Ch-8 DIRECTORS:

Appointment, Roles and Remuneration

DIRECTORS
Directors are the persons who direct,conduct,manage or superintend a companys affairs.Sec (291) has entrusted the management of affairs in their hands.

LEGAL POSITION OF DIRECTORS

They appoint companys officers and recommend the rate of dividend. Judicial pronouncement describes directors as:

1. AGENTS 2. TRUSTEES 3. MANAGING PARTNERS

LEGAL POSITION(contd.)
1. 2.

AGENTS: The directors act as agents of the company.They

exercise the powers and are subject to duties within the framework of the companys articles and the companys act.

TRUSTEES:
They are trustees of money which comes to their hands or which is actually under their control. They are trustees for exercising powers conferred on them for the benefit of the company. They stand in fiduciary relationship to the company. MANAGING PARTNERS: They manage the affairs of the company on their own behalf and on behalf of other shareholders who elect them.

3.

ARE THE DIRECTORS EMPLOYEES OF THE COMPANY?

They are not employees of the company or employed by the company,nor are they servants of the company,or members of the companys staff.A director can, however hold a salaried employment or an office in addition to that of his directorship which may for these purposes make him an employee or servant and in such a case he would enjoy rights given to employees as such.

LEGAL PROVISIONS AS REGARDS DIRECTORS

1. Number of directors: Every public company must have at
least three directors and every private company whether it is subsidiary of a public company or not must have at least two directors(Sec 252).The articles of a company may, and usually do, fix the minimum and maximum number of directors of its board. Increase in number of directors: Sec (259) provides that if a public company,or a private company which is a subsidiary of a public company wishes to increase the number of its directors beyond the maximum fixed by its articles, then it must be approved by the Central Government and shall become void if and in so far as it is disapproved by Central Government.But if increase in the number will not make the total number of director more than twelve, no approval of the central govt. is necessary.

2.

LEGAL PROVISIONS AS REGARDS DIRECTORS(contd)

3. Only individuals to be directors: Nobody corporate, 4. Appointment of directors:
Subscribers to the memorandum Sec 254;clause 64 (table A) Company in general meeting Sec 255-57;263-265; Board of Directors Sec 260,262,313; Central Govt. Sec 408; Third parties Sec 255. association or firm shall be appointed director of a company.Only an individual can be a director.Sec(253)

Appointment of directors
Appointment of first directors the first directors of a company are appointed by the subsribers to the memorandum and their names are mentined in the articles.if this is not done,the articles may prescribe the method of appointing them .If the articles neither contain the names of the first directors nor any provision for appinting them,the subsribers to the memorandum, who individuals,shall be deemed to be the first directors(254)

Subsequent directors
Regarding the appointment of subsequent directors sec255 and 265 three schmes for the constitution of the BOD of the public company or a private company .These areAll the directors retire at every AGM[SEC 255];or At least two-third of the total number of director must be person whose period of office is liable to determination by retirement by rotation[SEC255] At least two-third of the directors may be appointment by the principle of proportional representation,by a single transferable vote or by a system of cumulative voting or oterwise and shall be directors for a period three years at a time[sec265] The remaining directors in (2)and (3) above and the directors generally of a pure private company,unless otherwise provide in the articles ,must also be appointed by the company in general meeting .

Appointment in general meeting

Section 256 provides that at the first AGM after the general meeting at which the first directors are appointed in accordance with sec 255,the number nearest to onethird of the directors liable to retire by rotational must retire from office.The rotational for retirement shall be determined by the length of office of directors ,or in case all were appointed on the same day ,by lots.At every subsequent AGM,one-third of the directors must retire.This is known as retirement by rotational .

APPOINTMENT OF DIRECTOR BY BOARD

1. The board of director may appoint directors in the following circumstances: Casual vacancies: If the office of board falls vacant for some reason that is death or resignation etc. Before his term expires, the same way,subject to any regulations in the articles, be filled by the Board of Director. (Sec 262) Additional directors: If the articles so permit, Board of Directors can also appoint additional directors, subject to maximum number fixed in the articles, who shall hold office only up to the date of next general meeting (Sec 260) Alternate directors :The articles may empower the Board to appoint an alternate director during the absence of a director for more than three months , from the state in which the meetings of the board are ordinarily held. Such an alternate director shall vacate office either on expiry of the original directors term or on return of the original director to the state (Sec 313)

2.

3.

APPOINTMENT OF DIRECTORS BY CENTRAL GOVERNMENT

With a view to preventing oppression and mismanagement, the central govt. may appoint such number of directors as the company law board may, by order in writing, specify as being necessary to effectively safeguard the interest of the company, or its shareholders,or the public interest, for a period not exceeding 3 yrs. The company law board may pass the above order on reference made to it by the central govt. or on the application of at least 100 members of the company or of members holding at least 10% voting rights.

APPOINTMENT OF DIRECTOR BY THIRD PARTIES

Sec 255 provides that one third of the total number of directors of a public company and all the directors of a pvt. Company may be appointed by third party on a non rotational basis, if the articles so authorized.

Qualification and disqualification of directors

The companies act has not prescribed any academic or professional qualification for the directors.The articles provide for min share qualification,where a share qualification is fixed by the articles of a company ,the act provides[sec270]thatIt must be disclosed in the prospect; ii. Each director must take his qualification shares within 2months after his appointement; The notional value of the qualification share must not exceed rs5000or the nominal value of one share where it exceed rs5000.

i.

iii.

If a director fails to obtain his share qualification within 2months,he vacates office automatically on the expiry of two months from the date of his appointment ,and if he acts as director after the expiry of two months without taking the qualification shares ,he is liable to a fine rs 500 for every day until he stops acting as such[sec272].

Disqualification of directors[274]
a) b) c) i. ii. iii. iv. v. A director must beAn individual Competent to contract,and Hold a share qualification ,if so required by the articles , The following persons are disqualified for appointment as directors of a company : A person of sound mind, An undischarged insolvent A persons who has applied to be adjudicated as an insolvent and his application is pending . A persons who has failed to pay calls on the shares for six months from the date fixed for the payment; A persons who has been disqualified by court under 203,on the ground of fraud.

A person who is already a director of a public company which Has not filed the annunal accounts and annunal returns for any three continuous finanacial years commencing on and after the first day of april,1999:or Has failed to repay its deposit or interest thereon on due date redeem its debentures on the date or pay dividend and such failure continues for one years or more

Minor as director
In the case of a minor ,though there is no provision in the act,expressly disqualified him ,as he is not competent to contract,he cannot file either with the company or with the registrar any valid consent to act as director,as required by sec264.But as sec264 applies only to public companies and private companies which are their subsidiaries there nothing prohibiting a minor being a director of independent private companies.

PENALTY
IF A PERSON FUNCTIONS AS A DIRECTOR AFTER THE OFFICE HAS BECOME VACCANT ON ACCOUNT OF ANY OF DISQUALIFICATION,HE SHALL BE PUNISHABLE WITH FINE UPTO Rs.5000 FOR EVERY DAY DURING THE PERIOD HE SO FUNCTIONS.

REMOVAL OF DIRECTOR
REMOVAL BY SHARE HOLDERS: SECTION 284 PROVIDES THAT COMPANY MAY BE ORDINARY RESOLUTION PASSED IN GENERAL MEETING AFTER SPECIAL NOTICE, REMOVE THE DIRECTOR BEFORE THE EXPIRYOF HIS TERM OF OFFICE. BUT FOLLOWING DIRECTOR CANNOT BE REMOVED BY THE COMPANY IN GENERAL MEETING :-

 A DIRECTOR APPOINTED BY THE CENTRAL GOVERNMENT UNDER SEC.408; A DIRECTOR OF A PRIVATE COMPANY HOLDING OFFICE FOR LIFE ON APRIL 1,1952; DIRECTOR ELECTED BY THE PRINCIPLE OF PROPOTIONAL REPRESENTATION UNDER SEC.265.

 A company ( whether public or private) may, by giving a special notice and passing and ordinary resolution, remove a director before the expiry of his period of office. In case some of the shareholders want to move the resolution for the removal director, they must give a notice to the company at least 14 days before the meeting. specify the intention to move the resolution so that the proper notice may be sent to the director concerned and other members.

 Where notice is given of a resolution to remove a director, the director concerned has a right to make with respect thereto representations in writing to the company and may request that they be notified to the member of the company. The company then become bound to send a copy of the representations to every member of the company to whom notice of a meeting is sent except where relieved by the company law board on reasonable grounds.

REMOVAL BY CENTRAL GOVRNMENT:- (sec.388E). The central government may by order, remove from office any director against whom an adverse judgement has been given by the company law board, on a reference made by the government under sec.388B, for an alleged fraud, misfeasance, gross negligence or breach of trust, etc; in carrying out his legal obligations. The person removed shall not hold the office of a director or any other office connected with the conduct and management of the affairs of the company for a period of five years, again no compensation is payable to him for the termination of office.

 REMOVAL BY COMPANY LAW BOARD:(SEC.402).The company law also has the power to remove a director on an application made to it for prevention of oppression (under sec.397) or mismanagement (under sec.398). The person so removed is disabled from holding a managerial office in the company for a period of five years without the leave of the company law board. further he cannot claim compensation for the termination of his appointment. (sec.407).

DISTINCTION BETWEEN MANAGING DIRECTOR AND WHOLE TIME DIRECTOR

A managing director may be appointed in that capacity in two or more companies at the same time but whole time director, by virtue of his whole time employment cannot act such as more than one company. The tenure of managing director of a public company or a private company which is the subsidiary of a public company cannot be more than five years at a time. There is no such restriction in case of whole-time director.

REMUNERATION PAYABLE BY COMPANIES HAVING PROFITS

Subject to the provisions of sec.198* and sec.309,a company having profits in a financial years may pay any remuneration, by way of salary , dearness allowance, perquisites, commission and other allowances, which shall not exceed 5 per cent of its net profits for one such managerial person, and if there are more than one such managerial persons, 10 pre cent for all of them together.

REMUNERATION PAYABLE BY HAVING NO PROFITS

Where in any financial year during the currency of tenure of the managerial person, a company has no profits or its profits are in adequate, it may pay remuneration to a managerial person, by way of salary, dearness allowance, perquisite and any other allowance,not exceeding ceiling limit of Rs.24,00,000 per annum or Rs.2,00,000 per month calculated on the following scale:-

WHERE THE EFFECTIVE MONTHLY CAPITAL OF THE COMPANY REMUNERATION IS :PAYABLE SHALL NOT EXCEED Less than Rs.1 crore Rs.75,000 Rs. 1 crore or more but less Rs. 1,00,000 than 5 crores Rs 5 crores or more but less Rs.1,25.000 than Rs.25 crores Rs.25 crores or more but less Rs. 1,50,000 than Rs.50 crores Rs.50 crores or more but less Rs. 1,75,000 than Rs.100 crores Rs. 100 crores or more Rs.2,00,000

Duties of Directors

Duties of directors may be divided under two heads1. Statutory duties 2. Duties of general nature

Statutory Duties
a) To file return of allotments. Sec. 75 of the Companies Act, 1956 charges a company to file with the registrar, with in a period of 30 days, a return of the allotments stating the specified particulars. Failure to file such return shall make directors liable as officer in default. A fine up to Rs. 500 per day till the default continues may be levied. Not to issue irredeemable preference shares or shares redeemable after 10 years. Sec. 80, as amended by the Act of 1988, forbids a company to issue irredeemable preference shares or preference shares redeemable beyond 10 years. Directors making any such issue may be held liable as officer in default and may be subject to fine up to Rs. 1000.

b)

c) To disclose interest [sec. 299-300]. A director who is interested in a transaction of the company must disclose his interest, to the Board. The disclosure must be made at the first meeting of the Board held after he has become interested. This is because a director stands in a fiduciary capacity with the company and therefore, he must not place himself in a position in which his personal interest conflicts with his duty. An interested director should not take part in the discussion on the matter of his interest. His presence shall not be counted for the purpose of quorum. He shall not vote on that matter. If he does vote, his vote shall be void. Non-disclosure of interest makes the contract voidable and not void.

d) To disclose receipt from transferor of property. Sec. 319 provides that any money received by the directors from the transferee in connection with the transfer of the companys property or undertaking must be disclosed to the members of the company and approved by the company in general meeting. e) To disclose receipt of compensation from transferee of shares. If the loss of office results from the transfer (under certain conditions) of all or any of the shares of the company, its directors would not receive any compensation from the transferee unless the same has been approved by the company in general meeting before the transfer takes place. If the approval is not sought or the proposal is not approved, any money received by the directors shall be held in trust for the shareholders who have sold their shares.

General Duties
a) Duty of Good Faith. The directors must act in the best interest of the company. Interest of the company implies the interests of present and future members of the company on the footing that the company would be continued as a going concern. A director should not make any secret profits. He should also not exploit to his own use the corporate opportunities. Duty of Care. A director must display care in performance of the work assigned to him. He is, however, not expected to display an extraordinary care but that much care only which an ordinary prudent man would take in his own case.

b)

c)

d)

if directors act within their own powers, if they act with such care as is to be reasonably expected of them having regard to their knowledge and experience and if they act honestly for the benefits of the company they discharge both their equitable as well as legal duty to the company. Duty to Attend Board Meetings. A number of powers of the company are exercised by the board of directors in their meetings held from time to time. Although a director is not expected to attend all the meetings but if he fails to attend three consecutive meetings or all meetings for a period of three, whichever is longer, without permission, his office shall automatically fall vacant. Duty not to Delegate. Director being an agent is bound by maxim delegatus non potest delegare which means a delegate cannot further delegate. Thus, a director must perform his functions personally.

A director may, however, delegate in the following casesi. Where permitted by the companies act or article of the company.

ii. Having regards to the exigencies of business certain functions may be delegated to other officials of the company.

LIABILITIES OF DIRECTORS

THE LIABILITIES OF DIRECTORS MAY BE CONSIDERED UNDER THE FOLLOWING HEADS1) LIABILITY TO THE COMPANY 2) LIABILITY TO THE THIRD PARTIES 3) LIABILITY FOR BREACH OF STATUTORY DUTIES 4) LIABILITY FOR ACTS OF CODIRECTORS 5) CRIMINAL LIABILITY

LIABILITY TO THE COMPANY

The liability of a director to the company may arise froma) Breach of fiduciary duty b) Ultra-vires acts c) Negligence d) breach of trust and misfeasance

Breach of fiduciary duty

Where a director acts dishonestly in disregard to the interests of the company, he will be held liable for the breach of fiduciary duty. Most of the powers are powers in trust and therefore, should be exercised in the interest of the company and not in the interest of the directors or any section of members.

Ultra-vires acts
Directors are supposed to act within the parameters of the provisions of the Companies Act, Memorandum and Articles of Association since these lay down the limits to the activities of the company and accordingly to the powers of the Board of Directors. The directors shall be held personally liable for acts beyond the aforesaid limits, being ultra-vires.

Negligence
The directors shall be deemed to have acted negligently in discharge of their duties and consequently liable for any loss or damage resulting therefrom where they fail to exercise resonable care, skill and diligence.

Breach of trust and misfeasance

Directors are the trustees for the money and property of the company handled by them, as well as the exercise of the powers vested in them. If they act dishonestly in the exercise of their powers and performance of their duties, they will be liable for breach of trust and may be required to make good the loss or damage suffered by the company. Directors can also be held liable for their acts of misfeasance, i.e., misconduct or willful misuse of powers

Liability to third parties

Liability under the provisions of the Companies Act, 1956
Prospectus- Failure to state any particulars as per the requirements of Section 56 or
mis-statement of facts in a prospectus renders a director personally liable for damages to the third party. With Regard to Allotment- Directors may also incur personal liability forIrregular allotment, i.e., allotment before minimum subscription is raised or without filing a copy of the statement in lieu of prospectus [Section 71(3)]

For failure to repay application money in case of minimum subscription having not been received For failure to repay application money when application for listing of securities is not made or is refused [Section 73]

Unlimited Liability- Directors will also be held personally liable to the third parties where the liability is made unlimited in pursuance of Section 322 or Section 323 Fraudulent Trading- Directors may also be made personally liable for the debts or liability of a company by an order of the court under Section 542

Liability for breach of Warranty of Authority

Directors are supposed to function within the scope of their authority. Thus, where they transact in respect of matters ultravires the company or ultra-vires the Articles, they may be proceeded against personally for any loss sustained by the third party.

Liability for breach of statutory duties

The Companies Act,1956 imposes numerous statutory duties on the directors under various sections of the Act. Default in compliance of these duties attracts penal consequences

Liability for acts of co-directors

A director is the agent of the company and not of the other members of the Board. Accordingly, nothing done by the Board can impose liability on a director who did not participate in their action or did not know it.

CRIMINAL LIABILITY
Some of the provisions of the Companies Act which make directors criminally liable areSection 44(4). Filing of prospectus or statement in lieu of prospectus containing untrue statement. Section 58A(5). Failure to repay deposits within the prescribed time limits as specified under sub-sections (3) and (4) of Section 58. Sections 58A(6). Accepting deposits or inviting deposits in excess of the prescribed limit. Section 63. Issuing a prospectus containing untrue statement. Section 68. Knowingly making a false, deceptive or misleading statement and thereby including persons to invest money. Sections 84(3). Fraudulently renewing a share certificate or issuing a duplicate certificate. Section 210(5). Failure to lay balance-sheet , profit & loss accounts, etc. at the annual general meeting.

Section 240(3). Failure or refusal to produce books to inspector or furnish information or to appear before inspector conducting investigation Section 295(4). Granting loan to directors without approval of the Central Government.