Author Name:   Sudha Reddy

On incorporation, a company becomes a legal artificial person but it cannot act by itself and consequently it has to depend upon some human agency to act in its name...

Appointment, Disqualification And Liabilities Of Directors Of A Company: A Legal Perspective

On incorporation, a company becomes a legal artificial person but it cannot act by itself and consequently it has to depend upon some human agency to act in its name. The members have no inherent right to participate in the management of the company. A large sized company may have its members running into lakhs, who are dispersed all over the country and they even lack the expertise to manage the affairs of the company, which makes it impossible to give the management of the company in their hands. Therefore a specialized body of persons called as directors are appointed by the members to manage the affairs of the company. The directors must act as a body without improper exclusion of any of the directors. The directors collectively referred to as BOARD. The board is the managerial body constituted by the members to whom is entrusted the whole management of the company. Board owes a duty to the members to exercise care, skill and diligence in discharge of their functions.

Meaning and DEFINITION OF DIRECTOR:

Statutory definition: As per sec 2(13) of Companies act, 1956 “Director” includes any person occupying the position of a director by whatever name called.

Definition based on function:
A person is considered as a director, if he does whatever a director does normally. Thus,where a person performs the functions of a director, he will be treated as a director for the purposes of the act, though he may be called by a different name and is not actually appointed on the board of the company.

Legal Position Of Directors:
It is difficult to define the exact legal position of the director of the company. The CompaniesAct makes no effort to define their position. At various times they have been described by judges as agents, trustees or managing partners.

Directors as agents:
The relationship between the company and the directors is that of principal and agent and the general principles of agency will govern their relations. Consequently, where the directors enter into contracts on behalf of the company, it is the company and not the directors who are liable there under. But the directors will be personally liable only in the following cases:

· Where a director acts in his own name.

· Where a director contract on behalf of the company without using the words ‘Limited’ or ‘Private limited’ as a part of the name of a company.

· Where a director enters into any agreement or contract in which it is not made clear as to whether the director is signing in his personal capacity or as an agent of company.

Directors as trustees:
The office of a director is an office of trust. The directors stand in a fiduciary position towards the company. They are the trustees of:

· Company’s money and property: The property of the company must be applied for the genuine purposes. If the property is misappropriated it would amount to breach of trust.

· The powers entrusted to them: The directors must exercise their powers bonafide and for the benefit of the company. As a whole, not to promote their own personal or private interests. They should not put themselves in a position where their duties and personal interests may conflict.Where a director uses confidential information of the company for his personal purposes, misappropriates or misuses the assets of the company, he becomes accountable to the companyIf a director misuses his fiduciary position and makes a secret profit, he is liable to pay it to the company.

Directors as officers of the company:
Amongst other persons, a director is also included in the definition of an ‘officer’ of the companyWhether or not a director is in the employment of the company, he shall always be treated as an officer of the company.

Directors as ‘officers in default’ (section-5):

a) A Whole time director or managing director is always covered in the definition of officer in default.

b) Where a company has no wholetime director or managing director,or manager-A director shall be treated as an officer in default if
i. he has been so specified by the board in this behalf.
ii. no director is so specified by the board.

Kinds Of Directors:
Under the Companies Act, 1956, the following kinds of directors are recognized:
Ordinary Directors
Ordinary directors are also referred to as simple directors who attends Board meeting of a company and participate in the matters put before the Board. These directors are neither whole time directors nor managing directors.

Whole-time/Executive Directors
Whole-time Director or Executive Director includes a director in the whole-time employment of the company.

Additional Directors
Additional Directors are appointed by the Board between the two annual general meetings subject to the provisions of the Articles of Association of a company. Additional directors shall hold office only up to the date of the next annual general meeting of the company. Number of the directors and additional directors together shall not exceed the maximum strength fixed for the Board by the Articles.

Alternate Director
An Alternate Director is a person appointed by the Board if so authorised by the Articles or by a resolution passed by the company in the general meeting to act for a director called "the original director" during his absence for a period of not less than three months from the State in which meetings of the Board are ordinarily held. Generally, the alternate directors are appointed for a person who is Non-resident Indian or for foreign collaborators of a company.

Professional Directors
Any director possessing professional qualifications and do not have any pecuniary interest in the company are called as "Professional Directors". In big size companies, sometimes the Board appoints professionals of different fields as directors to utilise their expertise in the management of the company.

Nominee Directors
The banks and financial institutions which grant financial assistance to a company generally impose a condition as to appointment of their representative on the Board of the concerned company. These nominated persons are called as nominee directors.

Disqualifications of a director:
Section 274(1) reads as under:
A person shall not be capable of being appointed director of a company, if the director is

(a) Of unsound mind by a court of competent jurisdiction and the finding is in force;

(b) An un discharged insolvent;

(c) Has applied to be adjudicated as an insolvent and his application is pending;

(d) Has been convicted by a court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the date of expiry of the sentence;

(e) Has not paid any call in respect of 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; or

(f) An order disqualifying him for appointment as director has been passed by a court in pursuance of section 203 and is in force, unless the leave of the court has been obtained for his appointment in pursuance of that section;

(g) Such person is already a director of a public companywhich-

(A) Has not filed the annual accounts and annual returns for any continuous three financial yearscommencing on and after the first day of April,1999; or

(B) Has failed to repay its deposits or interest thereon on due date or redeem its debentures on due dateor pay dividend and such failure continues for one year or more:

Provided that such person shall not be eligible to be appointed as a director of any other public company for a period of five years from the date on which such public company, in which he is a director, failed to file annual accounts and annual returns under sub-clause (A) or has failed to repay its deposit or interest or redeem its debentures on due date or paid dividend referred to in clause (B).

Number of directors:
Sec 252 prescribes the mode of constitution of the board of directors. The purpose of the section is to prevent the company from going into the hands of a single person.The provisions relating to the minimum and maximum number of directors are explained as follows:

1. Minimum number of directors[sec 252(1) and (2)]
· Every public company shall have minimum of 3 directors.

· Every private company shall have a minimum of 2 directors.

ü Articles may stipulate higher minimum number:

When number of directors fall below statutory minimum:

· The provisions as to number of directors are mandatory and any business transacted after the number of directors fell below the statutory minimum was held to be invalid

· Where the minimum number of directors are three,but only two directors were appointed, an allotment of shares by two directors was held to be invalid, though two directors were sufficient to form a quorum

2. Maximum number of directors
The articles of a company generally specify the maximum number of directors. However, it is not bound to appoint the maximum number of directors fixed by the articles.

Increase or Decrease in number of directors :
The company in general meeting can increase or reduce the number of directors. The provisions in this regard are as follows:

1) Increase or decrease in general meeting (sec 258)
2) Increase with the approval of the central government (section 259)

Number of directorships:
1. No person can act as a director in more than 15 companies (section 275).The prohibition extends only to holding of office of a director. Thus, a person holding directorships in 15 companies may hold the office of a manager in other companies.

2. As per sec 278, directorships in the following companies shall be excluded for the above purpose
a. A private company which is neither a subsidiary nor a holding company of a public company.
b. An unlimited company.
c. A company incorporated under section 25 of companies act, 1956.
d. A company in which a director is only an alternate director.

Appointment of directors:
A. Appointment of First Directors of the Company
Procedure for appointment of first directors
a) Consent of each of the persons proposed to be named as director in the articles of association, seeking his consent to act as director, shall be obtained in the form of a letter.

b) Consent of the first directors (unless they are named in the articles of association) in Form No.29 prescribed under the Companies (Central Government’s) General Rules &Forms, 1956 shall be filed with the Registrar of Companies [section 264(2)].

c) Form No.32 prescribed under the Companies (Central Government’s) General Rules & Forms, 1956 in duplicate in respect of the first directors shall be filed with the Registrar, in the case of every company. [section 303].

d) The agreement, if any, which the company proposes to enter into with any individual for appointment as its managing director or whole-time director or manager shall be filed with the Registrar. [section 33(1)(c)]

e) Form Nos.29 and 32 may be filed within 30 days after incorporation. However, it is advisable to file them at the time of incorporation. The Registrar also insists on it to be filed at the time of incorporation.

f) Where a director undertakes to take up qualification shares, if any, Form No.29 should bear requisite stamp duty as applicable under the Stamp Act of the State in which the form is executed.

g) The particulars required to be entered in the Register of Directors under section 303 will be entered with respect to each director immediately after the incorporation of the company.

h) The particulars of the director’s shareholding will be entered in the Register of Directors’ Shareholdings.

i) Information relating to the director’s interests in other companies, firms and also names of his relatives for the purposes of sections 297 and 299 of the Act will be obtained. A general notice of the interests under section 299 will also be given in Form No.24 AA prescribed under the Companies (Central Government’s) General Rules & Forms, 1956.

Appointment of first directors at a general meeting
A public company and a private company which is a subsidiary of a public company must hold an extra ordinary general meeting before the first annual general meeting and appoint the first directors by passing ordinary resolutions. For each director, a separate resolution should be passed, unless it has first been agreed by a unanimous resolution that two or more directors shall be appointed by a single resolution (section 263).Procedure for appointment of first directors at general meeting

a. Consent of the directors named in the articles of association in Form No.29 prescribed under the Companies (Central Government’s) General Rules & Forms, 1956 shall be filed with the Registrar of Companies [section 264]. This is not required in the case of a private company unless it is a subsidiary of a public company.

b. Form No.32 prescribed under the Companies (Central Government’s) General Rules & Forms, 1956 in duplicate in respect of the first directors shall be filed with the Registrar, in the case of every company. [Section 303].

c. The date of appointment of the directors will be entered in the Register of Directors kept under section 303 with respect to each director immediately after the incorporation of the company. [Section 303].

B. Appointment of additional director
The Provisions applicable to additional directors are as follows

1. Conditions for appointment:
a. Articles of the company must authorize the board to appoint additional director.

b. Additional directors together with the other directors shall not exceed the maximum strength fixed for the board by the article.

2. Relaxations in the appointment:
a. Section 260 overrides the section 259. Therefore in no case, the approval of GG is required for appointment of an AD.

b. AD can also be appointed by passing a resolution by circulation.

c. The power of the board to appoint an AD is not affected by the fact that:

i. The strength of the board fallen below the statutory minimum.

ii. The strength of the board fallen below the quorum prescribed by the articles.

d. For the purpose of section 255 the AD shall not be included in the total no of directors.

3. Term of office of the directors:
a. He holds office upto the date of next AGM

b. Here the important point is that use of the upto the date of next AGM not upto the conclusion of next AGM.

c. It means whether the AGM is held or not the AD will retire on the date on which AGM should have been held.

4. Position of an AD:
The AD has same rights, powers, duties and liabilities as any other directors.

Procedure for appointment of additional director:
1. Check the Articles of Association of the Company to see whether they authorize the Board of directors of the Company to Appoint Additional Director. If not, alter the Articles of Association accordingly.

2. Obtain a written consent [Section 264(1)] from the person who is to be appointed as an AD

3. Ensure that the person who is to be appointed as AD must have [Director Identification Number] before being appointed as director under Section 266A.

4. Convene Board Meeting after giving notice to all the directors [Section 286] to discuss besides others the following matters to consider and approve the appointment of additional director. (Section 260)

5. Inform the Stock Exchange with which shares of the company are listed about the date of this meeting prior to the board meeting .

6. Inform the said Stock Exchange within 15 minutes of the board Meeting, of the outcome of the meeting by letter or fax.

7. Pass the necessary Resolution for the appointment of Additional Director to hold the office up to the date of Annual General Meeting.

8. Check that such Director makes intimation within twenty days of his appointment to the other companies in which he is already a director, Managing Director, manager, Secretary.

9. File e-form no 32 with the concerned ROC within 30 days from the date of Appointment.

10. Pay the requisite fee at the prescribed rates.

11. Make necessary entries in the Register of Directors and in the Register of Director’s Shareholding

12. Check that the number of directors including the Additional Director does not exceed the maximum strength fixed for the Board by Articles of Association of the Company.

13. Notify the Stock Exchange with which shares of the Company are listed about the change in the company directors.

Appointment of an alternate director
Provisions related to appointment of Alternate Director are governed by Section 313 of the Companies Act, 1956.

The Board may appoint an alternate director only if this is authorised by the Articles. The alternate director will act as a director for a director (original director) during his absence for at least three months from the state in which Board meetings are ordinarily held. This appointment may be made at a meeting of the Board or by a circular resolution. The Articles of a private company may provide for the appointment of an alternate director.The original director and the alternate director can remain on the Board so long as the above position continues and there is no need of approval by the company in general meeting. But whenever the "original" director returns to the state in question, the alternate director automatically vacates his office and he may be appointed again when the original director leaves that state. The return of the original director to the state will be enough for the cessation of office of the alternate director whether or not the original director attends a Board meeting. E-Form 32 shall be filed electronically with the Registrar in respect of vacation of office and appointment on every occasion.

Although either the original director or the alternate director can act at a given time, it appears that an alternate director can be appointed only where the maximum strength of the Board permits such addition to the Board.

Automatic Re-appointment of Directors retiring by rotation
As per Section 256 of the Companies Act, 1956, at every Annual General Meeting of a Public Limited Company 1/3rd (one-third) of the Directors, whose period of office is liable to determination by retirement of directors by rotation under Section 255, are liable to retire by rotation. These Directors, who are liable to retire by rotation, generally gets re-appointed in the AGM by offering themselves for re-appointment or if any member make a requisition to the Company for their re-appointment. But there are some situations where even though they are not re-appointed in an AGM, but still they can continue their office, this is know as Automatic Re-appointment.The provisions relating to Automatic/Deemed Re-appointment of Retiring Directors at the Annual General Meeting of a Public Limited Company are cited in the clause (b) of the Sub-section 4 of the Section 256.The Automatic Re-appointment of the Retiring Directors happens in the following 3(three) situations, if an Annual General Meeting ends:

(1) Without filling up the vacancy of the retiring director by his re-appointment; or

(2) Without filling up the vacancy of the retiring director by appointment of another person in place of the retiring director; or

(3) Without passing a resolution to the effect that the vacancy of the retiring director be not filled.

If any of the above situations does not happen in an AGM, then the AGM will stand adjourned till the same day in the next week, at the same time and place. If at the adjourned meeting also, the place of the retiring director is not filled up and that meeting also has not expressly resolved not to fill the vacancy, the retiring director shall be deemed to have been re-appointed at the adjourned meeting.

Circumstances wherein the Automatic Re-appointment of the Retiring Directors is not allowed:

(i) if at that meeting or at the previous meeting a resolution for the re-appointment of such director has been put to the meeting and lost ;

(ii) if the retiring director has, by a notice in writing addressed to the company or its Board of directors, expressed his unwillingness to be so re-appointed ;

(iii) if the retiring director is not qualified or is disqualified for appointment ;

(iv) if a resolution, whether special or ordinary, is required for his appointment or re-appointment in virtue of any provisions of this Act ; or

(v) if the proviso to sub-section (2) of section 263 is applicable to the case.

Vacation of directors office:
The office of the director shall become vacant if:
1) He fails to obtain within 2 months, or at any time thereafter ceases to hold the share qualification, if any required of him by the articles of the company;

2) He is found to be of unsound mind by a Court of competent jurisdiction;

3) He applies to be adjudicated insolvent

4) He is adjudged an insolvent;

5) He is convicted by a Court for any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than 6 months;

6) He fails to pay any call in respect of shares of the company held by him, whether alone or jointly with others within 6 months from the last date fixed for the payment for the call unless the Central Government has, by notification in the Official Gazette removed the disqualification incurred by such failure;

7) He absents himself from 3 consecutive meetings of the Board of directors or from all meetings of the Board for a continuous period of 3 months, which ever is longer without obtaining leave of absence from the Board;

8) He or any firm in which he is a partner or any private company, of which he is director, accepts a loan. Or any guarantee or a loan, from the company without the approval of the Central Government;

9) He fails to make disclosures to the Board in respect of contracts in which he is interested;
he becomes disqualified by an order of court for being convicted of an offence in respect of the promotion, formation or management of a company, or in the course of winding up he is guilty of fraud or misfeasance;

10) He is removed before the expiry of period of his office.

11) Having been appointed a director by virtue of his holding any office or other employment in the company he ceases to hold such office or other employment in the company;

12) He resigns from his office (resignation tendered cannot be withdrawn without the company’s or Board’s consent);

Remuneration of directors:
The remuneration payable to the directors of a company, including any managing or whole-time director, shall be determined, in accordance the provisions given below either by the articles of the company, or by a resolution ( special resolution if the articles so require ), passed by the company in general meeting and the remuneration payable to any such director determined as per the said provisions shall be inclusive of the remuneration payable to such director for services rendered by him in any other capacity. However, any remuneration for services will not be so included if the services are of a professional nature and in the opinion of the Central Government, the director possesses the requisite qualifications.

A director may receive remuneration by way of fees for attending each meeting of the Board or of any committee thereof (Sitting Fees ).

A director who is in whole time employment of the company or a managing director may be paid remuneration either by way of a monthly payment or at a specified percentage of net profits of the company or partly by one and partly by the other. Such remuneration cannot exceed 5 % of the net profits of the company, except with the approval of the Central Government in case of one director and 10 % for all such directors.

The total managerial remuneration payable by a public company or a private company which is a subsidiary of a public company to its directors and its manager in any financial year must not exceed 11 % of the net profits of the company calculated in accordance with the provisions of section 349, 350 and 351.

In the case of a director who is neither in the whole-time employment of the company nor a managing director may be paid remuneration either by way of a monthly, quarterly or annual payment with the approval of the Central Government or by way of commission if the company by special resolution authorises such payment. Such special resolution to in sub-section (4) shall not remain in force for a period of more than five years; but may be renewed, from time to time, by special resolution for further periods of not more than five years at a time. Remuneration payable to such directors cannot exceed :-

if the company has a managing or whole-time director or a manager, one per cent, of the net profits of the company;
in any other case, three percent of the net profits of the company.
If any director earns remuneration from a company in excess of the above limits without prior approval of the Central Government, he shall refund the excess to the company and until such repayment, hold the money in trust with him.The Company cannot waive recovery of such sum due from the director unless approved by the Central Government.No approval of the Central Government is required in case the remuneration is within the limits mentioned in Schedule XIII to the Companies Act, 1956.No director of a company who is in receipt of any commission from the company and who is either in the whole-time employment of the company or a managing director shall be entitled to receive any commission or other remuneration from any subsidiary of such company.The above provisions pertaining to remuneration do not apply to a private company unless it is a subsidiary of a public company.

Provision for increase in remuneration to require Government sanction
In the case of a public company, or a private company which is a subsidiary of a public company, any provision relating to the remuneration of any director or any amendment thereof, which purports to increase or has the effect of increasing, whether directly or indirectly, the amount of remuneration shall not have any effect unless :-

is within the limits specified in Schedule XIII, where Schedule XIII is applicable ; or
approved by the Central Governmentand the amendment shall become void if, and in so far as, it is disapproved by the Government.
Increase in remuneration of managing director on reappointment or appointment after Act to require government sanction
In the case of a public company, or a private company, which is a subsidiary of a public company, if the terms of any re-appointment or appointment of a managing or whole-time director, purport to increase or have the effect of increasing, whether directly or indirectly, the remuneration which the managing or whole-time director or the previous managing or whole-time director, as the case may be, was receiving immediately before such appointment, the or appointment shall not have any effect unless :-

is within the limits specified in Schedule XIII, where Schedule XIII is applicable ; or
approved by the Central Governmentand the amendment shall become void if, and in so
Liabilities of Directors under the Companies Act:

(A) Prospectus: Failure to state any particulars as per the requirement of the section 56 and Schedule II of the act or mis-statement of facts in prospectus renders a director personally liable for damages to the third party. Section 62 provides that a director shall be liable to pay compensation to every person who subscribes for any shares or debentures on the faith of the prospectus for any loss or damage he may have sustained by reason of any untrue or misleading statement included therein.

(B) allotment: Directors may also incur personal liability for:

a) Irregular allotment, i.e., allotment before minimum subscription is received received (Section 69), or without filing a copy of the statement in lieu of prospectus.

b) For failure to repay application monies in case of minimum subscription having not been received within 120 days of the opening of the issue.

c) Failure to repay application monies when application for listing of securities are not made or is refused Under section 73(2).

(C) Unlimited liability: Directors will also be held personally liable to the third parties where their liability is made unlimited in pursuance of section 322 or section 323.

1. Fraudulent trading: Directors may also be made personally liable for the debts or liabilities of a company by an order of the court under section 542.Section 542(1), in this regard, provides that if in the course of the winding up of a company, it appears that any business of the company has been carried on, with intent to defraud creditors of the company or any other person, or for any fraudulent purpose, the court, on the application of the Official Liquidator, or the liquidator or any creditor or contributory of the company may if it thinks it proper so to do, declare that any persons who were knowingly parties to the carrying on business in the manner aforesaid shall be personally responsible without any limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct.

2. 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.

3.Criminal liability: Apart from the civil liability under that Act or under the common law, directors of a company may also incur imprisonment as criminal liability when there is default in filing of prospectus or statement in lieu of prospectus containing untrue statementfailure to repay deposits within the prescribed time limit as specified, inducing persons to invest money, Failure to repay excess application moneyEtc…

Conclusion-
A company director’s role is the most crucial for the smooth operation of the company. He is perhaps the busiest person in the entire organisation with several decisions to be made, pressure from competitors. A company director is expected to ensure the right amount of effective communication at all levels. They are responsible for the management and good governance of the company. While their powers can be restricted by the company’s articles they can, in most cases do anything that the company can do. Since the directors can act as and for the company, they must ensure that the company does everything that it is obliged to do by law and that the decisions they make are in the best interests of the company.

References:
Elements Of Company Law By N.D.Kapoor
# Oxford Advance Learner’s Dictionary, 8th edition
# http://www.preservearticles.com/201104065048/duties-and-liabilities-of-a-director-of-a-company.html
# http://business.gov.in/legal_aspects/index.php
# http://corporatecases.blogspot.in/2012/07/automatic-reappointment-of-retiring-directors.html
# Piercy VS Mills and Co. Ltd.(1920
# Boardman V Phipps(1966)].
# sec 2(30) of companies act
# Re,Sly,Spink and co.(1911)Ch430
# British Empire Match Co., ex. P., Ross, (1888) 59 LT 291]
# section 264 (1)
# section 307
# Clause 19 of the Standard Listing Agreement
# Section 260, First Proviso
# Section 305(1)
# Section 303(1) & 307
# Section 260, Second Proviso
# Clause 30(a) of the Standard Listing Agreement
# i.e., vide Memorandum
# i.e., vide alterations of Memorandum by passing special resolution
# under sub sections (3) and (4) of section 58A
# Section 73

The  author can be reached at: sudhareddy.p.n@legalserviceindia.com

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