DIRECTORS

Question 1

Meaning of a Director

Answer 1

Section 2(34) of the Companies Act, 2013 defines a ‘director’ to mean a director appointed to the Board of a company.
Under the scheme of the Companies Act, the company itself and its directors or the Board of directors are primary agents of the company to transact its operations. The Companies Act specifies where the company itself is to act both as principal and the agent and where the Board of directors is to act on its behalf. In respect of the properties and assets of the company the directors or the Board of directors act as Trustees. Therefore, the directors have different attributes in relation to the company depending upon the facts of each case.

As stated earlier, directors apart from being trustees for the assets and properties of the company are also the agents of the company as it is the directors, collectively as Board, act on behalf of the company on all matters except those specifically reserved for the company to act. However, it may be noted that even though the directors for certain purposes can be considered as the agent of the company, yet in respect of such matters for which the directors (i.e., the Board) are empowered to take a decision, the company in any manner, including in the general meeting, cannot direct the directors to take a particular decision. For example, allotment of shares, transfer of shares, investments etc. If the body of the shareholders did not approve the decision, they are free to change the directors in the manner given in the Act. As stated elsewhere in the chapter a director apart from being the agent and trustee of the company, can also be treated as officer of the company, hence an employee for purposes specified in the Act.

Question 2

Who may be appointed as a Director ?

Answer 2

Section 149 of the Companies Act provides that only an individual can be appointed as director. Thus, no body corporate, association or firm can be appointed director of a company.
However, no person shall be appointed as a director of the company unless he has been allotted a Director Identification Number (DIN) or such other number as may be prescribed under section 153. Section 153, as amended by the Amendment Act, 2017 provides that the Central Government may prescribe any identification number which shall be treated as Director Identification Number for the purposes of this Act. [Section 152(3)].
Section 153 requires that every individual intending to be appointed as director of a company shall make an application for allotment of Director Identification Number to the Central Government in such form and manner and along with such fees as may be prescribed. However, the Central Government may prescribe any other identification number as a DIN.

Question 3

Qualifications for Directors

Answer 3

The Companies Act has not prescribed any academic or professional qualifications for directors. Also, the Act imposes no share qualification on the directors. So, unless the company’s articles contain a provision to that effect, a director need not be a shareholder unless he wishes to be one voluntarily. But the articles usually provide for a minimum share qualification.

Question 4

Disqualifications of a Director

Answer 4

Section 164(1) of the Companies Act, 2013 provides that a person shall not be eligible for appointment as a director of a company, if —
(a) he is of unsound mind and stands so declared by a competent court;
(b) he is an undischarged insolvent;
(c) he has applied to be adjudicated as an insolvent and his application is pending;
(d) he has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and sentenced in respect thereof to imprisonment for not less than six months. However, this disqualification will last only up to five years from the date of expiry of the sentence.
But, if a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of seven years or more, he shall not be eligible to be appointed as a director in any company;
(e) an order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force;
(f) he has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call;
(g) he has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years;
(h) he has not complied with sub-section (3) of section 152; or
(i) he has not complied with the provisions of sub-section (1) of section 165.

Question 5

Legal position of directors

Answer 5

Directors may correctly be described as agents of the company. Cairns, L.J. observed : “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”. The ordinary rules of agency will, therefore, apply to any contract or transaction made by them on behalf of the company. Where the directors contract in the name and on behalf of the company it is the company which is liable on it and not the directors.
Thus, where chief executive of company executed promissory note and borrowed amount for company’s sake, it could not be said that amount was borrowed by him, in his personal capacity - Kirlampudi Sugar Mills Ltd. v. G. Venkata Rao [2003] 42 SCL 798 (AP).

Question 6

However, directors incur a personal liability in the following circumstances :

Answer 6

1. where they contract in their own names;
2. where they use the company’s name incorrectly, e.g., by omitting the word ‘Limited’;
3. where the contract is signed in such a way that it is not clear whether it is the principal (the company) or the agent who is signing; and
4. where they exceed their authority, e.g., where they borrow in excess of the limits imposed upon them - Weeks v. Propert [1873] LR 8 CP 427.

Question 7

Independent Director

Answer 7

Sub-section (4) of section 149 requires every listed public company to have at least one-third5 of the total number of directors as independent directors and the Central Government may prescribe the minimum number of independent directors in case of any class or classes of public companies.
The Central Government vide Rule 4 of Companies (Appointment and Qualification of Directors) Rules, 2014 has prescribed as follows:
The following class or classes of companies shall have at least two directors as independent directors -
(i) the Public Companies having paid up share capital of ten crore rupees or more; or
(ii) the Public Companies having turnover of one hundred crore rupees or more; or
(iii) the Public Companies which have, in the aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees.
However, in case a company covered under this rule is required to appoint a higher number of independent directors due to the composition of its audit committee, such a higher number of independent directors shall be applicable to it.
Any intermittent vacancy of an independent director shall be filled up by the Board at the earliest but not later than the immediate next Board meeting or three months from the date of such vacancy, whichever is later:
Explanation - For the purposes of this rule, it is hereby clarified that the paid-up share capital or turnover or outstanding loans, debentures and deposits, as the case may be, as existing on the last date of the latest audited financial statements shall be taken into account.

Question 8

Who is an Independent Director

Answer 8

Section 149(6) of the Companies Act, 2013 defines an independent director as under:
An independent director in relation to a company means a director other than a managing director or a whole-time director or a nominee director,—
(a) who, in the opinion of the Board**, is a person of integrity and possesses relevant expertise and experience;
(b) (i) who is or was not a promoter of the company or its holding, subsidiary or associate company;
(ii) who is not related to promoters or directors in the company, its holding, subsidiary or associate company;

Question 9

Who is an Independent Director(c)

Answer 9

who has or had no pecuniary relationship, other than remuneration as such director, with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding finan- cial years or during the current financial year*. However, remuneration not exceeding 10% of his total income or such amount as may be prescribed will not be considered as a disqualification for appointment as independent director**.

Question 10

Who is an Independent Director(d)

Answer 10

none of whose relatives-
(i) is holding any security of or interest in the company, its holding, subsidiary or associate company during the two immediately preceding financial years or during the current financial year:
However, the relative may hold security or interest in the company of face value not exceeding fifty lakh rupees or two per cent of the paid-up capital of the company, its holding, subsidiary or associate company or such higher sum as may be prescribed;
(ii) is indebted to the company, its holding, subsidiary or associate company or their promoters, or directors, in excess of such amount as may be prescribed during the two immediately preceding financial years or during the current financial year;
(iii) has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, its holding, subsidiary or associate company or their promoters, or directors of such holding company, for such amount as may be prescribed during the two immediately preceding financial years or during the current financial year; or
(iv) has any other pecuniary transaction or relationship with the company, or its subsidiary, or its holding or associate company amounting to two per cent or more of its gross turnover or total income singly or in combination with the transactions referred to in sub-clause (i), (ii) or (iii).

Question 11

Who is an Independent Director(e)

Answer 11

who, neither himself nor any of his relatives—
(i) holds or has held the position of a key managerial personnel or is or has been employee of the company or its holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed.
However, in case of a relative who is an employee, the restriction under this clause shall not apply for his employment during preceding three financial years.
(ii) is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of—

(A) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or

(B) any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten per cent. or more of the gross turnover of such firm;

(iii) holds together with his relatives two per cent. or more of the total voting power of the company; or

(iv) is a Chief Executive or director, by whatever name called, of any non-profit organisation that receives twenty-five per cent. or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two per cent. or more of the total voting power of the company; or

(f) who possesses such other qualifications as may be prescribed.

Question 12

Who is an Independent Director(8)

Answer 12

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

Question 13

Who is an Independent Director(9)

Answer 13

Notwithstanding anything contained in any other provision of this Act, but subject to the provisions of sections 197 and 198, an independent director shall not be entitled to any stock option and may receive remuneration by way of fee provided under sub-section (5) of section 197, reimbursement of expenses for participation in the Board and other meetings and profit related commission as may be approved by the members.

Provided that if a company has no profits or its profits are inadequate, an independent director may receive remuneration, exclusive of any fees payable under sub-section (5) of section 197, in accordance with the provisions of Schedule V.

Question 14

Who is an Independent Director(10)

Answer 14

Subject to the provisions of section 152, an independent director shall hold office for a term up to five consecutive years on the Board of a company, but shall be eligible for reappointment on passing of a special resolution by the company and disclosure of such appointment in the Board’s report.

Question 15

Who is an Independent Director(11)

Answer 15

Notwithstanding anything contained in sub-section (10), no independent director shall hold office for more than two consecutive terms, but such independent director shall be eligible for appointment after the expiration of three years of ceasing to become an independent director:

Provided that an independent director shall not, during the said period of three years, be appointed in or be associated with the company in any other capacity, either directly or indirectly.

Explanation.—For the purposes of sub-sections (10) and (11), any tenure of an independent director on the date of commencement of this Act shall not be counted as a term under those sub-sections.

Question 16

Who is an Independent Director(12)

Answer 16

Notwithstanding anything contained in this Act,—

(i) an independent director;

(ii) a non-executive director not being promoter or key managerial personnel, shall be held liable, only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.

Question 17

Who is an Independent Director(13)

Answer 17

The provisions of sub-sections (6) and (7) of section 152 in respect of the retirement of directors by rotation shall not be applicable to the appointment of independent directors.

Question 18

Selection of Independent Director

Answer 18

As per Section 150 of the Companies Act, 2013, an independent director may be selected from a data bank containing names, addresses and qualifications of persons who are eligible and willing to act as independent directors. The responsi- bility of exercising due diligence before selecting a person as an independent director shall lie with the company making such appointment. The appointment of independent director shall be approved by the company in general meeting and the explanatory statement annexed to the notice of the general meeting called to consider the said appointment shall indicate the justification for choosing the appointee for appointment as independent director. Further, the explanatory statement for such appointment, annexed to the notice for the general meeting, shall include a statement that “in the opinion of the Board, he fulfils the conditions specified in this Act for such an appointment.”
No person shall be appointed as an alternate director for an independent director unless he is qualified to be appointed as an independent director.
Schedule IV to the Companies Act, 2013 has very elaborately given the manner of appointment of independent directors, their re-appointment, tenure, resignation, removal and separate meetings of the independent directors as well as their evaluation. A summary of these provisions is being given hereunder.

Question 19

Manner of Appointment

Answer 19

(1) Appointment process of independent directors shall be independent of the company management; while selecting independent directors the Board shall ensure that there is an appropriate balance of skills, experience and knowledge in the Board so as to enable the Board to discharge its functions and duties effectively.
(2) The appointment of independent director(s) of the company shall be approved at the meeting of the shareholders.
(3) The explanatory statement attached to the notice of the meeting for approving the appointment of an independent director shall include a statement that in the opinion of the Board, the independent director proposed to be appointed fulfils the conditions specified in the Act and the rules made thereunder and that the proposed director is independent of the management.
(4) The appointment of independent directors shall be formalised through a letter of appointment, which shall set out :
(a) the term of appointment;
(b) the expectation of the Board from the appointed director; the Board-level
committee(s) in which the director is expected to serve and its tasks;
(c) the fiduciary duties that come with such an appointment along with accompanying liabilities;
(d) provision for Directors and Officers (D and O) insurance, if any;
(e) the Code of Business Ethics that the company expects its directors and
employees to follow;
(f) the list of actions that a director should not do while functioning as such in the company; and
(g) the remuneration, mentioning periodic fees, reimbursement of expenses for participation in the Boards and other meetings and profit-related commission, if any.
(5) The terms and conditions of the appointment of independent directors shall be open for inspection at the registered office of the company by any member during normal business hours.
(6) The terms and conditions of the appointment of independent directors shall also be posted on the company’s website.

Question 20

Appointment of Additional Director

Answer 20

The articles of a company may confer on its Board of Directors the power to appoint any person as an additional director at any time. However, a person who fails to get appointed as a director in a general meeting cannot be so appointed.
It may thus be noted that without a power given by the Articles, the Board cannot appoint additional directors. The section applies to all companies, public as well as private - Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holdings Ltd. AIR 1981 SC 1298.

Question 21

Tenure of additional director

Answer 21

The person appointed as additional director shall hold office up to the date of the next annual general meeting or the last date, on which the annual general meeting should have been held, whichever is earlier.
The provision for an additional director is one which is meant to enable the companies to have the benefit of the services of a person, who otherwise is suitable for serving on the board, and whose presence in the board is desirable in the interests of the company, till the time the next AGM is scheduled to be held. That provision is not meant to enable the company to keep on its board a person as additional director for an indefinite period of time by not holding the AGM. Section 260 [now section 161], therefore, must necessarily be read with section 166 [now section 96] which stipulates that the AGM be held every year and not more than fifteen months shall elapse between the date of one AGM and the next - P. Natarajan v. Central Government [2004] 51 SCL 76 (Mad.).

Question 22

Powers of Additional Directors

Answer 22

Additional directors will enjoy the same powers and rights as other directors. Through this route, the Board of directors can therefore appoint competent persons on the Board who may find it difficult to come through election.

Question 23

Filling up Casual Vacancy

Answer 23

Section 161(4) as amended by the Amendment Act, 2017, empowers the Board to fill casual vacancies in the case of any company including a private company. A casual vacancy is one that arises otherwise than by retirement or the expiration of the time fixed for an appointment. Thus, if the office of any director appointed by the company in general meeting is vacated before his term of office expires in the normal course, the resulting casual vacancy may, subject to any regulations in the articles of the company, be filled by the Board of Directors at a meeting of the Board.

Question 24

Tenure -

Answer 24

It has to be noted that as per sub-section (4) of section 161, if the director fills up a casual vacancy and the same has been approved in the immediately next general meeting, then the person appointed will hold office not until the next Annual General Meeting only but for the entire period for which the person in whose place he was appointed would have held office. Thus, if Ram had been elected a director and died a month later, Bharat appointed in his place would continue for the whole period for which Ram, if he had not died, would have continued. But though Bharat would continue for the whole of the unexpired term for which Ram had been appointed; on the expiry of that term, Bharat will not be eligible for re-appointment as ‘a director retiring by rotation’.

Question 25

Alternate Director

Answer 25

The Board of directors of a company may, if so authorised by its articles or by a resolution passed by the company in general meeting, appoint an alternate director to act for a director during his absence for a period of not less than three months from India. However, a person holding any alternate directorship for any other director in the company shall not be appointed. Again, a person who is already a director of the company cannot be appointed as an alternate director for another director in the same company.
No person shall be appointed as an alternate director for an independent director unless he is qualified to be appointed as an independent director under the provisions of this Act.
An alternate director is not an agent of the original director.
Consent: It seems that an alternate director appointed as such for the first time shall be required to file his consent with the Registrar. However, on his regular appoint- ment as a director in continuation, it would not be necessary to file the consent [Sec. 152(5)].

Question 26

Resident Director

Answer 26

For the first time the Companies Act, 2013 has introduced the concept of resident director. Sub-section (3) of section 149 provides that every company shall have at least one director who stays in India for a total period of not less than one hundred and eighty-two days during the previous financial year.
However, in case of a newly incorporated company the requirement shall apply proportionately at the end of the financial year in which it is incorporated.

Question 27

Appointment of woman director on the Board

Answer 27

Second proviso to section 149(1) read along with Rule 3 of Companies (Appointment and Qualifications of Directors) Rules, 2014 require appointment of at least one woman director on the Board of the following class of companies –
(i) every listed company;
(ii) every other public company having -
(a) paid-up share capital of one hundred crore rupees or more; or
(b) turnover of three hundred crore rupees or more8 :
Compliance by new companies - A company, which has been incorporated under the Act and is covered under the aforesaid criteria, shall appoint at least one woman director within a period of six months from the date of its incorporation.

Question 28

Appointment of director elected by small shareholders [Section 151]

Answer 28

A listed company may have one director elected by such small shareholders in such manner and with such terms and conditions as may be prescribed.
‘Small shareholder’ means a shareholder holding shares of nominal value of not more than twenty thousand rupees or such other sum as may be prescribed.
The Ministry of Corporate Affairs, in this regard, has prescribed the rules. Rule 7 of Companies (Appointment and Qualification of Directors) Rules, 2014, inter alia, provides:

(1) A listed company, may upon notice of not less than one thousand small shareholders or one-tenth of the total number of such shareholders, which- ever is lower, have a small shareholders’ director elected by the small shareholders.
A listed company may opt to have a director representing small shareholders suo motu. In such a case the provisions of sub-rule (2) shall not apply for appointment of such director.
(2) The small shareholders intending to propose a person as a candidate for the post of small shareholders’ director shall leave a notice of their intention with the company at least fourteen days before the meeting under their signa- tures specifying the name, address, shares held and folio number of the person whose name is being proposed9 for the post of director and of the small shareholders who are proposing such person for the office of director.
(3) The notice shall be accompanied by a statement signed by the person whose name is being proposed for the post of small shareholders’ director stating -
(a) his Director Identification Number or any other identification number notified by the Central Government;
(b) that he is not disqualified to become a director under the Act; and
(c) his consent to act as a director of the company
(4) Such director shall be considered as an independent director and should, therefore, meet the requirements of section 149 relating to independent directors.
(5) The appointment of small shareholders’ director shall be subject to the provisions of section 152 except that-
such director shall not be liable to retire by rotation;
such director’s tenure as small shareholders’ director shall not exceed a period of three consecutive years; and

(6) A person shall not be appointed as small shareholders’ director of a company,
on the expiry of the tenure, such director shall not be eligible for re-appointment.
if the person is not eligible for appointment in terms of section 164.
(7) A person appointed as small shareholders’ director shall vacate the office if -
(a) the director incurs any of the disqualifications specified in section 164;
(b) the office of the director becomes vacant in pursuance of section 167;
(c) the director ceases to meet the criteria of independence as provided in sub-section (6) of section 149.
(8) No person shall hold the position of small shareholders’ director in more than two companies at the same time.
The second company to which he has been appointed must not be in a business which is competing or is in conflict with the business of the first company.
(9) A small shareholders’ director shall not, for a period of three years from the date on which he ceases to hold office as a small shareholders’ director in a company, be appointed in or be associated with such company in any other capacity, either directly or indirectly.

Question 29

Vacation of office of a director [Section 167]

Answer 29

Section 167 provides for the office of a director becoming vacant on the happening of certain events. Sub-section (1) of section 167 provides that the office of a director shall become vacant if:
(a) he incurs any of the disqualifications specified in section 164. However, where he incurs disqualification under sub-section (2) of section 164, the office of the director shall become vacant in all the companies other than the company that is in default under that sub-section*
(b) he absents himself from all the meetings of the Board of Directors held during a period of twelve months with or without seeking leave of absence of the Board;
(c) he fails to disclose or acts in contravention of the provisions of section 184 relating to entering into contracts or arrangements in which he is directly or indirectly interested;
(d) he becomes disqualified by an order of a court or the Tribunal;
(e) he is convicted by a court of any offence, whether involving moral turpitude or otherwise and sentenced in respect thereof to imprisonment for not less than six months.
(f) he is removed in pursuance of the provisions of this Act;
Please note that the office shall not be vacated by the director in case of
orders referred to in clauses (e) and (f) above—
(i) for thirty days from the date of conviction or order of disqualification;
(ii) where an appeal or petition is preferred within thirty days as aforesaid against the conviction resulting in sentence or order, until expiry of seven days from the date on which such appeal or petition is disposed of; or
(iii) where any further appeal or petition is preferred against order or sentence within seven days, until such further appeal or petition is disposed of.
(g) he, having been appointed a director by virtue of his holding any office or other employment in the holding, subsidiary or associate company, ceases to hold such office or other employment in that company.
Penalty: If a person, functions as a director even when he knows that the office of director held by him has become vacant on account of any of the disqualifications specified above, he shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both.

Question 30

Resignation by a Director

Answer 30

A director may resign from his office by giving a notice in writing to the company [Section 168(1)] on receipt of such notice, the Board shall take note of the same and the company shall intimate the Registrar in such manner, within such time and in such form as may be prescribed and shall also place the fact of such resignation in the report of directors laid in the immediately following general meeting by the company:
The director may also forward a copy of his resignation along with detailed reasons for the resignation to the Registrar within thirty days of resignation in such manner as may be prescribed.
The resignation of a director shall take effect from the date on which the notice is received by the company or the date, if any, specified by the director in the notice, whichever is later.
It may be noted that sub-section (2) of section 168 provides that the director who has resigned shall be liable even after his resignation for the offences which occurred during his tenure.
Where all the directors of a company resign from their offices, or vacate their offices under section 167, the promoter or, in his absence, the Central Government shall appoint the required number of directors who shall hold office till the directors are appointed by the company in general meeting [Section 168(3)].

Once a resignation letter is submitted to the board, the date on which the intention to relinquish post is communicated to board would be the date from which the director ceases to be a director of the company - Mother Care (India) Ltd. v. Prof. Ramaswamy P. Aiyar [2004] 51 SCL 243 (Kar.).
Where a director has contracted to serve the company for a fixed period, he may resign subject to payment of damages, if any, suffered by the company as a consequence of premature termination of his service agreement.
Once a director has given a notice of resignation, he cannot withdraw it except with the consent of the company properly considered by the directors. But, where articles contain a provision that a director may resign only if the Board consents, the resignation shall not be effective until the Board’s consent is given and the resignation may be withdrawn in the meantime - Glossop v. Glossop [1907] 2 Ch. 370.
A managing or whole time director cannot resign merely by giving a notice. In his case, a formal acceptance of the resignation by the company is essential. This is because of the fact that such a director, besides being an ordinary director, is also in the whole or substantially the whole time employment of the company. He has to be relieved of all the duties and responsibilities attaching to his office. The notice by a director holding office both of a whole time and ordinary director, for resignation shall apply to both the offices - Mosely v. Koffyfontein Mines Ltd. [1911] 1 Ch. 73.

Question 31

Is a resolution passed at Board meeting necessary for appointment of Additional Directors? -

Answer 31

Unlike in case of filling a casual vacancy which can be done only in a regular meeting of the Board [Section 161(4)], the appointment of additional directors may be made either at a meeting of the Board or by passing a resolution by circulation as provided in section 175.

Question 32

Can an Additional Director be appointed as a Managing/Whole time Director?

Answer 32

A managing director or whole time director, unless the articles of a company provide otherwise, is to be appointed by the Board of directors. However, since any director can be appointed as a managing or whole time director and there being nothing in the Companies Act suggesting that an additional director cannot be appointed as the managing/whole time director, there should be no objection to the appointment of an additional director as a managing or whole time director. But the tenure of an additional director being limited to the holding of the Annual General Meeting and if the company at the Annual General Meeting does not re-appoint him as a director, he will automatically vacate his office as managing or whole time director also. It is because no person who is not a director can function as a managing or whole time director. The aforesaid view has also been endorsed by the Department of Company Affairs [Now Ministry of Corporate Affairs].

Question 33

When does an alternate director vacate his office

Answer 33

An alternate director shall not hold office for a period longer than that permissible to the director in whose place he has been appointed and shall vacate the office if and when the director in whose place he has been appointed returns to India.
Where the original director is a non-retiring director, an alternate director ap- pointed in his place can continue indefinitely subject only to the condition that he shall vacate the office as and when the original director returns to India.
If the term of office of the original director is determined before he so returns to India, any provision for the automatic re-appointment of retiring directors in default of another appointment shall apply to the original, and not to the alternate director.

Question 34

Assignment of office by Director [Section 166(6)]

Answer 34

• The Supreme Court has made a distinction between ‘assignment’ and ‘appointment’ and has held that where in the case of a private company a managing director who was holding his office for life and was empowered by the Articles to appoint a successor, appointed by will of one G to succeed him as managing director after his death, the ‘appointment’ of the successor did not come within the prohibition of the section. The Court observed : “The section talks of assignment of his office by a director”. The word “his” would indicate that the office contemplated was one held by the director at the time of assignment. It is legitimate, therefore, to infer that by using the word ‘his’ the Legislature indicated that an appointment by a director to the office which he previously held but did not hold at the date of the appointment, was not to be included within the word ‘assignment’.

Question 35

Minimum and maximum number of directors*

Answer 35

Section 149(1) provides that every company shall have a Board of Directors consisting of individuals as directors and shall have—
(a) a minimum number of three directors in the case of a public company, two directors in the case of a private company, and one director in the case of a One Person Company; and
(b) a maximum of fifteen directors:
However, a company may appoint more than fifteen directors after passing a
special resolution.
Again, a Government company may have more then 15 directors**
Besides, such class or classes of companies, as may be prescribed, shall have at least one woman director

Question 36

Removal by shareholders

Answer 36

Section 169 recognises the inherent right of shareholders to remove the directors appointed by them. It is not even necessary that there should be proof of misman- agement, breach of trust, misfeasance or other misconduct on the part of the directors. Where the shareholders feel the policies pursued by the directors or any of them are not to their liking, they have the option to remove the directors by passing an ordinary resolution in the same way as they have the right to appoint directors by passing an ordinary resolution.
Section 169 provides that a company may, by ordinary resolution of which special notice as per section 115 has been given, passed in general meeting, remove a director before the expiry of his term of office. However, the following directors cannot be so removed:
(i) Directors appointed by the Tribunal; and
(ii) Directors appointed under the system of proportional representation.

In case a copy of the representation is not sent as aforesaid due to insufficient time or for the company’s default, the director may besides being heard orally require that the representation shall be read out at the meeting.

The copy of the representation of the director sought to be removed need not be circulated nor the concerned director be allowed the right to have the representation read out in the general meeting, if the company or any other person claiming to be aggrieved, the Tribunal is satisfied that the rights conferred by this sub-section are being abused to secure needless publicity for defamatory matter.

Question 37

Filling vacancy caused by removal of a director

Answer 37

A vacancy created by the removal of a director under this section may, if he had been appointed by the company in general meeting or by the Board, be filled by the appointment of another director in his place at the meeting at which he is removed. However, a special notice of the intended appointment must have been given.
A director so appointed shall hold office till the date up to which his predecessor would have held office if he had not been removed.
If vacancy is not filled by the company in general meeting, the Board of directors may fill it as if it were a casual vacancy in accordance with section 161. However, the Board cannot appoint the removed director [Section 169(7)].

Question 38

Validity of the acts of a director where his appointment is invalid [Section 176]

Answer 38

Section 176 provides that the acts done by a director shall be valid even if his appointment is discovered to be invalid because of any defect or disqualification or where his appointment had terminated by virtue of any provision contained in the Companies Act or in the articles.
Exceptions
However, the aforesaid position shall not prevail in the following cases:
(i) Where appointment is illegal or no appointment at all.
(ii) Where the director continues in his office knowingly that his term has expired.
(iii) Where the director knew from the beginning that his appointment was defective.
(iv) Acts done after his appointment has been noticed by the company to be invalid or to have terminated.
(v) Acts ultra vires the company.
(vi) Where the third party was aware of the irregularity, such party shall not be
entitled to enforce against the company.
(vii) Where an appointment of a managing director, whole-time director or manager is not approved by the company at a general meeting, any act done by him before such approval shall not be deemed to be invalid [Section 196(5)].

Question 39

Related party transactions [Section 188]

Answer 39

(1) Except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as may be prescribed17, no company shall enter into any contract or arrangement with a related party with respect to—
(a) sale, purchase or supply of any goods or materials;
(b) selling or otherwise disposing of, or buying, property of any kind;
(c) leasing of property of any kind;
(d) availing or rendering of any services;
(e) appointment of any agent for purchase or sale of goods, materials, services or property;
(f) such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company; and

(g) underwriting the subscription of any securities or derivatives thereof, of the company:

Provided that no contract or arrangement, in the case of a company having a paid-up share capital of not less than such amount, or transactions not exceeding such sums, as may be prescribed, shall be entered into except with the prior approval of the company by a special resolution resolution:

Provided further that no member of the company shall vote on such special resolution resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party

Provided also that nothing contained in the second proviso shall apply to a company in which ninety per cent. or more members, in number, are relatives of promoters or are related parties:

Provided also that nothing in this sub-section shall apply to any transactions entered into by the company in its ordinary course of business other than transactions which are not on an arm’s length basis.

Provided also that the requirement of passing the resolution under first proviso shall not be applicable for transactions entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval.

Question 40

Meaning of related party

Answer 40

“Related party”, as per section 2(76), with reference to a company, means—
(i) a director (other than an independent director) or his relative; [Section 2(77) read along with Rule 4 of Companies (Specification of Definitions Details) Rules, 2014, says ‘relative’ with reference to any person, means anyone who is related to another, if— (i) they are members of a Hindu Undivided Family; (ii) they are husband and wife; or (iii) if he or she is (a) Father including step- father; (b) Mother including the step-mother; (c) Son including the step-son; (d) Son’s wife; (e) daughter; (f) daughter’s husband; (g) brother including step brother and (h) sister including step sister;
(ii) a key managerial personnel or his relative;
(iii) a firm, in which a director, manager or his relative is a partner;
(iv) a private company in which a director or manager or his relative is a member or director;
(v) a public company in which a director or manager is a director and holds along with his relatives, more than two per cent of its paid-up share capital;
(vi) any body corporate whose Board of Directors, managing director or man- ager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;
(vii) any person on whose advice, directions or instructions a director or manager is accustomed to act:
Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity;
(viii) any body corporate which is-
(A) a holding, subsidiary or an associate company of such company;
(B) a subsidiary of a holding company to which it is also a subsidiary; or
(C) an investing company or the venturer of the company;

Question 41

Interested Director [Section 184]

Answer 41

A director who is interested in a transaction of the company must disclose his interest to the Board. Section 184 in this regard provides that every director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the disclosures already made, then at the first Board meeting held after such change, disclose his concern or interest in any company or companies or bodies corporate, firms, or other association of individuals. The disclosure shall include the shareholding and shall be made in such manner as may be prescribed.
Further, sub-section (2) requires every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered into—
(a) with a body corporate in which such director or such director in association with any other director, holds more than two per cent shareholding of that body corporate, or is a promoter, manager, Chief Executive Officer of that body corporate; or
(b) with a firm or other entity in which, such director is a partner, owner or member, as the case may be,
shall disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed and shall not participate in such meeting.**
Where any director who is not so concerned or interested at the time of entering into such contract or arrangement, he shall, if he becomes concerned or interested after the contract or arrangement is entered into, disclose his concern or interest forthwith when he becomes concerned or interested or at the first meeting of the Board held after he becomes so concerned or interested.
Non-disclosure of the interest by a director or his participation in the meeting renders the contract or arrangement voidable and not void [Sub-section (3)].
However, the director shall be punishable with imprisonment for a term which may extend to one year or with fine which may extend to one lakh rupees, or with both [Sub-section (4)].

Question 42

Powers of the Board of Directors

Answer 42

Section 179 of the Companies Act, 2013 provides for General Powers of the Board of Directors. It provides:
Subject to the provisions of the Act, the Board of Directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorised to exercise and do.
In exercising the aforesaid powers or doing any of the aforesaid acts or things, the Board will be subject to the provisions contained in that behalf in the Companies Act or any other Act, or in the Memorandum or Articles of the company, or in any regulations not inconsistent therewith and duly made thereunder, including regu- lations made by the company in general meeting.
Again, the Board cannot exercise those powers, acts or things which are directed or required, whether under the Companies Act or by the memorandum or articles of the company or otherwise, to be exercised or done by the company in general meeting.
However, no regulation made by the company in general meeting shall invalidate any prior act of the Board which would have been valid if that regulation had not been made.
Thus, the Board may exercise all powers of the company and can do all such acts and things that the company can do except those which are specifically provided to be exercised or done by the company in a general meeting. But the exercise of such powers of the Board shall be in conformity with the provisions of the Companies Act or any other Act and Memorandum, Articles, and resolutions of the company passed in general meeting.
It is therefore clear that the powers of a company in respect of all matters are to be exercised by the Board of directors except where these are reserved for exercise by company in general meeting. In Nibro Ltd. v. National Insurance Co. Ltd. [1991] 70 Comp. Cas. 388 (Delhi), the Delhi High Court observed as follows:
“It is well settled that under section 291 [Now section 179] except where express provision is made that the powers of a company in respect of a particular matter are to be exercised by the company in general meeting; in all other cases the Board of directors is entitled to exercise all its powers.”

Question 43

Meaning of Key Managerial Personnel

Answer 43

According to section 2(51)* “key managerial personnel”, in relation to a company, means—
(i) the Chief Executive Officer or the managing director or the manager;
(ii) the company secretary;
(iii) the whole-time director;
(iv) the Chief Financial Officer;
(v) such other officer, not more than one level below the directors who is in whole-time employment, designated as key managerial personnel by the Board; and
(vi) such other officer as may be prescribed.

Question 44

Whole time director

Answer 44

In many sections of the Companies Act, the term ‘Whole time director’ has been used side by side with that of the ‘managing director’. Confusion is, therefore, likely to arise in respect of their respective position and role.
While the term ‘managing director’ has been specifically defined under section 2(54), no such definition of a whole time director is available. Sub-section (94) of section 2, however, states that the expression ‘whole time director’ includes a director in the whole time employment of the company.
Regarding appointment/re-appointment and remuneration of a whole time direc- tor, same provisions as are applicable to a managing director, are applicable.

Question 45

General duties of directors are as follows :

Answer 45

1. Duty of good faith - The directors must act in the best interest of the company. Interest of the company implies the interest of present and future members of the company on the footing that the company would be continued as a going concern.
   Thus a director should not make any secret profits. He should also not exploit to his own use the corporate opportunity. In Cook v. Veeks [1916] AC 554, it was observed that “men who assume complete control of a company’s business must remember that they are not at liberty to sacrifice the interest which they are bound to protect and while ostensibly acting for the company, direct in their own favour business which should properly belong to the company they represent.
   In this case there was an offer of a contract to the company. Directors who were the holders of the share of 3/4th of the votes resolved that the company had no interest in the contract and later entered into the contract by themselves. Held, the benefit of the contract belonged in equity to the company.
   As regards the director selling his property to the company there would be breach of faith and he would have to account for the profit to the company if the property was acquired by him under circumstances which made it in equity the property of the company. But if the property in equity as well as in law belonged to him, there is no breach of faith - Burland v. Earle [1902] AC 83. In this case, the plaintiff was a director in one company and a shareholder and creditor in another company. The second company was being wound-up and the plaintiff purchased the assets of the second company at a public auction in four lots. One such lot he sold to the former company (in which he was a director) at almost three times the price he had paid for it. The lower Court decided that he should account for the profit on resale to the company. But the Privy Council overruled the decision.
   Again, if the property is acquired by a director by reason of the fact that he is a director and in the course of the exercise of the office of director, then the profit on resale of such property would belong to the company - Regal (Hastings) Ltd. v. Gulliver [1942] 1 All ER 378 (HC).
2. Duty of care - A director must display care in performance in work assigned to him. He is, however, not expected to display an extraordinary care but that much care only which a man of ordinary prudence would take in his own case. Justice Romer in Re City Equitable Fire Insurance Company’s case observed :
   “His (director’s) duties will depend upon the nature of the company’s business, the manner in which the work of the company is distributed between the directors and other officials of the company. In discharging these duties a director must exercise some degree of skill and diligence. But he does not owe to his company the duty to take all possible care or to act with best care. Indeed, he need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. It is, therefore, perhaps another way of stating the same proposition that directors are not liable for mere errors of judgment.”
   Similar view was expressed in Lagunas Nitrate Co. v. Lagunas Nitrate Syndicate [1899] 2 Ch. 392, in the following words:
   “If directors act within their powers, if they act with such care as is to be reasonably expected of them having regard to their knowledge and experience and if they act honestly for the benefit of the company they discharge both their equitable as well as legal duty to the company.”
   Section 463 further states that where a director may be liable in respect of the negligence, default, breach of duty, misfeasance or breach of trust but if he has acted honestly and reasonably and having regard to all the circumstances of the case, he ought fairly to be excused, the court may relieve him either wholly or partly from his liability on such terms as it may think fit.
3. Duty not to delegate - Director being an agent is bound by the maxim ‘delegatus non potest delegare’ which means a delegatee cannot further delegate. Thus, a director must perform his functions personally. A director may, however, delegate in the following cases:
   (a) Where permitted by the Companies Act or Articles of the company. (b) Having regard to the exigencies of business certain functions may be
   delegated to other officials of the company.

Question 46

Appointment of first directors [Section 152]

Answer 46

The first directors are usually appointed by name in the articles or in the manner provided therein. Where the articles do not provide for the appointment of first directors, the subscribers to the memorandum, 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 until the director or directors are duly appointed by the member in accordance with the provisions of this section.
Where, for any reason, for example, death, the persons named in the list of first directors do not assume office, it will be necessary for the subscribers of the Memorandum (who will then be the only members) to convene a meeting for the appointment of directors. To the extent to which the articles do not make any other provisions in that behalf, subscribers who would be entitled to requisition a meeting may call the meeting. Notice of the meeting must be served on every subscriber in the manner in which notices are required to be served by the Act

Question 47

Manner of rotation

Answer 47

Section 152(6)(c) provides that at the first annual general meeting of a public company held next after the date of the general meeting at which the first directors are appointed and at every subsequent annual general meeting, one-third of such of the directors for the time being as are liable to retire by rotation, or if their number is neither three nor a multiple of three, then, the number nearest to one-third, shall retire from office.

The directors to retire by rotation at every annual general meeting shall be those who have been longest in office since their last appointment, but as between persons who became directors on the same day, those who are to retire shall, in default of and subject to any agreement among themselves, be determined by lot [Section 152(6)(d)].

Question 48

Legal position of directors

Answer 48

It is difficult to define the exact legal position of the directors of a company. The Companies Act makes no effort to define their position. They have at various times been described by judges as agents, trustees or managing partners. In the words of Bowen, L.J. :
“Directors are described sometimes as agents, sometimes as trustees and sometimes as managing partners. But each of these expressions is used not as exhaustive of their powers and responsibilities but as indicating useful points of view from which they may for the moment and for the particular purpose to be considered.”

Question 49

Application for allotment of Director Identification Number before appointment in an existing company:

Answer 49

As per the Companies (Appointment and Qualification of Directors) Amendment Rules, 2018,
(a) every applicant, who intends to be appointed as director of an existing company shall make an application electronically in Form DIR-3, to the Central Government for allotment of a Director Identification Number (DIN) along with such fees as provided under the Companies (Registration Offices and Fees) Rules, 2014. However, in case of proposed directors not having approved DIN, the particulars of maximum three directors shall be men- tioned in Form No. INC-32 (SPICe) and DIN may be allotted to maximum three proposed directors through Form INC-32 (SPICe).
(b) Form DIR-3 shall be signed and submitted electronically by the applicant using his or her own Digital Signature Certificate and shall be verified digitally by a company secretary in full time employment of the company or by the managing director or director or CEO or CFO of the company in which the applicant is intended to be appointed as director in an existing company.

Question 50

Are directors employees of the company?

Answer 50

Ordinarily, a director is elected by the shareholders in general meeting, and once so elected, he enjoys well-defined rights and powers under the Act or the articles. Even the shareholders who elect them cannot interfere with their rights or powers except under certain circumstances. An employee appointed by the company under a contract of service is a servant of the company. He does not enjoy any powers other than those vested in him by the employer, who can always direct his actions and interfere in his work.

In Lee Behrens & Co., Re [1932] 2 Comp. Cas. 588, it was observed that directors are elected representatives of the shareholders 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 of the company. However, there is nothing in law to prevent a director from accepting employment under the company under a special contract which he may enter into with the company - R.R. Kothandaraman v. CIT (1957).

Accordingly, where a director accepts employment under the company under a separate contract of service, in addition to the directorship, he is also treated as an employee or servant of the company. He shall, in such a case, be entitled to remuneration and other benefits admissible to employees, in addition to his remuneration as Director under the Act.

To sum up, we may quote Jessel, M.R., in Forest of Dean Coal Mining Co., Re [1878] 10 Ch. D. 450, who observed : “Directors have sometimes been called as trustees or commercial trustees, and sometimes they have been called managing partners; it does not matter much what you call them so long as you understand what their real position is, which is that they are really commercial men managing a trading concern for the benefit of themselves and of all the shareholders in it. They stand in a fiduciary position towards the company in respect of their powers and capital under their control.”

Question 51

Appointment of directors in case of a private company

Answer 51

In case of a private company if the articles are silent as to the appointment of directors, or do not specifically provide for appointment of directors otherwise than in a general meeting, then the directors are to be appointed in general meeting by the sharehold- ers - Calcutta High Court in the case of Swapan Das Gupta v. Navin Chand Suchanti [1988] 3 Comp. LJ 76 (Cal.).

Question 52

Number of directorships

Answer 52

(1) As per section 165 of the Companies Act, 2013 a person, after the commencement of this Act, cannot hold office at the same time as a director in more than twenty companies except where members, by passing a special resolution, fix a lesser number. Out of the total number of twenty companies, his directorships in public companies cannot exceed ten including directorships in private companies that are either holding or subsidiary company of a public company. However, while counting 20 companies, directorship of dormant company shall not be included.
(2) As per sub-section (3) any person holding office as director in companies more than the specified limits immediately before the commencement of this Act shall, within a period of one year from such commencement,—

(a) choose, not more than the specified limit, companies in which he wishes to continue to hold the office of director;
(b) resign his office as director in the other remaining companies; and
(c) intimate the choice made by him:
(i) to each of the companies in which he was holding the office of director before such commencement; and
(ii) to the Registrar having jurisdiction in respect of each such company.

Resignation, as above, shall become effective immediately on the despatch thereof
to the company concerned [sub-section (4)].
Further, no such person shall act as director in more than the specified number of companies,
(a) after despatching the resignation of his office as director or non-executive director thereof, in pursuance of clause (b) of sub-section (3); or
(b) after the expiry of one year from the commencement of this Act, whichever is earlier.

Question 53

Resignation or Removal

Answer 53

(1) The resignation or removal of an independent director shall be in the same manner as is provided in sections 168 and 169 of the Act.
(2) An independent director who resigns or is removed from the Board of the company shall be replaced by a new independent director within a period of not more than 3 months* from the date of such resignation or removal, as the case may
be.
(3) Where the company fulfils the requirement of independent directors in its Board even without filling the vacancy created by such resignation or removal, as the case may be, the requirement of replacement by a new independent director shall not apply.

Question 54

Separate Meetings

Answer 54

(1) The independent directors of the company shall hold at least one meeting in a financial year**, without the attendance of non-independent directors and mem- bers of management;
(2) All the independent directors of the company shall strive to be present at such meeting;
(3) The meeting shall:
(a) review the performance of non-independent directors and the Board as a whole;
(b) review the performance of the Chairperson of the company, taking into account the views of executive directors and non-executive directors;
(c) assess the quality, quantity and timeliness of flow of information between the company management and the Board that is necessary for the Board to effectively and reasonably perform their duties.

Question 55

Compensation for loss of office

Answer 55

Clause (a) of sub-section (8) of section 169 provides that removal of a director would not deprive the person of any compensation or damage for the termination of appointment as a director or for an appointment terminating with that as director. However, section 202 does not provide for payment of compensation for loss of office held by the director except in the capacity of managing director, whole time director or manager. Further, the managing or whole time director or manager would not be entitled to any compensa- tion:
(a) where the director resigns his office in view of the reconstruction of the company, or of its amalgamation with any other body corporate or bodies corporate, and is appointed as the managing director, manager or other officer of the reconstructed company or of the body corporate resulting from the amalgamation;
(b) where the director resigns his office otherwise than on the reconstruction of the company or its amalgamation as aforesaid;
(c) where the office of the director is vacated under sub-section (1) of section 167;
(d) where the company is being wound up, whether by an order of the Tribunal or voluntarily, provided the winding up was due to the negligence or default of the director;
(e) where he has been guilty of fraud or breach of trust in relation to, or gross negligence in or, gross mismanagement, in the conduct of the affairs of the company or any subsidiary or holding company thereof;
(f) where as a director he had instigated or taken part directly or indirectly in bringing about the termination of his office.
(g) where the winding up of the company commences, before or at any time within twelve months after, the date on which he ceased to hold office, if the assets of the company on the winding up, after deducting the expenses thereof, are not sufficient to repay to the shareholders the share capital, including the premiums, if any, contributed by them.

Question 56

Where Articles of Association of a company confer power on board of directors to remove a director - Whether such power shall be affected by the provisions of section 169? -

Answer 56

In Ravi Prakash Singh v. Venus Sugar Ltd. [2008] 84 SCL 75, the Delhi High Court held that power to remove a director contained in the Articles is not affected by the provisions of section 284 [Now section 169]. In this case, since Articles of the company provided that co-promoters could remove or withdraw their nominees from Board of directors, co-promoters were held to be well within their rights to withdraw nomination of plaintiff as director of co-promoters.
Where petitioner-managing director by virtue of employment agreement himself agreed to get terminated by company on notice with 90 days time, he was estopped to say that he was not bound by agreement he entered into -Gautam Bhardwaj v. Invest India Micro Pension Services (P.) Ltd. [2015] 55 taxmann.com 208 (CLB - New Delhi).
In Cyrus Investment (P.) Ltd. v. Tata Sons Ltd. [2017] 78 taxmann.com 96 (NCLT), National Company Law Appellate Tribunal (NCLAT) dismissed appeals filed by family companies of Cyrus Mistry against orders of NCLT rejecting contempt application and refusing to pass interim order to restrain respondents from removing Mistry as director of respondent company at an Extraordinary meeting.

Question 57

Do shareholders have the right to intervene? -

Answer 57

• Shareholders, by amending the articles may restrict the powers of the Board. But such amendment cannot be made retrospectively and a meeting of shareholders cannot therefore invalidate any act validly done by the Board. In Jagdish Prasad v. Pt. Paras Ram [1942] 12 Comp. Cas. 21 (All.), it was observed that it is a first and elementary principle of company law that, when powers are vested in a Board of directors by the Articles of association of a company, they cannot be interfered with by the shareholders as such. If the shareholders are dissatisfied with what the directors do, their remedy is to remove them in the manner provided by the Articles or the Act. But so long as a Board of directors exists and particular powers are vested in it by the Articles, the Board is entitled to exercise those powers without interference by the shareholders and it is irrelevant whether the shareholders approve of what the directors have done or not.

Question 58

Exceptions - In the following cases, however, the general meeting of shareholders is competent to intervene and act in respect of a matter delegated to the Board of directors:

Answer 58

1. Directors acting mala fide - Where the directors act for their own personal interests in complete disregard to the interests of the company (Marshall’s Valve Gear Co. v. Manning Wardle & Co. Ltd. [1909] 1 Ch. 267), or where the personal interest of the directors clashes with their duties towards the company, or when they try to avoid taking steps for the redressal of the wrong done to the company, the majority shareholders may act to redress the wrong.
2. Directors themselves wrong doers - Where the directors who are the only persons to conduct litigation in the name of the company, are themselves the wrong doers and have acted mala fide, the shareholders can take steps to redress the wrong - Satya Charan Lal v. R.P. Bajoria [1950] SLR 394.
3. Incompetency of the Board - When the Board has become incompetent to act, e.g., where all the directors constituting the Board are interested in a dealing or where none of the directors was validly appointed, the majority of shareholders may exercise powers in a general meeting of the company. - B.N. Vishwanathan v. Tiffins B.A. and P Ltd. AIR 1953 Mad. 510.
4. Deadlock in management - When there is a deadlock in the management so that directors cannot exercise some of their powers, the majority sharehold- ers may exercise the powers in a general meeting of the company. In Barron v. Potter [1914] 1 Ch. 895, the Articles of a company gave the Board of directors power to appoint additional directors. But owing to differences between the directors, no meeting could be held for the purpose. The Articles also did not confer any power on the shareholders to increase the number of directors. Held, the company retained the power to appoint additional directors in a general meeting.

Question 59

Section 179(3) of the Companies Act, 2013 provides that the Board of directors of a company shall exercise the following powers on behalf of the company by means of resolutions passed at meetings of the Board:

Answer 59

(a) to make calls on shareholders in respect of money unpaid on their shares;
(b) to authorise buy-back of securities under section 68;
(c) to issue securities, including debentures, whether in or outside India;
*(d) to borrow monies11;
*(e) to invest the funds of the company12;
*(f) to grant loans or give guarantee or provide security in respect of loans;
(g) to approve financial statement and the Board’s report;
(h) to diversify the business of the company;
(i) to approve amalgamation, merger or reconstruction;
(j) to take over a company or acquire a controlling or substantial stake in another company;
(k) any other matter which may be prescribed:

Question 60

Evaluation Mechanism of Independent Directors

Answer 60

(1) The performance evaluation of independent directors shall be done by the entire Board of Directors, excluding the director being evaluated.
(2) On the basis of the report of performance evaluation, it shall be determined whether to extend or continue the term of appointment of the independent director.

Question 61

Statutory duties of Directors

Answer 61

(a) To file return of allotments - Section 39(4) of the Companies Act, 2013 requires a company to file with the Registrar, within a period of 30 days, a return of the allotments stating the specified particulars. Failure to file such return shall make the company and its officer who is in default liable to a penalty, for each default, of Rs. 1,000 per day till the default continues or on lakh rupees, whichever is less.
Where company filed Form 2 for allotment of shares with defective list of allottees and subsequently filed proper Form, since delay was not wilful, in view of ROC’s observations, offence was to be compounded on payment of compounding fees - Mrs. Kiran Mazumdar Shaw, In re [2017] 77 taxmann.com 95 (NCLT - Bang.)
(b) Duties under Section 166 - Section 166 provides that:
(1) Subject to the provisions of this Act, a director of a company shall act in
accordance with the articles of the company.
(2) He shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.
(3) He shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.
(4) A director of a company shall not involve 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.
Where a person was a director in a running business but started her independent business in competition with her own company, the Delhi High Court held her act to be prima facie not bona fide as it was done for monetary purposes and same was in violation of her fiduciary duties as a director under section 166 - Rajeev Saumitra v. Neetu Singh [2016] 66 taxmann.com 18 (Delhi).
(5) He shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.
(6) A director of a company shall not assign his office and any assignment so made shall be void.

Question 62

To disclose interest (Section 184)

Answer 62

• A director who is interested in a transac- tion of the company must disclose his interest to the Board. The disclosure must be made at the first meeting of the Board held after he has become interested.
  If a director fails to disclose his interest, as aforesaid, he shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than fifty thousand rupees but which may extend to one lakh rupees, or with both.
  Where general notice of disclosure was given by directors but same could not be taken on note in Board Meeting as no board meeting was conducted, there was non-compliance of section 184 (Section 299 of the Companies Act, 1956). - Personal Performance Consultants India (P.) Ltd., In re [2016] 75 taxmann.com 299 (NCLT - Bang.)

Question 63

To disclose receipt of compensation from transferee of shares (Section 191)

Answer 63

• If the loss of office results from the transfer (under certain conditions) of all or any of the shares of the company, its directors would not receive any compensation from the transferee unless the same has been approved by the company in general meeting before the transfer takes place. If the approval is not sought or the proposal is not approved, any money received by the directors shall be held in trust for the shareholders who have sold their shares.
  If a director of the company contravenes the provisions of this section, such director shall be liable to a penalty of one lakh rupees*.

Question 64

Duty to attend Board meetings -

Answer 64

A number of powers of the company are exercised by the Board of directors in their meetings held from time to time. Although a director may not be able to attend all the meetings but if he absents himself from all the meetings of the Board of Directors held during a period of twelve months with or without seeking leave of absence of the Board, his office shall automatically fall vacant [Section 167(1)(b)].

Question 65

To appoint first auditor of the company

Answer 65

(Section 139).

Question 66

To appoint cost auditor of the company

Answer 66

(Section 148).

Question 67

Liability to third parties

Answer 67

The discussion on liabilities of directors towards third parties may be grouped as under:
1. Liability under the provisions of the Companies Act, 2013.
2. Liability for breach of warranty of authority.

Question 68

Liability under the Companies Act -

Answer 68

Failure to state any particulars as per the requirements of section 26 of the Act or mis-statement of facts in a prospectus renders a director personally liable for damages to the third party. Section 35 provides that a director shall be liable to pay compensation to every person who subscribes for any shares or debentures on the faith of the prospectus for any loss or damages he may have sustained by reason of any untrue or misleading statement included therein. He may, however, escape liability where he proves that the prospectus was issued without his consent or he withdrew his consent before the issue of the prospectus.

Question 69

With regard to allotment

Answer 69

Directors may also incur personal liability for allotment before minimum subscription is received (Section 39). If the amount stated in the prospectus as the minimum amount has not been subscribed and the sum payable on application is not received within a period of thirty days from the date of issue of the prospectus, or such other period as may be specified by the Securities and Exchange Board, the amount received as application money shall be returned within such time and manner as may be prescribed. In case of default, the company and its officer who is in default shall be liable to a penalty, for each default, of one thousand rupees for each day during which such default continues or one lakh rupees, whichever is less.

Question 70

Fraudulent conduct of business -

Answer 70

Directors may also be made personally liable for the debts or liabilities of a company by an order of the Tribunal under section 339. Such an order shall be made by the Tribunal where the directors have been found guilty of fraudulent conduct of business. Section 339(1), in this regard, provides that if in the course of the winding-up of a company, it appears that any business of the company has been carried on, with intent to defraud creditors of the company or any other person, or for any fraudulent purpose, the Tribunal, on the application of the Official Liquidator, or the company liquidator or any creditor or contributory of the company, may if it thinks it proper so to do, declare that any persons who were knowingly parties to the carrying on business in the manner aforesaid shall be personally responsible without any limitation of liability, for all or any of the debts or other liabilities of the company as the Tribunal may direct.

Question 71

“Person in whom director is interested” means—

Answer 71

(a) any private company of which any such director is a director or member;
(b) any body corporate at a general meeting of which not less than twenty-five per cent of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or
(c) any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instruc- tions of the Board, or of any director or directors, of the lending company.