1. Meaning of a Director:
Section 2(34) of the 2013 Act defines Director to mean a Director appointed to the Board of a Company.
2. Who may be appointed as a Director:
A new s.149 of the 2013 Act came into force on 1st April, 2014 which provides for the provisions for companies to have a duly constituted Board of Directors. According to this section-
(i) Number of Directors:
According to s.149(1) of the 2013 Act, every Company shall have a Board of Directors consisting of individuals as Directors and shall have minimum-
- Public Company: 3 Directors
- Private Company: 2 Directors
- One Person Company: 1 Director
The maximum number of Directors can be increased to 15 by passing a special resolution.
(ii) Woman Director: At least one woman Director shall be on the Board of such class or classes of Companies.
(iii) Resident Director: Every Company shall have at least 1 Director who has stayed in India for a total period of not less than 182 days in the previous calendar year.
(iv) Independent Directors: According to s.149(4), every listed Company shall have at least 1/3 of the total number of Directors as Independent Directors.
3. Qualifications for Directors:
- No academic or professional qualifications are required as per the Act.
- The Director need not even be a shareholder of the Company.
However, the Articles of Association may lay down the qualifications for being appointed as a Director. The Articles usually provide for a certain number of shares to be held by each Director. Such shares are called qualification shares.
4. Disqualification of a Director:
s.164(1) of the 2013 Act provides that a person shall not be eligible for appointment as a Director of a Company if:
- He is of unsound mind.
- He is an undischarged insolvent.
- He has applied to be adjudicated as an insolvent and his application is pending.
- He has been convicted by a Court of any offence involving moral turpitude.
- A Court or Tribunal has passed an order to disqualify him from becoming a Director.
- He has not paid any calls in respect of shares.
- He has been convicted for an offence dealing with related party transaction u/s.188.
- He has not obtained a Director Identification Number.
5. Legal Position of Directors:
It is difficult to define the exact legal position of the Directors of a Company. The Companies Act fails to define the legal position of Directors. They have at various times been described as judges, agents, trustees or managing partners.
I. Director as Agent:
Director may correctly be described as an agent of the Company. "The Company itself cannot act in its own person, it can only act through Directors and the case is, as regards those Directors, merely the ordinary case of principal and agent". Where the Director contracts in the name and on behalf of the Company, it is the Company which is liable for it and not the Director.
Case: Kirlampudi Sugar Mills v. Venkata Rao
Held: Thus, where the Chief Executive of the Company executed promissory notes and borrowed amounts for the Company's sake, it could not be said that the amount was borrowed in his personal capacity.
II. Director as Trustee:
A trustee is a person in whom is vested the legal ownership of the assets which he administers for the benefit of another or others.
Case: Ramaswamy Iyer v. Brahmayya & Co.
Held: Directors are regarded as trustees of the Company's assets and perform duties in the interest of the Company and not for their own personal advantage.
III. Director as Managing Partner:
The persons holding this view consider a Company as a large partnership, Directors being charged with managing the affairs. The other shareholders are virtually dormant partners. By virtue of various provisions in the Memorandum of Association and Articles of Association they enjoy vast powers of management and act as the supreme policy and decision making body.
6. Are Directors employees of the Company?
Case: Lee Behrins & Co.
Held: Directors are elected representatives of the share holders engaged in directing the affairs of the Company on its behalf. As such Directors are agents of the Company but they are not employees or servants.
7. Appointment of Directors:
According to s.152 of the 2013 Act-
(1) Where no provision is made in the Articles of Association of a Company for the appointment of the first Director, the subscribers to the Memorandum of Association who are individuals shall be deemed to be the first Directors of the Company until the Directors are duly appointed. In case of a One Person Company, an individual being member shall be deemed to be its first Director.
(2) Every Director shall be appointed by the Company in the general meeting.
(3) No person shall be appointed as a Director of a Company unless he has been allotted a Director Identification Number u/s.154.
(4) Every person proposed to be appointed as a Director by the Company in the general meeting or otherwise, shall furnish his Director Identification Number and a declaration that he is not disqualified to become a Director.
(5) A person appointed as a Director shall not act as a Director unless he gives his consent to hold the office as Director and such consent has been filed with the Registrar within 30 days of his appointment in Form DIR-12 along with the prescribed fees.
8. Duties of Director:
S.166 of the 2013 Act states that-
(1) He shall act in accordance with the Articles of Association of the Company.
(2) He shall act in good faith in order to promote the objects of the Company for the benefit of it members. [Case: Cook v. Veeks]
(3) He shall exercise his duties with due care and reasonable care, skill and diligence.
(4) He shall not get involved in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the Company.
(5) He shall not achieve or attempt to achieve any undue gain or advantage.
(6) He shall not assign his office and if any assignment is so made, it shall be void.
(7) If the Director of the Company contravenes the provisions, such Director shall be punishable with fine which shall not be less than Rs. 1, 00, 000 - Rs. 5, 00, 000.
9. Statutory Duties of Director:
- To file return of allotments. [s.39(4)]
- To disclose interest. [s.184] [Case: Venkatachalapali v. Guntur Mills]
10. Liabilities of Director:
I. Liability to the Company:
The liability of a Director to the Company may arise from-
a. Breach of fiduciary duty.
b. Ultra vires acts.
d. Malafide acts.
II. Liability to Third Party:
A. Liability under the Companies Act-
The Director shall be personally liable to the third parties, inter alia under the following provisions-
(i) Prospectus- Failure to state any particulars as per the requirements of s.26 or mis-statement of facts in the prospectus renders a Director personally liable for damages to the third parties.
(ii) With Regard to Allotment- Directors may also be liable for allotment before minimum subscription is received. [s.39]
(iii) Fraudulent Conduct of Business.
B. Liability for Breach of Warranty:
Directors are supposed to function within the scope of their authority. Thus, where they transact any business in respect of matters, ultra vires the Company/Articles of Association, they may be proceeded against personally for any loss sustained by any third party.
III. Liability for Breach of Statutory Duties:
The 2013 Act imposes numerous statutory duties on the Directors under various sections of the Act. Default in compliance of these duties attracts penal consequences. The various statutory penalties which Directors may incur by reason of non-compliance with the requirements of the 2013 Act are referred to at appropriate places.
IV. Liability for Acts of Co-Directors:
A Director is the agent of the Company except for matters to be dealt with by the Company in the general meeting and not of the other members of the Board. Accordingly, nothing done by the Board can impose liability on a Director who did not participate in the Board's action or did not know about it. To incur liability, he must either be part of the wrongful act or later consent to it.
Case: Dovey v. Corey
Held:The absence of a Director from the meeting of the Board does not make him liable for the fraudulent act of a Co-Director on the ground that he ought to have discovered the fraud.
V. Criminal Liability:
Apart from civil liability under the Act, or under the common law, Directors of a Company may also incur criminal liability under the common law as well as under the Companies Act and other statutes.
Submitted by Pallav Tarnekar