Directors of Companies

We students of PGDBM DCP have prepared this Legal Aspects of Business project on Directors of Companies under the guidance of Prof. (Commodore) PK Goel. We would like to express gratitude for your constant guidance and support.

Thanking you,
Himanshu Chopra Kapil Agarwal Karan Verma Kushagra Goswami Kushagra Mathur Lokesh Chaudhary Manu V. Mathew Joseph Mridul A. Greenwold

1. Definition of Directors of a Company a) General: Appointed or elected member of the board of directors of a firm who, with other directors, has the responsibility for determining and implementing the firm's policy. He or she does not have to be a stockholder (shareholder) or an employee of the firm, and may only 'hold the office' of the directors. Directors act by resolutions made at directors' meetings, and derive their powers from the corporate legislation and from the articles of association of the firm. As the firm's agents, they can bind it with valid contracts, entered into with thirdparties such as buyers, lenders, and suppliers b) By Act: According to the Act Director includes any person occupying the position of the Director, by whatever name called . A company is an artificial legal person and the directors as a body endow the artificial legal person with human face that can act and react. 2. Position of Directors In A Company The law relating to companies in India is contained in the Companies Act, 1956. A company is a legal person who is leaving only in the eyes of law. It s a creation of law which lacks both body and mind. It cannot act, just like a human being. It can act only through some human agency. Di rectors are those persons through whom company acts and does business. They are collectively known as Board of Directors. Section 252 323 of the Companies Act, 1956 deal with the appointment of directors, remuneration of directors, disqualification of d irectors, vacation of office by directors, Meeting of Board of Directors. y Position Of Directors There is no definite definition for director under the Companies Act, 1956. Director includes any person who is occupying the position of a director, whatever name called. So in order to understand the position of a director in a company we have to look in to various decided cases. A director is sometimes described as agents, trustees, managing partners etc. But each of these expressions is used not as exhaustiv e of their powers and responsibilities, but as indicating useful points of view from which they may for the moment and for the particular purpose be considered.

a public company having (a) A paid up capital of 5 crore Rs or more . In fact. for a loan taken by a company. It was held that. On the other hand. However. In the real sense the directors are not trustees. It is an office of trust. the directors are commercial men managing a trading concern for the benefit of themselves and o f all the shareholders in it. They are acting on behalf of the company. and shall exercise their powers honestly in the interest of the company and all the shareholders. the directors. could not be made liable merely because they we re directors. Every other company shall have atleast 2 directors. 2000. . This peculiar nature of their office is one of the reason why the directors been described as trusties. with the commencement of Companies (amendment) Act.y Director As Agents Directors are the agents of a company. Directors are those persons selected to manage the affairs of the company for the benefit of shareholders. it is their duty to perform fully and entirely. other than a public company which has become such by virtue section 43 . A trustee is the legal owner of the trust property and contracts in his own name. director is a paid agent or officer of the company and contracts for the company12. property and their powers and such must account for all the moneys over which they exercise control and shall refund any moneys improperly paid away.(Section 252). y Director As Trustees Directors are the trusties of the company s money. which if they undertake. and not their own sectional interest. Number of directors Every public company. So the directors cannot be held personally liable for any default of the company. who had not given any personal guarantee to the creditor. shall have atleast 3 directors. 3.

i. are registered in his name. as the case may be. ii. Section 43 A can have minimum 2 Directors. in order to qualify to become a director of the company. i f any. Where the number of directors falls below the maximum number. may have a director elected by such small share holders in the manner as may be prescribed. signed the memorandum for shares not being less in number or value than that of his qualification shares. the remaining directors cannot act. by himself or by his agent authorised in writing (a) Signed and filed with the Registrar a consent in writing to act as such director. if any. or the filing of the statement in lieu of prospectus. and pay for them. Qualification shares must be acquired by a director within 2 months of his appointment. iv. if any. iii. from the company and paid or agreed to pay for them. The maximum number of directors is fixed by the Articles. if any. the publication of the prospectus. he has. Qualifications of a Director A person shall not be capable of being appointed director of a company by the articles. The maximum permissible limit of directors is 12. and (b) Either.(b) One thousand or more shareholders. or taken his qualification shares. 4. Small share holder means a shareholder holding shares of nominal value of Rs 20000 or less in a public company. Qualification shares are the minimum number of shares a person must own. . as provided in the articles of the company. or made and filed with the Registrar an affidavit to the effect that shares. unless before the registration of the articles. not being less in number or value than that of his qualification shares. or signed and filed with the Registrar and undertaking in writing to take from the company his qualification shares. The purpose is to avoid one man control ove r the company. A Director can hold office of a maximum of 15 companies.

One-third of rotational directors must retire at every annual general meeting. Appointment Of Directors y By members at general meeting SECTION 255 Unless articles provides for retirement of all dire ctors at every AGM.Rotational directors are to be appointed by company in general meeting and any fraction is to he rounded off to the next higher number. not less than 2/3 of total number of directors of public company shall be persons whose period of office is liable to be determined by retirement of directors by rotation. . mode of appointment. To fill casual vacancy .Those directors who have been longest in office since their appointment shall retire first. retirement is to be determined by mutual consent (agreement b/w them) and where no such agreement exists. one-third of them retire each year. . SECTION 256 . . subject to any regu lation by articles. Appointment of additional directors SECTION 260 .Additional directors shall hold office only up to the date of the next annual general meeting of the company: It should be noted that the number of the directors and additional directors together shall not exceed the maximum strength fixed for the Board by the articles.SECTION 262 . . In other words. It follows that all rotational directors must retire in the course of three years.Remaining directors and all directors of a Private Company shall also be appointed by company in general meeting. of non-rotational directors (directors of Private Company) may be contained in the AOA. by lots.In case of persons who became directors on the same day.5.Board of directors may appoint additional directors if authorized by AOA .

. .Nominee directors may not be required to hold qualification shares .An alternate director shall not hold office as such for a period longer than that permissible to the original director in whose place he has been appointed. Holding Company or other lenders nominate a director to represents their interest on the Board. Alternate director SECTION 313 The Board of directors of a company may appoint an alternate director to act for a director (hereinafter in this section 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.BOD may appoint alternate director only if authorized by its articles or by a resolution passed by the company in general meeting. .There may be occasions when directors represent certain third parties on the Board.Any person so appointed shall hold office only up to the date up to which the director in whose place he is appointed would have held office if it had not been vacated as aforesaid.The rights and terms of nominating directors on the Boards of Companies are usually contained in the agreement..As per section 255 of the Act it should be ensured that the total number of non-rotational directors should not exceed 1/3 of the total strength of the Board after the appointment of nominee directors. . Financial Institutions. the resulting casual vacancy may be filled by the Board of directors at a meeting of the Board. . Banks. .Nominee directors can be appointed if there is a provision in AOA of the Company unless where a statute provides for such nomination. .The nominee directors must be paid tees and expenditure to which the other directors are entitled. Appointment of director by third party (nominee director) . .if the office of any director appointed by the company in general meeting is vacated before his term of office will expire in the normal course. This usually happens when Government. .Applicable only in the case of a public company or a private company which is a subsidiary of a public company .He shall vacate office if and when the original director returns to the State in which meetings of the Board are ordinarily held.

the public interests.On the application made to it by  Not less than 100 members of the Company. may have a director elected by such small shareholders. the company.A Company may act suo-moto (on its own) to elect a small shareholders director from amongst small shareholders or upon notice of small . or .e. CLB issues such orders after making such inquiry as it deems fit and: .One thousand or more small shareholders. its shareholders or 3.000 or less in a public Company. the CLB may. 2001.Appointment by central government . if company itself has not availed the option given u/s 265 (i. or  Members holding not less than 1/10th of total voting power. appointment of directors by proportional representation). or 2.section 408 The Central Government (CG) may appoint such number of persons as directors as the CLB may by order in writing specify as being necessary to effectively safeguard the interests of: 1. 20. to hold office for a period not exceeding 3 years on any one occasion. Manner of election of small shareholder director . The Government has prescribed the Companies (Appointment of Small Shareholder s Director) Rules. give direction to the Company to alter its AOA in the manner provided in section 265 and make appointment in pursuance of amended AOA with in specified period.On the reference made to it by the Central Government. Alternatively. 5 crores or more and . Appointment of a director by small shareholders A Public company having: . Small Shareholders: a shareholder holding nominal value of shares of Rs.A paid-up share capital of Rs.

he is an undischarged insolvent.he has applied to be adjudicated as an insolvent and his application is pending. Restriction on number of directorship: .he has been convicted by a Cou rt of any offence involving moral turpitude and sentenced him to imprisonment for not less than six months.he has not paid any call in respect of shares of the company held by him.- - shareholders. Such director need not to be retired by rotation Such director shall be treated as director for all purposes except for appointment as MD or WTD. 6. . . Disqualifications A person shall not be eligible of being appointed as small shareholders director if: . The proposed candidates has to file his consent with the Company in writing to act as a director In case of listed Company the small shareholders director shall b e appointed through the postal ballot. who are not less than 1/10 th of total small shareholders and have proposed the name of a person who shall be the director.he has been found by a Court to be of unsound mind . and six months have elapsed from the last day fixed for the payment of the call. Tenure of such director shall be for maximum period of 3 years and same person can be re-appointed after 3 years if desired by the small shareholders. . and a period of five years has not elapsed from the date of expiry of the sentence. In case of unlisted Company such director shall be appointed if majority of the small shareholders recommended his candidature.he has been disqualified him by a Court in pursuance of section 203 which empowers the court to restrain fraudulent persons from managing the company 7. or . whether alone or jointly with others.

Secti on 284 provides that a company may. they have the option to remove the directors by passing an ordinary resolution in the same way as they have the right to appoint directors by passing an ordinary resolution. in the interest of members or creditors or in public interest. it was observed that section 284 is designed to enable the share holders to control the directors by their removal. the Company Law Board has the powers to pass an interim order suo moto or on application of the central government. on such application. misfeasance or other misconduct on the part of the directors. 8. breach of trust.2[8] b.Small Shareholders Directors shall not hold office at the same time in more than two Companies. Under section 388C. c. Removal by Central government: Under section 388 B. Where the shareholders feel the policies pursued by the directors or any one of them are not to their liking. The requirement of intimating the members . the central Government has the power to make reference to the Company Law Board against any managerial personnel. Removal by company Law Board: The provision to subsection (4) provides that the company or any other persons aggrieved may make an application to the Company Law Board alleging that by such r epresentation the Director is abusing the rights conferred by this section to secure needless publicity for defamatory matters. may order that the representation need not be circulated or read out at the meeting and award costs against the Director though he is not a party to the application. Raj Kumar Kapoor 1[7]. In Tarlok Chand Khanna v. by ordinary resolution passed in general meeting after due receipt of a special notice remove a director before the expiry of his term of office. It is not even necessary that there should be proof of mismanagement. The Company Law Board. Removal of Director a. Removal by shareholders: Section 284 recognizes the inherent right of shareholders to remove the directors appointed by them.

. Subject to statutorily prescribed procedural and numerical requirements. Escorts Ltd That with regard to a resolution proposed to be passed at a meeting requisitioned by the shareholders for removal of a Director. no reasons in support thereof need be given. In Escorts Ltd v Union of India. So in such case view taken in England is considered. The Supreme Court observed: Thus. we see that every shareholder of a company has the right. the requisitionists must disclose the grounds on which they want to proceed against the director. the court said that when a meeting is requisioned by some shareholders for the purpose of removing a director.3[11] Reasons for removal of a director The act is silent on the issue that shareholders must give reasons for removal of director or not. He cannot be restrained from calling a meeting and he is bound to disclose the reasons for the resolutions proposed to be moved at the meeting nor are the reasons for the resolutions subject to judicial review. without requiring shareholders to disclose reasons in support of intended removal looks rather preposterous and unjust as well. to call an Extraordinary General Meeting in accordance with the provisions of the Companies Act. This is necessary because the company has to inform the director beforehand of the resolution to remove him so as to enable him to exercise his statutory right of making representation to the shareholders about the matter. that no reasons need b given.about the representation having been made in the notice sent to members and the right of the Director of being heard at the meeting can not be dispensed with.4[15] It would appear that to confer a right on a Director to make representation and to be heard in defense of his removal. The court held that the notice which did not specify the grounds failed its purpose and the company would not be compelled to call the meeting for the consideration of the resolution In India it is now well settled by the decision of the Supreme Court in Life Insurance Corporation of India v.

The grounds for removal of the directors are required to be stated in the explanatory statement accompanying the notice of the meeting. though the resolution is to be only an ordinary resolution. So also where somebody else is to be appointed in place of the removed Director. Sub -section (3). when a special notice of resolution is properly served on a company. A significant right i s vested with every member and that is that a member who is entitled to attend a general meeting and move a resolution can give special notice of a resolution to remove a Director at a general meeting or to appoint somebody instead of the Director so removed. SPECIAL NOTICE Where a Director is to be removed.REQUIREMENTS To remove a Director under section 284 certain essential requirements. The special notice of resolution shall be served on the company at least 14 days before the meeting exclusive of the day on which it is served and the day of the meeting. a copy thereof shall forthwith be sent to the Director concerned. Manmohan Singh Kohli (Capt. Failure to comply with the requirements of notice would render the removal.) Ltd. So where a special notice of the resolution was not given. as well as the appointment of the Director in the meeting invalid. In this way a power of removal can be conferred upon the Board of Directors. it amounted to a serious lapse depriving the directors of their statutory right to make representation. are to be fulfilled. The Articles sometimes provide the office of a Director shall be vacated if he is requested in writing by all his co-Directors to resign. in addition to the power of the shareholders in general in General Meeting to remove a Director. The Director concerned. special notice must be given to that effect. must be given a reasonable opportunity to make representations against the proposal for his removal and the shareholders of the company should also have adequate opportunities of being acquainted with such representations before they subscribe to a resolution for removal. The company is also required to send a copy of the representations to every member to who notice of the meeting is sent. special notice must be given of such resolution. Venture India Properties (P. the respondents had failed to point out any special notice sent by . In this case.) v.

Therefore. whole time director or manager. unless it is a subsidiary of a public company. All subsequent action taken by the company in this regard would also be null and void. the Court may order the winding up of the company under the just and equitable clause under Section 433. Clause (a) of sub-section (7) of section 284 provide that removal of a director would not deprive the person of any compensation or damage for the termination of appointment as a director or for an appointment terminating with that as director. may in circumstances constitute an act of oppression in reference to the aggrieved Director and the Court may give him relief under Section 397 read with Section 402 so as to put an end to the matter complained of. both the petitioner and his son were restored to their original position as Directors. The respondents had failed to comply with the provisions of Section 284 (2) and (3). section 318 does not provide for payment of compensation for loss of office or any other payment for loss of office or place of profit except the loss of office held by the director in the capacity of managing director. the resolution passed in the extraordinary General Meeting of the shareholders of the company being illegal. having regard to the fact that Sections 85 to 89 do not apply to a private company. The directors have a right of compensation or damages which are payable to him in respect of the premature termination of the directorship. so as to prevent the removal of a Director by resolution at a General Meeting. in the absence of any notice. Consequently. the removal of the petitioner and his son from the directorship of the company was bad in law. there is no reason why special voting rights by issuing shares having extraordinary rights may not be validly given under the Articles. However. and not in com pliance with the provisions of the Act was liable to be set aside. As such. REMOVAL OF DIRECTORS IN PRIVATE COMPANIES The section applies to all companies public and private. But.5[29] RIGHTS OF A DIRECTOR AFTER TERMINATION OF DIRECTORSHIP. . Where a relief against oppression is not sufficient to provide justice to the aggrieved Director. The removal of a Director in a private company even if it is lawful.them. or of any appointment terminating with that as Director.

however. to which he is entitled if at all. Section 203 empowers the court to restrain frau dulent persons from managing companies and Section 283 provides the circumstances in which the office of a director is vacated. Where the office of the director is vacated by virtue of Section 203 or under Section 283. In such a case. The sub section provides that any payment made to a managing or other director in . but cannot obtain injunction to prevent the adoption of the new or altered Articles. subject to any contract with the company. Where the director has been guilty of fraud or breach of trust. the Director aggrieved can sue the company for damages for breach of contract. The Articles may also be substituted by new Articles or may be so altered as to cause a breach of an existing contract. A Director. Further in the following cases no compensation is payable : Where the director resigns his office in view of the reconstruction or amalgamation of the company and he is appointed in the company resulting from the reconstruction or amalgamation. the member of the company in General Meeting resolve not to have. Where the director has instigated or has taken part in bringing about the termination of his office. the Director concerned would not be granted an injunction in h is favour. a particular Director any longer in their company. He can claim damages. Where the director otherwise resigns his office. who is wrongfully removed from the Board of Directors. The Articles may confer on the company the power to remove Directors from office. Where the company is being wound up and the winding up is due to the negligence or default of the director. or gross negligence or mismanagement in the affairs of the company.Sub-section (7) provides for compensation or damages to a Director in the case of wrongful removal. Sub-section (4) of section 318 puts a ceiling on the amount of compensation payable to a director eligible for compensation for loss of office. Where. if any. can sue for relief by injunction or by declaration and injunction.

Disqualifications of directors (1) A person shall not be capable of being appointed director of a company. (c) he has applied to be adjudicated as an insolvent and his application is pending. The amount of compensation should not exceed the remuneration which he would have earned for the unexpired residue of his term or for three years. and a period of five years has not elapsed from the date of expiry of the sentence. 9. The amount should be calculated on the basis of the average remuneration actually earned by him during a period of three years before the termination. But. whichever is shorter. if (a) he has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force. the amount shall be calculated with reference to the period he actually worked.pursuance of sub section (1) shall not exceed the remuneration which he would have earned if he had been in office for the unexpired residue of his term or for three years. or where he held office for a lesser period. He may be entitled to compensation in the capacity of an employee. and six months have elapsed from the last day fixed for the payment of the call. The case of a Managing director is outside the section. (d) he has been convicted by a Court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less to six months. (b) he is an undischarged insolvent. or . whichever is shorter. The amount payable shall be calculated on the basis of the average remuneration actually earned by him during the period of three years immediately preceding the date on which he ceased to hold the office. during such a period. where he held the office for a lesser period than three years. (e) he has not paid any call in respect of shares of the company held by him. whether alone or jointly with others.

or (b) the disqualification incurred by any person in virtue of clause (e) of subsection (1). by notification in the Official Gazette. General powers of board (1) subject to the provisions of this Act. or (B) has failed to repay its deposit or interest thereon on due date or redeem its debentures on done date or 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.(f) an order disqualifying him for appointment as director has been passed by a Court in pursuance of section 203 and is in force. (3) A private company which is not a subsidiary of a public company may. (g) such person is already a director of a public company which. provide that a Person shall be disqualified for appointment as a director on any grounds in addition to those specified in subsection (1). the Board of directors of a company shall be entitled to exercise all such powers. 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 pay dividend referred to in clause (b). 1999. (A) has not filed the annual accounts and annual returns for any continuous three financial years commencing on and after the first date of April. either generally or in relation to any company or companies specified in the notification.] (2) The Central Government may. remove(a) the disqualification incurred by any person in virtue of clause (d) of sub section (1). and to do all such acts and things. unless the leave of the Court has been obtained for his appointment in pursuance of that section. 10. in which he is a director. by its articles. as the company is authorised to exercise and do : .

including regulations made by the company in general meeting. whether by this or any other Act or by the memorandum or articles of the company or otherwise.Provided that the Board shall not exercise any power or do any act or thing which is directed or required. and the nature of the investments which may be made. or in the memorandum or articles of the company.1 Certain powers to be exercised by Board only at meeting (1) The Board of directors of a company shall exercise the following powers on behalf of the company. or in any regulations not inconsistent therewith and duly made thereunder. the Board shall be subject to the provisions contained in that behalf in this or any other Act. (3) Every resolution delegating the power referred to in clause (d) of sub section(1) shall specify the total amount up to which the funds may be invested. (b) the power to issue debentures. (2) No regulation made by the company in general meeting shall invalidate any prior act of the Board which would have been valid if that regulation had not been made 10. (c) the power to borrow moneys otherwise than on debentures. (d) the power to invest the funds of the company. and it shall do so only by means of resolutions passed at meetings of the Board :(a) the power to make calls on shareholders in respect of mone y unpaid on their shares. to be exercised or done by the company in general meeting : Provided further that in exercising any such power or doing any such act or thing. . and (e) the power to make loans (2) Every resolution delegating the power re ferred to in clause (c) of subsection shall specify the total amount 4[outstanding at any one time] up to which money may he borrowed by the delegate. by the delegate.

or substantially the whole. lease or otherwise dispose of the whole. or (e) contribute. and the maximum amount of loans which may be made for each such purpose in individual cases. of the undertaking of the company.2. or where the company owns more than one undertaking. 10. or of a private company which is a subsidiary of a public company. . Restrictions on powers of Board (1) The Board of directors of a public company. reserves not set apart for any specific purpose. or of any premises or properties used for any such undertaking and without which it cannot be carried on or can be carried on only with difficulty or only after a considerable time. any amounts the aggregate of which will.(4) Every resolution delegating the power referred to in clause (e) of sub section (1) shall specify the total amount up to which loa ns may be made by the delegate. where the moneys to be borrowed. (b) Remit. in any financial year. of the whole. of any such undertaking. that is to say. whichever is greater. (d) borrow moneys after the commencement of this Act. after the commencement of this Act. together with the moneys already borrowed by the company (apart from temporary loans obtained from the company's bankers in the ordinary course of business). of any such undertaking as is referred to in clause (a). any debt due by a director (c) invest. will exceed the aggregate of the paid -up capital of the company and its free reserves. shall not. or five per cent. the purposes for which the loans may be made. of its average net profits as determined in accordance with the provisions of sections 349 and 350 during the three financial years immediately preceding. trust securities. to charitable and other funds not directly relating to the business of the company or the welfare of its employees. otherwise than in. or substantially the whole. (a) sell. or give time for the repayment of. (5) Nothing in this section shall be deemed to affect the right of the company in general meeting to impose restrictions and conditions on the exercise by the Board of any of the powers specified in sub -section (1). except with the consent of such public company or subsidiary in general meeting. exceed 3[fifty thousand rupees].

Duties of directors Directors duties arise from the following sources: y y y y y y the common law statutes the memorandum and articles of association of the compa ny service agreements specifically entered between the director and the company resolutions passed at members or directors meetings the rules of a regulatory body. a director s fiduciary duties rest upon him as an individual. The fiduciary duty is likewise not owed directly to creditors. where he is appointed by a major shareholder or is entitled to a seat on the board by virtue of an executive position in the company). Even if a director occupies his position on the board by virtue of another position he holds (for instance.1. Directors owe their fiduciary duty to the company as a corporate being in its own right and not to the members individually. Directors duties. Conflict of interests . responsibilities and rights 11. a director assumes two roles. not even to a member who is a majority shareholder. Common law duties: A director's fiduciary duty 'Every director is bound at common law by a separate and distinct fiduciary duty to the company (the term fiduciary being derived from the Latin fiduciarius meaning of trust ). be held personally liable to the company s stakeholders. although there is a range of circumstances in which a director may. and as a trustee who controls company assets.11. employees or other stakeholders of the company. by virtue of the neglect of his fiduciary duty to the company. as an "agent" acting on behalf of the company. if any a.' In this fiduciary capacity.

Duties in terms of the memorandum and articles of association The memorandum of association determines the scope of the company s objects and powers. It is important to note that where a director is simultaneously a director of a holding company and its subsidiary. The Companies Act provides a standard set of articles that many companies use as a basis but may amend to meet their specific needs. Directors may often sit on the boards of several companies and conflicts may also arise between the divergent interests of these companies. Should a conflict arise which prevents him from discharging his duty to both companies properly. he owes a separate and distinct fiduciary duty to both entities as legal individuals in their own right. he should consider resigning from either or both boards. b. c. Each case is considered individually taking into account the nature of the business and the director s specific obligations. while the articles of association is a contract between members themselves and between members and the company. As indicated earlier. The articles therefore contain the internal rules by which a co mpany is governed. A director who does so may be liable to account to the company in respect of any profits he makes as a result of such a transaction. The law is unequivocal as to the course of action a director who has a conflict of interests must follow and a director may never prefer his interests over that of the company he is entrusted to direct. Duty of care and skill The degree of care and skill required is determined objectively by considering how a reasonable person with similar knowledge and experience would h ave acted. and then comparing this to the director s actions. The memorandum and .A conflict may sometimes arise between a director s personal circumstances and that of the company. no distinction is made between executive and non-executive directors. thus presenting a problem to the individual who sits on the boards of both companies. Statutory Duties : A director's duties in terms of the Companies Act Directors have to comply with a number of obligations in terms of the Companies Act. A director must guard against a conflict of interests developing in a situation where he is a director of both the holding company and a subsidiary.

Any member of the company may institute action against any incumbent or previous director where the company has suffered damages due to a breach of trust or a wrongful act by that director. Directors and shareholders Decision making authority The board may delegate certain powers to managers and at the same time impose appropriate restrictions and conditions which can be vari ed or revoked at any time. Directors power to bind the company 'Normally the powers and duties of directors are left undefined and it is implied that directors possess all powers necessary to enable them to direct the affairs of the company. directors are generally entitled to trust management to perform their duties honestly and to accept and rely on the judgment. in which event these limitations must be strictly complied with. Ratification is not possible. [§266] Loans to directors Loans made either directly or indirectly to directors are prohibited unless: y all members give their consent . information and advice of management when reaching their own decisions. The directors have a duty to monitor management's performance and ensure that management work within their delegated power. both jointly as a board a nd individually. however. where the action falls outside the object of the company as defined in the company s memorandum of association. that they remain ultimately liable. In the absence of specific cause for suspicion. for the well being of the company. the Act and common law. the shareholders may subsequently ratify their action by special resolution. A director may not enter into transactions on behalf of the company which are beyond the powers conferred upon him by the articles. however. In some circumstances where directors have acted beyond their powers as directors. The articles may sometimes seek to limit these powers or to specify particular duties. Directors should not lose sight of the fact.articles are integral to the company and directors should familiarise themselves with their contents since they invariably impose duties on directors. Directors will be liable to the company for any financial losses incurred by it as a result of them having acted outside the scope of their authority.

wholly or partially. it appears to the court that the person has acted honestly and reasonably. the dissenting director could call a general meeting (if authorised by the articles) or rally shareholders to call .' Dissenting Directors Where a director strongly disagrees with a board decision.y y y y y y a special resolution approves a specific loan the loan is to enable a director to perform his or her duties the business of the company is to make loans the loan is to provide assistance to enable the director to participate in a company s share incentive scheme the loan is for directors' housing the loan is made to a director of a subsidiary who is not also a director of the lending company [§226] Indemnifying directors A company may take out insurance to indemnify its directors or officers for negligence. A dissenting director may: y y y y prepare a memorandum setting out his objections raise these concerns at a formal board meeting. default. [S247] This provision was introduced by a 1999 amendment to the Companies Act and it is suggested in King II that directors persuade their companies to take out this insurance. breach of duty or breach of trust. of his liability. in any proceedings for negligence. he has several ways to indicate this dissatisfaction. if. If the matter is not resolved at a board meeting. The burden of proof to show that he acted honestly and reasonably in the context of surrounding circumstances is on the director seeking relief. requesting that a meeting be convened if the matter needs urgent attention and the next board meeting is too late to give proper attention to the issue insist on a full hearing at the meeting and request that detailed objections be recorded in the minutes of the meeting seek professional advice if this is appropriate. the court may relieve him. officer or auditor. default. ' In terms of S248. (King II recommends that the company should have a procedure for the director to be able to do so at the expense of the company). breach of duty or of trust against a director.

Dalmia and others v. he may have no alternative but to resign. in deciding the liability of Directors. This rule rests on the ordinary principle of agency that where an agent enters into a contract without disclosing that he is acting as agent he accepts personal liability. and act with such care as is reasonably expected from him. Implied liability will arise when a director signs a contract for the Company or mentioning the name but failing to add the vital word "limited" or its abbreviation. Directors are the agents or the trustees of a Company." Express liability will usually arise only when a director has pers onally guaranteed the performance of a contract.e. having regard to his knowledge and experience. The Delhi Administration it was held th at "A director will be personally liable on a company contract when he has accepted personal liability either expressly or impliedly. under the Companies Act.. assisted by an accountant claim reimbursement for expenses incurred discharge their duties without interference from co-directors participate in the strategic management of the company and attend and vote at board meetings receive reasonable notice of meetings take independent professional advice at the expense of the company Liabilities of Directors Director s liability arises because of their position as agents or officers of the Company as also for being in the position of trustees or having fiduciary relation with the Company or its shareholders.K. i. some are under the criminal law and others are statutory. some are in tort. If this is not possible and the director is not prepared to abide by the majority board decision. Contractual Liability: Directors are bound to use fair and reasonable diligence in discharging the duties and to act honestly. In the case of . Some of these liabilities are in contract. The courts have. taken into consideration a director s position as a whole. 1956 and other laws.a general meeting as the shareholders hold the ultimate power in the company. In R. Rights of Directors Directors have the right to: y y y y y y inspect the company s accounting recor ds.

In Kelner v. But. or that the tort was committed on his instructions. a Company after incorporation cannot ratify a contract previously made.Incorporation Liability. It must make a fresh contract. It has been observed in Official Liquidator vs. (2) the directors committed breach of trust. but has no principle in existence at the time. nuisance or defamation it must be shown that he was himself the wrongdoer or that he was the employer or principal of the wrongdoer in relation to the act complained of. it has no legal existence.) signed the acceptance and was held to be personally liable by the Court of Exchequer Chamber. (3) there has been misfeasance and (4) the director has acted ultra vires and the funds of the company have been applied for such an act.director s liability to the Company may arise where (1) the directors are guilty of negligence. those who act on behalf of the unincorporated company may find themselves personally liable. Re"A director has to act in the way in which a man of affairs dealing with his own . Therefore.Penrose v. he is personally responsible. for negligence.A Company cannot make a contract before it is incorporated because. As far as fiduciary duties/obligations are concerned. To make a person liable for a tort. Our Supreme Court ha s considered this issue of fiduciary liability. It has been explained in the duties of directors as to what is standard or due care and diligence expected from him as explained by Justice Romer in Re City Aquintable Fire Insurance Company. Liability of Directors for Torts of the company: Directors as such are not liable for the torts or civil wrongs of their company. before incorporation. The defendant (Secretary to the Co. trespass. Baxter the Court of Common Pleas held that where a person purports to sign a contract as agent.g. Martyr a bill was addressed to a company and omitted the word "Limited" in describing it. e. A director is required to act honestly and diligently applying his mind and discharging his duties as a man of prudence of his ability and knowled ge would do. It was held in Duomatic Ltd. any breach by any director would visit them with liability. Pre. Civil Liability to the Company . Any willful misconduct or culpable negligence falls within the category of misfeasance. PA Tendulkar.

which may. A Director will.. A director might be in breach of duty if he left to others the matters to which the Board as a whole had to take responsibility. Industries v. It was held in the case of J. A proper degree of delegation and division of responsibility is permissible but not a total abrogation of responsibility. although these would not have been incurred if they had not been directors. Tax Liability:Under Section 179 of the Income Tax Act 1961 . there are certain duties.. ." A Director is liable to make good with interest all amount paid from time to time out of the funds of the company for the purchase of shares of the company. competence and integrity and they may not have the same faith in a nother person. then every person who was a director of the private company shall be jointly and severely be liable for the payment of such tax.K. Where the bank account of a Director was frozen for recovering income tax dues of the Company. properly be left to some other officials. Shareholders appoint him because of their faith in his skill. however.. Also. it was held in Gurudas Hazra v. having regard to the exigencies of business. and circumspection could reasonably be expected to act. He is not entitled to spend money for a purpose not covered by the Memorandum of Association although such payme nt is sanctioned by the Board of Directors and by the majority of shareholders. when any private company is wound up and the tax assessed cannot be recovered. Liability of co-director s defaults: A director is bound by the maxim delegatus non-potest delegare. The rule is. If the latter proves unfaithfu l. however. Directors are responsible for the management of the company and cannot divest themselves of their responsibility by delegating the whole management to agent and abstaining from all enquiries. not be liable for any such unlawful act if he had no kno wledge of such payments.. Chief Inspector of Factories that the directors being in control of the company s affairs cannot get rid of their managerial responsibility by nominating a person as the occupier of the factory.affairs with reasonable care. The funds of the company cannot be used by the Directors to pay their litigation costs. not inflexible. the liability is that of the directors as if they themselves had been unfaithful. The Act or Articles of Association of the Company may make a delegation of functions to the extent to which it is authorized. A shareholder can maintain an action against the director to compel them to restore to the company its funds employed in transactions that the directors have no authority to enter into.

A limited liabilit y can make the liability of any or all of its directors unlimited. which contained untrue statement. Directors with unlimited liability:The liability of the directors like the shareholders is limited to the extent of the shares held by them remaining unpaid. Statutory Liability: Misleading ProspectusA director is liable to compensate a person who has subscribed shares on the faith of a prospectus. or with fine which may extend to Rs. He may be imprisoned for two years and fined Rs. The Director should compensate every such subscriber for any loss or damage he may have sustained by reason of such untrue statement in an action in tort and also under section 62 of the Act to pay compensate.5000. The case of Peter J R Prabhu v. or with both. If the Director discovers a mistake in the prospectus.K. Maintenance of proper books of accounts: Where directors manage a company then each director shall be responsible (if there is no managing director) that the company should maintain and keep proper books of account. A provision to this effect has to be contained in the Memorandum. it is his duty to specifically point it out. Inducement to investThe Directors are liable to criminal prosecution for inducing or attempting to induce a person by statement or even forecast which is false or misleading to enter into or to offer to enter into any agreement to buy shares of the company. . Default or non-compliance will make the Director punishable with imprisonment for a term not exceeding six months or fine of Rs.100 or both. They shall be punishable with imprisonment for a term which may extend to five years. failing to keep proper accounts will make him punishable with one-year imprisonment and for falsification of book imprisonment for eight years. that a person who becomes director after incorporation of such a clause will have unlimited liability.10.000. arr ears of the tax amount are not to be recovered from the directors personally. The Director may also have to face criminal prosecution for untrue statement in the prospectus. In the event of winding up. Asstt Commissioner of Commercial Taxes stated that apart from any provisions of the taxing statute.Chowdhury that it was for the Director to show that the default on the part of the company was not attributable to any breach of duty on his part.P.

Liability on winding up: A Director of a company in liquidation must co -operate with the liquidator in realizing the assets of the company and distributing them among the creditors and contributors of the company. shall be determined. For default. which may extend to five years and fine.000. including any managing or whole-time director.Annual General Meeting: Directors must hold the meeting even though the accounts are not ready or the company is not functioning or the management of the business is vested in the Central Government. any remuneration for services will not be so included if the services . A good illustration here will be to cite an early case of Claridge s Patent Ashphalt Co. or by a resolution ( special resolution if the articles so require ). Special statutory protection against liability: The Act extends special protection against a liability that may have been incurred in good faith. 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 cap acity. in accordance the provisions given below either by the articles of the company. However.1. Directors are liable to prosecution on severa l issues. The Board of Directors shall at the meeting lay a balance sheet and a profit and loss account for the financial year. Some of these provisions have been listed and explained above. There are more than 150 sections dealing with criminal or penal liability of the Directors and other officers of the company. Directors are liable for theft of the company s property or for false accounting. 12. the Directors are liable to be punished wit h imprisonment for a term of six months and fine of Rs. The holding of the meeting must be within the period of 15 months after the preceding annual general meeting (AGM). Remuneration The remuneration payable to the directors of a company. Therefore.. If they fail to do so they are liable to imprisonment. Re where the Court said that the Directors were acting for the benefit of the company and took the best advice from the company s solicitor and thus were not held liable.

the director possesses the requisite qualifications. The Company cannot waive recovery of such sum due from the director unless approved by the Central Government. hold the money in trust with him.are of a professional nature and in the opinion of the Central Government. 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. if the company has a managing or whole -time director or a manager. by special resolution for further periods of not more than five years at a time. No approval of the Central Government is required in case the remuneration is within the limits mentioned in Schedule XIII to the Companies Act. of the net profits of the company. from time to time. 1956. Such special resolution to in sub -section (4) shall not remain in force for a period of more than five years. Such remuneration cannot exceed 5 % of the net profits of the company. Remuneration payable to such directors cannot exceed : a. 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. except with the approval of the Central Government in case of one director and 10 % for all such directors. one per cent. 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. . in any other case. b. three percent of the net profits of the company. 350 and 351. 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. A director may receive remuneration by way of fees for attending each meeting of the Board or of any committee thereof ( Sitting Fees ). If any director earns remuneration from a company in excess of the above limits without prior approval of the Central Government. but may be renewed. he shall refund the excess to the company and until such repayment.

it is disapproved by the Government. it is disapproved by the Government. as the case may be. and in so far as. and in so far as. Increase in remuneration of managing director on reappointment or appointment after Act to require government sanction In the case of a public company. the or appointment shall not have any effect unless : i. where Schedule XIII is applicable . ii.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 a ny commission or other remuneration from any subsidiary of such company. purport to increase or have the effect of increasing. which purports to increase or has the effect of increasing. if the terms of any re -appointment or appointment of a managing or whole-time director. which is a subsidiary o f a public company. Director cannot to hold office or place of profit Except with the previous consent of the company accorded by a special resolution :- . is within the limits specified in Schedule XIII. whether directly or indirectly. whether directly or indirectly. the amount of remuneration shall not have any effect unless :i. or approved by the Central Government and the amendment shall become void if. any provision relating to the remuneration of any director or any amendment thereof. or approved by the Central Government and the amendment shall become void if. is within the limits specified in Schedule XIII. Provision for increase in remuneration to require Gove rnment sanction In the case of a public company. ii. The above provisions pertaining to remuneration do not apply to a private company unless it is a subsidiary of a public company. the remuneration which the managing or whole-time director or the previous managing or whole-time director. or a private company. was receiving immediately before such appointment. where Schedule XIII is applicable . or a private company which is a subsidiary of a public company.

Any office or place in a company shall be deemed to be an office or place or profit under the company for these provisions :- . ii. firm. If any office or place of profit under the compa ny or a subsidiary thereof is held in contravention of the above provisions. 20000/ . in the company . private company or. no private company of which such a director is a director or member. or manger of such a private company can hold any office or place of profit carrying monthly remuneration in excess of the prescribed amount ( Rs. 10000/-). a director holding an office or place of profit in the company ). the special resolution mentioned above has to be obtained prior to the appointment and in addition to the special resolution. the director. Such person will also be liable to refund to the company any remuneration received. unless the remuneration received from such subsidiary in respect of such office or place is paid over to the company or its holding company. However. or in any subsidiary of the company. relative.per month. The special resolution required for the above purpose may be passed at the first general meeting after the appointment. if the monthly remuneration is not less than Rs. except with the approval of the Central Government. or the monetary equivalent of any perquisites or advantage enjoyed by him. manager. The company will not be able to waive recovery of such amounts. no firm in which such a director or relative is a partner. No director of a company can hold any office or place of profit in that company No partner or relative of such a director ( i. or trustee for the holders of debentures of the company either :i.e. banker. in respect of such office or place of profit. However. partner. approval of the Central Government will also be required for the appointment. Such special resolutions will required at subsequent re-appointments also on a higher remuneration not covered by the earlier special resolution. with effect from the day following the date of general meeting menti oned above. the above restrictions are not applicable to the office of managing director. and no director.i. manager shall be deemed to have vacated his office. ii.

or by a resolution of the company or the Board or by virtue of its memorandum and articles. private company or other body corporate. b. or otherwise. 1956 13. A managing director who is not a direc tor is contradiction in terms. A managing director occupies the dual capacity of being a director as well as employee of the company. if the individual. 1948. as defined in Section 2(26). firm private company or body corporate holding it obtains from the company anything by way of remuneration whether as salary. fees. perquisites. None of the above provisions apply to a director appointed by the Central Government u/s 408 of the Companies Act. means a director who is encrusted with substantial powers of management which would not otherwise be exercisable by him. Managing Director Managing Or Whole-time Director Or Manager A managing director. It is an essential requirement of his office as "managing director" that he should hold the office of a director. whether as salary. The "substantial powers" of management may be conferred upon him by virtue of an agreement with the company. perquisites. the right to occupy free of rent any premises as a place of residence. But if he is prematurely removed from office he is entitled to compensation. if the director holding it obtains from the company anything by way of remuneration over and above the remuneration to which he is entitled as such director. commission. in case the office or place is held by a director. in case the office or place is held by an individual other than a director or by any firm. He is also removable the same way as he was appointed irrespective of the fact that his appointment has been approved by the Central Government. The powers so conferred are alterable by the company.a. the right to occupy free of rent any premises as a place of residence. or otherwise. A managing director is an employee of the company. the Supreme Court observed that he can be regarded as a principal employer for the purposes of the ESI Act. but not to the extent so as to be entitled to preferential payments. fees. Thus for example. . commission.

though it may be relevant for determining whether his remuneration is salary or business income for purposes of the Income-tax Act. Sishu Ranjan Dutta v. Therefore.. The concept of a 'manager' as defined by the Act is different from that of managing director.The day to day management is entrusted to the managing director who can exercise powers of management without referring to the Board. namely. 220 contended that he was not liable as he had resigned before the last date for filing accounts. Ltd. 2(13) show the intention of the legislature to treat the two as separate categories. (1984) 56 Corn Cases 103 (Cal). true that a managing dir ector may resign his office and continue to be an ordinary director. A person does not acquire the status of a manager or managing director only on being appointed as a director. A managing director as defined by the Act is a director who is entrusted with substantial powers of management. It is necessary that the articles must provide for such an appointment being made . (1984) 2 Comp LJ 396 (AP). In our view the observation that a managing director holds two offices namely that of manager and of a director is not correct.Time Travels (P. 898 (Cal). inasmuch as he is both a 'director' and 'employee' should in his capacity of employee be considered a 'servant' or agent of the company is unimportant for purposes of the Companies Act. v. The Civil Court will not grant an injunction to restrain the company from interfering with a managing director carrying out the duties of managing director who is removed from his office. His resignation as managing director becomes effective only when accepted by the company. he continued to be managing director). when the term of a managing director expires. he cannot continue as a managing director without being reappointed. Sri Bezwada Papi Reddy. Deen De yalu. The capacity as manager cannot be terminated by merely sending up resignations. Bhola Nath Paper House Ltd. manager and director. It is. Joginder Singh Palta v. The court held that a managing director combines in himself two capacities.). Section 2(26) and S. however.. T. . (1983) 53 Com Cases 883. It becomes effective only when the company accepts the resignation and relieves him from his duties (on facts held that despite resignation. A managing director cannot be equated with an ordinary director. The question whether a managing director. A managing director who was prosecuted for default under S.

Not Designations Department's Clarification: Whether a director is to be regarded as a whole -time director or as a managing director of the company would depend on the nature and extent of the duties entrusted to him and that the designation under which the appointment is made would no! make any diff erence in this regard. Ltd. Thus. Section 316 prescribes the number of companies in which a person can be appointed as managing director at the same time. for recovery of dues from the company. Managing Or Wholetime Director. he was not liable to be arrested and detained in civil prison for enforcement of the decree. Section 2(24) of the Companies Act. he would be in the position of a Managing Director notwithstanding the fact that he ma y be designated as a technical adviser or as a technical director of the company. 8/16/(1)/61-PR]. 1960.. A company may. therefore. therefore. it was held that the managing director was not the judgment-debtor in his individual capacity and. have more than one managing director. v. Thus the managing director of a company may be entrusted with substantial power of management but not necessarily of the whole or substantially the whole of the affairs of a company. 18 -9-1990 Rs. Five crores or more) to appoint a managing director or wholetime director or manager. The remuneration of a managing director is now governed by section 309 and . Maruti Lid. Company May Have More Than One Managing Director Department's Clarification"Section 2(26) defines "Managing director" as a director who is entrusted with substantial powers of management which term refers to the nature of the powers and not the quantum thereof. No. (1995) 83 Com Cases 888 (P&H). a decree was passed against the company as well as its managing director. section 317 restricts the maximum term of appointment to five years.Where. [Departmen t's Clarification F. 1956. Link With Nature Of Duties.e. on the other hand has defined the word manager' as an individual who has the management of the whole or substantially the whole of the affairs of a company.f.-Section 269 makes it obligatory for a company having capital of a sum as may be prescribed (w. if a director is entrusted with managerial functions. Section 267 disqualifies certain persons from being appointed as managing director. Pan India Plastic P. Other Statutory Provisions. [Fou rth Annual Report Year ended 31st March.

the appointee should vacate the office from the date of the communication of the refusal to the company. Procedure Of Appointment Section 269 has been recast by the amendment of 1988. whole -time director or manager has been made compulsory. But if the appointment does not comply with the sche dule. The appointment has to correspond with the conditions specified in Parts I and II of Schedule XIII.Schedule XIII. (2) A person who suspends or has at any time suspended. Application for approval must be made within 90 days. function as a single unit and have a common managing director [S 316(2). The auditor of the company or company secretary has to certify that requirements have been complied with. which parts are subject to the provisions of Part III. If there is no approval. The first Part of Schedule XIII gives the list of statutes and provides that any person convicted for violating them and sentenced to imprisonment or fine up to Rs 1000 shall not be appointed without the approval of the Central Government. proviso] . A return of the appointment in a prescribed form must be filed with the Government within 90 days. The appointment and remuneration require approval of shareholders in general meeting. the approval becomes necessary. The Central Government may not accord the approval if it is satisfied that the candidate is not a fit and proper person for the post and his appointment is not in public interest and the terms and conditions of the appointment are not fair. payment to his creditors or makes or has made a composition with them. Where a person is already a managing director of another company he can be appointed only with the unanimous resolution of the board of directors. Disqualification (1) A person who is an undischarged insolvent or has at any time been adjudged insolvent. for their proper working. In the case of public companies or their subsidiary private companies. (3) A person who is or has been convicted by a court of an offence involving moral turpitude. 16 The Central Government may permit Any person to be appointed managing director of more than two companies if the Government is satisfied that it is necessary that the companies should. The Government may accord the approval for a shorter period than proposed. failing which he incurs a penalty of Rs 500 for every day of usurpation of the office. Teaching a figure of paid -up share capital which may be prescribed [Rs 5 crores or more] the appointment of a managing director. Approval of the Central Government is not necessary in such cases.

. The extent of liability of a director would depend on the nature of his directorship. they must not place themselves in a position in which their personal interests or duty to other persons are liable to conflict with the duties to the company. The terms of appointment can be changed. only with the approval of the Central Government. a greater degree of skill than may reasonably be expected from a person of his knowledge and experience (2) a director is not bound to give continuous attention to the affairs of his company. 309] Where a managerial personnel is working in more than one company. in the absence of grounds for suspicion. he can draw remuneration from one or both companies provided that the total remuneration drawn from the companies does not exceed the higher maximum limit admissible from any one of the companies of which he is a managerial personnel. a director is. They are (1) that di rectors must act in good faith in what they believe to be the in the best interest of the company (2) they must not exercise powers conferred upon them for purposes different from those for which they are conferred. four separate rules have emerged. [S. Conclusion: Accountability is an important element of Board effectiveness. ten per cent for all of them together. (3) that they must not fetter their disc retion as to how they shall act and (4) that without the informed consent of the company. Three propositions in regard to the duties and responsibilities of directors: (1) a director need not exhibit. his duties being of an intermittent nature to be performed at periodical board meetings or committee meetings. in the performance of his duties. when they are to be different from those prescribed by Schedule XIII. justified in trusting that official to perform such duties honestly. The remuneration of a managing director cannot exceed five per cent of the net profits and if there are more than one managing directors. There should be some mechanism for evaluating the performance of the directors. (3) in respect of such duties as may be properly left to some other off icial having regard to the exigencies of business or the articles of association of the company. In applying the general equitable principles to company directors.The maximum term of appointment can be five years at a time and a new term cannot be sanctioned earlier than two years from the date on which it is to come into force.

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