Professor Vipin [Year]
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.
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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;
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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,
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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:
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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)
b)
c)
d)
e)
f)
g)
Membership of the ICSI constituted under Company Secretaries Act 1980.
Pass in the intermediate exam conducted by ICSI.
PG Degree of commerce or corporate secretary-ship granted by any University in India.
Degree in law granted by any University
Member of ICAI constituted under Chartered Accountants Act 1949
Member of ICWAI constituted under Cost and Works Accountants Act 1959.
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.
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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).
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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).
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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.
ii.
iii.
To do all those acts which a director (where authorised) or any other managerial personnel
specifically directs him to do.
To assist the chairman to convene Board and general meetings and to make necessary
arrangements in this regard.
To advise directors and managing directors, regarding complying with their statutory duties.
b) Duties towards shareholders and public
i.
ii.
iii.
iv.
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.
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.
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.
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.
ii.
iii.
iv.
Default in filing a return of allotment-fine up to Rs. 5000 for every day during which the
default continues (Section 75),
Default in maintaining a register of securities bought back by the company (Section 77 A),
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 transferfine up to Rs. 5000 for every day during which the default continues (Section 113),
Default in filing particulars of charges on properties acquired subject to charge-fine up to Rs.
5000 (Section 127),
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v.
vi.
vii.
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,
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).
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.
ii.
iii.
iv.
v.
vi.
He should not allow his personal interest to clash with the interest of the company.
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.
He is personally liable for loss to any third party if he acts beyond his authority.
He is liable for damages caused to the company by wilful misconduct and negligence in the
discharge of his duties.
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
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.
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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.
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