Directors

Section 2(34) of the Companies Act, 2013 defines a ‘director’ to mean a

director appointed to the Board of a company.

A director may, therefore, be defined as a person having control over the

direction, conduct, management or superintendence of the affairs of a
company. Again, any person in accordance with whose directions or
instructions, the board of directors of a company is accustomed to act is
deemed to be a director of the company.

Who may be appointed as a director ?

Section 149 of the Companies Act provides that only an individual can be
appointed as director. Thus, no body corporate, association or firm can be
appointed director of a company.

However, no person shall be appointed as a director of the company

unless he has been allotted a Director Identification Number (DIN) or such
other number as may be prescribed under section 153. Section 153, as
amended by the Amendment Act, 2017 provides that the Central
Government may prescribe any identification number which shall be
treated as Director Identification Number for the purposes of this Act.
[Section 152(3)].

Section 153 requires that every individual intending to be appointed as

director of a company shall make an application for allotment of Director
Identification Number to the Central Government in such form and
manner and along with such fees as may be prescribed. However, the
Central Government may prescribe any other identification number as a
DIN.

As per the legal requirement, the no of director in a company are specified

as follows (Chapter XI, Section 149 of the Companies Act 2013):
 1. In the case of a public company Minimum, three and maximum
fifteen nos. of Directors are to be appointed out of which at least 1/3
rd number of them should be Independent Directors
2. In case of a private company, the minimum number of directors is
two and the maximum being fifteen.
3. Wherein in a One Person Company, there is a minimum of 1of only
one director.

Further, there should be at least one woman director and at least one of
the directors should have stayed in India for a minimum 182 days in the
previous calendar year.

Qualifications of Directors
The Companies Act has not prescribed any academic or professional
qualifications for directors. Also, the Act imposes no share qualification on
the directors. So, unless the company’s articles contain a provision to that
effect, a director need not be a shareholder unless he wishes to be one
voluntarily. But the articles usually provide for a minimum share
qualification.

Disqualifications of a director
Section 164(1) of the Companies Act, 2013 provides that 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. However, this
disqualification will last only up to five years from the date of expiry
of the sentence. But, 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; or
i. he has not complied with the provisions of sub-section (1) of section
165.

Section 165(1) limits the number of directorships to 10 public companies

and total companies to 20. After 2017 amendment, the disqualifications
referred to in clauses (d), (e) and (g) of sub-section (1) shall continue to
apply even if the appeal or petition has been filed against the order of
conviction or disqualification.

Sub-section (2) of section 164 further provides that no person who is or

has been a director of a company which—

(a) has not filed financial statements or annual returns for any
continuous period of three financial years; or
(b)has failed to repay the deposits accepted by it or pay interest
thereon or to redeem any debentures on the due date or pay
interest due thereon or pay any dividend declared and such failure
to pay or redeem continues for one year or more

shall be eligible to be re-appointed as a director of that company or

appointed in other company for a period of five years from the date on
which the said company fails to do so.

However, as per the 2017 amendment, he shall not incur the

disqualification for a period of 6 months from the date of his appointment.
Additional disqualifications for directors of a private company - A
private company may by its articles provide for any disqualifications for
appointment as a director in addition to those specified above.

Legal position of Directors

Director as Agents of the Company

A company cannot independently take action in its own capacity and

requires a representative. This representative role is fulfilled by the
directors, establishing a principal-agent relationship.

In this relationship, directors possess the authority to act and make

decisions on the company’s behalf. Any contracts or transactions made on
behalf of the company render the company responsible, while the
directors remain free from personal liability. Directors merely sign and
execute contracts on behalf of the company.

In the case of Ferguson v. Wilson (1904), it was legally recognized the

legal position of directors as agents of the company. This
acknowledgement stems from the legal principle that a company, as an
artificial entity, cannot function independently; it necessitates an agent to
act on its behalf.

Additionally, in the case of Ray Cylinders & Containers v. Hindustan

General Industries Limited (1998), it was clarified that directors act as
agents of the company, not of its individual members unless special
circumstances dictate otherwise. A company is legally distinct from its
shareholders.

In the case of Kirlampudi Sugar Mills Ltd. v. G. Venkata Rao

(2003), it was observed that when a company’s CEO executes a
promissory note and borrows money for the company, the liability does
not fall on the CEO personally. Even if the company fails to repay the
borrowed amount, the agent (CEO) does not incur personal liability.

However, directors incur a personal liability in the following circumstances

:
 1. where they contract in their own names;
2. where they use the company’s name incorrectly, e.g., by omitting
the word ‘Limited’;
3. where the contract is signed in such a way that it is not clear
whether it is the principal (the company) or the agent who is
signing; and
4. where they exceed their authority, e.g., where they borrow in excess
of the limits imposed upon them - Weeks v. Propert [1873] LR 8
CP 427.

Directors as trustees

Within a company, the legal position of director is also as a trustee. This

trustee role implies that directors manage the company’s assets and work
in the best interests of the company.

A trustee is someone who can be entrusted with the company’s resources

and acts to achieve the company’s objectives rather than for personal
gain. Furthermore, a trustee is granted certain powers, such as share
allocation, issuing calls, accepting or declining transfers, etc., which are
referred to as powers in trust.

In the case of Dale & Carrington Investment (P.) Ltd. v. P.K.

Prathapan (2004), it was emphasized that directors must act in a
fiduciary capacity. This means they have a duty to act on behalf of the
company with the utmost care, skill, good faith, and due diligence,
primarily in the best interests of the company they represent.

In Ramaswamy Iyer v. Brahmayya & Co. [1966] 1 Comp. LJ 107 (Mad.),

the Madras High Court held that “The directors of a company are trustees
for the company, and with reference to their power of applying funds of
the company and for misuse of the power they could be rendered liable as
trustees and on their death the cause of action survives against their legal
representatives”.
Directors as Managing Partners

The persons holding this view consider a company as large partnership,

directors being charged with the responsibility of managing the affairs.
The other sharehold ers are virtually dormant partners. By virtue of the
various provisions in the Memorandum and Articles, they enjoy vast
powers of management and act as the supreme policy and decision
making body.

Directors as organs of corporate body

It has been stated that the board of directors is the brain of the company
and a company does its act through them (Bath v. Standard Land Co.
Ltd.)

As a corporation has no mind or body of its own and its action is done by a
person that is not merely an agent or trustee but by someone the
company will be liable as his action is the action of the company itself. If a
company is considered a human body, the directors are the mind and the
will of the company as they control the actions of the company

Appointment of Directors- refer pdf

Disclosure by director
A director who is interested in a transaction of the company must disclose
his interest to the Board. Section 184 in this regard provides that every
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 whenever there is any change in the disclosures already
made, then at the first Board meeting held after such change, disclose his
concern or interest in any company or companies or bodies corporate,
firms, or other association of individuals. The disclosure shall include the
shareholding and shall be made in such manner as may be prescribed.

Further, sub-section (2) requires every director of a company who is in any

way, whether directly or indirectly, concerned or interested in a contract
or arrangement or proposed contract or arrangement entered into or to be
entered into—

 with a body corporate in which such director or such director in

association with any other director, holds more than two per cent
shareholding of that body corporate, or is a promoter, manager,
Chief Executive Officer of that body corporate; or
 with a firm or other entity in which, such director is a partner, owner
or member, as the case may be, shall disclose the nature of his
concern or interest at the meeting of the Board in which the
contract or arrangement is discussed and shall not participate in
such meeting.

Where any director who is not so concerned or interested at the time of

entering into such contract or arrangement, he shall, if he becomes
concerned or interested after the contract or arrangement is entered into,
disclose his concern or interest forthwith when he becomes concerned or
interested or at the first meeting of the Board held after he becomes so
concerned or interested.

Non-disclosure of the interest by a director or his participation in the

meeting renders the contract or arrangement voidable and not void [Sub-
section (3)].

However, the 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 [Sub-section (4)].

The different types of Disclosure of Directors Interest are as

follows:

 General Disclosure by Directors

Every Director of Company should disclose all of his concerns and interest
in any company or companies or firms and all other associations which
include shareholding. The disclosures which are made by the Director
should be kept at the registered office of the Company.
  Special Disclosure by Directors

This disclosure is specified under Section 184(2) of the Companies Act,

2013. This type of disclosures is transaction-specific Disclosures. A
Director who is interested or concerned in a contract or arrangement, to
be entered into:

 With a body corporate in which the Director holds more than 2% of

the shareholding of the Company, or is a promoter, manager or
Chief Executive Officer (CEO) of that body corporate.

 With a firm or any other entity in which the Director is the partner,
owner or a member.

What is the Time Limit Prescribed for the Disclosure of Directors

Interest?

 In the case of General Disclosure

The General Disclosure of Directors Interest should be made:

o At the first meeting of Board when the Director participates
as a Director.
o At every financial year, in the first Board meeting which is
held.
o At the first Board Meeting after any alteration in any
previous disclosure made by the Director.
 In the case of Special Disclosure

The Special Disclosure of Directors Interest should be made:

o At the Board Meeting, where the contract or arrangement

in which the Director is interested, will be discussed.
o In case if the Director is interested after the contract or
arrangement is entered, then the Director has to submit
the disclosure at the first Board meeting, which will be held
after the Director becomes interested.
Where general notice of disclosure was given by directors but same could
not be taken on note in Board Meeting as no board meeting was
conducted, there was non-compliance of section 184 (Section 299 of the
Companies Act, 1956). - Personal Performance Consultants India (P.) Ltd.,
In re [2016] 75 taxmann.com 299 (NCLT - Bang.) Where the whole body of
directors is aware of the facts, a formal disclosure is not necessary -
Venkatachalapati v. Guntur Mills AIR 1929 Mad. 353.