolution.
• Maximum number of directorships, including any alternate directorship a person
can hold is 20 [Sec 165].
• The maximum number of public companies in which a person can be appointed
as a director shall not exceed ten [Sec 165].
• The members of a company may, by special resolution , specify any lesser
number of companies in which a director of the company may act as director.
• Every company shall have at least one director who is resident in India [Section
149 (3)].
 Legal Position of the Directors
• Company is an artificial person it can not act
its own.
• Director as a trustee.
• Director as an agent
• Officer/Manager
• Employee
 APPOINTMENT OF DIRECTORS
APPOINTMENT OF DIRECTORS – Section 152
• The first directors of most of the companies are named in their articles.
• In case of the public company the directors are appointed in the general meeting.
• If they are not so named in the articles of a company, then subscribers to the
memorandum who are individuals shall be deemed to be the first directors of the
company until the directors are duly appointed.
• Director Identification Number is compulsory for appointment of director of a
company.
• Articles of the Company may provide the provisions relating to retirement of the all
directors.
• If there is no provision in the article, then not less than two-thirds of the total
number of directors of a public company shall be persons whose period of office is
liable to determination by retirement by rotation and eligible to be reappointed at
annual general meeting (any fraction to be rounded off to the one).
Appointment of Directors at General Meeting
• The directors who have been longest in office since their last appointment are liable
to retire by rotation.
• If two or more directors were appointed on same day, retirement by rotation will be
decided by either as per agreement, as per mutual consent or by lots.
• Directors retired on rotation may or any other person may be appointed at his place
or nobody may be appointed at his place.
• At after every AGM, one third of such of the director for the time being as are liable
to retire by rotation shall retire.
• At an AGM that director will retire first who has served the longest.
• The director of the company cannot prolong their tenure by not holding the general
meeting. The office must be vacated on the last day on which the AGM should have
been held – B.R. Kundra v. Motion Pictures Association [1976] 46 Comp. Cas. 339
• For private companies rotational directors are not mandatory unless specified by
Article.
 Appointment of Directors
• Deemed Appointment –
• The vacancy caused by the retirement of the director by rotation
should be filled up at the same meeting or at an adjourned meeting.
• In the adjourned meeting the vacancy is not filled in nor it is
expressly provided not to fill in the capacity, then the retiring
director shall be deemed to be reappointed but in the following
cases retiring director shall not be deemed to appointed -
• The director is no longer qualified.
• The retiring director has expressly asserted (in writing) his
willingness to not to continue.
• In the previous meeting a resolution to reappoint the director was
failed.
 Appointment of Directors
• Board Appointment –
• Casual Vacancy
• Alternate Director
• Nominee Director
 Vacation of office of director- Section 167
• (a) He incurs any of the disqualifications specified in section 164;
• (b) He absents himself from all the meetings of the Board of Directors
held during a period of twelve months.
• © He fails to disclose his interest in any contract or arrangement in
which he is directly or indirectly interested.
• (d) He becomes disqualified by an order of a court or the Tribunal.
• (e) He is convicted by a court of any offence.
• (f) He, having been appointed as a director by virtue of his holding any
office or other employment in the holding, subsidiary or associate
company, ceases to hold such office or other employment in that
company.
• (g) He is removed in pursuance of the provisions of this Act. [See Sec
169].
 Additional Director
• An additional director can be appointed at any time.
• An additional director is a person whose services are desirable for
the company.
• Any person can be appointed as an additional director except the one
who fails to get elected as director in general meeting.
• Power to appoint the additional director must be conferred by the
article – Needle Ind. V Needle Ind. (Newey) (India) Holdings Ltd. AIR
1981 SC 1298.
• Additional director will enjoy the same power like a regular director.
• An additional director can be appointed by a board resolution or
simple resolution but he should not be a person who could not be
appointed in the general meeting.
 Directors duties
• Directors Fiduciary Duty
• Directors Duty of Care
 Directors Duty of Care & Skill
• Centralized management and the separation of ownership and
managerial control are attributes of a modern public company
that make it inherently vulnerable to agency problems.
• “’reasonable care’ to be measured by the care an ordinary man
might be expected to take in the circumstances on his own
behalf.” (Re Brazilian Rubber Plantations & Estates Ltd (1911) 1
Ch 425)
• In an earlier case (Lagunas Nitrate Co v Lagunas Syndicate (1899)
2 Ch 392), Lindley MR said:
“if they act with such care as is reasonably to be expected from
them, having regard to their knowledge and experience”, they
would discharge their duty.
• In Re City Equitable Fire Insurance Co Ltd which is the locus
classicus in the area of director’s duty of care and diligence treated
both the judgements positively. Facts of the case were as under: an
insurance company was being wound up. The liquidator of the
company found an irregularity relating to fund of the company and
it was found that the company could have possessed of over
1,200,000/. The loss was attributable to the managing director of
the company. The managing director of the company convicted and
sentenced for the fraud committed by him. The liquidator sought to
implicate the other directors also on the ground of negligence for
authorizing poor investments and allowing dividend out of capital.
• [1925] Ch 407.
 Directors Duty of Care & Skill
• s.214(4) of the (English) Insolvency Act 1986 –
• ‘a reasonably diligent person having both – (a) the
general knowledge, skill and experience that may
reasonably be expected of a person carrying out the
same functions as are carried out by that director in
relation to the company, and (b) the general
knowledge, skill and experience that that director has.’”
• This formulation contains an objective element in (a),
the general standard, and a subjective element in (b),
relating to the particular director specifically.
 Directors Duty of Care & Skill
• The new UK Companies Act 2006, in s,174, now codifies a director’s duty substantially reflecting
the current common law position:
• “(1) A director of a company must exercise reasonable care, skill and diligence. (2) This means
the care, skill and diligence that would be exercised by a reasonably diligent person with –
the general knowledge, skill and experience that may reasonably be expected of a person carrying
out the functions carried out by the director in relation to the company, and
the general knowledge, skill and experience that the director has.”
• But see, Judges are generally reluctant to second-guess management decisions, recognizing that
business decisions involve taking risks and balancing risks and potential returns, often in uncertain
markets and with incomplete information. (Compare, business judgement rule of United States).
• The US version of the business judgment rule prescribes that provided certain conditions are met
the court will not review the substantive merits of a business decision by directors. These
conditions are: if the director (1) has made a decision; (2) is free from any disabling conflict of
interest; (3) is informed on the matter to the extent he reasonably believes to be appropriate in the
circumstances; and (4) has a rational basis for his decision. (Case - Kamin v American Express Co, 54
A.2d 654 (N.Y. 1976)).
 COMMON LAW FIDUCIARY DUTY
of Directors
• Nature of Fiduciary Duty –
• A director’s fiduciary duty is “the fundamental duty to which a
director is subject, that is the duty to act in what he in good faith
considers to be the best interests of his company.
• Gowans J in Marchesi v Barnes (1970) VR 434 stated: “to “act
honestly” refers to acting bona fide in the interests of the
company in the performance of the functions attaching to the
office of director.
• The UK Companies Act 2006, s.172(1) now provides:
• “A director of a company must act in the way he considers, in
good faith, would be most likely to promote the success of the
company for the benefit of its members as a whole….”
 COMMON LAW FIDUCIARY DUTY
of Directors
• Duty to Disclose his interest in any transaction.
• Independent Judgment - UK Companies Act 2006, s.173(1) provides: “A director of a
company must exercise independent judgment.” directors must disclose the facts, then it
seems to me that they must equally express their honest opinion as to what is in the interests
of the company.”
• Subjective Test: “…the question is whether the director honestly believed that his act or
omission was in the interests of the company. The issue is as to the director’s state of mind”.
• No-Conflict’ Rule - no director with fiduciary duties to discharge “shall be allowed to enter
into engagements in which he has, or can have, a personal interest conflicting, or which
possibly may conflict, with the interests of those whom he is bound to protect…..So strictly is
this principle adhered to that no question is allowed to be raised as to the fairness or
unfairness of a contract so entered into……” Aberdeen Rly Co v Blaikie Bros (1854) 1 Macq
461, HL.
• No-Profit Rule & Diversion of Corporate Opportunity – The rule of equity which insists on
those, who by use of a fiduciary position make a profit, being liable to account for that
profit.
• Section 149 (6) of the Act deals with “Independent Director” which means a
person:
• who, in the opinion of the Board, is a person of integrity and possesses
relevant expertise and experience.
• who is or was not a promoter of the company, or its holding, subsidiary or
associate company
• who is not related to promoters or directors of the company or any of its
associate companies.
• who has or had no pecuniary relationship, other than remuneration as such
director or having transaction not exceeding ten percent of his total income
or such amount as may be prescribed with any of the above
persons/companies during the current or two immediately preceding
financial years.
• None of his relatives
 Section 149 – Important Notes
• Women Directors - It is a listed company
whose securities are listed on any stock
exchange.
It is a company having paid-up capital of Rupees
one hundred crore or more, and a turnover of
Rupees three hundred crores or more.
 Independent Directors will charge only sitting
fees.
 Qualification & Disqualification
• The Act does not prescribe any professional or
academic qualification.
• There is no mandatory share qualification for
the directors.
• Such share qualification may be imposed by
the Articles of the company.
 Qualification & Disqualification
• Sec 164- A person shall not be eligible for
appointment as a director of a company, if —
(a) he is of unsound mind and stands so declared by a competent court;
(b) he is an undischarged insolvent;
(c) he has applied to be adjudicated as an insolvent and his application is pending;
• He has been convicted by a court of any offence (whether or not involving moral turpitude) and
has been imprisoned for at least six months – disqualification will last for five years
• However, if a person has been convicted of any offence and has served a period of seven years
or more, he shall not be eligible to be appointed as a director in any company.
• If an order has been passed disqualifying him of being appointed as a director by a court or
Tribunal.
• He has not paid any calls with respect to any shares of the company held by him, whether alone
or jointly with others, and a period of six months has elapsed from the last day fixed for the
payment of the call.
• He has been convicted of offences dealing with related party transactions at any time during
the last preceding five years.
• He has failed to acquire a Director Identification Number.
 Appointment of Directors
• Appointment of First Director [Section 152]
• Where no provision is made in the articles of a company for
the appointment of the first director, the subscribers to the
memorandum who are individuals shall be deemed to be
the first directors of the company until the directors are
duly appointed.
• DIN is essential for the appointment of the director.
• Every director has to give the consent for the appointment.