Unit-3

Company Management: Definition, Appointment of key managerial personnel, Position, Powers and
duties of directors, Types of Committees, Liability of directors, Types of directors, Removal,
disqualification, control, (Meaning, Definition, Rights and duties of managerial personnel,
Managerial Remuneration, Concept of Interest of Director, Role of Auditor, Appointment & Rotation,
Additional Responsibility of Independent Director.

Appointment, Disqualification And Liabilities Of Directors Of A Company: A Legal Perspective

On incorporation, a company becomes a legal artificial person but it cannot act by itself and
consequently it has to depend upon some human agency to act in its name. The members have no
inherent right to participate in the management of the company. A large sized company may have its
members running into lakhs, who are dispersed all over the country and they even lack the expertise
to manage the affairs of the company, which makes it impossible to give the management of the
company in their hands. Therefore, a specialized body of persons called as directors are appointed
by the members to manage the affairs of the company. The directors must act as a body without
improper exclusion of any of the directors. The directors collectively referred to as BOARD. The
board is the managerial body constituted by the members to whom is entrusted the whole
management of the company. Board owes a duty to the members to exercise care, skill and diligence
in discharge of their functions.

Meaning and DEFINITION OF DIRECTOR:

Statutory definition: As per sec 2(13) of Companies act, 1956 “Director” includes any person
occupying the position of a director by whatever name called.

Definition based on function:

A person is considered as a director, if he does whatever a director does normally. Thus, where a
person performs the functions of a director, he will be treated as a director for the purposes of the
act, though he may be called by a different name and is not actually appointed on the board of the
company.

Legal Position of Directors:

It is difficult to define the exact legal position of the director of the company. The Companies Act
makes no effort to define their position. At various times they have been described by judges as
agents, trustees or managing partners.

Directors as agents:

The relationship between the company and the directors is that of principal and agent and the
general principles of agency will govern their relations. Consequently, where the directors enter into
contracts on behalf of the company, it is the company and not the directors who are liable there
under. But the directors will be personally liable only in the following cases:

# Where a director acts in his own name.

# Where a director contract on behalf of the company without using the words ‘Limited’ or ‘Private
limited’ as a part of the name of a company.
# Where a director enters into any agreement or contract in which it is not made clear as to whether
the director is signing in his personal capacity or as an agent of company.

Directors as trustees:

The office of a director is an office of trust. The directors stand in a fiduciary position towards the
company. They are the trustees of: -

Company’s money and property: The property of the company must be applied for the genuine
purposes. If the property is misappropriated it would amount to breach of trust.

The powers entrusted to them: The directors must exercise their powers bonafide and for the
benefit of the company. As a whole, not to promote their own personal or private interests. They
should not put themselves in a position where their duties and personal interests may conflict.
Where a director uses confidential information of the company for his personal purposes,
misappropriates or misuses the assets of the company, he becomes accountable to the company. If
a director misuses his fiduciary position and makes a secret profit, he is liable to pay it to the
company.

Directors as officers of the company:

Amongst other persons, a director is also included in the definition of an ‘officer’ of the company.
Whether or not a director is in the employment of the company, he shall always be treated as an
officer of the company.

Directors as ‘officers in default’ (section-5):

a)A Whole-time director or managing director is always covered in the definition of officer in default.

b)Where a company has no wholetime director or managing director,or manager-A director shall be
treated as an officer in default if

c)he has been so specified by the board in this behalf.

d)no other director is so specified by the board

Kinds Of Directors:

Under the Companies Act, 1956, the following kinds of directors are recognized:

Ordinary Directors

Ordinary directors are also referred to as simple directors who attends Board meeting of a company
and participate in the matters put before the Board. These directors are neither whole time
directors nor managing directors.

Whole-time/Executive Directors
Whole-time Director or Executive Director includes a director in the whole-time employment of the
company.

Additional Directors

Additional Directors are appointed by the Board between the two annual general meetings subject
to the provisions of the Articles of Association of a company. Additional directors shall hold office
only up to the date of the next annual general meeting of the company. Number of the directors and
additional directors together shall not exceed the maximum strength fixed for the Board by the
Articles.

Alternate Director

An Alternate Director is a person appointed by the Board if so authorised by the Articles or by a

resolution passed by the company in the general meeting to act for a director called "the original
director" during his absence for a period of not less than three months from the State in which
meetings of the Board are ordinarily held. Generally, the alternate directors are appointed for a
person who is Non-resident Indian or for foreign collaborators of a company.

Professional Directors

Any director possessing professional qualifications and do not have any pecuniary interest in the
company are called as "Professional Directors". In big size companies, sometimes the Board appoints
professionals of different fields as directors to utilise their expertise in the management of the
company.

Nominee Directors

The banks and financial institutions which grant financial assistance to a company generally impose a
condition as to appointment of their representative on the Board of the concerned company. These
nominated persons are called as nominee directors.

Disqualifications of a director:

Section 274(1) reads as under:

A person shall not be capable of being appointed director of a company, if the director is

(a) Of unsound mind by a court of competent jurisdiction and the finding is in force;

(b) An un discharged insolvent;

(c) Has applied to be adjudicated as an insolvent and his application is pending;

(d) Has been convicted by a court of any offence involving moral turpitude and sentenced in respect
thereof to imprisonment for not less than six months and a period of five years has not elapsed from
the date of expiry of the sentence;

Key Managerial Personnel:

These are a group of people who are in charge of managing the operations of a Company; they are
responsible for the planning, directing and controlling the functioning of a Company. They are the
first point of contact between the company and its Stakeholders.

According to Section 2(51) of the Companies Act 2013, Key Managerial Personnel in a Company are:
-

1.Chief executive Officer (CEO) OR the Managing Director.

2.Chief Financial Officer (CFO).

3.Manager -Company Secretary (CS).

4.Whole-Time Director.

Companies that are obligated to Appoint KMP (Key Managerial Personnel):-

According to section 203(1) read with Rule 8 of the Companies (Appointment and Remuneration of
Managerial Personnel) Rules, 2014 the following companies are mandated to appoint KMP:

1.Every Listed Company Public Companies having paid-up share capital of 10 Crore rupees or more.

2.Public Companies Having paid-up share of 5 Crore rupees or more.

3.Companies having paid-up share capital of 10 Crore rupees or more are mandated to appoint a
Company Secretary.

What are the Roles and Responsibilities of Key Managerial Personnel?

The Management function of implementing important decisions comes under the responsibilities of
Key Managerial Personnel. Here are some of the main Roles and Responsibilities of KMP:

1.As per Section 170 of the Act, the details of Securities held by the Key Managerial Personnel in the
company or its holding, subsidiary, a subsidiary of the company or associated companies should be
disclosed and recorded in the register of the Books.

2.KMP has a right to be heard in the meetings of the Audit Committee while considering the
Auditor’s Report; however, they do not have the right to vote.
3.According to Section 189(2), Key Managerial Personnel should disclose to the company, within 30
days of appointment, relating to their concern or interest in the other associations, which are
required to be included in the register.

Non- Eligibility for Appointment: -

Section 196(3) of companies Act,2013 states that a Company shall not appoint or continue the
employment of a Managing Director, Whole-Time Director or Manager if such person:

1.Hasn’t attained the age of 21 years or has exceeded the age of 69 years (a person can be handed
over the roles at the age of 70 years on the fulfilment of certain conditions).

2.Has been an uncharged insolvent or was adjudged as an insolvent.

3.Has a record of holding payments to his/her creditors.

4.Has been convicted by a court for an offence and imprisoned for a period of more than six months.

5.Has been sentenced to imprisonment or has been fined with more than Rs.1000 for the Conviction
of an offence under certain acts.

6.Wasn’t detained under the Conservation of foreign Exchange and Prevention of Smuggling
Activities Act, 1974(Subject to further conditions).

Types of Committees:

Committees are a sub-set of the board, deriving their authority from the powers delegated to them
by the board. Under Section 177 of Companies Act, 2013, Board of Directors may delegate certain
matters to the committees set up for the purpose. Committees are formed as a means to improve
board effectiveness and efficiency in areas where more focused, specialised and technically oriented
discussions is required.
Auditor and his Role as per the Companies Act:

(1) A person shall be eligible for appointment as an auditor of a company only if he is a chartered
accountant in practice.

(2) Where a firm is appointed as an auditor of a company, only the partners who are Chartered
Accountants in practice shall be authorised by the firm to act and sign on behalf of the firm.

(3) None of the following persons shall be eligible for appointment as an auditor of a company,
namely:—

(a) a body corporate ;

(b) an officer or employee of the company;

(c) a person who is a partner, or who is in the employment, of an officer or employee of the
company;

(d) a person who, or his relative or partner—

(i) is holding any security of the company or its subsidiary , or of its holding or associate company or
a subsidiary of such holding company , of value in terms of such percentage as may be prescribed;

(ii) is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary
of such holding company; or

(iii) has given a guarantee or provided any security in connection with the indebtedness of any third
person to the company, or its subsidiary, or its holding or associate company or a subsidiary of such
holding company, for such amount as may be prescribed;

(e) a person or a firm who has business relationship with the company, or its subsidiary, or its
holding or associate company or subsidiary of such holding company or associate company of such
nature as may be prescribed;

(f) a person whose relative is in the employment of the company as a director or key managerial
personnel ;

(g) a person who is in full time employment elsewhere or a person or a partner of a firm holding
appointment as its auditor, if such persons or partner is at the date of such appointment or
reappointment holding appointment as auditor of more than twenty companies other than one
person companies, dormant companies, small companies and private companies having paid-up
share capital less than one hundred crore rupees

(h) a person who has been convicted by a court of an offence involving fraud and a period of ten
years has not elapsed from the date of such conviction;

(i) a person who, directly or indirectly, renders any service referred to in section 144 to the company
or its holding company or its subsidiary company.

Role/Duties of the Auditor

The duties of an auditor have been laid down by the Companies Act, 2013, provided in Section 143.
The Act explains the duties in a simplified manner, although the list given is not exhaustive.
Prepare an Audit Report

An audit report, in simple terms, is an appraisal of a business’s financial position. The auditor is
responsible for preparing an audit report based on the financial statements of the company. The
books of accounts so examined by him should be maintained in accordance with the relevant laws.

He must ensure that the financial statements comply with the relevant provisions of the Companies
Act 2013, relevant Accounting Standards etc.

In addition to this, it is imperative that he ensures that the entity’s financial statements depict a
true and fair view of the company’s financial position.

Form a negative opinion, where necessary

The auditor’s report has a high degree of assurance and reliability because it contains the auditor’s
opinion on the financial statements. Where the auditor feels that the statements do not depict a
true and fair view of the financial position of the business, he is also entitled to form an adverse
opinion on the same.

Additionally, where he finds that he is dissatisfied with the information provided and finds that he
cannot express a proper opinion on the statements, he will issue a disclaimer of opinion. A
disclaimer of opinion basically indicates that due to the lack of information available, the financial
status of the entity cannot be determined. However, it is to be noted that the reasons for such
negative opinion is also to be specified in the report.

Make inquiries

One of the auditor’s important duties is to make inquiries, as and when he finds it necessary. A few
of the inquiries include:-

Whether loans and advances made on the basis of security are properly secured and the terms
relating to the same are fair

Whether any personal expenses (expenses not associated with the business) are charged to the
Revenue Account

Where loans and advances are made, they are shown as deposits.

Whether the financial statements comply with the relevant accounting standards

Lend assistance in case of a branch audit

Where the auditor is the branch auditor and not the auditor of the company, he will lend assistance
in the completion of the branch audit. He shall prepare a report based on the accounts of the branch
as examined by him and then send it across to the company auditor. The company auditor will then
incorporate this report into the main audit report of the company. In addition to this, on request, if
he wishes to, he may provide excerpts of his working papers to the company auditor to aid in the
audit.

Comply with Auditing Standards

The Auditing Standards are issued by the Central Government in consultation with the National
Financial Reporting Authority. These standards aid the auditor in performing his audit duties with
relevant ease and accuracy. It is the duty of the auditor to comply with the standards while
performing his duties as this increases his efficiency comparatively.
Reporting of fraud

Generally, in the course of performing his duties, the auditor may have certain suspicions with
regard to fraud that’s taking place within the company, certain situations where the financial
statements and the figures contained therein don’t quite add up. When he finds himself to be in
such situations, he will have to report the matter to the Central Government immediately and in the
manner prescribed by the Act.

Adhere to the Code of Ethics and Code of Professional Conduct

The auditor, being a professional, must adhere to the Code of Ethics and the Code of Professional
Conduct. Part of this involves confidentiality and due care in the performance of his duties. Another
important requisite is professional scepticism. In simple words, the auditor must have a questioning
mind, must be alert to possible mishaps, errors and frauds in the financial statements.

Assistance in an investigation

In the case where the company is under the scope of an investigation, it is the duty of the auditor to
provide assistance to the officers as required for the same. Hence, it can be seen that the duties of
the auditor are pretty diverse, it has an all-round and far-reaching impact. The level of assurance
provided by a set of audited financial statements is comparatively far higher as compared to regular
unaudited financial statements.

Rotation of Auditor is appointing a new auditor when

a.an individual had been appointed as an auditor for more than one term of five consecutive years

b.an audit firm had been appointed as an auditor for more than two terms of five consecutive years.

MANDATORY REQUIREMENTS

For the purpose of the rotation of auditors

a.in case of an auditor (whether an individual or audit firm), the period for which the individual or
the firm has held office as auditor prior to the commencement of the Companies Act, 2013 shall be
taken into account for calculating the period of five consecutive years or ten consecutive years.

b.the incoming auditor or audit firm shall not be eligible if such auditor or audit firm is associated
with the outgoing auditor or audit firm under the same network of audit firms.

The term “same network” includes the firms operating or functioning, hitherto or in future, under
the same brand name, trade name or common control.

c.a break in the term for a continuous period of five years shall be considered as fulfilling the
requirement of rotation.
d.if a partner, who is in charge of an audit firm and also certifies the financial statements of the
company, retires from the said firm and joins another firm of chartered accountants, such other firm
shall also be ineligible to be appointed for a period of five years.

FOLLOWING PROCEDURE IS TO BE FOLLOWED

1.Obtain written consent and Certificate from the Proposed Auditor [Section 139(1) & Rule 4(1) of
the Companies (Audit and Auditors) Rules, 2014]

Company shall receive before such appointment is made, the written consent of the auditor to such
appointment and a certificate from him or it that the appointment, if made, shall be in accordance
with the conditions. The Auditor shall submit a certificate

a.that the individual or the firm, as the case may be, is eligible for appointment and is not
disqualified for appointment under the Act, the Chartered Accountants Act, 1949 and the rules or
regulations made thereunder

b.that the proposed appointment is as per the term provided under the Act

c.that the proposed appointment is within the limits laid down by or under the authority of the Act

d.that the list of proceedings against the auditor or audit firm or any partner of the audit firm
pending with respect to professional matters of conduct, as disclosed in the certificate, is true and
correct.

2.Obtain recommendations for appointment from the Audit Committee [Section 139 (11), 177]

Where a Company is required to constitute an Audit Committee under section 177, shall receive a
recommendation from the committee for the appointment and remuneration of the Auditor. In
other cases, the Board shall itself consider the matter of rotation of auditors and make its
recommendation for appointment of the next auditor by the members in annual general meeting.

3.Convene a Meeting of Board of Directors [As per Section 173 & Secretarial Standard-1 (SS-1)]

a.Issue Notice of Board Meeting to all the Directors of Company at their addresses registered with
the Company, at least 7 days before the date of Board Meeting. A shorter notice can be issued in
case of urgent business.

b.Attach Agenda, Notes to Agenda and Draft Resolution with the Notice.

c.Hold a meeting of Board of Directors and pass Board Resolution

to consider and recommend the appointment of Auditor for a period of 5 years.

to fix the day, date, time and venue of the Annual General Meeting (AGM)

to approve the draft notice convening the AGM along with explanatory statement annexed to the
notice as per requirement of the Section 102 of the Companies Act, 2013

to authorize the Director or Company Secretary to sign and issue notice of AGM.

Prepare and Circulate Draft Minutes within 15 days from the conclusion of the Board Meeting, by
Hand/Speed Post/Registered Post/Courier/E-mail to all the Directors for their comments.

4.Convene Annual General Meeting [As per Section 96 and Secretarial Standard-2 (SS-2)]
a.Notice of General Meeting shall be given at least clear 21 days before the actual date of Annual
General Meeting in writing, by hand or by ordinary post or by speed post or by registered post or by
courier or by facsimile or by e-mail or by any other electronic means or a Shorter Notice can be
issued with the consent of at least majority in number and ninety five percent of such part of the
paid up share capital of the company giving a right to vote at such a meeting in accordance
with Section 101.

b.Notice will be sent to all the Directors, Members, Auditors, Secretarial Auditor, Debenture
Trustees and to others who are entitled to receive the notice of the General Meeting.

c.Notice shall specify the day, date, time and full address of the venue of the Meeting and contain a
statement on the business to be transacted at the Meeting.

d.Hold the Annual General Meeting on the fixed date and pass the Ordinary Resolution for
appointment of the Auditor for a period of 5 years and shall fix the remuneration to be paid to the
Auditor.

e.Listed Companies shall disclose the proceedings of General Meeting to the Stock Exchange within
24 hours from the conclusion of General Meeting and same shall be posted on the website of the
company within 2 working days.

f.Listed Companies shall submit to the stock exchange the details of the voting results within two
working days from the conclusion of the meeting and post the same on the website of the
Company.

g.Prepare the minutes of General Meeting, get them signed and compile accordingly.

5.Filing Notice of Appointment with ROC

The Company shall inform the Auditor so appointed about the appointment and file a notice of such
appointment with the Registrar within 15 days of the general meeting. [Section 139(1) and Rule 4(2)
of the Companies (Audit and Auditors) Rules, 2014] along with the following attachments:

Certified true copy of the Ordinary Resolution passed in the AGM

Intimation/Offer Letter given by the Company to the Auditor

Consent Letter given by the Auditor to the Company

Certificate given by the Auditor to the Company.

Roles & Responsibility of Independent Director.

Listed Public Company

Every listed public company shall have at least one-third of a total number of directors as
independent directors. Any fraction contained in that one-third shall be rounded off as one.

Unlisted Public Company

The Central Government may prescribe the minimum number of independent directors in case of
any class(es) of public companies. As per Rule 4 of the Companies (Appointment and Qualification of
Directors) Rules, 2014, the following classes of companies shall have at least 2 directors as
independent directors.
Public companies with paid-up share capital of Rs. 10 crore or more.

Public companies with a turnover of Rs. 100 crore or more.

Public companies with aggregate outstanding loans, debentures, and deposits, exceeding Rs. 50
crore.

Every independent director shall, at the first meeting of the board in which he participates as a
director and thereafter at the first meeting of the Board in every financial year or when a situation
arises which affects his status of independence The terms and conditions of appointment of
independent directors shall also be posted on the company’s website.

Role of an Independent Director

Independent Director acts as a guide, coach, and mentor to the Company. The role includes
improving corporate credibility and governance standards by working as a watchdog and help in
managing risk. Independent directors are responsible for ensuring better governance by actively
involving in various committees set up by the company.

The independent directors are required because they perform the following important roles:

1.Facilitate withstanding and countering pressures from owners.

2.Fulfil a useful role in succession planning.

3.On issues such as strategy, performance, risk management, resources, key appointments and
standards of conduct he or she must support in gaining independent judgment to bear the board’s
deliberations.

4.While evaluating the performance of the board and management of the company, he or she needs
to bring an objective view.

5.Scrutinizing, monitoring and reporting management’s performance regarding goals and objectives
agreed in the board meetings.

6.Safeguard the interests of all stakeholders, particularly the minority shareholders.

7.Balance the conflicting interest of the stakeholders.

8.Check on the integrity of financial information and ensure financial controls and systems of risk
management are in operation.

9.In situations of conflict between management and shareholder’s interest, aim towards the
solutions which are in the best interest of the company.

10.Establishing suitable levels of remuneration of executive directors, key managerial personnel, and
senior management.

Duties of an Independent Director

a.Undertake appropriate induction and regularly update and refresh their skills, knowledge, and
familiarity with the company.

b.Attempt to attend company’s general meetings.

c.Attempt to attend BOD’s meetings and board committees meeting being a member.

d.Have adequate knowledge about the company and the external environment in which it operates.

e.Report matters concerning unethical behaviour, actual or suspected fraud or violation of the
company’s code of conduct or ethics policy.

f.Acting within his or her authority, assist in protecting the legitimate interests of the company,
shareholders and its employees.

g.Not to unfairly obstruct the functioning of the company or committee of the Board.

h.Participate in the Board’s committee being chairpersons or members of that committee.

i.Not to disclose confidential information, including commercial secrets, technologies, advertising

and sales promotion plans, unpublished price sensitive information, unless such disclosure is
expressly approved by the Board or required by law.

j.Ascertain and ensure that the company has an adequate and functional vigil mechanism and to
ensure that the interests of a person who uses such mechanism are not prejudicially affected on
account of such use.

Other Provisions Related to Independent Directors Under Companies Act, 2013:

Companies that trigger the conditions of Corporate Social Responsibility Committee of the Board to
formulate and monitor the CSR policy of a Company. The Companies Act, 2013 requires the CSR
Committee to consist of at least three directors, including at least one independent director.

Where a company is not required to appoint an independent director, it shall have in its Corporate
Social Responsibility Committee two or more directors.

The Independent director’s appointment process must be independent of the company’s

management.

Every independent director shall give a declaration that he meets the criteria of independence when
he or she attends the first board meeting as a director. In every financial year, at the first meeting of
the board of directors. When a situation arises which affects his or her status of independence being
an independent director.

The independent director shall be appointed for a maximum term of 5 years. The term shall not be
more than 2 consecutive terms. He or she shall be re-appointed only by special resolution by the
company.

Any vacancy in the office of independent director shall be filled in the very next Board Meeting or
within 3 months of such vacancy, whichever is later.

A person must be an independent director in not more than seven listed companies at a time.

An independent director shall not retire by rotation and shall not be included in the ‘total number of
directors’ for the purpose of computation of rotational directors.

A person can be appointed as an alternate director. But he or she must be qualified to be appointed
as an independent director.

A small shareholder director shall be considered as an independent director, if:

He or she is eligible for appointment as independent director u/s 149 (6).

He or she gives a declaration that he or she meets the criteria of Independence as specified u/s
149(7).

If the Board meeting is called at shorter notice so as to transact some urgent business, then the
presence of at least 1 independent director is mandatory. In absence of any independent director, a
decision shall be circulated to all the directors and later approved by at least 1 independent director.

Number Of Directorships of a Director:

Section 165(1) of the Act states that a person can hold the office of director simultaneously in 20
companies. The number of 20 companies includes the office of alternate directorship. A person
cannot be a director in more than 20 companies at a given time. However, the maximum number of
public companies in which a person can be a director simultaneously is 10. An individual cannot be
appointed as a director in more than 10 public companies at a given time.

For calculating the number of public companies, the directorship in private companies that are
either holding or subsidiary of a public company is included. However, the directorship in a dormant
company is not included in calculating the limit of directorships of 20 companies.

The purpose of prescribing the number of the office of directorship is that the person who is
appointed as a director can give proper and sufficient time to a company. The Act prohibits a person
from holding the office of a director in more than 20 companies to provide quality time to the
companies in which he is a director and discharge his functions as a director in an efficient manner.

Reduction In The Number of Directorships

Section 165(2) of the Companies Act provides a reduction in the number of directorships held by a
person. A company can specify any number less than 20 in which the directors of their company can
act as directors in other companies. The members of a company can specify a smaller number of the
office of directorship for its directors by passing a special resolution.

For Ex – Abc is appointed as a director in Xyz company. Xyz company has passed a special resolution
stating that Xyz company’s directors can hold the office of directorship in 10 companies. Then, Abc
can be a director in only 10 companies simultaneously and not beyond it. Though the Act provides
that a person can hold a director’s office in 20 companies, Abc can be a director in only 10
companies due to the resolution passed by Xyz reducing the number to 10. If he holds the office of
director in more than 10, it will amount to the contravention of the Act.

Alternate Director:

An alternate director can be appointed as a director only on occasions where a director of a

company is away from India for a period of 3 months or more. No other reasons would qualify.
Furthermore, alternate directors can be appointed at the mere possibility of the original director’s
absence. It is not necessary that the Board of Directors await the actual absence to make an
appointment.

A person appointed as an alternate director to one of the director’s cannot extend his role by acting
as an alternate director to another. Moreover, the alternate director proposed to be appointed
should not be a part of the company’s current Board members.