Directors- Appointment, Duties, Rights, Powers and Liabilities

Meaning of Director

Director is a term given to the senior most management staff responsible for handling all key activities of organization. He is an individual who is responsible for framing a corporate policy. These directors collectively form a body which is termed as Board of directors. Board of directors refers to top administration who have power to direct and control the management of company. They are known as the brain of organization who makes all policies and strategies for efficient working. Directors act as a trustees of all property and money of organization. All transactions of business are entered into by them on company’s behalf. The individuals acting as a directors of company performs several roles such as an employee, agent, officer and a trustee. 

There is a limit imposed by law on maximum and minimum numbers of directors that can be appointed by company. For a public limited company, there is minimum limit of 3 directors. In case of private limited company, this minimum limit is kept to 2 directors and 1 director for one-person company. The maximum limit for any company is kept to 15 directors whereas a special resolution can be passed in its general meeting by company for appointing more directors. There are distinct types of directors that are appointed by company such as Independent director, Additional director, Residential director, Small Shareholders director, Women director, Alternate director and Nominee director.

Appointment of a Director

Appointment of a director in a company is made as per the provisions of Section 152 to 159 of Companies act, 2013. Companies Act 2013 prescribes 

that only a real person can be appointed as a member of Board of directors. Director’s appointment is generally done by the shareholders of company. Appointment of about two-third directors in both public and private company is done by shareholders. Rest one-third of members of board of directors are appointed in accordance with article of association.

Article of association may prescribe the appointment of any or all of the directors in case of private sector company. However, if their article is silent then only shareholders appoints all of its directors.

Permission of appointing two-third of directors by principle of proportional representation is granted to company by a clause included in company’s act. Power to exercise this permission by company depends on whether it has implemented this policy.

Nominee directors are appointed within the company either by government or third party for monitoring the misconduct or mismanagement. Their prime duties are to act honestly and take utmost care while delivering their duties within the company.

Managing directors are appointed for a maximum tenure of 5 years and must be necessarily an individual. An individual who has served has a managing director of any previous running company can be re-appointed as a managing director in new company with the approval of board of directors of first company.

There are numerous conditions with regard to appointment of director in a company: –

  1. He must possess the Director Identification Number (DIN) as per the section 154 of Companies Act, 2013.
  2. Individual must have an age limit in between 25 to 70 years. This age bar is not applicable in appointment made by central government or through passing of special resolution in general meeting by company.
  3. Individual must be a resident of India which mean that he/she has been staying in India for a period not less than 12 months immediately preceding date of appointment as managerial person.
  4. He/She has not face imprisonment for any period and is not detained under the   Conservation of Foreign exchange and Prevention of Smuggling Activities Act, 1974. 
  5. Name of first directors to be appointed are listed in article of association of company. In case article does not contain any names, then memorandum subscribers are the first directors.
  6. Directors are established in first general meeting by company’s initial members.
  7. In case of any need arises, additional directors may also be appointed by company. 
  8. If director is absent for a period not less than 3 months, an additional director may be appointed.
  9. Member of board may take up the vacant director position on temporary basis.

Documents need to be furnished for appointing a Director

  1. Appointment of Additional director is made as per the provisions of Article of association of company by calling a board meeting and passing a special resolution. Provisions of Section 161 of company’s act is followed if article does contain any clause related to appointment.
  2. Individual willing to be appointed as a Director need to possess the DIN (Director Identification Number).
  3. Director must fill the form DIR 12 along with letter of appointment and submit it within a period of 30 days.
  4. Director need to give a consent form DIR-2 in written for his willingness to hold the director office. Rule 8 of Companies appointment and Qualification of Director Rules 2014 describe about this consent form.
  5. Form DIR 8 need to be given by appointing director stating that he/she is not disqualified under Section 164 (2) of company’s act.
  6. Director need to give a form MBP-1 after his/her appointment in compliance to section 184(1).

Removal of Directors

Process of removing director from board of directors is made by following authorities: –

  • Removal by company in its general meeting
  • Removal by Government
  • Removal by National company law tribunal/ Company law board

Removal by Company: Company by passing a special resolution in its general meeting can remove the director even before the expiry of his term of office. There is an exception to removal of directors in case they are appointed by Central government, Board for Industrial and Financial reconstruction and for companies adopting principle of proportional representation for appointing two-thirds of its directors.

Removal by Government: Central government on recommendations of National company law tribunal/Company law board may advice the removal of director to company.

Removal by Company law board/ National company law tribunal: In case if any director is found guilty of any misconduct such as fraud, oppression and harassment, then the Company law board and National company law tribunal may exercise his power to remove the director from his office.

Powers of Directors

Statutory Powers of Directors

These powers are exercised by passing a special resolution in a general meeting of company by Board of directors. These are listed below: –

  1. Directors has a power to make call for unpaid amount in respect of shares issued.
  2. They can issue debentures both inside and outside of India.
  3. Directors can make investment of company funds.
  4. They can borrow funds from market through distinct sources other than debentures.
  5. Directors can approve the merger, amalgamation and reconstruction of company.
  6. They can take decisions to diversify the business line of company.
  7. Directors possess power to approve board report and financial statement.
  8. They decide whether to take over or acquire a substantial stake in some another company.
  9. Directors gives guarantee with regard to loans and create loans.

Other Powers of Directors

There are several other powers of Directors which are given below: –

  1. Director has a power to fill up the casual vacancy as per section 161 of Companies act.
  2. Director can appoint additional director and alternate director of company under section 161.
  3. He/She can appoint the first auditor.
  4. Director holds power of appointment and removal of any key managerial personnel.
  5. Director can make contribution in political field.
  6. He/she can recommend the dividend rate on company’s shares that is subjected to approval from shareholders of company.
  7. In case of voluntarily wind up by company, Director can declare solvency.

Powers that can be exercised only with a resolution

  1. Director has a power to lease or sell off any of the company’s assets.
  2. Director can borrow money more than the paid up capital and free reserves.
  3. He/she can appoint a sole agent for a time period exceeding 5 years.
  4. Director possess power of issuing bonus shares and share capital reorganization.
  5. Director can make charitable contribution amounting to 5% of 3 years’ average profits or Rs. 50,000 whichever is greater.
  6. Allowing time for repayment of loan to Director.

Director Managerial Powers

Board of directors uses these powers in shareholders’ interest.

  1. Contract with third party are done by Director of company.
  2. Allotment, forfeiture and transfer of company share comes under the powers of director.
  3. Director decides all terms and conditions regarding issue of debentures.
  4. They formulate policies and provide guidelines for proper functioning of business.
  5. Appointment of Manager, Managing director and Secretary of company is done by Director.
  1. Director supervise and monitor the role of subordinates.
  2. They have a power to recommend the declaration of dividend.

Duties of Director

General Duties of Director

  1. Director is responsible for formulating policies and setting objectives of company.
  2. They can issue guidelines to subordinates regarding implementation of policy for reviewing the progress of company.
  3. All the duties must be performed with utmost care and diligence by Director.
  4. To look after the appointment of subordinate officer, Manager, secretary, Managing director and other employees of company.
  5. To perform all activities as per the provisions of Articles of company.
  6.  Director should not attempt to attain any undue advantage for himself or for his relatives.
  7. They should always act in good faith for promoting the company objectives.

Specific Duties of Director

  1. Director must clearly reveal his shareholdings and interest in company’s contract.
  2. Director must disclose his name, occupation and address.
  3. They must fairly decide the amount of minimum subscription and issue prospectus.
  4. Board of directors should be ready for calling an extraordinary general meeting.
  5. He must within the time period of 2 months from his appointment take up qualification shares.
  6. Fairly disclosing all matters in prospectus as per the requirements of law.
  1. Filing with Registrar the return of allotment of securities.
  2. Signing up of prospectus before it reaches the registrar. 
  3. Delivering prospectus to Registrar before it is issued to public.
  4. Application money should be deposited by them in scheduled bank and should be utilized as per the act provisions.
  5. It is the duty of director to call for Company’s statutory and annual general meeting.
  6. Issuing transfer and forfeit shares.
  7. Declaring the dividend and payment arrangement.
  8. Filing of reports and resolutions as per the provisions of act with Registrar.
  9. All duties must be performed as per the Act.

Liabilities of a Director

Liabilities against the company

Directors are responsible for any losses of company in case of following conditions: –

  1. Any loss arising out of negligence or misconduct of duties by directors.
  2.  Violation of breach of trust in order to generate secret profit from business.
  3. Committing any dishonest act for creating personal profits.
  4. Loss arising out of co-director’s activities.
  5. Loss arising due to ultra vires act where contract is entered beyond their power by directors.

Liabilities towards third party

Director are personally liable for any liability toward third party in case of following situations: –

  1. Any liability arising out at the time of winding up of company.
  2. In case the liability is made unlimited through Memorandum.
  1. In case a director acts in his name only without mentioning the company’s name.
  2. Application money is not re-paid due to non-receipt of minimum subscription.
  3. Application money is not re-paid because of refusal to share listing by stock exchange.
  4. Any liability arising out due to any mis-statement in prospectus for acting fraudulently.

Criminal Liability of Directors

These liabilities invite for a fine or imprisonment or both for non-compliance of any statutory guidelines. These situations are: – 

  1. If share certificate and debenture certificate is not issued by Director.
  2. Directors failed to provide Balance sheet and Annual accounts.
  3. Filing of return on allotment with registrar is not done by Director.
  4. Notice is not given regarding conversion of share into stock to registrar.
  5. Any mis-statement in prospectus.
  6. Annual General Meeting is held by any defaulter.
  7. If office of director is hold in more than 15 companies.
  8. If no register is maintained with regard to the members and debentureholders.