After reading this article you will learn about:- 1. Definition of Directors 2. Number of Directors 3. Legal Position/Status 4. Restriction on Appointment 5. Qualification 6. Disqualification 7. Restriction of Number of Directorship 8. Vacation of Office 9. Resignation.
Definition of Directors:
The directors are the persons elected by the shareholders to direct, conduct, manage or supervise the affairs of the company.
The Companies Act does not precisely define the term ‘director’.
But it has been defined under several sections of the Act, in the following manner:
According to Sec. 2 (13) of the Companies Act., “Director includes any person occupying the position of director by whatever name called.” This definition given by the Companies Act does not give the clear meaning of the word director, but it means that a person who performs the duties of a director will be deemed to be a director irrespective of the name by which he is called.
Similar view was expressed in Re Forest Dean Coal Mining Co. “It does not matter what you call them, as long as you understand what their true position is, what is that they are commercial men managing a trading concern for the benefit of themselves and all other shareholders in it.”
According to Sec. 2(30), “A director is the officer of the company.”
According to Sec.303 Explanation (1), “Any person, in accordance with whose directions or instructions, the Board of Directors of the company is accustomed to act, shall be deemed to be director of the company.”
Number of Directors:
Every public company by virtue of Sec. 43 A, shall have at least three directors, private company shall have at least two directors. [Sec. 252]
Subject to this minimum number of directors, the articles may fix the minimum and maximum number of directors for its board of directors.
The company in the general meeting may by ordinary resolution, increase or reduce the number of its directors within the limit fixed in that behalf by the articles. [Sec.258]
In the case of a public company or a private company which is a subsidiary of a public company any increase which is beyond the limit fixed by articles must be approved by the Central Government and such an increase shall become void if disapproved by the Central Government. However, no approval of Central Government shall be required if the increase in the number of directors does not exceed twelve. [Sec. 259]
This provision is not applicable to a Government Company and to a private company which is not a subsidiary to a public company.
Legal Position/Status of Directors:
The Act does not define the position/status of directors, and it is difficult to define the exact legal position of the directors of a company.
Although, the directors have been referred as the trustees, or the managing partners of the company, but in real sense they are none of them. Directors may be considered as the agent, trustees or managing partner for a particular moment and for the particular purpose.
Bowen, L.J. observed, “Directors are described sometimes as managing partners. But each of these expressions is used not as exhaustive of their powers and responsibilities, but as indicating useful points of view from which they may for the moment and for the particular purpose be considered.”
The legal position of directors can be better explained in the following manner:
1. Position of Directors as Trustees:
(i) Legally a director is not the trustee:
Legally speaking, a director is not the trustee of the company. In the case Smith vs. Anderson, James L.J. observed, “A trustee is a man who is the owner of property and deals with it as principal, as owner and as master, subject only to an equitable obligation to account to some persons to whom he stands in relation of a trustee. The office of director is that of a paid servant of the company. A director never enters into a contract for himself, but he enters into a contract for his principal i.e., for the company of which he is a director or for whom he is acting.”
From this point of view, directors are not the trustees of the company, because they are not the legal owners of the properties of the company.
(ii) Directors as trustees of the company’s property and money:
Although the directors are not, properly speaking, the trustees, yet they are trustees of the company’s money and property and they are bound to deal with capital under their control as a trust. They must act in good faith and exercise their powers in the interest and benefit of the company.
(iii) Directors as trustees to the powers entrusted to them:
The directors are the trustees in respect of powers entrusted to them. They must exercise these powers bonafide and for the benefit of the company as a whole.
Examples of such powers are as follows:
(a) The power of employing the funds of the company;
(b) The power to declare dividend in the general meeting;
(c) The power to make call;
(d) The power of forfeiting shares;
(e) The power of receiving payment of call in advance;
(f) The power of approving the transfer of shares;
(g) The power of accepting the surrender of shares;
(h) The power of issuing the unissued shares of the company and making allotments thereof.
(iv) Directors not as trustees to the shareholders:
It should be noted that directors occupy a fiduciary relationship only in relation to the company and not in relation to an individual shareholder. They are not trustees for any particular shareholder.
In case of Percival vs Wright, “The Directors purchased shares from a shareholder when negotiations were being held by them for sale of the company at a very high price. They did not disclose this fact to the shareholder. It was held that the shareholder could not repudiate the contract on that ground.”
(v) Directors not as trustees to the outsiders:
The directors are not as trustees to other persons entering into any contract with the Company.
The position of directors as Trustee can be briefly stated as under:
(i) They are not trustees in the legal sense of the term.
(ii) They occupy a fiduciary position in relation to the company and they are considered trustees with respect to the company’s property and money.
(iii) They are also trustees as regards powers entrusted to them. They must exercise these powers bonafide in the interest of the company and they are accountable for secret profits made by them, if any.
(iv) They are not trusted of individual shareholders.
2. Position of Directors as Agents:
The company being an artificial person cannot manage its affairs itself but the management of the company is entrusted to some human agency known as directors. They are the selected representatives of the shareholders. They run the business on behalf of the shareholders and may be termed as the agent of the company.
In the case of Forguson vs. Wislon, Cairns L.J. stated the position of the directors as, “They are merely agents of the company. The company itself cannot act in its own persons for it has no person, it can act ‘only through directors’ and the case is, as regards those directors, merely the ordinary case of principal and agent, for whenever an agent is liable, those directors would be liable. Where the liability would attach to the principal and the principal only, the liability is the liability of the company.”
In Great Eastern Railway vs. Turner, it was held that the directors are agents in the transaction which they enter into on behalf of the company.
The directors must act in the name of the company and within the scope of their authority. If the directors enter into a contract which is beyond their powers but within the powers of the company, the company, like any other principal, may ratify it.
Where the directors enter into a contract which is ultra virus the company, the company cannot ratify it and neither the company nor the directors are liable on it. However the directors may be held liable for breach of implied warranty of authority.
It is ‘however’ not correct to say that directors are the agents of the company because agents are not elected but appointed and second thing that agents have no independent power while the directors have independent powers on certain matters.
3. Position of Directors as Managing Partner:
Directors have been described as the managing partners because, on the one hand, they are entrusted with management and control of the affairs of the company, and on the other hand, they are usually important shareholders of the company.
However, directors are not partners in the ordinary partnership law sense in as much as the liability of a partner is unlimited whereas the liability of a director as a member is limited to the value of shares held by him (except in the case of unlimited companies). Further unlike a partner, director has no authority to bind the other directors and shareholders.
4. Position of Directors as Officers:
Under Sec. 2 (30) of the Companies Act, the directors are the officers of the company. As officers, they may by held liable if the provisions of the Companies Act have not been fully complied with by them.
5. Position of Directors as Employees:
The directors may be considered as the employees of the company also, because they work under a special contract of service with the company and are paid remuneration accordingly.
6. Position of Directors as Organs of the Company:
Directors have also been treated, in judicial decisions, organs of the company for whose action the company is to be held liable just as a natural person is liable for the actions of his limbs.
In Bath vs. Standard Land Co., Neville J. stated, “The board of directors are the brain and the only brain of the company which is the body and the company can and does act only through them.”
Considering the above discussion, Gessel said: “Directors are described as trustees, agents or managing partners, not as exhausting their powers or responsibilities, but as indicating useful points of view.”
According to L.J. Bowen, “Directors are described sometimes as agents, sometimes as trustees and sometimes as managing partners but each of this expression is used not as exhausting of their powers and irresponsibility’s, but as indicating useful points of view which they may for the moment and for the particular purpose be considered.”
Thus, it is clear from the above discussion that directors are neither the agents, nor the trustees, nor managing partners, nor officers, nor employees of the company but they stand in a fiduciary position towards the company for the powers and company’s property under their control.
Restrictions on Appointment of Directors:
A person shall not be capable of being appointed a director by the articles or named as a director of the company or intended company in a prospectus or statement in lieu of prospectus unless he or his agent authorised in writing has:
(i) Signed and filed with the Registrar his consent in writing to act as such director; and
(a) Signed the memorandum for his qualification shares; or
(b) Taken his qualification shares from the company and paid or agreed to pay for them; or
(c) Signed and filed with the Registrar an undertaking in writing to take from the company his qualification shares and pay for them; or
(d) Filed with the Registrar an affidavit that his qualification shares, if any, are registered in his name. [Sec. 266(1)]
The provisions of this section do not apply to:
1. A company not having a share capital;
2. A private company;
3. A company which was a private company before becoming a public company; or
4. A prospectus issued by or on behalf of a company after the expiry of one year from the date on which the company was entitled to commence business.
Qualifications of Directors:
The Act does not lay down any academic or shareholding qualification for a director. There is a widespread misconception that a director must necessarily be a shareholder of the company. But if it is not so, unless the articles of the company provide otherwise, a director need not be a shareholder of the company. But usually the articles provide for certain qualification shares for the directors.
1. Qualification Shares:
If the articles of the company so provide then as per Sec. 270, the directors must obtain their qualification shares as follows:
(i) The directors must obtain qualification shares within two months after their appointment unless they already hold shares.
(ii) If any provision in the articles requiring a person to hold the qualification shares before his appointment as a director or to obtain them within a period shorter than two months shall be void.
(iii) The nominal value of one qualification share must not exceed Rs. 5,000.
(iv) Bearer share warrants will not be counted for the purposes of qualification shares.
(v) If a director does not obtain qualification shares within two months of his appointment or thereafter does not possess such shares at any time, he ceases to be a director automatically.
(vi) The director should not obtain shares by way of gift from a promoter. He should make the payment for his qualification shares.
(vii) A director is required to hold qualification shares in his own right. It is also sufficient if he holds them as a trustee provided it does not appear on the register of members that he is a trustee.
(viii) Unless the articles provide otherwise, a joint holding will be sufficient for share qualification.
(ix) A person who acts as a director of a company without holding qualification shares even after the expiry of the period of two months from the date of his appointment shall have to vacate his office as a director and be punishable with a fine extending to Rs. 50 for every day from the date of expiry of the period of two months till the date he continues to act as a director. [Sec. 272]
(x) The above provisions as to qualification shares do not apply to a non- subsidiary private company, [Sec. 273]
2. Written Consent:
Every person proposed as a candidate for the office of a director has to sign and file with the company his consent to act as a director, if appointed (Sec. 264).
However, the following persons have not to file such consent:
(i) A person who is retiring from directorship by rotation or otherwise.
(ii) A person who has given notice of his candidature for directorship at the registered office of the company under Sec. 257.
However, a newly appointed director shall not act as a director unless he has also within 30 days of his appointment signed and filed with the Registrar his consent to act as such director.
Filing of such a consent is not necessary in the case of following person:
(i) A director reappointed after retirement by rotation or immediately on the expiry of his term of office.
(ii) Additional or alternate director, or a person filling a casual vacancy in the office of a director under section 262 or appointed as a director or reappointed as an additional or alternate director immediately on the expiry of his term of office.
(iii) A person named as a director under its articles of association as first registered.
It is to be noted that only persons newly seeking appointment as directors have to file their consent to act as such. A person who is already a director and who is retiring at the annual general meeting but immediately seeking reappointment is exempted from filing the consent.
The provisions of this section are not applicable to an independent private company.
3. Only Individuals: can be Directors:
Nobody corporate, association or a firm can be appointed director of a company. Only individuals can be appointed as directors. [Sec. 253]
Disqualifications of Directors:
The circumstances in which a person cannot be appointed as a director of a company are enumerated in Section 274. According to this section, a person cannot be appointed as a director of company, if—
(i) He has been found to be of unsound mind by a competent court and the finding is in force;
(ii) He is an undischarged insolvent;
(iii) He has applied to be adjudicated as an insolvent and his application is pending;
(iv) He has been convicted of an offence involving moral turpitude and sentenced to imprisonment for not less than six months and a period of five years has not elapsed since the expiry of his sentence;
(v) He has not paid any call in respect of shares of the company held by him for a period of six months from the last day fixed for the payment;
(vi) He has been disqualified by an order of the Court under Sec. 203 of an offence in relation to promotion, formation or management of the company or fraud or misfeasance in relation to the company.
The Central Government may by notification in the Official Gazette remove the disqualifications enumerated in clause (iv) and (v) above. [Sec.274(2)]
In addition to the disqualifications mentioned above, there is another disqualification, namely, the person ‘should not be a minor or older person under disability’ but should be one competent to contract.
A private company which is not a subsidiary of public company may by its Articles provide for additional grounds for disqualification.
Restriction of Number of Directorship:
According to Secs. 275 to 279, a person cannot be appointed as a director for more than 20 companies at a time. If any person holds office for 20 companies as a director of a company, then no appointment can be made in any other company unless he vacates his office within fifteen days.
If he does not vacate within fifteen days, new appointment shall be void. (Sec. 277) In calculating the number 20, the following shall be excluded:
1. An unlimited company.
2. A private company which is neither a subsidiary nor a holding company of a public company.
3. An association not carrying on business for profit.
4. Alternate directorship.
If a person holds office for more than 20 companies, he shall be punishable with fine which may extend to Rs. 5,000 for each company after the first 20 companies.
Vacation of Office by Directors:
The office of a director shall become vacant if:
(i) He fails to obtain or ceased to hold the qualification shares required of him by the articles of the company;
(ii) He is found to be of unsound mind by a competent court;
(iii) He applies to be adjudicated an insolvent;
(iv) He is adjudged as insolvent;
(v) He is convicted by a court of an offence involving moral turpitude and sentenced to imprisonment for not less than six months;
(vi) He fails to pay any calls on the shares held by him within six months from the date fixed for payment; unless the Central Government has by notification in the official Gazette removed this disqualification;
(vii) He absents himself from three consecutive meetings of the Board of directors or from all the meetings of Board for a continuous period of three months (which energy is longer), without obtaining leave of absence from the Board;
(viii) 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 guarantee or security for a loan from the company in contravention of Sec. 295;
(ix) He does not disclose to the Board of Directors his interest in any contract or proposed contract with the company;
(x) He is restrained by court from being a director for committing fraud or misfeasance in relation to the company under Sec. 203;
(xi) He is removed by the company in general meeting in pursuance of Sec. 284;
(xii) 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.
The grounds laid down above for vacating the office of director apply to all companies—public and private. On the happening of any of the above events, the director will have to vacate the office automatically. The provisions of this section apply to all directors by whomsoever appointed and for whatsoever period appointed. The Board has no power to waive the event or condone the act.
The words ‘absent himself’ mean voluntary or deliberate absence and do not cover cases of voluntary absence such as that caused by illness etc. A director who lived in Belfast was seriously ill and unable to travel and failed to attend several meetings. It was held that he did not vacate his office as absence was not deliberate.
Of the above grounds, the first six are similar to those which disqualify a director from holding the office under Sec. 274 of the Act. The grounds stated in (iv), (v) and (vi) above shall not disqualify a director from holding his office immediately until thirty days have elapsed from the date of the adjudication, sentence or order where no appeal is preferred. But in case of an appeal the specified disqualification shall take effect on the expiry of the seven days from the date on which such appeal is finally disposed of.
The office of a director is also vacated if he or any of his relative hold any office or place of profit in the company or its subsidiary in contravention of Sec. 314.
A person who acts as a director knowing fully well of disqualification is subject to a penalty which may extend to five hundred rupees for each day on which he so acts as a director.
A private company which is not a subsidiary of a public company may by its Articles provide for additional grounds for vacating the office of a director.
Resignation by the Directors:
There is no provision relating to the resignation by a director in the Companies Act. If there is any provision in the articles of the company giving right to a director to resign at any time, a director may resign in the manner provided in the Articles of Association. If there is no provision in the Articles, then the director may submit the resignation by sending a reasonable notice.
In the absence of any provision relating to resignation in the articles, it is well settled that a resignation once made takes effect immediately when the intention to resign is made clear (T. Murari vs. State 1976)
The resignation may be oral.
Once a director has resigned, he is not entitled to withdraw except with the consent of directors or the company.
It may be noted that a resignation by director will not relieve him from any liabilities and obligations which he may have incurred while in office.