“A company is an artificial person having existence only in contemplation of law and as such it cannot act in its own person. There must be some human agency to carry on the company’s business. The invisible and intangible nature of a company makes it obligatory for this corporate body to appoint some living persons through whom it may act and carry on its business. Such persons are usually called Directors”.
Meaning of the Company Director
In simple terms, the ‘Director’ is the supreme executive authority in the company, who is entrusted with the management and control of the company’s affairs. These teams of directors are collectively known as the ‘Board of Directors’.
The term director is defined under Section 2(34) of the Companies Act, 2013, It states that a ‘director’, “means a director appointed to the board of a company”. The definition provided under the Companies Act, 2013 is not an exhaustive one. In the case of Agarwal Trading Corporation v. Collector of Customs 1972, it was held by the Apex Court that the meaning of the term ‘director’ in relation to a firm connotes to the partner of that firm.
Company to have Board of Director
The directors of a public company don’t need to be experts in the type of business which company is promoting. However, the Board of Directors can include people with different areas of expertise like accounting, finance, law, banking, management etc. It may also include a few experts in the field of company’s business. Thus it was pointed out In Re City Equitable Fire Insurance Co. “a Director of a Life Insurance Company does not guarantee that he has the skill of an actuary or a physician”.
Section 149 of the Companies Act, 2013 provides that Every Company shall have a Board of Directors consisting of individuals as directors and shall have:
- A minimum number of three directors in the case of Public Company.
- Two director in the case of a Private Company.
- One director in the case of a One Person Company.
- A maximum number of fifteen directors.
- If company want to appoint more than fifteen directors, it may pass the special resolution.
- It is mandatory to have at least one woman director in some class of companies as prescribed.
Every Company shall have at least one director who stays in India for a total period of not less than 182 days during the financial year. Every listed company shall have at least one-third of the total number of directors as independent directors and Central Government may prescribed the minimum number of independent directors in case of any class or classes of Public Company.
Appointment of Directors
The Appointment of directors can be done in the following way:
- Selection of Independent Directors (Section 150)
An independent director may be appointed from a data bank, maintained by any body, institute or association, as may be notified by the Central Government. The appointment of independent director shall be approved by the company in general meeting. The Central Government may prescribe the manner and procedure of selection of independent directors who fulfill the qualification and requirements specified under Section 149 of the Companies Act, 2013.
- Appointment of director elected by small share-holder (Section 151)
One director elected by such small share-holders in such manner and with terms and conditions as may be prescribed. The term “small share-holders” means share-holders holding shares of nominal value of not more than Rs. 20,000/- or such other some as may be prescribed. It is mandatory for a listed company to appoint a Director from among such small share-holder.
- Appointment of First Directors
The first directors of a company are usually appointed by the subscribers of the Memorandum. In case the appointments are not done in above mentioned way, than the individual subscribers and signatories of the MOA become the directors. The first directors only hold the office until the new ones are appointed in the first annual general meeting.
A person can only be appointed as the first director of a public company when they have fulfill certain qualifications:
- If they have Director Identification Number (DIN) as per Section 154;
- A person must sign and submit a written consent to the Registrar of Companies within 30 days of being appointed as a director, in such manner as prescribed;
- A person must sign for the required qualification shares of the company, take them, and pay for them or agree to pay.
- If the general meeting appoints an independent director, the notice must include an explanatory statement. This statement should confirm that the Board believes he meets the conditions specified in this Act.
- A person must submit an affidavit to the Registrar confirming that the required qualification shares are registered in their name;
In the case of Usha Chopra (Dr.) v. Chopra Hospital (P) Ltd., the two non-resident Indians (NRIs) members were the first directors of the two-man Company. The Company appointed the same two first directors as its subsequent directors, but no Annual General Meeting was called nor was there any record of notice of such meeting or information having been to these directors. Held, the appointment wholly illegal and oppressive and it was liable to be quashed.
- Appointment of Proportional Representation (Section 163)
Normally, directors are chosen by a simple majority vote of shareholders. But sometimes, this method doesn’t even result in one director being elected. To fix this, Section 163 of the Companies Act, 2013 gives companies another option. It allows companies to use a method called proportional representation to chose directors. This means the company’s rules (article) can say that at least two-third of the directors will be chosen in a way that gives all groups of shareholders a fair chance using method like single transferable vote or cumulative voting. These directors can be appointed once every three years, and if any of them leave early, the Board of Directors can fill the vacancy in a Board Meeting.
The system of proportional representation can be followed only if the articles provide for it. The appointments under this system are made once in every three years and the directors so appointed cannot be removed under section 169 which contains provisions relating to the removal of directors.
- Appointment of Director by the Board (Section 161)
The Board of Directors has the powers to appoint any person, other than the person who fails to get appointed as a director in a general meeting. The appointment of director under Section 161 includes:
- Appointment of Additional Directors – The Board of Directors, may if the article so authorise, appoint additional directors provided that the total number of directors shall not exceed the maximum limit fixed by the article. Such additional directors shall hold office only upto the date of the next annual general meeting.
- Appointment of Alternate Directors – An alternate director is someone who temporarily takes the place of a regular director when the regular director is out of the state for at least three months. The company’s board can appoint an alternate director if the company’s rules (articles) or a general meeting allows it. A person can only be appointed as an alternate director if they meet the qualifications to be an independent director under the law.
- Appointment of Nominee Directors – Nominee directors are generally appointed to protect the interests of the controlling agencies. Though the term ‘nominee director’ has not been specifically defined in the Act, but it is common practice that companies usually provide for the appointment of nominee directors in their articles. Nominee directors appointed by the Financial Corporation of India, Industrial Development Bank of India are outside the purview of the provisions of the companies Act as they are created under special statutes.
- To fill in casual vacancies of Directors – Sometimes the director appointed by the general meeting may resign or a vacancy may arise on account of his death or due to some other reason. In such a situation, the Board may appoint a director to fill a casual vacancy subject to the provision made by the company in this regard in its article, which shall be subsequently approved by members in the immediate next general meeting.
Vishwanathan v. Tiffins B. A. & Co. (P) Ltd. In this case the article of the company authorised the Board to fill casual vacancy and also increase the number of directors within the maximum permissible limit. There occurred some casual vacancies which were promptly filled at the general meeting of the shareholders. The Board challenged this action of the company on the ground that once the power to fll casual vacancies had been delegated to the Board, it could not have been exercised at a general meeting.
In Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. the Supreme Court held that if the power of appointing additional directors is delegated to the Board by the articles, the Board can appoint additional directors without taking this item in the agenda of its meeting.
- Appointment of Key Managerial Personnel (Section 203)
The Companies Act, 1956 had made it compulsory for every public company and every private company which is a subsidiary of public company having paid up capital of prescribed sum, to appoint a Managing Director or whole time Director or Manager. The Companies Act, 2013 makes it compulsory for every company belonging to such class or classes of companies to appoint the following whole-time key managerial personnel-
- Managing Director (MD) or Chief Executive Officer (CEO) or Manager and in their absence, a whole-time director;
- Company Secretary and
- Chief Financial Officer (CFO).
No person can be appointed as Chairperson as well as Managing Director, unless articles of the company provide otherwise, or the company does not carry on multiple business. Managerial personnel shall not hold office in more than one company except in its subsidiary company at the same time. Any vacancy of a key Managerial personnel shall be filled up by the Board at a meeting within six months from the date of such vacancy.
Every individual intending to be appointed as a director of a company shall apply for allotment of Director Identification Number by the Central Government in such form and manner along with such fees as may be prescribed. No person shall be appointed as a director of a company unless he has been alloted the Director Identification Number. The company shall within 15 days provide the Director Identification Number of all its directors to the Registrar on a prescribed form as may be prescribed.
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