Management of Companies Corporate Law Notes

Management of Companies Corporate Law Notes

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Define the term director. Discuss their qualifications and disqualifications in respect of appointment.
Discuss the provisions of Companies Act, 2013 as to the number, appointment and remuneration of the directors of a company.

Ans. A company is an artificial person existing in the eyes of law. It does not have its physical body. Therefore, it cannot act by its own. It acts through some human agency. Such human agency is usually known as ‘directors’ or ‘the Board of directors.’

Definition of Director : “Director means a director appointed to the

Board of a company.” [Section 2(34)]

This definition does not indicate about the nature and position of a director. A definition given by the Supreme Court of India highlights the nature and position of a director.

According to the Supreme Court of India, “A person who guides policy and superintends the working of the company, is a director. the name by which he is called is immaterial.”

To conclude, it may be stated that a director means a person who is appointed as director to the Board of directors of a company and who guides the policy and supervises the working of the company.

Only individuals can be appointed as directors. No body corporate association or firm can be appointed as directors of a company. [Section 1491)]

A director is a member of the Board of directors. The Act States that the Board of directors or Board in relation to a company means the collective body of the directors of the company. [Section 2(10)]

Simply speaking a director is an individual elected by the shareholders to manage the affairs of the company. Directors collectively are called ‘Board of Directors’ or Board. Actually directors are required to exercise their powers collectively as a Board. There are certain powers which can be exercised only by passing resolutions at the Board Meeting. Thus, Board is the highest authority as far as the management of a company is concerned.

Number of Directors

Minimum Number of Directors [Section 149(l)(a]

(i) Every public company must have at least three directors and every private company, must have at least two directors and one director in case of One Person Company. However, a prescribed company. shall have at least one woman director.

(ii) Every company shall have at least one director who has stayed in India for a total period of not less than one hundred and eighty-two days in the previous calendar year.

(iii) Every listed public company shall have at least one-third of the total number of directors as independent directors and the Central Government may prescribe the minimum number of independent directors in case of any class or classes of public companies.

Maximum Number of Directors (Section The Act has fixed a limit of maximum 15 directors. An increase in the number of directors of a public company beyond the maximum limit of 15 members may be done by passing a special resolution.

Number of Directorships (Section 165)

l. No person, after the commencement of this Act, shall hold office as a director, including any alternate directorship, in more than twenty companies at the same time:

Provided that the maximum number of public companies in Which a person can be appointed as a director shall not exceed ten, For reckoning the limit of public companies in which a person can be appointed as director, directorship in private companies that are either holding or subsidiary company of a public company shall be included.

2. Subject to ,the provision of sub-section (l), the members Of a company may, by special resolution, specify any lesser number Of companies in which a director of the company may act as directors. Who may be appointed as a Director?

(i) No body corporate, association or firm shall be appointed director of a company, and only individual shall be so appointed; and

(ii) a person who has been allotted a Director Identity Number (DIN). Disqualification of Directors (Section 164)

Following persons cannot be appointed as directors of a company:

(i) A person found by a court to be of unsound mind and the finding is in force.

(ii) An undischarged insolvent.

(iii) A person who has applied to be adjudged as insolvent and his application is pending.

(iv) A person who has been convicted by a court, whether in India or elsewhere, of an offence involving moral turpitude and sentenced to sixe months’ imprisonment and a period of five years has not passed from the date of the expiry of the sentence.

Provided that if a person convicted of any Offence and sentenced in respect thereof to imprisonment for a period of seven years or more, he shall not be eligible to be appointed as a director in any company.

(v) An order disqualifying him for appointment as a director has been passed by a court, or Tribunal and I he order is in force.

(vi) He has not paid any calls in respect of an’* shares of the company held by him, whether alone or jointly with others, and six monihs have elapsed from the last day fixed for payment of the call.

(vii) He has been convicted of the offence dealing with related party transaction under Section 188 at any time, during the last preceding five years.

(viii) He has not been allotted Director Identification Number (DIN).

(ix) A person who is already a director of a public company which:

—has not filed the annual accounts and annual retums for any continuous 3 financial years commencing on and after the first day of April, 1999; or

—has 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.

A private company may by its articles provide for more grounds, in addition to those referred above, on account of which a person shall not be appointed as director of the company. But in case of public companies and their subsidiaries provisions on additional disqualifications will be invalid.

Appointment of Directors

The appointment of directors is made in the following manner:

1. Appointment of first ‘Directors [Section 152(1)] : ‘ The first directors are usually appointed by the promoters in the manner laid down by the company’s articles shall be the persons whose names appear in the articles of the company. Where no provision is made in the articles for the appointment of first directors, the subscribers to the memorandum, who are individuals shall be deemed to be first directors of the company. In case One Person Company an individual being member shall be deemed to be the first directors of the company subject to the regulations Of the company’s articles. The first directors can hold office only ,till the first annual general meeting of the company when they are replaced by the directors appointed by the company at this meeting. However, the members may appoint new directors to replace the first directors earlier than the annual general meeting.

It may be noted that now-a-days, it is the usual practice to submit list of proposed directors and their written consent to become first directors of the company at the time of registration of company to the Registrar.

2. Appointment of Directors by Members/Company : (a) Appointment in First General Meeting——The members of a company are entitled to appoint directors at the very first general meeting (this need not be annual general meeting) of the, company held after incorporation of-the company. The directors appointed at such meeting shall replace the first directors. (b) Appointment subject to retirement by rotation : Section 152 provides that unless the articles provide for the retirement of all directors at every annual general meeting, at least two-thirds of the total number of directors of a public company shall be persons who shall be subject to retirement by rotation and must be appointed by the company in it every annual general meeting. The remaining directors in the case of any such company and ene directors of a private company may be appointed in accordance with the provisions of the company’s articles. In the absence of any such provision in the atticles or in case of default in so appointing directors, these directors shall also be appointed by the company in general meeting. vacancies caused by the retirement of directors should be filled up at the same meeting. Retiring directors are eligible for re-election and may be re-appointed again.

Thus, in a public company, maximum -one-third of the total number of directors may be non-rotational directors. They shall also be appointed in the annual general meeting for a fixed period subject to the provisions Of articles of the company.

Note: For the purposes of calculating the number of rotation directors, “total number of directors” shall not include independent directors.

3. Appointment of Directors by the Board of Directors (Section 161) : The Board of Directors may make the following appointments:

(i) Additional pr co-opted Directors: If authorised by the Articles, Board ok Directors my appoint any person, other than a person who fails to get appointed as a director in a general meeting, as an additional director at any time who shall hold office up to the date of the next annual general meeting or the last date on which the annual general meeting should have been held, whichever is earlier. [Section 161(1)]

(ii) Alternate Directors : The Board of Directors may, if so authorised by the Articles of Association or by a resolution passed by the company in the general meeting appoint in alternate director, to act for a director during his absence for a period of not less than. 3 months from the State in which meetings of the Board are ordinarily held. Such a director will vacate office immediately on the return of the original director to the state. Such an alternate director will automatically vacate office on the expiry of the term of the original director even if the latter has not returned. [Section 161(2)]

(iii) Nominee Director : Subject to the articles of a company, the Board may appoint any person as a director nominated by any institution in pursuance of the provisions of any law for the time being in force or of any agreement or by the Central Government or the State Government by virtue of its shareholding in a Government company. [Section 161 (3)]

(iv) Casual Vacancy : A casual vacancy occurring amongst the directors (on account of death, resignation or otherwise) may filled up by the Board of Directors unless the Articles provide a different procedure. The person so appointed shall hold office only up eto the time his predecessor would have continued. [Section 161(4)]

4. Appointment of Directors by the Tribunal : Where an application is made to the Tribunal under section 241 for relief against oppression and mismanagement of a company’s affairs, the Tribunal may, if satisfied, order for the appointment of such number of persons as directors, who may be required to report to the Tribunal on such matters as the Tribunal may direct.           

The Tribunal may issue the order on a petition made to it by at least 100 members of the company or the member(s) holding at least 10% of the voting rights in the company. The ground on which such a petition can be filed is conduct of the affairs of the company in a manner oppressive to any member of the company or prejudicial to the interests of the company or public interest.

5. Appointment of Directors by the Central Government ; Where all the directors of a company vacate their offices under any of the specified disqualifications the promoter or, pin his absence, the Central Govemment shall appoint the required number of directors who shall hold office till the directors are appointed by the company in the general [Section 167(3)]

6. Appointment of Directors by Proportional Representation :

Directors in company may be appointed either by (a) a system of straight majority of votes or (b) a system of proportional representation, Section 163 of the Companies Act 2013 gives an option to the company to adopt principle of proportional representation for appointment of directors. The articles of a company may provide for the appointment of not less than two-thirds of the total number of the directors of a company in accordance with the principle of proportional representation, whether by the single transferable vote or by a system of cumulative voting or otherwise and such appointments may be made once in every three years.

Management of Companies Corporate Law Notes
Management of Companies Corporate Law Notes

Provisions Regarding Remuneration of Managing Director (MD) Whole-time Director or Manager

The remuneration payable to directors is usually determined by the Articles Association or a resolution passed by the company in its general meeting. However, this will be subject to the provisions of Section 197 of Companies Act, 2013. The main provisions regarding remuneration of managing and whole-time directors or manager are as follows :

(1) Overall Maximum Managerial Remuneration (Section 197) : The total managerial remuneration payable by a public company, to its directors, including managing directors and whole-time director, and its manager in respect of any financial year shall not exceed eleven percent of the net profits of that company for that financial year computed in the manner laid down in section 198. However, the remuneration of the directors shall not be deducted from the gross profits.

(2) Higher payment with the approval of Central Government : A company in a general meeting may authorise the payment of remuneration exceeding I i per cent of the net profits of the company, subject to the provisions of Schedule V. However, such resolution of general meeting for higher remuneration shall require the approval of the Central Government [First proviso to Section 197 (1)]

(3) Ceiling on individual and Overall Remuneration : The remuneration payable to any one MD or WD or manager shall not exceed 5 percent of the net profits of the company. If there is more than one such director, remuneration shall not exceed 10 per cent of the net profits toall such directors and manager taken together. [Second proviso to Section 191 (1)]

Note : It should be noted that the remuneration payable to a direct determined aforesaid shall be inclusive of the remuneration payable to him for the services rendered by him in any other capacity except the services of professional nature rendered in the professional capacity [Section 197 )4)]

(4) Remuneration in case of no profits or Inadequate Profits ‘ Sometimes, a company has no profits or inadequate profits and cannot pay remuneration in accordance with the above provisions. In such a case, the company shall not pay to its directors (including any managing or whole-time director or manager), by way of remuneration any sum (exclusive of any fees payable to directors for attending meetings and for their professional services) except in accordance with the provisions of schedule V. If the company is not able to comply with provisions of schedule V, it shall pay the remuneration only with the previous approval of the Central Government. [Section 197(3)]

Remuneration to Non-Executive (part-time) Directors : The remuneration payable to mm-executive (who are neither managing directors nor whole-time directors) shall not exceed the following limits :

(i) One per cent of the net profits of the company : If there is a managing or whole-time director or manager.

(ii) 3 per cent of the net profits : in any other case. (Proviso to Section Rem uneration to Independent Directors : Subject to the provisions of this Section, an independent director shall not be entitled to any ståck option. He may receive remuneration by the following ways :

(i) Fees for attending meetings of the Board or the Committees thereof,                               

(ii) Reimbursement of expenses for participation in the Board and other meetings.

(iii) Profits related commission as may be approved by the members. [Section. 197(7)]

His right to remuneration and commission is subject to the provisions of Sectio 97 and 198. [(Section 149(9)] 20. Distinguish between Managing Director and Whole time Dire tor. “Director is not merely agent, but in some sense trustees of the company.” Explain.

Ans. Legal Posidon of Directors ofA Company It is very difficult to define precisely the position of directors in a company. The directors are both the trustees and agents of the company. The dual character of directors is best expressed by Lord Selborne “The directors are the mere trustees or agents of the company—trustees of the company’s money and property—agents in the transactions which they enter into on behalf of the company. ‘ In any case directors are neither the servants nor the employees of the company.

The position of the directors as agents, trustee and managing partners can be discussed as follows :

I. Directors as Agents : The company is an artificial person. It cannot act on its own and must act through some human agency. The directors act as the agents of the company, The relationship between the company and its directors is that of principal and agent. As agents, they must conduct business with reasonable care and diligence, and abide by the Memorandum and Articles of Association. Their acts, within the scope of their authority, are acts of the company itself, and the company is liable for them. They enter into contracts and put their signature on behalf of the company like an agent. But if they exceed the powers given to them by the Memorandum and Articlesthey are liable to the third party for breach of warranty of authority.

However, the powers of directors are much more than those of an ordinary agent. An ordinary agent acts according to the instructions of his principal but directors do not. Once they are elected, they derive their powers from the articles and the Companies Act.

2. Directors as Trustee : In certain respect, directors are in the position of trustees for the company. They are trustees (i) of the company’s money or property which comes into their hands or which is actually under their control and (ii) ofthe powers entrusted to them. Directors stand in fiduciary capacity to protect the interests of the company. As trustees of the company’s money and property, directors are accountable for their proper use. Such property must be applied for the specified purposes of the company and a mis-application of it, is a breach of frust.

Directors are the trustees of the power committed to them as for instance, the power of approving transfer of shares, the power of allotment of shares, power of employing the funds of the company, power of making calls, the power of forfeiting shares and as trustees they may be rendered liable for their misuse.

3. Directors as Managing Partners : The directors are also sometimes described as a managing partner because like a partner of a firm, they manage the affairs of the company and they are also usually important shareholders of the company. However, there is quite difference between the position of a partner of a firm and a director in the company.

4. Directors as Officers : Directors are considered officers for certain matters. They are liable to certain penalties for the non-compliance of the provisions of the Companies Act. They are the officers of the company employed to manage its affairs in accordance with the articles of the Company and subject to the control of the shareholders and Board Of Directors.

5. Directors as Employees : Although directors are agents of the company, they are not employees or servants of the company. But when any director, besides being a director, is also in the service of the company such as secretary, manager or otherwise, he will be treated as an employee. Difference Between Mana  Director And Whole-Time Director Basis of Distinction Whole-time Director Mana in Director

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