Position of Directors of the company

Position of Directors of the company

Abstract

A company has a separate legal existence. In other words, a company is a separate legal person, but the company has no soul, no body, no flesh. It cannot act in its own person. It can act only through human agency. The persons through which the company generally acts, are known and called as Directors.

In this research paper we’ll also discuss how directors are appointed, disqualifications and removal of the Board Directors of a Company under the Companies Act,2013.

  • Definition:

Section 2(34) of the Companies Act,2013 defines “Director” as-

Director” means a director appointed to the Board of a company”.

In order to ascertain whether a person is a director or not, a reference must be made to the nature of the office and the nature of his duties. No matter by what name he is addressed, if such a person performs the functions of a director, he would be regarded as Director.

  • Position of Directors:

As Justice Neville puts it in the case decided by him way back in November of the year 1910, “The Board of Directors are the brain and the only brain of the company, which is the body and the company can act and do acts only through them”.

They are professional men who have been hired by the company to carry on its affairs. Yet, they cannot be called servants of the company, but they are regarded as the officers of the company. In the words of Justice McCardie,”A director is in fact, a director or controller of the company”.

They occupy an important position in the company. They are actually speaking, the main source of the company.

Directors can be described as agents, sometimes as trustees and sometimes as managing partners.

  • Directors as Agents of the Company:

Directors contract with other persons in the name and on behalf of their company. In such a case, it is the company and not the directors responsible for that contract. There exists the relationship of the Principal and Agent between the company and its director. Thus, the contract made by the Director of the company is governed by the general principles of agency under the Indian Contract Act,1872. 

  • Directors as Trustees of the company:

If the directors of a company misuse the funds of the company in their hands, they can be held liable as trustees. Because the position and the office which they hold, is the position and the office of trust. Their powers are the powers as trustees. The power to make calls, forfeit shares, issue further capital, and accept transfer of the shares must be exercised by them in good faith (with due care and caution) as trustees of the company for the benefit of the company.

  • Appointment of Directors (Section 152):

The articles of association of companies name the first directors by their names or prescribe the mode of appointing them. Section 152 deals with the appointment of directors. Under this section company appoints directors in the General Meeting 

[Section 152 (2)].

Section 152(1)-

  1. Where 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 shall be deemed to be first directors of the company until the directors are duly appointed.
  2. In case of One person company an individual being a member shall be deemed to be its first director until the director or directors are duly appointed by the members in accordance with the provisions of this Section.
  3. No person shall be appointed as a director of a company unless he has been allotted the Director Identification Number under Section 154. [Section 152(3)].
  4. Every person proposed to be appointed as a director by the company in general meeting or otherwise, shall furnish his Director Identification Number and a declaration that he is not disqualified to become a director under this Act.
  5. A person appointed as a director shall not act as director unless he gives his consent to hold the office as director and such consent has been filed with the registrar within 30 days of his appointment in such manner as may be prescribed.
  6. In case of appointment of an independent director in the General meeting, an 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 fulfills the conditions specified in this Act for such an appointment.
  7. At least (not less than) 2/3rd of the total numbers of directors must be appointed by the company in the General meeting.
  8. The company may fill up a vacancy of the director who retires by rotation.
  9. If the company appoints a new director, a notice to that effect is necessary.
  10. The appointment of a director of a public company is required to be made individually by separate ordinary resolution.
  11. The Board of Directors may also appoint a director as an additional director or in a casual vacancy or as an alternate director.
  12. Appointment of Director may also be by nomination from the debenture holders or other creditors i.e. banking companies or financial associations who have advanced loans to the company.
  13. Appointment of directors by the Central Government of such a number of directors on the Board of a company.
  • Restrictions on appointment of Directors:

A person is not entitled to be appointed as Director,

  1. Unless he has signed and submitted to the registrar of the company his consent in writing to act as director;
  2. Unless he has signed the memorandum for his qualification shares;
  3. Unless he has taken his qualification shares;
  4. Unless he had made an affidavit to substantiate that his qualification shares are registered in his name.
  • Only Individual can be a Director:

A statutory legal person, a body corporate cannot be appointed as director of a company. Only an individual can be appointed as director of the company for the purpose of doing an act on behalf of the company.

  • Number of Directors:

The number of directors in case Public company must be minimum three and the number of directors in case Public company must be minimum two. However, the articles of association of a company may prescribe the maximum and minimum number of directors for its board of directors. Such numbers of Directors can be increased or reduced  keeping the minimum required by law by an ordinary resolution of the company.

  • Disqualifications of Directors:

A person is disqualified to be appointed as director of the company:

  1. If he is of unsound mind;
  2. If he is undercharged insolvent;
  3. If he is convicted by Court of an Offence involving moral turpitude.
  • Removal of Director:

A director can be removed by the following:

A Director may be removed,

  1. By shareholder (Section 169);
  2. By special resolution;
  3. By giving notice before the expiry of his term of office;
  4. By Central Government (Section 196);
  5. By referring a case of director to Company Law Board for enquiries to be made by Company Law Board;
  6. Central Government may also exercise the power of removal of director if in the opinion of Central Government, a) He is guilty of Fraud, persistence negligence;

b) he does not conduct the business of the company according to sound business principle or the conduct of director is such that, there is likelihood of causing any injury damage to the business;

  1. Director may be removed by the Company law Board (Section 242):

A company law board for the purpose of granting any relief in the case of oppression or mismanagement, terminates any agreement between that company and its director. The Termination of appointment of director in such manner does not give him an opportunity to claim damages or compensation for loss of office.

  • Conclusion:

The board of directors formulate policies and establish an organisational set up for implementing those policies and they also help in achieving the objectives which are contained in the memorandum. The position of the board is that of the trustee. They are entrusted with the responsibility to act in the best interest of the company.  The board of directors, unless authorised by the board, do not possess any power of management over the affairs of the company.

  • References:
  1. http://ebook.mca.gov.in/Actpagedisplay.aspx?PAGENAME=17381
  2. http://www.bareactslive.com/ACA/ACT2371.HTM
  3. https://bizfluent.com/facts-7218574-board-governors-vs–board-directors.html#:~:text=For%20example%2C%20in%20many%20non,communities%20to%20increase%20outreach%2C%20and
  4. Articles by Jhabvala series
  5. Avatar Singh, Indian Company law

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