Book Name: Commercial Law and Industrial Law 26th Edition
Writer: Arun Kumar Sen, Jitendra Kumar Mitra
The Directors of a Company are selected according to the articles of Association of the Company and provisions of the Companies Act. They are in–charge of the management of the affairs of -the Company. The directors are collectively called the Board of directors. The Board is the Company's 'executive authority.
A director is an officer of the company within the meaning of section 2(30). Section 2(13) states that a director includes "any person occupying the position of the director by whatever name called”
The welfare of the shareholders and of the company depends upon who the directors are and how they carry out their duties and responsibilities. To protect the interests of the Company and of the shareholders, the Companies Act contains detailed rules regarding the appointment, remuneration, powers, duties, liabilities and various other matters concerning directors:
NUMBER OF DIRECTORS
The number of directors to be appointed to the Board of directors of a' Company is determined by the articles. The Act provides that there must be at least 3 directors in a Public Company (other than a public company which has become such by virtue of Sec. 43A) and at least 2 directors in other Companies.-Sec. 252.
(Sec. 43A states that under certain circumstance a private company may become a public company by a change in its structure of ownership:-See p. 553]
Subject to the minimum stated above and the maximum fixed r by the articles, the Company can, by ordinary resolution, increase or decrease the number of directors. It can also appoint additional directors for one year.-Sec. 258.
The Company can increase the number of directors beyond the maximum fixed by the articles provided previous sanction of the Central Government is obtained. Where the maximum fixed by articles is 12 or less, the number can be increased to 12 without Government approval.-Sec. 259.
MODE OF APPOINTMENT OF DIRECTORS
Persons named in the articles of association as directors become the first directors of a company In. the case of public companies, the persons named as directors must file with the Registrar, their consent in writing to become directors and must agree to pay for the minimum number of shares which, by the articles, a director is required to have.
Persons who sign the Memo
If no person is named in the articles as directors, the persons who sign the memorandum of association of the Company (and who are individuals, not companies) become the first directors. Sec. 254.
The normal mode of appointing directors is election by the members at the annual general meeting. The manner of holding the election must be provided for in the articles -Sec. 2SS.
2. Appointment of directors by company
According to Sec. 255 directors must be appointed by the company in a general meeting.
3. Appointment of directors by the Board of directors
The Board of directors may appoint directors in the following circumstances :
(a) Additional directors : – The Board of directors can appoint additional directors subject to the maximum number, fixed by the Articles of the company. Such additional directors hold office only up to the date of the next annual general meeting of the company.-Sec. 260.
(b) Casual vacancy : Casual vacancies among directors in public companies and private subsidiaries of public companies may be filled by the Board of directors by nomination. The person appointed to a casual vacancy holds office for the period during which the director, who ' post is vacant, would have remained in office.-Sec. 262
(c) Alternate Directors : The Board of directors of a company may, if so authorised by its articles or by a resolution passed by the company in a general meeting, appoint an alternate director to act for a direct during his absence for a period not less than three months from the State in which meetings of the Board are ordinarily held. The alternate director cannot hold office longer than the original director and vacates his office if and when the original director returns to the State.-Sec. 313.
4. Appointment of directors by third parties. The Articles under certain circumstances empower the debenture-holders or other creditors who have advanced loans to the company to appoint their nominees to the Board.
5. Appointment of directors by proportional representation.
The Articles of a company may provide for the appointment of not less than two-thirds of total number of directors of a public company, according to the principle of proportional representative whether by the single transferable vote or by a system of cumulative voting or otherwise.
6. Nomination by the Central Government
Under Section 408 of the Act, the Central Government can (in case of mismanagement and oppression) nominate some directors to the Board of a company as the Company Law Board may specify as being necessary to effectively safeguard the interest of the company, its shareholders or the public interest. The Directors so appointed are not required to hold any qualification shares. Besides, they are required to keep the Company Law Board informed of the affairs of the company to take such timely action as may be required.
7. Nomination in Statutory Corporations
The Government can nominate a director to the Board of a Company coming within the purview of the Industries (Development and Regulation) Act of 1951. Certain statutory corporations possess similar powers. For example, the Industrial Finance Corporation Act of 1947 empowers the Corporation to nominate a director to the Board of a Company to which it has advanced money.Other rules regarding the appointment of directors are mentioned below:
1. Qualification Shares
(Sections 270, 272, 273). The articles may provide that no person shall be eligible for appointment as director unless he holds a certain minimum number of shares. Such shares are called Qualification Shares. In the case of public companies and private companies which are subsidiaries of public companies, the following provisions apply, notwithstanding anything to the contrary contained, in the articles :
(a) A director shall be deemed to be qualified if he secures the qualification shares within two months after his appointment.
(b) The nominal value of the qualification share or shares shall not exceed Rs. 5,000, or the nominal value of one share where it exceeds Rs. 5,000.
(c) The bearer of a share warrant shall not be deemed holder of shares for the purposes of qualification shares.
If after the expiry of the said period of two months, any person acts as a director of the company when he does not held qualification shares, he shall be punishable with fine which may extend to Rs. 50 for every day between such expiry and the last day on which he acted as director.-Sec. 272. Also he has to vacate his office as director.
In the case of public companies and private companies which are subsidiaries of public companies, when it is intended to propose the name of some person as director, notice of the fact must be given by the candidate or the proposer to the Company at least 14 days before the date of the meeting in which the election will take place. This provision does not apply to a retiring directors. The company shall inform every member of the candidature by individual notices not less than 7 days before the meeting or by advertisement in two local newspapers (one English and one regional language paper) not less than 7 days before the meeting.-Sec. 257.
Section 257 of the Principal Act has been amended and the amended provision states that any person contesting the post of director must submit a notice "along with a deposit of five hundred rupees -which shall be refunded to such person" if the person succeeds in getting elected as a director.
3. Filing of Consent
In the case of public companies and private subsidiaries of public companies every person (other than a director retiring by rotation) proposed as director must sign and file with. The company his consent to act as such, if appointed, unless he himself notifies his candidature to the company.-Sec. 264(l).
A 'person shall not act as director unless he has within 30 days of his appointment signed and filed with the Registrar his consent in writing to be one. But this rule does not apply to
(a) a director re-appointed after retirement by rotation or immediately on the expiry of his term of office ;
(b) an additional or alternate director, or a person filling a casual vacancy, appointed or re-appointed under Sec. 262, and
(c) a person named as a director of the company under its articles as first registered. Sec. 264(2).
4. Method of Voting
Every person, proposed for election as a director; must be voted upon individually. Two or more names are not to be put together, unless such a procedure is agreed to by the members present unanimously. The articles may provide for the election of not less than two-thirds of the directors by the method of proportional representation with single transferable votes or cumulative votes. A non-profit and non-dividend paying company may provide in its articles for the election of all its directors by ballot.-Sections 263, 263A, 265.
5. Amendment of provisions relating to appointment of Directors –
In the case of a public company or a private company which is a subsidiary of a public company, an amendment of any provision relating to the appointment or re-appointment of a managing or whole-time director or a director not liable to retire by rotation; whether that provision be contained in the Company's memorandum or articles, or in an agreement entered into by it; or in any resolution'; passed by the Company in general meeting or by its Board of directors, shall not have any effect unless approved by the Central Government; and the amendment shall become void if, and in so far as, it is disapproved by that Government. f-Sec. 268.
6. Directors to be Individuals
7.Disqualification of Directors
Section 274 provides as follows : A person shall not be capable of being appointed director of a company, if
(a) he has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force ;
(b) he is an undischarged insolvent ;
(c) he has applied to be adjudicated as an insolvent and his application is pending;
(d) he has been convicted by a Court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not– elapsed from the date of expiry of the sentence ;
(e) he has not paid any call in respect of shares of the Company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call ; or . '
(f ) an order disqualifying him for appointment as director has been passed by a Court in pursuance of Section 203 and is in force, unless the leave of the Court has been obtained for his appointment in pursuance of that Section.
(Section 203 empowers the Court to prohibit a person, who is guilty of fraudulent practices, from participating in the management of Companies:)
The Central Government may, by notification in the Official Gazette, remove the disqualifications under Clauses (d) and (e) above, as regards any individual.
A private company, which is not a subsidiary of a public company, may provide by its articles that a person shall be disqualified from being appointed a director on any ground in addition to those specified in (a) to (f) above.
8. Number of Directorships
After the commencement of the Act of 1956, no person can hold office as director,. at, the same time, of more than 20 companies.-Sec. 275.
Exceptions : But the following companies are not to be taken into account while calculating the maximum allowable appointments as director :
(a) a private company which is neither a subsidiary nor a holding company of a public company;
(b) an unlimited company ;
(c) an association not' carrying on business for profit; and
(d) a company in which the person concerned is only an alternate director.-Sec. 278.
Penalty ; A person who contravenes this rule can be fined up to Rs. 5000 for each Company of which he is a director in excess of 20.-Sec. 279.
Who can be a Director ?
qualification of a Director : A director must be appointed in the mode stated in page 508. A director need not have any academic qualification : he need not have any degree from the university ; he need not have been to school. From the Contract Act and the Companies Act, it can be said that the director must have the following qualifications
1.A director must be capable of entering into a contract, i.e.,
(a) he must have attained the age of majority,
(b) he must have sound mind and
(c) he must not be disqualified from
contracting by any law to which. he is subject.-Sec. 11,
2.A director must be a natural person, i.e. not an artificial person
3.A director must have the requisite qualification shares The qualification shares are not required in nomination by the Central Government or in certain Statutory Corporations.
4. A director must not be disqualified under the circumstances enumerated in Sec. 274, e.g., if he is an undischarged insolvent or a person convicted by the Court.
RETIREMENT OF DIRECTORS
Section 255 of the Companies Act provides that not less than two-thirds of the total number of directors of a public company,
or of a private company which is a subsidiary of a public company, shall be persons whose period of office is liable to terminate by rotation.
The articles may be provided for the retirement of all directors at every annual general meeting. Section 256 of the Act provides that at every annual general meeting after the one by which the first directors are appointed, one-third of such of the directors for the time being as are -liable to retire by rotation, shall retire from office. If the number of directors is not three or a multiple of. three, then the number nearest to one-third shall so retire.
The directors to retire by rotation at every annual general meeting shall be those who have been longest in office since their last appointment, but as between persons who became directors on the same day, those who are to retire shall, in default of and subject to any agreement among themselves, be determined by lot.
At the annual general meeting at which a director retires as aforesaid, the Company may fill up the vacancy by appointing the retiring director or some other persons thereto.
If the vacancy is not filled at the annual general meeting or at the adjourned meeting, the retiring directors will be deemed to be automatically re-elected.
RESIGNATION OF A DIRECTOR
(The Company Act does not provide for resignation of a director. But the Articles of a company may have express provision of it. A director is an agent of a company and, therefore, he can resign his office by notice )-a resignation cannot he withdrawn without the consent of the company. Glossop v. Glossop. I An oral resignation is effective, if it is accepted at a meeting of the company, even though the Articles provide that the director must vacate his office in writing .A resignation is effective only when it is accepted by the Board of directors of the company. If a director part with his qualification shares he has to vacate his office. If this is voluntary, then parting with his qualification shares is equivalent to resignation.
VACATION OF OFFICE BY DIRECTORS
1. Statutory vacation
Section 283 of the Companies Act provides that the office of a director shall become vacant under the following circumstances :
(a) if he fails to obtain within due time or ceases to hold the share qualification, if any, required of him by the articles of the Company ;
(b) if he is found to be of unsound mind by a Court of competent jurisdiction ;
(c) if he applies to be adjudicated and insolvent ;
(d) if he is adjudged an insolvent ;
(e) if he is convicted by a Court of any offence involving moral , turpitude and is sentenced in respect thereof to imprisonment for not less than six months ;
(f) if he fails to pay any call in respect of shares of the company held by him whether alone or jointly with others within six months from the last date fixed for the payment of the call, unless the Central Government has by notification in the Official Gazette removed the disqualification incurred by such failure ;
(g) if he absents himself from three consecutive meetings of the Board, 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) if 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 ; '[Section 295 deals with the rules relating to the 'grant of loans to directors.]
(i) if he acts in contravention of Section 299'(which imposes a duty on directors to disclose their personal interest, if any, in any contracts entered into 'by the Company)
(j)if he becomes disqualified by an order of Court under Section 203 (which provides that the Court Can prohibit a person guilty of fraudulent' practices from managing a company) :
(k) if he is removed from the post of director by the members : 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. Consequences :
(1) The office of a director shall become vacant.
(2) In case of insolvency or conviction, the director shall vacate office within 30 days of the order of adjudication or sentence. But if there is any appeal or petition against the order of adjudication or sentence, he shall vacate office within seven days of the disposal of the appeal or petition, unless the order or sentence is set aside.
(3) If a director continues to function when be knows that his post has become vacant under any of the aforesaid provisions, he is liable to a fine up to Rs. 500 per day.
2. Additional grounds of vacation in private companies
A private company, which is not a subsidiary of a public company, may by its articles provide that the office of director . shall be vacated on any grounds in addition to those specified in Section 283.
3. Acceptance of office of profit
Under Section 314 of the Act, if a director accepts an office of profit under the company (except certain special posts like that of a managing director, etc.) without previous consent of the company accorded by a special resolution, he shall be deemed to have vacated his office as director. (See `office of profit' p. 696) REMOVAL OF DIRECTORS. Directors may be removed by shareholders, the Central Government or the Court. The rules regarding the removal of directors are stated below.
I. Removal by Shareholders
Section 284 of the Act provides that the members of a Company may, by ordinary resolution remove a director before the expiry of his period of office, except in the following cases :
l. An additional director appointed by the Central Govern ment under Section 408 (in case of mismanagement and oppression) cannot be removed
2. In a private company, a director appointed for life and holding office as such on Ist April 1952, cannot be removed by a members' resolution.
3. When the articles of a company provide for the election of directors by proportional representation, a director elected by that method cannot be removed by resolution.
Special notice must be given of the resolution to remove a director. A copy of it must be given to the director concerned. A statement relating to the matter may be sent by the director concerned, to the company and such statement shall be circulated among the members, if received in time, or read out in the meeting. The circulation of such statement may be prohibited by Court if it contains defamatory matter.
The meeting which removes a director can elect another in his place if the director was originally appointed by election. If a director is, by agreement or otherwise, entitled to receive compensation for premature termination of his services, he can enforce his claim notwithstanding the removal by resolution . Sec. 284(7)(a).
II. Removal by the Central Government
The Central Government can make a reference to the High Court to remove managerial personnel, including directors when
(a) any person is guilty of fraud, misfeasance, persistent negligence or default, etc., or
(b) the business of the Company is not following sound business principle or prudent commercial practices or
(c) the Company is causing damage to the trade and industry of the business pertaining to it or
(d) any person of the Company is trying to defraud creditors, members, etc. or a fraudulent or unlawful purpose.-Sections 388B to 388E. See Chapter 10.
III. Removal by the Company Law Board
Under Section 402, where, on an application to the Company Law Board for prevention of oppression (Sec. 397) or mismanagement (Sec. 398), the CLB finds that the relief ought to be granted, it may by an order provide for the termination, setting aside or modification of any agreement. between the Company and the Director. When the appointment of a Director so terminated or set aside, he or she cannot sue the Company for damages or compensation for loss of office.
The term Managing Director is defined in Section 2(26) of the Act. The Managing Director is a director who is "entrusted with any substantial powers o management". The power to do administrative acts of a routine nature when so authorised by the Board (e.g., the power to affix the common seal of the company or to draw and indorse any cheque etc.) shall not be deemed "substantial powers of management". The term Managing Director includes a director occupying the position of a managing director, by whatever name called.
Position of Managing Director
Managing Director is a member of the Board of directors. He is a whole time director. he is the chief executive of the company. The managing director is not an employee, nor is he a servant of the company. But he is a director of the company and has certain duties and responsibilities. In an English case, it was held that the managing director has two functions and two capacities. He is a director of the company and he has a contract with the company for his services. There is nothing anomalous in this. The same individual may have two or more capacities each including special rights and duties in relation to the same thing or matter in relation to the same persons.
Whole Time Director
A whole time director is a director who is entrusted with certain duties and responsibilities. lie is an employee of the Company. The ambit of his jurisdiction is defined by his contract of employment. The articles of some Companies contain the provisions regarding their services. It can be inferred that a whole time director gives the whole or the most of the working time to the Company. The term "Whole time director" has not been defined in the Act, but it has been used with the term managing director in sections of the Act.
Appointment of Managing Director and Whole Time Director The appointment of a managing director or of a whole time director can be made by any of the methods
(i) an agreement with the company, or
(ii) a clause in a memo or articles of the company, or
(iii) a resolution passed by -a company in its general meeting, or
(iv) a resolution of the Board of directors.
Under the Amendment Act, every public company or a private company which is a subsidiary of a public company having a paid up share capital of such sum as may be prescribed shall have a managingor a whole-time Director or a manager. The sum prescribed is Rs. 5 crores or more. Such appointment can be made without prior approval of the Central Government provided the appointment is made in accordance with the conditions specified in Schedule XIll and a return in the prescribed form filed within 90 days from the date of such appointment. [Sec. 269(2)]
Every application seeking approval to the appointment of a managing or whole-time director or a manager shall be made to the Central Government within a period of 90 days from the date of such appointment. The Central Government shall. not accord its approval to such an application, if it is specified that (a) the managing or whole-time director or the manager appointed is in its opinion, not a fit and proper person to be appointed as such or such appointment is not in the public interest ; or (b) the terms and conditions of the appointment of managing or whole-time director or the manager are not fair and reasonable [Sec. 269(4)].
When the appointment is not approved by the Central Government it may refer the matter to the Company Law Board for decision under Section 269(7).
The following rules are applicable to a public company and a private company which is a subsidiary or a public company :
(1) The rules relating to the appointment or reappointment of "managing" or "whole-time directors" or "a director in the whole-time employment of the company" cannot be amended without the approval of the Central Government.-Sec. 268.
(2) The appointment of a person as a managing or whole time director shall not have any effect unless approved by the Central Government.-Sec. 269(1).
(3) In the case of an existing company the re-appointment of a person as a managing or whole-time director shall not have
any effect unless approved by the Central Government.-Sec. 269(2).
(4) The Central Government shall not accord its approval under Sec. 269(l) in any case, unless it is satisfied that
(a)it is in the interests of the company to have a managing or whole-time director,
(b) the managing or whole-time director of the company is, in its opinion, a fit and proper person to be appointed as such and that the appointment of such person as managing or whole-time director-is not against the interest and
(c) the terms and conditions of appointment of the proposed managing or whole-time director of the company are fair and reasonable.-Sec. 269(3), Companies (Amendment) Act, 1974.
(5) Regarding the appointment of the managing director or whole-time director of a company, the Central Government can reduce the period of appointment when the approval is given.
(6) If the appointment of a person is not approved, the person so appointed shall vacate the office on the date when the decision of the Central Government is communicated to the company. [f a person omits or fails to do so he shall be punishable with a fine up to Rs. 500 per day.-Sec. 269 as amended in the Act of 1974. Powers and Duties of a Managing Director
The powers and duties of a managing director are specified in
(i) the agreement with the company by which tie is appointed or
(ii) in the memorandum or articles of the company or
(iii) in a resolution passed by the company in general meeting or
(iv) a resolution by its Board of directors. Thus managing '; directors of different companies may have different powers and , duties. Strangely enough, Model Articles in Table A do not provide any specific powers to Managing Director only. Articles of some companies do provide the powers in Article itself. Again, Company Act does not provide any specific powers to MD. A managing director exercises his powers subject to the superintendence, control and direction of the Board of directors.
Disqualification of Managing Director
As Managing Director or Whole-time Director is a Director first, he will be appointed only when he is qualified to become a Director. If he is disqualified as director he is automatically disqualified as Managing Director. So no company can employ, or continue the employment, of any person as its managing or whole-time Director who
(a) is an undischarged insolvent, or has at any time been adjudged an insolvent ;
(b) suspends, or has at any time suspended, payment to his creditors, or makes, or has at any time made, composition with them ; or
(c) is, or has at any time been, convicted by a Court of an offence involving moral turpitude.-Sec. 297.
(d) A managing director is also a director. Therefore all the disqualifications applicable to a director also apply to a managing director. Further any one who is below 25 years or above 70 years of age is usually disqualified for Managing Director.
Number of Managing Directorships
No person can ordinarily be managing director of more than one public company or private company which is a subsidiary of a public company. he can be managing director of two such companies if the second appointment is approved by a resolution of the Board of directors with the consent of all the directors present in a meeting of which specific notice was given to all the directors in India. No person can be managing director of more than two companies. But the Central Government may, by a special order, allow *a person to be managing director of more than two such companies where it is satisfied that the companies should, for their proper working, function as a single unit and have a common managing director. A person may be managing director of more than two companies where the companies are private companies not subsidiaries of public companies.-Sec. 316.
Term of Office
No person can be appointed managing director for a term exceeding five years at a time. "There is, however, no bar to the reappointment of a person after the expiry of his term of service.-Sec. 317. This section does not apply to a private company, unless it is a subsidiary of a public company.
LOANS TO A DIRECTOR, HIS RELATIVES ETC.
Without obtaining the previous approval of the Central Government, no company can, directly or indirectly, make any loan to, or give any guarantee or provide any security for,
(a) any director of the lending company or of a company which is its holding company orsup any partner or relative of any such director ;
(b) any firm, in which any such director or relative is a partner,
(c) any private company of which any such director is a director or member ;
(d) any body corporate at a general meeting of which not less than twenty-five per cent of total voting power may be exercised or controlled by any such director, or by two or more such directors together, or
(e) any body corporate the Board of Directors, or Manager whereof is accustomed to act in accordance with the directions or instructions of the Board or of any Director or Directors of the lending Company.-Sec. 295(1).
Sec. 295(2) provides that the above rules do not apply to any loan made, guarantee given or security provided
(a) by a private Company unless it is a subsidiary of a public Company :
(b) by a banking Company ; or
(c) by a holding Company to its subsidiary.
The restrictions imposed by Section 295 apply to a transaction represented by a book debt which was from its inception in the nature of a loan or an advance.-Sec. 296.
Every person, including the director to whom the loan is given, who knowingly contravenes the rules mentioned above, may be punishable by simple imprisonment up to six months and fine up to Rs. 5000. All persons who are knowingly parties to the contravention, are liable to make good the amount which the company paid on account of the loan, guarantee or security.
CONTRACTS IN WHICH A DIRECTOR IS INTERESTED
A director or his relative or a firm in which he is partner or a private Company in which he is member or director, shall not enter into contracts with the Company for the sale, purchase or supply of goods and services or for underwriting the subscription of its shares or debentures, except with the consent of the Board of directors.-Sec. 297(1).
The above rule does not apply to the following cases :
(a) contracts for the purchase and sale of goods and materials for cash at prevailing market prices ;
(b) contracts for the sale, purchase o,- supply of goods, materials and services in which either of the parties regularly trades or does business provided the value of the goods etc does not exceed Rs. 5000 in any year and
(c) any transaction of a banking or insurance company in the ordinary course of business.-Sec. 297(2).
In circumstances of urgent necessity a contract may be entered into without the prior consent of the Board, but such consent must be obtained within 3 months of the date on which the contract was entered into.-Sec. 297(3)).
The consent of the Board of directors is to be given by a resolution passed in a meeting.-Sec. 297(4).
If consent is not given, anything done in pursuance of the contract shall be voidable at the option of the Board of directors.-Sec. 297(5).
In case of a company having a paid-up share capital of not less than Rs. 1 crore, no such contract shall be entered into except with the previous approval of the Central Government.-Sec. 297. Amendment of 1974.
Every director who is in any way concerned or interested in a contract by or on behalf of a Company shall disclose the nature of his interest at a meeting of the Board of directors. Sec. 299.
No director of a Company shall, as a director, take any part in the discussion of, or vote on, any contract or arrangement entered into, or to be entered into, by or on behalf of the company, if he is in any way, whether directly or indirectly, concerned or interested in the contract or arrangement : nor shall his presence count for the purpose of forming a quorum at the time of any such discussion or vote; and if he does vote his vote shall be void.-Sec. 300(1).
The bar imposed upon participation in the Board's discussion does not apply in the case of a private Company which is not a subsidiary or a holding Company of a public Company, and certain other cases.Sec. 302(2).
Every Company must maintain one or more registers in which shall be entered particulars of all contracts entered into by the Company, in which any ~ of the directors are interested (except contracts not exceeding Rs. 1000 in value and the ordinary transactions of banking and insurance companies}-Sec. 301.
When a director has an interest in a contract by which a Manager or Managing Director is appointed, the Company must send to every member of the Company an abstract of the contract, together with a statement clearly specifying the nature of the director's interest.-Sec. 302.
Case Law :
Interested Director-who is : The interest or concern spoken of by Sections 299(1) and 300(1) cannot be a merely sentimental interest or ideological concern. Therefore, a relationship of friendliness with the Directors who are interested in contract or arrangement or even the mere fact of a lawyer-client relationship with such directors will not disqualify a person from acting as a Director on the ;round of his being an "interested" Director.
REGISTER OF DIRECTORS ETC.
Every Company shall keep at its registered office, registers containing particulars about its Directors. Manager and Secretary.-Sec. 303.
Copies of the particulars entered in the aforesaid registers shall be sent to the Registrar, who shall keep similar registers. All the registers can be inspected by. any person.
The Company must also maintain a register showing the number of shares and debentures (of the Company, its subsidiaries and its holding Company) held by every director and manager.
Sec. 307. Such persons must also disclose to the Company their shareholdings in the Company.-Sec. 308.
REMUNERATION OF DIRECTORS
The remuneration payable to the directors must be determined according to the provisions of Sections 198 and 309 either by the Articles or by the resolution of a company.
Rules regarding director's remuneration are summed up below.
1.The remuneration payable to the directors of a Company shall be determined either by the articles, or by a resolution passed in a general meeting of the members. The articles may require the resolution to be a special resolution.-Sec. 309(l).
2. If a director gives professional service to the company, he may be paid for it, provided that, in the opinion of the Central Government, lie has requisite qualifications for the profession.
3. The remuneration of directors is part of the overall managerial remuneration which, according to Section 198, cannot exceed Il% of the net profits. When profit is inadequate or company is in loss a managerial person is entitled to a minimum remuneration. The ceiling an minimum remuneration has been prescribed in }'art 11 of Schedule XIII. The minimum remuneration is in terms of `effective capital' of the company. Minimum remuneration will be Rs.40,000 up to effective capital Rs. I crore, Rs. 57,000 between Rs. 1 and Rs. S crores effective capital, Rs. 72,000 between S to 15 crores and maximum remuneration will he Rs. 87,000 when effective capital is more than Rs. 15 crores.
4. A director may receive remuneration either by way of a monthly payment, or by way of a fee for each meeting of the Board, or a Committee thereof attended by him, or partly by the one way and partly by the other.-Sec. 309(2).
5. A director, who is either in the whole-time employment of the company or a Managing Director, may be paid remuneration either by way of a monthly payment or at a specified percentage of the net profits of the company or partly by one way and partly by the other. But, except with the approval of the Central Government, such remuneration shall not exceed 5% of the net profits for one such director, and if there is more than one such director. 10% for all of them together.-Sec. 309(3).
6. Directors (who are not in the whole-time employment of the company and not a Managing Director) may be allowed a monthly, quarterly or annual sum with the approval of the Central Government, or a commission on net profits (if sanctioned by a special resolution). Such commission shall not exceed for all the directors together.
(i) 1 % of the net profits of the company, if the company has a managing or whole-time director, or a manager and
(ii) 3% of the net profits of the company, in any other case. Commission, in excess of these rates, may be allowed
with the approval of the Central Government if so resolved in a general meeting of the company.-Sec. 309(4).
7. The net profits are to be calculated in the manner laid down in Section 198(l).-Sec. 309(5).
8. Remuneration drawn in excess of what is allowable, must be refunded to the company and, till so refunded must be held in trust for the company.-Sec.309(SA). The company cannot waive recovery of such sums.-Sec. 309(513).
9. A whole-time director or a Managing Director who receives a commission from a Company is not entitled to receive any commission or remuneration from any subsidiary of the Company.-Sec. 309(G).
10. The rules stated above do not apply to private Companies unless they are subsidiary of public Companies.-Sec. 309(9).
11. Any provision relating to the remuneration of directors or managing directors or an amendment thereof, whereby such remuneration is increased, will not be valid unless sanctioned by the Central Government. But the director's fee, for attending a .meeting of the Board or a Committee can be increased up to Rs. 250 without Government sanction. When paid up capital of the Company is not more than Rs. 50 lakhs Rs. 500 between Rs. 50 lakhs to Rs. 5 crores paid up capital Rs. 750 between Rs. 5 crores and Rs. 10 crores and Rs. 1,000 in case of more than Rs. 15 crores paid up capital.
12. Legal decisions :
(a) The remuneration payable to directors is a debt for which a director may sue the Company. Orton v. Cleveland etc. Co. rSuch remuneration may be paid out of capital if there are no profits.
(b) Directors are not entitled to any remuneration as of right. The become entitled to remuneration when the articles so provide or when a resolution is passed by the members granting them remuneration.
(c) R and H were appointed managing directors of the company , , the first time after the coming into force of the Act. The Law Board, while granting approval, inserted the condition that the total remuneration of each managing director by way of commission and salary shall not exceed Rs. 12,000 per annum. The said remuneration was in addition to the benefit of certain perquisites which would be available to the managing directors.
Held, in view of the provisions of the Sections 269 and 637A, the Company Law Board was well within its powers in imposing the condition.
MEETINGS OF THE BOARD OF DIRECTORS
The Board of directors is the executive authority of the Company. Generally, the directors exercise their powers through resolutions passed in meetings of the Board. The Companies Act contains the following rules regarding Board meeting :
l. In the case of every Company, a meeting of its Board of directors shall be held at least once in every three months and at least four such meetings shall be held every year. The Central Government may, by notification in the Official Gazette, exempt any class of companies from this rule either wholly or subject to modifications and conditions.-Sec. 285.
2. Notice of every meeting of the Board of directors shall be given in writing to every director for the time being in India, and at his usual address in India to every other director.-Sec. 286.
3. The quorum for a meeting of the Board of directors shall be one-third of its total strength (any fraction contained in that one-third being rounded off as one) or two directors, whichever is higher.
But when some directors are unable to participate in the discussions of the Board (because some contract or arrangement in which they are interested is being discussed) and the number of such directors exceeds or is equal to two-thirds of the total strength, the number of the remaining directors, that is to say, the meeting being not less than two, shall be the quorum during such time.-Sec. 287.
Case Law :
A quorum of two directors meant a quorum of two directors who were competent to transact and vote on the business before the Board.
4. if a meeting of the Board could not be held for want of quorum, then unless the articles otherwise prove, the meeting shall automatically stand adjourned till the same day, in the next week, at the same time and place, or if that day is a public holiday, till the next succeeding day which is not a public holiday, at the same time and place.-Sec. 288.
A meeting, which could not be held for want of quorum, will count as a meeting for the purposes of Section 285. (Sec. l, above.)
5. A resolution shall be deemed to have been passed by the Board (or by a Committee thereof) by circulation, if the resolution has been circulated in draft, together with the necessary papers, if any, to all the directors, or to all the members of the Committee then in India (not being less in number than tile quorum fixed) and to all other directors or members, at their usual address in India and has been approved by such of the directors as are then in India or by a majority of such of them, are entitled to vote on the resolution.-Sec. 289.
LEGAL POSITION OF DIRECTORS
There are different views about tile legal position of directors. They have been described sometimes as trustees of the company and sometimes as its agents. Neither view is wholly correct but both contain elements of truth.
A director is not a trustee in the correct legal sense of the term. A trustee is a person who is the owner of property and deals with it as principal. A director is not the owner of the company nor does he enter into contracts with third parties as owner of the company's property. Therefore a director is not a trustee. But the director's position is similar to that of a trustee because the directors are bound to exercise their powers in the interest of the company and are liable for misuse of powers if any. A director may be called trustee in the sense that the courts expect from directors the same degree of integrity and standard of conduct as is expected from a trustee.
It is generally agreed that the directors occupy a fiduciary position in relation to the company. They cannot make secret profits and must make full disclosure of all material facts concerning their interests in connection with the company. There is, however, no fiduciary relationship between a director and an individual shareholder and he is not a trustee for any particular shareholder.
If is more accurate to describe directors as agents. The directors are agents of the company because the company acts through the directors. Contracts with third parties are entered into by the directors, not as principals, but as agents of the company. But it is not strictly speaking true to say that the directors are nothing more than agents of the company. By the articles and under the Companies Act the directors have independent powers in certain matters. An agent is bound to take instructions from his principal and to abide by his wishes in the business of the agency. But the directors are not bound to consult the shareholders in all matters.
"Directors are, in the eye of the law, agents of the company for which they act, and the general principles of the law of principal and agent regulate in most respects the relationship of the company and its directors."-Palmer's Company Law. Quoted and approved in R. K. Dalrnia v. Delhi Adm.2 and in Chavalier etc. v. The Dharmodayam Co.
In a case under the Penal Code, Sec. 409 (Criminal Breach of Trust), the Supreme Court observed as follows : A Director is not only an agent but is in the position of trustee. A Director, being a trustee of the assets which has come into his hand, has dominion and control over the same.
The Section 3(30) of the Companies Act provides that a director is an officer of the Company. Section 3(31) provides that an officer, `who is in default' may be punished if he is guilty of default, non-compliance, failure or refusal of the rules ,regarding the Companies Act (see p.705).
Employees or Servants
A director may enter into a service contract with the Company. For example, a director may be the legal advisor of a company.
A Director can become a servant of the company under a special contract of service.
In the case, Re Forest of Dean Coal Mining Co. the position of the directors was described as follows : "Directors are described as trustees, agents or managing partners, not as exhausting their powers and responsibilities but as indicating useful points of view. It does. not matter much what you call them, so long as you understand what their true position is, which is that they are commercial men, managing a trading concern for the benefit of themselves and all other shareholders in it."
POWERS OF DIRECTORS
Directors derive their power and authority from two sources
(i) the Articles of Association of the Company and
(ii) the Companies Act.
The articles of association generally contain a list of the powers which may be exercised by directors and the limitations on those powers if any.-The articles, also contain a list of those matters which are to be decided by the members in a general meeting. Section 291 of the Companies Act lays down that subject to the provisions of the articles the Board of directors of a company shall be entitled to exercise all such powers and do all such acts and things as the company is authorised to exercise and do.
All acts and things done by the Board of directors, within the powers given to it by the articles, are valid and binding on the company. If the Board does something which is beyond the powers of the Board but within the powers of the company as laid down in the Memo, the members can, if they wish, ratify the act of the Board. The thing done will thereupon be binding on the company. But the members, even if unanimous, cannot ratify and validate an act which is, beyond the powers of the company.
It is to be noted that a director individually has no authority over the affairs of the company except as regards matters which have been specifically delegated to him by the Board. Such delegation is permissible within certain limits. Apart from such delegated authority exercisable by individual directors, the authority and powers of directors are to be exercised collectively through resolutions of the Board of directors.
"The directors and shareholders in general meeting are primary organs of the company between whom the company's powers are divided. The general meeting retains ultimate control, but only through its powers to amend the Articles, to take away powers from the directors and to remove the directors and to substitute others to the taste of the shareholders.
Section 292 of the Companies Act provides that the Board of directors shall exercise the following powers on behalf of the company and it shall do so only by resolutions passed at meeting of the Board:
(a)make calls on shareholders ;
(b)issue debentures ;
(c) borrow moneys otherwise than on debentures ;
(d) invest the funds of the company ; and
(e) make loans.
[Clauses (c) and (e) do not apply to banking companies.] Some of these powers may be delegated to a committee of directors, or to the managing director, manager etc. Restrictions on the powers of the Board Section 293(1) of the Act imposes the following restrictions on the powers of the Board.
The Board of directors of a public company or of a private company which is subsidiary of a public company shall not, . except with the consent of the company in general meeting,
(a) sell, lease or otherwise dispose of the whole, or substantially the whole, of the undertaking of the company, or any of its undertaking where the company owns more than one undertaking ;
(b) remit or give time for the re-payment of any debt due by a director (except in the case of a loan by a banking company) ;
(c) invest otherwise than in trust securities the sale proceeds resulting from the acquisition, after the commencement of this Act without the consent of the company, of any such undertaking as is referred to in clause (a), or of any premises or properties used for any such undertaking;
(d) borrow moneys, where the moneys to be borrowed together with the moneys already borrowed by the Company, (apart from temporary loans obtained from the company's bankers in the ordinary course of business) will exceed aggregate of the paid-up capital of the company and its free reserves, that is to say, reserves not set apart for any specific purpose ; or,
(e) contribute, after the– commencement of this Act, to charitable and other funds not directly relating to the business of the company or the welfare of, its employees any amounts the aggregate of which will, in any financial year, exceed twenty five thousand rupees or five per cent of its average net profits during the three financial years immediately proceeding, whichever is greater. Under Sec. 293A, the Board of directors of a company cannot contribute to any political party or for any political purpose (See – below).
Sole selling agents
Section 294 provides that after the commencement of the Act of 1956, the Board of directors of a company shall not appoint a sole selling agent for any area for a term exceeding ;five years at a time. There may be re-appointment or the extension of the term of office: The above rules are subject to the condition that the appointment shall cease to be valid if it is not approved by the company in the first genera) meeting held after the date on which the appointment is made An appointment of sole selling agent would be void ab initio, unless the agreement contains` the above condition.
The Central Government can prohibit the appointment of sole selling agent in certain cases e.g.,
(1) where the agent to be appointed has a substantial interest of the company
(2) where the company has .a paid-up share capital of Rs: 50 lakhs or more, etc.-Sec. 294AA. Companies (Amendment) Act; 1974.
Validity of Acts of Directors
Acts done by a person as director are valid, notwithstanding that it may afterwards be discovered that his appointment was invalid by reason of any defect or disqualification or that his appointment as director had terminated by virtue of any provision contained in the Act or in the articles.-Sec. 290. It is, however, provided that nothing in Section 290 shall be deemed to give validity to acts done by a director after his appointment has been. shown to the company to be invalid or to have terminated.
CONTRIBUTION FOR POLITICAL PURPOSES
293A. (1) Notwithstanding anything contained in any other provision of this Act, neither a company in general meeting nor its Board of directors shall, after the commencement of the Companies (Amendment) Act, 1969, contribute any amount or amounts- .
(a) to any political party, or
(b) for any political purpose to any individual