Directors and their Compliances under Companies Act, 2013

REGULATORY PROVISIONS RELATED TO DIRECTORS

A company is created by law and is an artificial judicial person having its distinct entity. Though the company is bestowed with the characteristic of a separate legal entity, it cannot make the decisions on its own. Here the most crucial role is played by the directors of the company.

Directors are the eyes and brain of a company. To carry out all the necessary functions and do all the effective decision making, a person is required and expected to possess expertise in the field to which the company belongs. But apart from this, many requirements are needed to be complied with according to the laws prevailing in our country.

This article covers an overview of almost all the provisions, compliances and regulations that a company or a director must comply with and follow while dealing in matters related to a directorship in a company with a number of landmark judgements for more understanding.

TYPES OF DIRECTORS

• FIRST DIRECTOR- First directors are the directors who hold office from the date of incorporation of the company. Minimum 3, 2 and 1 director(s) are required in public, private and one-person companies, respectively.
• EXECUTIVE DIRECTOR-An executive director is a director who is in whole-time employment of a company.
• NON-EXECUTIVE DIRECTOR-A Non- Executive Director is the Non- working director of an organization that is not an Executive director.
• RESIDENT DIRECTOR-Every company shall have at least one director whose stay in India is not less than 182 days (for the previous calendar year) to be known as a resident director.
• WOMEN DIRECTOR-All Listed Companies and public companies having paid-up capital of Rs. 100 crore or more OR with a turnover of Rs 300 cr or more are mandatorily required to appoint a woman director in their company.
• ADDITIONAL DIRECTOR- Additional Director is a director who is appointed in a board meeting (except a person who fails to get appointed in the general meeting) who shall hold office up to the next annual general meeting or the due date on which the AGM should have been held, whichever is earlier.
• ALTERNATE DIRECTOR- An alternate director is a director appointed as a substitute for a director who is not present in India for a minimum period of 3 months. But a director of the same company and a person holding an alternate directorship for any other director in the same company cannot be appointed as an alternate director.
• SMALL SHAREHOLDER DIRECTOR- The listed company may have a small shareholder director appointed by the small shareholders of the company. A small shareholder is a shareholder holding shares of the nominal value of not more than 20000 rupees or other prescribed sum.
• NOMINEE DIRECTOR-A Nominee Director is a Director appointed to the Board to represent the interest in the Company. The Appointment of Nominee Director is made by any law for the time being in force or by agreement or by Central or State Governments by its shareholding in Government Company.
• DIRECTOR IN CASUAL VACANCY- A director in casual vacancy is appointed in place of a director (who was elected in a general meeting) who vacates his office before completing his tenure.
• PROFESSIONAL DIRECTOR- Director having expertise and skill in a particular field and contributing to the board's decision-making may be appointed as a professional director.
• INDEPENDENT DIRECTOR-An independent director means a director other than a managing director or a whole-time director or a nominee director having no material or financial interest in the company or with the directors. This type of director is gaining enormous attention these days because of the frauds done by the board of the companies in India.
• SHADOW DIRECTOR-This type of director is not appointed as a director officially, but the board of the company acts on his directions.
• DE-FACTO DIRECTOR-De-facto director is not appointed as a director but acts as a director and is also held accountable by the company for his acts in the position of a director.

QUALIFICATION, DISQUALIFICATION AND LIMITS ON THE DIRECTORSHIP

QUALIFICATION

The Act has a dedicated provision which is Section 162 that underlines the reasons for which a person may not appoint as a director. There is no such provision regarding the qualification under the Act. However, requirements can be listed as below:

1. The person must have completed the age of eighteen or above.
2. Nationality can be that of Indian or otherwise.
3. The person should have his own Digital Signature Certificate (DSC) through which Director’s Identification Number (DIN) shall be obtained.
4. The person has to furnish a written declaration expressing his consent to act in the position of Director and he is not a person who falls under the category of disqualified members.
5. There is no academic qualification that needs to be held by the person who is desirous of obtaining the directorship of a company.

DISQUALIFICATION

Section 164(1) provides grounds on which a person becomes disqualified to act as a director. A person shall not be eligible to become a director of a company if he

- is an undischarged insolvent or has applied for it and his application is still pending

- has been convicted for any offence and sentenced to imprisonment for a minimum period of six months and five years have not passed from the last date of his sentence (A person who has been convicted and sentenced for seven years or more becomes ineligible for all time).

- order disqualifying him for appointment as a director has been passed by a court or Tribunal

- has not paid any calls in respect of any shares of the company held by him and six months have elapsed from the due date of payment

- has been convicted of the offence dealing with related party transactions under section 188 during the last preceding five years

- has not been allotted a Director Identification Number (discussed later in the text)

- accepts directorships exceeding the maximum number of directorships provided in section 165, which brings us to our next topic, which is about the limits imposed on the number of directorships that a person can hold at one time.

Limits on number of Directorships

A person cannot hold directorship in more than 20 companies at one time (including alternate directorship but excluding dormant companies). This limit does not apply to Section 8 companies.

In the case of public companies (including their private holding or subsidiary companies) this limit has been reduced to only ten.

Section 164(2) covers one more ground for the disqualification of directors that a director of a company that has not filed its financial statements and annual returns for a continuous period of three years or

has failed to

• repay deposits or interest on them
• redemption of debentures or interest on them
• pay the dividends after the declaration

DIRECTOR IDENTIFICATION NUMBER (DIN)

A person is disqualified from acting as a company's director if he has not obtained a valid DIN. DIN is a unique identification number that can be obtained by any person who intends to be a director or is already acting as a director in a company but has not obtained a DIN. One person can only have one DIN at a time. In case if a director has wrongly obtained two DINs, then he is required to surrender his latest DIN.

Forms required for obtaining or surrendering DIN are mentioned later in this article.

DIN can also be obtained through the SPICE form at the time of incorporating the company (Up-to 3 DINs can be applied for).

DOCUMENTS REQUIRED FOR DIN APPLICATION IN FORM DIR-3

• Proof of Identity of the applicant (duly attested attachment)
• Indian national-PAN is mandatory
• Foreign national-Passport
• Proof of residence of the applicant (duly attested attachment)
• Photograph (format-JPG, max size-100kb)
• DSC of the applicant
• Attestation by any existing director of the company in which the person proposes to be a director.

Fees to be submitted- Rs 500

APPOINTMENT OF DIRECTORS

The appointment of a director can be made by

• Subscribing to the memorandum (First Director)
• Passing a resolution in a General Meeting (Director/ Regularization/ Reappointment)
• Board of Directors (Alternate/ Casual/ Additional Director)
• Small Shareholders (Small shareholders director)
• Tribunal

DUTIES OF A DIRECTOR

Section 166 talks about the duties which a director has to perform in a company. Their duty is

• To act in good faith
• To act as per the articles of the company
• To exercise due care and diligence
• To avoid any conflict of interest and make no undue gain
• Not to assign his office to any other person

RESIGNATION OF DIRECTOR

A director is required to give notice to the company intimating his resignation. The date of resignation shall be the date of receiving the information by the company or any date which is mentioned by the director in the notice (whichever is later)

After taking note of this, the company shall inform the registrar about this within 30 days of his resignation. If the company fails or refuses to file the director's resignation, then the director can also intimate about his resignation in the prescribed form. (In Karn Gupta v. Union of India case, it was held that if a director has resigned before the actual default, but the company fails to inform the ROC about his resignation, then the director's resignation shall not be rendered invalid and he will not be responsible for the default.

A director will be held responsible for all the actions done by him during his directorship in the office. (In the case of Alibaba Nabibasha, it was held that a director is not responsible for any act done by the company after his resignation).

REMOVAL OF A DIRECTOR

A company or its shareholders may remove its director by passing an ordinary resolution (but not the director appointed by the tribunal)

An independent director (appointed on his second term in the company) can only be removed after passing a special resolution by the shareholders.

The tribunal can also remove a director if it has received any application of oppression and mismanagement in the company and if it deems fit to remove the director.

VACATION OF OFFICE OF DIRECTOR

The Office of a director becomes vacant if that director

• becomes disqualified to act as a director (if the director has failed to file financial statements and annual returns of a company for three years continuously, then he shall vacate his office in all the companies but not the company in which he has defaulted. It was decided in the celebrated case of G. Vasudevan v. Union of India, Madras, HC that this provision is constitutionally valid.)
• fails to attend any board meeting for twelve months (this period is to be counted from the date of the meeting held just after the meeting that the concerned director last attended)
• contravenes the provisions related to contracts in which the director was interested
• a court's order renders him to be disqualified
• is removed according to the provisions of the Act
• was appointed because of his holding office in some other company and has ceased to hold office in that company.
• ceases to be a small shareholder or fails to meet the criteria of independence (in case of small shareholders director)

Private companies are allowed to provide some additional grounds also in their articles.

ANNUAL ROTATION

AOA may provide for the retirement of every director by rotation in a company. But if there is no clause related to it mentioned in the AOA, then, in that case, a minimum of two-thirds of the total number of directors shall be liable to retire by rotation and be appointed in the AGM of the company (in case of a Listed company). Out of those directors who are liable to retire, one-third of the directors shall retire every year at the Annual General Meeting. If their number is less than three, then the number nearest to one-third shall retire from office.

The directors liable to retire by rotation at every AGM shall be those who have the longest tenure in office since their last date of appointment, but as between persons who became directors on the same day, be determined by lot as agreed between them.

Small shareholders directors, independent directors and nominee directors are not liable to retire by rotation.

DISCLOSURE OF INTEREST

All the directors are required to disclose their interests in any company if any. This disclosure shall be made at his first board meeting and the first meetings in the subsequent financial years. If there is any change in his interests, then also he is required to disclose it.

LIST OF FORMS TO BE FILED DURING THE TENURE OF A DIRECTOR

Directors play a very significant role in the functioning and growth of the company and exercise powers that are in their capacity. They are the agents of the company. This famous quote, "With great powers comes great responsibility", fits well in the case of directors of a company. They must comply with all the statutory obligations applicable to them so that the company doesn't have to suffer because of them being non-compliant.

Authored by CS Richa Gulati & assisted by Khushi Khandelwal

The author can also be reached at info@manishanilgupta.com