WLC 47 CHAPTER 10– DIRECTORS

CHAPTER 10
DIRECTORS
DEFINITION [SECTION 2(13)]
 “director” includes any person occupying the position of director, by whatever name called;
• It is not the name by which a person is called but the position he occupies and the functions and the duties
which he discharges that determine whether in fact he is a director or not.
• An executive of the company, who is designated as executive director, but who is not a member of the Board,
is not a director.
Listed companies
The Listing Agreement now governs the provisions regarding the appointment and remuneration to Directors.
Clause 49 of the Listing Agreement, under the Corporate Governance, prescribes the composition of the Board –
executive and non-executive directors, their code of conduct besides many other compliances a listed company
has to comply with so as to ensure continued listing. Moreover, the Board meeting procedures are no more
governed exclusively by the Articles of Association of the listed company, it has to ensure compliance of Securities
Exchange Board of India (Insider Trading) Regulations, 1992 and Securities and Exchange Board of India
(Prohibition Of Fraudulent and Unfair Trade Practices Relating To Securities Market) Regulations, 2003, besides
SEBI Act.
TYPES OF DIRECTORS
Companies Act
 Rotational Director
 Permanent Director (not liable to retire by rotation)
 Special Director – appointed by the Central Government when empowered by the Tribunal under Section
408. He shall hold the office till the pleasure of the Central Government and shall not be liable to retire by
rotation nor shall he be liable to hold any qualification share.
Listing Agreement [Clause 49]
 Executive Director
 Non-executive directors
LEGAL POSITION OF DIRECTORS
• Directors as agents - Directors may correctly be described as agents of the company. Cairns, LJ
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".
• Directors as trustees - Directors are regarded as trustees of the company's assets, and of the powers that
vest them because they administer those assets and perform duties in the interest of the company and not for
their own personal advantage.
• Directors as managing partners - The persons holding this view consider 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.
CONSTITUTION OF BOARD OF DIRECTORS
Minimum number of directors (Section 252)
• Every public company shall have at least three directors:
• The small shareholders of a public company may elect a director (Small shareholder Director), —
 a paid-up capital of Rs. 5 Crore or more;
 1,000 or more small shareholders,
“Small shareholders” means a shareholder holding shares of nominal value of Rs. 25,000 or less in a public
company.
• A private limited company shall have at least two directors.
PROVISIONS REGARDING APPOINTMENT OF DIRECTORS
Who may be appointed as a Director?
• Only individuals shall be eligible to be appointed as director.
Provision in Articles for number of directors beyond 12
• Increase or reduce the number of directors - a company in general meeting may, by ordinary resolution,
increase or reduce the number of its directors within the limits fixed in the articles. However, any increase or
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provision thereof in number of directors beyond 12 shall require prior approval of Central Government.
• Appointment of directors to be voted on individually.
• Penalty for default - Any increase in the number of directors without approval of Central Government shall
be void.
Appointment of a director other than a retiring director [Section 257]
• A person wishing to stand for holding the office of director liable to retire by rotation (excludes addition, casual,
alternate or nominee director) of a company must signify his intention, in writing, to do so. A refundable
security deposit of Rs. 500/- shall also be deposit there along. The nomination may be proposed by that
person himself or any member of the company.
• This should be lodged with the company at least 14 days` before the general meeting of the company. The
company shall accordingly inform its members through a newspaper advertisement published at least 7 days`
before the general meeting.
Consent for directorship to act as director [Section 264]
• Every person proposed as a candidate for the office of the director shall sign and file with the company his
consent to act as a director, if appointed.
• Such a person shall also file his consent with the ROC within 30 days of his appointment as director of the
company.
Exception – the consent shall not be required to be filed in the case of
(i) A director reappointed after retirement by rotation or immediately on the expiry of his term of office;
(ii) An additional or alternate director or a person filing a casual vacancy
(iii) A director named as director of the company under its articles as first registered.
Exempted companies
 Private companies
 Government companies
 Section 25 companies
Share qualification [Section 270]
• Where the Articles of Association of a company prescribe any number of shares as the minimum qualification
for holding the office of directorship in the company, every person shall hold within 2 months and continue to
hold such number of shares of his appointment as director. If the articles do not require a share qualification,
the shareholders may elect as a director, any person not otherwise disqualified. Or the articles may prescribe
that a technical or finance or other special director need not possess any share qualification.
Exception
• The section does not apply to a private company.
APPOINTMENT OF DIRECTORS
• Directors may be appointed in the following manner: -
 By the Articles - The first directors are usually appointed by name in the articles or in the manner provided
therein. Where the articles are silent, the subscribers to the memorandum, who are individuals, shall be
deemed to be the first directors of the company. They shall hold office until the first directors pursuant to
Sec 255 are appointed.
 By the Board of Directors
1. Additional director – if the Articles authroise, the Board may appoint additional directors. Such
directors together with other directors should not exceed the maximum number of directors fixed by the
articles. Additional directors hold the office only upto the date of the next AGM.
2. Filling up casual vacancies – the Board may fill casual vacancies in the case of a public company. A
casual vacancy is one that arises due to the resignation, death, removal or disqualification of the office
of a director. The Casual director holds such office upto the original director would have other wise
held that office demitted.
3. Alternative director - the Board if so authrorised by the articles or by a resolution passed by the
company in general may appoint an alternate director. Alternate director may be appointed in place of
a director during the absence of original director for a period of not less than 3 months from the State in
which meetings of the Board are ordinarily held. The alternate director merely fills a temporary
vacancy. Such a director is accordingly not counted toward maximum number of directors, which a
person can hold, nor of the limit prescribed under articles of the company.
 By the Shareholders
1. Directors liable to retire by rotation – a public limited company shall atleast 2/3rd directors whose office
shall be liable to determination by rotation (Sec. 255). Sec. 256 provides that 1/3rd of such directors
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(2/3rd) shall retire at an AGM. Those directors who have been longest in the office shall retire first. The
vacancies caused by the retiring directors should be filed at the same AGM or at an adjourned
meeting. If it is not so done, the retiring director shall be deemed to have been appointed at the
adjourned AGM. There are however, certain exceptions to such automatic appoint.
2. By proportional representation – if the articles so provide, all the directors may be appointed through a
single transferable vote by way of proportionate representation on the Board.
 By the Central Government /Tribunal
Where the Tribunal comes to the conclusion that the affairs of the company are being conducted in a
manner prejudicial to the interest of the company or public interest, it may direct the Central
Government to appoint director. Such directors are called Special Director and hold office at the
pleasure of the Central Government.
 By third parties (Nominee director)
There may be certain contractual obligations on the part of a company to appoint a director. It may
arise due to term loan agreement with a financial institution/bank or joint venture partner.
DISQUALIFICATION OF DIRECTORS (Section 274)
• A person shall not be capable of being appointed director of a company, if a person is —
(a) found to be of unsound mind by a Court and the finding is in force;
(b) undischarged insolvent;
(c) applied to be adjudicated as an insolvent and his application is pending;
(d) convicted by a Court of any offence involving moral turpitude and sentenced to imprisonment for more
than six months, and a period of five years has not elapsed from the date of expiry of the sentence;
(e) not paid any call in respect of shares of the company and six months have elapsed from the last day fixed
for the payment of the call;
Exception
 The Central Government may, by notification in the Official Gazette, remove any disqualification
mentioned in clause (d) and (e).
 A private company may in its articles provide for additional grounds for disqualification
(f) disqualified by a Court order and is in force, exception where he has been so permitted by the court to
continue or
(g) a person shall not be qualified to be appointed as a director of any other public company (second
company) for a period 5 years in case he is a director of a public company (first company) and the first
public company has :-
(A) not filed the Annual accounts and Annual returns for 3 continuous financial years (commencing
from 1st April 1999); or
(B) failed to repay its deposit or interest thereon on due date or redeem its debentures on due date
or pay dividend and such failure continues for one year or more:

• The Central Government has issued Companies (Disqualification Of Directors Under Section 274(1)(G) of the
Companies Act, 1956) Rules, 2003. Accordingly, it shall be the duty of
 Statutory auditor of the appointing company as well as disqualifying company to mention in their Report
about compliance of this section.
 The defaulting company as well as its Directors have to immediately submit prescribed return to ROC for the
purpose
 The name of the defaulting company and Directors shall be displayed on the web site of the DCA.
 Exemption - Nominee Directors appointed by FI/Banks in Sick Industrial undertakings.
RESTRICTIONS ON NUMBER OF DIRECTORSHIPS
• No person shall hold office of director in more than 15 companies at the same time.
Exemption – persons holding the office of director in the following companies/capacity shall be excluded
(a) a private company;
(b) an unlimited company;
(c) Section 25 companies;
(d) an alternate director.
VACATION OF OFFICE BY DIRECTORS (SECTION 283)
• The office of a director shall become vacant (automatic vacation) if—
(a) fails to obtain within two months or at any time thereafter ceases to hold, the share qualification, if any,
required of him by the articles of the company;
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(b) found to be of unsound mind by a Court of competent jurisdiction;

(c) applies to be adjudicated an insolvent;
(d) adjudged an insolvent;
(e) convicted by a Court of any offence involving moral turpitude and sentenced in respect thereof to imprison-
ment for not less than six months;
(f) fails to pay any call in respect of shares of the company held by him, within six months from the last date
fixed for the payment of the call;
(g) absents himself from three consecutive meetings of the Board of directors, or from all meetings of the
Board for a continuous period of three months, whichever is longer, without obtaining leave of absence from
the Board;
(h) he (whether by himself or by any person for his benefit or on his account), or any firm in which he is a partner
or any private company of which he is a director, accepts a loan, or any guarantee or security for a loan,
from the company in contravention of section 295;
(i) does not disclose his interest in any contract entered into by the company (contravention of section 299);
(j) becomes disqualified by an order of Court;
(k) he is removed by the shareholders (section 284); or
(l) having been appointed a director by virtue of his holding any office or other employment in the company, he
ceases to hold such office or other employment in the company
• In addition to the above grounds, a director may also be removed by the Central Government and Tribunal
directions. The disqualifications in clauses (d), (e) and (j) shall not take effect for 30days from the date of the
adjudication, sentence or order or pendency of any appeal. A private company may, by its articles, provide for
additional grounds for vacation of office of director.
• Compensation for loss of office - An ordinary director may not be entitled to compensation for loss of office
for the remaining term. Managing Director if removed may however be entitled for compensation.
RESIGNATION BY A DIRECTOR
• There is nothing in the Companies Act as to whether, and by what procedure, a director can resign. The Act,
however, indirectly recognises the right of resignation. Notice may be written or oral. The resignation will
become effective from the date the director intends to resign.
• Articles of association usually provide for resignation by a director by giving written notice to the company.
APPOINTMENT AND REMUNERATION OF MANAGING/WHOLE TIME DIRECTOR
• The management of the affairs of the company are vested with the Board of Directors. In actual practice, the
substantial powers of the Board are vested with the managing director or manager or whole time directors who
are responsible for day-to-day activities of the company.
Managing director - “a director who by virtue of an agreement with the company or of a resolution passed by the
company in the general meeting or by its Board of Directors or by virtue of its memorandum or articles of
association, is entrusted with substantial powers of the Board which would otherwise be not exercisable by him.
Manager - an individual who subject to the superintendence, control and direction of the Board of Directors, has
the management of the whole, or substantially the whole, of the affairs of the company, and includes a director or
any other person occupying the position of a manager, by whatever name called and whether under a contract of
service or not.
Whole time director - A director who is in the whole time employment of the company.
Compulsory appointment
• Every company having a paid up capital of more than Rs. 5 Crores shall appoint a managing director or
manager or whole-time director. The managing director may be appointed for a maximum period of 5 years
subject to re-appointment for a further period of 5 years at a time.
• Simultaneous appointment of managing director and manager is not permissible.
• The appointment and remuneration of a managing director or manager or whole-time director shall be in
accordance with the conditions specified in Schedule XIII. Otherwise, the approval of Central Government
should be obtained for the appointment.

LECTURES BY PROF. S N GHOSH