Meaning of Director

The Companies Act 2013 under the section 2(34) defines the term ‘Director’ as a
person who is appointed and designated as the director of the company to carry out
the affairs of the company in accordance with the MOA and AOA of the company.
Section 2(10) of the companies act 2013 defines the term Board of Directors as the
group of directors of the company. Thus, we can say that the meaning of director is
the officers of the company appointed to govern the affairs of the company. They
are the top-level management officials in the company. A director is the agent of
the company for the reason that they act on behalf of the company. They are the
trustee of the company as entrusted with the assets and funds of the company and
they have to use their power to apply these in the interest of the company and
shareholders. They are also the officers of the company according to section 2(59)
of the companies act 2013 which says that the officers of the company include
Directors and other few officials.

Appointment of Director
Now if we focus on the appointment of directors in the company. Section 149(1)
provides that every company shall have a board of directors which shall be
consisting only individuals as directors. It also specifies that there shall be a
minimum number of three directors in the case of a public company, two
directorsfor the private company, and one in case of the one-person company. A
company can have a maximum of fifteen directors in the BOD.

There are few types of directors and their appointment are explained here: [1]

a. Women director- The act under the second proviso of section 149(1)
emphasize that there shall be one women director in the BOD of every listed
company or any public company having paid-up capital of Rs. 100 crores or
turnover of Rs. 300 crores.   Such women directors shall be appointed by the
shareholder in the general meeting.

 Independent Director- section 149(4) insists that one-third of the total

number of directors shall be independent directors. Independent directors
are appointed by the shareholder in the annual general meeting.Independent
directors dispense the role of an unbiased judge inside the company. They
supervise the functioning of the company and increase the credibility of the
company’s practices. They ensure the proper compliance of the act and the
standards of corporate governance. Independent directors also oversee the
auditing committee to preserve the integrity of the financial information
disclosed by the company. They are appointed to safeguard the interest of
all the stakeholders of the company.

 Minority Director- Section 151 of the act provides for the appointment of one
director by the small shareholder. Small shareholders are the shareholders
having shares of value not more than twenty thousand rupees or any amount
prescribed by the MOA or AOA.

 First director- Section 152(1) deals with such director. Article of association
specifies for the appointment of the first director. But when the AOA is quiet
on this subject, then the subscribers of the memorandum are considered as
 the FIRST DIRECTOR. Such first director shall hold the office till the first
annual general meeting. In the first AGM, all the directors are appointed.

 Rotational director- section 152(6) provides for the rotation of the directors.
In a public company, not less than two-third of the total number of directors
are liable to retire by rotation. Now at every annual general meeting one-
third of such directors are liable to retire by rotation. The director who have
been longest in office since their appointment shall retire by rotation at the
subsequent annual general meeting. But if two directors are appointed on the
same day then one of them shall retire after a mutual agreement between
them. The rest one-third directors are the whole-time directors and they are
also appointed by the company in the general meeting.

 Alternate director- Section 161(2) of the act indicates if any director is

absent from India for three or more than three months, then an alternate
director can be appointed by the board of the directors if the AOA authorizes
or if any resolution is passed by the board in a general meeting for such an
act. The person must not hold any other alternate directorship. He shall be
holding the office for the same term as the original director will. He shall
have to vacate the office when the original director returns to India.

 Additional Director- Section 161(1) of the act provides if the AOA of the
company confers the power on the board of directors then they can appoint
any person as an additional director. He will hold the office until the next
annual general meeting. He must not be the person who failed to get
appointed as a director in the general meeting.

 Nominee Director- Such directors are appointed under section 161(3) of the
act by the board. A person is nominated by any institution in pursuance of
any law or by state or central government by the virtue of its shareholding in
that company. 

 Director Identification Number

 Director Identification Numberis an 8-digit unique identification number which
is allotted by the central government to each individual who wants to be a
director of any company or who already is a director of a company. Section
153 provides that each person who wants to be a director of any company
shall make an application for allotment of the Director Identification Number
to the central government in the prescribed form and manner along with the
application fee

 Legal position of directors

 It is difficult to define the exact legal position of the directors of a

company. The Companies Act makes no effort to define their position.
Directors are described sometimes as agents, sometimes as
trustees and sometimes as managing partners. But each of these
expressions is used not as exhaustive of their powers and
responsibilities but as indicating useful points of view from which
 they may for the moment and for the particular purpose to be
considered
 Directors as agents
 Directors may correctly be described as agents of the company. Cairns, L.J.
observed : “The company itself cannot act in its own person; it can only act
through directors, and the case is, as regards those directors, merely the
ordinary case of principal and agent”. The ordinary rules of agency will,
therefore, apply to any contract or transaction made by them on behalf of the
company. Where the directors contract in the name and on behalf of the
company it is the company which is liable on it and not the directors. Thus,
where chief executive of company executed promissory note and borrowed
amount for company’s sake

Directors as trustees
A trustee is a person in whom is vested the legal ownership of the assets which he
administers for the benefit of another or others. Directors are regarded as trustees of
the company’s assets, and of the powers that vest in them because they administer
those assets and perform duties in the interest of the company and not for their own
personal advantage. The directors of a company are trustees for the company, and with
reference to their power of applying funds of the company and for misuse of the power they
could be rendered liable as trustees and on their death the cause of action survives against
their legal representatives. Fiduciary capacity, within which directors have to act, enjoins
upon them a duty to act on behalf of a company with utmost good faith, utmost care and skill
and due diligence and in interest of company they represent.

Directors as managing partners

The persons holding this view consider a company as large partnership, directors
being charged with the responsibility of managing the affairs. The other shareholders
are virtually dormant partners. By virtue of the various provisions in the
Memorandum and Articles, they enjoy vast powers of management and act as the
supreme policy and decision making body.
General Powers of a Company Director
As per Sec. 291 of the Act, the Board is entitled to exercise all
such powers and to do all such acts and things as the company
is authorized to do. The powers of directors are co-extensive with the
powers of the company itself. The director once appointed, they have almost
total power over the operations of the company.

Statutory Powers of Directors

Powers must be exercised by Board of Directors in the general meeting of the

company by passing a resolution.

 The power to make call on shares in respect of unpaid money.

 The power to authorize lack of shares
 The power to issue debentures, whether in or outside india.
 The power to invest in funds
 The power to borrow money otherwise than on debentures
 The power to make loans or give guarantee in respect of loans. But a
banking company does not require any resolution by the board.
 The power to approve the financial statement and board’s report.
 The power to diversify the business of the company.
 The power to approve amalgamation, merger or reconstruction.
 The power to take over a company or acquire a company or substantial stake
in another company.

Other powers –

 Power to fill casual vacancy 9sec 161)       

 Power to appoint the first auditor of the company
 Power to make political contribution.
 Power to appoint alternate directors. (sec 161)
 Power to appoint additional directors. (sec 161)
 Power to declare interim dividend. ( 123(3))
 Power to appoint or remove key managerial personnel (KMP)
 Power to declare solvency , where the company winds up voluntarily.
 Power to recommend the rate of dividend on the shares of the company
subjected to approval by shareholder of the company

Powers only with a resolution – 

 To sell or lease any asset of the company

  To allow time to the director for the repayment of the loan
 To borrow money in excess of paid up capital and free reserves
 To appoint a sole agent for more than 5 years
 To issue bonus shares and for reorganization of share capital
 To contribute money for charitable purposes exceeding Rs. 50,000 or 5% of
the average profits of 3 years whichever is greater

Managerial powers of Directors

The Board acts in the interest of shareholders with the following powers – 

 Power to contract with the third party

 Power to recommend dividend
 Power to allot, forfeit or transfer shares of company
 Power to take decision regarding terms and conditions for the issue of
debentures
 Power to form policy and to issue instructions for the efficient running of
the business
 Power to appoint Managing Director, Manager, Secretary of the company.
 Power of control and supervision of work of subordinates

Power to constitute an Audit committee

The board of directors are empowered under section 177 to constitute an
audit committee. It needs to be constituted of at least three directors,
including independent directors. In the committee, the independent directors
need to be 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.

Duties of Director of a Company

The position of Director of a Private Limited Company or Limited Company or One
Person Company comes with certain duties and responsibilities. Many Directors of a
Company are unaware of these duties and responsibilities expected of them and hold the
position just as a namesake. Our intention with this article is to change that mindset and
create awareness about the duties and responsibilities of a Director of a Company. This will
in turn help create companies that have a strong and ethical Board of Directors, thereby
benefitting all the stakeholders of a company.

Duty to act in the best interests of the

Company
Directors are in a fiduciary position in relation to the company. So the Director must
exercise his/her power for the benefit of the company or in the best interest of the
company. A Director must also consider the interests of the company supreme and, in any
case, above their personal interest. Therefore, a Director acting honestly but not in the best
interests of the company is in breach of duty.

Fiduciary:  A fiduciary is a person who holds a legal or ethical relationship of trust. Typically, a
fiduciary prudently takes care of money for another person.

Duty NOT to misapply company assets

Directors do not have legal ownership of the company’s assets. They only have effective
control of them, and they must use them and employe them for the proper purposes of the
company, and in the best interests of the company.

Duty NOT to make secret profits

A Director holds a key position in relation to the company. Therefore, in the course of
management of the business, the Director may get confidential and sensitive information
concerning the company’s business and affairs, or trade secrets. This privileged information
cannot be used by the Director for his/her personal benefit and gain to the detriment of the
company.

Duty of confidentiality
Directors would have access to all the relevant information about the operations and
financials of a company. However, a Director has a duty to ensure that such information is
not, directly or indirectly, divulged. A Director must not disclose or make use of that
confidential information for any purpose other than for the benefit of the company.

Duty to NOT permit conflict of interest

A Director of a company has a duty to not enter into any arrangement which will possibly
impair the Director’s interest and cause conflict of interest with the Company. A conflict of
interest arises when a person is in a position to derive personal benefit from actions or
decisions made in their official capacity.

Duty to attend meetings

A Director of a company must make best efforts to attend as many board meetings as
circumstances permit. In India, if a Director is absent from three consecutive meetings of
the Board, or from all meetings held in three months, whichever is longer, without obtaining
leave of absence from the Board, then the Director could lose his/her Directorship in the
Company.

Duty NOT to exceed powers

The Memorandum of Association (MOA) of a Company  states what the company is
authorized to do. Whereas, the Articles of Association (AOA) of the Company state
what powers are given to the Directors of the Company. It is the duty of the Directors to
ensure that not only do they keep within the company’s powers but also that hey keep
within the powers actually given to them in the Articles of Association.

Qualification For Appointment of Directors

The Act has a dedicated provision which is Section 162 that
underlines the reasons for which a person may not appoint as a
director. There is no such provision regarding the qualification
under the Act. However, requirements can be listed as below:

1. The person must have completed the age of eighteen

or above.
2. Nationality can be that of Indian or otherwise.
3. The person should have his own Digital Signature
Certificate (DSC) through which Director’s
Identification Number (DIN)[6] shall be obtained.
4. The person has to furnish a written declaration
expressing his consent to act in the position of Director
and he is not a person who falls under the category of
disqualified members.
5. There is no academic qualification that needs to be
held by the person who is desirous of obtaining the
directorship of a company.
Disqualifications For Appointment of Director
The relevant provision of the law that deals with the
disqualification of directors are Section 152, 164, 165, and 188 of
the Act and The Companies (Appointment and Qualification of
Directors) Rules, 2014.

The grounds for Disqualification are mentioned as below:

1. Under Section 164 (1)

i. Person will not hold eligibility for a directorship in the

company if he has been declared to be a person with
unsound mind by a competent court.
ii. Person is insolvent and has undischarged liabilities or
has a pending application in the court to be adjudged
as insolvent.
iii. The court has adjudged the person to be guilty of a
crime involving moral turpitude. The sentence for the
same being more than six months, the eligibility shall
be withheld subject to passing of five years from such
sentence. In the case of Durga Singh v. State of
Punjab[11], the Punjab High Court elaborated on the
meaning of moral turpitude and stated that “moral
turpitude is anything done contrary to justice, honesty,
principle or good morals, an act of baseness, vileness
or depravity in the private and social duties which a
man owes to his fellow men or society in general
contrary to accepted and customary rule of right and
duty between man and man”
iv. If the sentence of his crime exceeds that of seven
years. he shall be deemed ineligible for the post of
director in any company.
v. An order warranting the disqualification of the person
is ruled by a competent court and during the
 application of such order, the person cannot become a
director.
vi. The person has failed to pay the amount due on his
shares and a period of half a year has gone by without
his paying the due.
vii. The person has been involved in a related party
transaction[12] in the past five years.
viii. The person cannot be appointed as a director unless he
is allotted a Director’s Identification Number (DIN)[13]
2. Under Section 164 (2)

The person shall not be eligible for re-appointment in the

company or any other company if such company has failed to
furnish the returns or statement of finance consecutively for a
period of three years or as stated in Section 164(2)(b) “has failed
to repay the deposits accepted by it or pay interest thereon or to
redeem any debentures on the due date or pay interest due
thereon or pay any dividend declared and such failure to pay or
redeem continues for one year or more”

3. Other Disqualifications

i. Section 165 of the Act prohibits persons from holding

the position of a director in more than twenty
companies.
ii. If the e-form DIR-3 KYC of the person who is a director
is not filed the directorship of such person will be
disqualified.[14]
iii. If the e-form ACTIVE is not filed by the prescribed
company then the Directors of such company will be
categorized as Director of ACTIVE non-compliant
company.[15]
iv. Rule 7(8) of the Rules states that “No person shall hold
the position of small shareholders’ director in more
than two companies at the same time” [16]. The
second company must not be such that it is in a
position to cause conflict with the first company or is a
competitor of the first company.