(12.14.10) Duties of Directors

Duties of directors may be divided under two heads: 1. Statutory duties; and 2. Duties of a general nature. The statutory duties are the duties and obligations imposed by the Companies Act. These have been discussed at appropriate places. Important among them are:

  (a) To file return of allotments. Section 75 charges 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 directors liable as ‘officer in default’. A fine upto Rs 500 per day till the default continues may be levied.

  (b) Not to issue irredeemable preferences shares or shares redeemable after 10 years. Section 80, forbids a company to issue irredeemable preference shares or preference shares redeemable beyond 10 years. Directors making any such issue may be Held liable as ‘officer in default’ and may be subject to fine upto Rs 1,000.

  (c) To disclose interest [Ss.299-300]. A director who is interested in a transaction 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. This is because a director stands in a fiduciary capacity with the company and therefore, he must not place himself in a position in which his personal interest conflicts with his duty. Interest should be such which conflicts with the duties of the director towards the company.

Notice, however, that the Companies Act does not debar a company entering into a contract in which a director is interested. It only requires that such interest be disclosed. An interested director should not take part in the discussion on the matter of his interest. His presence shall not be counted for the purpose of quorum. He shall not vote on that matter. If he does vote, his vote shall be void. Non-disclosure of interest makes the contract voidable and not void. Where the whole body of directors is aware of the facts, a formal disclosure is not necessary (Venkatachalapathi v. Guntur Mills).In this case a loan was advanced by the wife of a director creating a mortgage on the property of the company. The director did not disclose his interest and he even voted on the matter. The company later sued to have mortgage set aside. Held, the fact was known to all directors and a formal disclosure was not necessary. As regards voting by the interested director, it was Held that the voting would not render the contract void or voidable unless in the absence of that vote, there would have been no quorum qualified to contract.

  (d) To disclose receipt transferee of property. Section 319 provides that any money received by the directors from the transferee in connection with the transfer of the company’s property or undertaking must be disclosed to the members of the company and approved by the company in general meeting. Otherwise the amount shall be Held by the directors in trust for the company. This money may be in the name of compensation for loss of office but in essence may be on account of transfer of control of the company. But if it is bona fide payment of damages of the breach of contract, then it is protected by s.321(3).

  (e) To disclose receipt of compensation from tranferee of shares. If the loss of office results from the transfer (under certain conditions) of all 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 (s.320). 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.

Section 320 further provides that in pursuance of any agreement relating to any of the above transfers, if the directors receive any payment from the transferee within one year before or within 2years after the transfer, it shall be accounted for to the company unless the director proves that it is not by way of compensation for loss of office.

Section 321 further provides that if the price paid to a retiring director for his shares in the company is in excess of the price paid to other shareholders or any other valuable consideration has been given to him, it shall also be regarded as compensation and should be disclosed to the shareholders.

Some other statutory duties are: to attend Board meetings; to convene and hold general meetings; to prepare and place before AGM financial accounts; to make declaration of solvency.

The general duties of directors are as follows:

  (A) Duty of good faith. The directors must act in the best interest of the company. Interest of the company implies the interests of present and future members of the company on the footing that the company would be continued as a going concern.

A director should not make any secret profits. He should also not exploit to his own use the corporate opportunities. In Cook v. Deeks (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 here was an offer of a contract to the company. Directors who were the holders of shares of 3/4 of the votes resolved that the company had no interest in the contract and later entered 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) AC83]. In this case the plaintiff was a director in one company and a shareholder and a 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 accounts for the profit on resale to the company. But the Privy Council overruled this decision.

Also if the property is acquired by a director by reason of the fact 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 & others (1942) 1 AUER 378].

  (B) Duty of care. A director must display care in performance of the work assigned to him. He is, however, not expected to display an extraordinary care but that much care only which an ordinary prudent man would take in his own case. Justic Romer in Re City Equitable Fire Insurance Company 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 judgement.”

Similar view was expressed in Langunas Nitrate Co. v. Lagunas Nitrate Syndicate (1899) 2 Chi. 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 201 states that a provision in the company’s Articles or in any agreement that excludes the liability of the directors negligence, default, misfeasance, breach of duty or breach of trust, is void. The company cannot even indemnify the directors against such liability. But if a director has been acquitted against such charges, the company may indemnify him against costs incurred in defense. Section 633 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.

  (C) Duty to attend board meetings. 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 is not expected to attend all the meetings but if he fails to attend three consecutive meetings or all meetings for a period of three months, whichever is longer, without permission, his office shall automatically fall vacant.

(D) Duty not to delegate. Director being an agent is bound by maxim ‘delegatus non protest delegate’ which means a delegate 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.

Some other duties are: to convene statutory, annual general meeting and also extraordinary general meeting general meeting when required by the shareholders of the company; to prepare and place at the AGM along with the balance sheet and profit and loss account a report on the company’s affairs; to make a declaration of solvency in the case of a Member’s voluntary winding up.

The duties of the directors are usually regulated by the company’s articles. While performing their duties, they must display reasonable care, honesty, good faith, skill and diligence. As they stand in a fiduciary relationship to the company and they are agents and trustees in certain respects, they are bound to exercise in the performance of their duties a reasonable degree of skill and care.

(12.14.9) Powers of the Board of Directors

Section 291 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.

However, the board cannot exercise any Power or do any act or thing which is directed or required, whether by this or any other Act or by the memorandum or articles of the company or otherwise, to be exercised or done by the company in general meeting. In exercising any such power or doing any such act or thing, the Board will be subject to the provisions contained in that behalf in this 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 regulations made by the company in general meeting.

Thus, the Board may exercise all powers of the company and can do all such acts and things that the company can do. 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 in general meetings. Thus, a general meeting may, by amending the articles, restrict the powers of the Board. But the meeting cannot invalidate any act validly done by the Board except in the following cases: 1. where the directors are either unable or unwilling to act [Barrona. v. Potter(1914) 1 Ch.895]; 2. when the directors act for their own personal interests in complete disregard to the company [Marshall’s Value Gear Co. Ltd. v. Manning Wardle & Co. Ltd (1909) Ch. 267];3. 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 [B.N. Vishwanathan v. Tiffins B.A. and Ltd. AIR (1953) Mad 510].

The mode ot manner of exercise of board’s powers, Section 292 provides that the

Board of directors of a company shall exercise the following powers on behalf of the company and it shall do so only by means of resolutions passed at meeting of the Board: (i) the power to make calls on shareholders in respect of money unpaid on their shares; (ii) the power to issue debentures; (iii) the power to borrow money otherwise than on debentures; (iv) the power to invest funds of the company; and (v) the power to make loans.

The Board may, however, by a resolution passed at a meeting delegate to any committee of directors, the managing directors, the manager or any other principal officer of the company, the powers specified in clauses (iii), (iv) and (v) on such conditions as the Board may prescribe.

Besides the powers specified in s.292, there are certain other powers also which can be exercised only at the meeting of the board. These are: (i) The power of filling casual vacancies in the Board (s.262); to appoint additional directors (s.260); and to appoint alternate disectors (s.313) (ii) sanctioning of a contract in which a director is interested [s.297]. (iii) the power to recommend the rate of dividend to be declared by the company at the Annual General Meeting, subject to the approval by the shareholders.

In the following cases, not only that the powers be exercised at the Board’s meeting but also that every director present and entitled to vote must consent thereto: 1. The power to appoint a person as managing director or manage, who is already managing director or manager of another company (Ss.316 and 386). 2. The power to invest in any shares and debentures of any other body corporate (s.372).

Restrictions on powers of directors. Section 293 provides that the Board of Directors of a public company or a private company which is a subsidiary of a public company cannot exercise the following powers without the consent of the shareholders in general meeting:

  1. Sell, lease or otherwise dispose of the whole, substantially the whole, of the undertaking of the company, or where the company owns more than one undertaking, of the whole or substantially the whole, of any such undertaking.

However, this restriction does not apply to the case of a company whose ordinary business is to sell or lease properly.

  2. Remit or give time for the re-payment of any debt due by a director except in the case of renewal or of continuance of an advance made by a banking company to its director in the ordinary course of business.

  3. Invest, otherwise than in trust securities, the amount of compensation received by the company in respect of compulsory acquisition of any fixed assets of the company.

  4. Borrow money exceeding the aggregate of the paid-up capital of the company and its free reserves. "Borrowing’ does not include temporary loans obtained from the company’s bankers in the ordinary course of business.

  5. Contribute in any year, to charitable and other funds not directly relating to the business of the company or the welfare of its employees, any amount exceeding Rs 50,000 or 5% of its average net profit for the last three financial years, whichever is greater.

However, contributions of National Defence Fund or any other fund approved by the Central Government for the purpose of national defence are exempted from the above provisions. Any amount maybe contributed without obtaining the sanction of the company is general meeting.

The Companies Act does not expressly empower companies to borrow money. Therefore, most of companies expressly provide for such borrowing powers in the memorandum. In such case, where memorandum authorises the company to borrow, the Articles provide as to how and by whom these powers shall be exercised. It may also fix up the maximum which can be borrowed by the company.

(12.74.8) Meetings of Directors.

The directors of a company are collectively known as Board and decisions are taken by them at a Board meeting. But in certain circumstances, resolutions of directors can be passed by circulating them among the directors. Also the Board may delegate powers to a director or a committee of directors.

Section 285 provides that a meeting of the Board of Directors of every company must be Held at least once in every three months and at least four such meetings must be Held in every calendar year.

The requisite quorum for a Board meeting is one-third of the total strength of the directors or two directors whichever is higher. For the purpose of counting number of directors forming the quorum, the directors who are interested in any contract to be entered into with the company should not be taken into account. In other words, only those who are disinterested in the matters to be discussed at the Board meeting will form the quorum. If the requisite quorum is not present at the meeting, it stands adjourned and will be Held on the same day, time and place in the next week. If the quorum is not present at the meeting, any decisions taken or resolutions passed shall be invalid, but no quorum is necessary at the adjourned meeting.

The chairman for the meetings of the Board of Directors may either be named in the articles or he may be elected by the directors. The questions arising at the meeting of the directors are to be decided by a majority vote and the chairman of the Board will have a casting vote in case of equality of votes.

Resolutions by circulation. As mentioned earlier, certain resolutions can be passed by circulation also. Section 289 states that the resolution to be passed by circulation must be circulated in a draft together with the necessary Papers, if any, to all the directors, or to all the members of the committee, as the case may be, then in India (not less than the quorum fixed for a meeting of the Board or Committee of directors) and to all other directors at their usual address in India. If the resolution is approved by such of the directors as are then in India, or by a majority of such of them as are entitled to vote on the resolution, it will be deemed to have been duly passed.

However, there are certain Powers of the Board which can be exercised only at Board meetings and not through circulation. Sections 262,292, 297 , 376 and 488 provide for such matters.

(12.14.7) Remuneration of Managerial Personnel

Section 198 provides that the total managerial remuneration payable by a public company or a private company which is subsidiary of a public company to its directors or manager in respect of any financial year must not exceed 11 per cent of the net profit of that company for that financial year. In computing the above ceiling of 11 per cent, the fees payable to directors for attending Board meetings is not included. If, however, in any financial year a company has no profits or its profits are inadequate, it may, subject to the approval of the Central Government, pay to directors (including managing or whole-time director) or manager by way of minimum remuneration such sum not exceeding Rs 50,000 per annum (excluding sitting fees) as it considers reasonable.

What is included in managerial remuneration? Explanation to s.198 describes the term remuneration. According to it, for the purposes of Ss. 309,310,311 and 387, ‘remuneration’includes the following: (a) any expenditure incurred by the company in providing rent-free accommodation, or any other benefit or amenity in respect of accommodation free of charge, to any of its directors or manager; (b) any expenditure incurred by the company in providing any other benefit or amenity free of charge or at a concessional rate to any of the persons aforesaid; (c) any expenditure incurred by the company in respect of any obligation or service, which, but for such expenditure by the company, would have been incurred by any of the persons aforesaid; and (d) any expenditure incurred by the company to effect any insurance on the life of, or to provide any pension, annuity or gratuity for, any of the persons aforesaid or his spouse or child.

Section 309 contemplates three kinds of directors, i.e., (i) Managing Director; (ii) Whole-time director; (iii) Director pure and simple. Further, s.309 provides that subject to the general provisions of s.198, dealing with the total managerial remuneration, the remuneration be determined by the articles, or by a resolution or, if the articles or require, by a special resolution, passed by the company in general meeting. Any remuneration paid for services in any other capacity shall not be included if: (a) the services rendered are of a professional nature; and (b) in the opinion of the Central Government, the director possesses the requisite qualifications for the practice of the profession.

A director who is neither in the whole-time employment of the company nor a managing director may be paid remuneration. (a) by way of a monthly, quarterly or annual payment with the approval of the Central Government or (b) by way of commission, if the company by special resolution authorises such payment; or (c) by both.

However, in either of the above cases, the remuneration paid to such director, or where there is more than one such director, shall not exceed: (i) one per cent of the net profit of the company, if the company has managing or wholetime director or manager; (ii) three per cent of the net profits of the company in any other case. The company in general meeting may, however, with the approval of the Central Government, authorise the payment of a commission at a rate higher than one per cent, or as the case many be, three per cent of its net profits.

Each director is entitled to receive a sitting fee for each meeting of the Board or a committee thereof, provided the same is authorised by the articles.

A whole-time director or a managing director may be paid remuneration either by way of a monthly payment or at a specified percentage of the net profits of the company or partly by one way and partly by the other; provided that except with the approval of the Central Government such remuneration shall not exceed 5 per cent of the net profits for one such director and if there is more than one such

director, 10 per cent for all of them together. Furthermore, a managing or whole-time director who is in receipt of any commission from the company cannot receive any remuneration from any subsidiary of the company.

If any director draws or receives, directly or indirectly, by way of remuneration any

sum in excess of the limits stated above, without the sanction of the Central Government, where it is required, he shall have to refund such sums to the company and until the refund is made the money will be Held by him trust for the company. The company cannot waive the recovery of any sum refundable to it, unless permitted by the Central Government.

The provisions of s.309 will not apply to a private company unless it is a subsidiary of a public company.

Increase in remuneration. Section 310 provides that every increase in the remuneration of any director including a managing or whole-time director granted or provided by any amendment in his term of appointment which has the effect of increasing, whether directly or indirectly, the amount payable to him would not be operative unless the same has been approved by the Central Government. But no approval of the Central Government would be required if the increase in remuneration made is a accordance with the conditions specified in Schedule XIII. Also no approval of the Central Government is necessary, if the increase in the remuneration is only by way of fee for each meeting of the Board or a committee of the Board attended by any such director and the amount of the fee after such increase does not exceed such sum as may be prescribed. The Central Government has laid down differential scale of sitting fee according to the paid-up capital of the companies.

As regards remuneration payable to a Manager, s.387 provides that he may receive remuneration either by way of a monthly payment or by way of a specified percentage of the ‘net profits’ of the company, or partly by one way and partly by the other. Such remuneration, however, must not exceed in the aggregate 5 per cent of the net profits except with the approval of the Central Government.

Managerial remuneration vis-a-vis schedule XIII. The Department of Company Affairs issued guidelines regarding managerial remuneration payable to managing or wholetime or part-time paid directors or manager in a public limited company.These were known as administrative ceiling, and s.637-AA empowered the Government to fix an administrative ceiling within the statutory ceiling on the managerial remuneration. But the Amendment Act of 1988 inserted statutory guidelines in the Act itself. Therefore, a public company or a private company which is subsidiary of a public company, is enabled to appoint its managerial personnel and fix their remuneration so long as the same is in accordance with the conditions laid down in Schedule XIII without seeking the prior approval of the Central Government. Schedule XIII, provides as follows:

Remuneration payable by companies having profits. subject to the provisions of s.198 and s.309, a company having profits in a financial year may pay any remuneration, by way of salary, dearness allowance, perquisites, commission and other allowances, which shall not exceed 5 per cent of its net profits for one such

managerial person and if there are more than one such managerial persons, 10 per cent for all of them together.

Remuneration payable by companies having no profits or inadequate profits. Where in any financial year during the currency of tenure of the managerial person, a company has no profits or its profits are inadequate, it may pay remuneration to a managerial person, by way of salary, dearness allowance, perquisites and other allowance, not exceeding ceiling limit of Rs 10,50,000 per annum or Rs 82,500 per month calculated on the following scale:

Where the effective capital of             the company is	Monthly remuneration payable shall      not exceed
(i)         Less than 1 crore (ii)        Rs 1 crore or more but less than             Rs 5 crores (iii)       Rs crores or more but less than             Rs 15 crores (iv)       Rs 15 crores or more	Rs 40,000      Rs 57,000      Rs 72,000      Rs 87,500

In addition to the above, certain perquisites like contribution to provident fund, gratuity, leave encashment may be paid. Non-resident Indians may also be paid children education allowance, holiday passage for children studying outside India or family staying abroad, leave travel concession. These additional benefits shall be subject to the limits laid down in Schedule XIII.

The expression ‘effective capital’ shall mean the aggregate of the paid-up share capital (excluding share application money or advances against shares); amount, if any, for the time being standing to the credit of share premium account, reserves and surplus (excluding revaluation reserve); long term loans and deposits repayable after one year (excluding working capital loans, overdrafts, interest due on loans unless funded, bank guarantee, etc. and other short term arrangements) as reduced by the aggregate of any investments (except in case of investments by an investment company whose principal business is acquisition of shares, stock, debentures or other securities), accumulated losses and preliminary expenses not written off.

Sitting Fee (s.310). The sitting fee payable to a director for each meeting of the Board of Directors or a committee thereof shall not exceed ceiling prescribed by the Central Government (presently, Rs 2000). Any increase in the sitting fee payable to a director shall not require the prior approval of the Central Govt. if it falls within the prescribed limits.

(12.14.6) Compensation to Directors for Loss of Office

Section 318 provides that no compensation for loss of office may be paid by a company to any director other than the managing director, or wholetime director, or a director holding the office of manager. Even in their cases, no such payment must be made: (i) when he resigns his office on reconstruction or amalgamation of the company; (ii) where the office is vacated under s.203 or s.283; (iii) where he has to give up directorship beyond 20 directorships; (iv) where the winding up of the company takes place due to his negligence and mismanagement; (v) where he has been guilty of fraud or breach of trust in relation to, or of gross negligence in or gross mismanagement of the conduct of the affairs of the company or any subsidiary or holding company thereof; (vi) where he has instigated or has taken part directly or indirectly in bringing about the termination of his office.

Where, however, the compensation is payable, it must not exceed the remuneration which would have been earned by the director for the unexpired residue of the term or for three years whichever is shorter. The calculation of this amount should be based on the average remuneration actually earned by him during a period of three years immediately prior to the date on which he ceased to hold the office, or where he Held the office for a shorter period than three years, during such period. No such payment can be made to him if the winding up has commenced either before or at any time within 12 months after the date of his ceasing to hold office, if the assets of the company are not sufficient to repay to the shareholders the share capital including the premium, if any, contributed by them.

(12.14.5) Manager

Section 2(24) states that "manager means an individual who, subject to the superintendence, control and direction of the Board of Directors, has the management of the whole, or substantially the whole of the affairs of the company and includes a director or any other person occupying the position of a manager, by whatever name called and whether under a contract of service or not".

Thus, an individual must be incharge of the whole or substantially the whole of the business of the company, in order to be called a manager in accordance with the Act. A person who is one of the departmental managers or a branch manager is not deemed to be a manager in this sense. Some of the more important legal provisions about managers are summarised as follows:

 (1) Only an individual can be appointed a manager of a company (s.384)

  (2) Section 385 lays down the disqualifications of a Manager. No company shall appoint or continue the appointmentor employment of any person as its manager, who (a) is an undischarged insolvent; or (b) has at any time within the preceding five years been adjudged an insolvent; or (c) suspends, or has suspended payment to his creditors; or (d) make, or has at any time, within the preceding five years made a composition with his creditors; or (c) is, or has at any time within preceding five years been convicted of an offence involving moral turpitude.

  (3) A person may not be appointed manager of more than 2 companies.

  (4) The provision of the following sections relating to managing directors have been made applicable to Manager also (s.388); (a) s.269: Appointment or re-appointment requires Government approval except in cases specified under Schedule XIII; (b) Ss. 310-311: Provisions for increase in remuneration requires Government approval; (c) s.312: Prohibition of assignment of office by a director; (d) s.317: Term of appointment to be not more than five years at a time.

(12.14.4) Managing Director

Section 2(26) defines ‘managing director’ as a ‘director’ who, by virtue of an agreement with the company or of a resolution passed by the company in general meeting or by its Board of directors or, by virtue of its memorandum or articles of association, is entrusted with substantial powers of management which would not otherwise be exercisable by him. The expression includes a director occupying the position of a managing director, by whatever name called.

However, the power to do administrative acts of routine nature when so authorised by the Board such as the power to affix the common seal of the company to any document or to draw and endorse any cheque on the account of the company in any bank or to draw and endorse any negotiable instrument or to sign any certificate of share or to direct registration of transfer of any share, shall not be deemed to be included within substantial powers of management. Further, a managing director of a company shall exercise his powers subject to the superintendence, control and direction of its Board of Directors.

Some of the more important legal provisions about managing directors are summarised as follows: (i) He, being a director, must be an individual. (ii) He is appointed, usually to perform such functions and carry out such duties as may be assigned to him by the Board of directors to whom he is responsible or subject. The Board can revoke the authority of the managing director. (iii) He must be entrusted with substantial powers of management. (iv) There can be two or more than two managing directors in a company. (v) A person cannot be appointed as managing director of more than two companies unless so permitted by the Central Government.

His appointment is subject to the approval by the Central Government. The Central Government upon application for permission to appoint a person as managing director of the company has power to impose conditions. Ss. 268,269,316 and 317 are applicable to a public company or a private company which is subsidiary of a public company.

Section 268 states that an amendment of any provision relating to appointrnent or reappointment of a managing director (or a wholetime director) shall not be effective unless approved by the Central Government and shall be become void if and in so far as, it is disapproved by the Central Government.

Appointment of managing or whole-time director or manager to require government approval only in certain cases(s.269). Every public company and/or private company which is subsidiary of a public company having a paid-up share capital of not less than Rs 5 crore must appoint either a managing or a whole-time director or Manager. Also no approval of the Central Government to the appointment of managerial personnel is required on fulfillment of certain conditions laid down in Schedule XIII [including the minimum remuneration under s.198(4) as also increase in the remuneration under Ss. 310 and 311].

For appointment of a managing, wholetime director or a manager, approval of the Central Government would not be required if the following conditions were satisfied:

  (i) he had not been sentenced to imprisonment for any period or to fine exceeding Rs 1,000 for conviction of an offence under any of the fourteen acts mentioned in Schedule XIII;

  (ii) he had not been detained for any period under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act 1974;

  (iii) he has completed the age of 25 years but has not attained the age of 70 years;

  (iv) he is not a managing or wholetime director or manager or in any way in wholetime employment elsewhere;

  (v) he is citizen of India and is resident in India;

  (vi) the company had neither suffered loss nor had inadequate profits: (a) during the preceding financial year immediate to the financial year in which appointment is made, or (b) in any of the three financial years out of the four financial years immediately preceding.

In case any of the above conditions are not complied with, an application must be made to the Central Government within 90 days of the appointment. If the appointment is not approved by the Central Government the appointee shall vacate the office immediately on communication of the decision by the Central Government.

Section 316 states that a person, who is either the managing director or the manager of any other company (including a pure private company), cannot be appointed a managing director of a public company or a private company which is a subsidiary of a public company. But such an appointment can be made if the board of such company approves of the appointment by a unanimous resolution passed at the Board meeting specific notice of which had been given to all the directors then in India. Also the Central Government is empowered to permit, by order, the same person to be managing director of more than one companies, if it is satisfied and it is necessary for their proper working that the companies should function as a single unit and have a common managing director.

Section 317 states that the term of office of a managing director cannot exceed five years at a time. Also re-appointments or extension can be made on the basis of 5 years tenure on each occasion, provided each time the re-appointment or extension is made by the company during two years of the existing term.

It may be emphasised that Ss.268, 269 and 317 relating to restrictions on appointment of managing directors (as noted above) do not apply to pure private companies.

Disqualification of a managing director. Section 267 prohibits the appointment or employment or the continuance of the appointment or employment of any person by a company as its managing director or wholetime director, if the said Person: (i) is an undischarged insolvent or has at any time been adjudged an insolvent; (ii) suspends, or has at any time suspended payment to his creditors, or makes or has at any time made a composition with them; or (iii) is or has at any time, been convicted by a court of an offence involving moral turpitude.

It may be noted that these disqualifications are in addition to the ones mentioned in s.272(i.e., disqualifications of a director).

(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.