HIDAYATULLAH NATIONAL LAW

UNIVERSITY

Corporate law-ii project

TOPIC Qualification, appointment and

removal of directors

PROJECT SUBMITTED TO

dr. Dipak Das

PROJECT SUBMITTED BY AMIT KUMAR KAYAL

6 th
SEMESTER
ROLL NO 18
SECTION - A
DATE OF SUBMISSION 07.03.2015

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TABLE OF CONTENTS

Acknowledgments................................................3
Introduction...........................................................4

Objective.................................................................5
Research Methodology........................................5

Meaning of a director...........................................6
Who may be appointed as director......................8
Qualification for director....................................9
Disqualification for director..............................10
Appointment of director........................................11
Removal of director...............................................16

Conclusions..............................................................19
Bibliography.............................................................20

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ACKNOWLEDGEMENTS
I have made this project work, and on the way of completing it, I have learned a lot of
things for which I am thankful to Dr. Dipak Das, Associate professor, HNLU, Raipur, and
my guide, who gave me the opportunity to do this project work and guided me all the way.
I would also like to thank my friends, and colleagues, for their opinions, suggestions and
critical analysis, which has helped me to improve this project. I also thank the HNLU
library and the people working there. Their silent work is the reason behind the completion
of this project.
I thank God, He has been very generous on me, to have kept me in good health and make
the conditions favourable for me to complete this work in time.
Lastly, I thank my parents. Without their continuous support and belief in me, I would
never have been able to make this project.

-Amit
Kumar kayal
Semester-VI, B.A. LL.B. (Hons.)
Roll no-18

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INTRODUCTION
The supreme executive authority controlling the management and affairs of a company vests
in the team of directors of the company, collectively known as its Board of Directors. At the
core of the corporate governance practice is the Board of Directors which oversees how the
management serves and protects the long term interests of all the stakeholders of the
Company. The institution of board of directors was based on the premise that a group of
trustworthy and respectable people should look after the interests of the large number of
shareholders who are not directly involved in the management of the company. The position
of board of directors is that of trust as the board is entrusted with the responsibility to act in
the best interests of the company.
Although the Board comprises individual directors, yet the actions and deeds of directors
individually functioning cannot bind the company, unless a particular director has been
specifically authorised by a Board resolution to discharge certain responsibilities on behalf of
the company.
The Companies Act, 2013 does not contain an exhaustive definition of the term director.
Section 2 (34) of the Act prescribed that director means a director appointed to the Board of
a company. A director is a person appointed to perform the duties and functions of director of
a company in accordance with the provisions of the Companies Act, 2013.

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OBJECTIVES

The objectives of this project work are as

follows:

1. To study the meaning of a director.

2. To discuss the qualification and disqualification for a director.
3. To analyse the appointment and removal of a director

RESEARCH METHODOLOGY
The research is based on secondary sources. Literature review has been done extensively in
order to make a comprehensive presentation. Books from the universitys library have been
used. Articles and reports from different websites have been used in order to get
comprehensive data on the subject Footnotes have been provided wherever needed, to
acknowledge the source.

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Meaning of a director
Section 2(13) of the Companies Act, 1956 defines a 'director' as including any person
occupying the position of a director by whatever name called. Thus, it is not the name by
which a person is called but the position he occupies and the functions and duties which he
discharges that determine whether in fact he is a director or not. In Re, Forest of Dean Coal
Mining Co1it was stated that function is everything; name matters nothing. So long as a
person is duly appointed by the company to control the company's business and authorized
by the Articles to contract in the company's name and on its behalf, he functions as a
director. A company is indeed a person, but a juridical person and the directors as a body
endow the juridical person with human face that can act and react. Under the scheme of the
Companies Act, the company itself and its directors or the Board of directors are primary
agents of the company to transact its operations. The Companies Act specifies where the
company itself is to act both as principal and the agent and where the Board of directors is to
act on its behalf. In respect of the properties and assets of the company the directors or the
Board of directors act as Trustees. Therefore, the directors have different attributes in
relation to the company depending upon the facts of each case.
Section 2(34) of the companies act, 2013 defines a Director as director means a director
appointed to the board of a company.

1 [1878]10ch.D 450.
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As stated earlier, directors apart from being trustees for the assets and properties of the
company are also the agents of the company as it is the directors, collectively as Board,
act on behalf of the company on all matters except those specifically reserved for the
company to act. However, it may be noted that even though the directors for certain
purposes can be considered as the agent of the company, yet in respect of such matters for
which the directors (i.e., the Board) are empowered to take a decision, the company in
any manner, including in the general meeting, cannot direct the directors to take a
particular decision. For example, allotment of shares, transfer of shares, investments etc.
If the body of the shareholders did not approve the decision, they are free to change the
directors in the manner given in the Act. As stated elsewhere in the chapter a director
apart from being the agent and trustee of the company, can also treated as officer of the
company, hence an employee for purposes specified in the Act.
The articles of a company may designate its directors as governors, members of the
governing council or the board of management, or give them any other title, but so far as
the law is concerned they are simply directors
Similarly, in the case of associations or other bodies registered as companies section 25
(that is companies whose object is not profit making but furtherance of art ,science,
commerce, culture, etc.), the members of the executive committee governing body are

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Register of directors, etc.) provides that any person with whose direction instructions the

In

Board of directors is accustomed to act is also deemed to be a director.

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directors for purposes of the Act, though they may not be called by that name.-

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Pradesh High Court in Deen Dayalu v. Sri B.P. Reddy.2.

According to section 2(30) of the Act, the definition of an officer includes a director as
well as any person under whose directions or instructions the Board or any one or more of
the directors are accustomed to act.

Who may be appointed as a director?

Section 253 of the Companies Act provides that no body corporate, association or firm
can be appointed director of a company. Only an individual can be appointed as
director.
However, no company shall appoint or re-appoint any individual or director of the
company unless he has been allotted a Directors Identification Number (DIN) under
section 266B*.
In Oriental Metal Pressing Works (P.) Ltd v. B.K. Thakoor3, the Supreme Court pointed out
the reason as to why it is necessary that only an individual should be director of a

[ 1984] 2

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Comp. LJ 396

company. It was held that the office of the director being to some extent an office of
trust, there should be somebody readily available who can be held responsible for the
failure to carry out the trust, and it might be difficult to fix that responsibility if the
director was a corporation or an association of persons.
The aforesaid requirement that only individuals should be appointed as directors does
not extend to deemed directors coming within the provisions of section 7 of the
Companies Act, for instance, a holding company will be deemed to be a director for
purposes of section 7, where all or the majority of the directors of a subsidiary
company are accustomed to act according to its directions.

Qualification for directors

The Companies Act has not prescribed any academic or professional qualifications for
directors. Also, the Act imposes no share qualification on the directors. So, unless the
companys Articles contain a provision to that effect, a director need not be a
shareholder unless he wishes to be one voluntarily. But the Articles usually provide for
a minimum share qualification. As per Reg. 66 of Table A, a director must hold at least
one share in a company. Where a share qualification is fixed by the Articles of a public

3 [1961] 31 Comp. Cas. 143

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company or a private company which is a subsidiary of a public company, section 270

provides that:
(i) Each director must take his qualification shares within 2 months after his
appointment;
(ii) The nominal value of the qualification shares must not exceed Rs. 5,000 or the
nominal value of one share where it exceeds Rs. 5,000;
(iii) Share warrants will not count for purposes of share qualification.

Disqualification of a director

Section 274 of the Companies Act, 1956 provides that the following persons shall not
be capable of being appointed as directors of any company:
(a) a person found by a competent court to be of unsound mind and such finding
remaining in force.

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(b) an undischarged insolvent;

(c) a person who has applied to be adjudged an insolvent;
(d) a person who has been convicted by a Court of an offence involving moral turpitude
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 the expiry of the sentence;
(e) a person who has not paid any call in respect of shares of the company held by him,
whether alone or jointly with others and six months have elapsed from the last date
fixed for the payment of the call; and
(f) a person who has been disqualified by a Court/Tribunal in pursuance of section 203.
Section 203 empowers the Court/Tribunal to restrain fraudulent persons from
managing companies, unless the leave of the Court/ Tribunal has been obtained for his
appointment
Section 274 further provides that no person who is or has been a director of a
company which(A) has not filed the annual accounts and annual returns for any continuous
three financial years commencing on and after the first day of April, 1999;
or
(B) Has failed to repay its deposits or interest thereon due date or redeem its
debenture on due date or pay dividend and such failure continues for one
year or more,
Shall be eligible to be re-appointed as a director of that company or appointed
to other company for a period of 5 years.

Appointment of directors
The discussion on appointment of a director may be dealt with under the following heads:
1. Appointment of first directors - The first directors are usually appointed by name in the
articles or in the manner provided therein. Where the articles do not provide for the
appointment of first directors, the subscribers to the memorandum, who are individuals,
shall be deemed to be the first directors of the company subject to the regulations of the
company's articles. The first directors can hold office until the directors are duly appointed
in accordance with the provisions of section 255 (Section 254).
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In case of a public company, a list of persons who are to be the first directors of a company
along with their consent in writing must be delivered to the registrar of companies.
Where, for any reason, for example, death, the persons named in the list of first directors do
not assume office, it will be necessary for the subscribers of the Memorandum (who will
then be the only members) to convene a meeting for the appointment of directors. To the
extent to which the articles do not make any other provisions in that behalf, subscribers who
would be entitled to requisition a meeting may call the meeting. Notice of the meeting must
be served on every subscriber in the manner in which notices are required to be served by
the Act4.
2 Appointment of directors at general meeting - According to section 255, the directors
must be appointed by the company in general meeting. In the case of a public company or
of a private company which is a subsidiary of a public company, unless the Articles provide
for the retirement of all directors at every annual general meeting, at least two-third of the
total number of directors must be persons whose period of office is liable to determination
by rotation. In other words, only one-third of the total number of directors can be nonrotational directors
In case of a private company, which is not a subsidiary of a public company, if the articles are
silent as to the appointment of directors, or do not specifically provide for appointment of
directors otherwise than in a general meeting, then the directors are to be appointed in general
meeting by the shareholders [Section 255(2)] as interpreted by the Calcutta High Court in the
case of Swapan Das Gupta- Navin Chand Suchanti.5
The Delhi High Court in B.R. Kundra v. Motion Pictures Association6 held that directors
cannot prolong their tenure by not holding a meeting in time. The directors due to retire by
rotation must vacate office at the latest on the last day on which an annual general meeting
ought to have been held. Retiring directors are, however, eligible for re-election.

4 A. Ramaiya, guide to the companies Act, 12

Edition, page 1215.
5 [1988] 3 Comp. LJ 76 (Cal.).
6

[1976] 46 Comp. Cas. 339

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3. Appointment by Board of directors - The Board of directors can exercise the power to
appoint directors in the following three cases:
(i) Additional Directors (Section 260)
(ii) Filling up the Casual Vacancy (Section 262)
(iii) Alternate Directors (Section 313).
(i) Appointment of Additional Directors-It the Articles authorize, the Board may appoint
additional directors. Such additional directors together with the directors constituting the
Board should not exceed the maximum number fixed by the articles. Also, the additional
directors are entitled to hold office only up to the date of the next annual general meeting
of the company (Section 260).
Additional directors will enjoy the same powers and rights as other directors. Through
this route, the Board of directors can therefore appoint competent persons on the Board
who may find it difficult to come through election.
Unlike in case of filling a casual vacancy which can be done only in a regular meeting
of the Board (Section 262), the appointment of additional directors may be made either
at a meeting of the Board or by passing a resolution by circulation as provided in section
289.
As noted above, an additional director is entitled to hold office only up to the date of the
next annual general meeting of the company. But, in case annual general meeting is not
held on time, can the stay of the additional director be extended thereby? In Krishna
Prasad Pilani v. Colaba Land and Milk Company7, it was held that a director appointed
as an additional director vacates his office, at the latest, on the last day on which the
annual, meeting could have been called as required by section 166, and cannot continue
in office thereafter on the ground that the meeting was not or could not be called within
time prescribed by that section. The expression up to the date of the annual general
meeting means "upto the date when the next Annual General Meeting ought held at the
latest
(ii)Filling up casual vacancies

- Casual vacancy means a vacancy in the office of

a director appointed by the shareholders in a general meeting and caused by the

[1959] 29 Comp. Cas. 273

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death, resignation, insolvency or disqualification. The expression does not include

vacancy caused by efflux of time or retirement by rotation. Section 262 empowers
the Board to fill casual vacancies in the case of a public company or a private
company which is a subsidiary of a public company. Thus, if the office of any
director appointed by the company in general meeting is vacated before his term of
office expires in the normal course, the resulting casual vacancy may, subject to
any regulations in the articles of the company, be filled by the Board of Directors at
a meeting of the Board.
It has to be noted that as per sub-section (2) of section 262, if the director fills up a
casual vacancy, the person appointed will hold office not until the next Annual
General Meeting only but for the entire period for which the person in whose place
he was appointed would have held office. Thus, if Ram had been elected a director
and died a month later, Bharat appointed in his place would continue for the whole
period for which Ram, if he had not died, would have continued. But though Bharat
would continue for the whole of the unexpired term for which Ram had been
appointed; on the expiry of the term, Bharat will not be eligible for re- appointment
as a director retiring by rotation.
(iii)Alternate director (Section 313)

The Board of directors of a

company may, if so authorized by its articles or by a resolution passed by the company

in general meeting, appoint an alternate director to act for a director during his absence
for a period of not less than three months from the State in which meetings of the Board
are ordinarily held. However, the question of appointment of alternate director must be
considered fairly in the interest of the company and its shareholders.
No person shall be appointed as an alternate director for an independent director unless
he is qualified to be appointed as an independent director under the provisions of this
act. An alternate director is not an Agent of the original director.
An alternate director shall not hold office for a period longer than permissible to the
director in whose place he has been appointed and shall vacate the office when the
director in whose place he has been appointed return to India.
4. Appointment of Directors by third parties (Nominee Directors) - There may be
occasions when directors represent certain third parties in the Board. This usually happens
when the Government, foreign collaborators, holding companies, and financial institutions or
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other lenders, etc., nominate a director to represent their interest on the Board. The
phenomenon of nominee directors has become an important feature of the modern Indian
corporate sscene. It is primarily because of the role of the various lending institutions like
banks, mutual funds, public financial institutions, State financial corporations, etc. These
lending institutions in the modem corporate world have assumed a pivotal role in financing
the various Projects of the companies. Because of their heavy commitments, such providers
of money naturally desire to safeguard their interests. Besides, they will also like to ensure
that the money is invested in the stipulated purposes only. The right to dominate the directors
on the Boards of financed companies is usually contained in the contract itself. However, the
special legislations governing certain public financial institutions and State financial
corporations envisage the appointment of directors on the Boards of borrowing companies
and such a provision has an overriding applicability in spite of the normal regulatory
provisions of the Companies Act, the Memorandum of Association and the Articles of
Association.
Except where a statute provides for nomination of directors on the Board of a company,
nominee directors can be appointed only if a provision to that effect exist in the
Memorandum of Association or Articles of Association of the company because section 255
of the Companies Act, 1956 provides that unless the Articles provide for the retirement of all
directors at every annual general meeting, not than 2/3rds of the total number of directors of a
public company or a private company which is a subsidiary of a public company shall be
liable to retire by rotation. Sub-section (2) of section 255 provides that the remaining
directors shall in default of and subject to any regulation in the Articles of the company, also
be appointed by the company in general meeting. Therefore, it would be necessary for the
company to specifically provide in its Articles, or amend its Articles to provide, for
appointment of a non-rotational director by the assisting financial institution, except those
created by special Acts and having the overriding provision in regard. Therefore, if the
Articles do not contain a provision in this regard, they shall have to be first amended and only
then the appointment can be made. It may be mentioned that in the case of statutes governing
certain statutory financial institutions like the LIC, UTI, SFCs and IDBI empower them to
appoint nominee director Therefore, in their cases, the above procedure need not be followed
as these special statutes override the provisions of the Companies Act and the Articles of
Association
The liability of nominee director is the same as any other director.
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5. Appointment of special directors under Sick Industrial Companies (Special Provisions)

Act (SICA), 1985 - Under section 16(4)of SICA, 1985 as amended in 1994, it is provided
that where the Board of Industrial and Financial Reconstruction (BIFR) constituted under the
Act (SICA) deems it necessary that an enquiry should be made into an industrial company
the BIFR shall appoint one or more persons as special directors for safeguarding financial
and other interests of the company or in public interest'. It is further stated in sub-section
(4A) that the BIFR may issue such directions to a special director as it may deem necessary
or expedient for proper discharge of his duties. Again, sub-section (5) provides that the
provisions relating to share qualification, age limit, number of directorships, removal from
office, etc. shall not apply to any director appointed by the BIFR. The Department of
Company Affairs has clarified that special directors appointed under section 16(4) of the
SICA, 1985 by the BIFR shall not be disqualified for appointment as directors in view of
new section 274(l) (g) of the Companies Act, 1956.The Act, however, contains no provision
as to powers exercisable by the special directors.
The difference between a special director appointed under SICA, 1985, and a director
appointed as nominee of a financial institution, etc., is that the special director is appointed
to safeguard the interests of the company or public interest while the nominee director
safeguards the interests of the nominating institution/person along with that of the
company.

Removal of a director
The discussion on removal of a director may be grouped under the following three
heads:
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1. Removal by shareholders - Section 284 recognizes the inherent right of shareholders to

remove the directors appointed by them. It is not even necessary that there should be proof
of mismanagement, breach of trust, misfeasance or other misconduct on the part of the
directors. Where the shareholders feel the policies pursued by the directors or any of them
are not to their liking, they have the option' to remove the directors by passing an ordinary
resolution in the same way as the have the right to appoint directors by passing an ordinary
resolution.
Section 284 provides that a company may, by ordinary resolution passed in general meeting
after due receipt of a special notice, remove a director before the expiry of his term of office.
In Queen Kuries & Loans (P.) Ltd v. Sheena Jose8it was held that the notice must disclose the
grounds on which the director is proposed to be removed. The disclosure of the ground for
removal is a matter of substance and not of form because the directors concerned are entitled
to make a representation in writing against their removal at the meeting. The company is
bound to send a copy of the representation to every member of the company to whom the
notice of the meeting has been sent. It is only after these steps are taken that the resolution
can be passed. So, where a special notice of the resolution was not given, it amounted to a
serious lapse depriving the directors of their statutory right to make a representation. The
resolution removing the director was therefore held to be invalid.

The following directors, however, cannot be removed by the shareholders in general

meeting:
(i) a director appointed by the Central Government under section 408;
(ii) a director of a private company holding office for life on April 1,1952
(iii) director elected by the principle of proportional representation under section
265;
(iv) Directors appointed by Central Government under Industries (Development &
Regulation) Act, 1951;
(v) special directors appointed under Sick Industrial Companies (Special Provisions) Act, 1985;
(vi) directors appointed by financial institutions under statutory powers;

[1993] 76 Comp. Cas. 821 (Ker)

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(vii) nominee directors;

(viii) directors appointed by Company Law Board (now Tribunal) under section 402.

The vacancy caused by the removal of a director may be filled at the same meeting,
and if so filled, person appointed thereto will hold office for the residual period of the
removal.

Compensation for loss of office it provides that any payment made to a managing
director or other director shall not exceed the remuneration which he would have
earned if he had been in office for the unexpired term residue of his term or for three
years whichever is shorter.

2. Removal by Central Government-Under section 388B, the Central Government has

the power to make a reference to the Company Law Board (now Tribunal) against any
managerial personnel. The power can be exercised where, in the opinion Central Government, there are
circumstances suggesting:

(a)that any person concerned in the conduct and management of the affairs of a company is or
has been guilty of fraud, misfeasance, persistent negligence or default in carrying out his
obligations and functions under the law, or breach of trust in connection therewith; or

(b) That the business of the company is not or has not been conducted and managed by such
person in accordance with sound business principles or prudent commercial practices; or

(c)that the business of the company is or has been conducted or managed by such person in a
manner which is likely to cause or has in fact caused, serious injury or damage to the interest of
trade, industry or business to which such company pertains; or
(d) that the business of the company is or has been conducted and managed by such person with
an intent to defraud its creditors, members, or any other person or otherwise for a fraudulent or
unlawful purpose in a manner prejudicial to public interest.
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In Union of India v. Satyam Computer Services Ltd, the company law board on a
reference by the Central Government and taking facts into account, ordered removal of
the then Board of Directors and allowed the Central Government to constitute a Board
comprising not more than ten members.

3.Removal by Company Law Board (now Tribunal) [Section 402(d)- where an

application has been made to the Company Law Board under section 397 or 398 against
oppression and mismanagement of a companys affairs Company Law Board may
order for the termination or setting of an agreement which the company might have
made with any of its directors Such a director shall not be entitled to serve as a
manager, managing director or director of the company without leave of the Company
Law Board (now Tribunal for a period of five years from the date of Company Law
Boards. He shall also not be entitled to claim any compensation from the company for
the loss of office

Conclusions

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Section 252 provides that every public company must have at least 3 directors and every
private company must have at least 2 directors. Subject to the minimum number of directors a
company should have, the articles of a company may prescribe the maximum and the
minimum number of directors for its board of directors. A company in a general meeting may
by ordinary resolution increase or reduce the number of its directors within the limits fixed in
that behalf by its article. A public company or a private company which is a subsidiary of a
public company cannot increase the number of directors beyond the permissible maximum
under its articles without the approval of the central government. However, no approval of
the central government is required if such permissible maximum is twelve or less than
twelve, and the increase in the number of its directors does not exceed twelve.
Directors are the selected body of persons upon whom lies the responsibility of the
management of the company as well as the business run by the company. They are the
persons in whom vests the power to make contracts and duty to take care of the property of
the company.

BIBLIOGRAPHY
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Books referred:
1. Company law and practice by A.K. Majumdar and Dr. G.K. Kapoor
Websites Referred:
1. http://www.preservearticles.com/201104085051/brief-note-on-the-appointment-andremoval-of-director-of-a-company-in-india.html
2. http://www.icsi.edu/Portals/0/APPOINTMENT%20AND
%20QUALIFICATIONS.pdf

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