Position of Director

Indian Legal System > Civil Laws > Company Law > Position of Director

a) Explain the legal position of a director.

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.

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.

In Imperial Hydropathic Hotel Co. v. Hampson, (1882) 23 Ch. D. 1 case the Court Observed: “directors are described sometimes as agents, sometimes as trustees and sometimes as managing partners. But each of these expressions is used, not an exhaustive of their powers and responsibilities, but as indicating useful points of view from which they may be considered.”

Directors as Agent:

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 directors who are elected representatives of the shareholders and who execute decision making for the benefit of shareholders. 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. They are acting on behalf of the company. So the directors cannot be held personally liable for any default of the company.

In Ferguson v. Wilson, (1886) 2 Ch. App. 77 case, the court clearly recognized that directors are in the eyes of law, agents of the company. It was held that the company has no person; it can act only through directors and the case is, as regards those directors, merely the ordinary case of a principal and agent. When the directors (agent of a company) contract in the name, and on behalf of the company, it is the company which is liable for it and not the directors.

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. A director of a company enjoys several powers where discretion is to be exercised, s for instance, the power to allot shares, to make calls, to declare a dividend, to forfeit shares, to allow or disallow a transfer of shares, etc. All these powers are to be exercised by the directors in the best interest of the company and not in their own personal interest.

Section 197 of the Companies Act, expressly regards the director as a trustee in certain circumstances. It lays down that if a director receives remuneration in excess of that permitted by the Act, he must refund the excess amount to the company, and until he does so, he holds it in trust for the company.

In Smith v. Anderson, (1880) 15 Ch D 247 at p 275 case, the Court observed that in the real sense the directors are not trustees. A trustee is the legal owner of the trust property and contracts in his own name. On the other hand, the director is a paid agent or officer of the company and contracts for 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. The Directors are more than mere agents or trustees of the company and recognized to be a primary organ of the company. Directors and managers represent the directing mind or will of the company and control what it does. The state of mind of these managers is the state of mind of the company. Thus the directors’ personal fault in the business of the company becomes the “fault of the company.

In Bath v. Standard land Co., (1910) 2 Ch. D. 408 case, the Court observed: “the board of directors is the brain and only brain, of the company which is the body, and the company can and does not act only through them.”

n Re. Lee Behrens & Co. Ltd., (1932) 2 Co. Cases 588 case, the Court held that 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.

Being a director does not, of itself, make that person an employee of the company. A directorship is an office, not necessarily an employment. 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. Law does not prevent the company to appoint the director as an employee. When the director is appointed as a whole-time employee of the company then that particular directors shall be considered an employee director or a whole-time director.

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. Even though substantial powers may be entrusted upon directors or to an outsider, such a person has to act under the superintendence, control, and direction of the board of Directors. Hence, unlike in a partnership firm, no power can be delegated to a single director as a managing partner. The principle that power once delegated cannot be further delegated, is applicable to company management.

b) What are the powers and duties of directors?

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.

c) Explain how directors can be removed.

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

Removal by Shareholders:

In Dr. Satya Charan Law v. Rameshwar Prasad Bajoria, AIR 1950 FC 133 case, the Court observed that ordinarily the directors of the company are the only persons who can conduct litigation in the name of the company, but when they are themselves the wrongdoers against the company and have acted mala fide or beyond their powers, and they will not take steps to seek redress for the wrong done to the company, the majority of the shareholders must in such a case be held entitled to take steps to redress the wrong. It may be added that even a single shareholder can proceed in such a case.

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.
• Above mentioned shareholders have the right to decide the date of meeting. However, the special notice shall be sent not earlier than three months but at least 14 clear days before the date of the meeting, at which the resolution is to be moved.
• The Company shall forthwith send a copy of the notice to the concerned director.
• The Director may request to send his representations along with the notice to the members and to be heard at the meeting. However, the rights may not be available, if on the application either of the Company or of any other person who claims to be aggrieved, the Tribunal is satisfied that the rights conferred by this sub[1]section are being abused to secure needless publicity.
• Company shall take immediate steps to send the notice to its members, at least 7 clear days before the meeting. The notice has to be sent in the same manner as in case of any other general meeting of the Company.
• If it is not practicable to give the notice as aforementioned, then notice shall be published in English language in English newspaper and in vernacular language in a vernacular newspaper, both having wide circulation in the State where the registered office of the Company is situated. At the same time, the notice shall also be posted on the website, (if any). However, it shall be published at least 7 clear days before the meeting.
• Members may pass remove the director by passing ordinary resolution.
• The shareholder/s may recommend appointment of any other director in place of removed director through special notice. Such a director can only hold office till the tenure of removed director.
• If a new director is not appointed as aforementioned, then Board may fill the position through casual vacancy, however the removed director shall not be re-appointed as a director by Board.
• When a director is removed as aforementioned, his office vacates automatically.

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.52 It is necessary that the Central Government should be notified of the intention to apply for such leave. This is to enable the Tribunal to hear the Central Government’s point of view on the matter of leave. Neither can he sue the company for damages or compensation for loss of office.

Removal by Central Government 

A director can be removed by the Central Government, Companies Act enables the Central Government to remove managerial personnel from office on the recommendation of the Company Law Board. The Government can make a reference to the Company Law Board when needed. The power of Central Government can be exercised in removal of directors if:

• The managerial personnel is guilty of fraud, misfeasance or persistent negligence in carrying out legal obligations or breach of trust. 
• The business of the company is not conducted in agreement with sound business principles.
• If the person has conducted business with the intention to defraud or the purpose is unlawful subject to public interest. 

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.

d) Explain different modes of appointments and qualifications of directors.

Modes of Appointment of Directors are listed below.

1. Appointment by Signatures to the Memorandum

• The Articles of a company usually name the first directors by their respective name or prescribe the method of appointing them.
• If the directors are not named in the Articles of the Company, the number of directors and the name of the directors shall be determined in writing by the subscribers of the Memorandum or a majority of them. (Clause 64 of Table A)
• If the first directors are not appointed in the above manner, the subscribers of the Memorandum who are individuals shall be deemed to be the directors of the company. They shall hold office until directors are duly appointed in the first annual general meeting. [Sec. 254]
• Subsequent directors shall be appointed according to the provisions of Sec. 255 of the Act.

2. Appointment of Director by Central Government

• According to Sec. 408, the Central Government may appoint the directors but not more than two in number and for the period not exceeding 3 years.
• The appointment of directors is made to prevent the affairs of the company which are oppressive to any member or which are prejudicial to the public or company’s interest.
• The Central Government may appoint the director on the application of not less than 100 members of the company or the members holding not less than 1/10th of the total voting rights. Such directors need not to retire annually and are also not required to have the qualification shares.
• The Companies (Amendment) Act, 1974, empowers the Central Government to issue necessary directions to companies where an appointment of directors is so made. [Sec. 408 (6)]
• Further, the directors so appointed are required to keep the Central Government informed of the affairs of the company to enable it to take such timely action as may be required by exigencies of the circumstances. [Sec. 408 (7)]

3. Appointment oy Company in the General Meeting

• Section 255 provides that subsequent directors shall be appointed by the company in general meeting. In the case of a public company or a private company which is a subsidiary of a public company, unless the Articles provide for the retirement of all directors at an annual general meeting, at last two-thirds of the total number of directors shall be liable to retire by rotation and shall be appointed by the company in general meeting.
• This means one-third of the total number of directors can be permanent directors. The remaining directors in the case of any such company and all the directors in the case of private company not being a subsidiary of the public company may be appointed as provided in the Articles. In the absence of any regulation in the Articles of the company, these directors shall be appointed by the company in general meeting.

4. Appointment of Directors by third party

• The articles may permit the third parties for the appointment of director as their nominee, but the number of directors so appointed should not exceed one- third of the total number of directors and they are not liable to retire by rotation. The third party means the Vendor, Banking Company, Finance Corporation and Debenture holders. The idea behind the appointment is that they may have the watch that money advanced to the company has been utilised for same purpose for which it was lent.

5. Appointment of Director by Proportional Representation

• Directors are appointed individually either by show of hands or by ballot unless the Articles otherwise provide. If the Articles permit, a system of proportional representation may be adopted for the appointment of directors.
• The appointment may be made by the single transferable vote or by a system of cumulative voting. In this system, the minority shareholders may become in a position to have their representation in the Board of Directors. Such appointment is made once in three years and the usual vacancies are filled up according to the provisions of Sees. 262 and 265.

6. Appointment by Board of Directors

• Section 260 of the Companies Act empowers the Board to appoint additional directors and Articles of every company also confer this power to the Board. But the additional director shall hold his office upto the next annual general meeting. The number of directors including the additional director should in no case exceed the maximum number of directors as determined by the articles of the company.
• The Companies Act empowers the Board to appoint the casual director subject to any regulation in the Articles. The casual vacancy in the office of the director may exist due to retirement, resignation, insolvency or any other reason. The casual director may hold his office only upto the period to which the original director would have his office if he had not vacated. [Sec. 262]
• The Board may appoint the alternate director if the article authorises. The Board is empowered to appoint the alternate director if the original director remains absent for more than three months from the date on which the meeting is ordinarily held. Such alternate director shall hold office only for the period till the original director returns. [Sec. 313]

Qualifications of Director:

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.