(12.14.3) Legal Provisions as Regards Directors

Some of the important legal provisions as regards directors are summarised as follows:

  (1) Number of directors. Every public company must have at least three directors. Every private company must have at least two directors (s.252). However, a public company having: (a) a paid-up capital of Rs 5 crore or more; (b) 1000 or more small shareholders may have a director elected by such small shareholders in the manner as may be prescribed. The phrase ‘small shareholders’ means a shareholder holding shares of nominal value of Rs 20,000 or less in a public company to which this section applies. This is the minimum legal requirement of the number of directors. The Articles of a company may and usually do, fix the minimum and maximum number of directors of its Board. For instance, the articles may fix 5 as the minimum and 9 as the maximum number of directors of the Board. Also, the articles may fix, within these limits, the number which will constitute the Board for the time being. For instance, in the above example, the number of directors constituting a Board may be fixed at 7.

  (2) Increase in number of directors. A company in general meetings may, by

ordinary resolution, increase or reduce the number of its directors within the limits fixed in that behalf by its articles (s.258).

In certain cases, the increase in number of directors also requires the approval of the Central Government. Section 259 provides that if a public company, or a private company which is subsidiary a public company wishes to increase the number of its directors beyond the maximum fixed by its articles, the increase even though decided upon by resolution of the company in general meeting will not have any effect unless approved by the Central Government and shall become void if and in so far as it is disapproved by the Central Government. But if the increase in the number will not make the total number of directors more than twelve, no approval of the Central Government is necessary. However, independent private companies and Government companies are exempted from the provisions of s.259.

  (3) Individuals to be directors. No body corporate, association or firm shall be appointed director of any company. Only an individual can be a director (s.253).

  (4) Appointment of directors. The appointment of directors rests in the following hands; (a) Subscribers to the Memorandum -  s.254; Clause 64 (Table A); (b) Company in general meeting – Ss. 255-57; 263-265; (c) Board of directors - Ss.260, 262, 313; (d) Central Government - s.408; (e) Third parties - s.255.

Appointment of first directors. The first directors are usually named in the articles of a company. The Articles may, however, instead of naming the first directors confer power on the subscribers, or majority of them to appoint the directors. Where the appointment is to be made by the majority of subscribe, the majority of them (and not only the quorum fixed by the Articles) should be present if the appointment is to be valid. Where there are no Articles or the Articles neither name them nor confer any such power on the subscribers, then Clause 64 of Table A in schedule I to the Act confers powers on the subscribers or a majority of them to make the appointment of first directors. Furthermore, if the Articles neither name them, nor do they contain a provision for their appointment by the subscribers and Table A is excluded, then the subscribers to the memorandum who are individuals are deemed to be the first directors of the company until the directors are duly appointed at a general-meeting of the company in accordance with the provisions of s.255.

Appointment of subsequent directors. Sections 255 and 265 provide for three schemes for the constitution of the Board of Directors of a public company or a private company which is subsidiary of a public company. These are: (i) All the directors retire at every Annual General Meeting [s.255]; or (ii) At least two-thirds of the total number of directors must be persons whose period of office is liable to determination by retirement by rotation (s.255); or (iii) At least two-thirds of the directors may be appointed by the principles of proportional representation, by a single transferable vote by a system of cumulative voting or otherwise and shall be directors for a period of three years at a time (s.265). The remaining directors in (ii) and (iii) and the directors generally of a pure private company, unless otherwise provided in the Articles, must also be appointed by the company in general meeting.

Thus, every company should have a duly constituted Board appointed in accordance with the provisions of s.225. A general meeting is called by the ‘first’ directors after the allotment of shares in the case of a company limited by shares and in the case of any other company, after its incorporation, for the specific purpose of appointment of directors.

Appointment in general meeting. Section 256 provides that at the first AGM after the general meeting at which the first directors are appointed in accordance with s.255, the number nearest to one-third of the directors liable to retire by rotation must retire from office. The rotation for retirement shall be determined by the length of office of directors, or in case all were appointed on the same day, by lot. At every subsequent AGM, one-third of the directors must retire. This is known as retirement by rotation. The retiring directors are, however eligible for re-election.

Deemed re-appointment of a retiring director. Section 256 also provides for automatic reappointment of directors in certain cases. The company may fill the vacancy caused by the retirement of a director at the AGM by appointment of the same Person or someone else, or decide not to fill the vacancy. If the vacancy is not filled up and the company has not expressly decided not to fill it up, the meeting shall stand adjourned till the same day in the next week, at the same time and place and if at that meeting also the vacancy is not filled up and that meeting also does not decide not to fill it up, the retiring director shall be deemed to have been elected at the adjourned meeting except where: (i) at that meeting or at the previous meeting a resolution for the re-appointment of such director had been put to vote but was lost; or (ii) the retiring director has, in writing, expressed his unwillingness to continue; or (iii) he has been rendered disqualified; or (iv) a special or ordinary resolution is necessary for his appointment by virtue of any provisions of this Act; or (iv) it is resolved not to fill the vacancy.

In respect of an independent private company s.256 does not provide for retirement of any director periodically. Therefore, in the absence of any provisions in the Articles, directors are entitled to continue until removed under s.284 [S. Labh Singh v. Panaser Mech. Works (P) Ltd. (1.987)].

Appointment of a director other than a retiring director. Section 257 provides for the procedure of appointment of a person other than the retiring director. If any person, other than the retiring director wishes to stand for directorship, he must signify his intention to do so by giving 14 days’ notice to the company before the meeting and the company must inform the members not later than seven days before the meeting either by individual notices or by advertisement of this fact in at least two newspapers circulating in the place where its registered office is situated, of which one must be in English and the other in the regional language of the place. Also the candidate or the member who intends to propose him as director has to deposit a sum or Rs 500 which shall be refunded to such person or as the case may be, to such other member, if the candidate succeeds in being elected. In case such person is not elected as director, he or the member, as the case may be, will not be entitled to the refund of Rs 500 and the amount deposited shall stand forfeited by the company. Also s.264 requires every person proposed as a candidate for the office of a director to sign and file first with the company his consent to act as a director, if appointed and then with Registrar within 30 days of his appointment.

Section 263 prescribes the mode of voting on appointment of directors. No motion can be made at a general meeting of a public company or a private company which is a subsidiary of a public company for the appointment of two or more persons as directors by a single resolution, unless a resolution is first unanimously passed that it shall be so made. Any resolution moved in contravention of this provision shall be void.

Appointment by board of directors. The Board of Directors can exercise the power to appoint directors in the following three cases: (i) Additional directors (s.260). (ii) Filling up the casual vacancies (s.262). (iii) Alternate directors (s.313).

If the Articles authorise, the Board may appoint additional directors. Such additional directors together with the directors constituting the Board should not exceed the maximum number fixed by the Articles. Also, the additional directors are entitled to hold office only up to the date of the next AGM of the company (s.260).

Section 262 empowers the Board to fill casual vacancies in the case of a public company or a private company which is subsidiary of a public company. Thus, if the office of any directors 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. Any person so appointed shall hold office only up to the date to which the original director would have continued if it had not been vacated.

By virtue of s.313, alternate director, in place of a director who is absent from the State in which Board meetings are Held for not less than three months, may be appointed by the Board, if so authorised by the Articles or by a resolution passed by the company in general meeting. The alternate director shall not hold office for a period longer than that permissible to original director and shall vacate office when the original director returns to such State. Also, if the term of office of the original director is determined before he so returns, any provision for the automatic reappointment (under s.256) of retiring directors in default of another appointment shall apply to the original director and not to the alternate director.

The Articles of a company may authorise a director to appoint by will or otherwise his successor in office. This appointment is not hit by s.312 which prohibits assignment of office by director.

Appointment by central government. Section 408 empowers the Central Government to appoint directors on the Board of a company on the recommendation of Company Law Board that it is necessary to appoint government directors to effectively safeguard the interests of the company or its shareholders or the public interest. On the application of not less than 100 members of the company or of members holding not less than one-tenth of the total voting power therein, the CLB may, if satisfied after making any inquiry it deems fit that it is necessary to prevent oppression and mismanagement and that the affairs of the company are being carried on in a manner which is prejudicial to the interest of the members or the company or the public, direct the appointment of as many persons (whether members of the company or not) as directors as it thinks fit to hold office for such period not exceeding three years on any one occasion. The Company Law Board, however, instead of passing the above order direct the company to alter its Articles so as to arrange for the election of its directors on the principle of a proportional representation under s.265.

A person appointed by the Central Government in pursuance of the above provisions shall not be: (a) considered for the purpose of reckoning 2/3rds or any other proportion of the total number of directors of the company [s.408(3)]; (b) required to hold qualification shares [s.408(4)]; (c) required to retire by rotation [s.408(4)]; and (d) required to file written consent with the company under s.264(1).

The Central Government may remove any such director from his office at any time and appoint another person to hold office in his place the provisions of this section are applicable to both public and private companies.

Appointment by third parties. Under s.255, there cannot be more than one-third of the total number of directors, which are not subjected to retirement by rotation. The third parties may be empowered by the Articles to nominate directors. Such third parties may be lenders of money - i.e., financial institutions, debentureholders.

  (5) Number of directorships. A person cannot hold office at the same time as a director in more than twenty companies (s.275). In computing this number of 20 directorship, the directorships of (i) private companies (other than subsidiaries) (ii) unlimited companies (iii) non-profit association and (iv) alternated directorships will be omitted (s.278).

If a person who is already a director of 20 companies, is appointed a director in any other company, the appointment will not be effective unless within 15 days thereafter, the director so has vacated his office in any of the companies in which he was already a director as to keep the number within the maximum allowed. None of the new appointments of director shall take effect until such choice is made and all the new appointments will become void if the choice is not made within 15 days of the day on which the least of them were made (s.277). Any person who holds office of, or acts as a director of more than 20 companies in contravention of the foregoing provisions is liable to be fined upto Rs 5,000 in respect of each of those companies after the forst 20 companies (s.279).

Example. If a person is already a director of 20 public companies and if a private company of which he is a director has become a public company under s.43-A, then, he will have to give up the directorships of one of those companies.

  (6) Qualification and disqualification of directors. The Act has not prescribed any academic or professional qualifications for the 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. Where a share qualification is fixed by the Articles of a company, the Act provides (s.270) that: (i) it must be disclosed in the prospectus; (ii) each director must take his qualification shares within two months after his appointment; (iii) the notional value of the qualification shares must not exceed Rs 5,000 or the nominal value of the one share where it exceeds Rs 5,000; (iv) share warrants will not count for purposes of share qualification.

If a director fails to obtain his share qualification within two months, he vacates office automatically on the expiry of two months from the date of his appointment and if he acts as director after the expiry of two months without taking the qualification shares, he is liable to a fine up to Rs 50 for every day until he stops acting as such (s.272).

However, the articles of a company cannot compel a person to hold qualification shares before he is elected a director nor can they require him to obtain qualification shares within a shorter period than two months after his appointment and if any provisions to this effect is made in the Articles, it shall be void.

The effect of this provision is that, if the company is wound up during this period

of two months, the director cannot be placed in the list of contributories, in as

much as there is no express or implied contract under which he would be bound to take the qualification shares, since his name cannot be put on the register of members unless he has applied for shares and these are allotted to him [Zamir Ahmed Raz. v. D.R. Banaji (1957)27 Comp. Cas. 634].

However, a private company which is not a subsidiary of a public company may, by its Articles, provide additional qualifications for a director, such as, a Person must be a B. Com. or holding a fixed deposit receipt in his own name issued by the company.

Section 274 has laid down certain disqualifications and therefore, the following persons are incapable of being appointed directors of any company: (i) a person found by the court to be of unsound mind; (ii) an undischarged insolvent; (iii) a person who has applied to be adjudged an insolvent; (iv) a Person who has been convicted anywhere in the world for an offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the date of the expiry of the sentence; (v) a person who has failed to pay calls on shares for six months from the date fixed for the payment; (vi) a person who has been disqualified by court under s.203 which empowers the court to restrain fraudulent persons from managing companies; (vii) such person is already a director of a public company which, (a) has not filed the annual accounts and annual returns for any continuous three financial years commencing on and after 1^st April, 1999; or (b) has failed to repay its depositor interest there on due date or redeem its debendures on due date or pay dividend and such failure continues for one year or more. Further such person shall not be eligible to be appointed as a director of any other public company for a period of 5 years from the date on which such public company, in which he is a director, failed to file annual accounts and annual returns under (A) above or has failed to repay its deposit or interest or redeem its debentures on due date or pay dividend referred to in (B).

The disqualifications mentioned under (iv) and (v) above may be removed by the Central Government by a notification in the Official Gazette. On the other hand, a non-subsidiary private company may provide in its Articles that a person shall be disqualified for appointment as director on any other additional ground. However, a subsidiary private company or a public company cannot, by its Articles, provide for any additional disqualifications(S.V.S. Nidhi v, Daivasigamani AIR 1951 Mad. 520; Also Cricket Club of India v. M.L. Apte (1975) 45 Comp. Cas.574].

Minor as a director: In the case of a minor, though there is no provision in the Act, expressly disqualifying him, as he is not competent to contract, he cannot file either with the company or with the Registrar any valid consent to act as director, as required by s.264. But as s.264 applies only to public companies and private companies which are their subsidiaries there is nothing prohibiting a minor being a director of independent private companies. However, from a practical point of view a minor can be an ornamental director as he cannot be party to any transaction which requires competency to contract- nor, for the same reason, can he be delegated any powers of the Board. He may possibly vote on all resolutions at Board meetings.

 (7) Vacation of office a director. Section 283 provides for the office of the director becoming vacant on the happening of certain contingencies. It provides that the office of a director shall become vacant if: (i) he is found to be of unsound mind by a competent court; (ii) he is adjudged insolvent; (iii) he fails to obtain within two months of his appointment, or ceases to hold at any time thereafter his share qualification, if any; (iv) he is convicted of any offence involving moral turpitude and sentenced to imprisonment for not less than six months; (v) he fails to pay any call within six months from the last date fixed for the payment; (vi) he absents himself from three consecutive meetings of the Board of Directors, or from all meetings of the board for a continuous period of three months, whichever is longer, without obtaining leave of absence from the Board; (vii) he becomes disqualified by an order of the court under s.203 which restrains fraudulent persons from managing companies; (viii) he is removed in pursuance of s.284 by an ordinary resolution of which special notice was given; (ix) he accepts a loan from the company in contravention of s.295; (x) he fails to disclose to the Board his interest in any contract entered into by the company as required by s.299; (xi) if he became the director by virtue of an office, on coming to an end of that office. A private company may provide additional grounds in its Articles for vacation of office of a director. If a person functions as a director after the office has become vacant on account of any of the disqualifications specified in (i) to (xi), he shall be punishable with fine up to Rs 500 for every day during the period he so functions.

  (8) Removal of directors. A director may be removed under Ss.284, or 388B-E.

Removal by shareholders. Section 284 provides that company may by ordinary resolution passed in general meeting after special notice, remove a director before the expiry of his term of office. But the following directors cannot be removed by the company in general meeting: (i) a director appointed by the Central Government under s.408; (ii) a director of a private company holding office for life on April 1, 1952; (iii) director elected by the principle of proportional representation under s.265.

On receipt of the special notice, the company must forthwith send a copy thereof to the director concerned to enable him to make a representation. If he makes a representation in writing and requests the company to notify it to the members, the company must, unless it is received by it too late for it to send to the members, state the fact of the representation in any notice of the resolution given to the members. It should also send a copy of the representation to every member of the company to whom notice of the meeting is sent. If the representation is not sent as aforesaid the company must at the instance of the director concerned read it out at the meeting. The director is also entitled to be heard on the resolution at the meeting.

The vacancy caused by the removal of a director may be filled at the same meeting and if so filled, person appointed thereto will only hold office for the residue period of the removed director. If the 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 s.262,but the Board cannot appoint the removed director.

Removal by central government. The provisions of Ss.203 and 274 prohibit certain persons from acting or being appointed as directors and provide for their removal only if they were convicted for offences involving rmoral turpitude. In all those cases conviction or finding of guilt by the court is the prerequisite for bringing about vacation of office. Strict proof of guilt in a criminal case is essential and very often such persons may go scot-free in spite of malpractices. The finding of the Company Law Board will enable the Central Government to take quick action against persons involved in cases of fraud, etc. For this purpose a Chapter IV- A and s.388B to 388E have been inserted in the Act.

Under s.388B, the Central Government has the power to make a reference to the Company Law Board against any managerial personnel. The power can be exercised where, in the opinion of the Central Government, there are circumstance suggesting:

  (a) the any person concerned in the conduct and management of the affairs of a company is or has been guilty of fraud, misfeasance, persistent negligence of default in carrying out his obligations and functions under the law, or breach of trust in connection therewith; or

  (b) that the business of the company is not or has not been conducted and managed by such person in accordance with sound business principles or prudent commercial practices; or

  (c) that the business of the company is or has been conducted or managed by such person in a manner which is likely to cause or has in fact caused, serious injury or damage to the interest of trade, industry or business to which such company pertains; or

  (d) that the business of the company is or has been conducted and managed by such person with an intent to defraud its creditors, members, or any other person or otherwise for a fraudulent or unlawful purpose or in a manner prejudicial to public interest.

The reference may be made by stating a case against the person aforesaid with a request that the CLB may inquire into the case, record finding as to whether or not such person is a fit and proper person to hold the office of director or any other office connected with the conduct and management of any company.

The statement of the case by the Central Government should be in the form of an application presented to the CLB and the person against whom such case is stated and referred should be joined as a respondent to the application. The application should contain a concise statement of such circumstances and materials as the Central Government may consider necessary for purpose of inquiry to be made by the CLB. The application must be signed and verified in the same manner as a plaint in a suit by the Central Government under the Code of Civil Procedure.

Thereafter, the CLB will hear the case against the respondent. At any stage of the proceedings, the CLB may allow the Central Government to alter or amend the application in such manner and on such terms as may be just and all such alterations and amendments shall be made as maybe necessary for the purpose of determining the real question in the inquiry (s.388-B).

If during the pendency of the case of CLB finds it necessary, in the interest of the members or creditors of the company, it may, either on the application of the Central Government or of its own motion, direct that the respondent shall not discharge any of the duties of his office until further orders and appoint in his place another suitable person to discharge the duties of the respondent. This person, who is temporarily appointed to discharge the duties in place of the respondent will be regarded as a public servant within the meaning of s.2l of the Indian Penal Code (s.388-C).

At the conclusion of the hearing of the case, the CLB shall record its findings, stating therein specifically as to whether or not respondent is a fit and proper person to hold the office of director or any other office connected with the conduct and management of any company (s.388-D). On the basis of the aforesaid findings, the Central Government may, by order, not-withstanding any other provisions contained in the Act, remove the delinquent respondent from his office [s.388-E(1)1.

An order under s.388E must not be passed against any person unless he has been given a reasonable opportunity to show cause against the order. However, no matter can be raised by such a person before the Central Government, which has already been decided by the CLB [s.388-E(2) and proviso thereto].

After the delinquent person has been, by order, removed, he shall not hold any office for a period of 5 years from the date of the order of removal, nor will he be paid any compensation for loss of office as a result of removal. The time-limit may, however, be relaxed by the Central Government with the previous concurrence of the CLB, and the Central Government may accordingly permit such person to hold the office of a director or any other office connected with the conduct and management of the affairs of the company even before the expiry of the period of 5 years. On the removal of the person, the company may, with previous approval of the Central Government, appoint another person to that office in accordance with the provisions of the Act.

            (9) Resignation by a director. There is nothing in the Act as to whether and by what procedure, a director can resign. The Act, however, indirectly recognizes resignation through the provisions in s.318 one of which is that no director is entitled to compensation if he resigns his office. In S.S. Lakshmana Pillai v. Registrar of Companies (1977) 47 Comp.Cas.652 (Mad), it was held, that if there is a provision in the articles, resignation will take effect in accordance with such provision and if there is no provision, resignation will take effect in accordance with its terms. Notice may be written or oral.

In the aforesaid case, it was also held, that the resignation shall be effective even when no other director was in office. In this case, of the two directors of a company, one died and the other wanted to resign. The Court however, observed that a director could not evade his obligations by severing his connection with the company.

Resignation to be valid must be addressed to the company. Letter of resignation addressed to a third party shall have no effect [Registrar of Cos. V. Orissa Paper Products Ltd. (1988) 63 Com. Cas. 460 Orissa]. Once a director has given a notice of resignation, he cannot withdraw it except with the consent of the company properly exeicised by the directors [Glossop v. Glossop (1907)2Ch.370].

(10) Directors not to hold office or place of profit. Section 314 imposes certain restrictions on the holding of office or place of profit in a company by the directors and their associates. Following is the summary of restrictions so provided:

  1. No director of a company shall hold any office or place of profit (carrying any remuneration) under the company or its subsidiary except with the consent of the company by a special resolution. It shall, however, be sufficient if the special resolution is passed at the first general meeting Held after such appointment.

A director shall be deemed to hold an office or place of profit under the company if the director holding an office obtains from the company anything by way of remuneration over and above the remuneration to which he is entitled as such director. Such remuneration may be by way of salary fees, commission, perquisites, the right to occupy free of rent any premises as a place of residence or otherwise.

  2. Except by passing a special resolution, partner or relative of such director, no firm in which such director or a relative of such director, is a partner, no private company of which such director is a director or member and no director, or manager of such a private company shall hold any office or place of profit carrying a total monthly remuneration of such sum as maybe prescribed (presently Rs 3,000 per month). Again, special resolution may be passed at the first general meeting after the appointment made. Where, however, the aforesaid appointment made without the knowledge of the director, the consent of the company may be obtained either in the general meeting aforesaid or within 3 months from the date of the appointment, whichever is later.

However, a director or any of his associates may be appointed as managing director, manager, banker or trustee for the debentureholders of the company without sanction of special resolution, if the remuneration received from such subsidiary in respect of such office or place of profit is paid over to the company or its holding company.

For the aforesaid appointment of a director or his associates, special resolution shall not only be necessary at the time of first appointment but also for every subsequent appointment on a higher remuneration not covered by the special resolution except where an appointment on a time-scale has already been approved by the special resolution.

It may be noted that the aforesaid restrictions do not apply where a relative of a director or a firm in which such relative is a partner holds any office or place of profit under the company or a subsidiary thereof having been appointed to such office or place before such director became a director of this company.

  3. No partner or relative of a director or manger, (ii) no firm in which such director or manger, or relative of either is a partner, (iii) no private company of which such a director or manager, or relative of either, is a director member, shall hold an office or place of profit in the company carrying a total monthly remuneration of not less than sum as maybe prescribed (Presently, Rs 6,000 per month). The aforesaid appointment may, however, be made by passing a special resolution and the approval of the Central Government.

While interpreting the scope of the term ‘remuneration’ for the aforesaid purpose, the emphasis should be on the ‘monthly remuneration’ and not on what a person gets for a whole year [R.K. sangal v. Auto Lamps Ltd. (7984) 55 Comp. Cas. 742 (Det.)].

If any director or his associate holds an office or place of profit in contravention of the aforesaid provisions, then: (i) he shall be deemed to have vacated such office or place of profits as such on and from the date next following the date of the general meeting. (ii) he shall be liable to refund to the company any remuneration received or the monetary equivalent of the perquisites or advantage enjoyed by him. The company cannot waive the recovery any sum refundable to it as above unless permitted to do so by the Central Government.

The aforesaid restrictions do not apply to a person who being the holder of any office of profit in the company is appointed by the Central Government, under s.408, as a director of the company.

Meaning of ‘office or place of profit’. Any office or place shall be deemed to be an office or place profit under the company: (a) in case the office or place is Held by a director, if the director holding it obtains from the company anything by way of remuneration over and above the remuneration to which he is entitled as such director, whether as salary, fees, commission, perquisites, the right to occupy free of rent any premises as a place of residence, or otherwise; (b) in case the office or place is Held by an individual other than a director or by any firm, private company or other body corporate holding it obtains from the company anything by way of remuneration whether as salary, fees, commission, perquisite, the right to occupy free of rent any premises as a place of residence or otherwise.