Startup

A Brief Overview on Company Directors: Duties, Powers, Appointment & Liabilities

A Director plays a critical role in a company. They are the trustees of a company’s money and property. The Directors play multiple roles in a company. They are responsible for managing, directing and controlling the affairs of the company. In this article, we shall discuss the qualifications, appointment, duties, powers and liabilities of a Company Director.

Who is a Company Director?

A Director of a company is a person who functions on behalf of the company. He or she must act honestly and lawfully and make decisions for the benefit of the company. A company director ensures that the company fulfils its business objectives, thereby making the company a success.

Qualifications of a Company Director

The following passage mentions the qualifications required to be a company director:-

• A Director must be of sound mind and must be mentally and physically fit to execute statutory duties.
• Under section 253 of the Company’s Act 2013, a director must be an individual. An association, a firm or a body corporate like a company cannot be appointed as a Director.
• In an amendment in 2006, a provision was added under section 266B saying that no company can appoint an individual as a director unless he or she has been assigned a DIN (Director Identification Number).
• A Director must not be a subject of disqualification.
• A Director must not be insolvent.

Appointment of Company Directors  

The well-being of the company depends upon its directors. Their competency and their integrity play a massive role. Therefore the appointment of a company director is an important process. The appointment of directors is regulated by the Companies Act, 2013. In the subsequent passage let’s take a look at the different ways in which a Company Director is appointed-

I: Appointment of first directors:

First Directors means those directors who hold office from the date of incorporation of the company. The first Directors are generally named in the articles of association or are appointed by the promoters in the manner laid down in the articles. If the article of association (AOA) of the company is silent in this regard, the subscribers to the memorandum who are individuals shall be deemed to be the first Directors of the company till the directors are appointed under section 152.

II: Appointment of directors at a general meeting:

According to the section 162 of the Companies Act, 2013 a public company and a private company which is a subsidiary of a public company shall hold an extraordinary general meeting (EGM) before the first Annual General Meeting and appoint the first director by passing an ordinary resolution.

III: Appointment of Directors by Board of Directors:

General power to appoint the directors is vested in the general meeting of the shareholders, but the board of directors can also appoint a director in the following cases–

Additional Directors

The Board of Directors can appoint additional Directors from time to time if it is authorised by its articles of association. The total number of directors and additional directors should not exceed the maximum strength fixed for the board of directors by articles of association.

Casual Directors

In case the removal is not followed by the appointment of another by the general meeting, the vacancy can be filled by the Board of Directors as casual vacancy on condition that the removed director should not be reappointed by the board of directors.

Alternate Directors

The board of directors may appoint an alternate director if authorised by the articles of association or by the resolution of the company at the general meeting. The appointment of an alternate director does not create a new office. It merely fills the temporary vacancy in the existing office of a director.

IV: Appointment of directors by third parties:

The third parties here mean the debenture holders, financial corporations or banking companies who have given loans to the company. The articles of association of the company may give power to third parties to appoint their nominee on the company’s board of directors.

V: Appointment of Directors by Proportional Representation:

Generally, company directors are appointed by a simple majority of shareholders. A substantial minority can’t succeed in placing a single director on board. Therefore section 265 proposes to protect the interests of the minority shareholders by providing them with an opportunity to place their nominees on board.

VI: Appointment of Directors by Central Government.:

The central government has the power to appoint directors on order passed by the Tribunal so as to protect the interests of the company and the shareholders or to prevent mismanagement.

Also, Read: Insight into the Duties and Responsibilities of a Director in a Private Limited Company.

Duties & Powers of Company’s Director

• Duties of Company Directors

Ordinarily, the duties of a director are classified into two groups- i) General Duties ii) Specific duties

• General Duties

1. A director must act honestly, in good faith and with integrity in the interest of the employees, companies and shareholders.
2. They must exercise reasonable care and diligence in relation to the company.
3. A Director must act within the powers. It must act in accordance with the company’s constitution.
4. A company’s director must attend the board meetings.
5. A director who’s interested in a transaction of the company must disclose his interest to the Board. It’s because the director holds a fiduciary relationship with the company; therefore, he must not place himself in a position in which his personal interest clashes with his duty. It’s his duty to avoid conflicts of interests.
6. A director must not accept benefits from third parties.

• Specific duties

1. A company director must disclose shareholding
2. The director of a company must submit a statement of affairs on winding up.
3. It’s the duty of the company’s director to take up qualification shares within two months of his appointment.

• Powers of Company Directors

• Power to make call on shareholders in respect of unpaid money on their shares.
• Power to invest in funds
• Power to borrow money
• Power to approve amalgamation, reconstruction or merger
• Power of taking over a company or acquiring a company or stake in another company
• Power to grant loans or give guarantee, or provide security with respect to loans.

The company directors have other powers as well. These include:

• Power to fill casual vacancies
• Power to appoint first auditors of the company
• Power to appoint alternate directors
• Power to appoint additional directors
• Power to suggest the rate of dividend on the shares of the company upon approval by the shareholder of the company
• Power to declare an interim dividend
• Power to invest in the companies of the same group beyond a certain limit.

Liabilities of a Director

The liabilities of a director can be of civil or criminal nature. Let’s look at it closely-

Liability against the company

The directors shall be responsible for an act where directors function beyond the parameters of the provision of the Companies Act, memorandum of association and the articles of association. Thus, where the directors pay dividends or interests out of capital, they will be liable to indemnify the company for the loss or damage suffered by it.

Directors can also be liable for any malafide acts. If they dishonestly exercise their powers and perform their duties, they will be liable for breach of trust and may be required to make good the loss or damage.

Liability against third parties

The directors shall be responsible for any mis-statement in a prospectus for acting fraudulently. The director shall be liable to grant compensation to every individual who subscribes for shares on faith of such prospectus.

The director shall be liable for failure to repay application money on non-receipt of minimum subscription and also for acting beyond the powers of the company.

Where permission has not been granted by the stock exchange, the company has to return all the money received from the applicant within the prescribed time period. If the money is not paid, the directors shall be jointly and severally liable to repay the money with interest.

Criminal Liability of Company Directors

Companies Act 2013 imposes certain duties upon the statutory directors, and they may be liable to penalties by way of fine or imprisonment if they fail to perform their duties properly.

The company directors shall be liable:

1. For misstatement in the prospectus;
2. Failure in filing return on the allotment with the registrar;
3. Default in giving notice to the registrar for the conversion of share to stock;
4. Default in holding AGM (Annual General Meeting).
5. Failing to issue share certificate and debenture certificate.

Conclusion

A Company Directors role can never be downplayed. If they use their power in the right way and with integrity, their company can go a long way to be a successful company. However, with great power comes greater responsibility. Directors are responsible for the proper management of a company as they are the core of a company. You can contact Enterslice for adding and removing of Company Directors. Our professionals will provide you end to end services throughout the process.

See Our Recommendation: Types of Board of Directors As Per The Companies Act 2013.