COMPANY LAW

UNIT – III

DIRECTORS
A company is an artificial person, so it must act through human agency. The people
through whom the company acts and does its business are called ‘directors’. They are
collectively known as ‘Board of Directors’ or ‘Board’.
As per Section 2(34) of the Companies Act, 2013, director means a director appointed to
the Board of a company.
According to Section 149, only an individual can be appointed as a director of a company
and every company shall have a Board of Directors.
As per Section 2(10), “Board of Directors” or “Board”, in relation to a company, means the
collectively body of the directors of the company.
Types of Directors in a Company
A company has different types of directors, and all of them have different roles in the
company. Let’s study about all the directors one by one.
Managing Director: Managing director is a person who has substantial powers of
management of the company. He is given this power by the articles of the company,
agreement with the company, passing resolution in the general meeting of the company, or
by the board of directors.
Independent Director: A person becoming the independent director of the company must
fulfil certain criteria given under section 149(6) of the Companies Act, 2013, which states
that an independent director is a person other than managing director, whole-time
director, or nominee director, and:
 He must have relevant experience and should be a person of integrity as per the board.
 A person appointed as an independent director shall not be a promoter of the same
company or any other company which is the holding, subsidiary, or associate company of
the same company in which he has been appointed.
 The person shall not be related to the promoters or directors of the company or its
holding, subsidiary, or associate company.
 The person must not have any money-related relationship with the company or its
holding, subsidiary, or associated company other than his salary.
 None of his relatives or he himself shall not have any kind of interest in the company.
Provided, the relative can hold shares of face value up to Rs. 50 Lakhs or 2% of the paid-
up capital.
Section 149(4) of the Companies Act, 2013, states that every listed public company must
have 1/3rd of its total directors as independent directors.
Example: XYZ Ltd is a listed public company having a total of 15 directors. 1/3rd of 15 is 5.
Therefore, the company will have 5 directors as independent directors.
Rule 4 of Companies (Appointment and Qualification of Directors) Rules, 2014 states that
the following companies will have at least two independent directors:
 Companies having paid-up share capital of Rs. 10 crores or more.
 Companies having a turnover of Rs. 100 crores or more.

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 Companies having outstanding loans, debentures, deposits, in aggregate of more than Rs.
50 crores.
Small Shareholders Director: As per the Companies Act, 2013, a small shareholder means a
shareholder holding shares of the nominal value of Rs. 20,000 or less.
As per Rule 7 of the Companies (Appointment and Qualification of Directors) Rules, 2014,
every listed company having paid-up share capital of Rs. 5 crores or more and also having
one thousand or more shareholders holding shares of the nominal value of Rs. 20,000 or
less may have a small shareholder director elected by such small shareholders.
Women Director: Every listed company, and every other public company having a turnover
of Rs. 300 crore or more and paid-up share capital of Rs. 100 crore or more must appoint
at least one women director in the company.
The women director can be appointed at any time during registration of the company or
even after incorporation and shall hold the office till the next annual general meeting
(AGM) of the company from the date of her appointment. She can also resign from the
office at any time by giving notice to the company.
Additional Director: The board of directors has the power to appoint additional directors if
required by the company. If a person has not been appointed as an additional director in
the general meeting, then he or she will not be appointed as an additional director of the
company.
The tenure of the additional director will be till the time of the next annual general meeting
(AGM) or the last date on which the annual general meeting should be held, whichever is
earlier.
Example: In the year 2020-21, if the last date for the company to take AGM is 30th
September, but the company has not taken AGM on that date due to some reasons and
postponed the same to 30th October. Still, the tenure of the additional director appointed
during the last AGM will come to an end on 30th September.
Alternate Director: If the existing director of the company is not present in India for the
last three months, then the company shall appoint an alternate director in his place.
A company can appoint an alternate director if the articles of the company authorise so or
by way of passing a resolution in the company’s general meeting.
The alternate director will hold the office till the term of the existing director on whose
place he has been appointed or if the existing director returns to India.
Nominee Director: The nominee director is not appointed or removed by the company. He
is appointed by the financial institution, by an agreement, by the Government, or by any
other person in order to represent his interest in the company.
The company does not have the power to retire such directors, nor are they retired by
rotation. Only the agencies who have nominated such a director can remove the nominee
director.
Example: If XYZ Ltd took a loan from SBI bank, then the bank (to monitor the activities of
the company) will appoint a nominee director in the company till the time the company
does not repay the loan.
Executive Director: An executive director is the company’s full-time working director. They
are in charge of the company’s activities and have a higher level of accountability. During
their operations in the company, they must be attentive and cautious.
Non-executive Director: A non-executive director is not involved in the day-to-day
operations of the company. They may take part in the planning or policy-making process,

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challenging the executive directors to make decisions that are in the company’s best
interests.
LEGAL POSITION OF DIRECTORS:
It is not easy to explain the legal position of the directors because the same have not been
defined by the companies Act clearly. Bowen L.J. observed "directors are described
sometimes as agents, sometimes as trustees and sometimes as managing partners. But
each of these expressions is used not as exhaustive of their powers and responsibilities, but
as indicating useful points of view from which they may, for the moment and for the
particular purpose, be considered." Thus, the real position of a director is not merely that
of an agent, or trustee of managing partner, but a combination of all these positions.
As Agents: The company being an artificial person cannot manage its affairs on its own. It
has to be entrusted to some human agency known as directors. They are elected
representatives of the shareholders and may be termed as agents of the company. The
relationship between the company and its directors is that of principal and agent,
Therefore, the general principles of the law of agency govern the relations of the company
and its directors. As agents, it is their duty to carry on the business with reasonable care
and diligence. They must act within the authority conferred upon them by the Act,
memorandum and articles and while entering into contracts on behalf of the company
within the scope of this authority, they will bind the company. In other words, if they act
beyond the scope of their authority, they will be held personally liable. However, you
should note that the acts done beyond the powers of the directors may be ratified by the
shareholders in general meeting of the company provided such acts are not beyond the
powers of the company.
To bind the company, the directors must act in the name of the company. Directors are the
agents of the company and not of the individual shareholders.
It is, however, not correct to say that directors are the agents of the company because
agents are not elected but appointed and secondly, the agents have no independent powers
while the directors have independent powers on certain matters.
As Trustees: The 'trustee' means a person who holds and manages the property for the
benefit of other persons. Though in the strict legal sense, directors are not the trustees of
the company, but, to some extent, they have been treated as trustees of the company. They
are the custodians of the money and properties of the company and as such are responsible
for the proper use of such money and property. If they misuse the money or property, they
have to refund or re-imburse the same.
The directors must exercise their powers in good faith and for the benefit of the company,
and not for their own benefit. The directors stand in a fiduciary capacity in relation to the
company. The same degree of integrity and standard of conduct is expected from the
directors as it is expected from a trustee. Directors are trustees for the company and not of
individual shareholders.
However, it should remember that directors are not the trustees in the strict sense. because
unlike a trustee a director does not enter into contracts in his own name. He enters into
contracts for the company of which he is a director and he does not hold any property in
trust, because the property is held by the company in its own name.
As Managing Partner: Directors have been described as the managing partners because
on the one hand. they are entrusted with the management and control of the affairs of the
companies. And on the other hand, they are the share-holders of the company. They

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manage the affairs of the company to their own benefit as a shareholder and for the general
benefit of the company.
But they are not managing partners in the strict sense because the liability of the director is
limited to the value of shares held by him whereas the liability of a partner is unlimited.
Further, unlike a partner, a director has no authority to bind the other directors and share-
holders.
As Employees: Directors are the elected representatives of the shareholders. As such,
they are not employees or servants of the company. But under a special contract with the
company a director may hold a salaried employment in the company and in that case he
will be treated as an employee or servant of the company and he will enjoy all the rights
available to an employee.
Thus. it is clear from the above discussion that directors are neither the agents, nor the
trustees, nor managing partners, nor employees of the company. In fact, they combine in
themselves all these positions. They stand in a fiduciary position towards the company in
respect of their powers and capital under their control.
APPOINTMENT OF DIRECTORS
Only individuals can be appointed as directors of the company; no body corporate,
association or firm can be appointed director of a company (Section 149). Further, no
company is to appoint any individual as a director unless he has been allotted a Director
Identification Number.
The provisions of the Companies Act, 2013 relating to the appointment of directors are as
follows: -
1. A public company must have at least three directors.
2. A private company must have at least two directors.
3. A one-person company must have at least one director.
4. A company can have a maximum of fifteen directors. However, it can p[ass a special
resolution to appoint more than fifteen directors.
5. The government is empowered to prescribe a class or classes of companies which
must have at least one woman director. The government has now notified that the
following class of companies shall appoint at least one woman director, namely-
(a) Every listed company;
(b) Every other public company having, paid-up share capital of Rs 100 crore or
more; or turnover of Rs 300 crores or more.
6. Every listed company must have at least one-third of the total number of directors,
who are independent directors. When calculating this number, a fraction, if any, is
to be round off to one.
7. A listed company may have one director elected by small shareholders (i.e.,
shareholders whose nominal value of shares held does not exceed Rs 20,000 or
such other amount as may be prescribed).
8. If no provision is made in the articles of a new company, the subscribers to the
memorandum, being individuals, become the first directors of the company.
9. In a newly formed OPC, the individual who is the member becomes the first director
of the company.
10. Unless otherwise so provided in the Act, all directors are to be appointed by the
company in general meeting.

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 11. Not less than two-third of the total number of directors of a public company must be
retiring directors- unless the articles of the company provide for the retirement of
all the directors every year at the annual general meeting.
REMOVAL OF DIRECTORS: A director can be removed from office before the expiry of
his term by (a) share-holders; or (b) the Tribunal.
By Share-holders: Section 169 of the Act, 2013 empowers the shareholders of a company to
pass an ordinary resolution at any general meeting to remove a director before the expiry
of the term of his office. There need be no proof of mismanagement, breach of trust, or any
other misconduct. Where the shareholders feel that the policies pursued by the directors
are not in the best interest of the company or the shareholders, they have the option to
remove such directors.
Although the resolution passed by the shareholders is an ordinary resolution, special
notice of the resolution is required to be given, namely, notice of the intention to move
such resolution has to be given to the company at least 14 days before the meeting.
However, the following directors cannot be removed by the shareholders in general
meeting by following the above procedure:
(a) Directors appointed by the Tribunal u/s 242;
(b) Directors elected by the shareholders following the system of proportional
representation u/s 163;
(c) Nominee directors;
(d) Directors appointed by the financial institutions under statutory powers;
(e) Special directors appointed under Sick Industrial Companies (Special Provisions)
Act, 1985.
By Tribunal: When an application has been filed before the Tribunal u/s 242 for relief
against oppression and mismanagement, the tribunal may order the termination or setting
aside of an agreement which the company might have made with any of its directors. Such
director is not entitled to hold any office in the company without the leave of the Tribunal
for a period of five years from the date of such an order. He is also not entitled to claim any
compensation from the company for the loss of his office.
Composition of Board of Directors: The following are the provisions of the
Companies Act, 2013 regarding composition of the Board of Directors:
1. Every company shall have a Board of Directors consisting of individuals as directors
(Section 149(1)). Thus, no one can act a director except an individual.
2. Every company shall have a minimum of: - 3 directors in case of a public company;
2 directors in case of a private company; and 1 director in case of One Person
Company [Section 149(1)(a)].
3. Every company shall have a maximum of 15 directors. However, a company may
appoint more than 15 directors after passing a special resolution [Section 149(1)(b)].
4. As per Section 149 (1) read with Rule 3 of the Companies (Appointment and
Qualification of Directors) Rule, 2014, the following companies shall have at least
one women director: (a) every listed company, and (b) any other public company
having (i) a paid up capital of Rs. 100 crores or more, or (ii) turnover of Rs 300
crores or more.
Powers of Board of Directors: The directors are appointed to manage and supervise
the overall affairs of the company. Therefore, the Board of directors has the power to do all
such things which the company is authorised or empowered to do. The directors derive

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their powers from the memorandum or articles of the company and from different
provisions of the Companies Act, 2013.
Section 179(1) prescribes that 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. But while exercising such power or doing such act or thing, the Board
shall be subject to the provisions contained in that behalf in: Act; Memorandum; Articles;
In any regulations not inconsistent therewith and duly made thereunder; Including
regulations made by the company in general meeting. Also, the Board shall not exercise
any power or do any act or thing which is directed or required, whether under Act;
Memorandum; Articles ; or Which is to be exercised or done by the company in the general
meeting.
Section 179(2) provides that no regulation made by the company in general meeting shall
invalidate any prior act of the Board which would have been valid if that regulation had not
been made.
As per Section 179 (3) the Board of Directors of a company shall exercise the following
powers on behalf of the company by means of resolutions passed at meetings of the Board,
namely: —
a) to make calls on shareholders in respect of money unpaid on their shares;
b) to authorise buy-back of securities under section 68;
c) to issue securities, including debentures, whether in or outside India;
d) to borrow monies;
e) to invest the funds of the company;
f) to grant loans or give guarantee or provide security in respect of loans;
g) to approve financial statement and the Board’s report;
h) to diversify the business of the company;
i) to approve amalgamation, merger or reconstruction;
j) to take over a company or acquire a controlling or substantial stake in another company;
k) any other matter which may be prescribed.
Rule 8 of the Companies (Meeting of Board and its Powers) Rules, 2014 prescribes
additional powers which can also be exercised by the Board of Directors only by means of
resolutions passed at meetings of the Board-
1. to make political contributions;
2. to appoint or remove key managerial personnel (KMP);
3. to appoint internal auditors and secretarial auditor.
By passing the resolution at its meeting, the Board may delegate the powers specified in
clauses (d) to (f) on such conditions as it may specify to:
 any committee of directors,
 the managing director,
 the manager,
 any other principal officer of the company or the principal officer of the branch
office (in the case of a branch office of the company).
It shall also be noted that the acceptance by a banking company in the ordinary course of
its business of deposits of money from the public repayable on demand or otherwise and
withdrawable by cheque, draft, order or otherwise, or the placing of monies on deposit by a
banking company with another banking company on such conditions as the Board may

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prescribe, shall not be deemed to be a borrowing of monies or making of loans by a
banking company within the meaning of this section as the case may be.
Section 179(4): Nothing in this section shall be deemed to affect the right of the company
in general meeting to impose restrictions and conditions on the exercise by the Board of
any of the powers specified in this section.
Company being an Artificial person cannot perform any functions by its own thus the need
of Board of directors arises. The Board of directors ensures that the company’s
management acts on the behalf of the shareholders. As the shareholders are the owners of
the Company, the board makes decisions as a fiduciary on their behalf. The board should
be a representation of both management and shareholder interests. And thus, Companies
Act governs the powers and duties of the board as it manages the functioning of the
company.
Restrictions on Board of Directors:
The company in the general meeting has the power to impose restrictions and conditions
on the exercise by the Board of any of the powers specified u/s 179.
Restrictions on Power of Board (Section 180): -
The Board of Directors may exercise particular powers only with the consent of the
company given by way of special resolution passed in the general meeting of the company.
These are: -
 to sell, lease or otherwise dispose of the whole, or 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;
 to remit, or give time for the re-payment of any debt due by a director except in the
case or renewal or continuance of any advance made by a banking company to its
director in the ordinary course of business;
 to invest, otherwise than in trust securities, the amount of compensation received by
the company in respect of compulsory acquisition of any such undertaking as is
referred to in clause (a), or of any premises or properties used for any such
undertaking and without which it cannot be carried on or can be carried on only
with difficulty or only after a considerable time;
 to borrow money, where the moneys to be borrowed together with the money
already borrowed by the company, will exceed the aggregate of the paid-up capital
of the company and its free reserves;
 to contribute, to charitable and other funds not directly relating to the business of
the company or the welfare of its employees, any amounts the aggregate of which
will, in any financial tera, exceed fifty thousand rupees, or five per cent of its average
net profits during the three financial years immediately preceding, whichever is
greater.
Duties of Directors: Directors of a company occupy an important position in the
management of the company and they have vast powers. However, it is expected of them to
exercise these powers for the public good and protect and safeguard the interests of the
company and shareholders. The duties of directors depend upon the nature and size of the
company. While discharging their duties, they must comply with the provisions of the
Articles and the Companies Act. The duties given in the Articles will certainly vary from

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company to company. The duties of directors can broadly be classified under the following
two heads:
1) Statutory duties; and
2) General duties.
Statutory Duties: Some of the statutory duties of directors are:
a) To file return of allotments (Section 39)– Directors are under a statutory obligation to
file with the Registrar, within a period of 30 days, a return of the allotments stating the
specified particulars.
b) To disclose interest (Section 184)- 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.
c) To disclose receipt from transfer of property (Section 191)- 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.
d) 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 may
not be able to attend all the meetings but if he absents himself from all the meetings of the
Board of Directors held during a period of twelve months with or without seeking leave of
absence of the Board, his office shall automatically fall vacant [Section 167(1)(b)].
e) To convene Annual General Meeting (AGM) and also extraordinary general meetings
[Sections 96 & 100].
f) To prepare and place at the AGM along with the financial statements including
consolidated financial statement, if any, and auditors’ report, a report by the Board of
Directors covering the specified particulars (Sections 134).
g) To authenticate annual financial statement including consolidated financial statement,
if any (Section 134).
h) To appoint first auditor of the company (Section 139).
i) To appoint cost auditor of the company (Section 148).
j) To make a declaration of solvency in the case of voluntary winding-up (Section 305).
General Duties: There are some duties of a general nature which every director must
discharge.
The following are some of the general duties:
i) Duty of good faith: The directors occupy a fiduciary position in a company. Fiduciary
position means a position of trust and confidence. Therefore, directors must act honestly
and diligently in the interest of the company and shareholders. They just not make any
secret profits from their dealings with the company. If a director makes some secret profits
by utilising his position, he shall be liable to account for it.
ii) Duty of reasonable care: The directors should discharge their duties with reasonable
care. The degree of care expected from him is the same as is reasonably expected from
persons of their knowledge and status. If the directors fail to exercise due care and skill in
the performance of their duties, they shall be liable for negligence. But they cannot be held
liable for mere errors of judgement.
iii) Duty not to delegate: The directors must perform their duties personally. They are
appointed because of their skill, competence and integrity, therefore, the maximum
delegatus non potest delegare (a delegate cannot delegate further) is applicable to them.

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But if permitted by Articles of the company, the directors can delegate certain functions to
the extent permitted by the Act of the Articles.
LIABILITIES OF DIRECTORS:
The liabilities of directors may be considered under the following heads:
1. Liability to the company.
2. Liability to third parties.
3. Liabilities for breach of statutory duties.
4. Criminal liability.
5. Liability for acts of co-directors
1. Liability to the company - The liability of a director to the company may arise from:
a) Breach of fiduciary duty- Where a director acts dishonestly to the interest of the
company, he will be held liable for breach of fiduciary duty. Most of the powers of directors
are ‘powers in trust’ and therefore, should be exercised in the interest of the company and
not in the interest of the directors or any section of members. Thus, where the directors, in
order to forestall a take-over bid, transferred the unissued shares of the company to
trustees to be held for the benefit of the employees, and an interest free loan from the
company was advanced to the trustees to enable them to pay for the shares, it was held to
be a wrongful exercise of the fiduciary powers of the directors - Hogg v. Cramphorm Ltd.
[1967].
b) Ultra vires acts- Directors are supposed to act within the parameters of the provisions of
the Companies Act, Memorandum and Articles of association, since these lay down the
limits to the activities of the company and consequently to the powers of the Board of
directors. Further, the powers of the directors may be limited in terms of specific
restrictions contained in the Articles of association. The directors shall be held personally
liable for acts beyond the aforesaid limits, being ultra vires the company or the directors.
Thus, where the directors pay dividends or interest out of capital, they will be liable to
indemnify the company for any loss or damage suffered due to such act. c) Negligence- As
long as the directors act within their powers with reasonable skill and care as expected of
them as prudent businessmen, they discharge their duties to the company. But, where they
fail to exercise reasonable care, skill and diligence, they shall be deemed to have acted
negligently in discharge of their duties and consequently shall be liable for any loss or
damage resulting therefrom. However, error of judgment will not be deemed as negligence.
But, the Court may grant relief to directors against such liability under section 463 of the
Act.
d) Mala fide acts- Directors are the trustees for the moneys and property of the company
handled by them, as well as for exercise of the powers vested in them. If they dishonestly or
in a mala fide manner, exercise their powers and perform their duties, they will be liable
for breach of trust and may be required to make good the loss or damage suffered by the
company by reason of such mala fide acts. They are also accountable to the company for
any secret profits they might have made in course of performance of duties on behalf of the
company. Directors can also be held liable for their acts of ‘misfeasance’, i.e., misconduct
or wilful misuse of powers.
2. Liability to Third Parties- The discussion on liabilities of directors towards third
parties may be grouped as under: (I) Liability under the provisions of the Companies Act,
2013. (II) Liability for breach of warranty of authority.

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(I) Liability under the Companies Act- The directors shall be personally liable to the
third parties, inter alia, under the following provisions of the Companies Act, 2013:
a) Prospectus- Failure to state any particulars as per the requirements of section 26 of the
Act or mis-statement of facts in a prospectus renders a director personally liable for
damages to the third party. Section 35 provides that a director shall be liable to pay
compensation to every person who subscribes for any shares or debentures on the faith of
the prospectus for any loss or damages he may have sustained by reason of any untrue or
misleading statement included therein. He may, however, escape liability where he proves
that the prospectus was issued without his consent or he withdrew his consent before the
issue of the prospectus.
b) With regard to allotment- Directors may also incur personal liability for allotment
before minimum subscription is received (Section 39). If the amount stated in the
prospectus as the minimum amount has not been subscribed and the sum payable on
application is not received within a period of thirty days from the date of issue of the
prospectus, or such other period as may be specified by the Securities and Exchange Board,
the amount received as application money shall be returned within such time and manner
as may be prescribed. In case of default, the company and its officer who is in default shall
be liable to a penalty, for each default, of one thousand rupees for each day during which
such default continues or one lakh rupees, whichever is less.
c) Fraudulent conduct of business- Directors may also be made personally liable for the
debts or liabilities of a company by an order of the Tribunal under section 339. Such an
order shall be made by the Tribunal where the directors have been found guilty of
fraudulent conduct of business.
(II) Liability for breach of warranty- Directors are supposed to function within the
scope of their authority. Thus, where they transact any business in respect of matters, ultra
vires the company or ultra vires the articles, they may be proceeded against personally for
any loss sustained by any third party.
3) Liability for Breach of Statutory Duties - The Companies Act, 2013 imposes
numerous statutory duties on the directors under various sections of the Act. Default in
compliance of these duties attract penal consequences. The various statutory penalties
which directors may incur by reason of noncompliance with the requirements of the
Companies Act have been discussed at appropriate places.
4) Criminal liability - Apart from civil liability under the Act or under the common law,
directors of a company may also incur criminal liability under common law, as well as
under the Companies Act, and other statutes. For non-compliance of certain provisions of
the Act, directors may incur criminal liability involving fine or imprisonment or both.
Some of the provisions of the Act under which the directors incur criminal liability are:
i) issue of a prospectus containing an untrue statement.
ii) Failure to deposit application money in a schedule Bank.
iii) Fraudulently inducing persons to invest money in the company.
iv) Accepting deposits or inviting any deposit in excess of the prescribed limit.
v) Destruction, mutilation, alteration or falsification of any books, papers or documents.
vi) Failure to file annual returns.
vii) Default in holding the annual general meeting.
viii) Granting loans to directors without the necessary approvals.
ix) Failure to maintain proper accounts, etc.

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5. Liability for acts of co-directors: A director is not liable for the acts of his co-
directors unless he was a party to it. A director is not the agent of his co- directors. He
cannot be held liable on the ground that he ought to have discovered the fraud. But a
managing director or the chairman signing the accounts without understanding its
implications cannot escape liability.

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