DIRECTORS

1. Meaning of Director (Section 2(34), Companies Act, 2013)

 A director is an individual appointed to the Board of a company.
 The Board of Directors (BOD) is responsible for managing the company's operations.
 Directors are professional individuals hired to direct a company's affairs but are not
servants of the company.
 Only individuals can be appointed as directors (firms, companies, or other legal
entities cannot be directors).
 In earlier days, firms could direct a company and were known as managing partners
or managing trustees.

2. Position of Directors (Short question internal important)

(a) As Officers of the Company (Section 2(59))
 Directors are classified as officers of the company.
 The term "officer" includes any director, manager, or key managerial personnel who
influences the Board’s decisions.
 The Companies Act, 2013 (Section 2(60)) classifies directors as "officers in default"
and holds them accountable for non-compliance.
Directors as Organs of the Company
 Directors are limbs and organs of a company, meaning their actions represent the
company itself.
 The Calcutta High Court (Gopal Khaitan v. State, AIR 1969 Cal 132) stated:
"Officials should be treated as organs of the company, just as a natural person is
responsible for their limbs' actions."
 Directors may also be employees of the company if they have a special employment
contract.
(b) As Agents
 A company cannot act by itself; it operates through directors, similar to a principal-
agent relationship.
 Directors enjoy authority granted by the Memorandum and Articles of Association.
 If they act beyond their authority, their actions are ultra vires (beyond legal power).
  Directors bind the company only when acting collectively as a Board.
 Directors differ from ordinary agents as they are appointed, not employed, and have
wider powers.
(c) As Trustees
 Like trustees, directors manage company assets for the benefit of shareholders.
 They can be held liable if they:
o Misapply, misappropriate, or misuse company funds.

o Act in a manner that harms the company.

 Directors act in a fiduciary capacity, meaning their acts must benefit the company.
 Directors are not traditional trustees but are treated as such because they have control
over company property and funds.

3. Decision-Making in a Company
(a) Who Makes Decisions?
 Board of Directors
 Members in General Meetings
(b) Types of Decisions
1. Operational & Business Decisions → Day-to-day management.
2. Capital Decisions → Investment and financial planning.
3. Constitutional Decisions → Amendments to company structure.
 Each decision by these organs is considered a decision of the company itself.

4. Liability of Directors
(a) When Directors Are Personally Liable
Directors may be held responsible in cases such as:
Signing Contracts in Their Own Name: Instead of the company’s name.
Misusing the Company’s Name: For personal gain or unauthorized purposes.
Unclear Contract Terms: When it is not clear if the company or the director is responsible.
Exceeding Authority: Taking actions beyond their authorized powers.
(b) Ratification of Acts
  Acts within a director’s power (intra vires) can be ratified by the company.
 However, if an act is beyond the company’s power (ultra vires), it cannot be ratified.

5. MINIMUM NUMBER OF DIRECTORS (SECTION 149)

 A Public Company must have at least 3 directors.
 A Private Company must have at least 2 directors.
 A One Person Company (OPC) must have at least 1 director. This is also private.
A company can have a maximum of 15 directors.
 This limit can be increased by passing a special resolution.

6. TYPES OF DIRECTORS
(A) Based on Work
1. Executive Director – Works full-time in the company. Includes:
o Whole-Time Director – Works only for the company and earns salary from it.

o Managing Director – Has the power to take important company decisions but
works under the Board of Directors.
o Every public company and private company (if it is a subsidiary of a public
company) must have a Managing Director, Whole-Time Director, or Manager
if their paid-up share capital exceeds ₹5 crore.
o Tenure: 5 years

o Reappointment: Yes, only one year before the current term expires.

o Age limit for appointment OF MANAGING AND WHOLE TIME

Minimum 21 years
Maximum 70 years (beyond 70 years requires a special resolution).

2. Non-Executive Director – Does not manage the company's daily work.

o In listed companies, at least 50% of directors should be non-executive
directors.
o Independdent and Non independent directors.

(B) Based on Appointment

 1. First Directors – These are the initial directors of the company. They are named in
the Articles of Association (AoA). If the AoA does not specify any names, the
subscribers to the Memorandum of Association (MoA) automatically become the first
directors.
2. Casual Directors – Appointed temporarily by the Board of Directors to fill a vacancy
that arises due to the death, resignation, or disqualification of an existing director
before their term ends.
3. Additional Directors – Appointed by the Board if the AoA permits, typically when
there is a need for additional expertise or during company expansion. They serve only
until the next Annual General Meeting (AGM).
4. Alternate Directors – Appointed when a director is expected to be absent from India
for more than three months. The alternate director acts in place of the original director
during their absence.
5. Shadow Directors – A person not officially appointed but whose advice is followed
by the Board.
6. De Facto Directors – A person not formally appointed but acts as a director and is
treated like one.
7. Nominee Directors – Appointed by external stakeholders like financial institutions,
banks, or the government to represent and protect their interests within the company.
8. Rotational Directors – Directors who are not permanent and must retire by rotation
as per Section 152 of the Companies Act, 2013. Generally, one-third of such directors
retire at each AGM but are eligible for reappointment

7. HOW DIRECTORS ARE APPOINTED

To become a director, a person must:
1. Have a Director’s Identification Number (DIN).
2. Give a written declaration that they are not disqualified from being a director.
3. Give written consent in the form to act as a director.
4. The company must submit this consent to the Registrar of Companies (RoC) within
30 days.
5. Board or Shareholder Approval: Depending on the type of director (e.g., additional,
independent, or managing director), the appointment may require approval from the
Board of Directors or the shareholders at a general meeting.

8. SPECIAL TYPES OF DIRECTORS

(A) Resident Director (Section 149(3)
Every company must have at least one resident director.
A resident director is a person who has stayed in India for at least 182 days in a financial year.
For a newly started company, this rule applies only for the first year based on the date of
incorporation.
(B) Woman Director (Section 149(1)) (MCQ internal important)
The following companies must have at least one woman director:
1. Listed companies or
2. Unlisted Public companies with:
o Paid-up share capital of ₹100 crore or more, OR

o Turnover (sales) of ₹300 crore or more

The company must appoint a woman director within 6 months of starting operations.
If a woman director leaves, the company must appoint a new one within 3 months from date
of vacancy.

9. SMALL SHAREHOLDERS’ DIRECTOR (SECTION 151)

A small shareholder is a person who owns shares in the company worth ₹20,000 or less.
A listed company must appoint a small shareholders' director if:
1. At least 1,000 small shareholders request it, OR
2. One-tenth of total small shareholders request it (whichever is lower).
He can also become the independent director after fulfilling sec 149 requirenments.
The small shareholders' director:
 Can serve for 3 years (cannot be reappointed for another 3 years).
 Cannot hold this position in more than 2 companies at the same time.

10. INDEPENDENT DIRECTORS (SECTION 149 (6)) (Long question internal

important)
The following companies must appoint independent directors:
1. Listed Public Companies → At least one-third of the total directors must be
independent.
 2. Unlisted Public Companies with any of these:
o Paid-up share capital of ₹10 crore or more.

o Turnover of ₹100 crore or more.

o Loans, borrowings, debentures, or deposits of ₹50 crore or more.

Required Skills: Independent directors should

have experience in
 Finance
 Law
 Management
 Sales
 Marketing
 Administration
 Research
 Corporate Governance
(A) Who is an Independent Director?
An independent director is a director who is not a: MWN
 Managing Director
 Whole-Time Director
 Nominee Director
He should not be the
 Promoter of the company or its holding or subsidiary or associate company.
(B) Rules for Being an Independent Director
An independent director:
1. Must have good character and knowledge.
2. Cannot be a promoter or related to promoters/directors.
3. Must not have had financial dealings with the company in the last 2 years.
4. Must not own more than 2% of company shares.
5. Must not have been an employee of the company in the past 3 financial years.
(C) Appointment and Time Period
 1. Independent directors must submit a declaration of independence when they join the
Board and at the start of every financial year.
2. Their term is 5 years, which can be renewed for another 5 years by passing a special
resolution.
3. An independent director cannot serve more than 2 consecutive terms (5+5 years).
4. After serving 2 terms, they can be reappointed only after a gap of 3 years.
INDEPENDENT DIRECTORS' MEETINGS
1. Independent directors must hold at least one meeting per year without other directors.
2. This meeting is held to:
o Evaluate the performance of the Board and non-independent directors.

o Assess the role of the Chairperson.

o Ensure there is clear communication between the company’s management and

the Board.
3. Based on this evaluation, it is decided whether an independent director’s term should
be extended or not.

11. PENALTIES FOR BREAKING THE RULES

If a company fails to appoint the required directors, both the company and responsible
officers must pay a fine:
 Minimum fine: ₹50,000
 Maximum fine: ₹5,00,000

Term of Independent Directors

 They can stay for 5 years.
 Can be reappointed by passing a special resolution.
 Cannot stay for more than two consecutive terms (5+5 years).

13. QUALIFICATIONS OF INDEPENDENT DIRECTORS

A person must:
 Be honest and have experience in the industry.
 Not be a promoter or related to any promoter of the company.
Financial Rules:
 They must not have any financial dealings with the company, its directors, or
promoters in the last 2 years or the current year.
 Their family members must also not have any financial connection with the company
that is:
o More than 2% of the company’s total turnover, OR

o More than ₹50 lakh, whichever is lower.

Work Restrictions:
They or their relatives must not:
 Have worked as Key Managerial Personnel (KMP) in the company in the last 3 years.
 Have worked as:
o Auditors, company secretaries, or cost auditors of the company.

o Lawyers or consultants if they earned 10% or more of their total income from
the company.

14. HOW ARE INDEPENDENT DIRECTORS SELECTED?

Selection Process
 Independent directors can be chosen from a government-approved list.
 The company must check their background before selecting them.
 Their appointment must be approved in a general meeting, and the company must
explain why they were chosen.
Declaration of Independence
They must declare that they are independent:
1. In the first Board meeting they attend.
2. In the first Board meeting of every financial year.
3. Whenever their independence is affected.

15. CODE OF CONDUCT FOR INDEPENDENT DIRECTORS

Rules to Follow
 They must act honestly and fairly.
  They must protect the company’s interests.
 They must attend meetings and share fair opinions.
 They must follow proper rules for appointment, reappointment, and removal.
 They must review the Board’s work in separate meetings.

16. WHEN IS AN INDEPENDENT DIRECTOR RESPONSIBLE?

An independent director is not responsible for everything the company does. They are only
responsible if:
 They knew about a wrongdoing and did not take action.
 They were involved in decisions that broke the law.
 They did not do their job properly.

20. CASUAL VACANCY IN DIRECTORSHIP

When Does a Casual Vacancy Happen?
 If a director dies, resigns, is disqualified, or is removed.
Rules for Filling a Casual Vacancy
 The Articles of Association must allow the company to appoint a replacement.
 The new director can serve only for the remaining term of the original director.
 If a director was elected but did not take office, this is not considered a casual
vacancy.
 Private companies follow their own Articles of Association to fill a casual vacancy.

21. LIMIT ON NUMBER OF DIRECTORSHIPS section 165

 A person cannot be a director in more than 20 companies at the same time.
 Out of these 20, they can be a director in only 10 public companies. If a private
company is a subsidiary or holding company of a public company, it will be counted
in the 10 public company limit.
What Happens If a Person Exceeds the Limit?
 They must resign from extra companies.
 They must inform the companies where they want to continue.
 There is no limit for charitable companies or unlimited companies.