Director Under Companies Act: Qualification, Appointment

Indian Legal System > Civil Laws > Company Law > Director Under Companies Act

In this article, we are having a basic idea of the concept of director under Companies Act, 2013. In upcoming articles we shall study individual concepts in detail.

Who is Director?

Section 2 (34) of the Act prescribed 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 accordance with the provisions of the Companies Act, 2013.

What is director identification number?

Director Identification Number or DIN is a unique Identification Number allotted to an individual who is appointed as a director of a company, upon making an application in form DIR-3 pursuant to section 153 & 154 of the Companies Act, 2013.

Who is independent director?

Section 2(47) of the Act prescribed that “Independent director” means an independent director referred to in sub section (5) of section 149 of the Act. An independent director is a non-executive director of a company who helps the company in improving corporate credibility and governance standards. They also ensure that there is no dominance of one individual or special interest group. They act as a coach, mentor and sounding Board for their full time colleagues.

Who is Nominee Director?

A director nominated by any financial institution in accordance with the requirements of any legislation now in effect, or of any agreement, or appointed by any Government, or any other person to represent its interests is defined as a nominee director under Section 149 (7) of the Companies Act, 2013.

Who is Alternate Director?

An alternate director is an individual who is appointed to attend a board meeting on behalf of the director of a company where the principal director would be otherwise unable to attend.

What are provisions for appointment of woman director?

The second provision of Section 149(1) of the Act provides that a certain class of companies (as specified in the Rules) should at least have one woman director on its board. Rule 3 of Rules provides that the following certain class of companies must appoint at least one woman director on its board:

Every listed company
Every other public company having Paid-up share capital of Rs.100 crore or more, or turnover of Rs. 300 crore or more.

Position of Directors:

Directors are regarded as being the Key Managerial Persons of a company, with special importance to the listed companies. The legal position of directors can be explained as follws:

Directors as Agent: An agent is a person who always acts on behalf of the principal; therefore, the third party can hold the only principal liable and not the agent. Thus, directors act as agents of a company.
Director as trustees: A trustee is a person who is vested with the legal ownership of certain property, which he has to administer for the benefits of others. Director is treated as trustees of the company, money, and property: and of the powers entrusted to and vested in them only as trustee and they have to use these powers for the benefit of the company.
Directors as Organs of a Company: A company, though a legal entity in the eyes of law, is an artificial person, existing only in contemplation of law. It has no physical existence. It has neither soul nor body of its own. As such, it cannot act in its own person. It can do so only through some human agency. It acts through the directors of the company.
Directors as employees (Servants): Directors are elected representatives of the shareholders, engaging in directing the affairs of the company on their behalf. As such they are agents of the company but not its employees or servants. If, however, the company enters into a service contract with the director, the terms of which make the director an employee under the usual common law test, then the director becomes an employee.
Directors as Managing Partners: Some authors consider a company to be a large partnership firm. In a company, the management is in the hands of many directors. So, the directors are managing partners (the term partner used in the sense of the Partnership Act) and the shareholders as dormant partners.

In Judhah v. Rampada Gupta, In Judhah v. Rampada Gupta, AIR 1959 Cal 715 case, the Court held that the directors of a company registered under the Companies Act are persons duly appointed by the company to direct and manage the business of the company. A director is sometimes described as agents, trustees, managing partners, etc. But each of these expressions is used not as exhaustive of their powers and responsibilities, but as indicating useful points of view from which they may for the moment and for the particular purpose be considered.

Appointment of Directors:

Section 152 of the Companies Act, 2013 deals with appointment of directors. The first directors of most of the companies are named in their articles. 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. In the case of a One Person Company, an individual being a member shall be deemed to be its first director until the director(s) are duly appointed by the member in accordance with the provisions of Section 152.

General provisions relating to appointment of directors

A director must be an individual (a real person);
Except as provided in the Act, every director shall be appointed by the company in general meeting;
Director Identification Number is compulsory for appointment of director of a company;
Every person proposed to be appointed as a director shall furnish his Director Identification Number and a declaration that he is not disqualified to become a director under the Act;
A person appointed as a director shall on or before the appointment give his consent to hold the office of director in physical form DIR-2 ;
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. Further independent directors shall not be included for the computation of total number of directors. At the annual general meeting of a public company one-third of such of the directors for the time being as are liable to retire by rotation, or if their number is neither three nor a multiple of three, then, the number nearest to one-third, shall retire from office. The directors to retire by rotation at every annual general meeting shall be those who have been longest in office since their last appointment.;
Nominee directors will be appointed by third party authorities or the Government to tackle mismanagement and misconduct. The duties of directors are to act honestly, exercise reasonable care and skill while performing their duties on behalf of the organization;

Qualifications of Directors:

The supreme executive authority controlling the management and affairs of a company vests in the team of directors of the company, collectively known as its Board of Directors. At the core of corporate governance, practice is the Board of Directors which oversees how the management serves and protects the long term interests of all the stakeholders of the Company. Directors are regarded as being the Key Managerial Persons of a company, with special importance to the listed companies. They can hold multiple high and responsible positions in the companies, such as the Managing Director, Manager, Whole Time Director, or an Independent Director. The institution of the board of directors was based on the premise that a group of trustworthy and respectable people should look after the interests of a large number of shareholders who are not directly involved in the management of the company.

As we all know, a director is a very important person in corporate affairs, so he must be highly qualified. However, the Companies Act does not specify any academic qualifications for directorship, which seems logical given that the right to trade is a fundamental right that should be available to everyone. To keep dishonest people from running businesses, the Companies Act imposes a slew of requirements. These are the requirements or qualifications:

People can use director database to find names of people who can work as independent directors.
A person who wishes to work as a director must apply to the central government for a Director Identification Number (DIN), which will be issued to him only once.
The requirement of qualification shares is no longer present in the Companies Act, 2013.

Disqualification of Directors:

Section 164 lays down the minimum eligibility requirements. A person is not appointed a director in the following cases:

where he is of unsound mind, provided that the fact has been certified by a court of competent jurisdiction and the finding is in force;
where he is an un-discharged insolvent;
where he has applied to be adjudicated as an insolvent and his application is pending;
where he has been sentenced to at least 6 months of or otherwise imprisonment for an offence involving moral turpitude or otherwise, and 5 years have not elapsed from the date of expiry of the sentence. 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;
an order for disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force;
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;
he has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years; or
he has not complied with the requirement of Director Identification Number.

Powers of Directors:

The Board of Directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorised to exercise and do provided that Board shall be subject to the provisions contained in that behalf in this Act, or in the memorandum or articles, or in any regulations not inconsistent therewith and duly made there under, including regulations made by the company in general meeting. It is further provided that the Board shall not exercise any power or do any act or thing which is directed or required, whether under this Act or by the memorandum or articles of the company or otherwise, to be exercised or done by the company in general meeting. The Board of Directors of a company shall exercise the following powers on behalf of the company by means of resolutions passed at meetings of the Board, namely:

to make calls on shareholders in respect of money unpaid on their shares;
to authorise buy-back of securities under section 68;
to issue securities, including debentures, whether in or outside India;
to borrow monies;
to invest the funds of the company;
to grant loans or give guarantee or provide security in respect of loans; vii. to approve financial statement and the Board’s report;
to diversify the business of the company;
to approve amalgamation, merger or reconstruction;
to take over a company or acquire a controlling or substantial stake in another company;
any other matter which may be prescribed

Following are the powers, which are to be exercised by the board only with the consent of the company by a special resolution namely:

to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company or where the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings.
to invest otherwise in trust securities the amount of compensation received by it as a result of any merger or amalgamation;
to borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share capital and free reserves, apart from temporary loans obtained from the company’s bankers in the ordinary course of business: Provided that the acceptance by a banking company, in the ordinary course of its business, of deposits of money from the public, repayable on demand or otherwise, and withdraw able by cheque, draft, order or otherwise, shall not be deemed to be a borrowing of monies by the banking company within the meaning of this clause.
To remit, or give time for the repayment of, any debt due from a director.

Duties of Directors:

The duties and responsibilities of directors stipulated by the Indian Companies Act of 2013 can broadly be classified into the following two categories: –

The duties and liabilities which encourage and promote the sincerest investment of the best efforts of directors in the efficient and prudent corporate management, in providing elegant and swift resolutions of various business-related issues including those which are raised through “red flags”, and in taking fully mature and wise decisions to avert unnecessary risks to the company.
Fiduciary duties which ensure and secure that the directors of companies always keep the interests of the company and its stakeholders, ahead and above their own personal interests.

The Companies Act, 2013 has in section 166 made a statutory formulation of director,s duties. They are mentioned as follows:

Director to act in accordance with articles of the company.
A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.
A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.
A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.
A director of a company shall not assign his office and any assignment so made shall be void.

Removal of Directors:

A company may, by ordinary resolution, remove a director before the expiration of his period of office.

Removal by Shareholders:

Power to remove directors has always been bestowed on shareholders, as we all know that at the end of the day, directors are answerable to shareholders. Shareholders can remove any director before the expiry of his tenure, except any director appointed by Tribunal for prevention of oppression and mismanagement and a director appointed under principle of proportional representation. Section 115, 169 and deals with the procedure of removal of director by shareholders. Only shareholder/s holding not less than 1% of total voting power or holding shares on which an aggregate sum of not less than Rs. 5,00,000 has been paid up as on the date of notice, can send special notice to the Company for removal of director. The same should be signed by the concerned shareholder/s.

Removal by Company Law Tribunal:

When, on an application to the Tribunal for prevention of oppression or mismanagement, it finds that a relief ought to be granted, it may terminate or set aside any agreement of the company with a director or managing director or other managerial personnel. When the appointment of a director is so terminated, he cannot, except with the leave of the Tribunal, serve any company in a managerial capacity for a period of 5 years.

Resignation by Director:

A director may resign from his office by giving a notice in writing to the company. On receiving it, the board has to take notice of the same. The company has then to intimate the Registrar in such manner, within such time and in such form as may be prescribed. The company has to place the fact of such resignation in the report of directors laid in the immediately following general meeting of the company.

Indian Legal System > Civil Laws > Company Law > Director Under Companies Act

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