UNIT 1 - DIRECTORS

Concept & Meaning of directors

A company is a legal entity and does not have any physical existence.
It can act only through natural persons to run its affairs.
The person, acting on its behalf, is called Director.
A Director is any person, occupying the position of Director, by whatever name called.
They are professional men, hired by the company to direct its affairs.
But, they are not the servants of the company. They are rather the officers of the
company.

Section 2(34) defines directors as anyone appointed at the position of a director is the
company. Has to be done in accordance with the articles of the company.

Legal Position of Directors

It is not easy to identify the position of a director, as he is not a master of the company but not
the servant either.

o Directors as Agents

In Ferguson v. Wilson, the court clearly recognised that directors are in the eyes of law, agents of
the company. It was held that, the company has no person; it can act only through directors and
the case is, as regards those directors, merely the ordinary case of a principal and agent. When
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
Like agents, directors have to disclose their personal interest, if any, in any transaction of the
company. In Ray Cylinders & Containers v. Hindustan General Industries Ltd, held that, the
directors are the agents of the institution and not of its individual members, except when that
relationship arises due to the special facts of the case.
Directors are the agents of a company. They are acting on behalf of the company. So the
directors cannot be held personally liable for any default of the company. It was held that, for a
loan taken by a company, the directors, who had not given any personal guarantee to the creditor,
could not be made liable merely because they were directors.
 o Directors as Trustees

Directors are the trusties of the companys money, 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, and shall exercise their powers honestly in the interest of the company
and all the shareholders, and not their own sectional interest.
Directors are those persons selected to manage the affairs of the company for the benefit of
shareholders. It is an office of trust, which if they undertake, it is their duty to perform fully and
entirely. This peculiar nature of their office is one of the reason why the directors been described
as trusties

To whom the directors are trustee? Whether to the company or to the individual shareholders.

This principle was laid down in 1902 in Percival v. Wright, and still holds ground as a basic
proposition. In this case the court held that, directors have no duty towards individual
shareholders. From this it is very clear that, the directors are trustees to the company and not of
individual shareholders. The principle of the case was reiterated in Peskin v. Anderson.
Ordinarily the directors are not agents or trustees of members or shareholders and owe no
fiduciary duties to them.

However we have to take the decision of Allen v. Hyatt. It was held that, the directors are trustees
of the profit for the benefit of the shareholders. They cannot always act under the impression that
they owe no duty to the individual shareholders. But it is of no doubt that the primary duty of the
director is to the company.
Hence the duty of the directors are primarily to the company and then to the shareholders.

o Directors as Managing Partners

The organic theory of corporate life treats certain officials as organs of the company, for whose
action the company is held liable just as a natural person is for the action of his limbs as was held
in Gopal Khaitan v. State.
Thus the modern directors are more than mere agents or trustees. The Board is also correctly
recognised to be a primary organ of the company. Directors and managers represent the directing
mind or will of the company and control what it does.

The state of mind of these managers is the state of mind of the company and is treated by law as
such. The practical effects of these rules are that the directors personal fault in the business of
the company becomes the fault of the company; their reason to believe is attributed to the
company and the intention to occupy a premises as expressed by their conduct is the intention of
the company.
Roles and Responsibilities of Directors

The erstwhile Companies Act, 1956 contained no statement of statutory duties of directors, and
acts of directors were usually reviewed in the context of their powers in terms of section 291 of
the CA 1956 (which dealt with general powers of the board) and other applicable laws, and their
established roles under common law as laid down in several judicial precedents1.

The Companies Act, 2013 for the first time has laid down the duties of directors in unequivocal
terms in section 166. In summary, the general duties of directors under the CA 2013 are as
follows:

to act in accordance with the articles of the company, in other words, to act within
powers;

to act in good faith in order to promote the objects of the company for the benefit of its
members as a whole;

to act in the best interest of the company, its employees, shareholders, community and for
the protection of environment;

to exercise due and reasonable care, skill and diligence and independent judgment;

to avoid direct or indirect conflicts of interest;

to avoid undue gain or advantage either to himself or relatives, partners or associates; and

not to assign his office to any other person;

Powers Duties & Liabilities

o Duties of the Directors under CA 13

In addition to the duties conferred u/s 166

Filing returns with the Registrar of Companies: Directors must file a return of allotment of shares
within thirty (30) days with the Registrar, stating the number and nominal amount of shares
comprising the allotment, the names, addresses and occupations of the allottees, and the amount,
if any, paid or due and payable on each share.
Convening Shareholders Meetings: Directors must convene the different kinds of shareholders
meetings provided for in the Companies Act, within their stipulated periods.
Approval of Companys Documents: Directors must approve the balance sheet and profit and
loss account of the company before it is signed on their behalf.
Audit Requirements: In cases of winding up or liquidation, the Directors must ensure that the
books of account of the company are completed and audited up to the date of winding up order
issued by the Company Court

Common law duties

Declaration of Interest: Directors, who are concerned or interested in a proposed contract or
arrangement with the company in any way, must disclose the nature of their concern or interest
to the Board.
Receipt of Compensation: Directors must not receive, in connection with a transfer of property
or shares of the company, any payment as compensation for loss of profit or in consideration for
retirement from office. If they do so, they must hold such an amount in trust for the company.
Attending Board Meetings: Directors are under an obligation to attend the board meetings as
prescribed by the Articles, or such as may be called by the chairman (if any) of the Board,
otherwise any absenteeism for three (3) consecutive meetings or for a period of three (3) months,
whichever is longer, without obtaining leave of absence, will result in that Director or Directors
vacating their respective offices.

o Liabilities

As a general rule, since the company and its Director are separate entities, the Director has no
personal liability on behalf of the company. However, under certain circumstances, a Director
may be held liable on behalf of the company. These circumstances are:

Liability for Tax: Under the Income Tax Act, 1961, where any tax due from a private company
in respect of any income of any previous year cannot be recovered from such private company,
then, every person who was a Director of such private company at any time during the relevant
previous year is liable, jointly and severally, for the payment of such tax. A Director (including
any past Director but only for the duration when he was in office) can, however, escape such
liability if he or she proves that the non-recovery of such tax cannot be attributed to any gross
neglect, misfeasance or breach of duty on his or her part in relation to the affairs of such private
company. Under the Central Sales Tax Act and certain state Sales Tax laws, liability may be
fastened on Directors of a company, which is wound up, for recovery of sales taxes due from
such liquidated company.

Debts of the Company: Generally, a Director is not personally liable for any debt of the company
unless fraud on the part of such Director can be established.

Liability for companys Contracts: A Director is, generally, not liable for any contract entered
into by the company, unless expressly provided for, or fraud on the part of such Director can be
established.
Refund of Share application money: A Director is personally liable along with the company to
repay the share application or excess share application money, as the case may be, if the same is
not repaid within the stipulated time limit.

Liability to pay for qualification shares: If the Director has not acquired his or her qualification
shares within the prescribed time period and the company goes into liquidation the day after this
period expires, the Director will be called upon by the Official liquidator to pay for the shares he
or she was supposed to have purchased.

Mis-statement in the Prospectus: Civil liability can be imposed on a Director for any untrue
statement in the prospectus of a public company if he or she is a Director at the time of the issue
of the prospectus, unless he or she proves that he or she withdrew consent before the issue of the
prospectus or that it was issued without his or her authority or consent or without his or her
knowledge or that, once he or she came to know of the untrue statement, he or she withdrew
consent and gave reasonable public notice of the same, or proves that he or she believed the
impugned statements to be true.

Fraudulent Conduct of Business: A Director may be held personally responsible, without any
limitation of liability, for all or any of the debts or other liabilities of the company if he or she
was knowingly party to the fraudulent carrying on of business.

Can libility of shareholders be unlimited in any case ? - Doubt

Qualification Appointment and Removal

o Qualification & Appointment

Who can be appointed as a Director: Appointment of a Director is not only a crucial

administrative requirement, but is also a procedural requirement that has to be fulfilled by every
company. Under the Companies Act, only an individual can be appointed as a Director; a
corporate, association, firm or other body with artificial legal personality cannot be appointed as
a Director.

Appointment of Directors: Generally, in a public company or a private company subsidiary of a

public company, two-thirds of the total numbers of Directors are appointed by the shareholders
and the remaining one-third is appointed in accordance with the manner prescribed in Articles
failing which, the remaining one-third of the Directors must be appointed by the shareholders.
The Articles of a public company or a private company subsidiary of a public company may
provide for the retirement of all the Directors at every AGM. In a private company, which is not
a subsidiary of a public company, the Articles can prescribe the manner of appointment of any or
all the Directors. In case the Articles are silent, the Directors must be appointed by the
shareholders. The Companies Act also permits the Articles to provide for the appointment of
two-thirds of the Directors according to the principle of proportional representation, if so adopted
by the company in question.
Nominee Directors can be appointed by a third party or by the Central Government in case of
oppression or mismanagement.

Additional Conditions to be fulfilled in case of public companies:

1. He or she should not have been sentenced to imprisonment for any period, or a fine
imposed under any of the following statutes,
2. He or she should not have been detained or convicted for any period under the
Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974.
3. He or she should have completed twenty-five (25) years of age, but be less that the age of
seventy (70) years. However, this age limit is not applicable if the appointment is
approved by a special resolution passed by the company in general meeting or the
approval of the Central Government is obtained.
4. He or she should be a managerial person in one or more companies and draws
remuneration from one or more companies subject to the ceiling specified in Section III
of Part II of Schedule XIII.
5. He or she should be a resident of India. Resident includes a person who has been
staying in India for a continuous period of not less than twelve (12) months immediately
preceding the date of his or her appointment as a managerial person and who has come to
stay in India for taking up employment in India or for carrying on business or vocation in
India. However, this condition is not applicable for companies in the Special Economic
Zone, as notified by Department of Commerce from time to time.

o Removal
Retirement of Directors: In any public company or a private company that is a subsidiary of a
public company, one-third of the Directors must retire at every AGM. However, every retiring
Director is eligible for re-appointment. If the vacancy is not filled and the meeting has not
expressly resolved to fill such vacancy, he or she shall be deemed to have been reappointed
until the next election meeting, unless he or she is not otherwise disqualified or is unwilling to
so act as a Director or no resolution for such appointment has been put to the meeting and lost.

Removal of Directors: A Director can be removed by an ordinary resolution of the general

meeting after a special notice has been given, before the expiry of his term of office. However,
this is not applicable to Directors appointed by proportional representation or the Directors
appointed by the Central Government.
Vacation of Office: The office of a Director of a public company, or of a private company
which is a subsidiary of a public company, becomes vacant if he or she:
1. Becomes subject to any of the three (3) disqualifications mentioned above
(Undischarged Insolvent, Suspends payment of creditors or is convicted be a court in a
offence relating to moral turpitude) during his or her term of office;
2. Fails to obtain within any time period as may be specified in the Articles (two months in
case of a public company), or at any time thereafter ceases to hold, the necessary share
qualification if any as prescribed by the Articles;
3. Absents himself or herself from three (3) consecutive meetings of the Board, or from all
meetings of the Board for a continuous period of three (3) months, whichever is longer,
without obtaining leave of absence from the Board;
4. Whether by himself or herself, or by any person on his or her account or any firm in
which he or she is a partner or company in which he or she is a Director, accepts a loan
or guarantee or security for a loan from the company in contravention of the
requirements governing loans etc to Directors;
5. Acts in contravention of the requirements regarding disclosure of interests;
6. Is removed from office under the Companies Act; or
7. Having been appointed as Director by virtue of his or her holding an office or other
employment in the company (for instance, that of Managing Director), he or she fails to
hold such office or other employment.

Also, in such public companies and private companies that are subsidiaries of public companies,
if a Director or his or her relative holds an office of profit without the consent of the company,
and with such Directors knowledge, such Director shall be deemed to have vacated his or her
office. In addition to these reasons for the Directors office becoming vacant, a pure private
company may prescribe other such reasons in its Articles.

Doctorines Doubt

Indoor management
Ultra Vires
UNIT 2 BOARD OF DIRECTORS
Kinds of Directors

Categories of Directors: The Companies Act refers to the following two specific categories of
Directors:

1. Managing Directors; and

2. Whole-time Directors.

A Managing Director is a Director who has substantial powers of management of the affairs of
the company subject to the superintendence, control and direction of the Board in question.

A Whole-time Director includes a Director who is in the whole-time employment of the

company, devotes his whole-time of working hours to the company in question and has a
significant personal interest in the company as his source of income.

Further classification of Directors: Based on the circumstances surrounding their appointment,

the Companies Act recognizes the following further types of Directors:

1. First Directors: Subject to any regulations in the Articles of a company, the subscribers to
the Memorandum of Association, or the companys charter or constitution
(Memorandum), shall be deemed to be the Directors of the company, until such time
when Directors are duly appointed in the annual general meeting (AGM).
2. Casual vacancies: Where a Director appointed at the AGM vacates office before his or her
term of office expires in the normal course, the resulting vacancy may, subject to the
Articles, be filled by the Board. Such person so appointed shall hold office up to the time
which the Director who vacated office would have held office if he or she had not so
vacated such office. This vacancy however needs to be approved/ratified by the shareholders
in the next AGM conducted.
3. Additional Directors: If the Articles specifically so provide or enable, the Board has the
discretion, where it feels it necessary and expedient, to appoint Additional Directors who
will hold office until the next AGM. However, the number of Directors and Additional
Directors together shall not exceed the maximum strength fixed in the Articles for the
Board.
4. Alternate Director: If so authorized by the Articles or by a resolution passed by the company
in general meeting, the Board may appoint an Alternate Director to act for a Director
(Original Director), who is absent for whatever reason for a minimum period of three
months from the State in which the meetings of the Board are ordinarily held. Such
Alternate Director will hold office until such period that the Original Director would have
 held his or her office. However, any provision for automatic re-appointment of retiring
Directors applies to the Original Director and not to the Alternate Director.
5. Shadow Director: A person, who is not appointed to the Board, but on whose directions
the Board is accustomed to act, is liable as a Director of the company, unless he or she is
giving advice in his or her professional capacity. Thus, such a shadow Director may be
treated as an officer in default under the Companies Act.
6. De facto Director: Where a person who is not actually appointed as a Director, but acts as a
Director and is held out by the company as such, such person is considered as a de facto
Director. Unlike a shadow Director, a de facto Director purports to act, and is seen to the
outside world as acting, as a Director of the company. Such a de facto Director is liable as a
Director under the Companies Act.
7. Rotational Directors: At least two-thirds of the Directors of a public company or of a private
company subsidiary of a public company have to retire by rotation and the term rotational
Director refers to such Directors who have to retire (and may, subject to the Articles, be
eligible for re-appointment) at the end of his or her tenure.
8. Nominee Directors: They can be appointed by certain shareholders, third parties through
contracts, lending public financial institutions or banks, or by the Central Government in
case of oppression or mismanagement. The extent of a nominee Directors rights and the
scope of supervision by the shareholders, is contained in the contract that enables such
appointments, or (as appropriate) the relevant statutes applicable to such public financial
institution or bank. However, nominee Directors must be particularly careful not to act only
in the interests of their nominators, but must act in the best interests of the company and its
shareholders as a whole.

Managing Director, Whole time Director & Manager

A managing director, as defined in Section 2(26), means a director who is encrusted with
substantial powers of management which would not otherwise be exercisable by him. The
"substantial powers" of management may be conferred upon him by virtue of an agreement with
the company, or by a resolution of the company or the Board or by virtue of its memorandum
and articles. The powers so conferred are alterable by the company.

The term Whole Time Director has not been defined under the Companies act.

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 difference in this regard.
Thus, if a director is entrusted with managerial functions, he would be in the position of a
Managing Director notwithstanding the fact that he may be designated as a technical adviser or
as a technical director of the company.
 o Difference between Managing Director and Whole Time Director

(1) A managing director is entrusted with substantial powers of management [Sec. 2(26)]
whereas a wholetime director is just an ordinary employee of the company having no
discretionary power to take decisions on policy matters regarding pricing of products, rate of
allowable trade discount, buying and selling policy, etc.

(2) The appointment of a managing director does not require the consent of the shareholders
but for the appointment of a wholetime director the sanction of the shareholders, by means of a
special reso-lution, is necessary except when he is appointed in the capacity of trustee for
debenture holders or manager (Sec. 314).

(3) A managing director and a manager cannot exist simultaneously in any company (Sec. 197-
A), whereas a wholetime director may be appointed along with a managing director or a
manager.

(4) A managing director can be a managing director of more than one company (Sec. 316) but
a whole time director, being a wholetime employee of the company, cannot be a wholetime
director in more than one company,

(5) A managing director of a public company or a subsidiary there-of can be appointed for a
maximum period of five years at a time (Sec. 317), whereas there is no such restriction
regarding the term of appointment of a wholetime director

KMP, Woman Directors & Small Shareholder Director

o KMP
Section 2(51) key managerial personnel, in relation to a company, means
(i) the Chief Executive Officer or the managing director or the manager;
(ii) the company secretary;
(iii) the whole-time director;
(iv) the Chief Financial Officer; and
(v) such other officer as may be prescribed;

This section is having very wide implication and intended to make all top most officials of the
company liable for its defaults. On careful reading of the section one can understand that CEO
is treated at par with the MD of the company . That means if there is no MD for the company,
the responsibilities / liabilities under the act will fall automatically on the shoulder of CEO who
is appointed there at.
Likewise it there is a WTD or CS or CFO they also will fall within the brackets of the said
definition and becoming liable for the compliance under the Act. Moreover Section 2(60)
defines the term ' Officer in default" and drag the term KMP within the ambit of that section.

o Woman Director

Proviso to Section 149(1) stipulates that Companies with such criteria to be announced shall
appoint woman directors. Rules currently displayed on the MCA web site for comments
indicate the following for appointment of women directors on the boards of companies:
a. Every listed company shall appoint at least one woman director within one year
from the commencement of the second proviso to Section 149(1).
b. Every other Public company: -
Having paid up capital of 100 crores or more or
A turnover of 300 crores or more
Have to compulsorily appoint within 3 years from the commencement of second proviso to
Section 149(1) of the Act.

o Small Shareholder Director

Explanation of section 151(1) defines small shareholder as a shareholder holding shares of

nominal value of not more than twenty thousand.
The term may makes it clear that there is no mandatory requirement for listed companies to
have a director elected by such small shareholders on its Board
Primary duty of a small shareholder director is to protect the interest of the small shareholders.

Shadow Director, De Jury & De Facto Directors

o De jure directors

A de jure director is one who has been validly appointed as a director via standard procedure, eg
by being elected by the companys membership at a general meeting or by being appointed by
the board acting under constitutional authority, and whose appointment has been duly registered
with Companies House. This is the orthodox route to service as a director.

o De facto directors

A de facto director differs from a de jure director in that he or she will not have been validly
appointed as director via any accepted standard procedure. Notwithstanding any defects in his or
her appointment, however, a de facto director will take part in the boards decision-making
machinery on the same basis as other directors and, in its dealings with the outside world, the
board may hold him or her out to be a director of the company. Where a person acts as a de facto
director, he or she will be subject to the law on directors duties in exactly the same way as will
de jure directors.

o Shadow Directors

Unlike the foregoing terms, the term shadow director is regulated by the Act. The term is
defined under S.60(5) It says that a shadow director is a person in accordance with whose
directions or instructions the directors of a company are accustomed to act.
While the term accustomed to act leaves open the question of whether the directors have to
obey the directions/ instructions given to them all of the time or only most of the time, the
definition will clearly apply in any case where a board of directors recognize communications
given to them by a particular person as being effectively directions or instructions and where
they obey these directions or instructions on any routine basis. The definition of shadow
director can apply to individuals or to corporate bodies.
There are two exceptions to the statutory definition of shadow director. First, a person will not
be deemed to be a shadow director of a company if he or she is a professional adviser to a
company and its directors act on the basis of advice given to them solely in that capacity. So an
accountant who advises a companys directors on issues relating to compliance with their
various responsibilities will not be thereby risk becoming a shadow director. (This could
conceivably change if the adviser sought to give instructions or directions to the directors which
went beyond the status of purely professional advice and the directors came to view the
advisers guidance as directions and instructions and acted upon them accordingly: any
professional adviser should be careful to ensure that this situation does not arise).
The second exception applies to parent companies. Where a company is a parent company, the
possibility of it being deemed to act as a shadow director of its subsidiary companies is real
the greater the level of control exercised by the parent the higher the chances are that it will fall
within the definition. The Act does not discount the possibility of this happening but says that,
for the purposes of three specified sets of Companies Act rules, a parent is not to be regarded as
a shadow director in respect of its subsidiaries by reason only that the directors of the
subsidiary companies are accustomed to act in accordance with the parents directions or
instructions.
 o Differences between Shadow director and De facto director

The term shadow director is a term which is recognised and defined in the Act: the term
de facto director is not.
The nature of the two categories is different while a de facto director will openly act as a
director and will be held out to be a director both by virtue of his own actions and possibly
by the actions of the company, the shadow director will not normally claim to be a director,
preferring to exert influence from behind the scenes.
The legal definition of the term shadow director provides that a person will be held to
occupy this position if the directors of a company routinely act upon his or her directions or
instructions. In other words, a shadow director, unlike a de facto or de jure director, will
not be one among equals he or she (or it, in the case of a company acting as a shadow
director) will be the person who is recognized by the directors as being the companys
ultimate source of decision-making power and they will be prepared to carry out the
instructions given by that person.

Independent Directors

In India, after due deliberated efforts of Kumar Birla committee and consequent recommendation
of Narayan Murthy Committee, Clause 49 of the Listing Agreement was revised with
modifications to adopt Corporate Governance structure. Primarily all listed companies were
mandatorily required to adhere to Corporate Governance structure.

As per sub section 4 of Section 149 of the Companies Act 2013, every listed public company is
mandatorily required to have at least one-third of the total number of directors as independent
directors.

Unlisted public companies must appoint at least two independent directors in the following
circumstances:

i. if the paid up share capital exceeds Rs.10 crores;

ii. if the turnover exceeds Rs.100 crores;

iii. if the aggregate of all the outstanding loans, debentures and deposits exceeds Rs 50
crores.
Role and functions listed under Schedule IV of the Companies Act, 2013 are as under:

The independent directors shall:

1. help in bringing an independent judgment to bear on the Boards deliberations especially

on issues of strategy, performance, risk management, resources, key appointments and
standards of conduct;
2. bring an objective view in the evaluation of the performance of board and management;
3. scrutinize the performance of management in meeting agreed goals and objectives and
monitor the reporting of performance;
4. satisfy themselves on the integrity of financial information and that financial controls and
the systems of risk management are robust and defensible;
5. safeguard the interests of all stakeholders, particularly the minority shareholders;
6. balance the conflicting interest of the stakeholders;
7. Determine appropriate levels of remuneration of executive directors, key managerial
personnel and senior management and have a prime role in appointing and where
necessary recommend removal of executive directors, key managerial personnel and
senior management; (8) moderate and arbitrate in the interest of the company as a whole,
in situations of conflict between management and shareholders interest.

Changes Form the 1956 Act to 2013 Act

1. Defined duties of directors

2. Defined the role of independent directors
3. Cast a duty on the Board to device proper systems to ensure compliance with the
provisions of all applicable laws and that such systems were adequate and operating
effectively.
4. made provision for appointment of woman director
5. Increased the maximum number of directors from existing limit of 12 to 15 and provided
for increase beyond 15 by a special resolution
6. Kept the power with Central Govt for prescribing minimum number of directors in case
of certain companies or class of companies
7. prohibited insider trading
8. provided for stringent penalties for violation of duties and non disclosure of interest in
related party transactions