LAW

CORPORATE LAW

Directors, their appointment, qualifications, positions, powers, duties and liabilities

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 Q1: E-TEXT

Module ID 17: Directors: Their Position, Appointments, Qualifications, Powers, Duties

and Liabilities

Overview of the module

The module is intended to apprise the reader about directors and their position in corporate
governance. The module deals with their qualifications, disqualifications, appointment,
removal and resignation. The module details out the ways how decisions are taken in
corporate governance by directors. The module in this regard presents the limitation and
restrictions of the powers of directors. The module also tells about duties and liabilities of
directors.

Information to be provided:
Subject Name: Law
Paper Name: Corporate Law
Module Name: Directors: Their Position, Appointments, Qualifications, Powers, Duties and
Liabilities
Module ID: 17
Pre-requisites: The prospective readers are required to have sound knowledge of General
Principles of Contract Law. The readers need to have comprehensive and deep knowledge of
general principles of corporate law. The readers are expected to co-relate the contents of
module with bare provisions of Companies Act, 2013.

Objectives:
The objectives of module are to apprise its readers about the director his position and
relationship with the company. The module also discusses the process of appointment,
removal and resignation of directors. The module deals with qualifications and
disqualifications and shows how new corporate law regime has become more responsive to
the need of good people in corporate governance. The module also defines as well as confines
the powers of directors by detailing out limitation on their powers. The module aims to
apprise its readers about duties and liabilities of directors.

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 Who is director?

What is his position in the company?

How a director is appointed in a company?

What are the qualifications of a director?

How a director is removed from his office?

What are the powers of a director?

What are the duties of a director?

What are the liabilities of a director?

Keywords: Directors, Appointment, Qualifications, Removal, Vacancy, Liabilities, Duties,

Ultra vires, Criminal Liability.

Structure of E-text
1.1 Introduction
1.2 Learning Outcome
1.3 Director: Meaning and Definition
1.4 Position of Directors
1.4.1 Directors As Agents of Company
1.4.2 Directors as Trustees of Company
1.4.3 Directors as organ or Officer of Company
1.5 Number of Directors and Inter-company Directorship
1.6 Qualification and Disqualification of Directors
1.6.1 Qualification of Directors
1.6.2 Disqualifications
1.7 Appointment of Directors
1.7.1 First Directors/Deemed Directors/Shadow Directors/Promoters as Directors
1.7.2 By Shareholders in General Meeting
1.7.3 By Board of Directors
1.7.4 By Central Government/National Company Law Tribunal
1.7.5 By Third Parties
1.8 Vacancy & Removal
1.8.1 Vacancy
1.8.2 Retirement & Resignation
1.8.3 Removal
1.9 Powers of Directors
1.9.1 General Powers of Directors (Routine)
1.9.2 Collective Powers of Board (Substantial)
1.9.3 Powers of Board to be Exercised In General Meetings
1.9.4 Managerial Powers of Directors

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 1.9.5 Other Restrictions on Directors
1.9.5.1 Restrictions on Political Contributions
1.9.5.2 Interested Directors
1.9.5.3 Restrictions Related with Loan
1.10 Duties of Directors
1.10.1 General Duties of a Director
1.10.2 Statutory Duties of Directors
1.11 Liability of Director
1.11.1 Ultra vires Acts
1.11.2 Negligence
1.11.3 Mala Fide Acts
1.11.4 Liability for Co-Directors?
1.11.5 Criminal Liability of Directors
1.12. Meetings of Board of Directors
1.13 Changes brought in by 2013 Act
1.14 Summary
1.15 Self Check Exercises

1.1 Introduction

The company is legal person which is physically not in existence so it needs limbs and organs
which may mobilize it and make it functional. The organs and limbs of the company are
directors. The directors of the company are like ship of the captain which steer it in right
direction to maximize the profit and make the company beneficial for all its stakeholders. The
directors of the company are the most important persons in corporate governance who do
almost everything related with affairs of the company. If they are best the company shall be
the best despite of all its resources but if they are not so good company cannot perform better
in spite of all its resources. The Board of Directors is an amalgam which includes various
types of directors like executive directors, independent directors, minority directors, deemed
directors, first directors, shadow directors, nominee directors, additional directors, whole-time
directors, retirable directors, celebrity directors, women’s directors, employees’ directors,
alternate directors, Managing director, chief managing director etc. The corporate and
securities laws provide detailed provisions regarding regulating his working pattern in
corporate governance. In this module we shall essentially see definition, meaning, types,
appointment, qualifications, removal, powers, liabilities and duties of directors.

1.2 Learning Outcome

At the end of this module one shall be able to understand the following:

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 Who is director?

What is his position in the company?

How a director is appointed in a company?

What are the qualifications of a director?

How a director is removed from his office?

What are the powers of a director?

What are the duties of a director?

What are the liabilities of a director?

1.3 Director: Meaning and Definition

A company is a legal entity and does not have any physical existence. Lord Reid held that, “A
living person has a mind which can have knowledge or intention and he has hands to carry out
his intention. A corporation has none of these it must act through living persons 1.” It can act
only through natural persons. The person, acting on its behalf, is called Director. A Director is
any person, occupying the position of Director, by whatever name called 2. Now there is slight
change in the definition and it is defined in section 2(34)3 as “director” means a director
appointed to the Board of a company. They are professional men, hired by the company to
direct its affairs. But, they are not the servants of the company. They are rather the officers of
the company. Only individual can be appointed as directors in company 4. Supreme Court5
pointed out reason as why it is necessary that a director must be an individual. It said that
office of director is office of trust and in case of failure to carry out this trust someone should
be held responsible. It simply means a firm, company or other legal persons cannot be
directors of company but in earlier days a firm used to direct a company and it was knows as
managing partners or managing trustees. Directors are public institution while companies are
social institutions6.

1
Tesco Supermarkets Ltd. v. Nattraso, [1977] AC 153 at 170.
2
Section 2(13) of Companies Act, 1956.
3
Companies Act, 2013.
4
Section 149, Companies Act, 2013.
5
Oriental Metal Pressing Works P. Ltd. v. B.K. Thakoor, (1961) 31 Comp Cas 143.

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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. 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. The Articles of a company may, therefore, 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 simple Directors 7.

1.4 Position of Directors

The directors are agents of company. They are trustees of company and they are also officer
of company. They are professional men hired by the company to direct its affairs yet they are
not servant of company8. But by a separate service agreement he can offer his professional
services to company as Lee was doing in his company of which he was sole employee and
sole director9. The Companies Act, 2013 is silent about their position in the company. Bowen
LJ clarifies his position in the company and he says that, “Directors are described sometimes
as agents, sometimes as trustees and sometimes as managing directors. But each of these
expressions is used not as exhaustive of their powers and responsibilities, but as indicating
useful points of view from which they may for the moment and for the particular purpose be
considered10.”

Position
of Agents Trustees Officers
directors

1.4.1 Directors as Agents of Company

6
Chiranjit Lal v. U.O.I., AIR 1951 SC 41 at 49 quoted in Dr. Avatar Singh, Introduction to Company
Law, (Eastern Book Company, Lucknow, 2006)p. 63
7
Robert R. Penington, Company Law, (Oxford University Press, New Delhi, 2006), p. 646.
8
Moriarty v. Regent’s Garage and Engg. Co., [1921] 1 KB 423.
9
Lee v. Lee’s Air Farming Ltd., (1961) AC 12.
10
Imperial Hydropathic Co. v. Hampson, (1882) 23 Ch.D. 1.

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Lord Cairns observed that, “What is the position of the directors of a public company? They
are merely agents of a company. The company itself cannot act in its person for it has no
person; it act only through directors and the case is as regards those directors, merely the
ordinary case of principal and agent11.”

In agency a person is employed to establish, maintain and annul a relationship of principal

with third parties and he has necessary authority for the same and directors also enjoy the
same authority in terms of company and third parties. This authority they get from
memorandum and articles of the company and if their act is beyond it, it is ultra vires.
Directors can bind the company as agents only when they act collectively as a Board of
directors12. However, the directors do not fit in the role of agents as they are selected not
employed with authority and powers of directors are wide and independent in comparison to
agents.

1.4.2 Directors as Trustees of Company

In trust an author creates a trust for the beneficiary which is managed by a trustee. Lindley LJ
on the basis of analogy observed that, “Although directors are not properly speaking trustees,
yet they have always been considered and treated as trustees of company which comes to their
hand or which is actually under their control and ever since joint stock companies were
invented, directors have been held liable to make good moneys whey have misapplied upon
the same footing as if they were trustees13.”

Being trustee of the company, they are custodian of the assets of the company and they should
apply the funds in best interest of company. If they misapply, misappropriate or divert the use
of fund for their own vested interests they must be held liable. In Percival v. Wright 14 the
directors were not held liable for buying shares from shareholders who were not disclosed
about a pending transaction of sale of an asset of the company. But if they would have
induced the shareholders to sell their shares to them concealing the fact that they were going
to merge the company to another company at a profit, they would have become trustees of
this profit to the individual shareholders. Supreme Court held that, “The directors of
companies have been variously described as agents, trustees or representatives but one thing

11
Ferguson v. Wilson, [1886] LR 2 Ch 77.
12
K.S. Anantharaman, Lectures on Company Law and Competition Act,(LexisNexis, Nagpur, 2009) p.
205
13
Re Land Allotment Co., [1894] 1 Ch 616.
14
(1902) 2 Ch 421.

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is certain that the director’s action on behalf of a company is in a fiduciary capacity and their
acts and deeds have to be exercised for the benefit of the company. They are agents of the
company to the extent they have been authorized to perform certain acts on behalf of
company. In a limited sense they are also trustees for the shareholders of company 15.”

The directors must exercise all his powers in utmost good faith of the company as they stand
in fiduciary capacity to the company. However, the directors are not trustees as strictu senso
as there is no author of a trust all agreements are singed on behalf of company by the
directors.

1.4.3 Directors as organ or Officer of Company

Directors are limbs and organs of the company as Calcutta High Court observed that, “We
should treat certain officials as organs of the company, for whose action the company is to be
held liable just as a natural person is for the action of his limbs 16.” The director is a vital organ
of company absence of which may paralyze the company.

The Companies Act 2013 in section 2(59) treats them as officer of company. It says that,
“officer” includes any director, manager or key managerial personnel or any person in
accordance with whose directions or instructions the Board of Directors or any one or more of
the directors is or are accustomed to act”. Section 2 (60) keeps the directors in category of
‘officer in default’ and the Companies Act, 2013 at several places punishes him as ‘officer in
default’ for non-compliance of its provisions. Apart from being officer, they can serve to any
post in official capacity so they can also be employee of company 17. They are also taken as
managing partners when they are having personal liabilities and golden shares i.e.
qualification share. In such cases all the good decisions made by them shall fetch them more
money in form of dividends. The directors also can be employees of company. It was held
that, “Directors are elected representatives of the shareholders engaged in directing the affairs
of the company in its behalf. As such directors are agents of the company but they are not
employees or servants of company. However, there is nothing in law to prevent a director
from accepting employment under the company under a special contract which he may enter
in to with the company18.”

15
Dale and Carrington Investment P.Ltd. and Anr. v. P.K. Prathapan and Ors., (2004) 122 Comp Cas
161 SC.
16
Gopal Khaitan v. State, AIR 1969 Cal 132.
17
Lee v. Lee’s Air Farming Ltd., (1961) AC 12.
18
In Re Lee Brehens & Co., (1932) 2 Comp Cas 588.

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1.5 Number of Directors and Inter-company Directorship
A public company shall have minimum three and private company shall have minimum two
directors and every company may have maximum 15 directors which can be raised by passing
special resolution and one of such directors shall be a woman 19. Every company has to have at
least one Indian resident director 20 and 1/3rd directors must be independent directors who
essentially are not connected with company and officers of company like promoters and
directors.
Section 165 provides that no person, after the commencement of this Act, shall hold office as
a director, including any alternate directorship, in more than twenty companies at the same
time. The maximum number of public companies in which a person can be appointed as a
director shall not exceed ten. If a person is appointed as director he may resign from one
company or chose his option and intimate the concerned company. It also explains that for
reckoning the limits of public companies in which a person can be appointed as director,
directorship in private companies that are either holding or subsidiary company of a public
company shall be included. Earlier there was no limit for private companies and this
limitation did not apply to subsidiary companies and alternate directorship but now even those
are included. Charitable companies and unlimited companies may exceed this limit.

1.6. Qualification & Disqualification of Directors

19
Supranote 13.
20
Who resides in India for 182 days.

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1.6.1 Qualification of Directors
As we know that a director is highly important person in corporate affairs so he must be very
qualified but Companies Act does not lay down any academic qualification for directorship
which seems logical being right to trade as a fundamental right it must be available to
everyone. The companies Act in order to weed out dishonest persons from running companies
lays down many requirements. These requirements or qualifications are following:
1. The people may take help of director database 21 to get the name of people who can
work as independent directors.
2. The person who intends to work as a director shall apply to central government for
Director Identification Number (DIN) which shall be allotted to him once only 22.
3. Now the requirement of qualification shares is not there in the new Act under section
270 of the old Act which provided that a director shall have to acquire the
qualification share within two months otherwise he shall be punished. One must be
mindful that this was earlier also not a provision of companies Act but if company
wanted to have this they could have by a provision in the Articles of Company. But
now new Act does not provide anything about qualification shares. One must be
mindful that qualification shares bring sense of responsibility and develops

21
Section 150 as maintained by Bombay Stock Exchange
22
Section 153 to 159 of the Companies Act, 2013.

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 belongingness to the company of the director. A company even now may have it
provided this does not contravene the provisions of Companies Act, 2013 23.

1.6.2 Disqualifications

Besides aforementioned qualifications a director needs following things in negative. These

are disqualifications. Section 164 provides for disqualifications of directors. According to it,
“A person shall not be eligible for appointment as a director of a company, if :
(a) He is of unsound mind and stands so declared by a competent court;
(b) He is an undischarged insolvent;
(c) He has applied to be adjudicated as an insolvent and his application is pending;
(d) He has been convicted by a court of any offence, whether involving moral turpitude or
otherwise, and sentenced in respect thereof to imprisonment for not less than six months and a
period of five years has not elapsed from the date of expiry of the sentence:
Provided that if a person has been convicted of any offence and sentenced in respect thereof
to imprisonment for a period of seven years or more, he shall not be eligible to be appointed
as a director in any company;
(e) An order disqualifying him for appointment as a director has been passed by a court or
Tribunal and the order is in force;
(f) He has not paid any calls in respect of any shares of the company held by him, whether
alone or jointly with others, and six months have elapsed from the last day fixed for the
payment of the call;
(g) He has been convicted of the offence dealing with related party transactions under section
188 at any time during the last preceding five years;
(h) He has not complied with sub-section (3) of section 152 and has not obtained DIN; or
(i) he has not complied with the provisions of sub-section (1) of section 165. 24 S. 165(1)
provides that a person shall not hold office as a director including any additional directorship
in more than 20 companies at the same time. It is provided that a person cannot a director in
more than 10 public companies at a time.
Apart from these requirements a person must not be director, including the company in
which he intends to be appointed as director, in more than 20 companies 25. Section 164(2)
provides for an additional disqualification which says that no person shall be re-appointed in a
company or appointed in another company as a director if a company of which he has been
23
Section 6 of the Companies Act, 2013.
24
Inserted by the Companies (Amendment) Act, 2019

25
Section 165.

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director has failed to file financial statement or annual returns for three consecutive financial
years or has failed to return the interest on public deposit etc for one year or more. The newly
inserted proviso to this section states that where a person is appointed as director of a
company which is in default of either of the above two, he shall not incur the disqualification
for a period of six months from the date of his appointment. 26
A private company may add additional disqualifications through its articles for disqualifying
directors. The new proviso says that disqualifications referred above in clauses (d), (e) and (g)
will continue to apply even if the appeal or petition has been filed against the order of
conviction or disqualification.27

All these qualification needs a little bit explanation. Unsoundness of mind is related with
contractual capacity which is related with cause-effect theory. If a person is capable to form a
rationale judgment about what is he doing and what is the effect of his doing he is of sound
mind. Insolvency again is related with contractual capacity. Moral turpitude offences are
essentially white-collar crimes i.e socio-economic offences. Punjab High Court held that
conviction on a criminal charge is also a moral turpitude offence. It said that moral turpitude
is, “Anything done contrary to justice, honesty, principle or good morals, an act of baseness,
vileness or depravity in the private and social duties which a man owes to his fellow men or
society in general contrary to accepted and customary rule of right and duty between man
and man28.”
In such cases appointment is possible after cooling off period (5 years). But in conviction for
serious offences no appointment is possible and this proviso has been added for first time to
keep perpetrators out of corporate governance. Related party transaction means siphoning off
the money of corporation by related party transaction.
If a person has been a director in company which defaults in filing annual return or does not
repay public deposits, he cannot be appointed as director in another company. It was
challenged earlier in Supreme Court 29 which upheld the constitutionality of provision. It held
that, “The judgment while dismissing the petition held that bringing in of section 274(1) (g)
of the Act was to serve a larger public interest and did not violate the fundamental rights or
any other rights of the petitioner. The provision is no punishment on the company, it only

26
As inserted by the Companies (Amendment) Act, 2017.

27
ibid

28
Durga Singh v. State of Punjab, AIR 1957 Punj 97.
29
Snowcem India Ltd. v. U.O.I., (2005) 60 SCL 50.

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renders directors of the defaulting company incapable of acting as directors of the defaulting
company incapable of acting as directors for a certain period.

1.7 Appointment of Directors

There are various methods to appoint various types of directors in various types of companies.
Some of such methods are following:

1.7.1 First Directors/Deemed Directors/Shadow Directors/Promoters as Directors

Generally Articles of the company provides for such directors 30. But if the Articles are silent
about it then subscribers of Memorandum are deemed to be first directors of company. They
shall hold office till first AGM when the directors are finally appointed. As the section 149
requires the directors to be appointed within one year of incorporation so the same must be
done as soon as possible. No person shall be appointed as a director of a company unless he
has been allotted the Director Identification Number under section 154 or any other number
as may be prescribed under section 15331 and a declaration that he is not disqualified to
become a director under this Act. A person appointed as a director shall not act as a director

30
Section 152.
31
Inserted by the Companies (Amendment) Act, 2017

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unless he gives his consent to hold the office as director and such consent has been filed with
the Registrar within thirty days of his appointment.

1.7.2 By Shareholders in General Meeting

Shareholders in Annual General Meeting appoint minority director, rotational directors,
independent directors. Section 151 provides that a listed company may have one director
elected by such small shareholders. Section 152 provides that every director shall be
appointed by the company in general meeting. In a public company 2/3 rd of such directors
shall be persons whose period of office is liable to determination by retirement of directors by
rotation. Others 1/3rd shall be whole time directors. Section 149(4) provides that every listed
public company shall have at least one-third of the total number of directors as independent
directors.
At the subsequent AGM the directors to retire by rotation at every annual general meeting
shall be those who have been longest in office since their last appointment, but as between
persons who became directors on the same day, those who are to retire shall, in default of and
subject to any agreement among themselves, be determined by lot. The maximum size of
board is fifteen and in counting the total number of directors independent directors are not
counted. In public company every director is appointed by a single resolution while in a
private company all directors may be appointed by a single resolution.
If the vacancy of the retiring director is not so filled-up and the meeting has not expressly
resolved not to fill the vacancy, the meeting shall stand adjourned till the same day in the next
week, at the same time and place, or if that day is a national holiday, till the next succeeding
day which is not a holiday, at the same time and place. 32 If at the adjourned meeting also, the
vacancy of the retiring director is not filled up and that meeting also has not expressly
resolved not to fill the vacancy, the retiring director shall be deemed to have been re-
appointed at the adjourned meeting.
1.7.3 By Board of Directors
According to section 161, the articles of a company may confer on its Board of Directors the
power to appoint any person, other than a person who fails to get appointed as a director in a
general meeting, as an ‘Additional Director’ at any time who shall hold office up to the date
of the next annual general meeting or the last date on which the annual general meeting
should have been held, whichever is earlier. Likewise for temporary absent of three months of
a director from India can be filled by ‘Alternate Director’. If the office of any director

32
Section 152(7)

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appointed by the company in general meeting is vacated before his term of office expires in
the normal course, the resulting casual vacancy may, in default of and subject to any
regulations in the articles of the company, be filled by the Board of Directors at a meeting of
the Board. Such directors are termed as ‘Casual Director’. The provision of additional and
alternate director is a periodic arrangement and cannot bypass the general process of
appointment by shareholders in general meetings by remaining on board for years 33.

1.7.4 By Central Government/National Company Law Tribunal

Section 161(3) provides that subject to the articles of a company, the Board may appoint any
person as a director nominated by any institution in pursuance of the provisions of any law for
the time being in force or of any agreement or by the Central Government or the State
Government by virtue of its shareholding in a Government company. The power under
section 408 of old Act has now been deleted where Central Government in case of oppression
and mismanagement could appoint its nominee directors on the board now such power has
been conferred upon National Company Law Tribunal under section 242.
1.7.5 By Third Parties
The Articles of the company may authorize the third parties to appoint persons on the Board
of Directors as their nominee to protect their interests. They can be directors nominated by
debenture holders, creditors and bankers etc. the idea behind such directors is to ensure
meticulous application of money lent by creditors so the repayment could be secured.

1.8 Vacancy & Removal

1.8.1 Vacancy
Section 167 provides that the office of a director shall become vacant in following cases:
(a) He incurs any of the disqualifications specified in section 164 for example unsoundness of
mind, insolvency, conviction for moral turpitude offences etc. Where he incurs
disqualification under s. 164(2), the office of director shall become vacant in all the
companies, other than the company which is in default under this sub-section. 34
(b) He absents himself from all the meetings of the Board of Directors held during a period of
twelve months with or without seeking leave of absence of the Board;
(c) He acts in contravention of the provisions of section 184 relating to entering into contracts
or arrangements in which he is directly or indirectly interested;

33
P. Natrajan v. Central Government, (2004) 51 SCL 76.
34
Proviso inserted by the Companies (Amendment) Act, 2018

15
(d) He fails to disclose his interest in any contract or arrangement in which he is directly or
indirectly interested, in contravention of the provisions of section 184;
(e) He becomes disqualified by an order of a court or the Tribunal;
(f) He is convicted by a court of any offence, whether involving moral turpitude or otherwise
and sentenced in respect thereof to imprisonment for not less than six months:
Provided that the office shall not be vacated by the director under (e) and (f)-
(i) for 30 days from the date of conviction or order of disqualification;
(ii) if he has filed an appeal or petition within 30 days against the order of such court
resulting in sentence or order, until expiry of 7 days from the date on which
appeal or petition is disposed of35;
(g) He is removed in pursuance of the provisions of this Act;
(h) He, having been appointed a director by virtue of his holding any office or other
employment in the holding, subsidiary or associate company, ceases to hold such office or
other employment in that company.
A private company may, by its articles, provide any other ground for the vacation of the
office of a director in addition to those specified in section 167(1).
If a person, functions as a director even when he knows that the office of director held by him
has become vacant on account of any of the disqualifications specified in 167(1), he shall be
punishable with imprisonment for a term which may extend to one year or with fine which
shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both.
All such vacancies on account of disqualifications shall be filled by promoter or central
Government.
1.8.2 Retirement & Resignation
The usual tenure of a rotation director is five years. As we know that 2/3 rd of directors shall
retire in each AGM by rotation after completion of their tenure. Section 168 provides that a
director may resign from his office by giving a notice in writing to the company and the
Board. His vacancy shall also be filled by promoter or central Government.
1.8.3 Removal
According to section 169, National Company Law Tribunal under section 242 and
shareholders under section 169 can remove a director before expiry of his term by giving him
opportunity of hearing. It can be done by ordinary resolution passed in AGM. This section
provides for detailed protection to such person affirming the principles of natural justice and
principle of Audi Altrem Partem which means hear the other side. Such vacancy shall be
filled in the same manner as the casual vacancies are filled. Though no grounds of removal

35
Substituted by the Companies (Amendment) Act, 2017

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are mentioned in the section however where the shareholders feel the policies pursued by
directors or any of them are not to their liking, they have the option to remove the directors by
passing an ordinary resolution. Directors can be removed on grounds of fraud, misfeasance,
persistent negligence in carrying out the duties, avoidance of sound principles of prudent
commercial practices, serious injury to interest of trade, industry or business, defrauding
creditors etc. Sound business principles include proper business accounts, clear balance sheet,
integrity, fair dealings, and efficient services.
Shareholders cannot remove a director who has been appointed by NCLT.
Apart from statutory provision of section 169 the Articles of a company may also provide for
removal of directors. Delhi High Court held that, “Where Articles confer power on Board to
remove a director such power is not affected by provision of section 284(now sec. 169). The
Articles are in nature of an agreement between the shareholders who are the joint owners of
the company. If some specific methodology is devised by consent nothing precludes the
members from doing so36.”
1.9 Powers of Directors
The directors steer the company for maximization of profit. The Board of directors gets its
powers from Articles, Memorandum and provisions of Companies Act, 2013. Certain powers
of Board can be exercised by individual directors to further the routine affairs as per
allocation but certain powers shall be exercised by the board collectively.

1.9.1 General Powers of Directors (Routine)

Section 179 says that the Board of Directors of a company shall be entitled to exercise all
such powers, and to do all such acts and things, as the company is authorised to exercise and
do. But in exercising such power or doing such act or thing, the Board shall be subject to the

36
Ravi Prakash Singh v. Venus Sugar Ltd., (2008) 84 SCL 75 (Delhi).

17
provisions contained in that behalf in this Act, or in the memorandum or articles, or in any
regulations not inconsistent therewith and duly made there under, including regulations made
by the company in general meeting.
The Board shall not exercise any power or do any act or thing which is directed or required,
whether under this Act or by the memorandum or articles of the company or otherwise, to be
exercised or done by the company in general meeting as mentioned in section 180.
1.9.2 Collective Powers of Board (Substantial)
The Board of Directors of a company shall exercise the following powers collectively on
behalf of the company by means of resolutions passed at meetings of the Board, namely:
(a) To make calls on shareholders in respect of money unpaid on their shares;
(b) To authorise buy-back of securities under section 68;
(c) To issue securities, including debentures, whether in or outside India;
(d) To borrow monies;
(e) To invest the funds of the company;
(f) To grant loans or give guarantee or provide security in respect of loans;
(g) To approve financial statement and the Board’s report;
(h) To diversify the business of the company;
(i) To approve amalgamation, merger or reconstruction;
(j) To take over a company or acquire a controlling or substantial stake in another company;
(k) Any other matter which may be prescribed:
Out of these powers the powers mentioned under clauses (a) to (c) can be delegated to a
committee of directors but other powers related with borrowing, merger, amalgamation,
diversification which are substantial in nature cannot be delegated.
The aforementioned powers of board shall not be deemed to affect the right of the company
in general meeting to impose restrictions and conditions on the exercise by the Board of any
of the powers specified in this section. Within the limits laid down by the Act, the powers of
board of directors are supreme and the shareholders cannot alter or restrict their powers by
passing a unanimous resolution. They can remove unscrupulous directors.
In following cases shareholders of company can restrict or interfere with powers of board:
i. Where directors are acting mala fide or against the interests of company;
ii. Where the board is interested in a transaction so they shall be incompetent to work;
iii. Where there is complete deadlock in management.
Supreme Court held that, “A company is a juristic person and it acts through its directors who
are collectively referred as Board of directors. An individual director has no power to act on
behalf of company of which he is director unless by some resolution of Board of the

18
company, specific powers are given to him. Whatever decisions are taken regarding running
the affairs of the company, they are taken by the board of directors 37.”
1.9.3 Powers of Board to be Exercised in General Meetings
Certain powers can be exercised by board with sanction in meetings of shareholders only.
Section 180 discusses about such powers. It provides that the Board of Directors of a
company shall exercise the following powers only with the consent of the company by a
special resolution, namely:
(a) To sell, lease or otherwise dispose of the whole or substantially the whole of the
undertaking of the company or where the company owns more than one undertaking, of the
whole or substantially the whole of any of such undertakings.
(b) To invest otherwise in trust securities the amount of compensation received by it as a
result of any merger or amalgamation;
(c) To borrow money, where the money to be borrowed, together with the money already
borrowed by the company will exceed aggregate of its paid-up share capital, free reserves and
securities premium38, apart from temporary loans obtained from the company’s bankers in the
ordinary course of business;
(d) To remit, or give time for the repayment of, any debt due from a director.
Restriction in such classes shall not affect the rights of bonafide transferee or such companies
where the ordinary business of the company consists of, or comprises, such selling or leasing.

1.9.4 Managerial Powers of Directors

The directors as are limbs of company so they have all power for better and effective
management of company including the following:

37
Dale and Carrington Investment P.Ltd. and Anr. v. P.K. Prathapan and Ors., (2004) 122 Comp Cas
161 SC.
38
Inserted by the Companies (Amendment) Act, 2017

19
 Power to enter in to contractual relationship for
mobilization of stock in trade;

Power to declare dividend;

Power to allot, forfeit and transfer of shares;

Power to appoint director to fill up casual

vacancies;

Power to issue debentures or hybrid instruments;

Power to appoint managing director, manager or

secretary of company;

Power to formulate and execute policies related

with corporate affairs of the company;

Power of control and supervisions of other

personnel in the company.

1.9.5 Other Restrictions on Directors

1.9.5.1 Restrictions on Political Contributions
Section 182 provides that a company, other than a Government company and a company
which has been in existence for less than three financial years, may contribute any amount
directly or indirectly to any political party.39
Every company shall disclose in its profit and loss account any amount or amounts
contributed by it to any political party. If a company makes any contribution in contravention
of the provisions of this section, the company shall be punishable with fine which may extend
to five times the amount so contributed and every officer of the company who is in default
shall be punishable with imprisonment for a term which may extend to six months and with
fine which may extend to five times the amount so contributed.
1.9.5.2 Interested Directors
Section 184 provides that an interested director shall disclose his interest to in the first
meeting of Board. If a director of the company contravenes the provisions of 184, such
director shall be punishable with imprisonment for a term which may extend to one year or
with fine which may extend to one lakh rupees, or with both.

1.9.5.3 Restrictions Related with Loan40

39
(The aggregate of the amount which may be so contributed by the company in any financial
year shall not exceed seven and a half per cent of its average net profits during the three
immediately preceding financial year.)- deleted by Act 7 of 2017
40
Substituted by Act 1 of 2018.

20
Section 185 provides that no company shall, directly or indirectly, advance any loan,
including any loan represented by a book debt to give any guarantee or provide any security
in connection with any loan taken by-
(i) Any director of company, or of its holding company or any partner or relative of
such director; or
(ii) Any firm in which any such director or relative is a partner.

A company may advance any loan including any loan represented by a book debt or give any
guarantee or provide any security in connection with any loan taken by any person in whom
any of the director of the company is interested or such other person subject to the condition
that a special resolution is passed by the company in general meeting or loans are utilized by
the borrowing company for its principal business activities.
But this restriction does not apply to managing and whole time directors who is being
extended such loan being resolved by special resolution in AGM for recognition of his
services or to a company the business of which is financing. If any loan is advanced or a
guarantee or security is given or provided in contravention of the provisions of section
185(1), the company shall be punishable with fine which shall not be less than five lakh
rupees but which may extend to twenty-five lakh rupees, every officer of the company in
default and the director or the other person to whom any loan is advanced or guarantee or
security is given or provided in connection with any loan taken by him or the other person,
shall be punishable with imprisonment which may extend to six months or with fine which
shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or
with both.

1.10 Duties of Directors

Duties of
Directors General statutory
duties duties

1.10.1 General Duties of a Director

The directors are very important persons in the corporate affairs. They derive their duties
wowing to the position and role that they have in the company. Their duties also ooze out

21
from their fiduciary capacity. Generally, a director is expected to show great amount of skill
and care in the all transaction where he is representing the company to the world. A director
has to conduct the affairs of company in such a manner that all the decisions taken by them
may serve the interests of company and all its stakeholders. He should not run the company in
autocratic way. Generally, powers of substantial nature are not exercised by the directors
alone and they are subject to final confirmation of general body of company. Substantial
powers are exercised by board in board’s meetings.

Generally, for better internal management of the corporate affairs, the Articles of the
company details out the role, responsibilities and duties of directors in routine and
extraordinary business of company. He must be meticulous especially in financial transaction,
account keeping and auditing of books of account. Though doctrine of indoor management is
a relic of past but on the basis of it the third party may bind the company for reckless
transactions done by reckless directors, therefore in performance of duties, great amount of
care and skill is expected from directors. He in general sense has following duties:

Duty of good faith;

Duty of reasonable care;

Duty not to delegate his powers;

Now these duties have been given statutory recognition categorically under section 166 which
provides that a director of a company shall act in accordance with the articles of the company.
A director of a company shall act in good faith in order to promote the objects of the company
for the benefit of its members as a whole, and in the best interests of the company, its
employees, the shareholders, the community and for the protection of environment. A
director of a company shall exercise his duties with due and reasonable care, skill and
diligence and shall exercise independent judgment. A director of a company shall not involve
in a situation in which he may have a direct or indirect interest that conflicts, or possibly may
conflict, with the interest of the company. A director of a company shall not achieve or
attempt to achieve any undue gain or advantage either to himself or to his relatives, partners,
or associates and if such director is found guilty of making any undue gain, he shall be liable

22
to pay an amount equal to that gain to the company. A director of a company shall not assign
his office and any assignment so made shall be void. If a director of the company contravenes
the provisions of this section such director shall be punishable with fine which shall not be
less than one lakh rupees but which may extend to five lakh rupees.

1.10.2 Statutory Duties of Directors

The Companies Act, 2013 at various places describes about so many duties of directors out of
which few may be seen as following:

i. Duty not to mislead by offer document; (sec. 34& 35)

ii. Duty not to induce investors for share subscription; (Sec. 36)
iii. Duty not to issue irredeemable preference shares; (sec. 55)
iv. Duty to file annual return to Registrar; (sec. 92)
v. Duty to hold statutory meetings of company; (sec 96)
vi. Duty to maintain books and auditing of the books, appoint auditors; (sec. 128)
vii. Duty to ensure planning and execution of Corporate Social Responsibility initiatives;
(sec. 135)
viii. Duty to get DIN (sec. 156 & 159)
ix. Duty to perform certain things as enumerated in section 166.
x. Duty to attend board’s meetings; (sec. 173)
xi. Duty not to make political contribution in contravention of provision; (sec. 182)
xii. Duty to disclose his interest in transaction; (184)
xiii. Duty not to receive loan from company;(sec. 185)
xiv. Duty to receive remuneration in confirmation of provisions; (sec. 197)
xv. Duty to make declaration of solvency in winding up of the company; (sec. 305).

1.11 Liability of Director

The liability of a Director to the company may arise from his breach of fiduciary duty. He
can be made liable to shareholders, outsiders, company and co-directors. Where a Director
acts dishonestly to the interest of the company, he will be held liable for breach of fiduciary
duty. Most of the powers of Directors are powers in trust and, therefore, should be exercised
in the interest of the company and, not in the interest of the Directors or, any section of
members.

23
1.11.1 Ultra vires Acts

The object clause of memorandum defines as well as confines the powers of company. Any
act done beyond such objects shall be ultra vires 41. Though doctrine of ultra vires has now
become diluted however it is still relevant to save the company from unwarranted reckless
transactions done by the directors for personal and vested interests in the garb of contracts
done on account of company by the directors. For ultra vires acts directors shall be held
personally liable. This doctrine aims at protecting the interests of shareholders of company.

1.11.2 Negligence

The directors as we know various statutory and non-statutory duties to various stakeholders.
If they breach such duty then resultantly they would be held negligent in performance of the
duties. For negligence of such duties directors may be held liable under tortuous liability and
they cannot be exonerated from their liabilities by Articles and general body of the company.

1.11.3 Mala Fide Acts

As we have discussed that directors are agents, trustees and officers of the company and they
stand in fiduciary position in relation to the company, therefore they should utilize the
resources, money and property of the company in the best interests of company with due care
and diligence. If want of care is shown then the acts shall be mala fide acts for which the
directors shall be liable for breach of trust and, may be required to make good the loss or
damage, suffered by the company by reason of such mala fide acts and in such situations
shareholders can intervene42. Since the directors are holding a confidential and powerful
position so they have access to information about the assets of the company and if they apply
the corporate funds for vested interests they can be held liable for torts like malfeasance and
misfeasance and conversion of property. They are equally liable for diversion of money for
personal use in criminal laws as a case of criminal breach of trust, criminal misappropriation
of property etc. In such cases the court may requisition him to return and restore such money
personally.

1.11.4 Liability for Co-Directors?

41
Ashbury Railway Carriage & Iron Co. Ltd. v. Riche (1875) LR 7 HL 653, A.L. Mudaliar v. LIC, AIR
1963 SC 1185.
42
Satya Charan Lal v. Rameshwar Prasad Bajoria, AIR 1950 FC 133.

24
The directors do not act in isolation. They are jointly and severally liable for the acts of
company. All the directors are agents of each other. They sink and swim together. A director
owes vicarious liability for other directors. If a particular act is to be done by the board of
directors and the same is done by single directors on behalf of all such directors, then in case
of liabilities he can seek contribution from all his co-directors.

1.11.5 Criminal Liability of Directors

Directors in so many cases incur criminal liability for their acts and omissions; some of them
are following:

i. Non-compliance of incorporation formalities (sec. 8);

ii. Misstatement in prospectus (sec. 35);
iii. Fraudulent Inducement for share-subscription (sec. 36);
iv. Failure to return application money;
v. Criminal liability regarding issuance of bonus shares, discounted shares, irredeemable
preference share and calling and falsification of share certificates;
vi. Failure to file annual return; (sec. 92)
vii. Failure to hold AGM;
viii. Grant of loan in contravention of Companies Act (sec. 185);
ix. Failure to maintain proper books of accounts;
x. Failure to distribute dividends (sec. 127);
xi. Failure to file annual financial statement (sec. 129)
xii. Failure to get DIN (sec. 159);
xiii. Failure to exceed maxim limit of inter-corporate directorship (sec. 165);
xiv. Failure to comply with statutory duties (sec. 166);
xv. Accepting deposit in contravention of provisions of companies Act;
xvi. Failure to disclose interest (sec. 184);
xvii. Criminal liability for fraud, false evidence etc. (sec. 339, 447, 449 & 450)

1.12. Meetings of Board of Directors

The board often is found to be either an amalgam where people do not meet and if they meet
they do not conduct the affairs of company. Therefore, the companies Act is very much
particular of meeting of directors so the business of the company may be negotiated and
furthered. Section 173 provides that every company shall hold the first meeting of the Board

25
of Directors within thirty days of the date of its incorporation and thereafter hold a minimum
number of four meetings of its Board of Directors every year in such a manner that not more
than one hundred and twenty days shall intervene between two consecutive meetings of the
Board. Central Government may exempt smaller companies from such requirements. The
participation of directors in a meeting of the Board may be either in person or through video
conferencing or other audio-visual means, as may be prescribed, which are capable of
recording and recognising the participation of the directors and of recording and storing the
proceedings of such meetings along with date and time. A seven days’ notice is must for such
notice by post or electronic mails.
Section174 provides that the quorum for a meeting of the Board of Directors of a company
shall be one third of its total strength or two directors, whichever is higher. Where a meeting
of the Board could not be held for want of quorum, then, unless the articles of the company
otherwise provide, the meeting shall automatically stand adjourned to the same day at the
same time and place in the next week or if that day is a national holiday, till the next
succeeding day, which is not a national holiday, at the same time and place. It is essential that
all business of such board’s meetings should be recorded in a book called minute book.
Minutes of every meeting must be signed as passed in the next meeting.

1.13 Changes brought in by 2013 Act

General
1. Woman director
One of the changes brought in by 2013 Act is the requirement of having at least one women
director. This new requirement is a good way of encouraging gender diversity, though it has
been found that only four percent of the directors of publicly listed Indian companies are
women.43
The companies which need to have women directors according section 149 of Companies
Act,2013 are:
(i) Every listed company, within one year from the commencement of second proviso to sub-
section (1) of section 149
(ii) Every other public company that has paid–up share capital of one hundred crore rupees or
more, or a turnover of three hundred crore rupees or more within three years from the
commencement of second proviso to sub-section (1) of section 149 which companies will
ensure compliance.

43
http://in.reuters.com/article/india-companies-women-idINKBN0G71IV20140807 accessed
November 1, 2016

26
2. Number of directorships
The 2013 Act increases the limit for number of directorships that can be held by an individual
from 12 to 15. 44 One new requirement introduced by the Companies Act 2013 is that at least
one director have to stay in India for at least 182 days during the financial year. 45

4. Independent directors
Change brought in by 2013 Act in regards to independent directors is every listed public
company to have at least one-third of the total number of directors as independent directors.
Additionally, according to section 149(4), the central government in the draft rules has
prescribed the minimum number of independent directors in case of the following classes of
public companies
(i) Public companies having paid up share capital of 100 crore INR or more; or
(ii) Public companies having turnover of 300 crore INR or more
(iii) Public companies which have, in aggregate, outstanding loans or borrowings or
debentures or deposits, exceeding 200 crore INR. 46

5. Appointment of an additional director

In relation to an appointment of an additional director 2013 Act states that any person who
fails to get elected as a director in the general meeting can no longer be appointed as an
additional director by the board of directors.47

6. Other observance for private companies

Till now there were certain requirements which were mandatory observed by public
companies and private companies which were subsidiary of public company, but now
following requirements are to be observed by private companies, such as :
 Appointment of director to be voted individually
 Option to adopt principle of proportional representation for appointment of directors

44
[section 149(1) of 2013 Companies Act].
45
[section 149(3) of 2013 Companies Act]
46
[section 149(4) of 2013 Companies Act]

47
[section 161 of 2013 Companies Act]

27
  negligibility on account of non-compliance with section 274(1)) (g) now extended for
appointment or reappointment as a director in a private limited company also. 48

Procedure for appointment and resignation of directors 49:

STEPS PARTICULARS WHAT NEEDS TO BE DATE

DONE
1. Directors Identification Details required for the
Number: individual:
Pursuant to Section 153 of a. Applicant’s full name.
the Act and rule 9(1) of the
Companies (Appointment b. Father’s full name.
and Qualification of
Directors) Rules, 2014, c. Photograph (JPEG
every individual, who is to format only).
be appointed as a director
shall make an application d. Nationality.
electronically in e-form
DIR-3 for the allotment of e. Occupation and
DIN. educational qualification.

f. Date of birth.
g. Passport number.

h. Permanent Residence
proof.

Mandatory attachments:

a. Passport copy (with

date of birth).

b. Proof of residence
(should not be older than 1
year).

c. Photograph (JPEG
format)

Note: In case of proofs

which are in languages
other than Hindi / English,

48
Companies Act, 2013 Key highlights and analysis,
http://www.pwc.in/assets/pdfs/publications/2013/companies-act-2013-key-highlights-and-
analysis.pdf accessed November 1,2016
49
CS. Gunjan Gaur (Managing Partner of Komplett Advisory LLP) with the Assistance of CS. Deepak
Bhardwaj,https://taxguru.in/company-law/change-directors-private-limited-company.html

28
 the translation done by the
notary of the home country
is required.
2. Obtaining consent, a. Consent in writing to
intimation and disclosure act as director in form
from the individuals DIR-2, pursuant to rule 8
proposed to be appointed as of the Companies
a director. (Appointment and
Qualification of Directors)
Rules, 2014.
b. Intimation in form
DIR-8, pursuant to rule 14
of the Companies
(Appointment and
Qualification of Directors)
Rules, 2014. To be filed
after appointment.

c. Disclosure of interest in
form MBP-1 pursuant to
section 184(1) read with
rule 9(1) of the Companies
(Meetings of Board and its
Powers) Rules, 2014. To be
filed after appointment.
3. Board meeting a. Call the board meeting.
b. Pass resolution for
appointment of additional
director.
c. Issue letter of
appointment.
4. File e-Form DIR – 12 Pursuant to section 170(2)
of the Act read with rule 8
of the Companies
(Appointment and
Qualification of Directors)
Rules, 2014, this e-form is
required to be filed with
the concerned registrar,
within thirty days of the
appointment.
Mandatory attachments:

a. Letter of appointment.
b. Board resolution.
c. DIR-2
5. Resignation from resigning Pursuant to section 168(1)
of the Act, a director may
directors.
resign from his office by
giving a notice in writing
to the company.

29
 6. File e-Form DIR – 11 Pursuant to Rule 16 of the
Companies (Appointment
and Qualification of
Directors) Rules, 2014,
where a director resigns
from his office, he shall
within a period of thirty
days from the date of
resignation, forward to the
registrar a copy of his
resignation along with the
reason of resignation in e-
form DIR-11.
Mandatory attachments:

a. Notice of resignation
filed with the company.

b. Proof of dispatch.
7. Board meeting a. Call the board meeting.
b. Pass resolution for
acceptance of the
resignations.
8. File e-Form DIR – 12 Pursuant to section 168(1)
of the Act read with rule 15
of the Companies
(Appointment and
Qualification of Directors)
Rules, 2014, this e-form is
required to be filed with
the concerned registrar,
within thirty days from the
effective date of
resignation.
Mandatory attachments:

a. Notice of resignation.

b. Evidence of cessation
(board resolution).

1.14 Summary
Company is contemplation in the eye of law and gets its locomotion and function through its
directors. Collective compendium of directors is known as ‘Board of Directors’. Board is
responsible for directing the affairs of company in such a manner which may prove beneficial

30
to all stakeholders. The legal position of directors is very interesting. He stands in fiduciary
capacity to company. He is trustee, agents and officer of company.
A public company must have three and a private company must have two directors. The
maximum strength of the board can be fifteen. A person may be directors of maximum twenty
companies. Only an Individual can be appointed as director. The directors need to have
contractual capacity, unscrupulous conduct and fair dealer in financial matters. He must have
director identification number. Articles of company may provide for golden or qualification
shares. A person of unsound mind, insolvent, convicted for moral turpitude and serious
offences involving punishment up to seven years are disqualified to work as a director.
Directors may be appointed by memorandum, articles, shareholders, National Company Law
Tribunal in general meeting. They may resign and retire. They may also be removed by
shareholders. There can be vacancy on account of incurring disqualifications as mentioned in
the Act after appointment as director. All such vacancies shall be filled by Board and
shareholders.
The powers of board are of two categories i.e. general powers and collective powers. The
board can exercise the less important powers without shareholders but substantial powers can
only be exercised by shareholders in general meetings only. The directors owe general and
statutory duties pertaining to wide aspects of corporate affairs.
The directors are liable for misconduct, ultra vires acts, malfeasance, misfeasance,
negligence, breach of trust, siphoning off money etc. In several matters they owe criminal
liability for acts and omissions cause substantial loss to corporate affairs of the company.
Group decisions are always welcomed in corporate governance process and now board has to
meet at least four times in one financial year. They can use electronic mail and video
conferencing now for meeting so as to further the cause of maximization of profit by
company.

31