WHAT THE COMPANIES ACT 2013 SAYS ABOUT DIRECTORS AND THEIR APPOINTMENT PROCEDURES?
A company is not a living person but acts through living persons. In other words, the functions which is to be performed by the company/corporation need to be done by these human agents known as the directors.
As per section 2(34) of the Companies Act, 2013(CA 2013) , a director means a person appointed to the board of a company. The Board or Board of Directors in a company is the collective body of the directors of the company as per section 2(10) of CA 2013.
In this particular piece of work, we would delve into the appointment procedures for different kinds of directors in public and private limited company.
DISTINCTION BETWEEN PUBLIC AND PRIVATE LIMITED COMPANY:
If we go by the definition provided by the companies act, a public company is a corporation which is not a private one and has a minimum paid up capital as may be prescribed. Even though the subsidiary company is a private one, it will be considered as public company if the principal company is a public one. But this definition in itself might be perplexing unless we refer to what a private company is. A private limited company as per section 2(68) of CA 2013 , is a corporation having a minimum paid up share capital and its articles restricts the right to transfer of its shares and limits the number of its members to two hundred. Only a public company can involve itself in the transfer of shares.
Now, the question arises, what is the meaning of the terms like paid up capital and articles?
The CA 2013 explains all these terms. Paid up share capital means the total amount of money invested by the creditors/investors in return for the shares of the company issued in their name. Articles refer to the articles of association of the company which regulates the internal management of the company and define the powers of its members.
The public company can be formed by seven or more persons while a private limited company can be formed by two or more persons for lawful purposes. A public company needs to have a minimum of three directors on its board and a private company needs to have a minimum of two directors on board and the maximum number in both the cases can go up to 15.
ROLE OF DIRECTORS IN A COMPANY:
As held in Ram Chand & Sons Sugar Mills Pvt Ltd v Kanhayalal Bhargawa, the position occupied by the directors in the company is not easy to explain. A director cannot be described as the servant of the company but a controller of the company’s affairs. The role of director has not been chalked out under the CA 2013 but for a broader understanding we can refer to the Nigerian Act , which says that the directors are appointed to direct and manage the business of the company.
The role of directors is dynamic as they can act as the agent of the company or sometimes as the trustees or even as the managing partner.
KINDS OF DIRECTORS AND THEIR APPOINTMENT PROCEDURES:
If we interpret the various sections of the CA 2013, we can list out the different kinds of directors which can be appointed in a public or a private limited company. Also, the directors can be appointed mostly through the general meeting of the company.
So the first kind is-
1) Independent Directors: every public company is to have at least one third of the total numbers of directors as independent one as mentioned in section 149(4). They, in relation to the company and as per the board is a competent person. The role of independent director is a crucial one as the directors act as the watchdogs and the role needs to be strengthened The person shall not be a promoter of the company and shall not have a pecuniary relationship with the company or its directors. Neither of the persons relatives shall hold a high position in the company or had been an employee of the same. Clause 7 of the same section provides that the independent director at the first annual meeting of the board in every financial year should declare that he meets the criteria of holding that position as per clause 6. The government shall create a data bank containing the list of competent persons who can be appointed by the companies as the independent directors.
2) Nominee Directors: As per section 161(3) of the act, the board can appoint a person as a director as nominated by the corporation in accordance with the company’s articles without getting it through general meeting. They are appointed in those situations in which one company has invested into another and wants to maintain a system of checks and balances by nominating a director. The nominations should be according to the provisions of any law in force. They can only be appointed if it is mentioned in the articles of association of the company. They are not considered as the independent directors. They are bound to act in the interests of the company as held in the landmark judgement of Tata Consultancy Services v Cyrus Investments Pvt Ltd & Ors.
3) Managing Directors: He/she is a person entrusted with substantial powers of management of the affairs of the company and has been appointed by a provision in the articles or through by a resolution passed in the general meeting or by the board of directors. The substantial powers of management give the authority to the managing director to administer the routine work of the company. These persons are in the charge of a company and are responsible for the conduct of the business of the company.
4) Whole-Time Directors: A director appointed in the whole-time employment of the company is called a whole-time director. They provide full-time services to their company’s management and do not possess substantial powers of management.
5) Additional Directors: Section 161(1) of CA 2013 , confers through the articles a power to the board to appoint a new person as an additional director at any time who shall be in office till the date of the next annual general meeting or till the last date on which the annual general meeting should have been held, either of the dates, whichever is earlier. A person who has failed to get appointed as a director in the general meeting cannot be appointed as an additional director. They are vested with the same powers as the directors and they are subjected to the same obligations.
6) Alternate Directors: If the articles of the company provide for or by a resolution passed in the general meeting the board can appoint a person as an alternate director in the absence of another director for a period of not less than three months. A person should not hold any alternate directorship for any other director at that point in time.
7) Casual Vacancy Directors: If the office of any director is vacated before the term expires, resulting in vacancy, in case of a public company subject to the articles, the such vacancy needs to be fulfilled by the board and the person duly appointed shall hold the office till the time the official term of the person whose post is vacated expires.
8) Small Shareholders Directors: A director can be appointed by small shareholders in a particular manner in a public company as may be prescribed. Small shareholders mean a shareholder holding shares of not more than twenty thousand rupees. The number of shareholders should be one thousand or more.
The appointment of directors and the procedures to be followed for such appointment in a company has been exhaustively dealt by the Companies Act 2013 and the rules. The directors either in a public or a private company are involved in vital roles which is necessary for the day-to-day functioning of the corporation and their appointment should be done in the manner duly provided otherwise it would affect the functioning of the companies and the management would go haywire.
Ms. Akhil Raj & Ekta Gupta
M/s Aura & Co.