Maximum Number of Directors in a Company

Introduction

A company has been defined by the Indian Companies Act 2013 as a company that is incorporated under the Companies Act 2013 of companies Act, 1956. It can also be referred to as a legal entity which has been formed as an association of many persons who have an aim of making profits from the commercial activities that they undertake on the behalf of company. Since the companies are artificial persons thus, they need some people who can act on its behalf and take decisions regarding the functioning of the company. The company being an artificial person does not have a mind of its own thus, the directors act on behalf of the company and perform functions in the name of the company. The directors are called the “directing mind and will” of the company[1]. Despite the concept of director the company is considered a separate legal entity for the ease of business and receives legal rights from the law. This article seeks to answer the questions related to the number of directors in a company, the composition of the board in different forms of companies. The matter will be addressed by taking into consideration the various provisions of law and the reasoning behind such law provisions. In order to understand the provisions related to the number of directors in different forms of companies, this article first explains the different forms of companies.

Types of Companies and Number of Directors

A PUBLIC COMPANY is an association of persons where the persons come together voluntarily to form a separate legal entity with the aim of conducting business. The members have a limited liability towards the company. The different feature of a public company is that they can raise capital by issuing shares to general public through a public issue of shares. The minimum number of members in a public company are 7 and there is no upper limit on the number of members. Section 149(1) of the Companies Act, 2013 states that the minimum number of directors in a public company is 2 and the maximum limit is 15 directors. But the proviso clause mention that the company can increase the maximum limit of 15 directors if they pass a special resolution for the appointment of those directors.[2]

A PRIVATE COMPANY is a small separate legal entity which can be formed by an association of 2 or more persons coming together to form a company. The maximum number of members can be 200 and as soon as the number of members exceeds 200 the company has to convert itself into a public company mandatorily. The liability of the members is limited. The different feature is that the private companies cannot make a public issue of shares which means that they cannot offer the shares to general public for subscription. As per section 149(1) of the Companies Act, 2013 a private company can have a minimum number of 2 directors with a maximum number exceeding to 15. However similar to a public company the proviso states that the maximum number of directors can be exceeded from 15 if a special resolution is passed in that respect.[3]

A ONE PERSON COMPANY this form of company consists of only one member who is also the director. In this case the company being a sole proprietor can enjoy the benefits of a company despite of being a sole proprietor in its kind. It still receives the status of a separate legal entity and enjoys the benefits of limited liability. The person who starts a one-person company has to nominate a person who will take over the company in case if he is incapacitated from being a member or dies. As per section 149(1) of the Companies Act, 2013 a one-person company can have one director.[4]

There is a responsibility created on every company regarding its number of members and regarding its number of directors.

Objective behind Section 149(1), Companies Act, 2013

The main logic behind the requirements being laid down pertaining to the number of directors in a company is to ensure multiple controls. It means that the control of the company is divided in the hands of multiple persons to ensure that the decisions can be taken in general welfare of the company by taking into consideration opinion of various persons and thereby avoiding any kind of fraudulent acts by giving all the powers in the hand of one person only. The only exception to the rule is a one-person company. Section 149 specifies other exceptions as well in respect of maximum number of directors’ requirement not applying on a government company i.e. a company in which 51% or more shares are held by the government. Though the maximum number of directors’ requirement has been laid down but proviso clause creates an exception to it. The main objective is to avoid the unnecessary loading of directors. As the director beyond 15 can be appointed only by passing a special resolution. After the discussion regarding the requirements pertaining to number of directors the article further discusses the provisions relating to composition of board of directors.[5]

Appointment of Directors in A Company

1. BY ARTICLES OF ASSOCIATION- the Articles of Association may provide for the way of appointing the first director in the company, along with the procedure for the same. But in case if there are no provisions specified in the Articles of Association then the persons who subscribe to the Memorandum of Association at the time of registration or incorporation of the company, will take up the position of first directors of the company, but the rule is that they can hold this position only till the 1st Annual General Meeting.[6]
2. BY GENERAL MEETING OF THE SHAREHOLDERS- The interested persons have to make an application at least 14 days before the general meeting is conducted and the company serves a notice to all such individuals who have applied, at least 7 days before meeting either through the electronic mode or through post. However, this provision is not mandatory when a common declaration has been made in a newspaper, in the local language as well as in English about the same, at least 7 days before the meeting. The candidate who is making an application is also require to submit a sum of Rs. 100000 or more as prescribed by the company. However, this amount will be refunded upon selection of such candidate or in case if he gets more than 25% of the votes.

Every person who is proposed as a director needs to obtain and thereby submit his Director identification number. The method of obtaining the Director identification number is stated in Section 154 of Companies Act, 2013. According to the provision a person can obtain his Director identification number by applying to the Central Government along with the required amount of fees.

• BY THE BOARD OF DIRECTORS- Basically, the board of directors can appoint four kinds of directors- 1) Additional Director 2) Alternate Director 3) Nominee director 4) To fill the vacancy. They are not required to submit the fees for being appointed as the director. The appointment of the directors through the board is merely an exception and it depends on the Articles of Association of the company. Thus, if the Articles of Association of the company do not permit the board to make an appointment of the directors then the board cannot in any case make the appointment.

The persons who had made an application regarding their appointment as the director, but they were not selected by the shareholders, then such persons cannot be appointed by the board as directors. The ones who were rejected from being directors by the shareholders in the general meeting cannot become Additional directors.

In case of absence of any director of the company, at least for a period of 3 months from India, the Board of Director can make an appointment of an Alternate Director in place of the absent director, and he will hold the position only till the original director returns.

When the financial institutions lend funds to the company then they may also enter into an agreement with the company to have one of their nominees as a director in the board. The financial institutions appoint their member as a director in the board so that he can keep a check on the activities of the company and day to day affairs.

To fill the vacancy– At times, a vacancy might be caused in the board because of death, retirement or resignation of a director, such vacancy can be filled by the board but the tenure of such director will be dependent on obtaining the approval of shareholders in next general meeting. Only if the approval of shareholders is obtained, the director so appointed by the board can continue his term for the entire tenure of previous director who vacated his office, otherwise his term will end on the day of the general meeting.[7]

• BY NATIONAL COMPANY LAW TRIBUNAL- If the business of the company is being conducted in a fraudulent manner that is opposed to the interests of its members or interest of the public in general or against company’s interests, then the tribunal is empowered by section 242 of Companies Act, 2013 to appoint the required number of directors.[8]
• BY PROMOTERS- As per section 168 of Companies Act, 2013, if all the directors of the company have either vacated their office or have resigned from their positions, then in this case the promoters and in their absence the Central Government have the right to make an appointment of the required number of directors in the company.
• BY SMALL SHAREHOLDERS- Small shareholders are the shareholders who hold shares amounting to Rs. 20,000 or more. They often feel that because they hold a small number or portion of shares thus, they are not being heard by the company that is not taking care of their interests. In this case the small shareholders, at least 1000, can make an application to the company asking for the appointment of their representative into the board of directors. The representative so appointed will be called a small shareholder director. [9]

Composition of the Board of Directors

Section 149 of Companies Act, 2013 specifies the composition of the board of directors in a company. In a listed company the board of directors need to consist of a combination of the executive and non-executive directors and at least one director has to be woman director and at the same time the non-executive directors shall be comprised of not less than 50% of the board. An executive director is a person who has joined the company as a director plus he has a whole-time employment, on the other hand, a non-executive directors means a person who has joined the company as a director but only in part-time employment and is not concerned with the day to day affairs of the company. The ratio of executive to non-executive directors in a company has to be specified in the Articles of Association of the company. There is not much difference between the functions of the two kinds of directors, the only difference is in respect of full-time and part-time employment. [10]

Section 149 also specifies that in case if the chairperson of the board of directors is a non-executive director then in that case at least one-third of the board should be consisting of independent directors. If in case the chairperson is not the non-executive director the requirement of independent director increases to at least half the board of directors. As per the proviso clause an exception to the provision is that if the non-executive chairperson is a promoter or in any way related to the promoter or manging positions, then the requirement of the number of independent directors is at least 50% of the board.[11] Independent director refers to a person who is not connected with the company in any manner, he must possess integrity, not be a promoter, he should not be in relation to any promoter or director, should not have any pecuniary interest, nor should any of his relative have a pecuniary interest with the company and he should not be holding any key managerial position.[12]

Conclusion

The director plays a very vital role in the company and the companies Act lays down various provisions controlling the composition of the board, the appointment of directors and the number of directors in a company. This control mechanism is laid down keeping in mind the importance of directors in a company. The maximum number of directors that a company can have are 15. This number can be increased on the passing of a special resolution to that effect. This provision ensures that there is no unnecessary loading of directors in the company at the same time the control of the company is not restricted in the hands of only one person who may misuse the powers for personal benefit rather than the general benefit of the company.

References:

[1] Avtar Singh, Company Law (17th ed. Eastern Book Company, 2018).

[2] B.K. Goyal, Company Law 300 (13th ed. Singhal Law Publications, 2018).

[3] Dr. G.K. Kapoor; Dr. Sanjay Dhamija, Company Law-A Comprehensive Text Book on Companies Act 2013 78 (22nd ed. Taxmann, 2019).

[4] Avtar Singh, Supra, 265

[5]Ananya Mukherjee Reed, Corporate Governance Reforms in India, Journal of Business Ethics 249, 260 May, 2002.

[6]Avtar Singh, Company Law (17th ed. Eastern Book Company, 2018).

[7] Dr. G.K. Kapoor; Dr. Sanjay Dhamija, supra, 139.

[8] B.K. Goyal, Supra, 78.

[9] Avtar Singh, Supra, 289

[10] P.P.S. Gogna, Textbook of Company Law 148 (11th ed. S. Chand & Co, 2015).

[11] Avtar Singh, Supra, 105.

[12]Dr. G.K. Kapoor; Dr. Sanjay Dhamija, supra, 130.