Legal Positions of Directors

This article deliberates the position of Directors in a corporate body, how directors are chosen, and what are the powers of directors under the Companies Act 2013, along with the relevant case laws. A company is an artificial person that is imperceptible and invisible. For making any decision and to have information and purpose, a living person has a mind and hands by which he transmits out his actions. But a communal body being an artificial person has none of these. So it requests to act through a living person. The company’s business is commended in the hands of directors.

Introduction

Directors are the person appointed to direct and supervise the affairs of a company under Section 2 subsection 34 of the company’s act defines “A director as any person appointed to the board of a company. Further, Director means any person occupying the position of a director by whatever name called thus a person will be deemed to be a director if he performs the functions of a director though he may be named differently.

The directors of a company are collectively referred to as the board of directors or simply board. According to Section 149, a subsection of the act, every public company must have at least three directors. Every private company must have at least two directors and three must be at least one director in the case of a one-person company. The maximum number of directors a company can appoint is 15 however a company can appoint more than 15 directors by passing a special resolution. Further, there must be at least one director in the company’s board who has stayed in India for a total period of not less than 182 days in the previous year which is the previous calendar year.

Types of Directors[i]

There are several types of directors in a company.

  1. Shadow Director
  2. De-facto Director
  3. First Director
  4. Additional Director, Casual / Ad-hoc Director
  5. Alternative Director 
  6. Executive and Non-Executive Director 
  7. Rotational Director 
  8. Women Director 
  9. Independent Director 

Shadow Director 

He is a director who is not formally appointed in a company but exerts such an influence over the company’s directors that other directors are accustomed to acting by his instructions. He acts in the background and hides the fact that he is in a control of the company.

De-facto Director

De-facto Director is also not formally appointed in a company or he may be a person who was disqualified to be appointed as a director but discharges the functions of a director despite a lack of authority and right to so act.

First Director

First directors are appointed by the promoters of the company immediately after the incorporation of the company. They are either named in the articles of the company if the articles are silent the subscribers to the memorandum of the association who are individuals become the first directors of the company.

Additional Directors 

Additional directors are appointed by the board of directors from time to time if so authorized by its articles of association. They hold office only the date of the next annual general meeting or the last date on which the AG should have been held whichever is earlier.

Causal / Ad-hoc Director

Casual directors are also appointed by the board of directors in case any vacancy arises in the office of the director due to death, resignation, insolvency, or the disqualifications of a director. Such directors will hold office until the term of the original director.

Alternative Director

Alternative directors are appointed by the board in the position of a director who remains absent from the state in which meetings of the boards are ordinarily held for more than three months. The articles of association must contain the provision for the same. Such directors hold the office till the expiry of the term of the original of a director or till the return to the state. 

Executive and Non-executive Directors

Executive directors are the directors who are also involved in the day to day management of the company. They are also termed as whole-time directors for example finance directors, marketing directors, etc. 

On the other hand, non-executive directors are the ones who are not involved day to day management of the company and do not hold any executive position within the company. They bring an independent voice and perspective to the board.

Rotational Director

Rotational directors are subject to retire by rotation from the company’s board however they may be reappointed after the retirement.

Women Directors

The class of the company shall appoint at least one woman director laid down by the company’s appointment and qualifications of director’s rules 2014. Every listed company and every other public company having paid-up share capital of 100 crore rupees or more or a turnover of 300 crore rupees or more.

Independent Directors

Section 149, subsection 4 provides that every listed company shall have at least one-third of the total number of directors as independent directors such directors shall not retire by rotation. There shall not be entitled to any remuneration other than sitting fees, reimbursement of expenses of participation in the board meeting, and profit related commission approved by the members. The whole and sole purpose behind introducing the concept of independent directors is to take an unbiased decision and to check whether the decision taken by management and majority shareholders. They bring accountability in credibility to the boarding process and are the trustee’s good corporate governance.[ii]

Legal Positions of the Directors[iii]

Directors are the persons duly appointed by the company to direct and manage the affairs of the company. They are sometimes described as agents, trustees, employees, managing partners, and so on 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 the particular purpose be considered.

Directors as Agents 

Directors are viewed as agents of the company for the conduct of the business of the company. A company cannot act by itself. It acts only to throw its directors. Director’s act on behalf of the company and acting on behalf of the company make the company liable for it and not the directors. Directors cannot be personally liable for any default of the company like agents directors should conduct the business of the company with the care, skill, and diligence possessed by them. They are accountable for all of the company’s assets under their control and profits from the assets of the company. They should not make any gains at the expense of the company. 

Directors as Trustees

Directors are also described as the trustees of the company as they stand in a fiduciary capacity towards the company however they are not trustees in the legal sense as the rules applicable to trustees under the trustee’s actions do not apply to the directors but for the assets and properties of the company. In addition to being an agent, they also act as trustees. They must account for all the money over which they exercise control. They must exercise their powers honestly in the interest of the company and all the shareholders and not their section interest. The peculiar nature of their office is one of the reasons why the directors have been described as trustees. 

Directors as Employees 

A person holding the position of a managing director or a holding director shall be in full-time employment of the company and hence can be called an employee.

Directors as Managing Partners 

Director represents the shareholders to conduct the business of a company on their behalf. They enjoy the vast past of the management over the company and perform many functions that are like proprietary. Allotment of share raising of loans and investment of funds of the company. This gives the impression of directors being the active partners and the shareholders appointing them as dormant partners. The very fact that most of the time, directors themselves are the significant shareholders in the company. Strengthen the argument that directors are the managing partners of the company but this may be true only partially as unlike partners directors cannot bind other shareholders by their dealings and be similar to partners. Directors are elected and are subject to retirement also. 

In the real sense, the directors are neither the agents completely nor the trustees, employees, or the managing partners. The position of directors combines all the four and more than that also. Directors are paid agents or officers of the company and conduct business for the company without being its legal owners.

Disqualification of Directors[iv]

As per Section 164 of the Companies Act 1956, a person shall not be eligible for appointment as a director of a company if:-

  1. He is of unsound mind and stands so declared by a competent court. 
  2. He is an undischarged insolvent.
  3. He has applied to be adjudicated as an insolvent and his application is pending.
  4. He has been convicted by a court of any offense whether involving moral turpitude or otherwise and sentenced in respect thereof to imprisonment for not less than six months or a period of five years has not elapsed from the date of the expiry of such sentence provided that if a person has been convicted of any offense sentence thereof to imprisonment for seven years or more. He shall not be eligible to be appointed as a director of a company. 
  5. In order disqualifying him for an appointment has been passed by a court or tribunal and the order is in force.
  6. 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 has elapsed from the last day fixed for the payment of such calls.
  7. He has been convicted of the offense dealing with related party transactions under section 188 of the act at any time during the last proceeding of five years. 
  8. He has not complied with the requirement of the din under section 152 subsection 3 of the act.
  9. He has been a director of a company which has not hired financial statement or annual returns for any continuous period of three financial years all has failed to repay the deposits accepted by it or pay interest or to redeem any debentures on the due date or interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more.

Appointment of a Director[v]

The appointment of a director in a company can be made by promoters, shareholders, the board of directors, the central government, and the tribunal.

Removal of a director[vi]

The director of a company can be removed by the shareholder and a tribunal. 

Conclusion

A director is a representative of the company for the manner of business of the company and has a fiduciary connection with the company as well as the shareholders when he acts as an agent or officer of a company. 

The director as the Companies Act, 1956 designates, holds a tremendously important position in the administration and supervision of a company. It must be noted that the director works in different measurements at different times to ensure that the company is run legally and efficiently. The Act spaces immense accountability on the solders of the directors.

Directors are bound to practice their fair and reasonable assiduousness while satisfying their duties and they shall act honestly, and with such care as may be reasonably anticipated from, having regard to their acquaintance and experience.

Frequently Asked Questions      

  1. What responsibilities does a director need?
  2. Does a managing director have to be a director of the company?
  3. What are the skills of a director?
  4. Is a director an owner?
  5. Who can be the director of the company?

Reference 

  1. Ram Chand & Sons Sugar Mills Pvt. Ltd.v. Kanhayalal Bhargava [(1996)AIR 1899 SC]
  2. Bath v. Standard Land Co. Ltd. [(1910) 2 Ch 408]
  3. Singh Avtar, Company Law, 16th Edition (2015), Eastern Book Company
  4. Sec. 3 (i) of the Companies Act, 1956
  5. Companies Act, 1956.

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