Director: Definition, Disqualification, Duties, Appointment

  • Post last modified:14 December 2020
  • Reading time:8 mins read

Definition of Director

Section 2 (34) of the Companies Act, 2013, defines a ‘director’ as a person appointed to the board of a company. It means that the person cannot be considered as director unless he is appointed by any method (i.e., either by the board or by shareholders) to the board of company.

Disqualification of Director

A person shall not be eligible for appointment as a director of a company, if –

  1. he is of unsound mind and stands so declared by a competent court;

  2. he is an undischarged insolvent;

  3. he has applied to be adjudicated as an insolvent and his application is pending;

  4. a person who 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;

  5. 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;

  6. an order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force;

  7. a person who 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;

  8. a person who has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years; or

  9. a person who has not obtained director identification number.

An additional disqualification is provided in sub section (2) of Section 164 relating to consequences of non-filing of financial statements or annual returns.

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 re- appointment in the same company for a period of five years from the date on which the said company fails to do so.

Legal Position of Director

Companies Act does not mention anything on legal position of directors. They have, at various times, been described by judges as agents, trustees or managing partners.

Directors as agents

Directors may correctly be described as agents of the company. The ordinary rules of agency will, therefore, apply to nay contract or transaction made by them on behalf of the company. Thus, where the directors contract in the name and on behalf of the company, it is the company which is liable on it and not the directors.

However, directors incur a personal liability in the following circumstances:

  1. Where they contract in their own names. Where the chief executive of the company executed a promissory note and borrowed an amount for the company’s sake, it could not be said that amount was borrowed by him, in his personal capacity.

  2. Where they use the company’s name incorrectly, e.g., by omitting the word ‘Limited’.

  3. Where the contract is signed in such a way that it is not clear whether it is the principle (the company) or the agent who is signing.

  4. Where they exceed their authority- Weeks vs Propert (1873)

Directors as trustees

Directors are regarded as trustees of the company’s assets and of the powers that vest in them because they administer those assets and perform duties in the interest of the company and not for their own personal advantage.

Directors as employees of the company

Where a director accepts employment under the company under a separate contract of service, in addition to the directorship, he is also treated as an employee or servant of the company.

Duties of Directors

Section 166 of the Companies Act, 2013 prescribes the duties of a director. The duties provided under Section 166 are applicable to all type of companies and to all directors. It includes:

  1. To act in accordance with the articles of the company.

  2. To 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 the environment.

  3. To exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.

  4. Not to 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.

  5. Not to 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.

  6. Not to 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.

Appointment of Directors

The director of a company may be appointed by any one of the following methods:

Appointment of first directors – Section 152

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.

General provisions relating to appointment of directorsIn 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.

  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. [Rule8]

  5. Articles of the Company may provide the provisions relating to the retirement of the all directors. If there is no provision in the article, 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.

    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.

    The directors to retire by rotation at every annual general meeting shall be those who have been longest in office since their last appointment.

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.

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.

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

  • a resolution for the re-appointment of such director has been put to the meeting and lost;

  • the retiring director has expressed his unwillingness to be so re-appointed;

  • he is not qualified or is disqualified for appointment;

  • a resolution, whether special or ordinary, is required for his appointment or reappointment by virtue of any provisions of this Act; or

    Section 162 i.e. appointment of directors to be voted individually is applicable to the case.

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