Directors

MEANING OF DIRECTORS Section 2 (34) of the Act prescribed that “director” means
a director appointed to the Board of a company.

Section 2 (10) of the Companies Act, 2013 defined that “Board of Directors” or “Board”,
in relation to a company, means the collective body of the directors of the company.

Statutory Requirement

It is mandatory for every company to have minimum number of directors as pe Section 149(1). i.e.

1. One director in the case of a One Person Company.

2. Two directors in the case of a private company.
3. Three directors in the case of a public company.

Separation of ownership from management

1. The members do not participate in the management of the company. They cannot interfere in day to
day management of the company.
2. A large sized company may have numerous shareholders who are scattered throughout the country,
making it impossible for them to take decisions relating to day to day affairs of the company.

A company cannot Act by itself

1. A company has no mind or body of its own, it has no eyes to see, n ears to hear, no hands to sign and
no brain to think and take decisions.
2. Therefore, directors are appointed to act on behalf of the company.

(b) maximum number of directors: 15

If the company wants to appoint more than 15 directors, it can do so after passing a special resolution.
[Every special resolution is required to be filed in form No. MGT – 14 as per Section 117(3)(a)].

This is not applicable in case of Government and section 8 (non-profit) company.

(d) Resident Director

Every company shall have at least one director who has stayed in India for a total period of not less than 182
days in the financial year. [Section 149 (3)]
Transition period: Section 149 (5) provides for the transition period of one year from the date of
commencement i.e., 1st April, 2014 to comply with section 149 (3). Section 149 (3) of the Companies Act,
2013 requires every company to have at least one director who has stayed in India for a total period of not
less than 182 days in the previous calendar year. The MCA clarified that residency requirement would be
reckoned from the date of commencement of section 149 of the Act i.e., 1st April, 2014. The first previous
calendar year for compliance with these provisions would, therefore, be calendar year 2014. The period to be
taken into account for compliance with these provisions will be the remaining period of calendar year 2014
(i.e., 1st April to 31st December). Therefore, on a proportionate basis, the number of days for which the
director(s) would need to be resident in India, during Calendar year 2014, shall exceed 136 days.

Regarding newly incorporated companies it is clarified that companies incorporated between 1 st April, 2014
and 30th September, 2014 should have a resident director either at the incorporation stage itself or within six
months of their incorporation. Companies incorporated after 30 th September, 2014 need to have the resident
director from the date of incorporation itself.

1. Executive Director

Executive directors are internal professionals i.e. they are internal to the organization and are involved in the
daily functions of the company. Any person who is a full-time employee of the company (i.e. whole-time
director) or who is responsible for the day-to-day operations of the company (i.e. managing director)
will be called an Executive Director. Thus, an Executive Director can be designated as Managing Director
and whole-time Director.

Generally, an executive director is paid more than a non-executive director because they are believed to
have rich expertise and experience in their field.

He is usually responsible for the executive functions in the management and administration of the company.
Certain skills are required for a person to be an executive director.

 As defined in Section 2(94) of Companies Act, 2013 – Rule 2(1) (k) of Companies (Specification of
Definitions Details) Rules, 2014 – Executive Director means a whole-time director.

They are generally appointed through an appointment agreement and their qualification and remuneration
will be discussed in detail before they are appointed as Executive Directors.

 Tenure – Managing director or a whole-time director can be appointed for a maximum period of 5
(five) years. They are eligible for re-appointment. The re-appointment can be done for the next term
but not before one year of the expiry of the current term.

 Age limit – The minimum age of a director should be 21 years. And the maximum age should be 70
years. For a person above 70 years, shareholder’s approval in the General meeting is required.
A Company (public or private) cannot appoint a manager along with a managing director but can
appoint a whole-time director along with a managing director or manager.

1. Managing Director – He is an executive director. When considerable power of managing the affairs of a
company is given to a director either by way of –

 Articles of Association of the Company (AOA) or

 An agreement with the Company, or

 A resolution passed in its general meeting, or

 By its Board of Directors.

Then he will be a Managing Director of that Company.

2. Whole Time Director – Director + Whole Time Employee of the company = Whole Time Director. As
per Clause 2(94) of Companies Act, 2013 – “whole-time director includes a Director in the whole-time
employment of the company. He is also an executive director of the company.

3. Non-Executive Director

Non-executive directors are external professionals.

The Companies Act, 2013 does not define non-executive directors but we can understand the meaning
from the definition of executive directors. Directors who are not involved in the day-to-day functions or
activities of the Company are called non-executive directors. Despite not being involved in the day-to-day
business they are still on the Board. The reason is that the Board needs their inputs in certain areas, or
because there may be a legal requirement to have them on the Board. Non-executive directors come to the
company only to make certain decisions at the Board meeting.

Two types of Non-executive directors are –

1. Independent Director – Directors who have knowledge or network in a particular area or a

particular field can be termed as independent directors. Usually, companies hire ex-officials for
such roles because they have the industrial expertise and the experience which is required to run a
company smoothly.

2. Women directors can also be appointed as independent directors.

3. Independent directors help maintain transparency, which is an especially relevant factor,

especially in the corporate regime.
As per Section 149(2) – an independent director is a director other than managing director, whole-time
director or nominee director and in the opinion of the Board possesses relevant expertise and
experience.

As per Section 149(4) of the Companies Act, 2013 – every listed public company must have at least
1/3rd of the total number of directors as independent directors. This will include companies listed on the
SME segment of the stock exchange.

The Central Government also prescribes the minimum number of independent directors in the case of
unlisted public companies.

The Central Government vide Rule 4 of Companies (Appointment and Qualification of Directors) Rules,
2014 – states that unlisted public companies must appoint at least 2 (two) directors as independent directors
in the following circumstances –

 If the paid-up share capital exceeds Rs. 10 crores.

 If the turnover exceeds Rs. 100 crores.

 If the aggregate of all the outstanding loans, debentures and deposits, exceeds Rs. 50 crores.

A declaration by an independent director that he meets the criteria of independence is a must-

 At the first meeting of the Board in which he participates as a director and

 At the first meeting of the Board in every financial year or

 Whenever there is any change in the circumstances which may affect his status as an
independent director

 Qualification – An independent director must have skills, experience and knowledge in one or more
fields of law, management, sales, marketing, corporate governance, administration, research,
technical operations or other disciplines related to the company’s business.

 Tenure – The term of independent director must not exceed 5 (five) years. They can be elected
again for a second term. A cooling period of 3 years is compulsory after the expiry of the second
term. Companies are allowed to appoint independent directors for less than 5 years, however a
person cannot be appointed for more than 2 (two) terms.

All independent directors should meet at least once a year in the absence of non-independent directors
and other members of the company so that they can evaluate the performances of the company’s
chairperson, other directors, and the Board.

An independent director must comply with the functions and duties mentioned in the Code of Conduct
provided under Schedule IV of the Companies Act, 2013.
Independent directors are not paid remuneration but are eligible for sitting fees for the meetings they
attend. Their nature is independent,

they cannot receive any stock option.

As per Regulation 25 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 – an
independent director cannot be a director of more than 7 (seven) listed companies.

2. Nominee Director –

Section 149(7) and Section 161(3) of the Companies Act, 2013 deals with a Nominee director.

If it is authorized by the Articles of Association (AOA) of a company then the Board may appoint any
person as a director nominated by any institution in pursuance of the provisions of any law for the time
being in force or any agreement or by the Central Government or the State Government under its
shareholding in a Government company.

If the Articles of Association of a Company authorizes it, only then can a nominee director be appointed
by the Board.

They represent the stakeholders on the board of directors. To put it in simple terms, a nominee director is a
representative of the stakeholder who protects the stakeholder’s interest.

Their job is to see that the company does not function in a manner detrimental to the interest of the
stakeholders they represent.

E.g – Unions

Appointment – Nominee directors are appointed by an agreement (either Shareholder’s agreement or

financing agreement) between the company and the stakeholder.

The stakeholders are responsible for the payment of such nominee directors they may appoint.

A nominee director must act in good faith and the interest of the company even if they are nominated by
the stakeholders.

In the landmark judgment of Tata Consultancy Services Limited v. Cyrus Investments Private Limited &
Ors. – It was made clear by the Court that while a nominee director is entitled to take care of the interests of
the nominator, he is duty-bound to act in the best interests of the company and not fetter his discretion.

Bhardwaj Thiruvenkata Venkatavaraghavan v. Ashok Arora – the Delhi High Court held that Nominee
Directors must act in the best interest of the Company and its shareholders and not only in the interest of
their Nominators.
3. Additional Director

Provisions of Section 161(1) of the Companies Act, 2013 deal with the Additional Director. Where there is
heavy pressure of work on the Board of directors then the Board of directors can appoint an additional
director, if authorized by the Articles of Association of that company.

Mode of appointment – Additional directors can be appointed by passing a resolution at the board
meeting or through circulation.

Who can appoint? – The power to appoint an additional director rest with the Board of directors and this
power is given to the Board by the Company’s Articles of Association (AOA).

If the AOA of the company does not confer the powers on the Board then the Board cannot appoint an
additional director.

 Tenure – Additional director holds office only up to the date of next Annual General Meeting
(AGM) or the last date, on which the annual general meeting should have been held, whichever
is earlier. If a person does not get appointed as a director in a general meeting then he cannot be
appointed as Additional Director.

An additional director can be a managing or a whole-time director. An additional director can also be
considered a rotational director. The powers and rights of the additional directors will be the same as
other directors of the Company.

T.M. Paul vs. City hospital Pvt. Ltd (2000) – It was held that an additional director cannot be appointed
on extraneous considerations such as strengthening the position of the majority in the Board.

4. Alternate Director

Provisions of Section 161(2) of the Companies Act, 2013 deal with Alternate directors.

When a director of a company is not in India for more than (3) three months then an alternate
director can be appointed on the original director’s behalf.

An alternate or an alternative director act on behalf of the director who is not in the office due to being away
for more than 3 months.

Thus, the alternate director exercises his duties for a limited time only i.e. only till the time the principal
director returns to his duties. In other words, alternate directors are appointed by the Board as a
replacement for a director who is going to be away from India and is unable to attend board meetings. Even
though a director can be present through video conferencing, at times the shareholders might find the
need to have a physical presence on the Board, which is when an alternate director gets appointed.
If, in the absence of an independent director, an alternate director is to be appointed on his behalf, then
that alternate director also needs to be independent. Further, an alternate director cannot be appointed as
an alternate director for some other director in the same company.

Tenure – An alternate director will hold office only till the time the original director comes back to India.
While in office as an alternate director, he will be responsible for all practical purposes and will be entitled
to all notices of the meetings along with the original director. The decisions taken by him in his capacity as
an alternate director will be valid.

Mode of appointment – The AOA of the Company must authorize the Board to appoint an alternate
director or he can be appointed by passing a resolution in the general meeting or through circulation.

If the original director resigns or is removed then the alternate director will also vacate his office
unless the Board appoints him as an additional director. An alternate director can be considered as a
rotational director only if the original director is rotational. An alternate director cannot be considered as a
proxy of the original director.

An alternate director can be appointed as a managing director because there is no provision in the
Companies Act 2013, which will prohibit alternate directors to be appointed as managing directors provided
that he must comply with sections 195,196 and schedule V of company act 2013.

5. Casual Vacancy Director

Provisions of Section 161(4) of the Companies Act, 2013 deal with a casual vacancy director. Before
understanding who is a casual vacancy director, it is important to understand the meaning of casual vacancy.

Casual vacancy means a vacancy in the office due to the reasons of death, resignation, disqualification,
incapacity, and removal.

Thus, a director assuming office due to any of these reasons will be considered as a casual vacancy
director.

The vacancy arising in the office of the director shall be considered as a casual vacancy if such a director
was appointed by a shareholder in a general meeting. Only the shareholder will have to make a valid
appointment with such a director. The concept of a casual vacancy director applies only to public
companies.

How to fill a casual vacancy?

 The AOA need not authorize the Board to fill the casual vacancy.

 If AOA has prescribed a procedure as to how to fill such a casual vacancy then that procedure
needs to be followed.
 If AOA has not mentioned any procedure for such filling of casual vacancy then the Board can pass a
resolution in the Board meeting but not by way of circulation.

Thus, even if the AOA is silent on filling in the casual vacancy, the Board has the power to fill such vacancy.

 Appointment – The Board of directors can appoint a casual vacancy director. AOA need not expressly
state for filling in the casual vacancy. Such a director needs to be appointed in the Board meeting only.

 Tenure – Casual vacancy director shall hold office only up to the date up to which director in whose
place he is appointed would have held office if he had not vacated. The concept of reappointment
applies to the original director not to the casual vacancy director.

A casual vacancy director can be appointed as a Managing director but he cannot be considered as a
rotational director.

6. Residential Director

Provisions of Section 149(3) of the Companies Act, 2013 deals with the residence of a Director. The new
Companies Act introduced this concept of Resident Director. The Act makes the residence of a Director in
India mandatory.

It states that every Company shall have at least 1 Director who has resided in India for a total period of
not less than 182 days in the previous financial/ calendar year. This provision applies to all companies,
both private and public.

In the case of Companies that are newly incorporated, the requirement of 182 days shall apply
proportionately at the end of the financial year in which it is incorporated – (proviso to section 149(3)
inserted w.e.f. 7-5-2018).

Due to the COVID-19 pandemic, the MCA General Circular No. 36/2020 dated 20-10-2020 states that
the minimum residency in India for a period of 182 days for the financial year 2020 – 2021 will not
apply.

Declaration of a Resident Director is not required.

A Resident Director is like any other Director and he is required to attend at least 1 Board Meeting in a
year.

7. Women Director
The Companies Act, 2013 made it mandatory for certain companies to appoint a woman director. As per the
provisions of Section 149(1) of the Act and Rule 3 of the Companies (Appointment & Qualification of
Directors) Rules, 2014 – The Companies that need to appoint a women director are as follows –

1. Every listed company.

2. Every public company having paid-up share capital of Rs. 100 crores or more.

3. Every public company which has a minimum turnover of Rs. 300 crores or more.

The time limit for an appointment – The existing Companies (i.e. old companies under the previous
Companies Act, 1956) shall appoint women directors within 1 (one) year from their commencement. The
new Companies (i.e. under the new Companies Act, 2013) have to appoint women directors within 6
(six) months from the date of their incorporation. If this provision is violated then it is punishable
under Section 172 of the Companies Act, 2013.

Case Law – Jalpower Corporation v. ROC (2016) – In this case, there was a delay of 6 months in appointing
a woman director. Jalpower Corporation stated that the delay was committed due to unavoidable
circumstances and it was not deliberate. While admitting to the offence, it stated that the said offence did not
cause any harm to the public interest. Due to this delay, the ROC had issued a show-cause notice to Jalpower
Corporation for the non-appointment of a woman director. The Court held that not appointing a woman
director was a compoundable offence and punishable under Section 172 of the Companies Act, 2013. A fine
of Rs. 50,000/- was imposed as a compounding fee which was to be paid within 3 weeks from the date of
receipt of the order.

Tenure – The tenure of women director is till the next Annual General Meeting (AGM) from the date of
her appointment. She can resign any time she wishes by giving notice to the Company.

The women director can be appointed during the time of registration of the Company or after the
incorporation of the Company by the Board of Directors and the shareholders.

Any intermittent vacancy of a women director shall be filled by the Board of Directors within 3 months
from the date of such vacancy, or not later than the immediate next board meeting, whichever is later.

Declaration of a woman director is not required.

8. Small Shareholders Director

Any person who holds shares of the nominal value of not more than Rs. 20,000 in a Public Company is
called a small shareholder. These small shareholders are allowed to elect a director in a listed company.
Thus, directors elected by these small shareholders are called Small shareholders Directors. According to
Section 151 of the Companies Act, 2013 every listed company may have 1 (one) director elected by such
small shareholders.

Thus, a small shareholder director can be appointed by a Company if –

1. The Company is a Public Company;

2. The Company has at least 1000 or more small shareholders;

Only if these two criteria exist, the listed company can have one director elected by a small shareholder.

Appointment – The appointment of such a director is optional and that is why there are hardly any
companies that have a small shareholder director. The Company can appoint a small shareholder director
either on its own or on the application made by a small shareholder.

Rule 7 of Companies (Appointment and Qualification of Directors) Rules, 2014 lays down certain
provisions relating to Small Share-Holder Director which are as follows –

1. At least 1000 small shareholders, or 1/10 th of the small shareholders, whichever is less, should provide a
written notice to the Company. But the notice should be provided 14 days before the General Meeting.

2. The said notice must contain details of the proposed director. Details such as name, address, folio
number, shares held etc.

3. The said notice must be signed by the person proposing to be the director.

4. The said notice should be accompanied by a statement signed by the proposed director stating that he has
a Director Identification Number (DIN), he is not disqualified to be a director and he has given his
consent to act as a director.

Other provisions related to a small shareholder director are as follows –

1. A small shareholder director is eligible for an independent director as per the provisions
of Section 149 (6) & (7) of the Companies Act, 2013.

2. A small shareholder director shall not be considered as a retiring director.

3. A small shareholder cannot be appointed as a Managing Director or a Whole Time Director.

4. A person shall not hold office as a small shareholder director in more than 2 (two) companies at
the same time i.e. he is allowed to hold office in 2 companies at the same time but not more than 2.

Tenure – A small shareholder director can be appointed for a maximum period of 3 (three) years. He is not
liable to retire by rotation and he is also not eligible for reappointment after the expiry of his tenure.
Further, he cannot be associated with the company for 3 (three) years after he has finished his service.
9. Shadow Director

A shadow director is nowhere mentioned in the Companies Act, 2013. A shadow director is someone who is
not appointed officially as a Director of the company but the Board follows his directions and orders. They
are very influential just like any other Director of a company but they manage to avoid the liability that
arises thereof. They give orders and their orders are followed but they do not have any managerial position
in the company. Such Directors are known as Shadow Directors.

 Example – Mr Ram is not a Director in QPR Ltd. Nor is he an employee nor does he have any
contractual association to QPR Ltd. Before taking any major decision, the Board of QPR Ltd.,
consults Mr Ram. And only after Mr Ram’s directions, QPR Ltd. goes ahead with the business. In
this case, Mr Ram will be a Shadow Director of QPR Ltd.

Section 2(59) of the Companies Act, 2013 defines “officer” which is similar to a Shadow Director. It
means “any person under whose directions or instructions the Board of Directors or any one or more
of the Directors are accustomed to act”. Also, under Section 2(60) (v) – a similar kind of person is
mentioned known as an “officer in default”. The Shadow Director can also be an officer in default.

Case Law: Re Hydrodan (Corby) Ltd [1994] is a UK company law case, which explains the meaning of a
shadow director. This case laid down a few characteristics of a Shadow Director

1. A person who is not a director in the Company;

2. A person who instructs the Board of Directors concerning the management of the Company;

3. The Board follows the instructions and directions given by such a person and then acts.

It is important to note that if the Board is acting and following the directions given by a person who is not
the director in a company and the Board is doing it continuously and the majority is following those
directions only then that person can be referred to as a Shadow Director or Deemed Director.

Thus, the following points need to be established for a person to be called a shadow Director-

 Not in official capacity – Such a person is not a Director in his official capacity.

 Direct involvement – The person is involved directly in the affairs of the company. He is not merely
advising but is directly involved in the company’s management.

 Continuity – The Board of Directors are following the instructions of such a person continuously
and not just once or twice.

 Majority following – The majority of the members of the company are following the instructions
and directions given by such a person.
Number Of Directorships of a Director

Section 165(1) of the Act states that a person can hold the office of director simultaneously in 20
companies.

The number of 20 companies includes the office of alternate directorship. A person cannot be a director
in more than 20 companies at a given time.

However, the maximum number of public companies in which a person can be a director simultaneously
is 10.

An individual cannot be appointed as a director in more than 10 public companies at a given time.

For calculating the number of public companies, the directorship in private companies that are either holding
or subsidiary of a public company is included. However, the directorship in a dormant company is not
included in calculating the limit of directorships of 20 companies.

The purpose of prescribing the number of the office of directorship is that the person who is appointed as a
director can give proper and sufficient time to a company. The Act prohibits a person from holding the office
of a director in more than 20 companies to provide quality time to the companies in which he is a director
and discharge his functions as a director in an efficient manner.

Reduction In the Number of Directorships

Section 165(2) of the Act provides a reduction in the number of directorships held by a person. A
company can specify any number less than 20 in which the directors of their company can act as directors
in other companies. The members of a company can specify a smaller number of the office of directorship
for its directors by passing a special resolution.

For Ex – Abc is appointed as a director in Xyz company. Xyz company has passed a special resolution
stating that Xyz company’s directors can hold the office of directorship in 10 companies. Then, Abc can be a
director in only 10 companies simultaneously and not beyond it. Though the Act provides that a person can
hold a director’s office in 20 companies, Abc can be a director in only 10 companies due to the resolution
passed by Xyz reducing the number to 10. If he holds the office of director in more than 10, it will amount to
the contravention of the Act.

Legal position of directors

It is really difficult to explain as to what is the exact legal position of directors in a company. There are
certain explanations given by the judges for defining directors, sometimes as agents, sometimes as trustees,
and sometimes as managing partners. They are the persons who are duly appointed by the company for the
purpose of directing and managing the company’s affairs. All the expressions to which directors are referred,
like agents, trustees, etc., are not exhaustive of their powers and responsibilities.

It was observed in the case of Ram Chand & Sons Sugar Mills Pvt. Ltd. v. Kanhayalal
Bhargava(1966), that it is really difficult to exactly explain the legal position of directors in a company.
Judges have summarised it as a multi-dimensional position which is held in the capacities of an agent,
trustee, or manager, even though these terms don’t hold the same meaning in a true legal sense.

Directors as an agent

As discussed, a company cannot act by itself in its own capacity. It would always need someone to act on its
behalf. A company can only act through directors, and this hence makes it a principal and agent
relationship. This relationship gives the directors the power to act and make decisions on behalf of the
company. Any contract or transaction made on behalf of the company makes the company liable and not the
directors. No liability occurs upon the directors, they only sign and make contracts on the company’s behalf.

In the case of Ferguson v. Wilson (1904), it was established that the directors are the agents of the company.
This was established in the eyes of the law that a company cannot work as an artificial person in its own
capacity that’s why it needs an agent to operate. In the case of Ray Cylinders & Containers v. Hindustan
General Industries Limited (1998), it was noticed that directors are the agents of the company but not of
the members of the company. This means that the directors are the agents of the company and not its
individual members, except in the case where the relationship between the two arises out of special facts. A
company is a different legal entity apart from its members, i.e., shareholders.

In the case of Kirlampudi Sugar Mills Ltd. v. G. Venkata Rao [2003], it was noticed that if the CEO of the
company executes a promissory note and borrows money from outside for the company’s use, it cannot be
said that he has borrowed money for himself. Even if the company fails to pay the amount promised, there
shall incur no liability on the one who borrowed money as an agent of the company. However, in the case
of H.P. State Electricity Board v. Shivalik Casting (P.) Ltd. [2003], it was established that if a director gives
surety in his own capacity/personal capacity and not for and/or on behalf of the company, then the company
cannot be sued for the amount of surety. There were some circumstances that were pointed out in the case
of Vineet Kumar Mathur v. Union of India [1996] in which the directors incurred liability on themselves-

1. In cases where directors contract in their own names rather than the company.

2. In cases where directors omit or use the company’s name incorrectly.

3. In cases where directors sign the contracts or agreements in such a manner that it is not evident
whether it is the company (principal) or the director (agent) who is signing and who shall be liable
for future circumstances.
 4. In cases where directors exceed the allowed limit and borrow in excess of funds.

There are ways in which unauthorised actions can be ratified. In Bhajekar v. Shinkar [1933], it was
mentioned that if a transaction made by the director exceeds the power given to him but falls within the
ambit of the power held by the company, then it can be ratified by passing a resolution of the
company. However, if the company has been struck off by the registrar and dissolved, then it cannot ratify
its actions. This is because a non-existent entity cannot initiate action in the first place.

Criticisms:

Director as a trustee

In a company, a director is regarded as a trustee as well. A director is known as a trustee because he

administers the assets and works toward the interests of the company. A trustee is someone who can
be entrusted with the company’s assets and performs towards achieving the company’s goals rather
than for their personal advantage.

Besides these, a trustee is given powers like allotment of shares, making calls, accepting or rejecting
transfers, etc., which are known as powers in trust. In the case of Dale & Carrington Investment (P.) Ltd. v.
P.K. Prathapan [2004], it was noticed that the directors have to act within their fiduciary capacity, which
means that they have a duty to act on behalf of the company with the utmost care, skill, good faith, and due
diligence, most importantly towards the interests of the company that they are representing.

As observed by the Madras High Court in the landmark case of V.S. Ramaswami Iyer v. Brahmayya and
Co. (1966), the directors can be rendered liable as trustees with reference to their power to apply
funds of the company. A director may misuse these in many ways. Due to this, if legal action is taken
against a director with reference to the mentioned offence, then the cause of action will survive even after
the death of the director against his legal representative. In both the cases of Percival v. Wright
(1902) and Peskin v. Anderson (2001), it was held that the directors of a company owe their duty to the
company as a whole, and are not trustees for individual shareholders or owe them a fiduciary duty merely by
virtue of their offices. They may purchase their shares without disclosing pending negotiations for the sale of
the company’s undertaking.

Director as a managing partner

The directors of a company represent the shareholders’ will and wants. They tend to act on behalf of the
shareholders and their goals. Due to this, they enjoy vast powers and can perform many functions that are
proprietary in nature. Due to the provisions mentioned in the MOA and AOA of the companies, the board of
directors acts as the supreme policy and decision-making authority.
Director as an employee/officer

Shareholders elect directors in a general meeting held by the company. Once the director is elected, he then
enjoys the rights and powers that are given to him as per the Act. These powers and rights cannot be taken
away by the shareholders and they cannot interfere in the decision-making of the directors as such. Since
directors possess such powers and rights, they cannot be termed employees of the company. This is
because employees have limited authority vested in them and always work under the directions of the
employer and cannot interfere in the employer’s decision-making.

In the case of Lee Behrens & Co., Re [1932], it was seen that it is the shareholders who elect their
representatives who shall engage in directing the affairs of the company on their behalf. This means that
they are acting in the capacity of an agent in this scenario. It can also be seen that they are not the employees
or servants of the company. However, in the case of R.R. Kothandaraman v. CIT (1957), was held by the
Madras High Court that since there is nothing mentioned in the law, no one can prevent the director from
accepting his position as an employee under a special contract made with the company.

Directors are also treated as an officer in a company for certain matters. They can be held liable for penalties
for failure to comply with the law. To summarize the legal position of directors in a company, Jessel M.R
can be quoted from Forest of Dean Coal Mining Co., Re [1878], “Directors have sometimes been called as
trustees or commercial trustees, and sometimes they have been called managing partners; it does not
matter much what you call them so long as you understand what their real position is, which is that they
are really commercial men managing a trading concern for the benefit of themselves and of all the
shareholders in it. They stand in a fiduciary position towards the company in respect of their powers and
capital under their control.”

Section 203
Corporations must designate key managerial personnel (KMP in short), according to the Companies Act of
2013. They are in charge of making decisions and guaranteeing the efficient operation of the business.

Section 2(51) states that, in relation to a company, “key managerial personnel” includes the following:

(i) the chief executive officer, manager or managing director;

(ii) the company secretary;

(iii) the whole-time director;

(iv) the chief financial officer;

(v) any other officer designated as key managerial personnel by the Board who is a full-time employee and
is not more than one level below the directors; and

(vi) any other officer as may be prescribed by the central government.

Rules governing the key managerial personnel

Section 203 of the Companies Act, of 2013, when read with Rule 8 of the Companies (Appointment
and Remuneration of Managerial Personnel) Rules, 2014, states that every public company with a
(paid-up) share capital of ten crore rupees or more and every listed company (companies whose shares
are listed on a recognised stock exchange for public trading like Nifty) must have full-time key
managerial employees, such as a Managing Director, Chief Executive Officer, or Manager and Chief
Financial Officer.

Section 203 of the Companies Act of 2013, in accordance with Rule 8A of the Companies
(Appointment and Remuneration of Managerial Personnel) Rules of 2014, mandates hiring a full-time
company secretary for every private company with a paid-up share capital of ten crore rupees or
more.

The Companies Act, 2013, in its Schedule V, sets forth the requirements for the appointment and salary of
the managing director, wholetime director, or manager.

Definitions of key managerial personnel

Chief Executive Officer

According to Section 2(18) of the Companies Act, 2013, a chief executive officer (CEO for brevity) is an
official of a corporation who has been appointed by that company. The CEO is the highest-ranking officer of
a company and is responsible for handling the day-to-day activities of the company.

They handle capital allocation, the determination of the organisation’s strategy, and the management
and organisation of the company’s executive staff.

Chief Financial Officer

Chief Financial Officer, also known as the CFO, is the person who has been appointed as the chief financial
officer under Section 2(19) of the Companies Act, 2013. They monitor cash flow, make financial plans,
assess the firm’s strengths and weaknesses, and develop strategic recommendations.
Company secretary

According to Section 2(24), “company secretary,” also referred to as “secretary”, means a person who is
appointed by any company to carry out the duties of a company secretary under the Companies Act, 2013.
The person is a company secretary as defined by Section 2(1)(c) of the Company Secretaries Act, 1980 .

The Companies Act, 2013 also follows the definition of secretary or company secretary as laid down in the
Company Secretaries Act, 1980, which defines the term as the members of the Institute of Company
Secretaries of India (ICSI) who work as company secretaries. They perform several duties in
numerous ministerial and managerial capacities for ICSI as a member of the organisation.

Manager

According to Section 2(53), a manager is anyone who, under the supervision, control, and direction of
the Board of Directors (people who represent the interests of the shareholders of the company and look
after the management of the company), has the management of all or largely all of the company’s affairs.

This includes directors and anyone else holding the position of manager, regardless of whether they
are employed under a contract of service or any contract for service.

They are responsible for developing operational strategies, conducting performance reviews, and
overseeing all daily operations.

They work to maintain the company’s productivity, efficiency, and organisation at all times.

Managing director

According to Section 2(54), a managing director is any director who is given a substantial supervisory role
over the company’s affairs by virtue of the articles of association of the company, by a resolution adopted by
its general meeting, or by a decision made by its board of directors. This definition also includes any director
who holds the title of managing director, irrespective of their name. The managing director oversees and
coordinates all corporate operations, personnel, and endeavours to sustain and expand the business.

Whole-time director

Section 2(94) defines a whole-time director, and it includes a person who is a whole-time employee of the
company. Under the Companies Act, 2013, the full-time director works throughout their entire period of
appointment and does the works that are as decided by the company. They are not the same as the
independent director. They operate on a daily basis and have a significant stake in the company. A managing
director can also act as a whole-time director.
Roles and responsibilities

Chief Executive Officer

CEOs are one of the most significant members of any company. A CEO can act as a director, managing
director, chairman or any other employee. The Companies Act, 1956 had no provision for a CEO. This is a
concept that has been borrowed from the United States of America. The responsibilities of a CEO are the
following:

The CEO is vested with the power to take major corporate decisions on behalf of the company.

He is also in charge of the overall operation of the company and the allocation of resources to the different
departments.

They have the responsibility for setting visions, laying down values and maintaining a healthy corporate
culture in the organisation.

Since the CEO is the face of any company and represents the company in front of the larger public, the
media and society in general, they are also responsible for maintaining effective communication with all
stakeholders.

Chief Financial Officer

The chief financial officer or the CFO is engaged in daily activities of the company related to Financial
planning.

CFOs are vested with the power to formulate new financial strategies and stimulate the company’s financial
function.

Section 134 of the Companies Act, 2013 mandates the signing of financial statements by the CFO, and they
must comply with all the financial rules, look over the accounts, and journalise new ways to overcome
difficulties faced by the company.

The responsibility for the protection of the authors of the company and communicating important
suggestions to the investors and the board members about the engagement of the companies also rests with
the CFO.

CFOs ensure that the company complies with all the set tax standards and is not engaging in any economic
malpractices.

Company secretary
The company secretary is also known as a compliance officer. CS is responsible for ensuring the company’s
compliance with the statutes and regulatory authorities.

Company secretaries report directly to the board of the companies about the legal provisions and
compliances of the company that must be followed.

Company secretary also assists the board of the companies in the daily functioning of the company.

They are responsible for suggesting legal requirements to the company directors and pointing out their
duties and responsibilities.

Company secretaries also act as a mediator between the government stakeholders and the company, as one
of their most important functions is to ensure positive corporate governance practices.

Managing director, whole time director and manager

Director, whole-time director and manager all perform almost similar duties and responsibilities as they are
invested with managing the affairs of the company as laid down in the Memorandum of Association (MOA
is a legal document that contains all the information about the company regarding the vision, goals behind
the formation and its authority) and Articles of Association(AOA is a legal document that contains all the
information regarding the constituents of the company, purpose and its authorities).

They are also responsible for guiding and directing the board of the company for smooth functioning and
achievement of its objective.

They have the duty to sign documents or financial statements, any meeting proceeding, or even enter into
any contract on behalf of the company.

They overlook the companies’ operation investments or other ventures and provide guidance and supervision
access to manage problems that the company might face.

Qualifications for key managerial personnel

The Companies Act, 2013 lays down no distinct qualification for appointing any key managerial position,
but the age criteria have been settled by it. Section 196 (3)(a) of the Companies Act, 2013 lays down the
minimum age of any person being considered to be hired for a key managerial position, which is twenty
years. It has been reduced by the 2013 Act from twenty-five to twenty.

The act has also laid down the upper limit of age, which is seventy. In case a person over seventy years of
age will have to be appointed, it will be done especially by passing a resolution along with notice and an
explanation for the reason behind appointing the person.

Bars on a person becoming a KMP

The Companies Act, 2013, alongside age, also excludes people from being appointed as a KMP who is an
undischarged insolvent (a person who is not able to pay his or her debts) or is yet to be adjudicated.

It excludes people who lack the mental capacity to function as reasonable people.

It also excludes any person who has delayed or defaulted in the payment to its creditors.

Lastly, people convicted by the court of any offence have been imprisoned for a period of more than six
months.

Exclusions under Schedule V

Schedule V of the Companies Act, 2013, in addition to other exclusions, lays down certain situations where
people won’t qualify to become members of the KMP.

Schedule V has a separate list of legislation, and it prohibits the person from becoming a KMP if convicted
and imprisoned or if he was made to pay a fine ranging from 1000 to 5000 rupees.

If any person has been detained for any offence under the Conservation of Foreign Exchange and Prevention
of Smuggling Activities Act, 1974.

The KMP, employed in the same position in any other company, would get the remuneration from the
companies as per the ceiling set down by the Companies Act, 2013.

Lastly, the person must be a resident of India. The term resident of India has also been defined by the act ‘as
any person who has stayed in India continuously for more than twelve months since the date of
appointment’.

Compliance related to people belonging to the Special Economic Zone (SEZs are zones where the trade laws
are different than the rest of the countries) is subject to changes made by the Ministry of Commerce and
Industry. They can take up the position without much problem by just producing visa documents.

Qualification for Chief Executive Officer

The Companies Act, 2013 does not lay down any strict guidelines for becoming a CEO. Neither
qualification, service term, experience, or terms and conditions exist. So, it is totally on the management of
members of the company as to what their qualifications, roles or functions must be. India and many other
countries practise this system where they don’t have any defined qualification or role. The requirements are
subject to the provisions of the Articles of association of any company.

Qualification for company secretary

Unlike the CEO, the company secretary has to qualify the criteria as laid down by Section 2(45) of the Act
to be appointed as a company secretary, which is:

The person must be a member of the Institute of Company Secretaries of India, incorporated by the
Companies Act, 1956 and also licensed. Any person who is also a member of the Institute of Chartered
Secretaries of London is also eligible for the same. This qualification stands for the company having a paid-
up share capital of more than rupees 50 lakhs or more.

In the case of any other type of company, the person qualifying to be a company secretary must have more
than one of the following qualifications:

 The person must have a law degree from any university.

 They must be a member of the Institute of Chartered Accountants.
 They must have a membership of the Cost Accountants of India.
 A postgraduate degree or diploma in management from any college or the Indian Institute of
Management.
 A postgraduate degree from any university in Commerce or
 A diploma in company law from an Indian law institute.
 Miscellaneous qualifications require the following:

A keen knowledge of Company Law, awareness about the meeting provisions, mercantile laws like the
Contract Act, 1872, Sale of Goods Act, 1930, Negotiable Instruments Act, 1881 and so on.

The person must also know economics and the existing market situations and understand the social and
political conditions.

Qualification for Chief Finance Officer

The Companies Act, 2013 does not lay down any definite qualifications, experiences or terms and conditions
for appointing a CFO. It is also silent on naming the roles or functions. It depends upon the management of
the company as to what qualifications are required. Still, the CFOs generally possess an MBA (Masters of
Business Administration) or Master’s degree in Accounting.

Qualification for Director

Similar to the provision for a CEO or CFO, the Companies Act, 2013 does not provide any educational or
professional qualification for a director. Unless otherwise stated by the company.

Section 149(1) of the Companies Act, 2013 provides a provision for appointing at least three directors if it is
a public company and two directors if it is a private company. Only one director is necessary in the case of
One Person Company (OPC). In any case, there can be a maximum of fifteen directors, and if more have to
be appointed, it would be done by passing a special resolution at the company’s general meeting. However, a
few conditions must be complied with for the appointment of a director:

 Only a natural person can become a director.

 The person is required to have a Director ID Number (DIN).
 The person also must possess a Digital Signature Certificate (DSC) giving their consent for the position.

Under Section 164(1) of the Companies Act, 2013, the person will be disqualified and not qualify for the
position of a director under these conditions:

 If the person is of unsound mind and has been declared so by the court.
 If the person is an undischarged insolvent
 If the person has applied and been adjudicated as an insolvent
 If the person has been accused of an offence which has the punishment of imprisonment involving a
period between six months to five years or convicted and imprisoned for an offence punishment for
which is seven years or more.
 If the person has been non-adherent to the call requests in response to the shares of the company.
 If the court has ordered the person stopping him from being appointed as a company director.

DIRECTOR IDENTIFICATION NUMBER (DIN)

Procedure for application for allotment of DIN - Section 153 & Rule 9

(1) Every individual, who is to be appointed as director of a company shall make an application
electronically in Form DIR-3 (Application for allotment of Director Identification Number) to the
Central Government for the allotment of a Director Identification Number (DIN).
 8-digit unique number allotted by Ministry of Corporate Affairs

(2) The Central Government shall provide an electronic system to facilitate submission of application for the
allotment of DIN through the portal on the website of the Ministry of Corporate Affairs.

(3) (a) The applicant shall download Form DIR-3 from the portal, fill in the required particulars and
attaching photograph; proof of identity; proof of residence; and verification by the applicant in Form DIR-4,
specimen signature duly verified and sign the form digitally.

(b) Form DIR-3 shall be signed and submitted electronically by the applicant using his or her own Digital
Signature Certificate and shall be verified digitally by -:

(i) a chartered accountant or a company secretary in practice or a cost accountant; or

(ii) a company secretary in full time employment of 16 Appointment and Qualifications of Directors the
company or by the managing director or director of the company in which the applicant is to be appointed a
director;

Procedure for Allotment of DIN- Section 154 and Rule 10

The Central Government shall, within one month from the receipt of the application under section 153, allot
a Director Identification Number to an applicant in such manner as mentioned below:

(1) On the submission of the Form DIR-3 on the portal and payment of the requisite amount of fees through
online mode the provisional DIN shall be generated by the system automatically which shall not be utilized
till the DIN is confirmed by the Central Government.

(2) After generation of the provisional DIN, the Central Government shall process the application. It may
approve or reject the application and communicate the same to the applicant within a period of one month
from the receipt of application. The such communication may be sent by post or electronically or in any
other mode.

(3) If the Central Government, on examination, finds such application to be defective or incomplete in any
respect, it shall give intimation of such defect or incompleteness, by placing it on the website and by email
to the applicant who has filed such application, directing the applicant to rectify such defects or
incompleteness by resubmitting the application within a period of fifteen days of such placing on the website
and email:

Provided that Central Government shall-

(a) reject the application and direct the applicant to file fresh application with complete and correct
information, where the defect has been rectified partially or the information given is still found to be
defective;

(b) treat and label such application as invalid in the electronic record in case the defects are not removed
within the given time; and

(c) Inform the applicant either by way of letter by post or electronically or in any other mode.

(4) In case of rejection or invalidation of application, the provisional DIN so allotted by the system shall get
lapsed Appointment and Qualifications of Directors 17 automatically and the fee so paid with the application
shall neither be refunded nor adjusted with any other application.

(5) All Director Identification Numbers allotted to individual(s) by the Central Government before the
commencement of these rules shall be deemed to have been allotted to them under these rules.
(6) The Director Identification Number so allotted under these rules is valid for the life-time of the applicant
and shall not be allotted to any other person

APPOINTMENT OF DIRECTORS – Section 152

First Director

The first directors of most of the companies are named in their articles. If they are not so named in the
articles of a company, then subscribers to the memorandum who are individuals shall be deemed to be the
first directors of the company until the directors are duly appointed.

In the case of a One Person Company, an individual being a member shall be deemed to be its first director
until the director(s) are duly appointed by the member in accordance with the provisions of Section 152.

General provisions relating to appointment of directors

1. Except as provided in the Act, every director shall be appointed by the company in general meeting.

2. Director Identification Number is compulsory for appointment of director of a company.

3. Every person proposed to be appointed as a director shall furnish his Director Identification Number and a
declaration that he is not disqualified to become a director under the Act.

4. A person appointed as a director shall on or before the appointment give his consent to hold the office of
director in physical form DIR-2 i.e. Consent to act as a director of a company. Company shall file Form
DIR-12 (particulars of appointment of directors and KMP along with the form DIR-2 as an attachment
within 30 days of the appointment of a director, necessary fee. {Rule8}

5. Articles of the Company may provide the provisions relating to retirement of the all directors.

If there is no provision in the article, then not less than two-thirds of the total number of directors of a public
company shall be persons whose period of office is liable to determination by retirement by rotation and
eligible to be reappointed at annual general meeting.

Further independent directors shall not be included for the computation of total number of directors.

Section 152(1) of the Act provides for the appointment of the first directors of the companies. The first
directors hold their offices from the date of formation of the companies.

As per Section 152(1), the Articles of Association of Companies have provisions through which the
companies appoint the first directors. Where the articles do not provide such provisions, the companies
consider the following persons as first directors:

1. One-Person Companies: Individuals being members.

 2. In other circumstances: Individuals who subscribe to the Memorandum of Associations of
companies.

The first directors hold their offices until the members appoint directors as per the provisions of Section 152.

Where, for any reason, for example, death, the first directors do not assume their offices, the subscribers of
the Memorandum (who will then be only members) have to convene meetings for the appointment of
directors.

Appointment of directors at general meetings

According to Section 152(2), the companies appoint directors in general meetings except where the Act
provides otherwise.

However, in the case of public companies, shareholders appoint two-thirds of the total number of directors.
They appoint the remaining one-third of the members as per the Articles of Association in general meetings.

In the case of Swapan Dasgupta v. Navin Chand Suchanti (1988), the Calcutta High Court held that the
Articles of Association of private companies prescribe methods to appoint directors. If the articles do not
specify such methods, the shareholders appoint directors in general meetings.

Applicable Rules

As far as the appointment of directors is concerned, these are the rules that the companies have to follow:

1. Persons who want to be directors of any company must have Director Identification Numbers
(DINs). Otherwise, they are not eligible to be directors [Section 152(3)].

2. Companies must follow the Companies (Appointment and Qualification of Directors) Rules, 2014.
The Rules of 2014 also provide the procedures for the allotment and revocation of DINs.

3. All the proposed persons who want to be directors must furnish their DINs and declarations that they
are eligible to become directors under the Act. They furnish such information in general meetings.
[Section 152(4)]

4. The persons appointed as directors must give consent to hold offices as directors. Otherwise, they are
not entitled to act as directors. Moreover, they must file such consent before the Registrars within 30
days of their appointment. [Section 152(5) of the Companies Act, 2013 & Rule 8 of the Companies
(Appointment and Qualification of Directors) Rules, 2014]

5. If the companies hold general meetings for the appointment of independent directors, there would be
explanatory statements, in addition to the notices of meetings, that the persons fulfill all the
conditions given in the Act for such appointment. [Proviso to Section 152(5)]

6. As per Rule 3 of the Companies (Appointment and Qualification of Directors) Rules, 2014, all the
listed companies and public companies must appoint at least one woman director.
 7. Rule 9 deals with applications for allotment of DINs before appointment in the existing companies.

8. Rule 17 provides that all companies have to keep registers of their directors. These registers must
have particulars such as DINs, full names of directors, their parents names, their spouses’ names (if
married), etc.

Retirement of directors

According to Section 152(6)(a), the Articles of the Association of Companies prescribe the retirement of all
directors at the Annual General Meetings (AGMs).

Otherwise, the directors of public companies retire through rotation. At least two-thirds of the total directors
(i.e., rotational directors) are liable for retirement. They may be eligible to be directors in general meetings.

The remaining directors are appointed as per the Articles of Association in general meetings [Section 152(6)
(b)].

One-third of the rotational directors retire annually in Annual General Meetings (AGMs). If their number is
neither three nor multiple of three, the number nearest to one-third, retire from office. [Section 152(6)(c)]

At the annual general meeting of a public company one-third of such of the directors for the time being as
are liable to retire by rotation, or if their number is neither three nor a multiple of three, then, the number
nearest to one-third, shall retire from office.

The directors to retire by rotation at every annual general meeting shall be those who have been longest in
office since their last appointment.

At the annual general meeting at which a director retires as aforesaid, the company may fill up the vacancy
by appointing the retiring director or some other person thereto.

If the vacancy of the retiring director is not so filled-up and the meeting has not expressly resolved not to fill
the vacancy, the meeting shall stand adjourned till the same day in the next week, at the same time and
place, or if that day is a national holiday, till the next succeeding day which is not a holiday, at the same time
and place.

If at the adjourned meeting also, the vacancy of the retiring director is not filled up and that meeting also has
not expressly resolved not to fill the vacancy, the retiring director shall be deemed to have been re-appointed
at the adjourned meeting, unless—

(i) a resolution for the re-appointment of such director has been put to the meeting and lost;
(ii) the retiring director has expressed his unwillingness to be so re-appointed;
(iii) he is not qualified or is disqualified for appointment;
 (iv) a resolution, whether special or ordinary, is required for his appointment or re-appointment by
virtue of any provisions of this Act; or

(iv) section 162 i.e. appointment of directors to be voted individually is applicable to the case.
Punishment - Section 159 If any individual or director of a company, contravenes any of the
provisions of section 152/155/156 such individual or director of the company shall be
punishable with imprisonment for a term which may extend to 6 months or with fine which
may extend to Rs. 50,000 and where the contravention is a continuing one, with a further fine
which may extend to Rs. 500 for every day after the first day during which the contravention
continues.

Retirement by Rotation [Section 152(6)]:

Articles of the Company may provide the provisions relating to retirement of the all directors.

If there is no provision in the article, then not less than two-thirds of the total number of directors of a public
company shall be persons whose period of office is liable to determination by retirement by rotation and
eligible to be reappointed at annual general meeting.

‘Total number of directors’ shall not include independent directors appointed on the Board of a company.

Nominee directors appointed by a financial institution or by Central Government under section 408 of the
Companies Act, 2013 shall not be included in the ‘total number of directors’ for the purpose of section
152(6) of the Act.

At the annual general meeting of a public company one-third of such of the directors for the time being as
are liable to retire by rotation, or if their number is neither three nor a multiple of three, then, the number
nearest to one-third, shall retire from office.

The directors to retire by rotation at every annual general meeting shall be those who have been longest in
office since their last appointment.

As between the persons who became directors on the same day, the directors who shall retire may be
determined by agreement among themselves. In the absence of any such agreement the persons liable to
retire shall be chosen by lot.

Government companies have been exempted vide notification dated June 5, 2015 from the applicability of
this section. Accordingly, directors in Government Companies are not liable to retire by rotation.

(a) Vacancy in case of retiring director [Section 152 (7)] At the annual general meeting at which a director
retires as aforesaid, the company may fill up the vacancy by appointing the retiring director or some other
person thereto. If the vacancy of the retiring director is not so filled-up and the meeting has not expressly
resolved not to fill the vacancy, the meeting shall stand adjourned till the same day in the next week, at the
same time and place, or if that day is a national holiday, till the next succeeding day which is not a holiday,
at the same time and place.

(b) If at the adjourned meeting also, the vacancy of the retiring director is not filled up and that meeting also
has not expressly resolved not to fill the vacancy, the retiring director shall be deemed to have been
reappointed at the adjourned meeting, unless—

(i) a resolution for the re-appointment of such director has been put to the meeting and lost;

(ii) the retiring director has expressed his unwillingness to be so re-appointed;

(iii) he is not qualified or is disqualified for appointment;

(iv) a resolution, whether special or ordinary, is required for his appointment or re-appointment by virtue of
any provisions of this Act; or

v) section 162 i.e. appointment of directors to be voted individually is applicable to the case.

Punishment [Section 159]

If any individual or director of a company, contravenes any of the provisions of section 152, such individual
or director of the company shall be punishable with imprisonment for a term which may extend to 6 months
or with fine which may extend to fifty thousand rupees and where the contravention is a continuing one,
with a further fine which may extend to five hundred rupees for every day after the first day during which
the contravention continues.

Appointment of Managing Director, Whole Time Director or Manager (Section 196)

Section 196 of the Act contain the provisions for appointment of Managing Director, Whole Time Director
or Manager. According to this section:

(a) No company shall appoint or employ a managing director and a manager at the same time. [Section
196 (1)].

(b) No company shall appoint or re-appoint any person as its managing director, whole time director or
manager for a term exceeding five years at a time; Provided that no re-appointment shall be made
earlier than one year before the expiry of his term.

(c) No company shall appoint or continue the employment of any person as managing director, wholetime

director or manager who:

(1) is below the age of 21 years or has attained the age of 70 years. Provided that a person who has
attained the age of seventy years may be appointed to such office by the passing of a special resolution in
which case the explanatory statement annexed to the notice for such motion shall indicate the justification
for appointing such person.

(2) is an undischarged insolvent or has at any time been adjudged as an insolvent, or

(3) has at any time suspended payment to his creditors or makes, or has at any time made, a composition
with them, or

(4) has at any time been convicted by a court of an offence and sentenced for a period of more than six
months.

(d) Schedule V to the Companies Act, 2013, prescribes additional conditions for managing or whole-time
director or a manager to be eligible for appointment. The schedule stipulates that :

(1) he had not been sentenced to imprisonment for any period, or to a fine exceeding one thousand
rupees, for the conviction of an offence under 16 Acts as specified under Schedule V.

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

Provided that where the Central Government has given its approval to the appointment of a person convicted
or detained under para (1) or para (2), as the case may be, no further approval of the Central Government
shall be necessary for the subsequent appointment of that person if he had not been so convicted or detained
subsequent to such approval.

(3) where he is a managerial person in more than one company, he draws remuneration from one or more
companies subject to the ceiling provided in section V of Part II.

(4) he is resident of India.

In this context, ‘resident in India’ includes a person who has been staying in India for a continuous period of
not less than twelve months immediately preceding the date of his appointment as a managerial person and
who has come to stay in India,

a) for taking up employment in India; or

b) for carrying on a business or vacation in India.

Procedure of appointment [section 196 (4)]

(a) Subject to the provisions of section 197 and Schedule V, a managing director, whole-time director or
manager shall be appointed, and the terms and conditions of such appointment and remuneration payable be
approved by the Board of Directors at a meeting.

(b) The terms and conditions and remuneration approved by Board of Directors as above shall be subject to
the approval of shareholders by a resolution at the next general meeting of the company.

(c) In case such appointment is at variance to the conditions specified in the Schedule V of the Companies
Act, 2013, the appointment shall be approved by the Central Government.

(d) The notice convening Board or general meeting for considering such appointment shall include the terms
and conditions of such appointment, remuneration payable and such other matters including interest, of a
director or directors in such appointments, if any.

(e) A return in the prescribed form (Form No. MR-1) along with the prescribed fee shall be filed with the
Registrar within sixty days of such appointment.

Subject to the provisions of this Act, where an appointment of a managing director, whole-time director or
manager is not approved by the company at a general meeting, any act done by him before such approval
shall deemed to be valid [Section 196 (5)].

Disqualifications for appointment of director (Section 164)

According to this section:

(1) A person cannot be appointed as director of a company in any of the following cases:

a) he is of unsound mind and stands so declared by a competent court.

b) he is an undischarged insolvent.

c) he has applied to be adjudicated as an insolvent and his application is pending

d) he has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and
sentenced in respect thereof to imprisonment for not less than 6 months and a period of 5 years has not
elapsed from the date of expiry of the sentence.

However, if a person has been convicted of any offence and sentenced in respect thereof to imprisonment
for a period of 7 years or more, he shall not be eligible to be appointed as a director in any company.

Word “or otherwise” in clause (d) above, means any offence in respect of which he has been convicted by s
Court under this Act or the Companies Act, 1956. Rule 2(1)(s) of the Companies (Specification of
definitions details) Rules, 2014.
e) an order disqualifying him for appointment as a director has been passed by a court or Tribunal and
the order is in force.

f) he has not paid any calls in respect of any shares of the company held by him, whether alone or jointly
with others, and 6 months have elapsed from the last day fixed for the payment of the call.

g) he has been convicted of the offence of dealing with related party transactions under section 188 at
any time during the last preceding 5 years, or (According to Section 188, companies must seek approval from
their board of directors for all transactions that exceed a certain limit. This limit is set at either 10% of the
company's turnover or Rs. 100 Crore, whichever is lower.)

h) he has not complied with sub-section (3) of section 152 which requires a director to have a Director
Identification Number under section 154.

i) he has not complied with the provisions of 165(1) relating to holding of maximum number of
directorship. In such case the penalty of ` 5,000 for each day of continuing failure. It may be noted that
no person can hold office of director including alternate director is more than twenty including maximum
ten in public company.

(2) No person who is or has been a director of a company which:

a) has not filed financial statements or annual returns for any continuous period of 3 financial years,
or

b) has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on
the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem
continues for 1 year or more, however, such director shall not incur the disqualification for a period of 6
months from the date of appointment. shall be eligible to be re-appointed as a director of that company
or appointed in other company for period of 5 years from the date on which the said company fails to
do so. [Section 164 (2)]

(3) Non applicability of section 164(2):

Section 164(2) is not applicable to Government Company.

(4) A private company may by its articles provide for any disqualifications for appointment as a
director in addition to those specified in sub-sections (1) and (2) of section 164 as stated above [i.e., point
(1) and (2) above].

(5) However, the disqualifications referred to in clauses (d), (e) and (g) of sub-section (1) [given in point
(1) above] shall not take effect:

a) for 30 days from the date of conviction or order of disqualification.

b) where an appeal or petition is preferred within 30 days as aforesaid against the conviction resulting
in sentence or order, until expiry of 7 days from the date on which such appeal or petition is disposed
off, or

c) where any further appeal or petition is preferred against order or sentence within 7 days, until such
further appeal or petition is disposed off.

1.1.3.5 Vacation of office of director (Section 167)

According to this section:

(a) The office of a director shall become vacant in case [Section 167(1)]:

(1) he incurs any of the disqualifications specified in section 164.

(2) he absents himself from all the meetings of the Board of Directors held during a period of
12months with or without seeking leave of absence of the Board.

(3) he acts in contravention of the provisions of section 184 relating to entering into contracts or
arrangements in which he is directly or indirectly interested.

(4) he fails to disclose his interest in any contract or arrangement in which he is directly or indirectly
interested, in contravention of the provisions of section 184.

(5) he becomes disqualified by an order of a court or the Tribunal.

(6) he is convicted by a court of any offence, whether involving moral turpitude or otherwise and sentenced
in respect thereof to imprisonment for not less than 6 months.

It is further provided that the office shall be vacated by the director even if he has filed an appeal
against the order of such court.

(7) he is removed in pursuance of the provisions of this Act.

(8) he, having been appointed a director by virtue of his holding any office or other employment in the
holding, subsidiary or associate company, ceases to hold such office or other employment in that
company.

(9) In case a director incurs any of disqualification u/s 164(2) due to default in planning of financial
statements or annual return or repayment of deposits or payment of interest or redemption of
debentures or repayment of interest on dividend then he shall vacate office in all companies other than the
company which has defaulted.

However, if appeal is preferred by such director, the vacation shall not take effect unless such appeal is
disposed off.
(b) If a person, functions as a director even when he knows that the office of director held by him has
become vacant on account of any of the disqualifications specified in sub-section (1), he shall be
punishable with fine which shall not be less than ` 1,00,000 but which may extend to `5,00,000. [Section
167 (2)].

(c) Where all the directors of a company vacate their offices under any of the disqualifications specified in
sub-section (1), the promoter or, in his absence, the Central Government shall appoint the required
number of directors who shall hold office till the directors are appointed by the company in the
general meeting. [Section 167 (3)].

(d) A private company may, by its articles, provide any other ground for the vacation of the office of a
director in addition to those specified in sub-section (1). [Section 167 (4)].

Resignation of Director (Section 168)

Provisions regarding resignation of directors have been provided for the first time under the Companies Act,
2013. According to this section:

(a) a director may resign from his office by giving a notice in writing to the company.

(b) The Board shall on receipt of such notice take note of the same.

(c) The company shall within 30 days from the date of receipt of notice of resignation from a director,
intimate the Registrar in Form DIR-12 and post the information on its website, if any.

(d) The company shall also place the fact of such resignation in the report of directors laid in the
immediately following general meeting by the company.

(e) Such director shall also forward a copy of his resignation along with detailed reasons for the
resignation to the Registrar within 30days from the date of resignation in Form DIR- 11 along with the
prescribed fee.

Removal of Directors (Section 169)

Section 169 of the Companies Act, 2013 came into force partially 4 from 1st April, 2014 which provides the
provisions for removal of directors. According to this section:

(a) A company may, by ordinary resolution, remove a director other than a director appointed by the
Tribunal under section 242 of the Act, before the expiry of the period of his office after giving him a
reasonable opportunity of being heard. [Section 169(1)].

Independent director appointed for the second term can be removed by the special resolution.
(b) It is further provided that the directors appointed on the principle of proportional representation under
section 163 cannot be removed by an ordinary resolution as aforesaid. {Proviso to section 169(1)].

(c) A special notice shall be required of any resolution, to remove a director under section 169 or to
appoint somebody in place of a director so removed, at the meeting at which he is removed. [Section 169
(2)].

(d) On receipt of the notice of a resolution to remove a director under section 169, the company shall
forthwith send a copy thereof to the director concerned, and the director, whether or not he is a
member of the company, shall be entitled to be heard on the resolution at the meeting. [Section
169(3)].

(e) The vacancy resulting from the aforesaid removal if he had been appointed by the company in general
meeting or by the Board, may be filled in by the appointment of another director at the same meeting at
which the director is removed, provided special notice of the proposed appointment has been given
under section 169(2). [Section 169(5)].

(f) A director so appointed shall hold office for the remaining period for which the director who has
been removed would have held office if he had not been removed. [Section 169(6)].

(g) If the vacancy is not filled in the same meeting as above, then it may be filled as a casual vacancy in
accordance with the provisions of this Act provided that the director who was so removed from office
shall not be reappointed as a director. [Section 169(7)].

(h) Nothing in this section shall be taken to deprive a person removed under this section of his rights to
compensation or damages payable to him in respect of the premature termination of the directorship,
or terms of his appointment as director or of any appointment terminating with that as a director.
[Section 169(8)(a)].

(i) Nothing in this section shall be derogating from any power to remove a director under any other
provisions of this Act. [Section 169(8)(b)]

Removal by Company Law Tribunal [S. 242(2)(/i)]

When, on an application to the Tribunal for prevention of oppression or mismanagement, it finds that a relief
ought to be granted, it may terminate or set aside any agreement of the company with a director or
managing director or other managerial personnel.

When the appointment of a director is so terminated he cannot, except with the leave of the Tribunal, serve
any company in a managerial capacity for a period of five years."^
It is necessary that the Central Government should be notified of the intention to apply for such leave.
This is to enable the Tribunal to hear the Central Government's point of view on the matter of leave.

Neither can he sue the company for damages or compensation for loss of office."

Maximum remuneration limit

Clause 78 of Section 2 of the Companies Act, 2013 defines “Remuneration” which means any money
or its equivalent given or passed to any person for services rendered by him and includes perquisites as
defined under the Income-tax Act, 1961.

Determination of Remuneration can be done either by the articles or by a resolution or if the articles so
require, by a Special Resolution passed by the company in general meeting.

The remuneration so determined to be payable is required to be inclusive of the remuneration payable to him
for the services rendered by any such director in other capacity.

However, any remuneration for services rendered by any such director in other capacity shall not be so
included if:- (a) the services rendered are of a professional nature; and (b) the director possesses the
requisite qualification for the practice of the profession in the opinion of the Nomination and
Remuneration Committee, if the company is covered under sub-section (1) of section 178, else in the
opinion of the Board of Directors.

The first clause of the Section lays down the maximum remuneration payable by a public company.

Section 197(1) states that for a financial year, the total managerial remuneration that is paid by a
public company to the managerial personnel and other directors, including the managing director,
whole-time director, and its director, shall not be more than 11 percent of the net profits of the
company.

This net profit is calculated as prescribed under Section 198 of the Act of 2013.

Also, this remuneration is not deducted from the gross profits.

The proviso clause of Section 197(1) states that a company may exceed the limit of 11 percent and authorise
the payment of remuneration exceeding 11 percent in a general meeting. However, it is important to note
that the company must do so in compliance with Schedule V.

The proviso further states that the remuneration paid to any one managing director, whole-time managing
director, or manager shall not exceed 5 % of the net profits of the company.

Also, if there is more than one such director, then the exceeding limit for remuneration to all such
directors and managers must not exceed 10% when taken together.
In the case of remuneration that is paid to directors who are neither the managing directors nor the
whole-time directors, the remuneration shall not exceed 1% of the net profits of the company, if there
is a managing or whole-time director or manager.

In any other case, it shall not exceed 3 percent.

In cases where there is any default in payment of dues by the company to any bank or other financial
institution, prior approval is necessary before obtaining such approval for payment of remuneration
in the general meeting.

Remuneration exclusive of any fees

Section 197(2) provides that the above-mentioned percentage limits are exclusive of any fees that are
to be paid under sub-section (5).

Managerial Remuneration when there are no profits or profits are inadequate [Section 197(3) & (11)]
(a) If in any financial year, a company has no profits or its profits are inadequate, the company shall not
pay by way of remuneration any sum exclusive of sitting fees to its directors, including any
managing or whole- time director or manager except in accordance with the provisions of Schedule
V.
(b) If the company is not able to comply with such provisions of Schedule V in the above case, then
previous approval of the Central Government shall be taken.
(c) In cases where Schedule V is applicable on grounds of no profits or inadequate profits, any
provision relating to the remuneration of any director which purports to increase or has the effect of
increasing the amount thereof, whether the provision be contained in the company’s memorandum
or articles, or in an agreement entered into by it, or in any resolution passed by the company in
general meeting or its Board, shall not have any effect unless such increase is in accordance with
the conditions specified in that Schedule and if such conditions are not being complied, the approval
of the Central Government had been obtained.

Clause (3) of Section 197 provides for the course of action that is to be taken in the event a company suffers
losses, makes no profit, or makes an inadequate profit. It states that in the above cases of loss or no profits,
the company shall not pay to its directors, including any managing or whole-time director or manager or any
other non-executive director, any remuneration that is exclusive of any fees that are payable to the director
under Section 197(5), and this shall be done in compliance with the provisions of Schedule V.

Remuneration payable by companies having no profit or inadequate profit without Central

Government approval (Schedule V- Part II -Section II)
Where in any financial year during the currency of tenure of a managerial person, a company has no profits
or its profits are inadequate, it may, without Central Government approval, pay remuneration to the
managerial person not exceeding, the limits under (A) and (B) given below:-

(A):

(1) (2)

Where the effective capital is Limit of yearly remuneration payable shall not exceed

(i) Negative or less than ` 5 crore ` 60 Lakhs

(ii) ` 5 crore and above but less than ` 100 crore ` 84 Lakhs

(iii) 100 crore and above but less than `50 crore ` 120 Lakhs

(iv) ` 250 crore and above 120 lakhs plus 0.01% of the effective capital in excess 250 cr

Provided that the above limits shall be doubled if the resolution passed by the shareholders is a special
resolution.

Remuneration payable by companies having no profit or inadequate profit without Central

Government approval in certain special circumstances: (Schedule V- Part II -Section III)

In the following circumstances, a company may, without the Central Government approval, pay
remuneration to a managerial person in excess of the amounts provided in Section II above:—

(a) where the remuneration in excess of the limits specified in Section I or II is paid by any other company
and that other company is either a foreign company or has got the approval of its shareholders in general
meeting to make such payment, and treats this amount as managerial remuneration for the purpose of section
197 and the total managerial remuneration payable by such other company to its managerial persons
including such amount or amounts is within permissible limits under section 197.

(b) where the company—

(i) is a newly incorporated company, for a period of seven years from the date of its incorporation, or

(ii) is a sick company, for whom a scheme of revival or rehabilitation has been ordered by the Board for
Industrial and Financial Reconstruction for a period of five years from the date of sanction of scheme of
revival, or

(iii) is a company in relation to which a resolution plan has been approved by the National Company Law
Tribunal under the Insolvency and Bankruptcy Code, 2016 for a period of five years from the date of such
approval, it may pay remuneration up to two times the amount permissible under section II."

(c) where remuneration of a managerial person exceeds the limits in Section II but the remuneration has
been fixed by the Board for Industrial and Financial Reconstruction or the National Company Law Tribunal:
Provided that the limits under this Section shall be applicable subject to meeting all the conditions specified
under Section II and the following additional conditions:—

(i) except as provided in para (a) of this Section, the managerial person is not receiving remuneration from
any other company;

(ii) the auditor or Company Secretary of the company or where the company has not appointed a Secretary, a
Secretary in whole-time practice, certifies that all secured creditors and term lenders have stated in writing
that they have no objection for the appointment of the managerial person as well as the quantum of
remuneration and such certificate is filed along with the return as prescribed under sub-section (4) of section
196.

(iii) the auditor or Company Secretary or where the company has not appointed a secretary, a secretary in
whole-time practice certifies that there is no default on payments to any creditors, and all dues to deposit
holders are being settled on time.

(d) a company in a Special Economic Zone as notified by Department of Commerce from time to time
which has not raised any money by public issue of shares or debentures in India, and has not made any
default in India in repayment of any of its debts (including public deposits) or debentures or interest payable
thereon for a continuous period of thirty days in any financial year, may pay remuneration up to `
2,40,00,000 per annum.

Payment to directors in any other capacity

Section 197(4) states that the remuneration that is to be paid to the directors of a company, shall be
computed in a manner that complies with Section 197. Also, this should be done either by the company’s
articles of association, by a resolution, or by a special resolution if there exists a provision requiring
the same in the AOA of the company. Also, the remuneration given to the director determined through the
aforesaid procedure is inclusive of any other services rendered by him in any other capacity as well.

Remuneration paid for the purposes mentioned in the above paragraph, i.e., remuneration paid in any other
capacity, shall not include the services rendered that are of a professional nature. Also, the remuneration for
the work done in any other capacity shall not be included if the company is covered under Section 178(1) as
per the opinion of the Nomination and Remuneration Committee or if the board of directors in other classes
has the essential qualification for the practice of the profession.

Fees for attending meetings

Section 197(5) states that a director can also be paid remuneration by way of fees for attending board or
committee meetings, based on the decisions taken by the board. The proviso of the sub-section states that the
aforesaid fees shall not exceed the prescribed amount. It also states that the fees for different classes of
companies and fees for independent directors may be as prescribed.

Procedure for payment of remuneration

Section 197(6) of the Act of 2013 provides for the way by which a director or a manager may be paid
remuneration. The director or manager can either be paid monthly or at a specified percentage of the net
profits of the company, or a combination of both, as the case may be.

Remuneration Drawn in Excess of Prescribed Limit

If any director draws or receives, directly or indirectly, by way of remuneration any such sums in excess of
the limit prescribed or without the prior sanction of the Central Government, where it is required, he shall
refund such sums to the company and until such sum is refunded, hold it in trust for the company. [Section
197(9)]

The company shall not waive the recovery of any sum refundable to it under sub-section 9 mentioned above,
unless permitted by the Central Government. [Section 197 (10)]

Disclosure of Remuneration in Board Report

Section 197(14) read with Rule 4 of Companies (Appointment and Remuneration of Managerial Personnel)
Rules 2014 provides that every listed company shall disclose in the Board’s report, the ratio of the
remuneration of each director to the median employee’s remuneration and such other details as may be
prescribed.

Penalty for non-compliance If any person makes any default in complying with the provisions of
section 197, he shall be liable to a penalty of one lakh rupees and if any default has been made by a
company, the company shall be liable to a penalty of five lakh rupees.

Mukut Pathak v. Union of India. 2019

The Government of India ("Government") has initiated a slew of measures through which it wants to restrict
the menace of shell companies and non-filing of financial returns of companies. In this regard, the
Government through ROC applying Section 164(2) of the Companies Act, 2013 ("Companies Act")
started disqualifying the Directors who had not filed the financial statements or annual returns for a
continuous period of three (3) financial years of their respective companies[i].
Recently, the aforesaid provision was challenged by numerous disqualified Directors of different companies
before the Hon'ble Delhi High Court ("Court").

The Court tagged all the similar matter and vide a common judgment pronounced in the case of Mukut
Pathak & Ors, vs. Union of India & Anr[ii] decided the issue in question. Apart from other issues, the
main aspect being challenged by the Petitioners was whether, in computing the consecutive three-year
period for purposes of section 164(2) of the Companies Act, the financial year 2013-14 ending on 31st
March, 2014 can be taken into account when the provision itself came into effect only on 1st April, 2014.
The three-year period in question was 2013-14, 2014-15 and 2015-16.

Whether the disqualification of directors was done by retrospective application of the provision?

The main contentious issue raised by the Petitioners was whether the directors can be disqualified prior
to the date the statutory provision coming into force by retrospectively applying the provision.

The Court came to the conclusion that section 164(2) of the Companies Act was prospective in nature.

The Court further went on to review the question as to the whether financial year 2013-14 should be
consider for disqualifying the Directors of defaulting companies as such that date/period of default was prior
to date of enforceability of the provision itself.

Court's observation

The Court rejected the claim of the Petitioners that the financial year could not be considered for the
purpose of disqualifying directors u/S. 164(2) of the Companies Act. The Court stated that companies by
law were mandatorily required to file financial returns even prior to the provision coming into effect.
Therefore, in the event of existing requirement to file financial returns and thus, non-compliance of the same
would lead to disqualification of director as envisaged under section 164 of the Companies Act.

The Court stated as follows -

"46. The penal consequences of not filing returns for three consecutive financial years would be attracted on
section 164 of the Act coming into force. Section 164 of the Act came into force on 01.04.2014 and thus, the
failure of a company/its directors to file annual returns (for three financial years) thereafter would result in
the directors incurring the disqualification as specified under Section 164(2) of the Act. It is of little
consequence that such defaults relate to filing annual returns that pertain to a period prior to 01.04.2014.

Undisputedly, the concerned companies (and vicariously the petitioners) were obliged to file the financial
statements for the financial year 2013-14 after 01.04.2014. As noticed above, the failure to do so would be in
violation of Section 137(2) of the Act and this Court finds no reason why such defaults should not be
considered for the purposes of Section 164 of the Act.

Merely, because the returns to be filed pertain to a period prior to 01.04.2014, is of no relevance
considering that the default in doing so has occurred after the provisions of section 164 of the act had
become applicable.

........

52. Concededly, Section 164(2) of the Act operates prospectively. However, such prospective operation
would entail taking into account failure to file the financial statements pertaining to the financial year
ending 31.03.2014 on or before 30.10.2014. This Court is of the view that the taking into account such
default does not amount to a retrospective application of Section 164 of the Act....

As per the Court, Section 164 (2) of the Companies Act sets out the conditions, on which directors of the
defaulting company could be disqualified from being appointed or reappointed as a director in other
company for a period of five years. The court clarified that disqualification of the Directors under Section
164(2) of the Companies Act occurred post May 7, 2018. Therefore, as per section 164(2) and 167(1) (a) of
the Companies Act a Director is terminated from his office in all companies other than the defaulting
company.

Conclusion

Evidently, the Court in this Case has tried to address the endeavour of the Government in eradicating shell
companies. One hopes that the ultimately, the issues relating to disqualification of Directors is settled once
and for all by this judgment in the Case. Of course, as a most likely step, the ball will fall into the Supreme
Court when the Petitioners appeal against this judgment.

Sandeep Agarwal v. Union of India, 2020

In a recent order by the Delhi High Court in the matter of Sandeep Agarwal v. Union of India, the court
restored the Director Identification Numbers (“DIN”) and Digital Signature Certificates (“DSCs”) of the
petitioners allowing them to discharge their duties as directors in the active companies and avail the
Companies Fresh Start Scheme (“CFSS”).

Brief facts:

The petition was filed by Mr. Sandeep Agarwal and Ms. Kokila Agarwal, both of whom were directors in
two companies namely Koksun Papers Private Limited (“Koksun Papers”) and Kushal Power Projects
Private Limited (“Kushal Power”).

The name of Kushal Power was struck off from the Registrar of Companies (“RoC”) on June 30, 2017,
due to non-filing of financial statements and annual returns.

The petitioners, being directors of Kushal Power were also disqualified with effect from November 1, 2016
for a period of five years till October 31, 2021 under Section 164(2)(a) of the Companies Act, 2013 (“Act”).
Pursuant to their disqualification, their DIN and DSC were also cancelled. By the present petition before the
Delhi High Court, the disqualification was challenged. The directors also sought to quash the impugned list
of disqualified directors.

Findings of the court:

i. No retrospective operation of Section 164(2) and Section 167(1)(a) of the Act

In the present case, Koksun Papers was struck-off by the RoC on June 30, 2017. As a result, the petitioners
were also disqualified from acting as directors of any other company by virtue of Section 164(2)(a) of the
Act.

Though, the provision for disqualification for non-filing of annual return was added vide the
Companies Amendment Act, 2018 and was effective only from May 7, 2018, the disqualification was
applied on the petitioners retrospectively. Therefore, one of the issues which arose for consideration was
whether disqualification prescribed under Section 164(2) and 167(1)(a) of the Act would be applicable with
retrospective effect.

The court held that the judgment in the matter of Mukut Pathak v. Union of India, 265 (2019) DLT 506,
insofar as the merits of the case is concerned, is squarely applicable in the present case. The said judgment
clearly holds that the proviso to Section 167(1)(a) of the Act cannot be read to operate retrospectively. It
was further held that the said proviso, being in the nature of a punitive measure with respect to the rights and
obligations of the directors, cannot be applied retrospectively unless the statutory amendment expressly
provided so.

ii. Status of disqualified directors vis-à-vis active companies

Another pertinent issue which arose for consideration before the court was whether disqualification due
to non-filing of return for one company would lead to the director being disqualified from all other
companies where he was previously serving as a director especially, in light of the CFSS being notified
on March 30, 2020.

The CFSS was launched by the Government in order to give a reprieve to such companies who have
defaulted in filing documents and that the companies, were allowed to file their requisite documents and
to regularize their operations, so as to not face disqualification. The CFSS also envisaged non-imposition
of penalty or any other charges for belated filing of the documents.

The court held that CFSS provides an opportunity for active companies who may have defaulted in filing of
documents, to put their affairs in order.

It thus provides directors of such companies, a fresh cause of action to also challenge their
disqualification qua the active companies.

Given the fact that CFSS is a new scheme, the disqualification and cancellation of DINs would be a severe
impediment for the directors in availing remedies under the CFSS, in respect of the active company. The
purpose and intent of the CFSS is to allow a fresh start for companies which have defaulted. In order for the
CFSS to be effective, directors of these companies ought to be given an opportunity to avail of the CFSS.

The launch of the CFSS itself constitutes a fresh and a continuing cause of action. Thus, in the present case,
where the petitioners are directors of two companies i.e. one, whose name has been struck off and one,
which is still active, disqualification from acting as director with respect to active company would not
stand.

It was further held that to give full effect to CFSS, if the directors are disqualified permanently and are not
allowed avail of their DINs and DSCs, the objective of the CFSS scheme would be rendered ineffective and
nugatory.

iii. Ratio of earlier judgement not applicable

The Delhi High Court earlier in the case of Anamika Devi v. Union of India. & Anr. W.P.(C) 4356/2020,
order dated July 20, 2020 and Gaurav Kumar v. Union of India & Anr. W.P.(C) 4357/2020, order dated July
20, 2020 had refused to quash the disqualification of director. However, the court held that the earlier
decisions were inapplicable to the issue at hand as the court did not delve into merits of those cases and the
applications were rejected merely on the procedural ground of delay in approaching the court. In the present
case, the question of disqualification arose in the light of the CFSS which was not under consideration in the
earlier matters.