Directors of a Company

A company, though a legal entity in the eyes of the law, is an artificial person, existing only in contemplation of law. It has no physical existence. It has neither soul nor a body of its own. As such, it cannot act in its own person. It can do so only through some human agency. The persons who are in charge of the management of the affairs of a company are termed as directors. They are collectively known as Board of Directors.

The Companies Act defines a ‘director’ as “any person occupying the position of a director by whatever name called” [Sec.2(13)]. This is however, an inadequate definition. In the absence of a precise definition, we can only determine whether a person is a director or not a director by referring to the nature of his office and functions. According to the functions performed by him, a director may be defined as a person who directs, conducts, manages and supervises the affairs of a company.

  • Only Individuals can be Directors: A body corporate, association or firm cannot be appointed director of a company. Only an individual can be appointed as directors.
  • Number of Directors: Every public company shall have atleast 3 directors and every other company shall have atleast 2 directors. Subject to this statutory minimum limit, the Articles of a company may prescribe the maximum and minimum number for its Board.
  • Share Qualification of Directors: The Articles of a company usually require its directors to hold a certain number of shares. Such shares are called qualification shares. The nominal value of the qualification shares should not exceed Rs.5,000. He should obtain his qualification shares within 2 months after his appointment as director.
  • Number of Directorships: A person cannot hold office at the same time as director in more than 20 companies. Where a person already holding the office of director in 20 companies is appointed as a director of any other company, the appointment can take effect only when such person has, within 15 days of his appointment, effectively vacated his office as director in any of the companies in which he was already a director.

Disqualification of Directors

The following persons are disqualified for appointment as directors of a company:

  1. A person of unsound mind.
  2. An undischarged insolvent.
  3. A person who has applied to be adjudicated as an insolvent and his application is pending.
  4. A person who has been convicted by a Court of any offence involving moral turpitude and sentenced to imprisonment for a minimum period of 6 months and a period of 5 years has not passed from the date of expiry of the sentence.
  5. A person whose calls in respect o shares of the company held by him have been in arrear for more than 6 months.
  6. A person who is disqualified for appointment as director by an order of the Court under Sec.203 on the ground of fraud or misfeasance in relation to a company.

Vacation of Office of Directors

The office of the director of a company becomes vacant, if:

  • he fails to obtain within 2 months of his appointment or at any time thereafter ceases to hold the share qualification;
  • he is of unsound mind;
  • he applies to be adjudicated an insolvent;
  • he is adjudged an insolvent;
  • he is convicted by a Court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for at least 6 months.
  • he fails to pay any call in respect of shares of the company held by him within 6 months from the last date fixed for the payment of the call;
  • he absents himself from 3 consecutive meetings of the Board of directors;
  • he accepts a loan without the approval of the Central Government;
  • he fails to make disclosures to the Board of directors with regard to any contracts with the company in which he is directly or indirectly interested;
  • he becomes disqualified by an order of the Court for guilty of fraud;
  • he is removed before the expiry of his period of office by an ordinary resolution.

Appointment of Directors

First Directors: The first directors are usually named in the articles of association of the company. If not, they shall be determined in writing by the subscribers of the memorandum. If this also is not done, all the subscribers of the memorandum shall be deemed to be the first directors of the company.

1. Appointment of Directors by the Company

According to Sec. 255, directors are appointed by a company in a general meeting. While one-third of the directors can be appointed permanently, the remaining two-thirds are liable to retire by rotation. Of these, only one-third are liable to retire at any annual general meeting. Retiring directors are also eligible for re-appointment.

2. Appointment of Directors by the Board of Directors

  1. As Additional Directors: (Sec.260). The Board of Directors may appoint additional directors within the maximum strength fixed by the articles. Such additional directors hold office only upto the date of the next annual general meeting of the company.
  2. In a Casual Vacancy: (Sec.262). Causal vacancy can be filled up by the board if the articles permit it. A casual vacancy may arise due to reasons such as death, resignation, disqualification or failure of an elected director to accept the office or due to any other reason. The director appointed in a causal vacancy shall hold office only upto the date on which the director whose place has been filled up was to retire.
  3. As an Alternate Director: (Sec.313). The Board of Directors if authorised by the articles or by the company’s resolution at the general meeting may appoint an alternate director. Such an alternate director is to act for the original director during his absence for a period of more than three months from the State in which the meetings of the company are held. The alternate director can continue as director only for the period for which the original director was eligible. Further on the return of the original director, the alternate director must vacate the office of directorship.

3. Appointment of Directors by Third Parties (Sec.255)

Sometimes the articles may give a right to financial institutions, debenture holders and banking companies which have lent money to the company to nominate directors on the board of the company with a view to ensuring that the funds advanced by them are used by the company for the purpose for which they are borrowed. The number of directors so nominated should not exceed one-third of the total strength of the board and they are not to retire by rotation.

4. Appointment of Directors by the Central Government

The Central Government may appoint such number of directors of the board of a company as the Company Law Board may by an order in writing specify as being necessary to effectively safeguard the interest of the company, its shareholders or the public interest. They are appointed to prevent oppression of the minority shareholders or to prevent mismanagement of the company or in the public interest. They are appointed for a maximum period of three years. They are not required to hold qualification share and are not liable to retire by rotation but they can be removed by the Central Government at any time and other persons may be appointed by it in their place.

Powers of Directors

The powers of the Directors can be broadly divided into two:

  1. Statutory Powers
  2. Managerial Powers

1. Statutory Powers

These powers are laid down in the Companies Act, 1956. They confer upon the Board of Directors is the right to exercise all such powers and do all such acts as the company itself has the authority to exercise and do. Thus, the powers of the directors are provided in the Companies Act. Powers to be exercised only at Board Meeting: Sec.292 of the Companies Act provides that the Board of Directors shall exercise the following powers by means of resolutions passed at a meeting of the

  • The power to make calls on shares;
  • The power to issue debentures of the company;
  • The power to borrow money otherwise than on debentures;
  • The power to invest the funds of the company; and
  • The power to make loans.

Powers to be exercised by the Board only with the consent of the Shareholders in the General Meeting:

  • Sell, lease or dispose the whole or part of the company’s undertaking,
  • Remit or allow time for repayment of debt due by a director,
  • Invest any amount received on the acquisition of any property or under-excess of the maximum laid down in the Act,
  • Appoint a sole selling agent for more than 5 years,
  • Issue bonus shares, and  reorganize the share capital of the company.

Other Powers to be exercised at Board Meetings

  • The power to appoint Additional Directors,
  • The power to fill-up causal vacancy in the office of Director,
  • The power to accord sanction to a Director to enter into certain specified contracts with the company.
  • The power to appoint as Managing Director.
  • The power to invest in any shares of any other body corporate.
  • The power to make declaration of solvency in the case of members voluntary winding up.

2. Managerial Powers

  1. Power to make contracts on behalf of the company.
  2. Power to decide the terms of issue of additional shares and debentures.
  3. Power to issue, allot, forfeit and transfer shares of the company.
  4. Power to appoint Directors to fill-up any casual vacancies, Additional Directors or Alternate Directors.
  5. Power to set organisational objectives and formulate major policies.
  6. Power of determining the organisational structure of the company.

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