Appointment of Directors
Directors is in charge of affairs of the company. The appointment of directors is a crucial
aspect of corporate governance, as directors play a significant role in the management and
strategic direction of a company.
1. First Directors
The individuals who are designated as the first directors of a company are those who are
officially appointed at the very moment the company is incorporated. These inaugural
directors are usually specified in the company’s articles of association or in the memorandum
of association, which are foundational documents that outline the company's structure and
governance. The first directors will serve in their capacity until the occurrence of the first
annual general meeting (AGM) of the company. During this significant meeting, there is an
opportunity for these initial directors to either be re-elected to continue in their roles or to be
replaced by new individuals who may be nominated for the position.
2. Appointment of Directors by the Company
The process of appointing directors within the company can be carried out through the
passage of a formal resolution during a general meeting convened for this specific purpose.
This particular procedure is relevant and applicable to both public companies, which are
those that offer their shares to the general public, as well as private companies, which do not
engage in such public offerings. It is important to note that the specific details and guidelines
governing the appointment of directors are usually delineated in the company’s articles of
association, which serve as the foundational document outlining the rules and regulations that
govern the internal management of the company.
Public Company vs. Private Company
Public Company: In public companies, the appointment of directors is subject to
more stringent regulations, including the requirement for a minimum number of
independent directors.
Private Company: Private companies have more flexibility in appointing directors,
often allowing for a simpler process as outlined in their articles of association.
3. Appointment of Directors by Existing Directors
In a significant number of companies, it is a common practice for the current board of
directors to possess the formal authority to appoint new directors. This authority is typically
exercised in order to fill casual vacancies that may arise or to facilitate the expansion of the
board itself. This particular method of appointment is frequently employed as a means to
ensure both continuity and stability within the board, thereby maintaining a consistent
leadership structure and fostering a sense of ongoing governance.
4. Appointment of Directors by a Third-Party Entity
In certain circumstances, it is not uncommon for directors to be appointed to their positions
by a third-party entity. This third party may take the form of a venture capital firm or a
prominent shareholder, particularly in scenarios where that entity possesses a substantial
ownership interest in the company in question. Such appointments often occur when the third
party seeks to exert influence or ensure that their interests are adequately represented within
the company's governance structure.
5. Appointment Through the Mechanism of Proportional Representation
Proportional representation is a systematic approach employed to guarantee that various
groups within an organization, including but not limited to minority shareholders, are
afforded the opportunity to have their voices heard and their interests represented on the
board of directors. This method is particularly prevalent in companies that boast a diverse and
varied shareholder base, reflecting a wide array of perspectives and interests.
6. Appointment by the Central Government
In certain specific and particular circumstances, the central government holds the
authoritative power to appoint individuals to serve as directors within a company. This
particular course of action is especially common in situations that are directly related to
national interest or in instances where a company is facing substantial and significant
financial difficulties. The primary aim and objective of such appointments is frequently to
bring about a stabilization of the company in question and to ensure the protection and
safeguarding of the interests of the various stakeholders who are involved in the company’s
operations and overall functioning.
POSITION OF A DIRECTOR
A director plays a crucial role in corporate governance and management. Their position can
be understood from multiple perspectives, including that of an agent, employee, officer, and
trustee. Below is a detailed analysis of each role, along with relevant case laws.
1. Director as an Agent
A director acts as an agent of the company because they enter into contracts and make
decisions on behalf of the company. However, unlike general agents, their powers are not
inherent but are derived from the Articles of Association (AOA), Companies Act, and board
resolutions.
Key Characteristics:
Directors act on behalf of the company but are not personally liable for company debts.
Their authority is limited to what is granted by the company's governing documents.
They can bind the company in contracts within their authorized powers.
🔹 Ferguson v Wilson (1866) – It was held that a company acts through its directors, who
function as its agents. The company, not the directors, is liable for their acts within the scope
of their authority.
2. Director as an Employee
A director is generally not considered an employee, but in certain cases, they may hold dual
status as an executive director or a managing director, where they are also under an
employment contract.
Key Characteristics:
If a director is given specific executive duties, they can be considered an employee.
A managing director has employment rights but still holds fiduciary duties.
Non-executive directors do not fall under the category of employees.
🔹 Lee v Lee’s Air Farming Ltd (1961) – The court ruled that a director can be an employee if
they have a separate contractual employment agreement with the company.
3. Director as an Officer of the Company
A director is an officer of the company under corporate law, responsible for ensuring legal
compliance and governance.
Key Characteristics:
Directors are classified as officers under company law and are liable for statutory compliance
failures.
They may be subject to penalties if the company violates the law (e.g., tax fraud, financial
misreporting).
They act as governing bodies, overseeing executive management.
🔹 Official Liquidator v P.A. Tendolkar (1973) – The Indian Supreme Court ruled that
directors have a duty to be vigilant and cannot escape liability for company misconduct by
claiming ignorance.
4. Director as a Trustee
Directors are often referred to as trustees of the company because they manage company
assets for the benefit of shareholders. However, unlike traditional trustees, they do not hold
legal ownership of company assets.
Key Characteristics:
Directors hold fiduciary responsibilities similar to trustees.
They must act in the best interest of the company and avoid conflicts of interest.
Breach of fiduciary duty can lead to legal action and personal liability.
🔹 Regal (Hastings) Ltd v Gulliver (1942) – Directors were found liable for breaching their
fiduciary duty by making secret profits without informing the company.
QUALIFICATION AND DISQUALIFICATION OF DIRECTORS
Qualification
The Act provides for a dedicated provision, which is Section 162 that underlines the
explanations that an individual might not appoint as a director. there’s no such provision
regarding the qualification under the Act. However, requirements are listed as below:
1. The said person should have completed 18 years age or above.
2. Nationality are often that of Indian or otherwise.
3. The person must be in receipt of his own Digital Signature Certificate (DSC) and
the same be used for obtaining Director’s identification number (DIN).
4. The person shall also furnish a written declaration providing his consent to act as
the Director and he’s not someone who falls under the category of disqualified
members.
5. there’s no academic qualification that has to be held by the one who is desirous of
obtaining the directorship of a corporation.
DISQUALIFICATION OF DIRECTORS
Section 164(1) provides grounds on which someone becomes disqualified to act as a
director. someone shall not be eligible to become a director of a corporation if he
is an undischarged insolvent or has applied for it and his application continues to
be pending
has been convicted for any offence and sentenced to imprisonment for a minimum
period of six months and five years haven’t passed from the last date of his sentence
(A one who has been convicted and sentenced for seven years or more becomes
ineligible for all time).
Any order disqualifying the director, for appointment as a director, and the same be
passed by a court or Tribunal
has not paid any calls in respect of any shares of the corporate held by him and
6 months have elapsed from the date of payment
has been convicted in respect of an offence addressing related party transactions as
per section 188 during the preceding five years
has not been allotted a Director identification number (discussed later within the text)
accepts directorships exceeding the most number of directorships provided in section
165, which brings us to our next topic, which is about the bounds imposed on the
quantity of directorships that someone can hold at only once.
LIMITS ON NUMBER OF DIRECTORSHIPS
A person is allowed to hold directorship in maximum of 20 companies at one point of
time (including alternate directorship but excluding dormant companies). This
limit doesn’t apply to Section 8 companies. However, in case of public companies (including
their private holding or subsidiary companies) the said limit has been reduced to only ten.
DIRECTOR IDENTIFICATION NUMBER (DIN)
A person is disqualified from acting as a company’s director if he has not obtained a
legitimate DIN. DIN could be a unique identification number that may be obtained
by somebody who intends to be a director or is already acting as a director during a company
but has not obtained a DIN. One director is allowed to hold only one DIN at a time. Just in
case if a director has wrongly obtained two DINs, then he’s required to surrender his latest
DIN.
Forms required for obtaining or surrendering DIN are mentioned later during this article.
DIN may also be obtained through the SPICE form at the time of incorporating the
corporate (Up-to 3 DINs is applied for).
DOCUMENTS FOR OBTAINING DIN
Proof of Identity of the applicant (duly attested attachment)
o Indian national-PAN is mandatory
o Foreign national-Passport
Proof of residence of the applicant (duly attested attachment)
o Photograph (format-JPG, max size-100kb)
o DSC of the applicant
o Attestation by any existing director of the corporate within which the person
proposes to be a director. Fees to be submitted-Rs 500
VACATION OF OFFICE OF DIRECTOR
The director shall vacant the office where,
Becomes disqualified to act as a director (if the director has did not file financial
statements and annual returns of an organization for 3 years continuously, then he
shall vacate his office altogether the businesses but not the corporate during which he
has defaulted.
Fails to attend any board meeting for a continuous period of twelve months.
Contravenes the provisions associated with contracts within which the director was
interested.
Any court’s order, restricting the director from appointing in any company.
Is removed in line with the provisions of the Act
Was appointed due to his holding office in another company and has ceased to
carry office in this company.
Ceases to be a tiny low shareholder or fails to fulfill the factors of independence (in
case of small shareholders director)
Private companies are allowed to produce some additional grounds also in their
articles.
REMOVAL OF DIRECTORS
Removal of Director under Companies Act, 2013
1. Legal Framework: In addition to the company's Articles of Association (AoA) and any
applicable shareholder agreements, the removal of a director is principally governed by the
provisions of the Companies Act, 2013 (or applicable company law in the jurisdiction).
2. Grounds for Removal: Misconduct, carelessness, incapacity, conflict of interest, loss of
confidence, or non-compliance with statutory obligations are usually grounds for director
removal. The company's Articles of Association (AoA) may additionally include particular
grounds for dismissal.
3. Board Decision or Shareholder Resolution: The removal procedure may be carried out
through a resolution approved by the shareholders or by the Board of Directors (BOD),
depending on the applicable laws and the company's rules. Certain directors might only be
removed by shareholders in specific circumstances.
4. Special Notice: In a lot of places, the shareholders are required to provide the firm with a
special notice before they can propose the removal of a director. The director has a chance to
react and challenge the removal during this notice period.
5. Board or Shareholder Meeting: To discuss the director's removal, either the board meeting
or the shareholders meeting. Usually, a majority vote of the board members or shareholders
present at the meeting decides whether to dismiss a director.
6. Filing Requirements: To update the company's records and reflect the change in
directorship, the appropriate filings must be made with the appropriate government agencies,
such as the Registrar of Companies, if the removal is granted.
Reasons behind Removal of Director
A Director of a company can be removed for any of the following reasons:
1. Misconduct: Directors may be removed for misconduct, which includes engaging in
criminal acts that violate their fiduciary duty to the firm, such as fraud, embezzlement,
corruption, or other forms of misconduct.
2. Negligence: Directors may be removed if they persistently neglect to carry out their
responsibilities, use due caution, or make a meaningful contribution to the board's decision-
making process.
3. Conflict of Interest: Directors are required to behave in the company's best interests and
abstain from circumstances in which their interests collide with those of the business.
Removal may result from failing to declare conflicts of interest or remove oneself from
pertinent decisions.
4. Breach of Duties: Directors are obligated to operate in the company's best interests,
honestly, and with good faith. Removal is a possibility for actions that go beyond their
authority, misuse business resources, or engage in self-dealing.
5. Loss of Confidence: The board or shareholders may decide to remove a director from
office if they no longer have faith in their capacity to carry out their duties.
6. Disqualification: A director may lose their right to serve on the board for a variety of
reasons, including insolvency, a criminal record, or a court-ordered mental illness.
Ways to Remove a Director of a Company
1. When the Directors Tender their Resignation
A formal resignation letter is usually sent to the Board of Directors (BOD) or other
appropriate authorities within the organization when a director chooses to leave their position
willingly. The effective date of the resignation should be included in the resignation letter. It
can be set for an agreed-upon future date or it might be immediate. The resignation will be
reviewed and accepted by the Board of Directors or other appropriate authorities by the
protocols specified in the company's bylaws or other governing documents. Upon approval,
the resignation becomes effective, and the board may start the process of appointing a
replacement director.
The following steps need to be followed:
Hold a board meeting by giving 7 days of clear notice.
Board members will take note of resignation in the meeting.
A resolution then needs to be passed in a particular format.
Further, Form DIR-11 needs to be filed by the resigning director in his capacity.
The company has to file Form DIR-12 with the ROC along with the registration letter and the
board resolution.
Once all the formalities are done, the name of the director will be removed from the master
data of the company on the Ministry of Corporate Affairs (MCA) website.
2. Director Remains Absent from the Board Meetings for 12 Months
A director may be considered to have resigned from their post if they routinely miss board
meetings without providing a good cause and getting approval from the board. The
company's rules or other governing papers usually specify the precise period of absence that
initiates this action. This period is frequently set at 12 months or another pre-defined
duration. The board may declare a director's position vacant after the allotted term of absence
has passed and fill the position by the processes specified in the company's governing
documents.
The following steps need to be followed:
If a director remains absent from all the meetings held over twelve months, with or without
seeking leave of absence from the board, they are considered to have vacated their office as
per Section 167.
Form DIR-12 must be filed.
Once all formalities are done, the concerned director's name will be removed from the
database of the Ministry of Corporate Affairs (MCA).
3. Removal of Director by Shareholders
A general meeting is where shareholders cast their vote to remove a director from their post.
The company's bylaws, controlling papers, and applicable laws and regulations control the
removal procedure. The processes specified in these agreements must be followed by
shareholders, which may include giving prior notice of their intention to vote on the removal
of the director and meeting certain voting requirements. The decision to remove the director
is effective immediately upon the shareholder's vote, and the board may then proceed to
replace the vacancy in the director post by the established processes.
The following steps need to be followed:
A notice for a board meeting is sent to all the shareholders within 7 days from the date of
issue.
A resolution is passed for a general meeting and then for the removal of the director, subject
to the approval of shareholders on the day of the meeting.
After a 21-day notice period is provided, the second meeting of shareholders is held to vote
on the resolution passed earlier. The one who is being removed as the director by
shareholders will be allowed to speak on their removal.
Form DIR-12 must be filed by shareholders along with the attachments of the board
resolution, and an ordinary resolution.
Once all formalities are done, the concerned director's name will be removed from the
database of the Ministry of Corporate Affairs (MCA).
Procedure for Removal
1. Strong case to be made by the central government against the concerned director
2. Refer the case to the NCLT
3. Decision of NCLT through an interim order
4. Compensation to be paid for loss of office
5. The concerned director so removed cannot hold the office for 5 years
RETIREMENT OF A DIRECTOR
Retirement of a Director
The retirement of a director can occur based on the provisions of company law, the
Articles of Association (AoA), or shareholders' agreement. There are different types of
retirement:
Retirement by Rotation (Common in Public Companies)
Voluntary Retirement (Resignation or Personal Reasons)
Retirement Due to Age Limit (As per company policy or law)
Retirement on Expiry of Term (For directors appointed for a fixed term)
1. Retirement by Rotation
Applicability: Usually in public companies as per the Companies Act (like India’s
Companies Act, 2013, or the UK’s Companies Act).
Process:
A certain proportion of directors (e.g., one-third) must retire at every Annual General
Meeting (AGM).
Retiring directors may be re-appointed by shareholders or replaced.
2. Voluntary Retirement (Resignation)
The director submits a written resignation to the Board.
The Board accepts the resignation and passes a resolution.
The company files necessary forms with the Registrar of Companies (ROC) (e.g., Form
DIR-12 in India).
The company updates its records and informs relevant stakeholders.
3. Retirement Due to Age Limit
Some companies have a mandatory retirement age for directors (e.g., 65 or 70 years).
The director steps down at the designated age, unless an extension is approved by
shareholders.
4. Retirement on Expiry of Term
Non-executive directors or independent directors often have a fixed term (e.g., 3-5 years).
Upon term completion, they may either retire or be re-appointed by the
Board/shareholders.
LIABILITIES OF A DIRECTOR
Directors play a crucial role in the management and governance of a company. However,
with this role comes significant responsibilities and potential liabilities. Understanding
these liabilities is essential for students studying business and corporate law.
1. Liabilities to Third Parties
Directors can be held liable to third parties in various situations, particularly when they
act outside their authority or engage in fraudulent activities. Key points include:
Personal Liability: Directors may be personally liable for contracts entered into on
behalf of the company if they exceed their authority.
Tortious Liability: Directors can be held liable for torts committed in the course of
their duties, such as negligence or misrepresentation.
Fraudulent Activities: If a director engages in fraudulent conduct, they can be held
personally liable for any resulting damages to third parties.
2. Liabilities to the Company
Directors owe a duty of care and loyalty to the company, and breaches of these duties can
lead to significant liabilities. Important aspects include:
Duty of Care: Directors must act with the care that a reasonably prudent person
would exercise in similar circumstances. Failure to do so can result in liability for any
losses incurred by the company.
Duty of Loyalty: Directors must act in the best interests of the company, avoiding
conflicts of interest. Breaching this duty can lead to personal liability for any profits
made from the conflict.
Statutory Duties: Under various corporate laws, directors have specific statutory
duties, such as maintaining accurate financial records and ensuring compliance with
regulations. Breaches can result in penalties and personal liability.
3. Liabilities to Co-Directors
Directors also have responsibilities towards their fellow directors. Breaches of these
duties can lead to liabilities, including:
Duty of Good Faith: Directors must act in good faith towards each other and the
company. Breaching this duty can lead to claims from co-directors.
Duty to Disclose: Directors are required to disclose any conflicts of interest or
relevant information to their co-directors. Failure to do so can result in liability for
any damages caused.
Indemnification: In some cases, directors may seek indemnification from the
company for liabilities incurred while acting in their capacity as directors, provided
they acted in good faith.
Powers of Directors
General Powers
Under the Companies Act 2013, the Board of Directors has been vested with wide-
ranging powers to manage the company's affairs. These powers are subject to the
provisions of the Act, the company's Memorandum of Association (MOA), and Articles
of Association (AOA). Key powers include:
Calling Meetings: The ability to call meetings on a suo moto basis, ensuring
timely decision-making and governance.
Issuing Securities: The power to issue shares, debentures, or other instruments for
the company's benefit.
Employee Bonuses: Approving bonuses to employees, recognizing their
contributions and motivating the workforce.
Dividend Declaration: The authority to declare dividends, rewarding shareholders
for their investment in the company.
Financial Management: Granting loans or giving guarantees regarding loans,
authorizing buybacks of securities, and approving mergers, acquisitions, or
takeovers.
Business Strategy: Powers to diversify the business, borrow, and invest funds,
underlining the board's central role in strategic planning.
Regulatory Compliance: Approving financial statements and board reports,
ensuring compliance with regulatory requirements.
Specific Powers
Additionally, the board can exercise specific powers, including:
Appointment and Management: Appointing secretaries, managers, or filling up
casual vacancies among directors or auditors.
Contractual Authority: Entering into contracts on behalf of the company with
other parties, ensuring operational continuity and expansion.
Contributions to National Defense Fund (NDF): Making contributions without
any limit, reflecting the company's social responsibility.
Duties of Directors
Directors' duties are critical for the lawful and ethical governance of the company. Key
duties include:
Financial Oversight: Determining the amount of minimum subscription, ensuring
application money is deposited in a scheduled bank, and approving financial
statements before they are submitted to auditors.
Regulatory Compliance: Preparing and filing statutory reports, calling
Extraordinary General Meetings (EGM), and ensuring dividends are paid out of
divisible profits.
Strategic Management: Managing the company's affairs efficiently, in alignment
with the powers granted by the MOA and AOA.
Ethical Governance: Disclosing any interest in transactions or contracts with the
company, purchasing and paying for qualification shares, and placing the annual
report at the AGM.
Enhanced Duties for Transparency and Accountability
Transparency: Directors must ensure all actions and decisions are transparent and
documented, maintaining accountability to shareholders and regulatory bodies.
Risk Management: Instituting policies for the identification, assessment, and
mitigation of risks, protecting the company's assets and shareholder value.
Stakeholder Engagement: Engaging with and considering the interests of
stakeholders, including employees, customers, suppliers, and the community,
ensuring the company's operations are sustainable and socially responsible.
