APPOINTMENT AND QUALIFICATIONS OF DIRECTORS

Question 1

How is the term “independent director” defined?

Answer 1

An independent director, in relation to a company, is a director other than a managing director, whole-time director, or nominee director who meets the following criteria:

The Board considers them a person of integrity with relevant expertise and experience.
They are not a promoter or related to the promoters or directors of the company or its subsidiaries.
They have no pecuniary relationship with the company, its subsidiaries, or their promoters or directors.
Their relatives have no significant pecuniary relationship with the company.
They have not held certain positions or employment relationships with the company or its subsidiaries.
They do not hold a significant voting power in the company or serve as Chief Executive or director of a nonprofit organization heavily dependent on the company.

Question 2

What declaration should an independent director provide?

Answer 2

An independent director must provide a declaration at the first Board meeting they attend and annually thereafter, confirming that they meet the criteria for independence as provided in sub-section (6).

Question 3

What does the term “nominee director” mean?

Answer 3

A “nominee director” is a director nominated by a financial institution, appointed by the government, or appointed by any other person to represent their interests in the company.

Question 4

What provisions should the company and independent directors abide by?

Answer 4

The company and independent directors should abide by the provisions specified in Schedule IV.

Question 5

Can an independent director receive stock options?

Answer 5

No, an independent director is not entitled to any stock options. They may receive remuneration in the form of fees, reimbursement of expenses, and profit-related commission, subject to approval by the members.

Question 6

How can independent directors be selected?

Answer 6

Independent directors may be selected from a data bank maintained by a body, institute, or association notified by the Central Government. The data bank contains the names, addresses, and qualifications of eligible and willing persons to act as independent directors.

Question 7

Who is responsible for exercising due diligence in selecting an independent director from the data bank?

Answer 7

The company making the appointment of an independent director is responsible for exercising due diligence before selecting a person from the data bank.

Question 8

How should the appointment of an independent director be approved?

Answer 8

The appointment of an independent director should be approved by the company in a general meeting as provided in sub-section (2) of section 152. The explanatory statement accompanying the notice of the general meeting should indicate the justification for choosing the appointee as an independent director.

Question 9

What should the data bank of independent directors create and maintain?

Answer 9

The data bank of independent directors should create and maintain data of persons willing to act as independent directors in accordance with the rules prescribed by the Central Government.

Question 10

Who has the authority to prescribe the manner and procedure of selecting independent directors?

Answer 10

The Central Government has the authority to prescribe the manner and procedure of selecting independent directors who fulfill the qualifications and requirements specified under section 149.

Question 11

What information should be included in the explanatory statement accompanying the appointment of an independent director?

Answer 11

The explanatory statement should justify the selection of the appointee as an independent director. It should provide reasons or justifications for choosing the individual for the role.

Question 12

What are the requirements for retirement of directors by rotation in a public company?

Answer 12

In a public company, unless the articles provide for the retirement of all directors at every annual general meeting, the following requirements apply:

At least two-thirds of the total number of directors must be liable to retire by rotation.
One-third of such directors (or the number nearest to one-third) must retire from office at each annual general meeting.
The directors to retire by rotation are determined based on their length of service since their last appointment, with lot-drawing used to break ties.

Question 13

Who are deemed to be the first directors of a company when no provision is made in the articles?

Answer 13

When no provision is made in the articles of a company for the appointment of the first director, the subscribers to the memorandum who are individuals are deemed to be the first directors of the company. In the case of a One Person Company, an individual being a member is deemed to be its first director.

Question 14

How is a director appointed in a company?

Answer 14

Every director is appointed by the company in a general meeting, unless otherwise expressly provided in the Companies Act.

Question 15

What is the requirement for a person to be appointed as a director?

Answer 15

No person can be appointed as a director of a company unless they have been allotted a Director Identification Number (DIN) under section 154 of the Companies Act.

Question 16

What must a person furnish when proposed for appointment as a director?

Answer 16

A person proposed for appointment as a director must furnish their Director Identification Number (DIN) and a declaration stating that they are not disqualified to become a director under the Companies Act.

Question 17

What is the requirement for a person appointed as a director to start?

Answer 17

A person appointed as a director cannot act as a director until they give their consent to hold the office and file their consent with the Registrar of Companies within thirty days of their appointment.

Question 18

What happens if a vacancy of a retiring director is not filled?

Answer 18

If the vacancy of a retiring director is not filled at the annual general meeting and the meeting has not expressly resolved not to fill the vacancy, the meeting stands adjourned. If the vacancy is still not filled at the adjourned meeting, the retiring director is deemed to have been re-appointed, except under specific circumstances specified in the Companies Act.

Question 19

What is the definition of a “retiring director”?

Answer 19

For the purposes of this section and section 160, the expression ―retiring director means a director retiring by rotation.

Question 20

What is an additional director?

Answer 20

An additional director is a person appointed by the Board of Directors of a company, as conferred by the articles of the company. They hold office until the next annual general meeting or the last date on which the annual general meeting should have been held, whichever is earlier.

Question 21

Can an alternate director be appointed for a director’s absence?

Answer 21

Yes, the Board of Directors, if authorized by the articles or a resolution passed in a general meeting, can appoint an alternate director for a director during their absence for a period of at least three months from India.

Question 22

What is the tenure of an alternate director?

Answer 22

An alternate director holds office for a period not longer than that permissible to the director in whose place they have been appointed. They vacate the office if and when the director they are replacing returns to India.

Question 23

How is a casual vacancy of a director filled in a public company?

Answer 23

In a public company, if the office of a director appointed by the company in a general meeting is vacated before their term expires, the resulting casual vacancy can be filled by the Board of Directors at a meeting of the Board. The person appointed to the vacancy holds office only until the date up to which the original director would have held office if it had not been vacated.

Question 24

Who can nominate a director to a company?

Answer 24

Subject to the articles of a company, a director can be nominated by an institution in pursuance of the provisions of any law, an agreement, or by the Central Government or State Government based on their shareholding in a Government company.

Question 25

Can an alternate director be automatically reappointed?

Answer 25

If the term of office of the original director is determined before their return to India, any provision for the automatic re-appointment of retiring directors applies to the original director and not to the alternate director.

Question 26

Who has the authority to fill a casual vacancy of a director in a public company?

Answer 26

The Board of Directors has the authority to fill a casual vacancy of a director in a public company at a meeting of the Board.

Question 27

What are the disqualifications for appointment as a director of a company?

Answer 27

A person shall not be eligible for appointment as a director of a company if:
(a) They are of unsound mind as declared by a competent court.
(b) They are an undischarged insolvent.
(c) They have applied to be adjudicated as an insolvent, and their application is pending.
(d) They have been convicted by a court of any offense and sentenced to imprisonment for not less than six months, provided that a person convicted and sentenced to imprisonment for seven years or more cannot be appointed as a director.
(e) An order disqualifying them for appointment as a director has been passed by a court or Tribunal and is in force.
(f) They have not paid any calls in respect of company shares held by them within six months from the last day fixed for payment.
(g) They have been convicted of an offense related to related party transactions under section 188 within the last five years.
(h) They have not complied with sub-section (3) of section 152.

Question 28

What is the consequence if a company fails to file financial statements or annual returns for three consecutive financial years?

Answer 28

A person who is or has been a director of a company that has not filed financial statements or annual returns for three consecutive financial years or has failed to fulfill financial obligations like repayment of deposits, debentures, or dividends for one year or more, shall be ineligible for reappointment as a director of that company or appointment in any other company for a period of five years from the date of such failure.

Question 29

Can a private company specify additional disqualifications for directorship?

Answer 29

Yes, a private company can include additional disqualifications for appointment as a director in its articles, in addition to those specified in sub-sections (1) and (2) of the Companies Act.

Question 30

What is the maximum number of companies in which a person can hold office as a director?

Answer 30

After the commencement of the Companies Act, a person, including any alternate directorship, cannot hold office as a director in more than twenty companies at the same time. However, the maximum number of public companies in which a person can be appointed as a director is ten.

Question 31

Are private companies counted towards the limit of directorships in public companies?

Answer 31

Yes, for reckoning the limit of public companies in which a person can be appointed as a director, directorships in private companies that are either holding or subsidiary companies of a public company are included.

Question 32

Can the members of a company specify a lesser number of companies in which a director can act?

Answer 32

Yes, the members of a company, by special resolution, can specify any lesser number of companies in which a director of the company may act as a director, subject to the provisions of sub-section (1).

Question 33

What is the primary duty of a director of a company?

Answer 33

The primary duty of a director of a company is to act in accordance with the articles of the company.

Question 34

What are the key obligations of a director?

Answer 34

A director of a company has the following obligations:

Act in good faith to promote the company’s objectives for the benefit of its members as a whole.
Act in the best interests of the company, its employees, shareholders, the community, and the protection of the environment.
Exercise their duties with due care, skill, and diligence while exercising independent judgment.

Question 35

What is the prohibition on undue gain for directors?

Answer 35

A director of a company should not seek or attempt to achieve any undue gain or advantage, whether for themselves or for their relatives, partners, or associates. If a director is found guilty of making an undue gain, they are liable to pay an amount equal to that gain to the company.

Question 36

Under what circumstances does the office of a director become vacant?

Answer 36

The office of a director becomes vacant in the following cases:
(a) When the director incurs any of the disqualifications specified in section 164.
(b) When the director is absent from all Board meetings for a period of twelve months without seeking leave of absence.
(c) When the director acts in contravention of the provisions of section 184 related to contracts or arrangements in which they have a direct or indirect interest.
(d) When the director fails to disclose their interest in a contract or arrangement in which they have a direct or indirect interest, in violation of section 184.
(e) When the director becomes disqualified by an order of a court or the Tribunal.
(f) When the director is convicted by a court of any offense and sentenced to imprisonment for not less than six months, even if an appeal has been filed.
(g) When the director is removed in accordance with the provisions of the Companies Act.
(h) When the director, who was appointed due to holding a specific office or employment in a holding, subsidiary, or associate company, ceases to hold that office or employment.

Question 37

What happens if all the directors of a company vacate their offices?

Answer 37

If all the directors of a company vacate their offices due to disqualification, the promoter or, in their absence, the Central Government will appoint the required number of directors who will hold office until directors are appointed by the company in a general meeting.

Question 38

How can a director resign from their office?

Answer 38

A director can resign from their office by giving a written notice to the company. The Board of Directors will take note of the resignation upon receipt of the notice. The company is required to intimate the Registrar of Companies about the resignation within 30 days, in the prescribed manner. The resignation should also be mentioned in the report of directors laid in the immediately following general meeting.

Question 39

When does the resignation of a director take effect?

Answer 39

The resignation of a director takes effect either from the date on which the notice is received by the company or from a later date specified by the director in the notice, whichever is later.

Question 40

How can a director be removed from a company?

Answer 40

A company can remove a director by passing an ordinary resolution at a general meeting, giving the director a reasonable opportunity to be heard. However, this provision does not apply if the company has availed itself of the option to appoint at least two-thirds of the total number of directors through proportional representation.

Question 41

What is required to propose the removal of a director under this section?

Answer 41

A special notice is required to propose the removal of a director under this section. The notice must also include the appointment of a replacement director, if applicable.

Question 42

Can the director being removed present their case?

Answer 42

Upon receiving notice of a resolution to remove a director, the company must send a copy of the resolution to the director concerned. The director, whether or not a member of the company, is entitled to be heard on the resolution at the meeting.

Question 43

Can a director make a written representation regarding their removal?

Answer 43

If a director receives notice of their removal and makes a written representation to the company, they may request that the representation be notified to all members. The representation may be required to be read out at the meeting if sufficient time permits.