COMPANY LAW UNIT - 4 LESSON 1: COMPANY MANAGEMENT

 

UNIVERSITY OF DELHI / SCHOOL OF OPEN LEARNING 

B. Com. (Program) / B. Com. (Hons.)

COMPANY  LAW 

N.O.T.E.S 

UNIT - 4 

LESSON 1: COMPANY MANAGEMENT

INTRODUCTION :

- Proper management of a company is a matter of public interest due to the involvement of various parties like shareholders and creditors.

- The Act contains strict provisions regarding the appointment, powers, and duties of top managerial positions to protect the interests of these parties.

- Key managerial positions, such as managers, managing directors, and whole-time directors, are discussed in detail in the Act.

- While various key managerial personnel may be optional for a company, the appointment of directors is mandatory for the proper functioning of the company.

MEANING OF DIRECTORS

- Section 2(34) of the Act provides a basic definition of a director as someone appointed to the Board of a company.

- However, this definition is not explanatory and lacks the appropriate meaning of the term director.

- Directors are individuals appointed to direct and supervise the affairs of the company and are responsible for controlling its powers.

- They play a crucial role as the company cannot operate on its own and requires individuals to perform functions on its behalf.

- Directors collectively form the Board and act collectively, with no individual director having the power to bind the company.

LEGAL POSITIONS OF DIRECTORS

- The legal position enjoyed by directors in a company is ambiguous and not clearly defined in the Act.

- Directors are often referred to as agents, trustees, or managing partners based on the nature and level of work they perform.

- As agents, directors represent the company and are not personally liable for contracts entered into on behalf of the company in the ordinary course of business.

- Directors also act as trustees in the sense that they must take care of the company's assets and work in the best interests of shareholders.

- However, the strict rules of the Trustee Act do not apply to directors in this context.

- Directors can also be considered as managing partners, as they are employees of the company and are elected by shareholders to manage the company's affairs in its best interests.

IN-TEXT QUESTIONS

1. The Board of Directors is the top administrative _______ of the company.

2. Directors as an agent must conduct the business with reasonable care and diligence and _____ by the memorandum and articles.

3. Every listed company has a paid-up share capital of Rs. 100 crores or more and turnovers of Rs. 300 crores or more must appoint at least one ______ director.

4. First Director shall hold the position _______ at the first annual general meeting.

5. Director works as a brain in the company.

6. Legal positions of directors in the company are not like to be.

ANSWERS :

1.  body.

2.  abide 

3.  independent.

4. First Director shall hold the position until the first annual general meeting.

5. True.

6. True.

NUMBER OF DIRECTORS

- Public companies must appoint a minimum of three directors, while private companies require a minimum of two directors. One-person companies must have at least one director.

- The Act sets a maximum limit of 15 directors for companies, but this limit can be increased by passing a special resolution.

- The limits on the number of directors do not apply to Section 8 companies and Government Companies, as they have the flexibility to appoint directors at their convenience.

CLASSIFICATION UNDER THE COMPANIES ACT

- There are two broad types of directors: executive directors and non-executive directors.

- Executive directors can be either whole-time directors or managing directors of a company.

- Executive directors actively engage in the day-to-day operations and management of the company.

- They are responsible for administrative tasks, implementing programs, overseeing company affairs, and executing the strategic plan.

- In contrast, non-executive directors are not involved in the day-to-day functioning of the company.

FURTHER CLASSIFICATION OF DIRECTORS

- First Director: Refers to the director(s) appointed at the incorporation of the company.

- Resident Director: A director who has stayed in India for a minimum period as required by the Act.

- Women Director: Mandated for certain categories of companies to promote gender diversity on boards.

- Independent Director: A director who is not affiliated with the company and brings an objective perspective to the board.

- Alternate Director: Appointed by a director to act on their behalf during their absence.

- Additional Director: Appointed by the Board between annual general meetings and holds office until the next AGM.

- Small Shareholder Director: A director elected by small shareholders as per the Act's provisions.

- Nominee Director: Appointed by a specific group or entity (such as a financial institution) that has invested or provided a loan to the company.

- Casual Vacancy: Arises when a director vacates their position before their term expires, and a replacement is appointed to fill the vacancy.

APPOINTMENT OF DIRECTORS

1. First Director [Section 152]:

- Subscribers of the memorandum of association appoint the first director.

- Articles may provide rules for appointments if not done by subscribers.

- If the article doesn't provide the name or method of appointment, the subscriber of the memorandum is deemed the first director.

2. Subsequent Directors:

- Appointed by members of the company in a general meeting.

- Director Identification Number (DIN) is mandatory.

- Required documents: DIN, written consent, declaration of eligibility.

- Submission of documents to Registrar of Companies within 30 days.

3. Retirement by Rotation [Sec. 152(6)]:

- Applicable to Section 8 companies, not to government companies and subsidiaries.

- Directors retire on a rotational basis at every Annual General Meeting.

- One-third of directors are appointed by ratification, and two-thirds are liable for retirement.

- One-third of the two-thirds actually retire (nearest number in case of decimals).

4. Resident Director [Sec.149(3)]:

- At least one director must stay in India for 182 days or more during the financial year.

- Newly incorporated companies determine the proportionate number of days at the end of the financial year.

5. Women Director [149(1)]:

- Listed companies and prescribed companies must appoint at least one woman director.

- Criteria based on paid-up capital or turnover.

- Compliance within 6 months from the date of incorporation.

- SEBI notification requires the top 500 and top 1000 listed companies to appoint women independent directors by specific deadlines.

6. Independent Director [Sec. 149(6)]:

- Introduced in the Companies Act 2013 for good corporate governance.

- Listed companies must have at least 1/3rd of total directors as independent directors.

- Criteria for independent directors' qualifications and restrictions to ensure independence.

- Focus on expertise, experience, competency, integrity, and lack of pecuniary relationships.

7. Declaration by Independent Director [Sec. 149(7)]:

- Independent directors must submit declarations on three occasions: the first board meeting, the first board meeting of each financial year, and in case of any change affecting their status.

8. Remuneration of an Independent Director [Sec. 149(9)]:

- Independent directors are restricted from receiving fixed remuneration or stock options.

- They are entitled to receive sitting fees, reimbursement of expenses, and profit-related commission.

9. Term of an Independent Director [Sec. 149(10) & (11)]:

- Independent directors hold office for five years, renewable for another five years.

- Maximum two consecutive terms allowed, followed by a cooling-off period of three years.

- During the cooling-off period, no association with the company or its subsidiaries/associates.

10. Obligations of an Independent Director as per SEBI:

- Prohibition on serving more than seven listed entities as an independent director or more than three listed entities is also serving as a whole-time director.

- Mandatory to hold a meeting without non-independent directors and management members annually.

- Limited liability to matters in their direct knowledge or acted negligently upon.

11. Retirement by Rotation:

- Independent directors are not subject to retirement by rotation.

12. Small Shareholders' Director [Sec. 151]:

- Represents the interests of small shareholders holding shares of nominal value up to a specified amount.

- Appointed in listed entities based on self-nomination or application by a fraction of small shareholders.

- Tenure is three years, with restrictions on holding the position in more than two companies.

Appointment of Directors by Board

1. Casual Vacancies:

- Board can appoint a director to fill a vacancy caused by death, resignation, or other reasons before the original director's term expires.

- Appointment made through a board resolution.

- Tenure of the director is until the term of the original director.

2. Additional Director [Section 161(1)]:

- Board can appoint additional directors if authorized by the company's articles.

- Appointment allowed when the number of directors falls below the prescribed limits.

- Conditions: Not failing to get appointed in a general meeting, holding office until the next annual general meeting, or the scheduled AGM date, whichever is earlier.

- Applicable to all companies (private or public).

3. Alternate Director [Section 161(2)]:

- Appointed when the original director is absent from India for more than three months.

- Board can appoint an alternate director based on company articles.

- Tenure depends on the original director's term or their return to India.

- An alternate director cannot hold alternate directorship in another company or directorship in the same company, except in the absence of an independent director.

4. Appointment of Director by Third Parties:

- Subject to the approval of the company's Articles of Association.

- Debenture holders and special creditors may be authorized to appoint non-rotational directors to represent their interests.

DIRECTOR IDENTIFICATION NUMBER (DIN)

1. Obtaining Director Identification Number (DIN):

- Section 153 of the Companies Act requires individuals to obtain DIN by applying electronically through Form DIR-3 on the MCA 21 portal.

- The central government should allot the DIN within one month of application submission (Section 154).

2. Prohibition on Multiple DINs:

- Section 155 prohibits individuals from holding more than one DIN.

- Once a person is allotted a DIN, they cannot apply for another DIN.

3. Director to Inform DIN:

- Section 156 mandates that existing directors must inform their DIN to all the companies they are associated with within one month of receiving the DIN.

4. Company to Inform DIN to ROC:

- After receiving the director's DIN, the company must submit the details of the DIN to the Registrar of Companies (ROC) or the authorized office using e-form DIR-3C.

- The e-form must be digitally signed by the company secretary or a practicing company secretary.

- Failure to comply may result in a fine of not less than Rs. 25,000, up to Rs. 100,000, for the company, as well as for the officers directly involved (Section 157).

DISQUALIFICATION FOR APPOINTMENT OF DIRECTOR

Conditions for Disqualification of a Director (Section 164):

1. Lunacy:

- An individual declared as a lunatic by a competent court is disqualified from being appointed as a director.

2. Undischarged Insolvency:

- An undischarged insolvent is ineligible for directorship.

3. Pending Insolvency Application:

- If a person has applied to be adjudicated as insolvent and the application is pending, they cannot be appointed as a director.

4. Conviction and Imprisonment:

- If a person has been convicted by a court of justice and sentenced to imprisonment for at least six months, they are disqualified.

- The disqualification remains until five years have elapsed from the expiry of the sentence.

- If the person is convicted and sentenced to imprisonment for seven years or more, they cease to be appointed as a director.

5. Disqualification by Court or Tribunal:

- If a person has been disqualified by a court or tribunal, and the disqualification order is still in effect, they cannot be appointed as a director.

6. Non-Payment of Due Share Call Money:

- If a person is unable to pay their due share call money even after six months from the last date for payment, they are disqualified.

7. Guilty in Related Party Transactions:

- If a person has been found guilty by a court of justice about related party transactions within the last five years, they are disqualified.

8. Non-Compliance with DIN Provision:

- If a person has not complied with the provisions of Section 152(3) of the Act, which pertains to Director Identification Number (DIN), they are disqualified.

9. Defaulting Company Director:

- If a person has been a director of a company that has not submitted its financial statements or annual returns consecutively for the last three years, or has not fulfilled obligations regarding deposits, debentures, or dividends for one or more years, they are disqualified.

REMOVAL OF DIRECTORS

1. Removal by Shareholders [Section 169]:

- Shareholders can remove a director before the expiry of their term by serving a special notice, passing an ordinary resolution, and providing the right to be heard.

- Exceptions include directors appointed by the Tribunal or under the principle of proportional representation.

2. Removal by Tribunal [Section 242]:

- The Tribunal has the power to remove a director for mismanagement, misconduct, or unethical behavior.

- A person removed by the Tribunal cannot be reappointed to a managerial position for five years.

Powers of Directors:

1. Powers as per Section 179(1):

- Directors are empowered to act in the best interest of the company within the scope of authorized power.

- Shareholders cannot interfere unless there is malafide interest, board incompetence, or deadlock.

2. Statutory Powers of Directors (Section 179(3)):

- Directors have powers to make calls, issue shares or debentures, borrow money, invest in the company's funds, approve financial statements, diversify the business, approve amalgamation/merger, and take over/acquire other companies.

- These powers require resolutions passed in board meetings.

3. Other Powers of Directors:

- Approving corporate social responsibility policy, filling casual vacancies, appointing additional/alternate directors, making contributions to political parties, recommending dividend rates, making a declaration of solvency, and filling the vacancy of key managerial personnel.

Restrictions on Directors' Powers [Section 180]:

- Directors cannot sell/lease/dispose of the whole or substantially the whole of the company's undertaking without shareholders' consent.

- Shareholders' consent by a special resolution is required for investments in securities from merger/amalgamation funds, borrowing money exceeding paid-up capital and free reserves, and granting extra time for repayment of dues from directors.

Summary of the above text with headings:

Duties of Directors:

1. Duty to Act as per Articles of Association:

- Directors must act by the company's Articles of Association.

2. Duty to Act in Good Faith:

- Directors must act in good faith and in the best interest of the company.

3. Duty of Competency and Care:

- Directors should exercise their duties with full competency and exercise extra care for the present and future betterment of the company.

4. Prohibition of Conflict of Interest:

- Directors must avoid conflicts of interest and ensure their judgment is not biased or influenced by personal gains at the company's expense.

5. Duty to Avoid Undue Advantage:

- Directors should not seek or take undue advantage of their position.

Key Managerial Personnel (KMP):

1. Definition of KMP:

- KMP refers to the executive management responsible for the day-to-day management and operation of the company.

- KMP includes the CEO, managing director, manager, company secretary, whole-time director, and other designated officers.

Managing Director:

- MD is a director entrusted with substantial powers of management, either through articles, agreement, resolution, or appointment by the board or general meeting.

- Routine administrative acts are not considered substantial powers.

Manager:

- Manager refers to an individual who, under the control and direction of the board, manages the whole or substantially the whole affairs of the company.

Whole-Time Director (WTD):

- WTD refers to a director employed on a full-time basis by the company.

Appointment of Managing Director, Whole-Time Director, or Manager:

 Restrictions on Appointment:

- MD and manager cannot be appointed simultaneously.

- The maximum tenure for MD, manager, and WTD is five years, with reappointment possible only in the last year of their present term.

- Restrictions on age, insolvency, nonpayment of creditors, and convictions for certain offenses.

- Shareholders' rejection in a general meeting can prevent an appointment.

IN-TEXT QUESTIONS

7. A person cannot become a director until he does not acquire _________

8. Resignation takes effect from the date on which the _______ is received by the company.

9. When the directors are unable or not willing to act called _______

10. Academic qualification does not mention in the law about the appointment of a director.

11. Director must not delegate any of the powers to some other person.

12. Unanimous consent of shareholders is required where assets of the company’s sold.

13. Director cannot be removed from his position before the expiry of the tenure.

14. Whole Time Director is just like a simple employee.

15. M. D has more substantial powers than a manager.

ANSWERS:

7.  Director Identification Number (DIN).

8.  resignation letter 

9.  deadlock.

10. Academic qualification is not mentioned in the law as a requirement for the appointment of a director.

11. Directors are allowed to delegate certain powers to other individuals as per the law.

12. Unanimous consent of shareholders is required for the sale of the company's assets.

13. Directors can be removed from their positions before the expiry of their tenure as per the provisions of the Companies Act.

14. A Whole-Time Director is not just a simple employee but holds a managerial position with substantial responsibilities.

15. Managing Directors (M.D.) typically have more substantial powers than managers.

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