Director of a Company
A company is an artificial person. As such, it cannot act on its own; it has to depend on human beings to carry on its activities. The shareholders who collectively constitute the corporate entity are not also in a position to run the show profitably and efficiently. There are practical difficulties in it.
Firstly the shareholders are more in number and they cannot think uniformly. Secondly, they are not confined to a particular place but scattered over a wide area. Therefore, the shareholders as a whole cannot take part in the day-to-day administration of a company. To do away with this defect, they elect a few amongst them to conduct the business of the corporate enterprise.
The persons through whom the shareholders carry on the business of the company are known as directors. They are the head and brain of the company.
Definition of Directors
According to Sec. 2(13) of the Companies Act (herein after called the Act),
“A director means any person occupying the position of a director by whatever name called “.
It means that a director is one who is performing the functions of a director like controlling the affairs of the company.
According to Sec. 303 of the Act, any person in accordance with whose directions or instructions, the Board of Directors is accustomed to act is deemed to be a director of the company.
Board of Directors
The directors of a company collectively are referred to as the Board of Directors or Board. The minimum number of members of the Board for a public company must be at least three. A company may increase the number of its directors by passing an ordinary resolution in a general meeting. But if the number exceeds 12, then the previous approval of the Central Government will become necessary.
Who is eligible to become a Director?
Only an individual can be appointed as a director. It means that no body corporate or association or firm can be appointed as a director of the company. However, no company shall appoint or re-appoint any individual as director of the company unless he has been allotted a Director Identification Number u/s 266B.
If the Articles require that the director should hold or agree to purchase or subscribe for the shares prescribed by it as qualification shares, he should acquire the qualification shares within two months from the date of appointment. The nominal value of such shares should not exceed Rs.5,000. If the nominal value of one share exceeds Rs.5,000, one share is sufficient.
Who is not eligible to become a Director
According to Sec. 274 of the Act, the following persons are not eligible to become the directors of a company:
1. If he is of unsound mind,
2. If he is an undischarged insolvent,
3. If he has applied to be adjudged as an insolvent,
4. If he has been convicted by a Court for an offense involving moral turpitude. Here the essential thing is that the imprisonment must be for not less than 6 months and 5 years has not elapsed from the date of expiry of the sentence,
5. If he has not paid the calls relating to his shares, and
6. If the Court under Sec. 203 of the Companies Act disqualifies him.
Number of Directorships
One can act as a director of 15 companies at the same time. But while calculating such number, private companies, unlimited companies, Associations not for profit in which he is a director, and companies in which he is only an alternate director should not be taken into account.
If a person acts as a director in more than fifteen companies, he is liable to be fined up to Rs.50,000 in respect of each of the companies after the first fifteen companies.
Appointment of Directors
1. Appointment of First Directors
The first directors are named by the subscribers to the Memorandum or mentioned in the Articles. If no one is appointed either by the subscribers or by the Articles, then all the subscribers (who are individuals) will become the first directors. They will hold the office till the conclusion of the first Annual General Meeting.
2. Appointment of Subsequent Directors
1. Appointment by the Company
As per Sec. 255 of the Act, the subsequent directors must be appointed by the company in a general meeting. In the case of a public company and a subsidiary private company, unless the articles provide otherwise, not less than two thirds of the directors must retire by rotation. These rotational directors in such a company are to be appointed by the company in general meeting.
The remaining directors in the case of any such company and the directors of a private company which is not a subsidiary of a public company shall also be appointed by the company in general meeting if the Articles do not provide the mode of their appointment.
Thus only one-third of the total number of directors can be permanent directors. In the absence of any regulations in the Articles, these directors shall be appointed by the shareholders in general meeting.
2. Appointment by the Board
As per Sec. 260, the Board may appoint as many number of additional directors as it wants subject to the provisions in the Articles. Such additional directors shall hold office up to the next AGM.
According to Sec. 262, casual vacancy in the Board may be filled by the directors at a Board meeting according to the provisions in the Articles. By casual vacancy we mean a vacancy caused by the death, resignation, disqualification or any reason other than retirement by rotation. Such directors shall hold office up to the expiry of the period for which the outgoing director would have to hold office.
Sec. 313 of the Act provides that if any director is absent for not less than three months from the State in which the Board Meetings are held, the Board can appoint a director known as “Alternate Director” in his place. The appointment must be subject to the provisions of the Articles, and a resolution is to be passed by the company in the general meeting.
3. Appointment by Outsiders
If the Articles empower, one third of the directors may be allowed to be appointed by third parties like bankers or financial institutions (IFC, NSIFC etc.) or other creditors.
4. Appointment by the Central Government
If the Central Government is of the opinion that the affairs of the company are being managed in a manner oppressive to any member or prejudicial to public interest, it may appoint not more than 2 directors for 3 years to protect the interests of the members and the public. Such directors need not have the qualification shares and they may or may not be the members of the company. They are not subject to retirement by rotation. They may be removed only by the Central Government.
The National Company Law Tribunal may pass the above order on a reference made to it by the Central Government or on the application made by any of the following persons:
- not less than 100 members of the company, or
- members of the company holding not less than 1/10th of the total voting power therein.
Vacation of Office by Director
The director is automatically vacated from the office in the following cases:
1. If he fails to obtain within the time specified in Sec. 270(1), or at any time thereafter ceases to hold, the share qualification, if any, required of him by the articles of the company;
2. If he is found to be of unsound mind by a Court of competent jurisdiction;
3. If he applies to be adjudicated an insolvent;
4. If he is adjudged an insolvent;
5. If he is convicted by a Court of any offense involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months;
6. 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;
7. If he absents himself from three consecutive meetings of the Board of directors, 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;
8. 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 Sec. 295;
9. If he acts in contravention of Sec. 299;
10. If he becomes disqualified by an order of Court U/s 203;
11. If he is removed in pursuance of Sec. 284; or
12. If 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.
A private company may include in its Articles some more grounds for vacation.