Business Law - Directors
Directors, as the word suggests, are a special group of people who direct the company. The directors give certain direction to all the other members of the company to achieve certain goals.
There may be one director or a board of directors of a company depending on the company. All the important decisions of the company are made by the board of directors of the company. Many general and special board meetings are conducted by the company for the directors to make crucial decisions pertaining to the company. All the important future planning is also done by the board of directors. The board of directors plays the most vital role in the rise and fall of a company.
In other words, the board of directors actually is the leading body of the company. All the other members of the company have to comply with the decisions made by the board of directors.
Powers of Directors
The powers of the directors are normally written in the articles of association of the company. The shareholders cannot meddle with the affairs undertaken by the board of directors till the board makes the decisions within their specified power. The general powers of the board of directors are specified in section 291 of the Companies Act, 1956.
The director must not exhibit any power or do any act, which is not in accordance with the memorandum of association of the company or which violates the Companies Act, 1956.
No powers are given to the directors individually.
Directors have their powers only when they are with the board of directors.
Directors are considered to be the first shareholders of the company.
Any decision is made if majority of directors from the board of directors agree to the decision.
Resolutions must be passed at the meetings held by the board of directors for the directors to enjoy any special powers.
Some of the powers exhibited by the directors are as follows −
- The power to call shareholders on the context of any unpaid money
- The power to announce buy-back of shares
- The power of issuance of debentures
- The power to borrow any amount of money in case of debentures
- The power of investing funds of the company on various commercial ventures
- The power of making loans
The board of directors is entitled to do all such acts and exhibit such powers as authorized by the memorandum of association and articles of association of the company and as prescribed by the Companies Act, 1956. However, when an authorization is required by a law to be invoked, the directors can do such an act only when they are authorized to do so.
However, whenever a delegation is required, the board of directors can delegate their powers to their lower ranking officers.
The delegation is done by passing a resolution in the presence of a committee comprising of the directors, the managing director, the managers and other high ranking officers of the company.
Delegation is defined as the transfer of powers of a higher officer to a lower ranking officer with the consent of the officer whose power is to be delegated, the officer to whom the power is being delegated and other important officers of the company as and when required.
Usually delegation is done in case of the absence of the higher officers.
Duties of Directors
Directors are held responsible for the company’s compliance with the law. These duties are normally delegated to a company secretary, a director or a trusted employee of the company. It must be ensured that these responsibilities are being carried out.
Abbreviated accounts of the responsibilities can be submitted by small to medium-sized companies in most of the cases.
It is not mandatory for small-scale with a maximum turnover of INR 6.5 million and asset value of INR 3.26 million to audit their accounts and recruit auditors for their companies.
It is no longer a matter of obligation to most of the private companies to conduct an Annual General Meeting every year.
However, it is compulsory to hold an Annual General Meeting for a company if any director or at least five percent of the members of the company request to hold one.
The section of the Amendment Act, 1996, states that it is forbidden for a company to issue irredeemable preference shares or preference shares redeemable beyond 20 years.
Directors found responsible for any such issues are termed responsible for default and a fine of up to INR 10,000 may be imposed as a penalty.
In case of a proposed contract, the required disclosure should be made at the board meeting.
The decision of whether to enter the contract has to be taken in the board meetings.
A director, who fails to comply with the requirements as to the disclosure of the contract, will be punishable with a fine, which may extend up to INR 50,000.
For disclosure of receipt of a transfer of property, any money received by the directors from the transferee in the context of the transfer of the property inside the company, the property of undertaking must be disclosed.
If the loss of office of a director of a company results due to transfer of any or all shares of a company, the director does not receive any compensation unless it is foresaid in a general meeting.
A number of powers and duties can be exercised by the board of directors in board meetings.
It is the duty of a director to attend board meetings.
Board meetings should be held from time to time.
If a director is unable to attend three consecutive board meetings or all the meetings for three months without the consent of the other board members, his office will fall vacant.
General Duties of a Director
A director must fulfill the following general duties −
Duty of Good Faith
The directors should act in the best interests of the company. The foundation of the company, i.e., the interest of the company, defined as the interest of the present and future members of the company, would be continued as going concern.
Duty of Care
A director must show care and dedication towards the work he has been assigned although he should not be too much obsessive towards his work. Any provision in agreement with the articles that excludes the liability of the directors for default, negligence, breach of duty, breach of trust, or misfeasance is considered to be void. The directors cannot be even indemnified by the company against such liabilities.
Duty Not to Delegate
A director who has become an acting director as a result of delegation offered by a director of higher order cannot delegate any further. The functions of a director must be performed by the director personally, avoiding delegation as best as possible. However, a director may delegate his powers under certain circumstances.
Liabilities of Directors
The liability of directors to the company arises under few circumstances.
Breach of Fiduciary Duty
A director will be liable for the breach of fiduciary duty when he acts dishonestly to the interest of the company. The powers of the directors must be invoked keeping in mind the advantage and interest of the company and not in the interest of the directors or any member of the company.
Directors are needed to exercise their powers within the limits provided by the Companies Act, 1956, the memorandum of association and the articles of association of the company.
The articles of association of a company may invoke further specific restrictions on the powers of the board of directors of the company. Being ultra-verse, the directors will be held liable personally, if they act beyond the powers limited by the articles of association of the company.
Reasonable skill and care is expected from the directors of a company as long as they hold their designation. The directors may be deemed for acting negligently in discharge of their duties and they will be both responsible and liable, if any loss or liability is faced by the company due to their negligence.
Mala Fide Acts
The directors are considered to be the trustees of the money and the property of the company handled by them. If the directors of a company perform their duties dishonestly or in a mala fide manner, they will be liable to the company in the context of mala fide and they will personally provide any compensation for any loss taken by the company as a result of their dishonest performance.
This will be considered as a breach in trust.
They are also accountable for any secret profits they have earned in past ventures on the behalf of the company.
Directors also face certain liabilities on the context of misconduct and misuse of their powers.
Liabilities under the Companies Act
The following duties and liabilities have been imposed on the directors of companies under the Companies Act −
Any misstatement in the prospectus of a company or failure to state any particulars in the prospectus of a company, according to the prerequisites of the section 56 and schedule II of the Companies Act, 1956, will result in liability of the directors.
The directors will be personally liable for the above mentioned defaults and will compensate for any damage or loss taken by the third party.
According to section 62 of the Companies Act, 1956, if any loss is faced by a shareholder due to untrue or misleading statements in the prospectus of a company, then the directors will be held liable and will have to compensate for the loss.
With Regard to Allotment
The directors of a company are also considered liable if they conduct irregular allotments. Irregular allotment may be either allotment before minimum subscription is received or filing a copy of the statement in the prospectus of the company.
A director may be held liable to the company and compensate for any loss faced by the company if he fully authorizes the contravention of any of the provisions of section 69 or 70 of the Companies Act, 1956, with respect to all allotment.
Failure to Repay Application Money when Minimum Subscription Having Not Been Received within 120 Days of the Opening of the Issue
According to section 69 (5) of the Companies Act, 1956, and in compliance with SEBI guidelines, if the application money is not repaid with in 130 days, the directors will beheld severally liable and will have to pay the money with six percent annual interest on and after the completion of the 130th day. However, a director can be saved from beingliable if he can prove that the default in repayment is not a result of his misconduct or negligence.
Failure to Repay Application Money when Application for Listing of Securities Is Not Made or Is Refused
If the permission for lifting of shares has not been granted, the company shall repay all the money received from all the applicants pursued by the prospectus without any interest.
The company and its directors may be held liable if the money is not paid back within eight days. On completion of the eighth day, the company and its directors have to pay the money back with four percent to eight percent interest to the applicants. The rate of interest will be directly proportional to the delay in time.
Appointment and Removal of Directors
The appointment and recruitment of directors is a crucial procedural requirement of a company. In accordance with the Companies Act, 1956, only an individual can be appointed as a director of a company.
An association, a firm, a corporation or any other body with artificial legal identity cannot be appointed as a director.
For a public company or a private company, which is a subsidiary of a public company, two-thirds of the total number of directors are appointed by the shareholders. The remaining one-third of the directors are selected in accordance with the manner prescribed in the articles of association of the company, failing which, the remaining one-third is also appointed by the shareholders.
The articles of a company may provide the conditions for retirement of the directors at every annual general meeting.
If the articles remain silent, all the directors are appointed by the shareholders.
Formal, considered and transparent elections can be conducted for election of directors.
Evaluation of skills and abilities of the board is done from time to time to ensure smooth progress and need for succession in the board.
Re-elections and re-appointments of the directors are conducted from time to time.
In case of oppression and mismanagement, third parties or the government may propose for the appointment of nominee directors.
A statement comprising the name of the first director of the company must be sent to the Registrar of Companies.
The appointment of the subsequent directors is governed by the articles of association of the company.
Qualifications of Directors
The Companies Act does not provide any qualifications for the directors. However, specific qualifications can be stipulated in the articles of association of a company for the appointment of various directors. The specified share qualification of the directors is however limited by the Companies Act, which can be prescribed by a company to be five thousand rupees.
In some cases, the articles of association of the company impose some shareholding qualifications, which must be complied with to become eligible for the nomination as a director.
Directors having special expertise and experience in various fields constitute to form the board of directors. The main objective here is a balanced management and smooth functioning of the board of directors.
The board of directors has the following two primary objectives −
- To provide support for the management with good corporate governance.
- To formulate business strategies to achieve various business goals.
A director having a professional and ethical mind should have knowledge and experience in specific fields. With a commitment to create long term values and commitment to the shareholders, a director should fully understand his obligations and practices.
Enough time should be given to the director to perform his duties effectively.
A director should be able to judge himself and inform the board if he faces any hindrances or obstructions in the course of his work.
The chairman of the board of directors, beyond the duties mentioned above, must fulfill the following responsibilities −
- To act as the chairman of the board in the board of directors’ meetings.
- To exercise a casting vote in case of tie in the directors’ meeting.
- To call for the meetings of the board of directors.
- To preside over the shareholders’ meetings.
The qualifications of the chairman are slightly different from the qualifications of directors as follows −
- The chairman must not be an executive director.
- The chairman must not be involved in day to day management.
- The chairman must not be an auditor.
- The chairman must not be a legal consultant.
- The chairman must not be an employee of the company.
- The chairman must not be a staff of the company.
- The chairman must not be an advisor of the company.
- The chairman must not be a person controlling power of the company.
- The chairman must not be a person controlling power of the associated company.
- The chairman must not be a person controlling power of the auditing company.
- The chairman must not be a person who may have conflict of interest.
Removal of Directors
The removal of a director before the expiry of his term in the office can be done by passing an ordinary resolution in the general meeting of a company after the issuance of a special notice. However, the above process is not applicable for promotional directors or directors appointed by the government.
A director may be removed from his office by other directors before the expiry of his term in case of any conduct of offence and in case the director is no longer found to be qualified to hold his designation and does not resign from his post voluntarily.
The resulting vacancy may be fulfilled by the appointment of another director.
Voluntary resignation and rotations are the most common ways for the removal of directors
The company must issue a special notice to all the directors of the company in case of the removal of any director/s.
A written representation from the director who is subjected to be removed concerning circumstances of his proposed removal must be issued to the company.
However, the written representation may not be read if the company is able to convince a federal high court judge that the written representation of the director intends to create adverse publicity and/ or is defamatory in nature.
Therefore, an abuse of the statutory rights is conferred on the director according to the Companies and Allied Matters Act.
The removal of a director is considered to be null by the constituted court of law if a copy of the notice of removal has not been delivered to all the directors.
By passing an ordinary resolution by a simple majority, the members of a company may remove a specific director or any number of directors.
A person appointed as a director throughout his life can be removed by making various changes in the articles and the memorandum of association.
A removed director cannot be deprived of compensation or damages to which he is entitled under a contract of employment.
‘Corporate democracy’ is a practice, according to which, a director holds substantial number of shares in a company or represents a group of shareholders.
Considerable litigation follows a decision to remove a director from the board.
The litigation concerned with the removal of a director becomes too much complicated to deal with if the director subjected to the removal or the group of people he represents are extremely resistant to the act of the removal of the specific director.
Usually the issue of removal of a director is agitated in the high court or the Company Law board under section 397/398 of the Companies Act, 1956.
Generally, many conflicts and controversies arise in the general meetings amongst groups of shareholders during the process of the removal of a director.
A removed director may seek justice from the court of law if he perceives his removal to be on illegal grounds.