DIRECTORS

Created by: 153177 Date: 11/9/2010

Doc. Classification: General
 Director - meaning
Section 2(13) :“Director includes any person
occupying the position of director by whatever
name called.”
Functional Definition - hence a person is
considered as director, if he does whatever a
director does normally, i.e. controlling and
managing the affairs of the company.

The directors of a company collectively are referred as “Board of

Directors” or “Board”.
 Directors – Why Needed
• Company being an artificial person – needs help of
a human agency to act in its behalf. The two human
agencies on whom a company depends are
– Members
– Board of Directors

• Statutory Requirement – Section 252 requires

– Public Co. – At least 3 directors
– Pvt. Co. – At least 2 directors
 Shadow Director
• A person in accordance with whose directions or
instructions, the BOD is accustomed to act is called
as a “deemed” or “shadow” director.

• However, if the directions are given in professional

capacity, such person shall not be treated as a
director (Sec. 7)
ABC Pvt. Ltd has 3 directors.
2 directors are holding 85 % shares and other 1
holding 15 %.
One of the directors holding 15 % shares is creating
trouble in business. Is it possible to - Remove/
terminate this director by simple majority or a
special resolution?
How to withdraw his share or transfer shares to some
body else.
 removal from directorship u/s 284
(1) Get request letter from 2 directors who are holding 85%
shares stating their intention to remove the director.
(2) Place the same in board meeting and get boards approval.
(3) Issue notice to the director to be removed.
(4) Conduct board meeting and conduct EOGM.
(5) In EOGM pass the resolution to remove the director.
(6) File form 23.
As far as shares issued to him it is only he has to sell to the
existing directors. It is his property and the same cannot
be taken back.
However the removed director can approach courts or
R.O.C towards such removal demanding justification
 Increase / Reduction in No. of Directors (258)
• Ordinary resolution is required for increasing or
decreasing the number of directors

• The increase / decrease should be within the limits

fixed by the articles

• Any increase in the directors beyond the limit

prescribed by articles requires an amendment to
the articles by a Spl. Resol.
 Increase / Reduction in No. of Directors
If the number of directors exceed 12 , approval from CG is
required (259)

However, if a company is existing on 21.07.1951, no approval

is required if the total number of directors does not exceed
the number mentioned in the articles as on 21.07.1951

This section is not applicable to

- Govt. Co
- Sec 25 Co.
- Pvt. Co.
 Restriction on the No. of Directors (275,
277 & 278)
275 – No person can be Dir.in more than 15 Cos.

277 (1)- if a person is already holding directorship of 15 cos.

the new appointment shall not be effective unless within
15 days of such appointment he vacates any of the earlier
directorships

Directorship of the following are excluded’

- Pvt. Co
- Unlimited Co.
- Sec 25 Co.
- A co. where the director is alternate director
 Types of Directors
• On the basis of
– functions & responsibilities
• Executive Directors
• Non-executive Directors

– Retirement
• Rotational
• Non-Rotational
 Executive Directors
The directors who are in the employment of the company are
called executive or inside directors.

Examples: Whole time Director and Managing Directors.

They actively participate in the day to day affairs of the

company. Generally, they have personal involvement with
the company since there remuneration depends on the
successful operation of the company.
 Non-executive Directors
Directors who are not in the employment of the company are
called as non-executive directors or outside directors.

Example: Independent Director, Nominee Director.

The are not intimately connected with the day to day affairs of
the company except through attending the board meetings.
 Who Can be the Director
• Section 253: Only Individuals to be a director of a
company. Reason - the office of director is akin to trust and
somebody should be readily available who can be held
responsible for the failure to carry out obligations of such an
office.

• Besides this, section 312 of co’s act prohibits the

assignment of office of director.

• The provisions of Sec 253 and 312 are applicable to the

manger also
 Legal position of directors

Directors have been described sometimes as agents,

sometimes as trustees and sometimes as managing
partner.

However they have some attributes of all of them, but

they are neither trustees nor agents nor managing
partners in full sense.
 Position of Directors
• Appointment and removal by shareholders
• Overall supervision & Control entrusted to directors
• BOD is entitled to exercise all the powers of a Co.
except the powers which can be exercised in the
GM only as per the Act. (AOA can, however, restrict
the powers of the directors)
• All the powers vested are exercisable by the
directors collectively. Individual director can act if
such powers are delegated by the Act, MOA, AOA
or a resolution of the Board of Shareholders
 Director Identification No.
(253, 266A -266G)
253 – No co. shall appoint or re-appoint any individual
as a director unless he has been allotted DIN U/s
266B
266A- Application be made to the CG by a director or
person intending to become a director
266B – CG shall allot DIN within 1 month from the
date of receipt of application
266C – Only one DIN per person
266G – Upto 5,000/- plus Rs. 500/- per day
 Qualification Shares
No Statutory requirement – To be held only if
required by the articles
Time Limit – within 2 months from appointment. If
qualifying shares are already held, then no need to
have additional shares.
Maximum share Qualification – Nominal value of
shares shall not exceed Rs. 5,000/- .
 Exceptions to Qualifying shares
- Nominee Director appointed by CG U/s 408
- Nominal Director appointed by FIs
- Small Shareholders director
- Director specifically exempted by the Articles

- Bearer of a share warrant is not treated as a holder

of qualification shares
• Mr. Busy has been appointed as a director of LML
Ltd. on 2nd April 2010. The articles require that
qualification shares are 10. Mr. Busy applied for 10
shares on 31st May 2010. But the same were
allotted to him on 19th August 2010.

Implications ???
 Disqualification of Directors (274)
applicable to every Co.
• Person of Unsound Mind
• Person who is undischarged insolvent
• Person who has applied to be adjudicated as an
insolvent
• Person who has not paid any call on shares
• Person convicted by court
– Offence involving moral turpitude
– Sentenced to imprisonment for 6 months or more
– 5 yrs. Not elapsed from the expiry of the sentence
 Disqualification of Directors {274(1)(g)}
applicable to Public Co. Only
If the public co.
(a) does not file the annual accounts & returns for
any continuous 3 financial years commencing on
and after 1.04.1999 OR
(b) fails to repay its deposits or interest thereon on
due date or redeem its debentures on due date or
pay dividend and such failure continues for 1 year
or more

Escape from disqualification – if the director resigns

before the disqualification becomes effective
Additional grounds for disqualification
The Articles of the co. may provide additional
grounds for disqualification

Example – articles may provide that a person

below the age of 18 years shall not be capable
of being appointed as a director
 Vacation of Office by Dir. (283)
• All the disqualifications u/s 274
• Contravention of Sec 295 i.e., accepting a loan or
guarantee from a public Co.
• Contravention of Sec 299 i.e., failure to disclose the
concern or interest in any contract or arrangement
• Removed U/s 284
• Failure to obtain qualification shares u/s 270
• Absents himself, without obtaining leave of absence from
the board
– From 3 consecutive BMs or
– From all the BMs for a continuous period of 3 months whichever
is longer
What would be the position of following persons for
appointment as a director of a public Co.
- Mr. A having huge personal liabilities, has applied to the
court for adjudicating himself as an insolvent. The
application is still pending.
- Mr. B who was caught red-handed in a shop lifting case two
years ago and was imprisoned for a period of eight weeks
- Mr. C, a former bank executive convicted by a court eight
years ago for embezzlement of funds and imprisoned for a
period of 1 year.
- Mr. D, the director of DEF Ltd, which has not filed its annual
returns for the financial year 2006,2007 and 2008
 Appointment of directors
1) First Directors Section 254;
2) Appointment by shareholders:
a) u/s 255 Director Retiring by rotation, u/s 256 Filling of casual
vacancies.
b) Appointment other than retiring directors u/s 257;
c) Appointment by proportional representation u/s 265;
d) Appointment by small shareholders u/s 252(1).

3) Appointment by Board u/s 260 (additional dir), u/s 262 (casual

vacancy), u/s 313 ( alternate director)of co’s act.
4) Appointment by C. Govt. u/s 408;
5) Appointment by third party i.e. Nominee Directors.
 First Directors Section 254

Directors named in the articles shall be the first directors

Un-till the first directors are so determined, all the subscriber

shall continue to be deemed directors and they hold office
till the first general meeting held after incorporation but
prior to holding 1st AGM.
 Rotational & non-rotational Directors
Sec 255 – Not less than 2/3rd of the total number of
directors shall be rotational directors (any fraction
be rounded of to one.

The articles may even provide that

- all the directors shall be rotational directors or
- all the directors shall retire at every AGM

Sec 255 not applicable to Pvt. Co.

 Illustration on Rotational Dirs.
• Co. having 6 directors – Min. 4 Dirs. be rotational
• Co. having 6 directors of which 5 are rotational
• Co. having 6 Dirs of which 4 are rotational and 2
non-rotational. The Co. intends to appoint one
more rotational director
 Position of MD or WTD
• Any director whether rotational or otherwise can
be appointed as MD and WTD
• Where a rotational director is appointed as MD or
WTD, but his term of office is fixed he shall retire as
per the provisions of the act even if his term of
office is not expired. He will continue the office if
re-appointed after retirement.
 Dirs. Retiring by rotation (256)
• Of the rotational directors
– 1/3rd (or nearest to 1/3) shall retire from the office

– Directors who are longest in the office will retire first

– If more than one director appointed on the same day

then
• By mutual consent
• By lots
 Dirs. Retiring by rotation (256)
Filling of Vacancy can be done by
Reappointing the retiring director Or
Appointing some other person

- If the place of retiring director is not filled and the meeting

has not resolved not to fill the vacancy then
The AGM shall adjourn to
Next week (same time, same place)
if public holiday (succeeding day)
- If the vacancy is not filled in the adjourned meeting and no
resolution not to fill the vacancy then the director shall be
deemed to be reappointed
Appointment other than retiring directors (257)

Any person retiring director (whether a member of

company or not) can propose to stand for
directorship.

He is required to give a notice (at registered office of

company together with sum of Rs.500) of candidature
at least 14 days before the meeting (AGM or EOGM).
This appointment requires ordinary resolution.

The section does not apply to private company.

 Appointment by proportionate representation
(265)
Not Mandatory – can be provided in the articles to
allow small shareholders to have a representative
on the Board.
At least 2/3rd dirs. by proportionate representation

Directors appointed by proportionate representation

cannot be removed u/s 284

Not applicable to Pvt. Cos.

 Appointment by small shareholders
Small shareholder - nominal value of `20000 or less.

At least 14 days before the meeting notice by 100 or

more small shareholders duly signed should be
submitted at the reg. office of the company.

Tenure - for directorship is for a maximum period of 3

yrs.

i) not applicable to private company.

ii) only small shareholder can be appointed as Small shareholder
director
Section 274(1)(g) disqualification shall not apply to him
iii) Shall not retire by rotation.
iv) Provision of Qualification Share (QS) section 270 does not
apply to them.
 Appointment by Board

Additional Director: Subject to articles, Section 260-authorises Board

to appoint Additional Director, these director holds office only up to
the date of next annual general meeting of the company and the
number of directors and additional directors together shall not
exceed the maximum strength fixed for the board by articles.

Note: i) Above directors can be appointed even through resolution by

Circulation.
ii) They are not included in total number of directors for the
purpose of section 255.
iii) he is not a retiring director.
iv) Provision of QS is applicable to additional director.
v) The above provision are applicable to both public as well as
private company.
 Appointment by Board …

Filling of casual vacancy by board section 262:

Casual vacancy due to
- resignation,
- disqualification under section 283,
- death or removal for any other reason other than retirement or expiry
of tenure).
Any person so appointed shall hold office only upto the date up to which
the director in whose place he is appointed would have held office if it
had not been vacated.
Where a casual vacancy filled by board is again vacated than the
resulting vacancy cannot be filled by the board under 262, in that case
section 260 has to be invoked, i.e. board should appoint additional
director only.

Note: i) This section does not apply to Pvt Co.

ii) Not obligatory to fill the casual vacancy.
iii) Director filling Casual Vacancy is not retiring director.
 Appointment by Board…
313 appointment and term of Alternate director: Subject to articles of
the company the BOD of a company by a resolution in general
meeting appoint an alternate director to act for director in his absence
for more than 3 months from the state in which meetings of the board
ordinarily held.
The alternate director cannot exceed the term permissible to original
director. The term of alternate director comes to an end on return of
original director.

Note: i) They can be appointed through resolution by circulation also.

ii) No Central Govt approval is required for appointment of
alternate director.
iiii) This section applies to all company whether public or private.
iv) alternate director is excluded while counting number of director
ship for the purpose of section 275 and 277.
 Appointment by third party
Appointment by Banks or public financial institutions which
has provided finance to the company.
To ensure that the borrower company complies all the legal
requirements under various corporate laws.
Note: i) shall not retire by rotation.
ii) shall not be required to hold QS.
iii) not counted for the purpose of total number of dirs.
iv) can be appointed even if there is no prov. in articles
v) can be appointed even if his appointment would result
in increasing the strength of the board beyond maximum
numbers of directors.
vi) can be removed only by authority appointing him.
 Appointment by C.Govt
Section 408 empowers CG to appoint directors on the board of company
if such orders are given by Company Law Board (CLB);
The CLB can do only if :
a) reference is made by C. Govt.- to prevent oppression and mis-
management in the company or
b) an application is made by not less 100 members of the company, or
c) an application is made by members holding not less 1/10th voting total
voting power of the company;

Note: i) Such director appointed by C. Govt shall not retire by rotation.

ii) shall not be required to hold QS.
iii) can be removed only by authority appointing him.
iv) Monitoring and directives of these directors is being done by C. Govt.
v) As long as C. Govt. appointed directors are there on board any change in
Board of Director ship requires CLB approval.
 Consent to act as a Director (264)
Every person willing to act as a director shall
- File his consent with the Co. before appointment
- With the registrar (within 30 days of appointment)

Exceptions:
1) Director retiring by rotation
2) Person filing his own candidature u/s 257
3) Directors of Pvt. Co.
Mr. Balak, aged 17 years wants to become a director
of M/s ABC Ltd. Can he succeed ?

Will your answer be the same after 3 years from now

if he wants to become a director of a company
involved in the real estate business (transfer of
property Act)
 Restrictions on power of Board (293)
The Board of a public Co. shall not exercise following
powers except with the consent of the
shareholders in a general meeting:
1) Sell or give on lease of all the property of Co.
2) Remission, or give time for the repayment of debt
due by a director
3) Borrow money (if the money already borrowed
together with monies proposed to borrow will
exceed the aggregate of paid up capital and free
reserves
4) Charitable contribution (exceeding 50,000)
 Restrictions on power of Board (293)…
293A- political contribution
Following co.’s are prohibited from making any political
contribution
Govt. Co.
Co. in existence for less than 3 years
Max. Limit – not exceeding 5% of average net profits in the
immediately preceding 3 years
Contribution only after passing a resolution at the Board
meeting
Disclosure in the P&L Account
Penalty – 3 times amount contributed (Co.)
- imprisonment upto 3 years & Fine (officer in default)