Unit 3
Company Administration
Meaning of Director as per the Companies Act, 1956
A company is a legal entity and does not have any physical existence. It can act only through
natural persons to run its affairs. The person, acting on its behalf, is called Director. A
Director is any person, occupying the position of Director, by whatever name called. They
are professional men, hired by the company to direct its affairs. But, they are not the
servants of the company. They are rather the officers of the company.
The Articles of a company may, therefore, designate its Directors as governors, members of
the governing council or, the board of management, or give them any other title, but so far
as the law is concerned, they are simple Directors.
Appointment of Directors
The details of appointment or reappointment of whole time director are similar to that of
managing director which are:
a) Period of Appointment
i.
Section 317 restricts a MD period of appointment to up to 5yrs. There is no such
restriction on the appointment of a whole time director
ii.
There is no necessity for renewal every 5yrs
iii.
His office however must not be subject to retirement of directors by rotation.
b) Whole time director is virtually managing director
i.
A whole time director can be managing director although not designated.
ii.
A director in charge also stands in the same position as managing director even if
he does not give his whole time to the management of the company.
c) Whether a whole time employee is a whole time director
i.
A whole time employee may be appointed as an alternate director under
Sections 314, 269, 309 and 198
ii.
A whole time employee may be appointed as a whole time director.
d) Branch manager is appointed director
i.
A branch manager can also be appointed as a whole time director
ii.
The appointment however would require the approval of the Central
Government if it is not in accordance with Schedule XIII.
Duties of a Director
There is no exhaustive list defining the duties of the Board of Directors towards the
company and shareholders. But based on the analysis of the provisions of the Companies
Act, 1956 with regards to a director, some general duties of a Director are mentioned
herein:
a) To file return of allotments: a company must file with the Registrar, within a period
of 30 days, a return of the allotments, stating the specified particulars. Failure to file
such return shall make the Directors liable as 'officer in default'. A fine, up to Rs.500
per day, till the default continues may be levied.
b) Not to issue irredeemable preference shares or shares, redeemable after 20 years: A
company cannot issue irredeemable preference shares or preference shares,
redeemable beyond 20 years. Directors, making any such issue, may be held liable as
'officer in default' and may be subject to a fine, up to Rs.1, 000.
c) To disclose interest: A Director, who is interested in a transaction of the company,
must disclose his interest to the Board. The disclosure must be made at the first
meeting of the Board, held after he has become interested. This is because a
Director stands in a fiduciary capacity with the company and, therefore, he must not
place himself in a position in which his personal interest conflicts with his duty.
d) A company is not debarred from entering into a contract in which a Director is
interested. It only requires that such interest be disclosed. An interested Director
should not take part in the discussion on the matter of his interest. His presence
shall not be counted for the purpose of quorum for that item. He shall not vote on
that matter. If he does vote, his vote shall be void. Non-disclosure of interest makes
the contract avoidable and not void. However, the concerned Director may be
subjected to fine, up to Rs. 5,000.
e) Duty to attend Board meetings - A number of powers of the company are exercised
by the Board of Directors in their meetings, held from time to time. Although, a
Director may not be able to attend all the meetings, but, if he fails to attend three
consecutive meetings or, all meetings for a period of three months, whichever is
longer, without permission of the Board, his office shall, automatically, fall vacant.
Additional Duties of a Director
a) To convene Statutory, Annual General Meeting (AGM) and also Extraordinary
General Meetings;
b) To prepare and place at the AGM, along with the balance sheet and, profit and loss
account, a report on the company's affairs, including the report of the Board of
Directors;
c) To authenticate and approve annual financial statement;
d) To appoint first auditor of the company;
e) To appoint cost auditor of the company;
f) To make a declaration of solvency in the case of a Members' voluntary winding up;
Powers of a Director
a) Subject to the provisions of this Act, the Board of directors of a company shall be
entitled to exercise all such powers, and to do all such acts and things, as the
company is authorised to exercise and do.
Provided that the Board shall not exercise any power or do any act or thing which is
directed or required, whether by this or any other Act or by the memorandum or
articles of the company or otherwise, to be exercised or done by the company in
general meeting.
Provided further that in exercising any such power or doing any such act or thing, the
Board shall be subject to the provisions contained in that behalf in this or any other
Act, or in the memorandum or articles of the company, or in any regulations not
inconsistent therewith and duly made there under, including regulations made by
the company in general meeting.
b) No regulation made by the company in general meeting shall invalidate any prior act
of the Board which would have been valid if that regulation had not been made.
c) Certain powers to he exercised by Board only at meeting. The Board of directors of a
company shall exercise the following powers on behalf of the company, and it shall
do so only by means of resolutions passed at meetings of the Board :i.
The power to make calls on shareholders in respect of money unpaid on their
shares;
ii.
The power to issue debentures;
iii.
The power to borrow moneys otherwise than on debentures;
iv.
The power to invest the funds of the company; and
v.
The power to make loans.
Minimum Number Of Directors
Every public company must have at least three directors. Every other company must have at
least two directors.
The directors of a company collectively are referred to as the "Board of directors" or
"Board". Only individuals can be appointed as directors. No body-corporate, association or
firm can be appointed director of a Company.
In case the first directors are not appointed by the promoters of a company, subscribers of
the memorandum who are individuals shall be deemed to be the directors of the company,
until the directors are duly appointed.
Managing Director; Meaning as per Companies Act, 1956
Section 2 (26) defines a managing director. It says a managing director means a director who
has been appointed by:
a) Virtue of an agreement with the company or,
b) A resolution passed in a general meeting or,
c) Its board of directors or,
d) By virtue of its articles or memorandum of association
He is entrusted with substantial powers of management which would not otherwise be
exercisable by him; he may be referred to as a ‘managing director’ or simply as ‘director’
Appointment of MD
A MD is appointed by the company’s Board of Directors, which is generally authorized in the
Articles. However, if the articles do not have any provision for the Board to appoint a
director, then appointing any person within the company or a third party if qualified for the
position is beyond the powers of the Board.
After an amendment in 1990, it is obligatory for a public or a private limited company which
is subsidiary of a public company having a paid up share capital of Rs. 5/- Crore or more to
appoint a managing director or whole time director.
Appointment with the Approval of Central Government
If the company is unable to fulfil the terms in Schedule XII, it must file an appointment with
the Central Government in E-Form No. 25A. While according its approval, the Central
Government should be satisfied that:
a) The managing director is in its opinion a fit and proper person to be appointed or
such appointment is in the public interest
b) The term and conditions of appointment of managing director are fair and
reasonable [Section 269 (4)]
Duties of a Managing Director
The duties and responsibilities of a managing director are set out in detail in the document
by which he is appointed i.e. either in the Articles or the Board resolution which he is
appointed or by the agreement which he enters into the company.
The Companies Act says that the managing director of a company is entrusted with
substantial powers. He shall exercise his powers subject to the superintendence, control and
directions of the Board of Directors. However the Board cannot divest its own powers under
the Act and under the memorandum and articles by delegating all its powers to the MD.
Powers of a Managing Director
A MD acts subject to the superintendence, direction and control of the Board of Directors.
He derives the power from the Board. Section 2 (26) indicates the powers given to a MD. He
is entrusted with substantial powers of management which would not otherwise be
exercisable by him.
The sub section also states:
a) A managing director shall exercise his powers subject to the superintendence,
control and directions of the Board of Directors.
b) Exclusion the managing director from administrative acts of routine in nature.
c) The managing director must affix the common seal of the company to any document
or to draw or endorse a cheque on account of the company in any bank.
d) The common seal is required to be affixed to draw or endorse any negotiable
instrument or sign any share certificate or direct registration of transfer of any share.
Meaning of Secretary
A secretary refers to ‘Company Secretary’ who is a member of the ICSI of India or be an
individual possessing qualification as may be prescribed by the Government. In the past it
was held that a secretary of a company is cannot be held liable for acts related to fraudulent
representations to induce persons to take shares of the company. The secretary is however
the proper official to issue shares certificates and so the company is barred from denying
the truth of genuine share certificates issued by him without the authority of the company.
Qualifications of a Company Secretary
No individual shall be appointed as secretary unless he possesses any one or more of the
following qualifications:
a) Membership of the ICSI constituted under Company Secretaries Act 1980.
b) Pass in the intermediate exam conducted by ICSI.
c) PG Degree of commerce or corporate secretary-ship granted by any University in
India.
d) Degree in law granted by any University
e) Member of ICAI constituted under Chartered Accountants Act 1949
f) Member of ICWAI constituted under Cost and Works Accountants Act 1959.
g) PG degree or diploma in management sciences granted by any university or IIMs
Ahmadabad, Kolkata, Bangalore or Lucknow.
h) PG in CLSP granted by University of Udaipur.
Appointment of Secretary
No Body corporate, association of persons or firm can be appointed as a company secretary
in any Company. Therefore, Individual only can act as a Company secretary or compliance
officer. However, the said Acts does not prohibit in one more assistants appoint in
secretarial department and compliances under 383A.
Any contract of appointment of an individual as company secretary of a company prior to
incorporation of the company would not automatically empower the person appointed to
work as secretary after the formation of the company.
In such cases, it is necessary for the company secretary to enter into a fresh contract with
the company after it came into existence. Sometimes even if the name of the person to be
appointed as the company secretary is indicated in the Articles of Association; it does not
bind either the company or its members. Therefore appointing a person as secretary in such
a manner does not confer him a right to sue since he is not a party to the contract.
Appointment of a person who is a director as a secretary in the company would fall within
the ambit of Section 314 and would require approval by way of a special resolution. Even
appointment of certain persons specified under Section 314 other than directors will require
approval by way of a special resolution.
Powers of a Company Secretary
Secretary of a company is empowered to perform the following:
a) All functions which he is required to perform under various enactments like
Companies Act, MRTP Act, Income Tax Act, FEMA etc
b) All acts which the Board of directors are specifically direct him to perform.
c) All acts which are essential to enable him to discharge his duties smoothly as the
administrative head in his department.
The powers of the secretary mentioned above are conferred on him either under the Act or
by the Board or out of his service agreement with the company. At times, the general
meetings authorise him to perform an act. However if the secretary performs an act without
being so authorized the company may not be bound by it.
Duties of A Secretary
The role and position of a company secretary varies from company to company and,
therefore, it would be difficult to codify his duties. However, it can be said the the company
secretary acts in three-fold capacity, namely:
a) As an agent of the Board of directors, i.e. as a liaison or link between the Board on
the one hand and the executive and staff, shareholders, customer and general public
on the other;
b) As an officer-in-charge of secretarial work;
c) As a chief business executive or chief administrative officer of the company if he is
put in charge of office administration, including accounts, taxation an legal sections.
d) Whilst all the above three functions will possibly be performed by a company
secretary for small or medium sized companies, in big companies there could be
chief accountant, a personnel manager or legal officer who may be in charge of
functions relating to accounts, personnel and law and they may report to the
secretary or could report directly to the chief executive of the organisation.
The statutory duties of a company secretary are:
1. To sign any document or proceedings requiring authentication by the company
(Section 54).
2. To arrange to file statement in lieu of prospectus (Section 70).
3. To deliver for registration of return of allotment and contracts relating to allotment
of shares for consideration other than cash (Section 75).
4. To give notice of the increase in the share capital to the Registrar (Section 97).
5. To deliver the share or debenture certificate within 3 months of allotment or within
2 months of registration of transfer (Section 113).
6. To make entries in the register of members on issue of share warrants (Section 115).
7. To make available for inspection trust deed to every member or debenture holder
and to forward a copy of it to the members or debenture holders on their request
and within 7 days of request on payment of prescribed fee (Section 118). .
8. To deliver for registration particulars of mortgages and charges to the Registrar
(Sections 125-127).
9. To file Notice of situation of registered office or change thereof of the company in
the prescribed e-Form 18 (Section 146),
10. To get painted or affixed the name plate of the company outside every office or the
place of its business, to get it printed on documents of the company and to get it
engraved on the seal of the company (Section 147).
11. To make a statutory declaration for obtaining the certificate of commencement of
business and file it with the Registrar (Section 149).
12. To sign the Annual Return (Section 161).
13. To allow inspection of and to furnish copies of register of members and register of
debenture holders(Section 163).
14. To send notices of general meetings to every member of the company (Section 171).
15. To file resolutions and agreements requiring registration with the Registrar (Section
192).
The General Duties of a Company Secretary are:
a) Duties towards Directors, Managing Director, Manager, etc. The duties of the company
secretary in relation to the directors may be stated briefly as follows:
i.
To do all those acts which a director (where authorised) or any other managerial
personnel specifically directs him to do.
ii.
To assist the chairman to convene Board and general meetings and to make
necessary arrangements in this regard.
iii.
To advise directors and managing directors, regarding complying with their statutory
duties.
b) Duties towards shareholders and public
i.
To perform all the necessary things relating to shares and debentures, issuing a
prospectus, inviting applications for the subscription of shares and debentures,
arranging for allotment and issuing share certificates and debentures, handling
transfer and transmission of shares and debentures, arranging payment of dividend
and interest on shares and debentures respectively.
ii.
To handle all correspondence between the company and the shareholders, creditors
and public; but should abstain from disclosing any confidential or secret information
relating to the affairs of the company.
iii.
To allow the inspection of various books and registers desired by the members and
other persons as per the provisions of the Companies Act, 1956 unless such
inspection is prohibited under the said Act.
iv.
To ensure transparency and accountability in the operations/functioning of the
company by vouching good corporate governance practices.
c) Duties towards office staff
The status of Company Secretary as the chief administrative head of the organisation,
wherever applicable, bestows upon him the duty of planning, organising, directing and
coordinating the office work effectively. The work inter-alia involves recruiting new
employees, informing the employees about the policies and decisions concerning them.
Liabilities of a Company Secretary
The liabilities of the company secretary can be discussed under two broad heads:
a) Statutory Liabilities
i.
Default in filing a return of allotment-fine up to Rs. 5000 for every day during which
the default continues (Section 75),
ii.
Default in maintaining a register of securities bought back by the company (Section
77 A),
iii.
Default in keeping ready for delivery share certificates, debenture certificates etc.,
within 3 months after allotment and within 2 months of the application for
registration of transfer-fine up to Rs. 5000 for every day during which the default
continues (Section 113),
iv.
Default in filing particulars of charges on properties acquired subject to charge-fine
up to Rs. 5000 (Section 127),
v.
Failure to comply with the requirements of Section 147 of the Act regarding
exhibiting the name of the company-fine may extend up to Rs. 5000,
vi.
Default in filing annual return-fine up to Rs. 500 for every day during which the
default continues (Section 162) and failure to allow inspection of documents- five of
Rs. 500 per day (Section 163).
vii.
Default in holding statutory meeting or filing the statutory report with the Registrar
fine up to Rs. 5000 (Section 165)
b) Contractual Liabilities - In addition to the statutory liabilities, a number of liabilities arise
out of the Secretary's contract of service with the company and such liabilities are called his
contractual liabilities. The secretary is in a fiduciary relationship (position of trust) to the
company and, therefore,
i.
He should not allow his personal interest to clash with the interest of the company.
ii.
He should not make secret profit by virtue of his office and would be certainly
accountable to the company for any secret profit or similar gain made from the
company.
iii.
He is personally liable for loss to any third party if he acts beyond his authority.
iv.
He is liable for damages caused to the company by wilful misconduct and negligence
in the discharge of his duties.
v.
He should not indulge or engage in any other activity not relating to his company
unless he obtains authority in this regard from the board/managing directors, and
vi.
He cannot reveal trade secrets which he comes to know during his course of
employment.
Rights of Secretary
Rights are given to the secretary by the Companies Act, Board of directors and the general
body of shareholders. He also derives some rights out of his service agreement with the
company. A secretary has the following rights:
a) He has the right to control and supervise the working of his department.
b) As a principal officer of the company, he has the right to sign a document or
proceeding requiring authentication by the company.
c) He has a right to be indemnified by the company for any loss suffered by him while
discharging his duties.
d) As an employee of the company, he has the right to receive remuneration. In the
event of winding-up of the company, he has a right to be treated as a preferential
creditor for his salary subject to a maximum of Rs. 1,000.
Dismissal of Secretary
The appointment of a company secretary is generally done by means of a resolution of the
Board and his dismissal can be done by the Board of Directors or by the Managing Director if
he is authorized by the Board.
The power to remove / suspend / appoint is vested with the Board as per Articles. This can
be delegated to the managing director.
The secretary must be given notice of termination of his employment in accordance with
the terms of his contract of appointment. In the absence of express provision in the
contract, the employee is entitled to a reasonable notice and compensation in lieu of such
notice.
An employee may be dismissed without notice when:
a) For wilful disobedience of any lawful order of the company
b) For misconduct and speculating on the stock exchange
c) For incompetence or permanent disability. Even an act of forgetfulness by an
employee can be held as sufficient cause for dismissing him without notice if it has
or is calculated to have serious results.