5_directers

7/28/2019 5_directers

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AN INSIGHT TO

Directors Role, Responsibilities andLiabilities


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This Presentation.

.is an attempt to highlight the role,

responsibilities and liabilities of the Directors

of a Company as outlined under variousprovisions of Companies Act, 1956.


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Director Directing mind and will of the

Company

Meaning under the Companies Act,1956

Section 2 (13):

Director includes any person occupying the position of

director, by whatever name called.


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Who may be appointed as a Director?

No body corporate, association or a firm shall beappointed director of a company, and only an

individual shall be so appointed. (Section 253 )


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Shadow Director/Deemed Director

Any person in accordance with whose directions

or instructions directors are accustomed to act.(Section 7)


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Overcoming mental blocks

Can a Body corporate become the director of

the Company?


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Legal Position of Directors

As Agents - Directors are the agents of theCompany .Thus , where the directors contract in the

name and on behalf of the company it is thecompany which is liable for it and not the Directors(Subject to exceptions)

As Trustee - The Directors of the company aretrustees(to a limited extent)for the company withreference to their power of applying funds of thecompany and for misuse of the power they could berendered liable as trustees.


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Are Directors Employees?

Directors are not the employees of the company as once

elected they enjoy well-defined rights and powers under

the Companies Act,1956 or the Articles of the Company

Even the shareholders who elect them cannot interfere

with their rights and powers except under certain

circumstances


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Types of Directors - A Glance

Non-ExecutiveExecutive

Directors

Independent Non- Independent


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Executive Director

Executive Director means managing

director or whole- time director .

Not defined under the Companies Act, 1956.


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Non-Executive Director

Non-executive directors are the directors on the

Board of a company, other than a Managing

Director and whole-time Director or a Directoremployed in his professional capacity.

Not defined under the Companies Act, 1956.


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Understanding- Managing Director


Section 2(26)ManagingDirector means a director who, by virtue

of an agreement with the Company or

of a resolution passed by the company in general meeting or

by virtue of its memorandum or articles of association ,

is entrusted with substantial powers of management which wouldnot otherwise be exercisable by him ,

AND includes a director occupying the position of managing director by

whatever name called:

Contd...


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Understanding- Managing Director

Provided that the power to do administrative acts of routinenature when so authorised by the Board such as power toaffix the common seal of the company to any document orto draw and endorse any cheque on the account of thecompany in any bank or to draw and endorse any

negotiable instrument or to sign any certificate of share or todirect registration of transfer of any share , shall not bedeemed to be included within the substantial powers ofmanagement.

Provided further that a managing director of a companyshall exercise his powers subject to superintendence,control and direction of the Board of Directors


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Understanding- Whole Time Director


Explanation to section 269 whole time directorincludes a director in the whole time employment ofthe company


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Overcoming Mental Blocks

Can a company have two Managing directors?

Is Managing Director/ Whole Time Director an employee ofthe Company?

Whether the whole time employee appointed as a part timedirector can be construed as a whole time director?

If the whole time company secretary is appointed as parttime director without being entrusted with the substantialpowers of management, can he be regarded as whole timedirector?


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Independent Director

As per Clause 49 of Listing Agreement

Independent Director shall mean a non-executivedirectorof the company who:

a. apart from receiving directors remuneration, does not haveany material pecuniary relationships or transactions with

the company, its promoters, its directors, its seniormanagement or its holding company, its subsidiaries andassociates which may affect independence of the director;

b. is not related to promoters or persons occupyingmanagement positions at the board level or at one level

below the board;

c. has not been an executive of the company in theimmediately preceding three financial years;


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d. is not a partner or an executive or was not partner or an

executive during the preceding three years, of any of thefollowing:

i. the statutory audit firm or the internal audit firm that isassociated with the company, and

ii. the legal firm(s) and consulting firm(s) that have a materialassociation with the company.

e. is not a material supplier, service provider or customer or

a lessor or lessee of the company, which may affectindependence of the director; and

f. is not a substantial shareholder of the company i.e.owning two percent or more of the block of voting shares.

Independent Directorcontd


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Important sections under Companies Act, 1956 as are

applicable to Directors

Sections 255 to 269 relating to appointment.

Section 274 relating to disqualifications.

Section 283 relating to vacation of office.

Section 284 relating to removal.

Sections 198, 309,310 and 311 relating to

remuneration.


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Appointment of Directors

Subscribers- as Directors

Appointment of first Directors Appointment at general meeting

Appointment by the Board of Directors

Appointment by third parties, and

Appointment by Central Government.


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Additional Directors

(Section 260)


Filing up the Casual Vacancy

(Section 262)AlternateDirectors

(Section 313)



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Additional Directors

Section 260

Nothing in section 255, 258 or 259 shall affect any powerconferred on the Board of directors by the articles to appointadditional directors:

Provided that such additional directors shall hold office only upto the date of the next ensuing annual general meeting of thecompany:

Provided further that the number of the directors andadditional directors together shall not exceed the maximumstrength fixed for the Board by the articles.


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Brainstorming-additional directors

Whether a resolution passed at the board meeting

necessary for appointment of additional Directors?

Filing of return under section 303(2) Whether

necessary?

Can an additional director be appointed as Managing/

Whole time director?

Can general body appoint additional directors?


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Filling of casual vacancies among directors

Section 262

(1) In the case of a public company or a private companywhich is a subsidiary of a public company, if the office of anydirector appointed by the company in general meeting isvacated before his term of office will expire in the normalcourse, the resulting casual vacancy may, in default of andsubject to any regulations in the articles of the company, befilled by the Board of directors at a meeting of the Board.

(2) Any person so appointed shall hold office only up to thedate up to which the director in whose place he is appointedwould have held office if it had not been vacated as aforesaid.


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Brainstorming-Casual vacancy

Can a Resolution by circulation be passed for

appointment of a director by way of casual vacancy?


necessary?

Whether the casual vacancy arises if a director

appointed in general meeting does not assume office?

Whether the vacancy arising on account of resignation

,etc of a director appointed by way of casual vacancy

can be filled again by way of casual vacancy?


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Alternate Directors

Section 313

(1) The Board of directors of a company may, if so authorized by itsarticles or by a resolution passed by the company in general meeting,appoint an alternate director to act for a director (hereinafter in thissection called the original director) during his absence for a period ofnot less than three months from the State in which meetings of the Boardare ordinarily held.

(2) An alternate director appointed under sub-section (1) shall not holdoffice as such for a period longer than that permissible to the originaldirector in whose place he has been appointed and shall vacate office ifand when the original returns to the State in which meetings of the Boardare ordinarily held.

(3) If the term of office of the original director is determined before he soreturns to the State aforesaid, any provision for the automatic re-appointment of retiring directors in default of another appointment shallapply to the original and not to the alternate director.


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Brainstorming-Alternate directors

Can the general meeting itselfappoint alternatedirectors ?


necessary? Is the alternate director the agent of the original director?

Can the Company appoint Alternate Director as MD , incase of absence of MD for 3 months?

Can alternate director be appointed as additionaldirector?

Can director of the company be alternate to anotherdirector?


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1

2

3

A clear picture

Type of company All Public All

Sl.

No.

Particular Section 260 Section

262

Section 313

Authority in AoA X Tenure Till the

commencementof next AGM

Till theunexpired

tenure of

the original

director

When the originaldirector returns to

the state or until

the expiry of office

of original

director,whichever is

earlier


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4

5

A clear picture

No specified

situation

Office of

director

appointed

in general

meeting

becomes

vacant

Sl.

No.

Particular Section 260 Section 262 Section 313

Director is absent

for not less than 3

months from the

state where the

board meetings

are ordinarily held

Whether

counted inquorum of

board meeting

Situation


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6

7

A clear picture

Sl.

No.

Particular Section 260 Section 262 Section 313

Applicability of

Sections 295,

297, 299 and

300

Applicability

of filing of

Form 32 and

Form 29


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Powers of the Board of Directors

General Powers of the Board under section 291

Powers entrusted under the Companies Act, 1956


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General Powers of the Board

Section 291 of the Companies Act, 1956

Subject to the provisions of this Act, the Board of directors of acompany shall be entitled to exercise all such powers, and to doall such acts and things, as the company is authorized toexercise and do:

Provided that the Board shall not exercise any power or do anyact or thing which is directed or required, whether by this or anyother Act or by the memorandum or articles of the company orotherwise, to be exercised or done by the company in generalmeeting:

Provided furtherthat in exercising any such power or doing any

such act or thing, the Board shall be subject to the provisionscontained in that behalf in this or any other Act, or in thememorandum or articles of the company or in any regulations notinconsistent therewith and duly made there under, includingregulations made by the company in general meeting.


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Powers entrusted to Directors under the Companies

Act,1956:

Certain powers of the Board of Directors which can be exercised only

at a meeting:

Power to make calls on unpaid shares Section 292(1)(a)

Power to issue Debentures and borrow moneys otherwise than onDebentures Section 292(1) (b) & (c).

Power to invest the funds of the Company Section 292(1)(d)

Power to grant loans Section 292(1)(e)

Power to authorize the buyback of shares Section 292(1)(aa)

CONTD..


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The power of filling vacancies in the Board (Section 262)

Power to make political contributions (Section 293-A)

Sanctioning or giving consent to contracts of or with any

director (Section 297(4))

Receiving of notice of disclosure of interest (Section 299)

Receiving notice of disclosure of share holdings of directors

only at a meeting of the Board (Section 308)

Contd

Certain powers of the Board of Directors which can

be exercised only at a meeting .. Contd..


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Certain powers of the Board of Directors which can be

exercised only at a meeting .. Contd..

Unanimous consent of all directors present at Board meetingnecessary for appointing as managing director or manager,a person who is already managing director or manager ofanother company - Sections 316(2) and 386(2)

Sanction by unanimous consent of all the directors present

at a Board meeting necessary for making investments incompanies, loans etc. - Section 372A

Declaration of solvency- Section 488(1)

Approval of text of advertisement for inviting public deposits-Section 58A read with rule 4(4) of the Companies(Acceptance of Deposits) Rules, 1975.


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Duties of Directors Statutory

To file return of allotments (Section 75)

Not to issue irredeemable preference shares or sharesredeemable after 20 years (Section 80)

To convene statutory, Annual General Meeting (AGM) and also

extraordinary general meetings [Sections 165, 166 & 169]

To prepare and place at the AGM along with the balance sheetand profit and loss account a report on the companys affairsincluding the report of the Board of Directors (Sections 173, 210and 217).

To authenticate and approve annual financial statement (section215).

CONTD.


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Duties of Directors Statutory

Duty to attend board meetings

To appoint first auditor of the company (Section 224)

To appoint cost auditor of the company (Section 233B)

To disclose interest (Section 299-300)

To disclose receipt from transfer of property (Section 319)

To disclose receipt of compensation from transferee of shares

(Section 320)

To make a declaration of solvency in the case of a Membersvoluntary winding up (section 488).

CONTD


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Duties of Directors General

Duty of good faith Directors must act in the best interest of the

company and should not make any secret

profits.

Duty of care - Director must display such care inperformance of work assigned to him

which a man of ordinary prudence would

take in his own case

Duty not to delegate - Director being an agent is bound by themaxim delegatus non potest delegate

subject to certain exceptions.


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Liabilities of Directors

Liability to the company

Liability to third parties

Liabilities for breach of statutory duties

Liability for acts of co-directors

Criminal liability.


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Liabilities to the company

Breach of fiduciary duty- where a director acts dishonestly to theinterests of the company, he will be held liable for breach offiduciary duty.

Ultra vires acts- Directors are supposed to act within theparameters of the provisions o the Companies Act, Memorandumand Articles of association, since these lay down the activities tothe limits of the company and consequently to the powers of theBoard of Directors. Where the directors act ultra vires, they areliable to indemnify the company for any loss/damage suffered dueto such act.

CONTD...

.


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Liabilities to the companyCONTD..

Negligence - Where 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 damageresulting there from.

Misfeasance - Directors can also be held liable for their

acts of misfeasance ,i.e., misconduct or wilful misuse of

powers .


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Liability to third parties

Liability under the provision of Companies Act, 1956

Mis-statement in Prospectus (section 62 and 63)

Irregular allotment (section 71)

Unlimited liability (section 322 and section 323) Fraudulent trading (section 542)

Liability for breach of warranty of authority

The directors may be proceeded against for any loss sustained by

any third party where they transact any business which is ultra

vires the company or the articles of association of the company.


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Liability for breach of statutory duty

The Companies Act, 1956 imposes numerousstatutory duties on the directors under various sections

of the Act. Default in compliance of these duties attract

penal consequences .


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Liabilities for acts of co-directors

A director is the agent of the company (except for

matters to the dealt with by the company in the general

meeting) and not the agent of the other members of

the Board. So nothing done by the Board can imposeliability on a director who did not participate in the

boards action or did not know about it. To incur liability

he must either be a party to a wrongful act or must

consent to it.


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Criminal Liability

Apart from civil liability director of a company may also incur criminalliability under common law as well as Companies Act and otherstatutes. Some of them (fine or /and imprisonment) are as follows:

Filing of untrue prospectus or statement in lieu of prospectus[Section 44(4)]

Failure to repay deposits (Section 58A)

Failure to repay excess application money [Section 93] Fraudulently renewing a share certificate or issuing a duplicate

share certificate [section 84(3)]

Undischarged insolvent acting as director [section 202(1)]

Default in distributing dividends [section 207]

Failure to supply information to auditors [section 221(4)]

Failure to disclose interest [section 299 (4)]

Failure to disclose shareholding [section 308(3)]

Acting as director or manager after removal by the Company LawBoard [Section 407 (2)


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Thank you

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