chp 1

APPOINTMENT AND QUALIFICATIONS OF DIRECTORS

Learning Outcomes

  • Understand the provisions related to director appointments and qualifications.

  • Explain Director Identification Number (DIN) and its significance.

  • Describe Independent Directors, their appointment, qualifications, and tenure.

  • Identify provisions on various types of directors, including casual vacancies, woman directors, and small shareholder directors.

  • Address disqualifications for directors and processes regarding their removal and resignation.

Introduction

  • Definition of 'Board of Directors': According to Section 2(10) of the Companies Act, 2013, the term refers to the collective body of directors managing a company's affairs.

  • Role of Directors: Directors are appointed to handle business affairs, acting on behalf of a company's shareholders, addressing mismanagement as company size increases.

Legal Position of Directors

  • Agents and Trustees: Directors function as both agents (binding the company during transactions) and trustees (managing company assets in the best interest).

  • Fiduciary Relationship: Directors have a fiduciary duty to act in the company’s interest, compensating for losses caused by illegal acts.

Company Constitution and Board of Directors [Section 149]

Number of Directors

  • Minimum Requirements:

    • Public Company: 3 Directors

    • Private Company: 2 Directors

    • One Person Company (OPC): 1 Director

  • Maximum Limit: 15 Directors (require special resolution for more).

Exemptions

  • Government companies are exempt from the maximum limit and the requirement of special resolution if in compliance.

  • Companies under Section 8 have similar exemptions provided no defaults in statutory filings are recorded.

Woman Director

  • Requirement: At least one woman director on the board for certain classes of companies as per the Companies (Appointment and Qualifications of Directors) Rules, 2014.

  • Newly incorporated companies must comply within six months of incorporation.

Types of Directors

Resident Director

  • Every company must have at least one director residing in India for 182 days or more in a financial year.

Independent Director

  • Certain public companies are mandated to appoint independent directors to enhance governance.

  • They must act independently, free from undue influence by other board members.

Interested Director

  • Directors must declare any interest in transactions and ensure transparency.

Executive vs. Non-Executive Directors

  • Executive Directors: Actively manage operations.

  • Non-Executive Directors: Provide oversight without daily operational involvement.

Appointment of Directors [Section 152]

First Directors

  • If not specified in Articles, the subscribers of the Memorandum are deemed the first directors until appointments are made at the first AGM.

Subsequent Directors

  • Appointed typically at the general meeting unless otherwise specified in the Act.

Other Requirements

  1. DIN Application: A person must apply for a DIN before appointment.

  2. Consent and Declaration: Must provide written consent and declaration of no disqualifications before acting as a director.

  3. Explanatory Statement: Required for independent director appointments.

Retirement by Rotation [Section 152(6)]

  • Provisions: At least one-third of directors must retire by rotation at every AGM. Certain conditions affect who qualifies.

  • Nominee Directors: Directors appointed through nominees or by the government are generally exempt from rotation.

Disqualifications and Removal of Directors

Disqualifications [Section 164]

  • A director may be disqualified due to reasons including unsound mind, insolvency, criminal convictions, non-payment of company dues or financial defaults.

Removal Process [Section 169]

  • Directors can be removed by an ordinary resolution, requiring special notice.

  • A director removed can be reappointed in limited circumstances, and reasons for removal must be communicated.

Resignation of Director [Section 168]

  • The resignation must be communicated, and companies must notify the registrar of the change within 30 days.

Unique Directorship Provisions

Appointment of Additional Director [Section 161(1)]

  • Can be appointed if empowered by Articles but holds office only until the next AGM.

Casual Vacancy [Section 161(4)]

  • Casual vacancies can be filled by the Board of Directors until the immediate next AGM.

Appointment via Proportional Representation [Section 163]

  • Articles must allow proportional representation for fair minority representation.

Independent Directors [Section 149]

  • Criteria: Must meet integrity standards and independence from company interests.

  • Tenure and Removal: Limited to two consecutive terms with a cooling-off period of three years post-termination to mitigate conflicts of interest.

Conclusion

  • Directors have established legal responsibilities and are essential in company governance. Understanding the provisions helps in effective management and compliance.