ROLE OF COMPANY DIRECTORS

by :
DR. T.K. JAIN
AFTERSCHO☺OL
centre for social entrepreneurship
sivakamu veterinary hospital road
bikaner 334001 rajasthan, india
FOR – PGPSE PARTICIPANTS
mobile : 91+9414430763

5 DECEMBER 09 www.afterschool.tk 1
 WHO IS A DIRECTOR?

SEC 2(13) : ANY PERSON WHO OCCUPIES

THE POSITION OF A DIRECTOR – BY
WHATEVER NAME CALLED

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 CASE STUDY : FERGUSON
V.S WILSON

Truely speaking the director of a company is

an agent of the company

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Case study : Smith v/s Anderson

Directors are truely the trustees of the property

fo the company

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 DEEMED DIRECTOR ???

As per sec. 5 , 303, 372A : if directors act on

advice of a person, that person is called
deemed director.
Sec. 7 : if that person is giving professional
advice – that person will not be called deemed
director.

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 Managing Director ???

Sec 2(26) : a person who has been given

substantial powers of management is called
managing director - he can be appointed – by
- board resolution / articles / AGM /
agreements

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 Minimum number of directors

Sec. 252 : public company : 3, private

company : 2
no maximum limit in law
these limits can be set in articles of association
sec. 259- when the number of direcors increase
beyond 12, it may require Govt. Permission

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 Directors representing small
shareholders
(only on public companies with Rs. 5 crore or
more)
As per Companies (appointment of small
shareholders' director) rules 2001 – there
should director / s representing small
shareholders.
Small shareholders : holding upto Rs. 20000
nominal value (face value) of shares.
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 First directors (sec. 254)

May be appointed by articles of association.

Regulation 64 of Table A of schedule I : the
first directors are appointed by subscribers of
MOA & AOA .

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 Subsequent Directors (sec. 255,
256)

They are appointed by AGM

2/3rd directors are retiring directors - 1/3 rd may
be non-retiring directors. Thus if you have 12
directors, 8 directors have to retire by rotation.

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 Case study : S. Jabh Singh vs
Panesar Mech. Works P. Ltd.

Where no period for retirement is prescribed in

AOA, then directors will retire when they are
removed as per sec. 284.

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Case : Consolidated Nickel Mines
Ltd.

When AGM is not held, directors due to retire,

will retire on their due date – similarly when
AGM is adjourned, the directors due to retire,
will retire on that that day
retiring director may be reappointed.
FIFO in retirements

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How will you become a director?

At least 14 day notice of willingness to become

a director with fees of Rs. 500 (by the person
or the person who is proposing someone as
director).
The person must also submit his accent to
become a director to ROC at least 30 days
before appointment.

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 Can BoD (board of directors)
appoint additional directors?

Yes – IF AOA authorise it .

But this appointment will be till next AGM.
If AGM is not held, the director will retire on
the date of AGM.
(sec. 260)

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Casual Appointments (Sec. 262)

If there is a vacancy, the board may appoint a

director as per procedure in AoA. This is
casual appointment.

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ALTERNATE DIRECTOR (SEC.
313)

BoD may appoint alternate director in place of

a director who is going for a long vacation -
the alternate director will leave the position
when original director returns. It must be for 3
months or more.

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 Appointment by Central Govt.
(sec. 408)
If Company Law Board thinks it is necessary,
then Central govt. May appoint a director for a
period upto 3 years.
This director will not require qualification
shares (minimum number of shares to be held
by every director to be eligible to become a
director).
While counting 2/3rd, we will not take this
director into account.
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 rd
Appointment by 3 parties

Financial institutions like

IDBI/IFCI/ICICI/SBI etc. Can appoint
addional nominee directors – their particulars
have to be submitted in form no. 32.

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 Appointment in AGM

As per sec. 263 – a director is appointed by

shareholders – by simple majority. Each
director will require separate resolution.

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 Principle of Proportional
Representation (sec. 265)
In order to enable minority shareholders, this
principle has been introduced. The directors
appointed by this principle should hold office
for 3 years and cannot be removed by AGM as
per sec. 284.
(upto 2/3rd directors may be appointed by this
system – by single transferable vote /
cumulative voting).
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 MD / whole time director (sec.
269)

Every public company having 5 crore or more

capital must have an MD / whole time director.
It requires permission of Central Government /
or apply as per schedule XIII and submit return
in form 25C within 90 days of appointment.

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 Schedule XIII – part I

The person being appointed as MD must not

have violated any act like Central Excise,
Income Tax, Wealth Tax, Customs, FEMA etc.
Age – between 25 and 70 (A major with less
than 25 years age / more than 70 ,can also
become, if special resolution + govt.
Permission is obtained).
must not have violated COFEPOSA
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 Maximum period of term

The maximum period is 5 years -

reappointment is permitted.

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 Maximum remuneration (sec.
198)

5%
total managerial remuneration of the company
= 11% of profit (computed as per sec. 349 and
350)
for part time director : 1% (if MD is there, 3%,
if there is no MD)

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 Sitting fees (sec. 309)

Maximum fees : 20000 for each meeting

(when turnover is above 50 crore and capital +
reserves at least 10 crores).
Otherwise maximum : 10000 / per meeting.

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 Qualification of directors (sec.
274)

Qualifications are not mentioned, but

disqualifications are mentioned in the law. A
person of unsound mind, undischarted
insolvent, a person imprisoned for moral
turpitude for 6 months or more is not eligible
for directorship.

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 Case : Oriental Metal Pressing
works P. Ltd vs. Bhaskar
kashinath

The court held that only individual can be

director, a firm or association cant be director,
as it is a position of trust.

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 Case : People's bank of northern
India

Articles of association may exempt persons of

technical / professional qualification from
having qualification shares. Otherwise the
articles may require the director to have
qualification shares.

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 Qualification shares (sec. 270)

Director must have qualification shares in 2

months from appointment
the nominal value of qualification shares
should not be more than Rs. 5000
bearer of share warrant cant be said to be
holding qualification shres.

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 Penalty : sec 272

If a director doesnt acquire qualification shares

in 2 months, he shall pay penalty Rs. 500 per
day. (all these provisions are applicable only
on public companies)

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 Number of directorship (max.)
sec. 275

No person can become director of more than

15 companies (public companies)

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 Sec. 278 – what to exclude from
15 companies

Following are not counted in 15 companies :

private company
unlimited company
a company in which the person is alternate director
association not for profit
penalty : (sec. 279) : upto 50000 if you become director
of more than 15 public companies

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 Vacation of post of director (sec.
283)
A director has to vacate if :
he is of unsound mind, he doesnt acquire
qualification shares in 2 months, he is judged
insolvent, convicted for moral turpitude &
imprisoned for 6 months or more, absents the 3
consecutive meetings or for 3 months (without
leave), he doesnt disclose his interest in a
contract (sec. 299), by court (sec. 203), when
he is there as an employee, but he retires.
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 Removal of director (sec. 284,
388B, 402, )

Shareholders can remove a director by

ordinary resolution. They have to send a
special notice (14 day notice) for this meeting
and pass the resolution. They cant remove a
director appointed by Govt / financial
institution. (sec. 284)

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Removal by govt. In case of fraud

If the director is engaged in fraud, mal-

practices, anti-social activities etc. Or the
company is not managed properly or the
company is working against the interest of
lenders / financers, or the company is
following unsound business practices, The
director can be removed by government as per
sec. 388B to 388E.
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Removal by company law board

In order to prevent oppression and

mismanagement, CLB can remove director
(sec. 397,398,402) – that director cant become
director of another company for 5 years.

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 Loans to director (sec. 295)

Without prior permission from government, no

company can give loan to its director / firm
(where the director of this company is a partner
/ proprietor ) / company of its director (its
director is holding 25% voting power in that
company),
however, these provisions dont apply to private
/ banking / holding company
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 Case : MR electronics
components

Advance salary to the wife of a director will

not come in sec. 295

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 Case : Dr. Fredie Ardeshir

Sale of flat on instalment to the director will

not come under sec. 295

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 Contract with firms related to
director (sec. 297)
A company cannot enter into a contract with
another firm / company in which its own
director is a partner / owner, unless it has been
approved by the board.
Exemptions : if it is cash transaction, or it is a
ordinary transaction in banking / insurance
firm or if the value of transaction is less than
Rs. 5000 per annum.
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 Case study

Professional services (like auditing,

consultancy) dont come in sec. 297.

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 Notice by director

A director has to give notice in form 24AA

when a company is about to enter into contract
in which director is interested. The notice must
be given to the board of directors when they
meet. (sec. 299)
penalty : Rs. 50000

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Case : fire stone tyre & rubber co
v/s synthetics and chemicals co.

Interest here means personal interest – not

official interest and includes closeness of
relatives (like father – son).

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Director not to participate in some
meetings (sec. 300)

A director cannot participate in a meeting in

which a matter / contract related to his issue /
in which he is interested, is discussed.

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 Office of profit Sec. 314

Director / his relatives cannot hold an office of

profit having remuneration of Rs. 10000 or
more per month – without special resolution.
Any firm / company in which director is a
partner / owner also cant hold a place of profit
without special resolution

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 Restriction on the powers of the
board
Sec. 293 restricts the powers of the board : it
cant remit loan due to director or his firm, it
cant invest compensation received otherwise
than as per law, it cant dive charity of more
than 5% of profit (or 50000) it cant borrow
more than equity + reserves without
permission.

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Can the directors keep accounts in
other places than registered
office?
Yes – the board of directors have to take a
decision and communicate it in 7 days to ROC
(registrar of companies) in form23 AA.
It can keep its accounts of branch offices at
branch office – but a summarised report should
be sent to the registered office at intervals of 3
months.

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Can a director inspect any book of
accounts?

Yes - during business hours ( sec. 209 (4) )

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 How long should the directors
keep the books of accounts
preserved?

For 8 years.

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 How should directors get the
accounts and reports approved
from shareholders?

Within 6 months of date of closure of financial

year,it must be adopted by AGM as per sec.
210
financial year can be extended upto 15 months
and with permission of ROC, upto 18 months.

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 Signing of annual accounts
Annual accounts must be signed by 2
direcotrs / manager / secretary
if you have MD, he must sign it.

Sec. 216 : P & L as per format must be

attached with balance sheet.
Sec. 217 : board of director must add his report
on working of company with the annual
account.
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