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Directors in a Company under Companies Act 2013

- Prof. (Dr.) Bindu S Ronald

Reading for Dec 2019 ( part of E-Learning)

Read

Sec 2(34) gives the definition of Director: “director” means a director appointed to the Board
of a company

 Directors or the BOD are primary agents of the company to transact its operations.

 They are professional men, hired by the company to direct its affairs. But, they are not
the servants of the company. They are officers of the company

 Only individual can be appointed as directors in company- reason - office of director is

office of trust and in case of failure to carry out this trust someone should be held
responsible. It simply means a firm, company or other legal persons cannot be directors
of company but in earlier days a firm used to direct a company and it was knows as
managing partners or managing trustees

 It is not the name by which a person is called but the position he occupies and the
functions and duties which he discharges that determine whether in fact he is a Director
or not.

 So long as a person is duly appointed by the company to control the company's business
and authorized by the Articles to contract in the company's name and, on its behalf, he
functions as a Director.

 The Articles of a company may, therefore, designate its Directors as governors, members
of the governing council or, the board of management, or give them any other title, but so
far as the law is concerned, they are simple Directors

Directors as trustees of company

 In trust an author creates a trust for the beneficiary which is managed by a trustee

 Although directors are not properly speaking trustees, yet they have always been
considered and treated as trustees of company …which is actually under their control
and ever since joint stock companies were invented , directors have been held liable to
make good moneys whey have misapplied upon the same footing as if they were trustee-
Lindley LJ

 Being trustee of the company- custodian of the assets of the company and they should
apply the funds in best interest of company
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 If they misapply, misappropriate or divert the use of fund for their own vested interests
they must be held liable

 Director's action on behalf of a company is in a fiduciary capacity and their acts and
deeds have to be exercised for the benefit of the company.

 They are agents of the company to the extent they have been authorized to perform
certain acts on behalf of company. In a limited sense they are also trustees for the
shareholders of company

Director as agents

 The company itself cannot act in its person for it has no person; it act only through
directors, merely as in the ordinary case of principal and agent

 Just as in any principal agent relationship- the director enjoys authority in terms of
company and third parties

 They get this authority from memorandum and articles of the company and if their act is
beyond it, it is ultra vires. Directors can bind the company as agents only when they act
collectively as a Board of directors

 However the directors do not completely fit in the role of agents as they are selected not
employed with authority and powers of directors are wide and independent in comparison
to agents.

1. Read Section 149: Appointment of Directors

(i) Only individuals can be appointed as Directors.

Why?

(ii) Minimum Number of Directors in a Company: Public Company 3, Private Company 2

(iii) Maximum Number of Directors: 15. However there can be more than 15 Directors
appointed in case if a Special resolution is passed in the shareholders meeting.

Keep in Mind

Section 149(1) (b) does not apply to Government Companies and also does not apply to Section
8 companies
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There are different kinds of directors in a company:

 Rotational Directors (who have to retire after every 3 years. They hold office on
rotational basis. 2/3 of the directors in a company have to be rotational directors. After
the end of their term either they can be re-appointed or in their place new directors are
appointed)
 Permanent Directors (They hold office of directors permanently or for a long time.
They are usually the promoter directors.1/3 of the directors may be permanent directors)
 Executive Directors (They are full-time working director of the company. They have a
higher responsibility towards the company. The Executive directors include Managing
Directors, Whole time Directors, part time directors)
 Non- Executive Directors (are non- working directors and are not involved in the
everyday working of the company. They might take part in the planning or policy-making
process. All directors other than executive directors are Non- executive directors)
 Nominee Directors (They are Directors appointed by financial institutions. Certain
statutory bodies such as LIC IDBI etc in their statute provide that if they have loaned
money to a company, they must have their nominee directors on the Board of Directors of
the company. They are essentially appointed by the nominating company to protect their
company interest)
 Small Shareholders Directors (Directors representing small shareholders in a company.
Small shareholders are defined as those share holders who hold share of the value less
than Rs 20,000. These directors are appointed to represent the interest of the small
shareholders on the Board of Directors of the company)
 Resident Directors ( explained below)
 Women Directors( explained below)
 Alternate Directors (When a director is absent from the country for more than three
months; an alternate director comes on board on his behalf. He acts as a director for a
temporary period ie until the return of the original director. And can only hold office as
permissible to the director whose office this director holds)
 Additional Directors (An individual can act as an additional director by taking the
position of a director until the next Annual General Meeting.)
 Casual vacancies of directors created and Filled
 Managing Directors: (A managing director is someone who is responsible for the daily
operations of a company, organization, or corporate division. Manager means an
individual who, subject to the superintendence, control and direction of the board of
directors, has the management of the whole, or substantially the whole, of the affairs of a
company, and includes a director or any other person occupying the position of a
manager, by whatever name called, whether under a contract of service or not.)
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 Whole time Directors

 Part time directors
 Independent Directors ( explained below)
 Shadow Director - A person, who is not appointed to the Board, but on whose directions
the Board is accustomed to act, is liable as a Director of the company, unless he or she is
giving advice in his or her professional capacity. Thus, such a 'shadow' Director may be
treated as an 'officer in default' under the Companies Act.
 De facto Director- Where a person who is not actually appointed as a Director, but acts
as a Director and is held out by the company as such, such person is considered as a de
facto Director. Unlike a 'shadow' Director, a de facto Director purports to act, and is seen
to the outside world as acting, as a Director of the company. Such a de facto Director is
liable as a Director under the Companies Act.

(iv) Woman director

According to Companies (Appointment and Qualification of Directors) Rules 2014, The

following class of Companies shall appoint at least one woman director

a) Every listed Company

b) Every other public company having a paid up capital of 100 crore rupees or turnover of three
hundred crore rupees or more.

For the purposes of this provision- the paid up share capital or turnover as the case may be, as on
the last date of the latest audited financial statement shall be taken into account.

Any vacancy in the position of a woman Director shall be filled up by the Board of Directors at
the earliest but not later than immediate next Board meeting or 3 months from the date of such a
vacancy whichever is later.

(Read Articles on Woman Directors)

1. Women Board Directors: Characteristics of the Few Author(s): Zena Burgess and Phyllis
Tharenou
Source: Journal of Business Ethics, Vol. 37, No. 1

2. Women in the Boardroom: How Do Female Directors of Corporate Boards Perceive

Boardroom Dynamics? Author(s): Gro Ellen Mathisen, Torvald Ogaard and Einar Marnburg
Source: Journal of Business Ethics, Vol. 116, No. 1 (August 2013), pp. 87-97
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3. Access Denied: Low Mentoring of Women And Minority First-Time Directors And Its
Negative Effects on Appointments to Additional Boards Author(S): Michael L. Mcdonald And
James D. Westphal Source: The Academy of Management Journal, Vol. 56, No. 4 (August
2013), pp. 1169-1198

(v) Resident Directors: Every company has t appoint one resident director who stays in India
for a total period of not less than 182 days during the financial year

(vi) Independent Directors: Section 14(4) states that every public company shall have at least
1/3 of the total number of directors as independent directors and the Central Government
may prescribe the minimum number of independent directors in case of any class or classes of
companies.

Any fraction contained in such one-third numbers shall be rounded off as one.

An independent director in relation to a company, means a director other than a managing

director or a whole-time director or a nominee director,—
(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and
experience;
(b)           (i) who is or was not a promoter of the company or its holding, subsidiary or associate
company;
(ii) who is not related to promoters or directors in the company, its holding, subsidiary or
associate company;
(c) who has or had no pecuniary relationship with the company, its holding, subsidiary or
associate company, or their promoters, or directors, during the two immediately preceding
financial years or during the current financial year;
(d) none of whose relatives has or had pecuniary relationship or transaction with the company, its
holding, subsidiary or associate company, or their promoters, or directors, amounting to two per
cent. or more of its gross turnover or total income or fifty lakh rupees or such higher amount as
may be prescribed, whichever is lower, during the two immediately preceding financial years or
during the current financial year;
(e) who, neither himself nor any of his relatives—
(i) holds or has held the position of a key managerial personnel or is or has been employee of the
company or its holding, subsidiary or associate company in any of the three financial years
immediately preceding the financial year in which he is proposed to be appointed;
(ii) is or has been an employee or proprietor or a partner, in any of the three financial years
immediately preceding the financial year in which he is proposed to be appointed, of—
(A) a firm of auditors or company secretaries in practice or cost auditors of the company or its
holding, subsidiary or associate company; or
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(B) any legal or a consulting firm that has or had any transaction with the company, its holding,
subsidiary or associate company amounting to ten per cent. or more of the gross turnover of such
firm;
(iii) holds together with his relatives two per cent. or more of the total voting power of the
company; or
(iv) is a Chief Executive or director, by whatever name called, of any nonprofit organisation that
receives twenty-five per cent. or more of its receipts from the company, any of its promoters,
directors or its holding, subsidiary or associate company or that holds two per cent. or more of
the total voting power of the company; or
(f) Who possesses such other qualifications as may be prescribed.

(Read Articles on Independent Directors)

1. Lucian A. Bebchuk & Assaf Hamdani, Independent Directors and Controlling Shareholders,
165 U. Pa. L. Rev. 1271 (2017).

2. Maria Gutierrez & Maribel Saez, Deconstructing Independent Directors, 13 J. Corp. L. Stud.
63 (2013)

3. Hiring Cheerleaders: Board Appointments of "Independent" Directors Author(s): Lauren

Cohen, Andrea Frazzini and Christopher J. Malloy Source: Management Science, Vol. 58, No. 6
(June 2012), pp. 1039-1058