B.COM 2nd Semester
Subject: Corporate Laws [Core – 4]
UNIT – 2 SYLLABUS: COMPANY ADMINISTRATION
Director (Concept and Definition), DIN, Qualification, Disqualification, Appointment, Position, Rights,
Duties, Power, Resignation, Liabilities, Removal and Resignation of director, Key Managerial Personnel
(Definition, Appointment and Qualifications) – Managing Director, Whole time Directors, the Companies
Secretary, Chief Financial Officer, Resident Director, Independent Director, Women director.
NEED FOR DIRECTORS
A company being an artificial person cannot act by itself because it has no physical existence. Therefore, it
must act through human beings. The persons by whom the business of the company is carried on are
termed as ‘directors’. A company has two organs, the ‘general body of shareholders’ and the ‘Board of
Directors’.
The directors of a company are its eyes, ears, brain, hands, nerves and other essential limbs, upon whose
efficient functioning depends the success of the company. The directors formulate policies and establish
organisational set up for implementing those policies and to achieve the objectives is contained in the
Memorandum, muster resources for achieving the company objectives and control, guide, direct and
manage the affairs of the company.
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. The Board directs, controls, manages,
and superintends the affairs of a company.
Minimum/Maximum Number of Directors in a Company- Section 149(1):
Section 149(1) of the Companies Act, 2013 requires that every company shall have a minimum number of
3 directors 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. A company can appoint maximum 15 fifteen directors.
A company may appoint more than fifteen directors after passing a special resolution in general meeting
and approval of Central Government is not required.
Directors can exercise powers only when they act collectively. An individual director has no authority to
act on behalf of the company, unless he is authorised by the:
(i) Act
(ii) Articles of Association
(iii) A resolution of the Board of Directors
(iv) A resolution of the shareholders.
Only Individuals to be Directors:
No body corporate, association or firm shall be appointed as a director of a company and only an individual
shall be so appointed (Sec. 149). It is because that the office of a director is an office of trust.
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There should be somebody readily available who can be held responsible for the failure to carry out the
obligations of such an office.
CLASSIFICATION OF DIRECTORS
(1) Shadow Director – Shadow director is the new term, which means that the person who is not
officially appointed by the board but he/she gives such advice to the directors which they are
accustomed to follow except when such shadow director provides the same in his professional
capacity.
In other words, a person in accordance with whose directions and instructions the Board of Directors
of a company is accustomed to act shall be called as ‘Shadow Directors’ as per the English Law.
They are also known as ‘Deemed Directors’. It is not necessary that such person is an individual.
The person may even be a body corporate.
(2) De facto Director – Any person who is not technically a director but according to whose directions
and instructions (rather than expert or professional advice) other directors and/or employees are
accustomed to act is legally deemed a de facto director. Whether or not such person fulfils the
qualifications of a director, or enjoys the rights and privileges of a director, he or she is generally held
liable as a de jure director.
(3) Ordinary Directors – Such persons who simply attend the Board meeting of a company and
participate in matters put forward before the Board are known as ‘Ordinary Directors’. These directors
are neither whole time directors nor managing directors.
(4) Residential Director – As per Section 149(3) of Companies Act, 2013 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 Previous
calendar year.
(5) Whole-time/Executive Directors – This includes a director in the whole-time employment of the
company.
(6) Additional Directors – Such directors are appointed by the Board u/s 161 of the Companies Act, 2013
between two Annual General Meetings (AGMs) subject to the provisions of the Articles of
Associations of a company.
They shall hold office only up to the date of the next AGM of the company. Number of directors and
additional directors together shall not exceed the maximum strength fixed for the Board by the
Articles.
(7) Alternate Director – As per the provisions of Sec. 161 of the Companies Act, 2013, an ‘Alternate
Director’ is a person appointed by the Board if so authorised by the Articles or by a resolution passed
by the company in the general meeting to act for a director called “The Original Director” during his
absence for a period of not less than three months from India.
(8) Professional Directors – Any director possessing professional qualifications and do not have
pecuniary interest in the company is called as “Professional Directors”. The Board may sometimes
appoint such directors to utilise their expertise in the management of the company.
(9) Women Director – Rule 3 of Companies (Appointment and Qualification of Directors) Rules, 2014
requires certain categories of companies to have At Least One Woman director on the board. Such
companies are:
• every listed company;
• every public company with
o Paid Up Capital of Rs. 100 crore or more, or
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o Turnover of Rs. 300 crore or more.
(10) Nominee Directors – They can be appointed by certain shareholders, third parties through contracts,
lending public financial institutions or banks, or by the Central Government in case of oppression or
mismanagement.
(11) Managing Director – Section 2(54) of the Companies Act, 2013, defines ‘managing director ‘as a
director who, by virtue of the articles of a company or an agreement with the company or a resolution
passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of
management of the affairs of the company and includes a director occupying the position of
managing director, by whatever name called.
He must be entrusted by the administrative acts of a routine nature when so authorised by the Board
such as the power to affix the common seal of the company to any document or to draw and endorse
any cheque on the account of the company in any bank or to draw and endorse any negotiable
instrument or to sign any certificate of share or to direct registration of transfer of any share, from the
substantial powers of management.
(12) Small Shareholders’ Director – According to Section 151 of the Companies Act, 2013 every listed
company may have one director elected by “small shareholders”.
For the purpose of this section, “small shareholder” means a shareholder holding shares of
nominal value of not more than twenty thousand rupees or such other sum as may be
prescribed.
Rule 7 of the Companies (Appointment and Qualification of Directors) Rules, 2014
(i)
A listed company may suo moto opt to have a director representing small shareholders.
(ii)
A listed company, may upon notice of not less than 1000 or one-tenth of the total number of
small shareholders, whichever is lower, have a small shareholders’ director elected by the small
shareholders.
(iii) The small shareholders intending to propose a person as a candidate for the post of small
shareholder’s director shall leave a signed notice of their intention with the company at least 14
days before the meeting.
(iv) The notice shall be accompanied by a statement signed by the proposed director for the post of
small shareholders’ director stating
a. his Director Identification Number;
b. that he is not disqualified to become a director under the Act; and
c. his consent to act as a director of the company.
(v)
The director’s tenure as small shareholders’ director shall not exceed a period of 3
consecutive years and he shall not be liable to retire by rotation. Further he shall not be
eligible for re-appointment after the expiry of his tenure.
(vi) In case of listed company, the election of small shareholders’ director will be through postal
ballot.
(vii) Simultaneously he shall not hold the office of small shareholders’ director in more than two
companies.
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(13) Chief Financial Officer (CFO) – As per Section 2 sub section 19 of Companies Act, 2013
A person appointed as the Chief Financial Officer of a Company. Generally a person who leads the
finance and treasury functions of a business enterprise is designated as “CFO”.
The person appointed as the CFO under this Act is also considered as a Key Managerial Personnel
(KMP). A CFO of the company should be a person who is appointed as a CFO and not engaged in
any other manner (retainer or consultant) or by any other designation.
(14) Independent Director – Section 149(6) gives the definition of Independent Director, in relation to a
company, which means a director other than a managing director or a whole time director or a
nominee director –
(a) who in the opinion of the Board, is a person of integrity and possesses relevant expertise and
experience;
(b) who is or was not a promoter of the company or its holding, subsidiary or associate company;
(c) who is not related to promoters or directors in the company, its holding, subsidiary or associate
company;
(d) who has or had no pecuniary relationship with the company, its holding, subsidiary or associate
company, or their promoters, or directors, during the two immediately preceding financial years of
the current financial year.
(e) none of whose relatives has or had pecuniary relationship or transaction with the company, its
holding, subsidiary or associate company, or their promoters, or directors, amounting to two percent.
or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be
prescribed, whichever is lower, during the two immediately preceding financial years or during the
current financial year;
(f) who, neither himself nor any of his relatives—
(i)
holds or has held the position of a key managerial personnel or is or has been employee of the
company or its holding, subsidiary or associate company in any of the three financial years
immediately preceding the financial year in which he is proposed to be appointed;
(ii) is or has been an employee or proprietor or a partner, in any of the three financial years
immediately preceding the financial year in which he is proposed to be appointed, of—
A. a firm of auditors or company secretaries in practice or cost auditors of the company or its
holding, subsidiary or associate company; or
B. any legal or a consulting firm that has or had any transaction with the company, its holding,
subsidiary or associate company amounting to ten per cent. or more of the gross turnover of
such firm;
(iii) holds together with his relatives two per cent. or more of the total voting power of the
company; or
(iv) is a Chief Executive or director, by whatever name called, of any non-profit organisation that
receives twenty-five per cent. or more of its receipts from the company, any of its promoters,
directors or its holding, subsidiary or associate company or that holds two per cent. or more of
the total voting power of the company.
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Qualification of Independent Directors
An independent director shall possess appropriate skills, experience and knowledge in one or more
fields of finance, law, management, sales, marketing, administration, research, corporate governance,
technical operations or other disciplines related to the company’s business.
Appointment of an Independent Director- Section 149(10)
An independent director can be appointed for a term of up to five consecutive years on the Board.
However, in case of his reappointment for further five year then special resolution passed in general
meeting and disclosure of such appointment is made in the Board’s report shall be required.
The provisions of retirement of directors by rotation are not applicable on Independent director.
[Section 149 (13)]
Further, in case of independent directors, the explanatory statement relating to their appointment
should contain a declaration from the Board that in their opinion, the independent directors satisfy the
conditions provided in the Act for such appointment. [proviso to Section 152 (5)]
DIRECTOR IDENTIFICATION NUMBER (DIN)
Director Identification Number (DIN) is a unique identification number given to an existing or a potential
Director of any company which is incorporated.
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).
(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 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. Such communication may be sent by post or
electronically or in any other mode.
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(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 (Provisional DIN generated by
the system shall be valid for a period of 60 days) so allotted by the system shall get lapsed
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.
DIGITAL SIGNATURE CERTIFICATE (DSC)
Digital Signature Certificates (DSC) are the digital equivalent (that is electronic format) of physical or
paper certificates. In other words, DSC is a digital equivalent of a hand written signature which has an
extra data attached electronically to any message or a document.
Few Examples of physical certificates are drivers' licenses, passports or membership cards. Certificates
serve as proof of identity of an individual for a certain purpose; for example, a driver's license identifies
someone who can legally drive in a particular country. Likewise, a digital certificate can be presented
electronically to prove one’s identity, to access information or services on the Internet or to sign certain
documents digitally.
Process of obtaining DSC from Certifying Authority:
•
•
•
Digital Signature Certificate (DSC) Applicants can directly approach Certifying Authorities (CAs)
with original supporting documents, and self-attested copies will be sufficient in this case. The time
generally taken by CAs to issue a DSC may vary from three to seven working days.
DSCs can also be obtained, wherever offered by CA, using Aadhar eKYC based authentication, and
supporting documents are not required in this case. On fulfilment of terms and conditions, DSC is
issued by some CA’s on same day based on eKYC for Aadhaar Holders.
A letter/certificate issued by a Bank containing the DSC applicant’s information as retained in the
Bank database can be accepted. Such letter/certificate should be certified by the Bank Manager.
Certifying Authority:
A licensed Certifying Authority (CA) issues the digital signature. Certifying Authority (CA) means a
person who has been granted a license to issue a digital signature certificate under Section 24 of the Indian
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IT-Act 2000.The list of licensed CAs along with their contact information is available on the MCA portal.
Few examples of Certifying Authority are National Informatics Center (NIC), NSDL, CDAC etc.
Types of DSC valid for MCA21 program: The different types of Digital Signature Certificates are:
Class 2: Here, the identity of a person is verified against a trusted, pre-verified database.
Class 3: This is the highest level where the person needs to present himself or herself in front of a
Registration Authority (RA) and prove his/ her identity.
DSC of either Class 2 or Class 3 signing certificate category issued by a licensed Certifying Authority
(CA) needs to be obtained for e-Filing on the MCA Portal.
Validity – The Certifying Authorities are authorized to issue a Digital Signature Certificate with a validity
of one or two years.
Digital Signatures are legally admissible in a Court of Law, as provided under the provisions of IT Act,
2000.
NUMBER OF DIRECTORSHIPS (SECTION 165)
•
•
•
Maximum number of directorships, including any alternate directorship a person can hold is 20.
Maximum number of public companies* in which a person can be appointed as a Director is 10.
*Public companies shall include private companies that are either holding or subsidiary company of a
public company.
If a person accepts an appointment as a director in contravention of above mentioned provisions, he
shall be punishable with fine which shall not be less than Rs. 5,000 but which may extend to Rs.
25,000 for every day after the first day during which the contravention continues.
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 subsequent 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.
5.
Articles of the Company may provide the provisions relating to retirement of the all directors. If there
is no provision in the Articles, 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.
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6.
Further, independent directors shall not be included for the computation of total number of
directors. 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.
7.
The directors to retire by rotation at every annual general meeting shall be those who have been
longest in office since their last appointment.
8.
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.
9.
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.
10. 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
(v)
Section 162 i.e. appointment of directors to be voted individually is applicable to the case.
Appointment by the Board
The BOD may make the following appointments:
(A)
Additional directors
(B)
Alternative directors
(C)
Casual vacancy
(A) Appointment of Additional Director – Section 161(1):
• The Board of Directors can appoint additional directors, if such power is conferred on them by the
articles of association.
• Such additional directors hold office only up to the date of next annual general meeting or the last date
on which the annual general meeting should have been held, whichever is earlier.
• A person who fails to get appointed as a director in a general meeting cannot be appointed as
Additional Director.
((
(B) Appointment of Alternate Director – Section 161(2):
(i) The Board of Directors of a company must be authorised by its articles or by a resolution passed by
the company in general meeting for appointment of alternate director.
(ii) The person in whose place the Alternate Director is being appointed should be absent for a period of
not less than 3 months from India.
(iii) The person to be appointed as the Alternate Director shall be the person other than the person holding
any alternate directorship for any other Director in the Company.
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(iv) If it is proposed to appoint an Alternate Director to an Independent Director, it must be ensured that
the proposed appointee also satisfies the criteria for Independent Directors.
(v) An alternate director shall not hold office for a period longer than that permissible to the director in
whose place he has been appointed and shall vacate the office if and when the director in whose place
he has been appointed returns to India.
(vi) If the term of office of the original director is determined before he so returns to India, any provision
for the automatic reappointment of retiring directors in default of another appointment shall apply to
the original, and not to the alternate director.
(C) Appointment of Directors in causal vacancy – Section 161(4):
•
If any vacancy is caused by death or resignation of a director appointed by the shareholders in
General meeting, before expiry of his term, the Board of directors can appoint a director to fill up
such vacancy.
•
The appointed director shall hold office only up to the term of the director in whose place he is
appointed.
Appointment by Third Parties:
Sec. 152 permits one-third of the total number of directors of a public company and of a private
company which is a subsidiary of a public company to be appointed by parties other than shareholders on a
non-rotational basis.
The Articles may give right to debenture holders, financial corporations or banking companies who have
advanced loans to the company to nominate directors on the Board of the company.
Appointment by the Central Government:
Where all the director of a company vacates their offices under any of the specified disqualifications, in the
absence of the promoter, the central government shall appoint the required number of the directors.
The Central Government also has the power to appoint directors on an order passed by the NCLT to
effectively safeguard the interest of the company or its shareholders or the public interest to prevent
mismanagement or oppression.
Such directors shall hold office for a period not exceeding three years on any occasion.
Appointment of Special Directors in case of Sick Industrial Companies:
The NCLT may appoint one or more persons who possess knowledge, expertise in management and
control of the affairs of any other company to be a special director on the Board of a Sick Industrial
Company.
Any provision regarding share qualification, age, limit, number of directorship, removal from office etc.
shall not apply to a special director appointed by NCLT.
Appointment of directors to be voted individually – Section 162(1):
A single resolution shall not be moved for the appointment of two or more persons as directors of the
company unless a proposal to move such a motion has first been agreed to at the meeting without any vote
being cast against it.
A resolution moved in contravention of aforesaid provision shall be void, whether or not any objection was
taken when it was moved.
A motion for approving a person for appointment, or for nominating a person for appointment as a director,
shall be treated as a motion for his appointment.
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QUALIFICATION OF A DIRECTOR
As regards to the qualification of directors, there is no direct provision in the Companies Act, 2013. An
Indian company may, therefore, in its Articles, stipulate qualifications for Directors. But, according to the
different provisions relating to the directors, the following qualifications may be mentioned:
1.
2.
3.
4.
5.
A director must be a person of sound mind.
A director must hold share qualification, if the article of association provides such.
A director must be an individual.
A director should be a solvent person.
A director should not be convicted by the Court for any offence, etc.
Qualification Shares:
• It that number of shares which directors of the company must hold (if the Articles of the company so
provide) to become the directors of the said company.
• Every director must obtain qualification share within 2 months of appointment and its nominal
value shall not exceed Rs. 5,000.
• Where the nominal value of one shall exceed Rs. 5,000, share qualification shall be holding of one
share only.
• It may be noted that the bearer of share warrant is not deemed to be a holder of qualification shares.
• If a director fails to obtain qualification shares within 2 months, he cannot act as a director.
• If a person acts as a director when he knows that the office of director held by him has become vacant,
he shall be punishable with fine up to Rs. 5,000 per day for the period he acts as a director [Sec. 283
(2A)].
• If a person acts as a director of a company without holding the qualification shares, he shall be
punishable with fine which may extend to Rs. 500 per day for the period he acts as a director [Sec.
272].
• Therefore, the cumulative fine up to Rs. 5,500 (Rs. 5,000 + Rs. 500) per day can be charged for the
period he acts as a director if qualification shares are not obtained within 2 months.
DISQUALIFICATIONS FOR APPOINTMENT OF DIRECTOR – SECTION 164
(1) A person shall not be eligible for appointment as a director of a company, if —
(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 six months and a period of five
years has not elapsed from the date of expiry of the sentence.
If a person has been convicted of any offence and sentenced in respect thereof to imprisonment for
a period of seven years or more, he shall not be eligible to be appointed as a director in any
company;
(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 six months have elapsed from the last day fixed for the payment of the call;
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(g) he has been convicted of the offence dealing with related party transactions under section 188 at
any time during the last preceding five years; or
(h) he has not got the DIN.
(2) Any person who is or has been director of any company which has not filed any financial statements
and Annual Return for 3 continuous financial year or has defaulted in payment of
debentures/deposit/dividend etc., shall also not be eligible for appointment as director of any
public company and for reappointment in the same company for a period of five years from the date
on which the said company fails to do so.
Rule 14 prescribed that every director who disqualified u/s 164 (2), shall inform to the company
concerned in Form DIR-8 (Intimation by Director) before he is appointed or re-appointed.
(3) A private company may by its articles provide for any disqualifications for appointment as a director in
addition to aforesaid mentioned.
DUTIES OF DIRECTORS – SECTION 166
For the first time, duties of directors have been defined in the Act. A director of a company shall:
• Act in accordance with the articles of the company.
• Act in good faith in order to promote the objects of the company for the benefit of its members as a
whole, and in the best interests of the company, its employees, the shareholders, the community and
for the protection of environment.
• Exercise his duties with due and reasonable care, skill and diligence and shall exercise independent
judgment.
• Not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly
may conflict, with the interest of the company.
• Not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives,
partners, or associates and if such director is found guilty of making any undue gain, he shall be liable
to pay an amount equal to that gain to the company.
• Not assign his office and any assignment so made shall be void.
If a director of the company contravenes the provisions of this section such director shall be punishable
with fine which shall not be less than Rs. 1,00,000 but which may extend to Rs. 5,00,000.
VACATION OF OFFICE OF DIRECTOR – SECTION 167
The office of a director shall become vacant in case—
(a) He incurs any of the disqualifications specified in section 164;
(b) He absents himself from all the meetings of the Board of Directors held during a period of twelve
months with or without seeking leave of absence of the Board;
(c) 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;
(d) He fails to disclose his interest in any contract or arrangement in which he is directly or indirectly
interested
(e) He becomes disqualified by an order of a court or the Tribunal;
(f) 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;
Provided that the office shall be vacated by the director even if he has filed an appeal against the order
of such court;
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(g) He is removed in pursuance of the provisions of this Act;
(h) 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.
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 above, he shall be punishable with
imprisonment for a term which may extend to 1 year or with fine which shall not be less than Rs.
1,00,000 but which may extend to Rs. 5,00,000 or with both.
LEGAL POSITION OF A DIRECTOR
It is very difficult to define precisely the position of directors in a company. The Companies Act, 2013, is
also silent on this issue. Directors have been described sometimes as trustees, sometimes as agents or
sometimes as managing partners. They have some attributes of all of them, but they are neither trustees nor
managing partner in full sense of the term.
The legal position can be discussed as under:
1.
Directors as Agents:
Directors are, in the eyes of law, agents of the company for which they act. The company itself cannot
act, it can act only through directors and due to this, a relation of principal and agent is established
between the company and the directors. Where the liability would attach to the principal and principal
only, the liability is the liability of the company.
Where the directors make contracts on behalf of the company, they incur no personal liability provided
they act within the scope of their authority. In such a case, the company alone would be liable.
Example: ‘E’ agreed to supply goods to a company. The contract was made at a Board meeting at
which ‘H’ was the chairman. The payment was to be made by the issue of 600 of the company’s
debentures. ‘E’ constantly pressed for the debentures but none was issued and eventually the company
went into liquidation. It was held that ‘H’ was not liable to an action [Elkington & Co. v. Hurter
(1892), 2 Ch. 452].
However, Directors incur a personal liability in the following circumstances:
(a) Where the contract in their own names.
(b) Where they use the company’s name incorrectly.
(c) Where directors exceed their powers.
But, the position of directors differs from that of the agents because an agent can enter into a contract
in his own name but a director cannot. Again, an agent may not disclose the name of his principal but a
director must disclose the name of his principal.
Hence, the directors are not agents in the true sense.
2.
Directors as Trustees:
A trustee is a person who is vested with the legal ownership of certain property, which he has to
administer for the benefits of others.
The directors have also been described as trustees of the company. They are trustees of the company’s
money or property which comes into their hands or which is actually under their control and of the
powers entrusted to them.
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But in real sense, the position of directors differs from that of the trustees because a trustee can’t be an
employee of the trust but a director can be an employee of the company.
Again, an artificial person can become a trustee but an artificial person cannot become a director. As,
only individual can be a director. Hence, directors may better be considered as quasi trustee.
Following court cases may be referred:
(i)
In Lands Allotment Co., Re, (1894) 1 Ch. 616, 631, it was held by the court that although the
directors are not, properly speaking, trustees, yet they have always been considered and treated
as trustees of money which comes to their hands or which are actually under their control and
directors are held liable to make good, the money which they have misapplied upon the same
footing as if they were trustees.
(ii)
In Selangor United Rubber Estates v. Cradock (1968) 1 WLR 1555, it was held that the directors
were trustees of the money standing to the credit of the company’s bank account which they
operated.
(iii) In Baket v. Gibbons [1972] 1 WLR 693 it was held that the position of trusteeship of directors
also extended to trade secrets and other items of intellectual property.
3.
Directors as Officers:
As per Section 2(59) of the Companies Act, 2013, “officer” includes any director, manager or key
managerial personnel or any person in accordance with whose directions or instructions the Board of
Directors or any one or more of the directors is or are accustomed to act.
Under sec. 2(59) of the Companies Act, they are liable to certain penalties if the provisions of the
Companies Act are not complied with.
Moreover, whether or not a director is in the employment of the company, he shall be treated as an
officer of the company.
4.
Directors as Employees:
Although directors are agents of the company, they are not employees or servants of the company.
Hence, they cannot claim their remuneration as a preferential creditor in the event of winding up of a
company under sec. 327 of the Companies Act, 2013.
But where any director, besides being a director, is also in the service or employment of the company,
such as secretary, manager, accountant or otherwise, he will be treated as an employee.
As such he will be entitled to the remuneration and other benefits admissible to him as an employee in
addition to his rights as a director to sitting fee, etc.
5.
Directors as Managing Partners:
The directors are also sometimes described as managing partners because like a partner of a firm, they
manage the affairs of the company and they are also usually important shareholders of the company.
They do all proprietorial functions like allotting shares, making calls, forfeiting shares etc.
However, all the partners of a firm act on the principal of mutual agency. But it is not so in the case of
directors. A director has no authority to bind the other directors and shareholders. Moreover, directors
are subject to retirement by rotation whereas partners of a firm are not.
Hence, the directors are not managing partners in the full sense.
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6.
Directors as Organs of a Company:
The organic theory of corporate life “treats certain officials as organs of the company, for whose action
the company is held liable just as a natural person is for the action of his limbs.
Thus, the modern directors are more than mere agents or trustees. The Board is also correctly
recognised to be a primary organ of the company. Directors and managers represent the directing mind
or will of the company and control what it does.
The state of mind of these managers is the state of mind of the company and is treated by law as such.
Hence, the Board of Directors are the brain and the only brain of the company which is the body and
the company can act only through them.
POWERS OF DIRECTORS
On incorporation, a company becomes a legal artificial person but it cannot act by itself and consequently it
has to depend upon some human agency to act in its name. A large sized company may have its members
running into lakhs, who are dispersed all over the country and they even lack the expertise to manage the
affairs of the company, which makes it impossible to give the management of the company in their hands.
Therefore, a specialized body of persons called as Board of Directors are appointed by the members to
manage the affairs of the company. The Board is the managerial body constituted by the members to whom
is entrusted the whole management of the company.
The powers which vest in the board can be classified under the following heads:
(1) General Powers: General Powers are those which can be exercised in accordance with the articles.
These powers are laid down in sec. 179 of the Companies Act, 2013. It empowers the board to exercise
all such powers and do all such acts and things, as the company is authorised to exercise and do. There
are, however, two limitations upon their powers:
•
First, the Board shall not do any act which is to be done by the company in general meeting
•
Second, the Board shall exercise its powers subject to the provisions contained in the Companies
Act, or in the Memorandum or the Articles of the company or in any regulations made by the
company in general meeting.
Right of Shareholders to Intervene:
The directors shall exercise their powers bona fide and in the interests of the company. But, once
specific powers of control and management have been granted by the company to its directors, the
company cannot without justification impose its will at a general meeting. The shareholders cannot
dictate to the directors the manner in which their executive authority is to be employed.
In the following exceptional cases, the general meeting is competent to intervene in a matter
delegated to the Board.
(A) Directors acting malafide: When the directors are themselves the wrongdoers against the
company and have acted malafide or beyond their powers, and their personal interest is in conflict
with their duty, the majority of shareholders must in such a case be entitled to take steps to redress
the wrong by controlling the action of the directors.
(B) Board incompetent: The general body of shareholders my exercise the powers vested in the
Board when there is no legally constituted Board which could function or if there is a Board
but is unable or unwilling to act.
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(C) Deadlock in the Board: When the directors are unable to act on account of a deadlock and the
administration was at a standstill, the shareholders have the inherent power to take necessary steps
to ensure the working of the company.
(D) Residuary Powers: The residuary powers of a company reside in the general meeting of the
shareholders and the shareholders can always exercise such residuary powers.
(2) Powers to be exercised at Board meetings [Sec. 179 (3)]: The Board of directors of a company shall
exercise the following powers on behalf of the company by means of resolutions passed at the
meetings of the Board, viz. the power to:
(a) to make calls on shareholders in respect of money unpaid on their shares;
(b) to authorise buy-back of securities under section 68;
(c) to issue securities, including debentures, whether in or outside India;
(d) to borrow monies;
(e) to invest the funds of the company;
(f) to grant loans or give guarantee or provide security in respect of loans;
(g) to approve financial statement and the Board’s report;
(h) to diversify the business of the company;
(i) to approve amalgamation, merger or reconstruction;
(j) to take over a company or acquire a controlling or substantial stake in another company;
(k) any other matter which may be prescribed.
(3) Powers to be exercised with the approval of company in general meeting (Sec. 180):
(a) Sale or lease of the company’s undertaking
(b) Extension of the time for payment of a debt due by a director
(c) Investment of compensation received on acquisition of the company’s assets in securities other
than trust securities
(d) Borrowing of money beyond the paid-up capital of the company
(e) Contributions to any charitable fund beyond Rs.50,000 in one financial year or 5% of the average
net profits during the preceding three financial years, whichever is greater.
(4) Powers under rule 8:
Rule 8 of the Companies rule, 2014 provides that, the following powers shall be exercised only by
means of resolutions passed at meeting of the board, namely:
(a) To make political contribution;
(b) To appoint or remove key managerial personnel (KMP);
(c) To take note of appointment(s) or removal of one level below the KMP;
(d) To appoint internal auditors and secretarial auditors;
(e) To take note of the disclosure of director’s interest and shareholding
(f) To accept or renew or review the terms and conditions of public deposits.
(g) To approve quarterly, half yearly and annual financial statements or financial results as the case
may be.
(5) Other powers:
In addition to the items referred above, there are various other matters, as illustrated below in the
routine working of a company which are considered by the Board at Board meetings:
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(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
Issuance of shares;
Allotment of shares and debentures;
Appointment of directors and managing director / whole-time directors;
Consideration of Annual Accounts;
Approval of interim dividend and recommendation of final dividend;
Appointment of selling/buying agents;
Merger and acquisition of companies;
Capitalisation of reserves and issuance of bonus shares;
Appointment of auditors in casual vacancy caused otherwise than by resignation;
Appointment of whole-time secretary for issuance of compliance certificate.
RIGHTS OF DIRECTORS
Rights can be categorized into individual rights and collective rights.
Individual rights are:
(a)
Right to inspect books of accounts [Section 128(3)]
(b)
Right to receive notices of board meetings [Section 173(3)]
(c)
Right to receive draft circular resolutions [Section 175]
(d)
Right to receive sitting fee [Section 197(5)]
(e)
Right to be heard at the General Meetings [Section 169(3)]
(f)
Right to inspect minutes of board meetings [Section 118]
(g)
Right to record his dissent [Section 118(4) (b)]
(h)
Right to participate and vote at Board meetings
(i)
Right to claim travel, stay and other expenses
(j)
Right to summon board meetings
(k)
Right to ask the board to appoint alternate director
Collective rights are as follows:
(i)
Right to refuse to transfer shares: According to Section 58 of the Act, directors of private
companies and deemed public companies are entitled to refuse registration of transfer of shares to a
person whom they do not approve.
(ii) Right to elect a Chairman: The directors are entitled to elect a chairman for the board meetings.
(iii) Right to appoint a Managing director: The Board has the right to appoint the managing director/
manager (as defined in the Act) of the company.
(iv) Right to recommend dividend: The Board is entitled to decide whether dividend is to be paid or
not. Shareholders cannot compel the directors to pay dividend. However, they can reduce the rate of
recommended dividend.
RESIGNATION OF DIRECTORS – Section 168 and Rule 15, 16
➢ Written Notice of Resignation – A director may resign from his office by giving notice in writing.
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➢ Intimation by the Board – The Board shall, on receipt of such notice within 30 days intimate the
Registrar in Form DIR-12. Also, the Board shall place the fact of such resignation in the Directors’
Report of subsequent general meeting of the company and post the information on its website.
➢ Copy of Resignation along with the reason – The director shall also forward a copy of resignation
along with detailed reasons for the resignation to the Registrar in Form DIR-11 within 30 days
from the date of resignation.
➢ Effective date of Resignation – The notice shall become effective from the date on which the notice
is received by the company or the date, if any, specified by the director in the notice, whichever is
later.
➢ Liability of the director after resignation – The director who has resigned shall be liable even after
his resignation for the offences which occurred during his tenure.
➢ Power to appoint directors where all directors resign – If all the directors of a company resign from
their office or vacate their office, the promoter or in his absence the Central Government shall appoint
the required number of directors to hold office till the directors are appointed by the company in
General Meeting.
REMOVAL OF DIRECTORS
(1) REMOVAL BY SHAREHOLDERS (SECTION 169):
➢ Removal by Ordinary Resolution – A company may, remove a director except the director
appointed by National Company Law Tribunal u/s 242, before the expiry of the period of his
office after passing the ordinary resolution.
➢ Special Notice of Resolution – A special notice shall be required of any resolution, to remove a
director under this section, or to appoint somebody in place of a director so removed, at the
meeting at which he is removed.
➢ Opportunity of being heard – The company shall send a copy of the resolution 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.
➢ Written representation by the director to be removed – If the director concerned makes any
representation in writing to the company and requests its notification to members of the company,
the company shall, if the time permits it to do so,—
• state the fact of the representation in any notice of the resolution given to members of the
company;
• send a copy of the representation to every member of the company to whom notice of the
meeting is sent (whether before or after receipt of the representation by the company);
• if a copy of the representation is not sent as aforesaid due to insufficient time or for the
company’s default, the representation shall be read out at the meeting.
➢ Filling up of the vacancy –
• A vacancy created by the removal of a director under this section may, be filled by the
appointment of another director in his place at the meeting at which he is removed.
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• If the vacancy is not filled under sub-section (5), it may be filled as a casual vacancy in
accordance with the provisions of this Act, provided that the director who was removed from
office shall not be re-appointed as a director by the Board of Directors.
➢ Tenure of office of the new director – A director so appointed shall hold office till the date up to
which his predecessor would have held office if he had not been removed.
➢ Compensation – A director so removed shall not be deprived of any compensation or damages
payable to him in respect of the termination of his appointment as director as per the terms of
contract or terms of his appointment as director, or of any other appointment.
(2) REMOVAL BY THE TRIBUNAL (SECTION 242):
➢ On application to the Tribunal for prevention of oppression and mismanagement, the Tribunal
may terminate, or set aside or modify any agreement between the company and the MD or any
other director or manager.
➢ On termination, such director cannot serve the company in a managerial capacity for a period of
five years from the date of the order of termination, without the permission of the Tribunal.
➢ The director on removal cannot sue the company for damages or compensation for loss of office.
LIABILITIES OF DIRECTORS
The liabilities of Directors can be considered under the following heads:
(I) Civil Liability:
(1) Liability towards the Company: The liability of the Directors to the company may arise from:
(a) Breach of trust – Whenever a director works dishonestly to the interest of company, he will be
held liable for breach of trust because most of the powers of Directors are ‘powers in trust’.
Therefore, such powers should be exercised in the benefit of company and not for their own
benefit or for the benefit of other members.
(b) Ultra Vires acts – Everybody in the company are supposed to work within the prescribed limits
or the provisions of Companies Act, Memorandum and Articles of association since they lay down
the limits to the activities of the company and consequently to the power of Board of Directors. If
the Directors do anything which is beyond these prescribed limits, it would be considered as ultra
vires and so they shall be made personally liable for this.
(c) Negligence – If the directors fail to exercise reasonable care, skill and diligence, they shall be
deemed to have acted negligently in discharge of their duties and consequently shall be liable for
any loss or damage resulting therefrom.
(d) Misfeasance – Misfeasance is defined as any breach of duty in the conduct of the company’s
affairs which causes loss to the company. It is something more than negligence. Any fraud or
secret dealing by the director will render him liable to the company for any loss suffered by the
company as a result of such activity.
(2) Liability to Third Parties:
(i)
As to Contracts – Directors being the agents of the company are not liable to third parties on
contracts which they make on behalf of the company. They will be liable only when ordinary
agents will be liable under those circumstances.
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Example: ‘F’ had an option to subscribe for some of the company’s shares. Accordingly, he
applied for the shares. The directors allotted the whole of its authorised capital to other persons,
including themselves. Consequently, the option given to ‘F’ became worthless. ‘F’ sued ‘W’, one
of the directors of the company, claiming that ‘W’ should transfer some of his own shares to ‘F’
and pay damages. It was held that F’s claim failed on the ground that the directors of a company
acting in normal course of their duties are agents for their company and incur no personal
liability [Ferguson v. Wilson (1866) L.R. 2 Ch. App. 77].
(ii)
As to frauds and torts – A director who is a party to a fraud, or to the commission of any other
tort is personally liable to the injured party. But, a director is not liable for the fraud of his codirectors unless it is authorised by him or he has participated therein.
(iii) Liability under the provisions of the Act: The directors are personally liable to third
parties in the following cases:
(a) For any misstatement in the prospectus, the directors shall be liable to pay compensation to
every person who has subscribed for shares on the faith of such prospectus (Sec. 35).
(b) For the failure to repay application money on non-receipt of minimum subscription (Sec. 39
read along with SEBI guidelines).
(c) Where the directors knowingly contravene the provisions as to allotment, they are liable to
compensate the company and the allottee for any loss or damage suffered.
(d) Failure to repay application money on refusal to list shares by the Stock Exchange (Sec. 40).
(e) In case of fraudulent trading by the company, the directors may be held personally liable by
an order of the Court u/s 339 of the Companies Act, 2013.
(II) Criminal Liability:
Under the Companies Act, 2013, criminal proceedings against directors may be instituted in
pursuance of the following Sections, among others, resulting in imprisonment:
(a) Section 34 – Filing of prospectus containing untrue statements – it has the same liability as that of
fraud under Section 447 of the Act i.e. punishable with imprisonment for a term ranging from six
months to 10 years.
(b) Section 74 – Inviting deposits in contravention of the rules or manner or conditions – seven years
imprisonment and fine not less than Rs. 25 lakhs.
(c) Section 26 – Issuing false advertisement inviting deposits – three years imprisonment and/or Rs.
50,000 fine.
(d) Section 36 – Fraudulently inducing persons to invest money – imprisonment up to 10 years or
fine.
(e) Section 40 – Failure to repay application money – imprisonment up to one year and fine not less
than Rs. 5 lakhs and maximum Rs. 50 lakhs.
(f) Section 66 – Concealing name of creditor – imprisonment up to 10 years or fine or both.
(g) Section 164 – Undischarged insolvent acting as director – imprisonment or fine or both.
(h) Section 127 – Default in distributing dividends – 2 years imprisonment and fine not less than Rs.
1000 per day of default.
(i) Section 207, 208A – Failure to assist Registrar in inspection of books of accounts etc. –
imprisonment up to one year and fine not less than Rs. 25,000 which may extend to Rs. 1 lakh.
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(j) Section 129 – Failure to lay Balance Sheet etc. at the AGM – imprisonment up to one year or fine
up to Rs. 50,000 or both.
(k) Section 134 – Failure to attach to Balance Sheet a report of the Board – imprisonment up to 3
years for each offence or fine not less than Rs. 50,000 and maximum Rs. 25 lakhs.
(l) Section 222 – Improper issue of shares – imprisonment up to six months or fine of one lakh and
maximum 25 lakhs.
(m) Section 243 – Acting as director after removal by Court – imprisonment up to six months or fine
up to Rs. 5 lakhs or both.
(n) Section 185 – Grant of loan to directors – Simple imprisonment up to six months or fine of Rs. 5
lakhs and maximum Rs. 25 lakhs.
(o) False declaration of company’s solvency – imprisonment or fine or both.
KEY MANAGERIAL PERSONNEL
The Companies Act, 2013 has for the first time recognized the concept of Key Managerial Personnel. As
per section 2(51) “key managerial personnel”, in relation to a company, means—
(i) the Chief Executive Officer or the managing director or the manager;
(ii) the company secretary;
(iii) the whole-time director;
(iv) the Chief Financial Officer; and
(v) such other officer as may be prescribed.
MANAGING DIRECTOR
Section 2(54) of the Companies Act, 2013, defines ‘managing director’ “as a director who, by virtue of
the articles of a company or an agreement with the company or a resolution passed in its general
meeting, or by its Board of Directors, is entrusted with substantial powers of management of the
affairs of the company and includes a director occupying the position of managing director, by
whatever name called.”
Important Features:
(a) A Managing Director (MD) must be an individual. His appointment is automatically terminated if he
ceases to act as director.
(b) A managing director is entrusted with substantial (not the whole) powers of management.
(c) An MD exercises his powers subject to the superintendence, control and direction of the Board. Hence,
an MD is subordinate to the Board.
(d) Therefore, the appointment of a managing director or whole-time director or manager and the terms
and conditions of such appointment and remuneration payable thereon must be first approved by the
Board of directors at a meeting and then by an ordinary resolution passed at a general meeting of the
company.
(e) An MD is generally a whole-time employee of the company. Of course, a director who is not in
employment of the company, may also be appointed as an MD.
(f) A company shall not appoint or employ at the same time a managing director and a manager
(Sec. 196).
(g) Tenure: Appointment of Managing Director, Whole-Time Director or Manager shall not be for a
term exceeding five years at a time.
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(h) Re-appointment: The Company may re-appoint him for next term before expiry of their present term
but not earlier than one year before expiry of the current term. This means, company may re-appoint
them for next term in last one year of current term. He may be reappointed or the tenure may be
extended by successive five years each.
(i) Remuneration to Managerial Personnel:
▪ Section 197 of the Companies Act, 2013 prescribed the maximum ceiling for payment of
managerial remuneration by a public company to its managing director whole-time director and
manager which shall not exceed 11% of the net profit of the company in that financial year.
▪ A managing director or director or manager may be paid remuneration either by way of a:
• monthly payment or
• at a specified percentage of the net profits of the company or partly by one way and partly by
the other. [Section 197 (6)].
▪ The remuneration payable to any one managing director or whole-time director or manager
shall not exceed 5% of the net profits of the company and if there are more than one such
director remuneration shall not exceed 10% of the net profits to all such directors and manager
taken together.
Appointment of Managing Director:
According to the definition given by the Act, the appointment of an MD can be made by:(a) An agreement with the company; or
(b) A resolution passed by the company in general meeting; or
(c) A resolution passed by its Board of Directors.
Every such appointment shall be made either:
(i) With the approval of the Central Government; or
(ii) In accordance with Schedule V.
Disqualification of MD, Whole-Time Director or Manager:
No company shall appoint or continue the employment of any person as managing director, whole-time
director or manager who:
(a) is below the age of 21 years or has attained the age of 70 years.
(b) is an undischarged insolvent or has at any time been adjudged as an insolvent;
(c) has at any time suspended payment to his creditors or makes, or has at any time made, a composition*
with them; or
(d) has at any time been convicted by a court of an offence and sentenced for a period of more than six
months.
*Composition – A composition is an agreement made between a debtor and his creditors by which the
creditors accept a part of their claim in satisfaction of the whole.
Apart from this, Part I of Schedule V contains five conditions which must be satisfied by a person to be
eligible for appointment as managing director, whole-time director or manager without the approval of the
Central Government.
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These conditions are as below:
(a) 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 any of the following Acts, namely:
(i) the Indian Stamp Act, 1899,
(ii) the Central Excise Act, 1944,
(iii) the Industries (Development and Regulation) Act, 1951,
(iv) the Prevention of Food Adulteration Act, 1954 ,
(v) the Essential Commodities Act, 1955,
(vi) the Companies Act, 2013,
(vii) the Securities Contracts (Regulation) Act, 1956,
(viii) the Wealth-tax Act, 1957,
(ix) the Income-tax Act, 1961,
(x) the Customs Act, 1962,
(xi) the Competition Act, 2002,
(xii) the Foreign Exchange Management Act, 1999,
(xiii) the Sick Industrial Companies (Special Provisions) Act, 1985,
(xiv) the Securities and Exchange Board of India Act, 1992,
(xv) the Foreign Trade (Development and Regulation) Act, 1992;
(xvi) the Prevention of Money Laundering Act, 2002;
(b) he had not been detained for any period under the Conservation of Foreign Exchange and Prevention
of Smuggling Activities Act, 1974.
(c) he has completed the age of 21 years and has not attained the age of 70 years.
(d) 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.
(e) he is resident in India.
WHOLE-TIME DIRECTOR
Section 2 (94) of the Companies Act, 2013 defines “whole-time director” as a director in the wholetime employment of the company.
It may be noted that a company can simultaneously employ:
(a) Two or more than two whole-time directors.
(b) Managing Director and Whole-time directors.
(c) Whole-time directors and manager.
Compensation for Loss of Office of Managing or Whole-time Director or Manager (Section 202):
➢ A company may make payment to a managing or whole-time director or manager, but not to any other
director, by way of:
• compensation for loss of office, or
• as consideration for retirement from office or
• in connection with such loss or retirement.
➢ Any payment made to a managing or whole-time director or manager shall not exceed the
remuneration which he would have earned if he had been in office
• for the remainder of his term or
• for three years, whichever is shorter.
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➢ No payment shall be made in the following cases:
(a) where the director resigns from his office as a result of the reconstruction/amalgamation of the
company and is appointed as the managing or whole-time director, manager or other officer of the
reconstructed company/of resulting company from the amalgamation;
(b) where the director resigns from his office otherwise than on the reconstruction/ amalgamation of
the company;
(c) where the office of the director is vacated due to disqualification;
(d) where the company is being wound up due to the negligence or default of the director;
(e) where the director has been guilty of fraud or breach of trust or gross negligence or
mismanagement of the conduct of the affairs of the company or any subsidiary company or
holding company.
COMPANY SECRETARY
Secretary means ‘one entrusted with secrets’. The word ‘secretary’ is derived from the Latin word
‘secretarius’ which means a confidential writer or notary.
Section 2(24) of the Act defines a secretary as follows:
“Secretary means a Company Secretary within the meaning of Section 2(1) (c) of the Company
Secretaries Act, 1980, and includes any other individual possessing the prescribed qualifications and
appointed to perform the duties which may be performed by a secretary under this Act and any
other ministerial or administrative duties.”
Qualifications of a Company Secretary:
Qualification prescribed for appointment of a Company Secretary
➢ The whole-time company secretary as a KMP shall be a member of the Institute of Company
Secretaries of India.
➢ A listed or any other public company having a paid-up share capital of Rs. 10 crores or more shall
appoint any individual who possess the qualification of membership of the Institute of Company
Secretaries of India constituted under the Company Secretaries Act, 1980 as a whole-time secretary to
perform the duties of a KMP under the Act.
Other Qualifications
➢ Sound Education – The secretary should possess high standard of academic qualification.
➢ Proficiency in Language – The writing of précis, the drafting of reports, the writing of minutes, the
preparation of agenda, and the framing of resolutions require a specialised knowledge of the English
Language. Hence, it is necessary that the secretary should command that knowledge.
➢ Knowledge of Accountancy and Taxation - Must have basic knowledge of book keeping and
accountancy as well as the law and practice of income tax and other tax laws.
➢ Knowledge of Mercantile Law – It is necessary that the secretary should be thoroughly conversant
with the Acts like the Contract Act, Sale of Goods Act, Companies Act, and laws relating to Insurance,
Patents, Trade Marks, Copyrights, Workmen’s Compensation etc.
➢ Knowledge of economics, banking and finance – He should know the law and practice of banking,
working of money and capital markets, methods of financing trade and industry and foreign exchange.
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➢ Knowledge of office organisation and business methods – The secretary should posses sound
practical knowledge of different systems of filing, indexing, duplicating. He should have practical
knowledge of office mechanisation and automation and other office routines and methods.
He must also know the methods of selecting, remunerating and controlling the staff and apportioning
the work among members to ensure smooth and efficient working of office.
Appointment of Company Secretary (CS):
➢ An individual who is member of Institute of Company Secretaries of India can be appointed as
Company Secretary.
➢ Every Listed company must have a full-time company secretary.
➢ Every unlisted Company /Private limited Company having paid-up capital 5 Crore or more must also
have a full time CS.
➢ A CS is appointed by the resolution of the Board.
➢ A CS is not allowed to hold office more in than one company.
➢ The post of Company Secretary must not be vacant for more than 6 months.
➢ In case of default in complying above provision the company shall be fined from 1 to 5 Lakh Rupees.
Rights and Powers of a Company Secretary:
➢ Supervision and control: As a head of the office, a company secretary has the rights to supervise,
direct and control all office activities of subordinate offices.
➢ Singing authority: Being a principal officer, a company secretary can sign contracts, proceedings of
the company meeting, files and documents on behalf of the company.
➢ Exercising power: He has the right to apply power as authorized by the board of directors or company
through the general meeting.
➢ Issuing testimonial: A company secretary can issue testimonials to employees on behalf of the
company.
➢ Claiming salary and damages: As per contract, he has the right to claim his salary and other
allowances. He can also take legal action against the company if there is any breach of contract.
➢ Preferential creditor: During winding up of a company, company secretary can claim his legal dues
as like as a preferential creditor.
➢ Attending meeting: He has the right to be present in the meetings of the shareholders and board of
directors.
Restrictions on the Powers and Rights of Company Secretary:
➢ Distribution and transfer of shares: A company secretary cannot distribute or transfer any share if
he is not authorized by the board of directors.
➢ Company agent: A company secretary cannot attend any meeting as a company agent without any
consent of board of directors. He requires authority from the board of directors to sign any contract on
behalf of the company.
➢ Taking loan: A company secretary cannot take loan in the name of the company. If he does so,
company will not be liable for such loan.
➢ He cannot participate in the management of company’s affairs.
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Duties of a Company Secretary:
The Company Secretary is an employee of a company and he must perform his duties with reasonable care.
He may be dismissed on the grounds of disobeying, misconduct or permanent disability.
The duties of a company secretary can be classified into two types as follows:
(1) Statutory Duties
(I) According to Companies Act:
(i) To sign documents and proceedings requiring authentication by the company. (Sec. 21).
(ii) To deliver registration and return of allotment to the Registrar (Sec. 39).
(iii) To give notice to registrar for increase in the share capital (Sec. 64).
(iv) To deliver share certificate within 3 months of allotment or within 2 months of registration
of transfer (Sec. 56).
(v) To make available trust deed for inspection to every member or debenture holder and to
forward a copy of it to them at their request within 7 days of request on payment of
prescribed fee. (Sec. 71).
(vi) To deliver particulars of mortgages and charges for registration (Sec. 77).
(vii) To sign annual return (Sec. 92).
(viii) To make a statutory declaration for receiving certificate of commencement of business
(Sec. 11).
(ix) To send notice of general meeting to every member of the company (Sec. 101).
(x) To allow inspection of and to furnish copies of register of members (Sec. 94).
(xi) To sign every balance sheet and P/L account in case of non-banking companies (Sec. 134).
(xii) To prepare minutes of every General Meeting and Board Meeting within 30 days (Sec.
118).
(xiii) To file resolutions and agreements requiring registration with the registrar (Sec. 117).
(xiv) To make available register of directors for inspection (Sec. 171).
(xv) To make entry for register of members of the share warrant.
(xvi) To maintain statutory books:
• Register of investments (Sec. 187)
• Register of charges (Sec. 85)
• Register of Members (Sec. 88)
• Register of debenture holders (Sec. 88)
• Register of directors (Sec. 170)
• Register of contracts, companies and firms in which directors are interested (Sec. 189).
(II) According to Income Tax Act:
(i) To ensure proper income tax is deducted at source from the salary of employees.
(ii) To see that the certificate of TDS is issued.
(iii) To ensure that the tax deducted is deposited to government treasury.
(iv) To submit and verify various forms and returns.
(III) According to Stamp Act: The Company Secretary is required to see that every document like
share certificate, share warrant, debenture certificate and transfer forms, are properly stamped as
per the Indian Stamp Act.
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(IV) Under Other Acts: To comply with the provisions of various Acts like the Factories Act, 1949,
the Industrial Disputes Act, 1947, the ESI Act, 1948, the Minimum Wages Act, 1948, the
Payment of Wages Act, 1936, the PF Act, 1952, FEMA 1999, MRTP Act, 1969 etc.
(2) General Duties
According to Section 205 the duties of Company Secretary shall also include:
(i)
To report to the Board about compliance with the provisions of this Act;
(ii)
to provide to the directors of the company, collectively and individually, such guidance as they
may require, with regard to their duties, responsibilities and powers;
(iii)
to facilitate the convening of meetings and attend Board, committee and general meetings, and
maintain the minutes of these meetings;
(iv)
to obtain approvals from the Board, general meetings, the Government and such other
authorities as required under the provisions of the Act;
(v)
to represent before various regulators, Tribunal and other authorities under the Act in
connection with discharge of various functions under the Act;
(vi)
to assist the Board in the conduct of the affairs of the company;
(vii)
to assist and advise the Board in ensuring good corporate governance and in complying with
the corporate governance requirements and best practices;
(viii) to discharge such other duties as may be assigned by the Board from time to time; and
(ix)
such other duties as have been prescribed under the Act and Rules.
CHIEF FINANCIAL OFFICER (CFO)
➢ “Chief Financial Officer” means a person appointed as the chief financial officer of a company. There
was no corresponding section or definition under the Companies Act, 1956, it is introduced for the first
time in the Act.
➢ The CFO may be appointed either by the Board of Directors or by the Managing Director (unless such
person is designated as a key managerial person under section 203).
➢ As per the provisions of section 203 every public Company having a paid up share capital of Rs. 10
Crores or more shall have a whole time key managerial personnel, which includes whole time Chief
financial officer.
Position of CFO:
➢ The CFO need not be a director of the company.
➢ However he has been recognised as a KMP under Section 203 and his designation is equated with
other managerial personnel such as the managing director, the manager or in their absence, the whole
time director.
➢ The remuneration payable to CFO shall not be subject to regulation under Section 197 of the Act read
with Schedule V in the Act, unless he is part of the Board or he is appointed as a manager in addition
to his designation as CFO.
➢ The Act does not prescribe any qualification for the appointment of CFO.
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Role and Responsibilities of CFO:
➢ Sub-section (1) of section 134 of the Act, requires the CFO to sign the financial statements whether
he is KMP or not, as he is responsible for overseeing the financial activities of an entire company.
➢ His duties include financial planning and monitoring cash flow.
➢ In few companies, the finance director might be the CFO and vice versa.
➢ The CFO being an internal person in the organization has responsibility towards presenting the
financial statements truly and fairly which are subsequently audited by the statutory auditors of the
Company.
➢ Maintenance of Books of Accounts: Under Section 128 of the Companies Act, 2013, CFO need to
ensure that company prepares and keeps at its registered office books of account and other relevant
books and papers and financial statement for every financial year giving true and fair view of the state
of affairs of the company
➢ Filing of Financials Statements with Registrar of Companies:
• Under Sec. 137 of the Companies Act, 2013, CFO should ensure that the copy of the Financial
statement including consolidated financial statement, if any, along with all documents to be
attached is filed with the Registrar within 30 days of the AGM (whether adopted or not at the
AGM).
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• In case the AGM has not been held, CFO to ensure that financial statements are filed along with
statement of facts and reasons for not holding AGM within 30 days of due date for holding AGM.
Provides the direction, leadership and management to the finance or accounting team of the company.
Should develop financial and tax strategies.
Whenever it is necessary, the CFO should arrange for the debt and equity financing.
Should participate in key decisions which are related to finance as a member of the executive
management team
Should look after the employee benefit plans with a particular emphasis towards maximisation of the
cost-effective benefits packages.
Should report the financial results to the Board of Directors.
Should ensure that the record-keeping of the books of accounts meets the requirements of the auditors
and government agencies.
Manage the departments of accounting, compliance, legal, tax, treasury and investors.
To look after the company’s business transaction processing systems.
Identifies the financial risks and opportunities for the company.
Provides strategic recommendations to the CEO and members of the executive management team
related to the finance or budgeting issues.
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