Director of a Company- Appointment, Qualification, Duties, Rights, etc.

Introduction

Being an artificial juristic personality, any company needs an agent who executes the purpose of the company, a director is that person. This article will discuss the meaning of the director, its appointment, removal, and resignation. This article will also enlighten the readers about the meaning of the director, his rights, duties, and liabilities. Some other points of focus will be the qualification, disqualification, and Directors Identification Number (DIN).

The shareholders of the company cannot manage the affairs of the company for different reasons like they do not attend the day-to-day functions of the company, they are not professionals who have the know-how of the management of the company, etc. Also, a company is an artificial person and exists only in the eyes of law. Therefore it requires a living person to perform the function on behalf of it. The directors are the experts who are appointed by the shareholder to run the affairs of the company for the benefit of the company and the shareholders. There is a numerous type of directors in a company such as independent director, whole-time director, managing director, nominee director, retiring director, additional director, alternate director, women director, etc.

Meaning of Director

The Companies Act 2013 under the section 2(34) defines the term ‘Director’ as a person who is appointed and designated as the director of the company to carry out the affairs of the company in accordance with the MOA and AOA of the company. Section 2(10) of the companies act 2013 defines the term Board of Directors as the group of directors of the company.

Thus, we can say that the meaning of director is the officers of the company appointed to govern the affairs of the company. They are the top-level management officials in the company. A director is the agent of the company for the reason that they act on behalf of the company. They are the trustee of the company as entrusted with the assets and funds of the company and they have to use their power to apply these in the interest of the company and shareholders. They are also the officers of the company according to section 2(59) of the companies act 2013 which says that the officers of the company include Directors and other few officials.

Appointment of Director

Now if we focus on the appointment of directors in the company. Section 149(1) provides that every company shall have a board of directors which shall be consisting only individuals as directors. It also specifies that there shall be a minimum number of three directors in the case of a public company, two directorsfor the private company, and one in case of the one-person company. A company can have a maximum of fifteen directors in the BOD.

There are few types of directors and their appointment are explained here:[1]

1. Women director– The act under the second proviso of section 149(1)  emphasize that there shall be one women director in the BOD of every listed company or any public company having paid-up capital of Rs. 100 crores or turnover of Rs. 300 crores.  Such women directors shall be appointed by the shareholder in the general meeting.

• Independent Director– Section 149(4) insists that one-third of the total number of directors shall be independent directors. Independent directors are appointed by the shareholder in the annual general meeting.Independent directors dispense the role of an unbiased judge inside the company. They supervise the functioning of the company and increase the credibility of the company’s practices. They ensure the proper compliance of the act and the standards of corporate governance. Independent directors also oversee the auditing committee to preserve the integrity of the financial information disclosed by the company. They are appointed to safeguard the interest of all the stakeholders of the company.

• Minority Director– Section 151 of the act provides for the appointment of one director by the small shareholder. Small shareholders are the shareholders having shares of value not more than twenty thousand rupees or any amount prescribed by the MOA or AOA.

• First director– Section 152(1) deals with such director. Article of association specifies for the appointment of the first director. But when the AOA is quiet on this subject, then the subscribers of the memorandum are considered as the FIRST DIRECTOR. Such first director shall hold the office till the first annual general meeting. In the first AGM, all the directors are appointed.

• Rotational director– section 152(6) provides for the rotation of the directors. In a public company, not less than two-third of the total number of directors are liable to retire by rotation. Now at every annual general meeting one-third of such directors are liable to retire by rotation. The director who have been longest in office since their appointment shall retire by rotation at the subsequent annual general meeting. But if two directors are appointed on the same day then one of them shall retire after a mutual agreement between them. The rest one-third directors are the whole-time directors and they are also appointed by the company in the general meeting.

• Alternate director– Section 161(2) of the act indicates if any director is absent from India for three or more than three months, then an alternate director can be appointed by the board of the directors if the AOA authorizes or if any resolution is passed by the board in a general meeting for such an act. The person must not hold any other alternate directorship. He shall be holding the office for the same term as the original director will. He shall have to vacate the office when the original director returns to India.

• Additional Director– Section 161(1) of the act provides if the AOA of the company confers the power on the board of directors then they can appoint any person as an additional director. He will hold the office until the next annual general meeting. He must not be the person who failed to get appointed as a director in the general meeting.

• Nominee Director– Such directors are appointed under section 161(3) of the act by the board. A person is nominated by any institution in pursuance of any law or by state or central government by the virtue of its shareholding in that company.

Director Identification Number

Director Identification Numberis an 8-digit unique identification number which is allotted by the central government to each individual who wants to be a director of any company or who already is a director of a company. Section 153 provides that each person who wants to be a director of any company shall make an application for allotment of the Director Identification Number to the central government in the prescribed form and manner along with the application fee. The central government within one month from the receipt of application allots the DIN. Section 155 provides that no person shall obtain more than one DIN.

Section 156 requires that the director shall intimate the DIN in the company wherein he is a director within one month of the receipt of the DIN from the central government.

Section 157(1) of the act provides that the company is required to furnish all the DIN of all the directors to the registrar of the company with prescribed fees within fifteen days of the intimation of the Director Identification Number. If a company fails to furnish Director Identification Number under section 157 (1), before the expiry of the two hundred seventy days period from the date by which it should have been furnished with an additional fee, the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees and every officer of the company who is in default shall be punishable with fine.[2] Section 158 provides that every person or company while furnishing any return, the information shall also mention the Director Identification Number.

Officer in default

Some of the officers of the company such as the whole-time director and key managerial personnel are considered as the ‘officer who is in default’ under section 2(60) of the Companies Act 2020. The term ‘officer who is in default’ indicates that such officers will be held liable for any non-compliance of any of the provisions of this act. This provision is necessary for the reason that the key managerial personnel will be more responsible in the discharge of their duties. It helps to ensure that the officers are performing their duties in good faith for the best interest of the company.[3]

Disqualifications of Director

Companies act 2013 elucidates various grounds on which a person shall be disqualified from being appointed as a director. Section 164(1) of the act provides these disqualifications. Thus, a person is disqualified if:

1. ‘He is of unsound mind and so declared by the court’.
2. ‘He is an undischarged insolvent’.
3. ‘He has applied to be adjudicated as an insolvent and his application is pending.
4. ‘He has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the date of expiry of the sentence’. Also, if a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of seven years or more, he shall not be eligible to be appointed as a director in any company
5. ‘An order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force’.
6. ‘He has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call’.
7. ‘He has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years.
8. ‘If he has not been allotted the Director Identification Number’.

Section 164(2) states further disqualification that if a person is or has been a director of any company who has not filed financial statements or annual returns for any continuous period of three financial years or has failed to pay any deposit or interest or dividend declared for one year or more.

Vacancy of the office of Director

Now the Companies act 2013 also prescribes provision for the vacancy of the office of director. If any of the provision of section 167(1) is attracted then the office of the director shall become vacant. The provisions are as following:

1. If the director incurs any of the disqualifications provided in section 164.
2. If he is absent from all the meetings of the Board of Directors held during a period of twelve months with or without seeking leave of absence of the Board.
3. Related party transaction- If he acts in contravention of the provisions of section 184 relating to entering into contracts or arrangements in which he is directly or indirectly interested.
4. If he fails to disclose his interest in any contract or arrangement in which he is directly or indirectly interested, in contravention of the provisions of section 184.
5. If he is disqualified by an order of a court or the Tribunal.
6. If he is convicted by a court of any offence, whether involving moral turpitude or otherwise and sentenced in respect thereof to imprisonment for not less than six months. Provided that the office shall be vacated by the director even if he has filed an appeal against the order of such court
7. If he is removed in pursuance of the provisions of this Act.
8. If he, having been appointed 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.

A private company can add some more grounds in addition to those given under subsection (1) by making some amends in its article of association.This section also provides that if a director having the knowledge that the office held by him has become vacant continues to perform the function of the director. Then he shall be punished with imprisonment for a term, not more than one year or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both.If there is a vacancy in the office of the director, then the promoter or the central government is required to fill the places by the appointment of the required number of directors in general meeting.

Removal and Resignation of Director

Removal of the directors has been provided in section 169 of the act. Any director other than those who are appointed by the NCLT under section 242 can be removed by ordinary resolution before the expiry of the term of his office after giving him reasonable opportunity of being heard. A special notice of resolution shall be sent to the members of the board and the director who is being removed.  If the director concerned wants to make his representation in writing and there is enough time then he can do so. The copy of the representation will be sent to all the member of the board. The vacancy created by the removal of the director shall be filled up by the appointment of another director in the general meeting but the notice of appointment must be given along with the notice of resolution of removal otherwise the vacancy shall be filled as casual vacancy as per the provision of this act. The director appointed in such a case shall hold the office till the date the removed director would have held.

A director has the right to resign under section 168 of the companies act. He can also himself resign from his office by giving notice to the company in writing. The board after taking note of the notice shall communicate the notice to the registrar in the prescribed form within the prescribed time. The director also has to send a copy of his resignation along with the reasons for his resignation to the registrar within thirty days of the resignation. The resignation will take effect from the date on which the notice is received by the company or any date which is written in the notice by the director.

Duties of Director

The director plays a pivotal role in any company. His position and role in the company inflict a great deal of duty upon him. Section 166 of the Companies Act 2013 states some of the duties of a director. A director has to act in good faith to promote the object of the company for the benefits of its members. He should apply his skills and knowledge for the best interest of the company, its employees, the shareholders, the environment, and the community. He has a duty to execute any transaction with due and reasonable care, skill and diligence. He shall not engage in any transaction in which he may have direct or indirect interest that clashes with the interest of the company.

A director should not try to accomplish any undue advantage or gain for himself or any other person and he shall be liable to pay the same amount he does so.  He shall not delegate his power to any other person. A director is not permitted to hand over his office. If any director contravenes any of the provision of section 166 and failed to fulfil his duty then she shall be liable to fine of an amount not less than one lakh rupees which can extend to five lakh rupees.

Some other duties of the director are:

1. Section 92– Duty to file annual return before the registrar.
2. Section 128– Duty to maintain books of accounts and auditing of the books, duty to appoint auditors.
3. Section 135– Duty to ensure planning and execution of Corporate Social Responsibility initiatives.
4. Section 173-Duty to attend meeting of board.
5. Section 184– Duty to disclose his interest in a related-party transaction.
6. Section 96– Duty to hold statutory meetings of company.

Liabilities of Director

Directors are the agent of the company. They work for the company as the company is an artificial person. It implies that if any wrongful transaction committed in the name of the company, it must be committed by any officer of the company. Thus, the directors are liable for any wrong is committed in the name of the company. A director is liable to the shareholders, company and community.

Liabilities of the director:

1. Ultra vires acts: The purpose of the company is defined in the object clause of the memorandum of association.  If any transaction which is outside the scope of the object clause is done it is said to be the ultra vires act. If any such transaction is done by the directors in the name of the company. Then the directors are personally liable.
2. Negligence: Section 166 of the act imposes several duties on a director towards the company and stakeholders. If they breach the duties imposed on them, they shall be held liable for negligently performing the duties. In such cases a director is held under Tortious liability.
3. Mala fide acts: The directors are entrusted with the funds and the assets of the company. If he uses them for his own interest then the director is liable for breach of trust. In criminal law they are charged under criminal misappropriation of property.

Criminal liability of Directors:[4]

1. Section 8– Non-compliance of incorporation formalities.
2. Section 35– Misstatement in prospectus.
3. Section 36- Fraudulent Inducement for share-subscription.
4. Failure to return application money.
5. Criminal liability regarding issuance of bonus shares, discounted shares, irredeemable preference share and calling and falsification of share certificates.
6. Section 92– Failure to file annual return.
7. Failure to hold AGM.
8. Section 185– Grant of loan in contravention of Companies Act.
9. Failure to maintain proper books of accounts
10. Section 127– Failure to distribute dividends.
11. Section 129– Failure to file annual financial statement.
12. Section 159– Failure to get DIN.
13. Section 165– Failure to exceed maxim limit of inter-corporate directorship.
14. Section 166– Failure to comply with statutory duties.
15. Accepting deposit in contravention of provisions of companies Act.
16. Section 184– Failure to disclose interest.
17. Section 339, 447, 449 and 450– Criminal liability for fraud, false evidence etc.

Remuneration of Director

Managerial personnel are the whole-time director or managing director. They play a crucial role in the success of the company. These personnel invest their expertise and experience to maximise the profit of the company. Therefore, the managerial personnel are entitled to the remuneration provided by the company from the profit earned.

Section 197 of the Companies Act 2013 lays down the limit of the amount of remuneration to be awarded to these officers. The provision of this section says that a public company cannot pay more than 11% of the net profit to its whole-time director or managing director.[5]The remuneration payable to any one managing director or whole time director or manager shall not exceed 5% of the net profits of the company and if there is more than one such director remuneration shall not exceed 10% of the net profits to all such directors and manager taken together.[6]

Conclusion

So, we can say a director is an important organ of the company. As a company only exists in the eye of the law and does not have any physical existence, a director is a person who manages the affairs of the company.  All the directors collectively i.e., the Board of Directors is responsible for executing transactions in the interest of the company and its members. Powers are vested in a director in order to assist him in working for the benefit of the company.

One of the most vital requirements to be appointed as a director is Director Identification Number, this is an identification number allotted to a person who wants to be a director in a company. Companies act 2013 has provided for the disqualification so that only competent persons are eligible to be appointed as the director of the company. The directors are appointed in different ways like by the shareholder in general meeting, by the state or central government, memorandum or article, etc. A Director is entrusted with wide powers.

Therefore, he is also liable for any act such as abuse of his power, breach of his duty, ultra-vires acts, money laundering, etc. Thus, it is evident that in order to maximize the profit and ensure good corporate governance we need an experienced and skilful director.

References:

[1] https://www.icsi.edu/media/portals/0/APPOINTMENT%20AND%20QUALIFICATIONS.pdf

[2] The Institute of Company Secretaries of India, Appointment and Qualifications of Directors.

[3] Note on officer in default under companies act 2013, https://taxguru.in/company-law/note-officer-default-companies-act-2013.html

[4]http://epgp.inflibnet.ac.in/epgpdata/uploads/epgp_content/law/04._corporate_law/12._directors,_their_appointment,_qualifications,_position,_powers,_duties_and_liabilities_/et/5674_et_12_et.pdf

[5] Section 197 of the companies act, 2013

[6] The Institute of Company Secretary of India, Appointment and Remuneration of Key Managerial Personnel.