Learn about directors under company law in India, including their meaning, types, appointment, powers, duties, disqualifications, removal, resignation, and liability under the Companies Act, 2013.
Introduction
With the aim of promoting a healthy
working environment, companies are now strictly adhering to the norms of
corporate governance, wherever possible. To foster a healthy corporate legal
environment, company law plays a crucial role. From regulating the provisions
relating to the structure of the company to the management, conduct, and
affairs of the company, the company law deals with everything.
One must understand that even though,
in law, a company is a separate legal entity and is termed as a Juristic Person,
it is just an artificial person and has its existence only in contemplation of
law. A company cannot act on its own. It requires some driving force or human
agency that can carry out the business and other affairs of the company.
From the above discussion, it is clear
that a company or a corporation, though a legal entity, does not have a
physical or material existence. In order to exercise the functions, duties,
rights, and obligations and to have knowledge and intent, the presence of a
natural person to handle its affairs is significant. A corporation, not being a
natural person, lacks these attributes, and so it acts through a natural
person. The affairs of the company or the corporation are delegated to the
directors, who in turn act as agents and perform the required functions for the
company or the corporation.
Sir Viscount Haldane L.C., in the case
of Lennard’s Carrying Co. Ltd. versus Asiatic Petroleum Company Ltd. (1915),
while commenting on the characteristics that a company possesses and the
inability of a company to work on its own, opined that “A corporation
is an abstraction. It has no mind of its own any more than it has a body of its
own; its active and directive will must consequently be sought in the person of
somebody who, for some purposes, may be called an agent, but who is really the
directing mind and will of the corporation, the very ego and centre of the
personality of the corporation.”
Meaning and definition of some
important terms
Before starting a discussion about the
appointment, qualification, disqualification, liability, etc. of the directors
and the relevant provisions under the company law in India, it is of paramount
significance to comprehend and develop an understanding of certain terms like
directors, board of directors, etc. Let’s have a look at the definitions of
these important terms.
Director
In simple terms, the ‘director’ is the
supreme executive authority in the company, who is entrusted with the
management and control of the company’s affairs. Generally, a company has a
team of directors, which are ultimately responsible for the entire management
of the company’s state of affairs. These teams of directors are collectively
known as the ‘Board of Directors’. In ideal corporate governance practice, it
is the team of directors that ensures the protection of the stakeholders of the
company and of other members of the company.
This institution of the formulation of
a team of members, known as directors, was based on the foundation that a
company must have a team of faithful, trustable, and respectable members who
work for the betterment of the company. They are appointed to work for the
company’s best interests.
It is pertinent to mention here that
the directors do not work in an individual capacity, unless specifically said
so, in any board resolution meeting. It means that all the directors have to
work collectively. The work done by any director in its individual capacity is
not binding on the company.
The term ‘director’ is defined under
Section 2(34) of the Companies Act, 2013 (hereinafter referred to as
the 2013 Act). It states that a ‘director’, “means a director appointed
to the board of a company.” The definition provided under the 2013 Act
is not an exhaustive one. This section corresponds to Section 2(13) of the
Companies Act, 1956. It defines a director as “any person occupying the
position of director by whatever name called”.
According to Section 5(2) of the Small
Coins (Offences) Act, 1971, the term ‘director’ in relation to a firm is said
to be the partner of the firm. Whereas, if the term is used in relation to a
society or association, it connotes the person who has been conferred with the
management and control of the affairs of that particular society or association
under the concerned rules.
In the case of Agarwal Trading
Corporation versus Collector of Customs (1972), it was held by the Apex Court
that the meaning of the term ‘director’ in relation to a firm connotes to the
partner of that firm.
In conclusion, the term director
connotes a person who has been elected or appointed in accordance with the law
and who has been conferred with the task or function of managing and directing
the affairs of a company. Directors are often regarded as the brains of a
company. They hold a pivotal position in a company’s structure as they make
important decisions for the company in board meetings or in special
committee meetings organised for certain particular purposes. Also, it is
noteworthy that a director has to work in compliance with the provisions of the
2013 Act.
Board of Directors
As discussed above, a company, being an
artificial person with no mind of its own, cannot function without a human
agency. Thus, the persons responsible for managing the affairs of a company are
known as directors, and collectively they are termed as ‘Board of Directors’.
The definition of the term is provided under Section 2(10) of the 2013
Act. It states that a ‘Board’ or ‘Board of Directors’ of a company refers to a
collective body of the directors of the company.
Board meetings
In simple layman’s language, as defined
under Collin’s dictionary, the term ‘board meeting’ means a meeting held by the
board of a company or any organisation. According to section 173 of the
2013 Act, after the formulation of a company, a meeting of the board of
directors should be conducted within thirty days. Also, there should not be a
gap of more than 120 days between two consecutive meetings. The mode of
conducting such board meetings is enumerated under Section 173(2) of the 2013
Act.
Classification of directors
As per the Companies Act 2013,
directors can mainly be classified under two subheads, namely, managing
directors (one who has substantial powers of management and control of the
affairs of the company) and full-time directors (one who is in full-time employment).
Further, the classification of the
directors based on the manner in which they are appointed, the role they play,
the duties they have, the powers they possess, etc. can be under the following
subheads, namely:
1. First Directors: As per the rules and norms laid down in
the Article of Association or any charter or constitution of the company, the
ones who have signed the Memorandum of Association of the company are
considered to be as first directors, and they hold the office until any other
directors are officially appointed by the company in the first annual general
meeting.
2. Casual vacancies: The directors who are appointed for a
short-term term when any existing directors vacate the office.
3. Additional Directors: If the Articles expressly
provide, the Board of Directors has the authority to appoint additional
directors as they deem fit and necessary. These additional directors will serve
until the subsequent annual general meeting.
4. Alternate Director: the director who has been appointed by
the Board through a special resolution in place of the director who has been
absent from his post.
5. Shadow Director: A person who isn’t officially appointed
to the Board but whose advice or directions the Board is accustomed to
following is held accountable as a director of the company. It is pertinent to
note that this doesn’t apply if the individual is providing advice in a
professional capacity. Therefore, such a ‘shadow’ Director could be considered
an ‘officer in default’ under the 2013 Act.
6. De Facto Director: A person who has not been officially
appointed as a director by the company but acts as a director and is also held
out as a director by the company is classified as a ‘de facto director’.
7. Rotational Directors: In a public company or a private
company that is a subsidiary of a public company, at least two-thirds of the
directors are supposed to retire by rotation, and the ones retiring through
such a process are referred to as “rotational directors”. Further, if the
articles of the company provide so, they can be reappointed.
8. Nominee Directors: These are the directors who have been
appointed by the shareholders, third parties through contract, or other parties
as may be prescribed.
Position of directors: a legal
perspective
As discussed above, directors are the
key managerial personnel of a company. By far, it is very clear that a company,
be it private or public, is required to appoint a director. They are entrusted
with the entire management of the affairs of the company, and the same is done
in accordance with prevailing laws. The role played by the directors in the
corporate governance of a company is very significant and crucial.
The term ‘director’ has been defined
under Section 2(34) of the 2013 Act; however, the definition fails to provide
clarity pertaining to the exact meaning of the term, duties, responsibilities,
functions, etc. the director is supposed to perform.
Defining and explaining the position
that a director hold is a complex and herculean task. The reasoning is that it
varies according to the context and circumstances. There are no precise words
that can explain the position that directors hold in any corporate enterprise.
However, attempts have been made by various courts to explain the position that
a director holds. Let’s take a look at a few important case laws wherein this
subject has been dealt with.
In the case of Imperial Hydropathic
Hotel versus Hampson (1883), the Court of Appeal opined that the position
that a director holds in a corporate body is very versatile. Depending upon the
circumstances and context, a director can be regarded as a trustee, an agent,
or a managing partner. It is pertinent to note that these terms are entirely
indicative of the various legal capacities that a director may hold in relation
to a company.
While explaining the legal position a
director holds, Justice Jessel M. R. In Re Forest of Dean Coal
Mining Ltd. Co. (1872), opined that “it does not matter much what you
call them, so long as you understand what their true position is, which is that
they are merely commercial men, managing a trading concern for the benefit of
themselves and all other shareholders in it.”
In the case of Albert Judah versus
Rampada Gupta and anr (1958), it was observed that the directors are
the persons appointed to manage the affairs of the companies that are
incorporated under the Companies Act. These are the ones whose appointments are
done in accordance with the prevailing law. The role that a director plays may
vary from that of an agent to that of a managing partner, a trustee, etc.
However, one must understand that these expressions are not meant to define the
powers, functions, and duties conferred upon them exhaustively. It is
restrictive for the purpose of suggesting useful perspectives from which they
may be examined.
Section 152(1) of the 2013 Act provides
that, in default and as per the contents of the Articles of the Association of
a company, the ones who are the subscribers of the Memorandum of Association
(provided they are individuals and not an association, enterprise, etc.) shall
be termed as directors. However, this shall only be applicable until the
directors are duly appointed according to the prevalent provisions and
procedures provided in the Companies Act.
Thus, from the above discussion, it is
clear that the directors may sometimes act as an agent of a company, whereas
sometimes they act as trustees or managing partners. But one clear thing is
that they are indispensable organs of the company, responsible for the
management of affairs of the company.
A brief explanation of the various
legal positions that a director may hold is as under;
Director as an agent
Put simply, a company is an artificial
person, and thus it cannot function and work on its own. Thus, a company needs
someone to work for it and manage its affairs. So in this sense, the director
acts as the agent of the company for which they work. Hence, pursuant to this
proposition, the relationship between the director and the company is governed
by the principles of the law of agency.
The fact that directors also act as the
agents of the company was also recognised by the Scottish Court of Session in
the case of Ferguson versus Wilson (1904). The court acknowledged the
fact that a corporation or a company, being an artificial person, cannot act on
its own, and hence the directors act as the agents of the company and manage
the affairs of the company. While considering this duty that a director is
entrusted with, the court opined that the relationship between a director and
company is akin to the relationship that exists between a principal and
agent.
It is pertinent to note that, just as a
director does not act as the trustee of the shareholders but that of a company,
similarly, the directors are not the agents of individual members but of the
institution as a whole.
The High Court of Delhi, in the case of
Indian Overseas Bank versus RM Marketing (2001), held that if a director
has not given surety for a loan taken by the company in his personal capacity,
he cannot be solely held liable merely because he holds the directorship.
Director as trustee
It is pertinent to note that the
directors are the trustees of the money of the company, which they are
duty-bound to handle as they act as agents in the transactions that are carried
out on behalf of the company. As the directors are entirely in control of the
company’s funds in the official capacity, which they are obligated to utilise
and administer for the benefit and profit of the company, in this sense, they
can be regarded as the trustees of the company.
In a strictly literal interpretation,
the directors have not been deemed trustees per se; however,
they are regarded as trustees of the company’s properties, which have been
entrusted to their hands. A similar proposition was laid down by the High Court
of Madras in the case of Ramaswamy Iyer versus Brahamayya & Co. (1965). In
the aforesaid case, the court held that directors can be held liable as
trustees if they misuse the power conferred upon them or if they disregard the
power of applying the company’s funds. The court further went on to say that
even after the death of the accused director, the cause of action remains with
the legal representatives of the director.
It is pertinent to note that the reason
behind treating directors as trustees is often due to the nature of their
office and the responsibilities that come with it. From the discussion we had
in previous paragraphs, one thing that is crystal clear is that the directors
are bestowed with the duty to manage and control the affairs of the company.
However, it is noteworthy that the directors are the company’s paid officers.
They work for the benefit of the shareholders of the company; they are not
trustees in a literal sense. For instance, a trustee of a will or marriage is
entirely different from the role that the director plays as a trustee.
The Court of Justice, England, in the
case of Percival versus Wright (1902), made it very clear that the directors
are the trustees of the company and not of the shareholders. This principle was
reiterated in the case of Bruce Peskin and another versus John Anderson (2000) by
the Court of Appeal of England and Wales. The court clarified that the
directors hold no fiduciary duty to the shareholders. Thus, even though the
ultimate profit that a company makes goes to the shareholders, it cannot be
said that the directors are the trustees of the shareholders. They owe their
duty as trustees to the company.
Director as a managing partner
As the terms suggest, managing partner
in a literal sense connotes the person who is responsible for or who manages
the day-to-day running of a company, enterprise, etc. Further, as we have
discussed, a director, before everything else, is the person responsible for
the management of the affairs of the company. Thus, his role as a managing
partner needs no explanation.
Furthermore, the shareholders’ will and
their needs are entirely taken care of by the directors of the company. They
act as the agents of the shareholders’ and pursue their objectives. Also, one
must note that a director possesses extensive powers and exercises many
proprietary functions. The Article of the Association as well as the Memorandum
of Association bestow on the board of directors the ultimate authority to
formulate policies and decisions for the welfare of the company in accordance
with the law.
Directors as an organ of the company
The transformation and evolution of the
roles and responsibilities of modern-day corporate entities, with time, have
led to the emergence of a new theory called the ‘organic theory of corporate
life’. In terms of this theory, certain officials of the company are treated as
the organs of the company. As per this theory, the company is held liable for
the actions of these organs in a manner similar to the one where a natural
person is held accountable for the actions of his limbs. Put simply, in the
modern era, the directors are much more than just agents or trustees; they are
often regarded as the organs of the company. Almost the entire work of the
corporate entities and companies is conducted by the directors and their
managerial personnel. They are conferred with enormous powers through the
regulations embodied in the Articles of Association. The courts in various
judgements have opined that the directors function like the brain of the
company, and it is through the directors that the company acts. The same
observation was laid down by the Hon’ble Apex Court in the case of the State
Trading Corporation of India Ltd. and ors versus Commercial Tax Officer,
Visakhapatnam and ors (1963).
Appointment of directors
The crucial role that the directors
play in the management of the affairs of the companies is unquestionable. Thus,
the persons appointed to the post of director hold desirable qualities and
integrity. The 2013 Act has an ample body of provisions that deal with the
appointment of various directors in a very elaborate manner.
According to Section 149 of the
2013 Act, every company is required to have a Board of Directors. The board
shall have individuals as directors. Further, it provides the minimum number of
directors that a company is required to have, i.e., for a public company, the
minimum number is three, and for a private company, the minimum number is two.
In the case of a one-person company, the minimum number is one. Furthermore,
the provision also provides for a maximum number of directors, i.e.,
fifteen.
The proviso clause provides that a
company can also appoint more than fifteen directors by passing a special
resolution. Also, having one woman director is an essential requirement.
Section 149(3) mandates the presence of
at least one director who stays in India for a total of 182 days during the
financial year. Whereas, sub-section 4 provides that every listed company is to
have at least one-third of the total independent directors. For public
companies, the Central Government may prescribe a limit on the minimum number
of independent directors.
Section 152 provides for the
appointment of directors. Let’s have a brief overview of how different classes
of directors are appointed.
Appointment of the first directors
Generally, the first directors are
appointed by the subscribers of the Memorandum of Association (Section 152(1)
of the 2013 Act). In case the appointments are not done in the aforementioned
way, the individual subscribers and signatories of the MOA become the
directors. Further, it is important to note that the first directors only hold
the office until the new ones are appointed in the first annual general
meeting.
It is pertinent to note that no person
shall be capable of being appointed as a director of a public company (that has
a share capital) unless he fulfils the below-mentioned points:
1. Allotment of a Director Identification
Number (DIN) as per the provisions of Section 154 of the 2013 Act.
2. The First Director has signed and
filed a consent in writing for the appointment with the Registrar of Companies
(ROC). Provided this must be done within thirty days of the appointment of the
director.
3. He has signed the memorandum for his
qualification shares, if any.
4. A written undertaking to the ROC if
he has taken any qualification shares from the company. He must also pay for
that qualification share. Further, an affidavit is also required to this
effect, specifying that shares have been registered in his name.
5. In cases of independent directors
appointed in the general meeting, it is mandatory that an explanatory statement
by the board be provided for such an appointment. The statement must mention
that the director fulfils the requirements as per the 2013 Act.
Section 162: Voting on the appointment
of director
It is important to note that the
appointment of every director in a public company or its subsidiary and the
passing of an ordinary resolution in this context in the general meeting are
mandatory. According to Section 162 of the 2013 Act, it is mandatory that
each candidate must be voted individually. Thus, if two or more directors are
appointed by a single resolution, then it will be invalid and void in the eyes
of the law. However, if in the meeting it has been unanimously decided, more
than one director can be appointed by a single resolution. Further, if such an
appointment is made, it is necessary that first a resolution is passed which
authorises such an appointment.
One must note that this provision does
not apply to private companies that are not subsidiaries of public
companies.
Appointment by proportional
representation
The basic or traditional method for
appointment is an election by a simple majority of the shareholders. However,
it has been observed that this method of appointment frequently fails to
appoint even a single director on the board. Thus, Section 163 of the
Companies 2013 Act allows the minority to place their representative and
enables minority shareholders to appoint directors through the method of
proportional representation. The very purpose of enumerating this provision of
voting through proportional representation is to amplify the method of minority
voting. This method can be followed by different methods, namely, a single
transferable vote, voting by way of cumulative voting or any other means. This
system of appointment by way of proportional representation is also called a
‘cumulative voting system’. Put simply, this provision allows companies to
appoint directors through the method of proportional representation. One must
note that this method can only be adopted if the Articles of Association (AOA)
provide for it.
Rights of the persons to stand for
directorship apart from the retiring directors
Section 160(1) of the 2013 Act provides
that a person who is not retiring from the post of director (appointed as per
Section 152 of the 2013 Act) is eligible to be appointed a director, provided
he fulfils all the requirements of the 2013 Act.
Appointment of directors by the board
As per the provisions of the 2013 Act,
the board has the power to appoint any person as director if he fulfils the
requirements in a general meeting. As per Section 162 of the 2013 Act, the
following directors can be appointed by the board, namely:
1. Additional director (Section 161(1)
of the 2013 Act)
2. Alternate director (Section 161(2)
of the 2013 Act)
3. Nominee director (Section 161(3) of
the 2013 Act)
4. To fill in vacancies of directors
(Section 161(4) of the 2013 Act)
Appointment by tribunal
The Company Law Tribunal has been given
the power to appoint directors, and the provision for the same has been
enumerated under Section 242 (j) of the 2013 Act.
Appointment of directors through
election by small shareholders
As enunciated under Section 151 of
the 2013 Act, it is mandatory that at least one director should be elected by
small shareholders. The term ‘small shareholders’ connotes those shareholders
who possess a maximum of Rs. 20,000 shares in the company.
Independent directors and their
appointments
The provisions pertaining to the
independent directors are laid down under Section 149(4) of the 2013 Act.
It enumerates that at least one-third of the total number of directors in every
listed company should be independent directors. However, as far as the public
companies are concerned, the central government has the power to prescribe the
minimum number of independent directors.
Who is an independent director?
Section 149(6) of the 2013 Act provides
for the definition of an independent director. It states that an independent
director is a director other than a managing director, a whole-time director,
or a nominee director. It further lays down certain characteristics
and other circumstances that must be fulfilled in order to be an independent
director. The following are the points that need to be considered:
1. A person with integrity who has the
desired expertise and experience.
2. A person who has never been a
promoter of the company, its subsidiary or any other holding company in the
past or present.
3. A person who does not have a
pecuniary relationship with the company, its subsidiary, or any other holding
company, directors, or promoters.
4. A person whose relative or he
himself does not hold any post of key managerial personnel. Further, he must
also not be an employee of the company.
It is pertinent to note that every
independent director is required to clarify and declare his independence at the
very first board meeting and shall continue to do so every year at the first
board meeting of every financial year. It is to be noted that an independent
director holds the office of directorship for a period of five years. Also, an
independent director can be reappointed, provided the same shall be done after
the passing of a special resolution. However, an independent director can only
hold office for two consecutive terms.
Selection of Independent Directors
Section 150 of the 2013 Act provides
for the manner in which independent directors are to be appointed. Further, it
also provides for keeping and maintaining a data bank for the independent
directors. As per the aforesaid provision, the independent directors are to be
selected from the data bank, which comprises pertinent information stating the
name, address, and qualifications of the individuals who have the eligibility
to become independent directors and who are willing to serve as independent
directors. This data bank is maintained by any body, institute, or association
that has expertise in such matters and that has been officially recognised by
the Central Government. It is pertinent to note that the company making such an
appointment from a databank must practise due diligence under the provisions of
the 2013 Act and the requirements for appointing a director.
One must note that the appointment of
an independent director must be approved in a general meeting. Also, the manner
and procedure as laid down under Section 149 of the 2013 Act must be complied
with.
Disqualifications
Section 164 of the 2013 Act provides
for the eligibility criteria for the directors of the company. Under the
following circumstances, a person will not be eligible for the appointment of
director if,
· He is of unsound mind and has been
declared as a person of unsound mind by the competent court.
· He is an undischarged insolvent.
· A person who has applied to be
adjudicated as an insolvent or whose application for adjudicating him as an
insolvent is pending.
· A person charged for any offence,
whether involving moral turpitude or otherwise and has been sentenced for that
offence to imprisonment for not less than 6 months, and a maximum of 5 years
has not been passed after that imprisonment. Provided that 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.
· If he has been disqualified by any
tribunal for the concerned position. Provided that 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.
· A person who has been convicted of the
offence dealing with related party transactions under Section 188 at any time
during the last preceding five years.
· The concerned person has not made any
calls relating to the shares of the company he holds.
· If he has not complied with the
provisions of Section 152(3) and Section 165(1) of the 2013 Act.
Further, if the person who has been
previously appointed as a director has not a filed financial statement and paid
returns for up to 3 financial years, continuously failed to repay the accepted
deposits, payment of interest, or pay any declared dividend, he or she shall
not be eligible to be re-appointed as director in any other company for a
period of 5 years.
Apart from this, a private company may
provide in its Articles of Association for any disqualifications along with the
ones provided in the aforementioned provision.
Removal of director
Section 169 of the 2013 Act, provides
for the removal of the director. As per the said provision, a director can be
removed from his office by any of the two below-mentioned authorities;
1. Company
2. Tribunal
Removal by company
Section 169(1) of the 2013 Act provides
that a person can be removed from his directorship prior to the expiration of
the term of his office by passing an ordinary resolution. However, the
aforesaid section does not apply to the below-mentioned circumstances.
1. If the director is appointed by the
tribunal in pursuance of Section 242.
2. If the company has adopted the
system of electing two-thirds of its directors by the method of proportional
representation.
In order to remove a person from his
directorship, furnishing him with a special notice is mandatory. In the
aforesaid notice, an intimation regarding the intention to remove the director
must be there. Further, it should be served at least 14 days prior to such a
meeting.
As soon as the company receives such
notice, a copy of such notice is furnished to the director concerned. Then the
concerned director has the right to make a presentation against the resolution
at the general meeting. If a director makes a representation, then its copy
needs to be circulated among the members.
Removal by the Tribunal
Clause (h) of Section 242(2) confers
the power to remove a managing director, manager, or any other director of the
company. When an application is made to the tribunal for relief from oppression
or mismanagement, it may terminate any agreement of the company that has been
made with a director. When the appointment of a director is terminated, he
cannot serve the managerial position of any company for five years without
leave of the Tribunal.
Resignation by the director
The provision for resignation by the
director is provided under Section 168 of the 2013 Act. A director of a company
may resign from the position of directorship as per the norms or rules or in
the manner provided in the Articles of Association of the company. In case the
articles do not contain any rules or provisions in this respect, then the
director may give his resignation after providing a notice for the same to the
board and the company. Further, the company, after taking notice of the
resignation, is required to inform the Registrar of Companies in the manner and
within the time as prescribed. The report of such resignation by the director
should also be placed forward in the general meeting of the company.
As per the proviso to Section 168(1) of
the 2013 Act, the director may also forward a copy of his resignation within
thirty days to the registrar, along with mentioning the reasons for the same.
Further, as per Section 168(2), the resignation shall be effective as soon as
the company receives the intimation of the same by the notice or on any
specific date as provided in the notice. Section 168(3) of the 2013 Act
provides that if all the directors vacate their offices under Section 167,
then, for the time being, the promoters or the Central Government, in the
absence of any promoter, shall appoint the required number of directors, who
shall hold office till the directors are appointed by the company in a general
meeting.
In the case of Mother Care (India)
Pvt. Ltd. v. Ramaswamy P. Aiyar (2003), the Karnataka High
Court held that the resignation of a director would be effective even if he was
the only director in the office.
It is important to note that even after
resignation, the director can be held liable for any wrong associated with him
or that has been done in his personal capacity during the period in which he
served as the director.
Liability of directors
The directors can be held liable for
the acts done by them without the company’s authority. Such acts may also be
called ultra vires acts. Furthermore, they can also be held
liable, in their personal capacity, for the acts that are intra
vires the company; however, those acts are beyond a director’s scope
or power, provided they are not ratified by the company. The liability of
directors can be divided into two subheads, namely, criminal and civil
liability.
Below is a detailed explanation of each
of the classifications.
Criminal liability
If the directors perform any act in an
official capacity that is not in compliance with the provisions of the
Companies Act, they can be held criminally liable for default or breach of
certain provisions of the Companies Act, apart from being held liable for the
offences enumerated in the Indian Penal Code at present BNS. As far as the
offences under IPC/BNS are concerned, a director can be held liable for fraud,
perjury, misappropriation of funds, embezzlement of funds, etc.
Apart from the sections in the
Companies Act that expressly deal with the imposition of penalty on a director
by holding him liable, many sections or provisions in the 2013 Act impose a
fine or imprisonment, or as the case may be, on the company and every officer
who is in default. So first, let’s understand exactly what the term ‘officer
who is in default’ means.
As per Section 2(60) of the 2013
Act, the term ‘officer who is in default’ means:
1. A whole-time director;
2. Key managerial personnel of the
company;
3. In the absence of any key managerial
personnel, the director or directors who have been appointed by the Board
itself;
4. Any person who has been authorised
by the Board and who is under the immediate authority of the Board or any key
managerial and is given any responsibility like maintenance, filing, or any
other thing, knowingly allows or actively participates, or knowingly fails to
take appropriate steps to prevent any default;
5. Any person on whose advice the
directors or the board of directors of the company are supposed to act;
6. Any director who willingly
contravenes the provisions of the 2013 Act;
7. In relation to the issue or transfer
of shares, any registrar, agent, merchant banker, etc.
Further, it is pertinent to note
that mens rea (intention) is an essential ingredient to hold
somebody liable unless the statute expressly or impliedly states otherwise.
Furthermore, Section 450 of the
2013 Act provides for punishment where no specific provision is provided. It
provides that if a director or any other officer of the company is in default
of any provision of the 2013 Act or the rules made thereunder, shall be
punishable with a fine, which may extend up to Rs. 10,000/- or if the
contravention is done repeatedly, Rs. 1000/- for every day. Also, if a director
of the company, which is being wound up, destroys, falsifies, or alters any
books or any other valuable documents relevant to the company, he shall be
liable for imprisonment, which may extend up to 7 years, along with a
fine.
Civil liability
Apart from the above-discussed criminal
liability, directors can also be held liable for acts done by them that are
outside the powers of the company as defined in the Memorandum of Association.
For instance, a director can be held liable if there is any misapplication of
the funds of the company, and in such a case, he may be obligated to replace
such funds. A director may be asked to replace the funds by buying up shares of
the company (Section 337 of the 2013 Act), payment of dividends out of the
capital, payment of bonuses to the promoters, buying a property in which the
company had no power to purchase, and returning the capital without reducing.
One must understand that if a director
acts malafidely and misuses the powers conferred upon him by the company, he
will incur civil liability for breaching warranty.
Also, negligence on the part of the
director, if it causes loss to the company in his individual capacity, will
attract civil liability. If a director makes personal gains from the company,
he will be asked to pay damages to the company. In such a case, the liability
arises from the principle called ‘unjust enrichment’. It refers to a situation
where a director enriches himself unjustly by abusing or misusing his fiduciary
position.
Generally, a director is not held
liable to third parties for transactions that they enter on behalf of the
company; however, in certain situations, they are held liable. Some of these
are mentioned below.
1. When directors have entered into a
contract knowingly and expressly in their name, have willingly hidden the fact
that they are acting on behalf of the company.
2. In a situation where directors have
acted fraudulently in collusion with third parties.
3. In case of the issuance of a
prospectus that does not fulfil the statutory requirements.
4. Acts that are outside the authority
of the director.
5. Directors who make use of the
company’s official seal or signature on a document without the knowledge of the
company and without mentioning the name of the company.
In the above-mentioned cases, the
directors are supposed to pay damages. The amount of damages that is required
to be paid depends upon the losses suffered in each of the cases.
Powers of directors
Generally, the powers conferred upon
the directors are expressly or otherwise outlined in the Articles of
Association of the company. Once these powers mentioned in articles are
delegated and vested in the Board of Directors, only they can exercise them. It
is pertinent to note that the shareholders cannot order or direct the board as
to how the powers are to be exercised. Provided, the board exercises these
powers within the prescribed scope.
General powers vested under Section 179
Section 179 of the 2013 Act provides
that the Board of Directors will be entrusted with all the powers conferred
upon them by the company. The board is entitled to exercise all the powers that
the company has authorised. However, it is pertinent to note that these powers
are subject to certain restrictions.
The powers of directors are
co-extensive with the powers of the company itself. The director, once
appointed, has almost total power over the operations of the company.
There are two limitations on the
exercise of the power of directors, which are as follows:
1. The board of directors is not
competent to do the acts that the shareholders are required to do in general
meetings.
2. The powers of directors are to be
exercised in accordance with the memorandum and articles.
The individual directors have powers
only as prescribed by memorandum and articles.
The intervention of shareholders in
exceptional cases
In the following exceptional
situations, the general meeting is competent to act on matters delegated to the
board:
1. When directors have acted malafide.
2. When directors have due to some
valid reason become incompetent to act.
3. The shareholders can intervene when
directors are unwilling to act or there is a situation of deadlock.
4. The general meetings of shareholders
have the residuary powers of a company.
Powers to be exercised with general
meeting approval
Section 180 of the 2013 Act mentions
certain powers that can be exercised by the Board only when they are approved
in the general meeting:
1. To sell, lease, or otherwise dispose
of the whole or any part of the company’s undertakings.
2. To invest otherwise in trust
securities.
3. To borrow money for the purpose of
the company
4. To give time or refrain the director
from repayment of any debt.
When the director has breached the
restrictions imposed under the sections, the title of lessee or purchaser is
affected unless he has acted in good faith along with due care and diligence.
This section does not apply to companies whose ordinary business involves the
sale of property or putting a property on lease.
Power to constitute an audit committee
Section
177 of the 2013 Act provides power to the board of directors to
formulate an audit committee. It is to be noted that the committee should be
constituted of at least three directors, including independent directors.
Further, it is mandatory that the committee should have independent directors
in the majority. The chairperson and members of the audit committee should be
persons with the ability to read and understand the financial statements.
The audit committee is required to act
in accordance with the terms of reference specified by the board in writing.
Power to constitute nomination and
remuneration committees and stakeholder relationship committee
The Board of Directors can constitute
the Nomination and Remuneration Committee and Stakeholder Relationship
Committee under Section 178 of the 2013 Act. The Nomination and
Remuneration Committee should consist of three or more non-executive directors
out of which one-half are required to be independent directors.
The Board can also constitute the
Stakeholders Relationship Committee, where the board of directors consists of
more than one thousand shareholders, debenture holders, or any other security
holders. The grievances of the shareholders are required to be considered and
resolved by this committee.
Power to make a contribution to
charitable or other funds
The Board of Directors of the company
is empowered under Section 181 to contribute to bona fide charitable and
other funds. The prior permission of the company in a general meeting is
required when the aggregate amount of contribution, in any case, exceeds 5% of
the average net profit of the company for the immediately preceding financial
years.
Power to make a political contribution
Under Section 182 of the 2013 Act,
the companies can make a political contribution. The company making a political
contribution should not be other than a government company or a company that
has been in existence for less than three years.
Also, the amount of contribution should
not exceed 7.5% of the company’s net profit in the three immediately preceding
financial years. The contribution needs to be sanctioned by a resolution passed
by the Board of Directors.
Power to contribute to the national
defence fund
The Board of Directors is empowered to
make contributions to the national defence Fund or any other fund approved by
the Central Government for the purpose of National Defence under Section 183 of
the 2013 Act. The amount of contribution can be the amount as much as the
company thinks fit. This total amount of contribution made is mandated to be
revealed in the profit and loss statement during the financial year to which it
pertains.
Restrictions on powers under the
statutory provision
The Companies Act 2013 also lays out
the manner in which the powers of the company are to be exercised. There are
certain powers that can be exercised only when their resolution has been passed
at the board’s meetings. Those powers, such as the power:
1. To make calls.
2. To borrow money.
3. To issue funds for the company.
4. To grant loans or give guarantees.
5. To approve financial statements.
6. To diversify the business of the
company.
7. To apply for amalgamation, merger,
or reconstruction.
8. To take over a company or to acquire
a controlling interest in another company.
The shareholders in a general meeting
may impose restrictions on the exercise of these powers.
Conclusion
From the above discussion, it is clear
that the directors are the most significant and supreme controlling authority
responsible for the management of the affairs of the company. The directors
together are collectively known as the Board of Directors. The directors of the
company serve as the supreme executive authority, or, we may say, the cerebral
entity, playing a significant role in the management and control of the
company’s affairs. Their ultimate goal is to make the company progress. The
position of director is considered to be a post of great responsibility within
the corporate structure. In order to work for the benefit of the company, they
have been conferred with enormous powers according to the provisions enshrined
in the Companies Act, 2013. They have been equipped with these powers in order
to work for the fulfilment of the corporation’s or any enterprise’s objectives.
Further, it is clear that even though the directors are bestowed with enormous
powers, they cannot go beyond the scope of their powers, and their actions
should not be in contravention of the provisions of the 2013 Act.
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