The Companies Act, 2013 passed by the Parliament has received the approval of the

President of India on 29th August, 2013. The Act consolidates and amends the law relating to
companies. The Companies Act, 2013 was enacted on August 30, 2013. Some of the
provisions of the Act have been implemented by a notification published on 12th September;
2013 and some need to be notified yet. It is worthy to mention that the provisions
of Companies Act, 1956 is still in force.
Meaning and Features of a Company
With a phenomenal change in the domestic and international economic landscape,
the Government of India decided to replace the Companies Act, 1956 with a new legislation.
The Companies Act, 2013, endeavours to make the corporate regulations in India more
contemporary. In this article, we will focus on the meaning and features of a Company.

Meaning of a Company

There are many definitions of a Company by various legal experts. However, Section 2(20)
of the Companies Act, 2013, defines the term ‘Company’ as follows: “Company means
a company incorporated under this Act or under any previous company law.”

Hence, in order to understand the meaning of a Company, it is important to look at the

distinctive features that explain the realm of a Company.

Features of a Company

A Company is a Separate Legal Entity

One of the most distinctive features of a Company, as compared to other organizations, is that
it acquires a unique character of being a separate legal entity. Hence, when you register a
company, you give it a legal personality with similar rights and powers as a human being.

The existence of a company is distinct and separate from that of its members. It can own
property, bank accounts, raise loans, incur liabilities and enter into contracts. According to
Law, it is altogether different from the subscribers to the Memorandum of Association.

Also, it has a distinct personality which is different from those who compose it. Member can
also contract with the Company and acquire a right against it or incur a liability to it.
However, for any debts, the creditors can sue the Company but the members cannot

A Company can own, enjoy, and dispose of a property in its own name. While the
shareholders contribute to the capital and assets, the company is the rightful owner of such
assets and capital. Further, the shareholders are not private or joint holders of the company’s
property.
Perpetual Succession
Another important feature of a Company is that it continues to carry on its business
notwithstanding the death of change of its members until it is wound up on the grounds
specified by the Act. Further, the shares of the company change hands infinitely, but that does
not affect the existence of the company.

In simple words, the company is an artificial person which is brought into existence by the
law. Hence, it can be ended by law alone and is unaffected by the death or insolvency of its
members

Limited Liability
One of the important features of a company is the limited liability of its members. The
liability of a member depends on the type of company.

● In the case of a limited liability company, the debts of the company in totality do not
become the debts of its shareholders. In such a case, the liability of its members is
limited to the extent of the nominal value of shares held by them. The shareholders
cannot be asked to pay more than the unpaid value of their shares.

● In the case of a company limited by guarantee, members are liable only to the extent of
the amount guaranteed by them. Further, this liability arises only when the company
goes into liquidation.

● Finally, if it is an unlimited company, then the liability of its members is unlimited too.
But such instances are very rare
Artificial Legal Person
Another one of the features of a company is that it is known as an Artificial Legal Person.

● Artificial – because its creation is by a process other than natural birth.

● Legal – because its creation is by law, and

● Person – because it has similar rights to a human being.

Further, a company can own property, bank accounts, and do everything that a natural person
can do except go to jail, marry, take an oath, or practice a learned profession. Hence, it is a
legal person in its own sense.

Since a company is an artificial person, it needs humans to function. These humans are
Directors who can authenticate the company’s formal acts either on their own or through the
common seal of the company.
Common Seal
While a company is an artificial person and works through the agency of human beings, it has
an official signature. This is affixed by the officers and employees of the company on all its
documents. This official signature is the Common Seal.

However, the Companies (Amendment) Act, 2015 has made the Common Seal optional.
Section 9 of the Act does not have the phrase ‘and a common seal’ in it. This provides an
alternative mode of authorization for companies who do not wish to have a common seal.

According to this amendment, if a company does not have a common seal, then the
authorization shall be done by:

● Two Directors or

● One Director and the Company Secretary (if the company has appointed a Company
Secretary).

Types of Companies
The Companies Act, 2013 provides for the kinds of companies that can be promoted and
registered under the

Act. The three basic types of companies which may be registered under the Act are:

1. Private Companies;
2. Public Companies; and
3. One Person Company (to be formed as Private Limited Company)
Section 3 of the Companies Act 2013, states that

(1) A company may be formed for any lawful purpose by–

1. seven or more persons, where the company to be formed is a public company;

2. two or more persons, where the company to be formed is a private company; or
3. one person, where the company to be formed is a One Person Company that is to say,
a privatecompany,
by subscribing their names or his/her name to a memorandum and complying with the
requirements of this act in respect of registration.

Provided that the memorandum of One Person Company shall indicate the name of the other
person, with his prior written consent in the prescribed form, who shall, in the event of the
subscriber’s death or his incapacity to contract become the member of the company and the
written consent of such person shall also be filed with the Registrar at the time of
incorporation of the One Person Company along with its memorandum and articles:
 Provided further that such other person may withdraw his consent in such manner as may be
prescribed:

Provided also that the member of One Person Company may at any time change the name of
such other person by giving notice in such manner as may be prescribed:

Provided also that it shall be the duty of the member of One Person Company to intimate the
company the change, if any, in the name of the other person nominated by him by indicating
in the memorandum or otherwise within such time and in such manner as may be prescribed,
and the company shall intimate the Registrar any such change within such time and in such
manner as may be prescribed:

Provided also that any such change in the name of the person shall not be deemed to be an
alteration of the memorandum.

2) A company formed under sub-section (1) may be either–

1. a company limited by shares; or

2. a company limited by guarantee; or
3. an unlimited company
PRIVATE COMPANY

As per Section 2(68) of the Companies Act, 2013, “private company” means a company
having a minimum paid-up share capital as may be prescribed, and which by its articles,–

1. restricts the right to transfer its shares;

2. except in case of One Person Company, limits the number of its members to two
hundred:
Provided that where two or more persons hold one or more shares in a company jointly, they
shall, forthe purposes of this clause, be treated as a single member

Provided further that the following persons shall not be included in the number of members;–

1. persons who are in the employment of the company; and

2. persons who, having been formerly in the employment of the company, were
members of the company while in that employment and have continued to be
members after the employment ceased,
shall not be included in the number of members; and

● prohibits any invitation to the public to subscribe for any securities of the company;
It must be noted that it is only the number of members that is limited to two hundred. A
private company may issue debentures to any number of persons, the only condition being
that an invitation to the public to subscribe for debentures is prohibited.
 The aforesaid definition of private limited company specifies the restrictions, limitations and
prohibitions, which must be expressly provided in the articles of association of a private
limited company.

As per proviso to Section 14 (1) of the Act, if a company being a private company alters its
articles in such a manner that they no longer include the restrictions and limitations which are
required to be included in the articles of a private company under this Act, such company
shall, as from the date of such alteration, cease to be a private company.

A private company can only accept deposit from its member’s upto a particular limit in
accordance with section 73 of the Companies Act, 2013.

The words ‘Private Limited’ must be added at the end of its name by a private limited
company.

As per section 3(1), a private company may be formed for any lawful purpose by two or more
persons, by subscribing their names to a memorandum and complying with the requirements
of this Act in respect of registration. Section 149(1) further lays down that a private company
shall have a minimum number of two directors. The only two members may also be the two
directors of the private company.

Characteristics of Private Limited Company

● Members– To start a company, minimum number of 2 members is required and a

maximum number of 200 members as per the provisions of the Companies Act, 2013.
● Limited Liability– The liability of each member or shareholders is limited. It means that
if a company faces loss under any circumstances then its shareholders are not liable to sell
their own assets for payment. Thus, the personal, individual assets of the shareholders are
not at risk.
● Perpetual succession– The company keeps on existing in the eyes of law even in the
case of death, insolvency, the bankruptcy of any of its members. This leads to perpetual
succession of the company. The life of the company keeps on existing forever.
● Index of members– A private company has a privilege over the public company as they
don’t have to keep an index of its members since the number of members is less than 50
generally in these companies whereas the public company is required to maintain an
index of its members, as generally such companies have the number of members in
hundreds and thousands and so on. In short, the maintenance of index is not necessary
where the number of members is less than fifty.
● A number of directors– When it comes to directors, a private company needs to have
only two directors. With the existence of 2 directors, a private company can come into
existence and can start with its operations.
● Paid up capital– There is no minimum capital requirement. Prospectus– Prospectus is a
detailed statement of the company affairs which is issued by a company for its public.
However, in the case of private limited company, there is no such need to issue a
prospectus because in this type of companies, public is not invited to subscribe for the
shares of the company.
● Minimum subscription– It is the amount to be received by the company on the shares to
be issued within a certain period of time. If the company is not able to receive such
amount then they cannot commence further business. In case of private limited company
shares can be allotted without receiving the amount of such minimum subscription since
such amount is required to be stated in the prospectus which is not applicable and
required in the case of private companies.
● Name– It is mandatory for all the private companies to use the word “private limited”
after its name.
PUBLIC COMPANY

By virtue of Section 2(71), a public company means a company which:

1. is not a private company; and

2. has a minimum paid-up share capital, as may be prescribed
Provided that a company which is a subsidiary of a company, not being a private company,
shall be deemed to be public company for the purposes of this Act even where such
subsidiary company continues to be a private company in its articles.

As per section 3(1)(a), a public company may be formed for any lawful purpose by seven or
more persons, by subscribing their names or his name to a memorandum and complying with
the requirements of this act in respect of registration. A public company may be said to be an
association consisting of not less than 7 members, which is registered under the Act. In
principle, any member of the public who is willing to pay the price may acquire shares in or
debentures of it. The securities of a public company may be quoted on a Stock Exchange. The
number of members is not limited to two hundred.

As per section 58(2), the securities or other interest of any member in a public company shall
be freely transferable. However, any contract or arrangement between two or more persons in
respect of transfer of securities shall be enforceable as a contract.

The Companies Act, makes a clear distinction in regard to the transferability of shares
relating to private and public companies. By definition, a “private company” is a company
which restricts the right to transfer its shares. In the case of a public company, the Act
provides that the shares or debentures and any interest therein, of a company, shall be freely
transferable.

The provision contained in the law for the free transferability of shares in a public company is
founded on the principle that members of the public must have the freedom to purchase and,
every shareholder should have the freedom to transfer. The incorporation of a company in the
public, as distinguished from the private, realm leads to specific consequences and the
imposition of obligations envisaged in law. Those who promote and manage public
companies assume those obligations. Corresponding to those obligations there are some
rights, which the law recognizes as inherent in the members of the public who subscribe to
shares of the company.

CHARACTERISTICS OF PUBLIC COMPANY

● Board of Directors– Public limited companies are headed by a board of directors.
Composition of the board of directors is set out in the company’s articles of association.
Normally it comprises of a minimum number of three members and a maximum of 15.
The company may appoint more than 15 directors after passing a special resolution.
These are elected by the shareholders during the annual general meeting. They act as the
representatives of the shareholders in the management of the company.
● Limited Liability Shareholder- liability for the losses of the company is limited to their
share contribution only. This is what makes it a separate legal entity from its
shareholders. The business can be sued on its own and not involve its shareholders. The
company does not belong to any person since one person can own only a part of it.
● Number of Members– A public limited company has a minimum number of seven
shareholders or members and a limitless number of members. It can have as many
shareholders as its share capital can accommodate.
● Transferable shares- Shares of a public limited company are bought and sold in a stock
exchange market. They are freely transferable between its members and people trading in
the stock exchange.
● Life Span- A public limited company is not affected by death of one of its shareholders,
but the shares are transferred to the next kin or legal heir of such deceased shareholder
and the company continues to run its business as usual. In the case of a director’s death,
the Board is empowered to fill the resulting casual vacancy may be filled by Board of
Directors at Board meeting which shall be subsequently approved by members in the
immediate next general meeting.
● Financial Privacy– Public limited companies are strictly regulated and are required by
law to publish their complete financial statements annually. This ensures that they reveal
their true financial position to their owners and to potential investors so that they can
determine the true worth of its shares.
● Capital- Public limited companies enjoy an increased ability to raise capital since they
can issue shares to the public through the stock market. They can also raise additional
capital by issuing debentures and bonds through the same market from the public.
Debentures and bonds are in the form of secured or unsecured debts issued to a company
on the strength of its integrity and financial performance by the general public or its
members etc

ONE PERSON COMPANY (OPC)

With the implementation of the Companies Act, 2013, a single person could constitute a
Company, under the One Person Company (OPC) concept. The introduction of OPC in the
legal system is a move that would encourage corporatization of micro businesses and
entrepreneurships.

OPC is a one shareholder corporate entity, where legal and financial liability is limited to the
company only.

As per section 2(62) of the Companies Act, 2013, “One Person Company” means a company
which has only one person as a member. Section 3(1)(c) lays down that a company may be
formed for any lawful purpose by one person, where the company to be formed is to be One
Person Company that is to say, a private company. In other words, one person company is a
kind of private company.

An One person company shall have a minimum of one director. Therefore, a One Person
Company will be registered as a private company with one member and one director.

By virtue of section 3(2) of the Act, an OPC may be formed either as a company limited by
shares or a company limited by guarantee; or an unlimited liability company.

Rule 3 of Companies (Incorporation) Rules, 2014 – One Person Company

1. Only a natural person who is an Indian citizen and resident in India- (a) shall be
eligible to incorporate a One Person Company; (b) shall be a nominee for the sole
member of a One Person Company. Explanation-For the purposes of this rule, the
term “resident in India” means a person who has stayed in India for a period of not
less than one hundred and eighty two days during the immediately preceding one
calendar year.
2. A natural person shall not be a member of more than a One Person Company at any
point of time and the said person shall not be a nominee of more than a One Person
Company.
3. Where a natural person, being member in One Person Company in accordance with
this rule becomes a member in another such Company by virtue of his being a
nominee in that One Person Company, such person shall meet the eligibility criteria
specified in sub rule (2) within a period of one hundred and eighty days.
4. No minor shall become member or nominee of the One Person Company or can hold
share with beneficial interest.
5. Such Company cannot be incorporated or converted into a company under section 8
of the Act.
6. Such Company cannot carry out Non-Banking Financial Investment activities
including investment in securities of anybody corporates.
7. No such company can convert voluntarily into any kind of company unless two years
have expired from the date of incorporation of One Person Company, except
threshold limit (paid up share capital) is increased beyond fifty lakh rupees or its
average annual turnover during the relevant period exceeds two crore rupees.
The common differences between a private and public limited company are as follows:
Public  limited
Features Private limited company
company
Minimum members 7 2
Minimum directors 3 2
Maximum members Unlimited 200
Minimum capital 500000 100000
Invitation to public Yes No
Issue of prospectus Yes No
Quorum at AGM 5 Members 2 Members
Certificate for commencement of
Yes No
Business ( Mandatory)
Term used at the end of name Limited Private Limited
Can not exceed more than 11%
Managerial remuneration No restriction
of Net Profits
Statutory meeting (Mandatory) Yes No
Advantages of a Private Limited Company
Members: You can start a private limited company with a minimum of only 2 members (and
maximum of 200), as per the provisions of the Companies Act 2013.
Limited liability: The liability of each shareholder or member is limited. This means that if
the company runs into a loss, the company shareholders are liable to sell their company
shares to clear the debt or liability. The individual or personal assets of shareholders or
members are not at risk.

Perpetual succession: As per company law, perpetual succession means that the company
continues its existence even any owner or member dies, goes bankruptcy, exits from the
business and transfers his shares to another person.
Prospectus: Prospectus is a detailed statement that must be issued by a company that goes
public. However, private limited companies do not need to issue a prospectus because the
public is not invited to subscribe for the shares of the company.
Number of directors: A private limited company needs a minimum of only 2 directors. At
least one director on the board of directors must have stayed in India for a total period of not
less than 182 days in the previous calendar year. The directors and the shareholders can be
the same people.
Capital: Minimum share capital required is only Rs. 1 lakh.
Disadvantages of a Private Limited Company

● The shares in a private limited company cannot be sold or transferred to anyone

unless other shareholders agree on the same.
● There is no option to invite public to subscribe to the shares.
● It is mandatory that you should mention Pvt. Ltd. at the end of a company name.

Advantages of a Public Limited Company

Members: In order for a company to be public , it should have a minimum of 7 members
(maximum  unlimited).
Limited liability: The liability of a public company is limited. No shareholder is individually
liable for the payment. The public limited company is a separate legal entity, and each
shareholder is a part of it.
Board of Directors: A public company is headed by a board of directors. It should have a
minimum of 3 and can have a maximum of 15 board of directors. They are elected from
among the shareholders by the shareholders of the company in annual general meetings. The
elected directors act as  representatives of the shareholders in managing the company and
taking decisions. Having a bigger board of directors therefore benefits all shareholders in
terms of transparency as well as fostering a democratic management process.
Transparency: Private limited companies are strictly regulated and are required by law to
publish their complete financial statements annually to ensure the true financial position of
the company is made clear to their owners (shareholders) and potential investors. This also
helps to determine the market value of its shares.
Capital: A public company can raise capital from the public by issuing shares through stock
markets. Public companies can also raise capital by issuing bonds and debentures that are
unsecured debts issued to  a company on the basis of financial performance  and integrity of
the company.
Transferable shares: A public limited company’s shares are purchased and sold on the
market. They are freely transferred among the members and the people trading on stock
markets.
Disadvantages of going public:
Prospectus: For a public company, issuing prospectus is mandatory  because the public is
invited to subscribe for the shares of the company.
Expensive: Going public is an expensive and time consuming process. A public company
must put its affairs in order and prepare reports and disclosures that match with SEBI
regulations concerning initial public offerings (IPO). The owner has to hire specialists like
accountants and underwriters to take the company through the process.
Equity Dilution: Any company going public is selling a part of the company’s ownership to
strangers. Each bit of ownership that the owner sells comes out of their current equity
position. It is not always possible to raise the amount of money that you may need to operate
a public corporation from shares, so company owners should hold at least 51 percent of the
ownership in their control.
Loss of Management Control: Once a private company goes public, managing the business
becomes more complicated. The owner of the company can no longer make decisions
independently. Even as a majority shareholder, they are accountable to minority shareholders
about how the company is managed. Also, company owners  will no longer have total control
over the composition of the board of directors since SEBI regulations place restrictions on
board composition to ensure the independence of the board from insider impact.
Increased Regulatory Oversight: Going public brings a private company under the
supervision of the SEBI and other regulatory authorities that regulate public companies, as
well as the stock exchange that has agreed to list the company’s stock. This increase in
regulatory oversight significantly influences management of the business.

Formation of Company
(1) A company may be formed for any lawful purpose by—
(a) seven or more persons, where the company to be formed is to be a public company;
(b) two or more persons, where the company to be formed is to be a private company; or
(c) one person, where the company to be formed is to be One Person Company that is to say,
a private company,
by subscribing their names or his name to a memorandum and complying with the
requirements of this Act in respect of registration:
Provided that the memorandum of One Person Company shall indicate the name of the other
person, with his prior written consent in the prescribed form, who shall, in the event of the
subscriber's death or his incapacity to contract become the member of the company and the
written consent of such person shall also be filed with the Registrar at the time of
incorporation of the One Person Company along with its memorandum and articles:
Provided further that such other person may withdraw his consent in such manner as may be
prescribed:
Provided also that the member of One Person Company may at any time change the name of
such other person by giving notice in such manner as may be prescribed:
Provided also that it shall be the duty of the member of One Person Company to intimate the
company the change, if any, in the name of the other person nominated by him by indicating
in the memorandum or otherwise within such time and in such manner as may be prescribed,
and the company shall intimate the Registrar any such change within such time and in such
manner as may be prescribed:
Provided also that any such change in the name of the person shall not be deemed to be an
alteration of the memorandum.
1&2[(2) A company formed under sub-section (1) may be either—
(a) a company limited by shares; or
(b) a company limited by guarantee; or
(c) an unlimited company. ]

Incorporation of Company

(1) There shall be filed with the Registrar within whose jurisdiction the registered office of a
company is proposed to be situated, the following documents and information for
registration, namely:—
(a) the memorandum and articles of the company duly signed by all the subscribers to the
memorandum in such manner as may be prescribed;
(b) a declaration in the prescribed form by an advocate, a chartered accountant, cost
accountant or company secretary in practice, who is engaged in the formation of the
company, and by a person named in the articles as a director, manager or secretary of the
company, that all the requirements of this Act and the rules made thereunder in respect of
registration and matters precedent or incidental thereto have been complied with;
(c) 1[a declaration] from each of the subscribers to the memorandum and from persons
named as the first directors, if any, in the articles that he is not convicted of any offence in
connection with the promotion, formation or management of any company, or that he has not
been found guilty of any fraud or misfeasance or of any breach of duty to any company under
this Act or any previous company law during the preceding five years and that all the
documents filed with the Registrar for registration of the company contain information that is
correct and complete and true to the best of his knowledge and belief;
(d) the address for correspondence till its registered office is established;
(e) the particulars of name, including surname or family name, residential address, nationality
and such other particulars of every subscriber to the memorandum along with proof of
identity, as may be prescribed, and in the case of a subscriber being a body corporate, such
particulars as may be prescribed;
(f) the particulars of the persons mentioned in the articles as the first directors of the
company, their names, including surnames or family names, the Director Identification
Number, residential address, nationality and such other particulars including proof of identity
as may be prescribed; and
(g) the particulars of the interests of the persons mentioned in the articles as the first directors
of the company in other firms or bodies corporate along with their consent to act as directors
of the company in such form and manner as may be prescribed.
(2) The Registrar on the basis of documents and information filed under sub-section (1) shall
register all the documents and information referred to in that sub-section in the register and
issue a certificate of incorporation in the prescribed form to the effect that the proposed
company is incorporated under this Act.
(3) On and from the date mentioned in the certificate of incorporation issued under sub-
section (2), the Registrar shall allot to the company a corporate identity number, which shall
be a distinct identity for the company and which shall also be included in the certificate.
(4) The company shall maintain and preserve at its registered office copies of all documents
and information as originally filed under sub-section (1) till its dissolution under this Act.
(5) If any person furnishes any false or incorrect particulars of any information or suppresses
any material information, of which he is aware in any of the documents filed with the
Registrar in relation to the registration of a company, he shall be liable for action under
section 447.
(6) Without prejudice to the provisions of sub-section (5) where, at any time after the
incorporation of a company, it is proved that the company has been got incorporated by
furnishing any false or incorrect information or representation or by suppressing any material
fact or information in any of the documents or declaration filed or made for incorporating
such company, or by any fraudulent action, the promoters, the persons named as the first
directors of the company and the persons making declaration under clause (b) of sub-section
(1) shall each be liable for action under section 447.
*(7) Without prejudice to the provisions of sub-section (6), where a company has been got
incorporated by furnishing any false or incorrect information or representation or by
suppressing any material fact or information in any of the documents or declaration filed or
made for incorporating such company or by any fraudulent action, the Tribunal may, on an
application made to it, on being satisfied that the situation so warrants,—
(a) pass such orders, as it may think fit, for regulation of the management of the company
including changes, if any, in its memorandum and articles, in public interest or in the interest
of the company and its members and creditors; or
(b) direct that liability of the members shall be unlimited; or
**(c) direct removal of the name of the company from the register of companies; or
**(d) pass an order for the winding up of the company; or
(e) pass such other orders as it may deem fit:
Provided that before making any order under this sub-section,—
(i) the company shall be given a reasonable opportunity of being heard in the matter; and
(ii) the Tribunal shall take into consideration the transactions entered into by the company,
including the obligations, if any, contracted or payment of any liability.
What are the documents required for public limited company registration?

1. PAN of the director of the company: PAN or Permanent Account Number is a prerequisite
if you are trying to apply for public limited company incorporation.

2. Passport sized photo ID

3. For address proof, you can go either of two ways:

a. If you are renting the property that you want to become the head office of the public
limited company, then you would need the NOC from the owner of that property

b. If you are the owner of the property, then a sale deed is needed.

4. ID proof of the applicant of the incorporation:

a. Voter ID or

b. Aadhar card or

c. Driving license

5. A copy of any utility bill of the applicant’s address.

6. If you are an NRI, then you need to provide the utility bill from the country that you
belong now. This document should be notarized.

7. Bank account statements as well.

8. For foreign nationals, a passport copy is also required. Furthermore, this copy should be
properly notarized by the Indian embassy in that country.
Company Directors

Section 149(1) of the Companies Act, 2013 requires that every company shall have a

minimum number of 3 directors in the case of a public company, two directors in the case
of a private company, and one director in the case of a One Person Company.
A company can appoint maximum 15 fifteen directors.

The directors are the professional men of the company who are hired to direct the affairs of
the company. They are the officers of a company and not a servant. In the case of Moriarty v.
Regent’s Garage Co, it was held that a director is not a servant of the company, but a
controller of the affairs of a company.

Directors as agents

In the landmark case of Ferguson v. Wilson, it was clearly recognised that the directors are
the agents of a company in the eyes of law. The company being an artificial person can act
only through the directors. Regarding this, the relation between the directors and the
company is merely like the ordinary relation of principal and agent.

The relation between the directors and the company is similar to the general principle of
agency. When a director signs on behalf of the company, it is a company that is held liable
and not the director. Also, like agents, they have to declare any personal interest if they have
in a transaction of the company.

One of the important points to be noted is that they are not agents of its individual members.
They are the agents of the institution.

In the case of Indian Overseas Bank v. RM Marketing, it has been held that the directors of
a company could not be made liable merely because he is a director if he has not given any
personal guarantee for a loan taken by the company,

Directors as Trustees

In a strict sense, the directors are not the trustees, but they are always considered and treated
as trustees of money and properties which comes to their hand or which is under their control.
As observed by the Madras High Court in the case of RamaswamyIyer v. Brahamayya& Co.,
regarding their power of applying funds of the company and for the misuse of power, the
directors are liable as trustees and after their death, the cause of action survives against their
legal representative.

Another reason due to which the directors are described as trustees is because of their nature
of the office. Directors are appointed to manage the affairs of the company for the benefit of
shareholders. But, the director of a company is not exactly a trustee, as a trustee of will or
marriage settlement. He is a paid officer of a company.

As per the principles laid down in the case of Percival v. Wright, directors are not the trustees
of the shareholders. They are trustees of the company. The same principle was repeated again
in the case of Peskin v. Anderson that the directors are not trustees for shareholders and hold
no fiduciary duty to them.

Directors as organs of Corporate body.

In the case of Bath v. Standard Land Co. Ltd., Neville J. stated that the board of directors
are the brain of the company and a company does act only through them.

A corporation has no mind or body and its action needs to be done by a person and not
merely as an agent or trustee but by someone for whom the company is liable as his action is
the action of the company itself. If we consider a company as a human body, the directors are
the mind and the will of the company and they control the actions of the company

Appointment of Directors

The appointment of Directors of a company is strictly regulated by the Company’s Act, 2013.

Company to have Board of Directors

Every company is required to have a Board of directors and it should be consisting of

individuals as directors and not an artificial person. Section 149 lays down the minimum
number of directors required in a company as follows:

1. Public Company– At least 3 directors

2. Private company- At least 2 directors
3. One person company– Minimum 1 director

There can be a maximum of 15 directors. A company may appoint more than 15 directors
after passing a special resolution.

The Central Government may prescribe a class or classes of a company have a minimum one
women director. Every company is also required to have a minimum of one director who has
stayed in India in the previous year for a period of 182 days or more.

Independent Directors

The provisions of Independent Directors has been laid down under section 149(4) of the
Companies Act, 2013. This section lays down that at least one-third of the total number of
directors should be independent directors in every listed company The Central Government
may prescribe the minimum number of independent directors in public companies.

Who is an independent director?

Sub-section (6) of section 149, defines that an independent director stands for a director
other than a managing director, whole-time director or a nominee director:
 1. Who is a person with integrity and has relevant expertise and experience.
2. Who has not been a promoter of the company, its subsidiary or holding company
either in past or present.
3. Who himself or his relative has no pecuniary relationship with the company, its
holding or subsidiary company, directors or promoters.
4. Who himself or his relative, do not hold the position in key managerial personnel,
or not an employee of the company.

The independent director has to declare his independence at the first meeting of the Board
and subsequently every year at the first meeting of the Board in the financial year.

An independent director holds office for a term of five years on the Board. He is also eligible
for being reappointed after passing a special resolution, but no independent director is to hold
the office for more than two consecutive terms.

TYPES OF DIRECTORS

1. Residential Director: – According to Section 149(3) of Companies Act,2013, Every

company should appoint a director who has stayed in India for a total Period of not
less than 182 days in the previous calendar year.
2. Independent Director: – According to Section 149(6) an independent director is an
alternate director other than a Managing Director which is known as Whole Time
Director Or Nominee Director. According to Rule 4 of Companies (Appointment and
Qualification of Directors) Rules,2013 these are the following type of companies
which have to appoint minimum 2 independent directors:-
I} Public Companies which have Paid-up Share Capital-Rs.10 Crores or More; –
II} Public Companies which have Turnover- Rs.100 Crores or More:-
III} Public Companies which have total outstanding loans, debenture, and deposits of
Rs. 50 Crores or More.
3. Small Shareholders Directors: – Small shareholders can appoint a single director in
a listed company. But this action needs a proper procedure like handing over a notice
to at least 1000 Shareholders or 1/10th of the total shareholders.
4. Women Director: – As per Section 149 (1) (a), there are certain categories according
to which there should be at least one woman as a director on the Board. Such
companies are any listed company or any public company having. There are types of
directors in women director also:

● Additional Directors:-
Any Individual can be appointed as Additional Directors by a company under section
161(1) of the New Act.
● Alternate Directors:-
As per Section 161(2), a company may appoint, if the articles confer such power on
the company or a resolution is passed (if a Director is absent from India for at least
three months).
● Shadow Director:–
A person who is not the member of Board but has some power to run it can be
appointed as the director but according to his/her wish.
RESPONSIBILITY
There are some responsibilities which board of directors has to play:
• determining the company’s strategic objectives and policies.
• monitoring progress towards achieving the objectives and policies.
• appointing senior management.
• accounting for the company’s activities to relevant parties, e.g. shareholders.

DIRECTORS’ POWERS
The decisions which must be made by a resolution of the members are:
Most of the companies have not inserted any special article or did not pass any resolution
which says that director does not possess the power to perform certain actions. But according
to the Act, it needs a resolution in general meeting which specifies this type of power. The
following decisions should be made by the directors but usually also require a resolution of
the shareholders:

● Some loans to directors

● Directors’ fixed term service contracts for more than 2 years
● Substantial property transactions in which directors have a personal interest
● Issue shares
● Delegation to individual directors:-

The powers noted above are given to the directors collectively. For this, the board must
delegate power to the director concerned. Both the Model Articles and Table A permit this.

Duties of a Company Director:

As a director you must:

1. Act within powers

You must act in accordance with the company’s constitution, and only exercise
your powers for the purposes for which they were given.

The company’s constitution includes its articles of association and resolutions and
agreements of a constitutional nature (e.g. shareholder or joint venture
agreements).

2. Promote the success of the company

You must act in the way you consider, in good faith, would be most likely to
promote the success of the company for the benefit of its members as a whole.

Success will generally mean a long-term increase in value but fundamentally it is

up to each director to decide, in good faith, whether it is appropriate for the
company to take a particular course of action.
 When considering what is most likely to promote the success of the company, the
legislation states that a director must have regard to:

● the likely consequences of any decision in the long term

● the interests of the company’s employees
● the need to foster the company’s business relationships with suppliers, customers
and others
● the impact of the company’s operations on the community and the environment
● the desirability of the company maintaining a reputation for high standards of
business conduct
● the need to act fairly as between members of the company.

This list is not exhaustive but is designed to highlight areas of particular

importance to responsible business behaviour. Other relevant factors should also be
properly considered.

3. Exercise independent judgment

You must exercise independent judgment and make your own decisions.

This does not prevent you from acting in accordance with the company’s
constitution or an agreement which the company has entered into.

4. Exercise reasonable care, skill and diligence

You must exercise the same care, skill and diligence that would be exercised by a
reasonably diligent person with:

● the general knowledge, skill and experience that may reasonably be expected of a
person carrying out the same functions as you in relation to the company
● the general knowledge, skill and experience that you actually possess.

The expected standard is measured against both objective and subjective

yardsticks. A director’s actual understanding and abilities may not be enough if
more could reasonably be expected of someone in his or her position.

5. Avoid conflicts of interest (a conflict situation)

You must avoid a situation in which you have, or could have, an interest that
conflicts, or may conflict, with the interests of the company. This applies in
particular to the exploitation of any property, information or opportunity,
regardless of whether the company could take advantage of it.
 This duty is not infringed if:

● the situation you are in cannot reasonably be regarded as likely to give rise to a
conflict of interest. On a proper analysis of the circumstances, consider whether
there will actually be a conflict or potential for conflict with the interests of the
company
● the situation has been pre-authorised. Authorisation may be given in the articles of
association, by specific shareholder resolution or, in certain circumstances, by the
other directors who do not share the same conflict.

There is no convenient set of rules to determine which situations will or will not
give rise (or potentially give rise) to a conflict of interest. The following are
examples of arrangements which may potentially give rise to a conflict situation:

● Multiple directorships – you are also on the board of a major shareholder, the
pension scheme trustee company, a competitor or a customer or supplier of the
company.
● Personal interests – you are a major shareholder, a competitor, a customer or
supplier of the company or you own property adjacent to the company’s property
which could be affected by the company’s activities.
● Advisory positions – you have another hat as an advisor (e.g. accountant or
consultant) to the company or to a competitor of the company.
● Other profits – you make personal use of the company’s information or
opportunities, want to take up an opportunity declined by the company or are in
any situation where you can make a profit as a result of your directorship.
● Connected persons – if any of the above situations apply to a person connected
with you, e.g. spouse, partner, parent, child or other close family member.

If you think you may be in a potential conflict situation you should:

Seek approval – potentially a conflict situation can be approved by the other

members of the board. If the board does not have the power to authorise conflicts
or is otherwise unable to approve the conflict situation it could refer the matter to
the shareholders for approval.

Check the articles of association – the company’s articles might contain

provisions relating to conflicts of interest, including:

● pre-authorised common conflict situations – these might list a limited set of

circumstances allowing you to put yourself in a situation which could otherwise
give rise to a potential conflict of interest without obtaining specific approval.
 Typical examples include cross-directorships of group companies or positions
relating to the company pension scheme.
● conduct provisions – these might set out how you are expected to conduct yourself
in relation to an authorised conflict and might also confirm that you will not be in
breach of other duties to the company if you act accordingly. These typically deal
with:
o protecting the confidential information of the company and the third party
o inclusion or exclusion from board meetings and receipt of board papers
o any benefit received as a result of the authorised conflict.

Regulate your behaviour – even if a potential conflict situation has been

authorised or is permitted by the articles of association you should still act
appropriately, remembering your obligation to promote the success of the
company. You must take care to act in accordance with the articles of association
and any terms and conditions attached to the authorisation.

6. Not accept benefits from third parties

You must not accept a benefit from a third party given because you are a director
or because you do (or do not do) anything as a director.

This duty is not infringed if your acceptance cannot reasonably be regarded as

likely to give rise to a conflict of interest.

7. Declare interests in proposed or existing transactions or arrangements with the

company

If you are in any way, directly or indirectly, interested in a transaction or

arrangement with the company, you must declare the nature and extent of that
interest to the other directors. In the case of a proposed transaction you must do
this before it is entered into. In the case of an existing transaction you must do this
as soon as reasonably practicable. This duty is not infringed if:

● your interest in the transaction cannot reasonably be regarded as likely to give rise
to a conflict of interest
● an interest has not been declared because you are unaware that you have the
interest or the other directors are already (or ought reasonably to be) aware of it.
The general duties of Company Director are owed to the company and not other
group companies or individual shareholders. It is the company itself which can
take enforcement action against a director if there has been a breach of duty. The
decision to start proceedings against a director would be made by the board or, in
an insolvency situation, a liquidator. In certain circumstances and subject to certain
 hurdles, an individual shareholder or group of shareholders can also bring a claim
against a director for breach of duty on behalf of the company (known as a
derivative action).

Breach of Duties

A breach of a general duty typically gives the company a number of potential

remedies including an injunction, damages or compensation. Failure to disclose an
interest in an existing transaction or arrangement with the company also carries the
risk of a criminal fine.

If a director finds he or she has acted in a way which breaches the general duties
owed to the company the following help may be available:

● in certain circumstances the breach may be ratified by resolution of the company’s

shareholders
● in certain circumstances the court may grant relief if the director acted honestly
and reasonably
● the company may have arranged insurance for the benefit of its directors
● the company may offer to assist the director by indemnifying him or her against
costs incurred in successfully defending a claim for breach of duties owed to the
company.