Study Notes: Board of Directors under Companies Act, 2013

Introduction

It is essential to recognize that, although a company is regarded as a separate legal entity and termed a juristic person under the law, it remains an artificial person, existing solely within the scope of legal contemplation. A company is incapable of independent action; it necessitates a driving force or human agency to conduct its business and manage its affairs.

A company or corporation, although a legal entity, lacks physical or material existence. To exercise its functions, duties, rights, and obligations, and to possess knowledge and intent, the presence of natural persons to manage its affairs is crucial. As a corporation is not a natural person and inherently lacks these attributes, it operates through natural persons. The affairs of the company or corporation are entrusted to its directors, who act as agents and perform the necessary functions on its behalf.

In the case of Lennard’s Carrying Co. Ltd. v. Asiatic Petroleum Company Ltd. (1915),  Sir Viscount Haldane L.C., was of the opinion that “A corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directive will must consequently be sought in the person of somebody who, for some purposes, may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation.”[1]

Who is a director?

Director is defined under Section 2(34) of the Companies Act, 2013 as “Director” means a director appointed to the board of a company.[2]

A Director is an individual elected or appointed in accordance with the law, tasked with managing and directing a company’s affairs. Often considered the brains of the company, directors hold a pivotal role, making key decisions in board or committee meetings. It is essential for directors to operate in compliance with the provisions of the Companies Act, 2013.

A company, being an artificial person without its own mind, requires human agency to function. The individuals responsible for managing a company’s affairs are known as directors, collectively referred to as the ‘Board of Directors.’ According to Section 2(10) of the Companies Act, 2013, the term ‘Board’ or ‘Board of Directors’ in relation to a company, means the collective body of the directors of the company.[3]

Types Of Directors

1) Based on functions

• Executive Director- There are the two types of Executive Directors- Managing Director and Whole time Director.
• Non – Executive Director- There are two types of Non- Executive Directors- Nominee Director and Independent Director. 

2) Based on appointment- On the basis of appointment, there can be three types of directors- Additional Director, Alternate Director, Casual Vacancy Director.

3) Other types- There are other types of directors as well such as Residential Director, Women Director, Small Shareholders Director, Shadow Director.

Composition of Board of Directors

Under Section 149 of the Companies Act, 2013 every company shall have board of directors where:

• minimum three directors are required in the case of a public company,
• two directors in the case of a private company, and
• one director in the case of a One Person Company and
• any company can have maximum of fifteen directors but it can be extended after passing a special resolution and such class of company shall have at least one women director.[4]

Every company shall have at least one director who has stayed in India for a total period of not less than one hundred and eighty-two days in the previous calendar year.[5]

Qualifications of Directors

The Companies Act of 2013 does not prescribe specific educational or professional qualifications of directors.

However, Section 153 of the Act mandates every individual intending to be appointed as director of a company to make an application for allotment of Director Identification Number (DIN) to the Central Government. Within one month from the receipt of the application under section 153, the Central Government shall allot a Director Identification Number to the applicant.[6]

It is pertinent to note that an individual can only possess or obtain single DIN (Section 155). Further, the director after obtaining the DIN has to intimate the same to his/her company within one month of the receipt of the DIN (Section 156). Companies then have 15 days to file these DINs with the government along with the prescribed fees. Failing to do so within the timeframe set by another section (likely annual return filing deadline) can result in penalties of ₹25,000 to ₹1 lakh for both the company and any responsible officer. This process ensures the government has an accurate record of DINs associated with each company (Section 157 and 158).[7]

Violation of Section 155 and 156 is a punishable offense. Punishment for violating these provisions is imprisonment for up to six months, or a fine of up to fifty thousand rupees. In cases where such contravention is ongoing, the penalty increases with an additional fine of up to five hundred rupees for each day after the first during which the contravention continues (Section 159).[8]

Powers of Board of Directors

• Powers on behalf of the company by means of resolutions (Section 179): This provision outlines the powers of the Board and specifies certain acts that require their approval for implementation. The Board of Directors shall exercise the following passed at meetings of the Board to: make calls on shareholders in respect of money unpaid on their shares; authorise buy-back of securities; issue securities; borrow monies; invest the funds of the company; diversify the business of the company etc.
• Contribute to Bonafide and Charitable Funds (Section 181): The Board of Directors of a company may contribute to bona fide charitable and other funds, provided that prior permission of the company in general meeting shall be required.[9]
• Power to Make a Political Contribution (Section 182): Under Section 182 of the 2013 Act, the companies can make a political contribution. The company making a political contribution should not be other than a government company or a company that has been in existence for less than three years. The contribution needs to be sanctioned by a resolution passed by the Board of Directors.
• Power of Board to Make Contributions to National Defence Fund (Section 183): The Board has the power to authorize contributions to the National Defence Fund. This provision allows companies to make donations to support national defense efforts to provide financial assistance to the armed forces, their families, and veterans, as well as supporting various defense-related initiatives. Thus, promotes corporate social responsibility and encourages corporate participation in national security and defense matters.[10]
• Defects in appointment of directors not to invalidate actions taken (Section 176): Actions taken by a person acting as a director will not be considered invalid, even if it is later discovered that their appointment was flawed or terminated due to disqualification.

Restrictions on power of board

Section 180 of the Companies Act, 2013 deals with restrictions on the powers of the Board of Directors to borrow, invest, or grant loans:

• Cannot borrow money, issue debentures, or provide security exceeding the aggregate of the company’s paid-up share capital, free reserves, and securities premium account or 100% of its free reserves and securities premium account, whichever is higher. The approval of the company in a general meeting is necessary if the borrowing exceeds the threshold.
• Cannot invest funds of the company except in modes specified in the articles of association or by a special resolution passed in a general meeting.
• Cannot grant loan, guarantee, security beyond specified limits. Any such transactions exceeding the limits require approval from the company in a general meeting.
• Companies cannot advance loans to directors or provide guarantees or securities for loans taken by directors or any other person in whom the director is interested (Section 185). This provision aims to prevent potential misuse of funds and conflicts of interest by ensuring that companies do not extend financial assistance to their directors or related parties.

Appointment of Directors

The Companies Act, 2013 lays out the process for appointing the first directors of a company in Section 152.

According to Section 7(1)(f,) the names of the first directors should be mentioned in the Articles of Association or deemed as the subscribers to the Memorandum if not explicitly mentioned.

For public companies, the Act mandates that at least two-thirds of the directors must be chosen for a term that ends by rotation at the annual general meeting. Shareholders vote on these appointments. The remaining directors can also be chosen by shareholders, or by following the company’s articles of association if those articles provide a different method.

Articles of Association:

The Articles of Association (AoA) of a company can specify the names of the first directors. These individuals will be responsible for managing the affairs of the company until the directors are duly appointed in accordance with the Act.

Subscribers to the Memorandum:

If the Articles of Association do not specify the names of the first directors, the subscribers to the Memorandum of Association (MoA) who are individuals will be deemed to be the first directors of the company. This applies until directors are appointed as per the provisions of the Companies Act, 2013.

One Person Company (OPC):

In the case of a One Person Company (OPC), the individual who is the sole member is considered the first director until the company appoints a director or directors in accordance with the Act.

Board Meeting:

The first directors may convene a board meeting after the incorporation of the company to appoint additional directors if necessary and to carry out other essential business matters.

Subsequent Appointments:

After the initial appointment, the company typically appoints directors through a general meeting of the members, as per Section 152(2) of the Act.

Appointment of Additional Directors (Section 161(1))

• Appointment by Board: The Board of Directors can appoint additional directors, subject to authorization by the company’s articles of association or a resolution passed at a general meeting.
• Tenure: These directors hold office only until the next annual general meeting (AGM) or the date by which the AGM should have been held, whichever is earlier.
• Purpose: This provision allows the board to temporarily fill vacancies or bring in expertise for a specific project.

Appointment of Alternate Directors (Section 161(2))

• Appointment by Board: The Board can appoint an alternate director for a director who will be absent from India for at least three continuous months.
• Authorization: Similar to additional directors, this power requires authorization by the company’s articles or a resolution passed at a general meeting.
• Qualifications: The alternate director must meet the same eligibility criteria as the original director (e.g., independent director requirements for an independent director).
• Tenure: The alternate director acts only during the original director’s absence and vacates the office upon their return.

Appointment of Nominee Directors (Section 161(3))

• Appointment by Board: The Board can appoint a director nominated by: 1. Any institution in accordance with a law or agreement; or 2. The Central Government or State Government for a government company based on their shareholding.
• No Specific Authorization: Unlike the previous two, Board authorization might not always be required, depending on the nomination source.

Appointment of Independent Directors

Every listed public company must have at least one-third of its total directors as independents (rounded up if there is a fraction).

Unlisted public companies with a paid-up share capital of Rs. 10 crore or more, turnover of Rs. 100 crore or more, or outstanding loans exceeding Rs. 50 crores also require at least two independent directors.

Appointment Process:

• The company can select an independent director from a data bank maintained by a government-authorized body.
• The Board needs to prepare an explanatory statement justifying the selection of the proposed independent director. This statement gets attached to the notice for the company’s general meeting.
• Shareholders’ approval is mandatory – the appointment requires approval by the company in a general meeting.
• The independent director must file a declaration confirming they meet the independence criteria as laid out in the Act.

Number of Directorships

Maximum number of directorships: No person can hold more than 20 offices as a director in any companies at a same time but the members of a company may, by special resolution, specify any lesser number of companies in which a director of the company may act as directors.[11]

Public company: In case of a public company a person can hold directorship in a maximum of 10 companies at same time. This provision also includes the private companies that are part of public companies in the form of holding or subsidiary companies.

Punishment: If any person violates this clause, he shall be punishable with fine which shall not be less than five thousand rupees but which may extend to twenty-five thousand rupees for every day after the first during which the contravention continues.[12]

Duties of Directors

As per Section 166 of the Companies Act, 2013–

a) Follow the articles:

Directors must act according to the company’s Articles of Association (AoA), which defines its internal rules and regulations.

b) Good faith & stakeholder focus:

They must act in good faith to promote the company’s objectives for the collective benefit of its members, employees, shareholders, the community, and the environment.

In Regal (Hastings) Ltd. v. Gulliver [(1967) 2 A.C. 134 (HL)], it was held that directors are held to a high standard. They can’t simply take advantage of situations that the company, due to temporary setbacks, cannot capitalize on. Even if the directors acted without any malicious intent, they still breached their fiduciary duty. The court also noted that the directors could have avoided this whole mess by getting the shareholders’ approval for their actions. This case reminds directors that their loyalty lies with the company, and they must always prioritize the company’s interests over their own.[13]

c) Duty of care & independent judgment:

Directors are obligated to exercise reasonable care, skill, and diligence while performing their duties. This includes independent judgment, not simply following the lead of others.

City Equitable Fire Insurance Co., Re[14]

This UK based landmark judgment is concerned with the duty of care directors owe to a company. The company lost a significant amount of money due to bad investments and a fraudulent chairman and so the company’s liquidator sued the other directors for negligence.

Key points:

• The court established a subjective standard of care for directors. This meant they were judged based on their own knowledge and experience, not an objective standard. (This is no longer the law in the UK).
• The directors were not held liable.

This case is important because:

• It established a precedent for director duties in the UK.
• The subjective standard of care has since been replaced by an objective one.

Standard Chartered Bank v. Pakistan National Shipping Cop.[15]

This case dealt with deception and the consequences for a company’s director. Standard Chartered Bank (SCB) loaned money based on a fake shipping document issued by Pakistan National Shipping Corporation (PNSC). PNSC knew the document was false but used it to secure payment from the bank. SCB sued PNSC for fraud.

PNSC tried two defenses:

• Contributory Negligence: They argued that SCB should have been more careful in verifying the document.
• Director’s Liability: They claimed the director who authorized the document, not the company itself, was responsible for the fraud.

The House of Lords, the highest court in the UK, rejected both defenses. Here is why:

• Contributory Negligence did not apply: Fraud is an intentional act. Even if SCB could have been more vigilant, PNSC’s deliberate deception still caused the loss.
• Director’s Liability did not shield the company: The director’s actions were seen as acting on behalf of PNSC to commit the fraud. The company, not just the individual director, was held liable for the damages caused to SCB.

In essence, this case clarifies that companies cannot escape responsibility for the fraudulent actions of their directors, especially when those actions are intended to benefit the company. Additionally, victims of fraud cannot be penalized for not anticipating such deliberate deception.

d) Not involved in conflicts of interest:

Directors should avoid situations where they have a direct or indirect interest that conflicts with the company’s interest. They must disclose any potential conflicts of interest and must not exploit their position for personal gain.

A director of a company is required to avoid situations where their personal interests’ conflict with the interests of the company. This means that a director should not participate in any activity or decision where they might benefit personally, whether directly or indirectly, in a way that is contrary to the company’s best interests.

Industrial Development Consultants v. Cooley [(1972) 1 WLR 443], emphasizes that directors have a responsibility to be transparent and prioritize company opportunities over their own, even if it means letting go of a potential personal gain. Directors and those in high positions within a company cannot take advantage of their roles for personal benefit. Any business opportunities that arise during their work should be brought to the company’s attention, not used for personal gain. The court emphasized that directors cannot put themselves in a position where their personal interests’ conflict with their company’s duties. Any information or opportunities they acquire while working for the company should be disclosed and presented to the company for consideration. Their loyalty lies with the company, and they must act in its best interests, even if it means sacrificing a personal opportunity.[16]

e) Not achieve or attempt to achieve any undue gain: 

Directors should not make any undue gain or advantages for themselves, their relatives, partners, or associates. If any undue gain is made, they must repay the company an equivalent amount.

f) Not assign their office:

Directors should not assign their office to any other person. Any such assignment, if done, is void.

g) Act in the best interest of stakeholders:

Directors must consider the interests of the company’s stakeholders, including employees, shareholders, creditors, and the community, ensuring that their actions contribute positively to the company’s reputation and sustainability.

If a director, due to personal reasons, wants to hand over their role to a friend or relative, such an action would not be legally valid. The director must instead resign from their position if they can no longer fulfill their duties, and the company would need to follow the proper procedures to appoint a new director through its established governance processes, typically involving a board or shareholder resolution.

If a director of the company violates these duties, then the director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.[17]

Committees under the Board of Directors

1. Audit Committee

Section 177 of the Companies Act, 2013, mandates the formation of an Audit Committee for:

• Listed companies.
• Public companies with a paid-up capital of ₹10 crore or more.
• Public companies with a turnover of ₹100 crore or more.
• Public companies with outstanding loans, debentures, and deposits exceeding ₹50 crore.

Composition:

• Minimum of three directors with independent directors forming a majority.
• Majority of members, including the Chairperson, should be individuals with the ability to read and understand financial statements.

Key Functions:

• Oversight of the company’s financial reporting process.
• Reviewing the quarterly and annual financial statements.
• Monitoring the effectiveness of the internal control system.
• Reviewing the performance of statutory and internal auditors.
• Approval of related party transactions.

2. Nomination and Remuneration Committee

Section 178 of the Companies Act, 2013, requires the formation of a Nomination and Remuneration Committee for:

• Listed companies.
• Public companies with a paid-up capital of ₹10 crore or more.
• Public companies with a turnover of ₹100 crore or more.
• Public companies with outstanding loans, debentures, and deposits exceeding ₹50 crore.

Composition:

• Minimum of three non-executive directors, with at least half being independent directors.
• The Chairperson of the company (whether executive or non-executive) may be appointed as a member but cannot chair the committee.

Key Functions:

• Formulate criteria for determining qualifications, positive attributes, and independence of directors.
• Recommend policies relating to the remuneration of directors, key managerial personnel (KMP), and other employees.
• Identify individuals qualified to become directors and who may be appointed in senior management positions.

3. Stakeholders Relationship Committee

Section 178 mandates that every company having more than 1,000 shareholders, debenture holders, deposit holders, and any other security holders at any time during a financial year shall constitute a Stakeholders Relationship Committee.

Composition:

• Chairperson who is a non-executive director.
• Other members as decided by the Board.

Key Functions:

• Resolve the grievances of security holders.
• Address issues like transfer of shares, non-receipt of balance sheet, and non-receipt of declared dividends.

4. Corporate Social Responsibility (CSR) Committee

Section 135 mandates the formation of a CSR Committee for companies meeting certain thresholds:

• Net worth of ₹500 crore or more.
• Turnover of ₹1,000 crore or more.
• Net profit of ₹5 crore or more during the immediately preceding financial year.

Composition:

• Minimum of three directors, with at least one being an independent director.

Key Functions:

• Formulate and recommend to the Board a CSR Policy.
• Recommend the amount of expenditure to be incurred on CSR activities.
• Monitor the CSR Policy of the company from time to time.

Disqualification of Directors

According to Section 164 of the Companies Act, 2013 a person is not eligible for appointment as a director of a company, if-[18]

1. Unsound Mind: A person who has been declared to be of unsound mind by a competent court and the declaration is still in force
2. Insolvency: If a director is an undischarged insolvent or has a pending application for insolvency.
3. Conviction by a Court: A person who has been convicted by a court of any offense, whether involving moral turpitude or otherwise, and sentenced to imprisonment for at least six months. This disqualification lasts for five years from the date of release. If a person is convicted of any offense and sentenced to imprisonment for seven years or more, they are disqualified for life.
4. Non-Payment of Calls: A person who has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call.
5. Non-Compliance with Section 165: A person who has been disqualified by an order of the court or the Tribunal. This includes a person disqualified under Section 165 (related to the number of directorships a person can hold, which is a maximum of 20 companies, out of which not more than 10 can be public companies).
6. Failure to File Financial Statements or Annual Returns: A person who has not filed financial statements or annual returns for any continuous period of three financial years. A person who has failed to repay the deposits accepted by it, pay interest thereon, or redeem any debentures on the due date, or pay interest due thereon or pay any dividend declared and such failure continues for one year or more.
7. Disqualification by Tribunal: A person who is disqualified by an order made by a Tribunal under Chapter XIX (related to the revival and rehabilitation of sick companies).
8. Disqualification under the Companies Act, 1956: A person who is already disqualified under the provisions of Section 274(1)(g) of the Companies Act, 1956, which has been repealed but still holds relevance for historical disqualifications.
9. Appointment by Companies Convicted of Offenses: Any person who is or has been a director of a company which has not filed financial statements or annual returns for a continuous period of three financial years. Any person who is or has been a director of a company that has failed to repay deposits, interest, or debentures or pay any declared dividend for a continuous period of one year or more. Such individuals cannot be reappointed as directors of other companies for five years from the date of default.

Vacation of office of Director

As per Section 167 of the Companies Act, 2013, the office of director will became vacant if-

a) Disqualification

A director must vacate their office if they incur any of the disqualifications specified under Section 164 of the Companies Act, 2013. This includes reasons such as being declared of unsound mind, being an undischarged insolvent, and others as mentioned earlier.

b) Absence from Meetings:

If a director is absent from all meetings of the Board of Directors held during a period of 12 months, with or without seeking leave of absence from the Board, they must vacate their office. This ensures active participation in the governance of the company.

c) Contravention of Provisions:

If a director acts in contravention of Section 184, which relates to the disclosure of interest by directors, they must vacate their office. This helps in maintaining transparency and avoiding conflicts of interest.

d) Conviction by a Court:

A director must vacate their office if they are convicted of any offense, whether involving moral turpitude or otherwise, and sentenced to imprisonment for at least six months. The office must be vacated even if an appeal is filed against the conviction.

e) Removal:

If a director is removed in accordance with the provisions of the Act, which could be due to a resolution passed by the company’s shareholders, they must vacate their office.

f) Non-Compliance with Orders:

If a director fails to comply with any order of the court or Tribunal under the provisions of this Act, they must vacate their office.

g) Resignation:

If a director resigns from their office, the office is vacated upon the receipt of the resignation by the company. The resignation becomes effective from the date specified in the resignation letter, or if no date is specified, from the date the resignation is received by the company.

h) Companies Not Filing Financial Statements or Annual Returns:

If a director is disqualified under clause (a) of sub-section (2) of Section 164, which relates to the company not filing financial statements or annual returns for a continuous period of three financial years, they must vacate their office in all the companies other than the company which is in default.

If the person violates any of these terms, then he shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both.[19]

Removal of Directors

1. By Company

Section 169 of the Companies Act, 2013, provides the framework for the removal of directors from their position before the expiry of their term. This section ensures that shareholders have the authority to remove directors, while also protecting the rights of directors to a fair hearing.

a) Removal by ordinary resolution

A company may, by an ordinary resolution, remove a director before the expiry of their period of office, except in cases where the director was appointed by the Tribunal under Section 242 of the Act for the prevention of oppression and mismanagement.

A special notice of at least 14 days before the meeting where the resolution for removal is proposed is required. This notice must be given to the company and, subsequently, the company must send a copy of the notice to the concerned director.

b) Right to be heard and legal representation

The director being considered for removal has the right to be heard at the meeting where the resolution for their removal is discussed. The director can make representations in writing, which, if time permits, must be circulated to the members of the company. If not, the director can request that the representations be read out at the meeting.

If a director is removed under Section 169, the company must file a Form DIR-12 with the Registrar of Companies within 30 days of the removal. The resolution for removal must be duly recorded in the minutes of the meeting.

A vacancy created by the removal of a director can be filled at the same meeting by appointing another director, provided special notice of the proposed appointment has been given. If the vacancy is not filled at the meeting, the Board of Directors may fill the vacancy as a casual vacancy (except in the case of a director appointed by proportional representation).

2. By Tribunal

Under Section 242 of the Companies Act, 2013, the National Company Law Tribunal (NCLT) can remove a director if it finds that the company’s affairs are being conducted oppressively, prejudicially, or against public interest. An application for removal can be made by eligible members or the Central Government.

The Tribunal, upon hearing the case and considering evidence, may issue an order to remove the director and take necessary measures to address issues of oppression or mismanagement. This provision ensures accountability of directors and protection of shareholders’ interests, providing a legal recourse for minority shareholders and enforcing compliance with the Tribunal’s orders.[20]

Practical Process for Removal

I. Issuance of Special Notice:

• Shareholders intending to remove a director must provide a special notice to the company.
• The company must forward this notice to all shareholders and the director concerned.

II. Board Meeting and Shareholders’ Meeting:

• The company must convene a Board meeting to discuss the special notice and set the date for a general meeting of shareholders.
• The general meeting is called where the ordinary resolution for the removal of the director will be put to vote.

III. Director’s Representation:

• The concerned director must be informed about the meeting and their right to make a representation.
• The director may submit a written representation to the company and request it to be sent to shareholders or read out at the meeting.

IV. Voting on Resolution:

• At the general meeting, shareholders discuss and vote on the ordinary resolution for the removal of the director.
• The director has the opportunity to present their case before the shareholders.

V. Filing and Documentation:

• Once the resolution is passed, the company must file the necessary forms with the RoC.
• The decision must be recorded in the company’s official minutes.

Conclusion

Directors are the highest authority in charge of managing a company’s affairs. They play a key role in guiding the company towards progress and hold a position of great responsibility. The Companies Act, 2013 grants them significant powers to fulfill the company’s objectives. However, their actions must always comply with the Act and not exceed their designated authority.

[1] Lennard’s Carrying Co v. Asiatic Petroleum Co [1915] A.C. 705

[2] The Companies Act, 2013, s. 2(34).

[3] Id., s. 2(10).

[4] Id., s. 149.

[5] Id., s. 149(3).

[6] Id., s. 154.

[7] Id., ss. 157, 158.

[8] Id., s. 159.

[9] Id., s. 181.

[10] Id., s. 183.

[11] Id., s. 165(1).

[12] Id., s. 165(6).

[13] Regal (Hastings) Ltd. v. Gulliver (1967) 2 A.C. 134 (HL).

[14] (1925) Ch. 407.

[15] (2003) 1 All ER 173 (HL).

[16] Industrial Development Consultants Ltd. v. Cooley, (1972) 1 WLR 443

[17] The Companies Act, 2013, s. 166(7).

[18] Id., s. 164.

[19] Id., s. 167(4).

[20] Id., s. 242(2)(h).