Law Project - Final

8/8/2019 Law Project - Final

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Directors of Companies



Acknowledgement

We students of PGDBM DCP have prepared this Legal Aspects of Business

project on Directors of Companies under the guidance of Prof. (Commodore)

PK Goel.

We would like to express gratitude for your constant guidance and support.

Thanking you,

Himanshu Chopra

Kapil Agarwal

Karan Verma

Kushagra Goswami

Kushagra Mathur

Lokesh Chaudhary

Manu V.

Mathew Joseph

Mridul A. Greenwold



1 . Definition of Directors of a Company

a) General: Appointed or elected member of the board of directors of afirm who, with other directors, has the responsibility for determiningand implementing the firm's policy. He or she does not have to be astockholder (shareholder) or an employee of the firm, and may only'hold the office' of the directors. Directors act by resolutions made atdirectors' meetings, and derive their powers from the corporatelegislation and from the articles of association of the firm. As the firm'sagents, they can bind it with valid contracts, entered into with third-parties such as buyers, lenders, and suppliers

b) By Act: According to the Act Director includes any person occupyingthe position of the Director, by whatever name called . A company is an

artificial legal person and the directors as a body endow the artificiallegal person with human face that can act and react.

2 . Position of Directors In A Company

The law relating to companies in India is contained in the Companies Act, 1956.A company is a legal person who is leaving only in the eyes of law. It s acreation of law which lacks both body and mind. It cannot act, just like ahuman being. It can act only through some human agency. Di rectors are thosepersons through whom company acts and does business. They are collectively

known as Board of Directors.

Section 252 323 of the Companies Act, 1956 deal with the appointment of directors, remuneration of directors, disqualification of d irectors, vacation of office by directors, Meeting of Board of Directors.

y Position Of Directors There is no definite definition for director under the Companies Act,1956. Director includes any person who is occupying the position of adirector, whatever name called. So in order to understand the positionof a director in a company we have to look in to various decided cases.

A director is sometimes described as agents, trustees, managingpartners etc. But each of these expressions is used not as exhaustive of their powers and responsibilities, but as indicating useful points of viewfrom which they may for the moment and for the particular purpose beconsidered.



y Director As Agents Directors are the agents of a company. They are acting on behalf of thecompany. So the directors cannot be held personally liable for anydefault of the company. It was held that, for a loan taken by a company,the directors, who had not given any personal guarantee to the creditor,could not be made liable merely because they were directors.

y Director As Trustees Directors are the trusties of the company s money, property and theirpowers and such must account for all the moneys over which theyexercise control and shall refund any moneys improperly paid away, andshall exercise their powers honestly in the interest of the company andall the shareholders, and not their own sectional interest.

Directors are those persons selected to manage the affairs of thecompany for the benefit of shareholders. It is an office of trust, which if they undertake, it is their duty to perform fully and entirely. Thispeculiar nature of their office is one of the reason why the directorsbeen described as trusties.

In the real sense the directors are not trustees. A trustee is the legalowner of the trust property and contracts in his own name. On the other

hand, director is a paid agent or officer of the company and contracts forthe company12. In fact, the directors are commercial men managing atrading concern for the benefit of themselves and of all the shareholdersin it.

3. Number of directors

Every public company, other than a public company which has become such by

virtue section 43 , shall have atleast 3 directors. Every other company shallhave atleast 2 directors.(Section 252).

However, with the commencement of Companies (amendment) Act, 2000, apublic company having

(a) A paid up capital of 5 crore Rs or more ;



(b) One thousand or more shareholders.

may have a director elected by such small share holders in the manner as maybe prescribed.

Small share holder means a shareholder holding shares of nominal value of Rs 20000 or less in a public company.

Where the number of directors falls below the maximum number, theremaining directors cannot act. The purpose is to avoid one man control ove rthe company. Section 43 A can have minimum 2 Directors. The maximumnumber of directors is fixed by the Articles. The maximum permissible limit of directors is 12.

A Director can hold office of a maximum of 15 companies.

4 . Qualifications of a Director A person shall not be capable of being appointed director of a company by thearticles, unless before the registration of the articles, the publication of theprospectus, or the filing of the statement in lieu of prospectus, as the case maybe, he has, by himself or by his agent authorised in writing

(a) Signed and filed with the Registrar a consent in writing to act as suchdirector; and

(b) Either;-

i. signed the memorandum for shares not being less in number orvalue than that of his qualification shares, if any, or

ii. taken his qualification shares, if any, from the company and paidor agreed to pay for them; or

iii. signed and filed with the Registrar and undertaking in writing totake from the company his qualification shares, if any, and pay forthem; or

iv. made and filed with the Registrar an affidavit to the effect thatshares, not being less in number or value than that of hisqualification shares, if any, are registered in his name.

Qualification shares are the minimum number of shares a person must own,as provided in the articles of the company, in order to qualify to become adirector of the company. Qualification shares must be acquired by a directorwithin 2 months of his appointment.



5 . Appointment Of Directors

y By members at general meeting

SECTION 255

U nless articles provides for retirement of all dire ctors at every AGM, notless than 2/3 of total number of directors of public company shall bepersons whose period of office is liable to be determined by retirement of directors by rotation.

- Rotational directors are to be appointed by company in general meetingand any fraction is to he rounded off to the next higher number.

- Remaining directors and all directors of a Private Company shall also beappointed by company in general meeting, subject to any regu lation by

articles.In other words, mode of appointment, of non-rotational directors(directors of Private Company) may be contained in the AOA.

SECTION 256

- One-third of rotational directors must retire at every annual generalmeeting. It follows that all rotational directors must retire in the courseof three years, one-third of them retire each year.

- Those directors who have been longest in office since their appointmentshall retire first.

- In case of persons who became directors on the same day, retirement isto be determined by mutual consent (agreement b/w them) and whereno such agreement exists, by lots.

Appointment of additional directors SECTION 260

- Board of directors may appoint additional directors if authorized by AOA- Additional directors shall hold office only up to the date of the next

annual general meeting of the company:

It should be noted that the number of the directors and additional directorstogether shall not exceed the maximum strength fixed for the Board by thearticles.

To fill casual vacancy - SECTION 262



- Applicable only in the case of a public company or a private companywhich is a subsidiary of a public company

- if the office of any director appointed by the company in generalmeeting is vacated before his term of office will expire in the normalcourse, the resulting casual vacancy may be filled by the Board of directors at a meeting of the Board.

- Any person so appointed shall hold office only up to the date up towhich the director in whose place he is appointed would have held officeif it had not been vacated as aforesaid.

Alternate director SECTION 3 1 3

- The Board of directors of a company may appoint an alternate directorto act for a director (hereinafter in this section called "the originaldirector") during his absence for a period of not less than three monthsfrom the State in which meetings of the Board are ordinarily held.

- BOD may appoint alternate director only if authorized by its articles orby a resolution passed by the company in general meeting,

- An alternate director shall not hold office as such for a period longerthan that permissible to the original director in whose place he has beenappointed.

- He shall vacate office if and when the original director returns to theState in which meetings of the Board are ordinarily held.

Appointment of director by third party (nominee director)

- There may be occasions when directors represent certain third partieson the Board. This usually happens when Government, FinancialInstitutions, Banks, Holding Company or other lenders nominate adirector to represents their interest on the Board.

- The rights and terms of nominating directors on the Boards of Companies are usually contained in the agreement.

- Nominee directors can be appointed if there is a provision in AOA of theCompany unless where a statute provides for such nomination.

- As per section 255 of the Act it should be ensured that the total numberof non-rotational directors should not exceed 1/3 of the total strength of the Board after the appointment of nominee directors.

- Nominee directors may not be required to hold qualification shares- The nominee directors must be paid tees and expenditure to which the

other directors are entitled.



Appointment by central government - section 408

The Central Government (CG) may appoint such number of persons asdirectors as the CLB may by order in writing specify as being necessary toeffectively safeguard the interests of:

1. the company, or2. its shareholders or3. the public interests.

to hold office for a period not exceeding 3 years on any one occasion.

CLB issues such orders after making such inquiry as it deems fit and:

- On the reference made to it by the Central Government, or- On the application made to it by

Not less than 100 members of the Company, or Members holding not less than 1/10th of total voting power.

Alternatively, the CLB may, if company itself has not availed the optiongiven u/s 265 (i.e. appointment of directors by proportionalrepresentation), give direction to the Company to alter its AOA in themanner provided in section 265 and make appointment in pursuance of amended AOA with in specified period.

Appointment of a director by small shareholders

A Public company having:

- A paid-up share capital of Rs. 5 crores or more and- One thousand or more small shareholders,

may have a director elected by such small shareholders.

Small Shareholders: a shareholder holding nominal value of shares of Rs.20,000 or less in a public Company.

The Government has prescribed the Companies (Appointment of SmallShareholder s Director) Rules, 2001.

Manner of election of small shareholder director

- A Company may act suo-moto (on its own) to elect a small shareholdersdirector from amongst small shareholders or upon notice of small



shareholders, who are not less than 1/10 th of total small shareholdersand have proposed the name of a person who shall be the director.

- The proposed candidates has to file his consent with the Company inwriting to act as a director

- In case of listed Company the small shareholders director shall beappointed through the postal ballot.

- In case of unlisted Company such director shall be appointed if majorityof the small shareholders recommended his candidature.

- Tenure of such director shall be for maximum period of 3 years andsame person can be re-appointed after 3 years if desired by the smallshareholders.

- Such director need not to be retired by rotation- Such director shall be treated as director for all purposes except for

appointment as MD or WTD.

6 . Disqualifications

A person shall not be eligible of being appointed as small shareholdersdirector if:

- he has been found by a Court to be of unsound mind- he is an undischarged insolvent;- he has applied to be adjudicated as an insolvent and his application is

pending;- he has been convicted by a Court of any offence involving moral

turpitude and sentenced him to imprisonment for not less than sixmonths, and a period of five years has not elapsed from the date of expiry of the sentence;

- he has not paid any call in respect of shares of the company held by him,whether alone or jointly with others, and six months have elapsed fromthe last day fixed for the payment of the call; or

- he has been disqualified him by a Court in pursuance of section 203which empowers the court to restrain fraudulent persons frommanaging the company

7. Restriction on number of directorship:



Small Shareholders Directors shall not hold office at the same time in morethan two Companies.

8. Removal of Director

a. Removal by shareholders: Section 284 recognizes the inherent right of shareholders to remove the directors appointed by them. It is not evennecessary that there should be proof of mismanagement, breach of trust,misfeasance or other misconduct on the part of the directors. Where theshareholders feel the policies pursued by the directors or any one of themare not to their liking, they have the option to remove the directors bypassing an ordinary resolution in the same way as they have the right toappoint directors by passing an ordinary resolution. Secti on 284 provides

that a company may, by ordinary resolution passed in general meeting afterdue receipt of a special notice remove a director before the expiry of histerm of office.

In Tarlok Chand Khanna v. Raj Kumar Kapoor1[7], it was observed thatsection 284 is designed to enable the share holders to control the directorsby their removal.2[8]

b. Removal by Central government : U nder section 388 B, the centralGovernment has the power to make reference to the Company Law Board

against any managerial personnel. U nder section 388 C , the Company LawBoard has the powers to pass an interim order suo moto or on applicationof the central government, in the interest of members or creditors or inpublic interest.

c. Removal by company Law Board: The provision to subsection (4) providesthat the company or any other persons aggrieved may make an applicationto the Company Law Board alleging that by such r epresentation theDirector is abusing the rights conferred by this section to secure needlesspublicity for defamatory matters. The Company Law Board, on such

application, may order that the representation need not be circulated orread out at the meeting and award costs against the Director though he isnot a party to the application. The requirement of intimating the members



about the representation having been made in the notice sent to membersand the right of the Director of being heard at the meeting can not bedispensed with.3[11]

Reasons for removal of a director

The act is silent on the issue that shareholders must give reasons forremoval of director or not. So in such case view taken in England isconsidered, that no reasons need b given.4[15] It would appear that toconfer a right on a Director to make representation and to be heard indefense of his removal, without requiring shareholders to disclose reasonsin support of intended removal looks rather preposterous and unjust aswell.

In Esc ort s Ltd v Union of India , the court said that when a meeting is

requisioned by some shareholders for the purpose of removing a director,the requisitionists must disclose the grounds on which they want toproceed against the director. This is necessary because the company has toinform the director beforehand of the resolution to remove him so as toenable him to exercise his statutory right of making representation to theshareholders about the matter. The court held that the notice which did notspecify the grounds failed its purpose and the company would not becompelled to call the meeting for the consideration of the resolution

In India it is now well settled by the decision of the Supreme Court in LifeIns uran c e Corporation of India v. Esc ort s Ltd That with regard to aresolution proposed to be passed at a meeting requisitioned by theshareholders for removal of a Director; no reasons in support thereof needbe given. The Supreme Court observed: Thus; we see that everyshareholder of a company has the right. Subject to statutorily prescribedprocedural and numerical requirements; to call an Extraordinary GeneralMeeting in accordance with the provisions of the Companies Act. Hecannot be restrained from calling a meeting and he is bound to disclose thereasons for the resolutions proposed to be moved at the meeting nor arethe reasons for the resolutions subject to judicial review.



REQUIREMENTS

To remove a Director under section 284 certain essential requirements,are to be fulfilled. The Director concerned, must be given a reasonableopportunity to make representations against the proposal for his removal

and the shareholders of the company should also have adequateopportunities of being acquainted with such representations before theysubscribe to a resolution for removal. The Articles sometimes provide theoffice of a Director shall be vacated if he is requested in writing by all hisco-Directors to resign. In this way a power of removal can be conferredupon the Board of Directors, in addition to the power of the shareholdersin general in General Meeting to remove a Director.

SPECIAL NOTICE

Where a Director is to be removed, special notice must be given to thateffect, though the resolution is to be only an ordinary resolution. So alsowhere somebody else is to be appointed in place of the removed Director,special notice must be given of such resolution. The company is alsorequired to send a copy of the representations to every member to whonotice of the meeting is sent. A significant right is vested with everymember and that is that a member who is entitled to attend a generalmeeting and move a resolution can give special notice of a resolution toremove a Director at a general meeting or to appoint somebody insteadof the Director so removed. The grounds for removal of the directors arerequired to be stated in the explanatory statement accompanying thenotice of the meeting.

Failure to comply with the requirements of notice would render theremoval, as well as the appointment of the Director in the meeting invalid.So where a special notice of the resolution was not given; it amounted to aserious lapse depriving the directors of their statutory right to makerepresentation. The special notice of resolution shall be served on thecompany at least 14 days before the meeting exclusive of the day on whichit is served and the day of the meeting. Sub-section (3); when a specialnotice of resolution is properly served on a company, a copy thereof shallforthwith be sent to the Director concerned.

M anmohan Singh Kohli (Capt.) v. Venture India Propertie s (P.) Ltd. In thiscase, the respondents had failed to point out any special notice sent by



them. As such, in the absence of any notice, the removal of the petitionerand his son from the directorship of the company was bad in law. Therespondents had failed to comply with the provisions of Section 284 (2) and(3). Therefore, the resolution passed in the extraordinary General Meetingof the shareholders of the company being illegal, and not in com pliancewith the provisions of the Act was liable to be set aside. Consequently, boththe petitioner and his son were restored to their original position asDirectors. All subsequent action taken by the company in this regard wouldalso be null and void.

REMOVAL OF DIRECTORS IN PRIVATE COMPANIES

The section applies to all companies public and private. But, having regardto the fact that Sections 85 to 89 do not apply to a private company, unlessit is a subsidiary of a public company, there is no reason why special votingrights by issuing shares having extraordinary rights may not be validly givenunder the Articles, so as to prevent the removal of a Director by resolutionat a General Meeting. The removal of a Director in a private company evenif it is lawful, may in circumstances constitute an act of oppression inreference to the aggrieved Director and the Court may give him relief under Section 397 read with Section 402 so as to put an end to the mattercomplained of. Where a relief against oppression is not sufficient toprovide justice to the aggrieved Director, the Court may order the winding -up of the company under the just and equitable clause under Section

433.5[29]RIGHTS OF A DIRECTOR AFTER TERMINATION OF DIRECTORSHIP.

The directors have a right of compensation or damages which are payableto him in respect of the premature termination of the directorship, or of any appointment terminating with that as Director.

Clause (a) of sub-section (7) of section 284 provide that removal of adirector would not deprive the person of any compensation or damage forthe termination of appointment as a director or for an appointmentterminating with that as director. However, section 318 does not providefor payment of compensation for loss of office or any other payment forloss of office or place of profit except the loss of office held by the directorin the capacity of managing director, whole time director or manager.



Sub-section (7) provides for compensation or damages to a Director in thecase of wrongful removal. The Articles may confer on the company thepower to remove Directors from office, subject to any contract with thecompany. The Articles may also be substituted by new Articles or may be soaltered as to cause a breach of an existing contract. In such a case, theDirector aggrieved can sue the company for damages for breach of contract, but cannot obtain injunction to prevent the adoption of the newor altered Articles. A Director, who is wrongfully removed from the Board of Directors, can sue for relief by injunction or by declaration and injunction.Where, however, the member of the company in General Meeting resolvenot to have, a particular Director any longer in their company, the Directorconcerned would not be granted an injunction in h is favour. He can claimdamages, if any, to which he is entitled if at all.

Further in the following cases no compensation is payable :

Where the director resigns his office in view of the reconstruction oramalgamation of the company and he is appointed in the companyresulting from the reconstruction or amalgamation.

Where the director otherwise resigns his office.

Where the office of the director is vacated by virtue of Section 203 or

under Section 283. Section 203 empowers the court to restrain frau-dulent persons from managing companies and Section 283 providesthe circumstances in which the office of a director is vacated.

Where the company is being wound up and the winding up is due tothe negligence or default of the director.

Where the director has been guilty of fraud or breach of trust, or grossnegligence or mismanagement in the affairs of the company.

Where the director has instigated or has taken part in bringing aboutthe termination of his office.

Sub-section (4) of section 318 puts a ceiling on the amount of compensationpayable to a director eligible for compensation for loss of office. The sub-section provides that any payment made to a managing or other director in



pursuance of sub section (1) shall not exceed the remuneration which hewould have earned if he had been in office for the unexpired residue of histerm or for three years, whichever is shorter. The amount payable shall becalculated on the basis of the average remuneration actually earned by himduring the period of three years immediately preceding the date on whichhe ceased to hold the office. But, where he held the office for a lesserperiod than three years, the amount shall be calculated with reference tothe period he actually worked.

The amount of compensation should not exceed the remuneration whichhe would have earned for the unexpired residue of his term or for threeyears, whichever is shorter. The amount should be calculated on the basisof the average remuneration actually earned by him during a period of three years before the termination, or where he held office for a lesserperiod, during such a period. The case of a Managing director is outside thesection. He may be entitled to compensation in the capacity of anemployee.

9 . Disqualifications of directors

(1) A person shall not be capable of being appointed director of a company, if -

(a) he has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force;

(b) he is an undischarged insolvent;

(c) he has applied to be adjudicated as an insolvent and his application ispending;

(d) he has been convicted by a Court of any offence involving moralturpitude and sentenced in respect thereof to imprisonment for not less

to six months, and a period of five years has not elapsed from the dateof expiry of the sentence;

(e) he has not paid any call in respect of shares of the company held byhim, whether alone or jointly with others, and six months have elapsedfrom the last day fixed for the payment of the call; or



(f) an order disqualifying him for appointment as director has beenpassed by a Court in pursuance of section 203 and is in force, unless theleave of the Court has been obtained for his appointment in pursuanceof that section.

(g) such person is already a director of a public company which, -

(A) has not filed the annual accounts and annual returns for anycontinuous three financial years commencing on and after the firstdate of April, 1999; or

(B) has failed to repay its deposit or interest thereon on due date orredeem its debentures on done date or pay dividend and suchfailure continues for one year or more :

Provided that such person shall not be eligible to be appointed as adirector of any other public company for a period of five years fromthe date on which such public company, in which he is a director,failed to file annual accounts and annual returns under sub -clause(a) or has failed to repay its deposit or interest or redeem itsdebentures on due date or pay dividend referred to in clause (b).]

(2) The Central Government may, by notification in the Official Gazette,remove-

(a) the disqualification incurred by any person in virtue of clause (d) of subsection (1), either generally or in relation to any company or companiesspecified in the notification; or

(b) the disqualification incurred by any person in virtue of clause (e) of subsection (1).

(3) A private company which is not a subsidiary of a public company may, by itsarticles, provide that a Person shall be disqualified for appointment as a

director on any grounds in addition to those specified in subsection (1).

10 . General powers of board

(1) subject to the provisions of this Act, the Board of directors of a companyshall be entitled to exercise all such powers, and to do all such acts and things,as the company is authorised to exercise and do :



Provided that the Board shall not exercise any power or do any act or thingwhich is directed or required, whether by this or any other Act or by thememorandum or articles of the company or otherwise, to be exercised or doneby the company in general meeting :

Provided further that in exercising any such power or doing any such act orthing, the Board shall be subject to the provisions contained in that behalf inthis or any other Act, or in the memorandum or articles of the company, or inany regulations not inconsistent therewith and duly made thereunder,including regulations made by the company in general meeting.

(2) No regulation made by the company in general meeting shall invalidate anyprior act of the Board which would have been valid if that regulation had notbeen made

10 .1 Certain powers to be exercised by Board only at meeting

(1) The Board of directors of a company shall exercise the following powers onbehalf of the company, and it shall do so only by means of resolutions passedat meetings of the Board :-

(a) the power to make calls on shareholders in respect of money unpaidon their shares;

(b) the power to issue debentures;

(c) the power to borrow moneys otherwise than on debentures;

(d) the power to invest the funds of the company; and

(e) the power to make loans

(2) Every resolution delegating the power re ferred to in clause (c) of subsectionshall specify the total amount 4 [outstanding at any one time] up to whichmoney may he borrowed by the delegate.

(3) Every resolution delegating the power referred to in clause (d) of sub -section(1) shall specify the total amount up to which the funds may beinvested, and the nature of the investments which may be made, by thedelegate.



(4) Every resolution delegating the power referred to in clause (e) of sub-section (1) shall specify the total amount up to which loa ns may be made bythe delegate, the purposes for which the loans may be made, and themaximum amount of loans which may be made for each such purpose inindividual cases.

(5) Nothing in this section shall be deemed to affect the right of the companyin general meeting to impose restrictions and conditions on the exercise by theBoard of any of the powers specified in sub-section (1).

10 .2 . Restrictions on powers of Board

(1) The Board of directors of a public company, or of a private company whichis a subsidiary of a public company, shall not, except with the consent of suchpublic company or subsidiary in general meeting, -

(a) sell, lease or otherwise dispose of the whole, or substantially the whole, of the undertaking of the company, or where the company owns more than oneundertaking, of the whole, or substantially the whole, of any such undertaking;

(b) Remit, or give time for the repayment of, any debt due by a director

(c) invest, otherwise than in. trust securities, of any such undertaking as isreferred to in clause (a), or of any premises or properties used for any suchundertaking and without which it cannot be carried on or can be carried ononly with difficulty or only after a considerable time;

(d) borrow moneys after the commencement of this Act, where the moneys tobe borrowed, together with the moneys already borrowed by the company(apart from temporary loans obtained from the company's bankers in theordinary course of business), will exceed the aggregate of the paid -up capitalof the company and its free reserves, that is to say, reserves not set apart forany specific purpose; or

(e) contribute, after the commencement of this Act, to charitable and otherfunds not directly relating to the business of the company or the welfare of itsemployees, any amounts the aggregate of which will, in any financial year,exceed 3[fifty thousand rupees], or five per cent, of its average net profits asdetermined in accordance with the provisions of sections 349 and 350 duringthe three financial years immediately preceding, whichever is greater.



11 . Directors duties, responsibilities and rights

11 .1 . Duties of directors

Directors duties arise from the following sources:

y the common lawy statutesy the memorandum and articles of association of the compa nyy service agreements specifically entered between the director and the

companyy resolutions passed at members or directors meetingsy the rules of a regulatory body, if any

a. Common law duties:

A director's fiduciary duty

'Every director is bound at common law by a separate and distinct fiduciaryduty to the company (the term fiduciary being derived from the Latin

fiduciarius meaning of trust ). Directors owe their fiduciary duty to thecompany as a corporate being in its own right and not to the members

individually, not even to a member who is a majority shareholder. Even if adirector occupies his position on the board by virtue of another position heholds (for instance, where he is appointed by a major shareholder or is entitledto a seat on the board by virtue of an executive position in the company), adirector s fiduciary duties rest upon him as an individual. The fiduciary duty islikewise not owed directly to creditors, employees or other stakeholders of thecompany, although there is a range of circumstances in which a director may,by virtue of the neglect of his fiduciary duty to the company, be heldpersonally liable to the company s stakeholders.'

In this fiduciary capacity, a director assumes two roles, as an "agent" acting onbehalf of the company, and as a trustee who controls company assets.

Conflict of interests



A conflict may sometimes arise between a director s personal circumstancesand that of the company. The law is unequivocal as to the course of action adirector who has a conflict of interests must follow and a director may neverprefer his interests over that of the company he is entrusted to direct. Adirector who does so may be liable to account to the company in respect of any profits he makes as a result of such a transaction.

Directors may often sit on the boards of several companies and conflicts mayalso arise between the divergent interests of these companies, thus presentinga problem to the individual who sits on the boards of both companies. It isimportant to note that where a director is simultaneously a director of aholding company and its subsidiary, he owes a separate and distinct fiduciaryduty to both entities as legal individuals in their own right. A director mustguard against a conflict of interests developing in a situation where he is adirector of both the holding company and a subsidiary. Should a conflict arisewhich prevents him from discharging his duty to both companies properly, heshould consider resigning from either or both boards.

Duty of care and skill

The degree of care and skill required is determined objectively by consideringhow a reasonable person with similar knowledge and experience would h aveacted, and then comparing this to the director s actions. Each case isconsidered individually taking into account the nature of the business and the

director s specific obligations. As indicated earlier, no distinction is madebetween executive and non-executive directors.

b. Statutory Duties :

A director's duties in terms of the Companies Act

Directors have to comply with a number of obligations in terms of theCompanies Act.

c. Duties in terms of the memorandum and articles of association

The memorandum of association determines the scope of the company sobjects and powers, while the articles of association is a contract betweenmembers themselves and between members and the company. The articlestherefore contain the internal rules by which a co mpany is governed. TheCompanies Act provides a standard set of articles that many companies use asa basis but may amend to meet their specific needs. The memorandum and



articles are integral to the company and directors should familiarisethemselves with their contents since they invariably impose duties ondirectors.

Directors and shareholders Decision making authority

The board may delegate certain powers to managers and at the same timeimpose appropriate restrictions and conditions which can be varied or revokedat any time. The directors have a duty to monitor management's performance and ensure that management work within their delegated power. In theabsence of specific cause for suspicion, directors are generally entitled to trustmanagement to perform their duties honestly and to accept and rely on the

judgment, information and advice of management when reaching their owndecisions. Directors should not lose sight of the fact, however, that theyremain ultimately liable, both jointly as a board a nd individually, for the wellbeing of the company.

Directors power to bind the company

'Normally the powers and duties of directors are left undefined and it isimplied that directors possess all powers necessary to enable them to directthe affairs of the company. The articles may sometimes seek to limit thesepowers or to specify particular duties, in which event these limitations must bestrictly complied with. A director may not enter into transactions on behalf of the company which are beyond the powers conferred upon him by thearticles, the Act and common law.

In some circumstances where directors have acted beyond their powers asdirectors, the shareholders may subsequently ratify their action by specialresolution. Ratification is not possible, however, where the action falls outsidethe object of the company as defined in the company s memorandum of association. Directors will be liable to the company for any financial lossesincurred by it as a result of them having acted outside the scope of theirauthority. Any member of the company may institute action against any

incumbent or previous director where the company has suffered damages dueto a breach of trust or a wrongful act by that director. [§266]

Loans to directors

Loans made either directly or indirectly to directors are prohibited unless:

y all members give their consent



y a special resolution approves a specific loany the loan is to enable a director to perform his or her dutiesy the business of the company is to make loansy the loan is to provide assistance to enable the director to participate in a

company s share incentive schemey the loan is for directors' housingy the loan is made to a director of a subsidiary who is not also a director of

the lending company [§226]

Indemnifying directors

A company may take out insurance to indemnify its directors or officers fornegligence, default, breach of duty or breach of trust. [S247] This provision wasintroduced by a 1999 amendment to the Companies Act and it is suggested inKing II that directors persuade their companies to take out this insurance.

' In terms of S248, if, in any proceedings for negligence, default, breach of dutyor of trust against a director, officer or auditor, it appears to the court that theperson has acted honestly and reasonably, the court may relieve him, whollyor partially, of his liability. The burden of proof to show that he acted honestlyand reasonably in the context of surrounding circumstances is on the directorseeking relief.'

Dissenting Directors

Where a director strongly disagrees with a board decision, he has several waysto indicate this dissatisfaction. A dissenting director may:

y prepare a memorandum setting out his objectionsy raise these concerns at a formal board meeting, requesting that a

meeting be convened if the matter needs urgent attention and the nextboard meeting is too late to give proper attention to the issue

y insist on a full hearing at the meeting and request that detailed

objections be recorded in the minutes of the meetingy seek professional advice if this is appropriate. (King II recommends that

the company should have a procedure for the director to be able to doso at the expense of the company).

If the matter is not resolved at a board meeting, the dissenting director couldcall a general meeting (if authorised by the articles) or rally shareholders to call



a general meeting as the shareholders hold the ultimate power in thecompany. If this is not possible and the director is not prepared to abide by themajority board decision, he may have no alternative but to resign.

Rights of Directors

Directors have the right to:

y inspect the company s accounting records, assisted by an accountanty claim reimbursement for expenses incurredy discharge their duties without interference from co-directorsy participate in the strategic management of the company and attend and

vote at board meetingsy receive reasonable notice of meetingsy take independent professional advice at the expense of the company

Liabilities of Directors

Director s liability arises because of their position as agents or officers of theCompany as also for being in the position of trustees or having fiduciaryrelation with the Company or its shareholders.

Some of these liabilities are in contract, some are in tort, some are under thecriminal law and others are statutory, i.e., under the Companies Act, 1956 andother laws. The courts have, in deciding the liability of Directors, taken intoconsideration a director s position as a whole.

Contractual Liability: - Directors are bound to use fair and reasonable diligence in discharging theduties and to act honestly, and act with such care as is reasonably expectedfrom him, having regard to his knowledge and experience.In R.K. Dalmia and others v. The Delhi Administration it was held th at "Adirector will be personally liable on a company contract when he has acceptedpersonal liability either expressly or impliedly. Directors are the agents or the

trustees of a Company."Express liability will usually arise only when a director has pers onallyguaranteed the performance of a contract. Implied liability will arise when adirector signs a contract for the Company or mentioning the name but failingto add the vital word "limited" or its abbreviation. This rule rests on theordinary principle of agency that where an agent enters into a contract withoutdisclosing that he is acting as agent he accepts personal liability. In the case of



Penrose v. Martyr a bill was addressed to a company and omitted the word"Limited" in describing it. The defendant (Secretary to the Co.) signed theacceptance and was held to be personally liable by the Court of ExchequerChamber.

As far as fiduciary duties/obligations are concerned, any breach by any directorwould visit them with liability. Our Supreme Court has considered this issue of fiduciary liability. It has been observed in Official Liquidator vs. PA Tendulkar.

Pre- Incorporation Liability- A Company cannot make a contract before it isincorporated because, before incorporation, it has no legal existence.Therefore, a Company after incorporation cannot ratify a contract previouslymade. It must make a fresh contract. But, those who act on behalf of theunincorporated company may find themselves personally liable. In Kelner v.Baxter the Court of Common Pleas held that where a person purports to sign acontract as agent, but has no principle in existence at the time, he is personallyresponsible.

Liability of Directors for Torts of the company: - Directors as such are not liable for the torts or civil wrongs of their company.To make a person liable for a tort, e.g. for negligence, trespass, nuisance ordefamation it must be shown that he was himself the wrongdoer or that hewas the employer or principal of the wrongdoer in relation to the actcomplained of, or that the tort was committed on his instructions.

Civil Liability to the Company- director s liability to the Company may arisewhere(1) the directors are guilty of negligence,(2) the directors committed breach of trust,(3) there has been misfeasance and (4) the director has acted ultra vires andthe funds of the company have been applied for such an act.

A director is required to act honestly and diligently applying his mind anddischarging his duties as a man of prudence of his ability and knowled ge would

do. It has been explained in the duties of directors as to what is standard ordue care and diligence expected from him as explained by Justice Romer in ReCity Aquintable Fire Insurance Company.

Any willful misconduct or culpable negligence falls within the category of misfeasance. It was held in Duomatic Ltd, Re-"A director has to act in the way in which a man of affairs dealing with his own



affairs with reasonable care, and circumspection could reasonably be expectedto act....."

A Director is liable to make good with interest all amount paid from time totime out of the funds of the company for the purchase of shares of the

company. He is not entitled to spend money for a purpose not covered by theMemorandum of Association although such payme nt is sanctioned by theBoard of Directors and by the majority of shareholders. A shareholder canmaintain an action against the director to compel them to restore to thecompany its funds employed in transactions that the directors have noauthority to enter into. The funds of the company cannot be used by theDirectors to pay their litigation costs, although these would not have beenincurred if they had not been directors. A Director will, however, not be liablefor any such unlawful act if he had no kno wledge of such payments.

Liability of co-director s defaults: - A director is bound by the maxim delegatus non-potest delegare .Shareholders appoint him because of their faith in his skill, competence andintegrity and they may not have the same faith in a nother person.

It was held in the case of J.K. Industries v. Chief Inspector of Factories that thedirectors being in control of the company s affairs cannot get rid of theirmanagerial responsibility by nominating a person as the occupier of thefactory. The rule is, however, not inflexible. The Act or Articles of Association

of the Company may make a delegation of functions to the extent to which it isauthorized. Also, there are certain duties, which may, having regard to theexigencies of business, properly be left to some other officials. A proper degreeof delegation and division of responsibility is permissible but not a totalabrogation of responsibility. A director might be in breach of duty if he left toothers the matters to which the Board as a whole had to take responsibility.Directors are responsible for the management of the company and cannotdivest themselves of their responsibility by delegating the whole managementto agent and abstaining from all enquiries. If the latter proves unfaithfu l, theliability is that of the directors as if they themselves had been unfaithful.

Tax Liability:- U nder Section 179 of the Income Tax Act 1961, when any private company iswound up and the tax assessed cannot be recovered, then every person whowas a director of the private company shall be jointly and severely be liable forthe payment of such tax. Where the bank account of a Director was frozen forrecovering income tax dues of the Company, it was held in Gurudas Hazra v.



P.K.Chowdhury that it was for the Director to show that the default on the partof the company was not attributable to any breach of duty on his part. Thecase of Peter J R Prabhu v. Asstt Commissioner of Commercial Taxes statedthat apart from any provisions of the taxing statute, arrears of the tax amountare not to be recovered from the directors personally.

Directors with unlimited liability:- The liability of the directors like the shareholders is limited to the extent of theshares held by them remaining unpaid. A limited liabilit y can make the liabilityof any or all of its directors unlimited. A provision to this effect has to becontained in the Memorandum. that a person who becomes director afterincorporation of such a clause will have unlimited liability.

Statutory Liability: - Misleading Prospectus-A director is liable to compensate a person who has subscribed shares on thefaith of a prospectus, which contained untrue statement. The Director shouldcompensate every such subscriber for any loss or damage he may havesustained by reason of such untrue statement in an action in tort and alsounder section 62 of the Act to pay compensate. If the Director discovers amistake in the prospectus, it is his duty to specifically point it out. The Directormay also have to face criminal prosecution for untrue statement in theprospectus. He may be imprisoned for two years and fined Rs.5000.

Inducement to invest- The Directors are liable to criminal prosecution for inducing or attempting toinduce a person by statement or even forecast which is false or misleading toenter into or to offer to enter into any agreement to buy shares of thecompany. They shall be punishable with imprisonment for a term which mayextend to five years, or with fine which may extend to Rs.10,000, or with both.

Maintenance of proper books of accounts: - Where directors manage a company then each director shall be responsible (if there is no managing director) that the company should maintain and keep

proper books of account. Default or non-compliance will make the Directorpunishable with imprisonment for a term not exceeding six months or fine of Rs.100 or both. In the event of winding up, failing to keep proper accounts willmake him punishable with one-year imprisonment and for falsification of bookimprisonment for eight years.



Annual General Meeting: - Directors must hold the meeting even though the accounts are not ready orthe company is not functioning or the management of the business is vested inthe Central Government. The holding of the meeting must be within the periodof 15 months after the preceding annual general meeting (AGM). The Board of Directors shall at the meeting lay a balance sheet and a profit and loss accountfor the financial year. For default, the Directors are liable to be punished wit himprisonment for a term of six months and fine of Rs.1,000.

Liability on winding up: - A Director of a company in liquidation must co-operate with the liquidator inrealizing the assets of the company and distributing them among the creditorsand contributors of the company. If they fail to do so they are liable toimprisonment, which may extend to five years and fine.

Therefore, Directors are liable for theft of the company s property or for falseaccounting. Directors are liable to prosecution on several issues. There aremore than 150 sections dealing with criminal or penal liability of the Directorsand other officers of the company. Some of these provisions have been listedand explained above.

Special statutory protection against liability: - The Act extends special protection against a liability that may have beenincurred in good faith. A good illustration here will be to cite an early case of

Claridge s Patent Ashphalt Co, Re where the Court said that the Directors wereacting for the benefit of the company and took the best advice from thecompany s solicitor and thus were not held liable..

12 . Remuneration

The remuneration payable to the directors of a company, including anymanaging or whole-time director, shall be determined, in accordance the

provisions given below either by the articles of the company, or by a resolution( special resolution if the articles so require ), passed by the company ingeneral meeting and the remuneration payable to any such directordetermined as per the said provisions shall be inclusive of the remunerationpayable to such director for services rendered by him in any other cap acity.However, any remuneration for services will not be so included if the services



are of a professional nature and in the opinion of the Central Government, thedirector possesses the requisite qualifications.

A director may receive remuneration by way of fees for attending eachmeeting of the Board or of any committee thereof ( Sitting Fees ).

A director who is in whole time employment of the company or a managingdirector may be paid remuneration either by way of a monthly payment or at aspecified percentage of net profits of the company or partly by one and partlyby the other. Such remuneration cannot exceed 5 % of the net profits of thecompany, except with the approval of the Central Government in case of onedirector and 10 % for all such directors.

The total managerial remuneration payable by a public company or a privatecompany which is a subsidiary of a public company to its directors and itsmanager in any financial year must not exceed 11 % of the net profits of thecompany calculated in accordance with the provisions of section 349, 350 and351.

In the case of a director who is neither in the whole-time employment of thecompany nor a managing director may be paid remuneration either by way of a monthly, quarterly or annual payment with the approval of the CentralGovernment or by way of commission if the company by special resolutionauthorises such payment. Such special resolution to in sub-section (4) shall notremain in force for a period of more than five years; but may be renewed, fromtime to time, by special resolution for further periods of not more than fiveyears at a time. Remuneration payable to such directors cannot exceed : -

a. if the company has a managing or whole -time director or a manager,one per cent, of the net profits of the company;

b. in any other case, three percent of the net profits of the company.

If any director earns remuneration from a company in excess of the abovelimits without prior approval of the Central Government, he shall refund the

excess to the company and until such repayment, hold the money in trust withhim.

The Company cannot waive recovery of such sum due from the director unlessapproved by the Central Government.

No approval of the Central Government is required in case the remuneration iswithin the limits mentioned in Schedule XIII to the Companies Act, 1956.



No director of a company who is in receipt of any commission from thecompany and who is either in the whole-time employment of the company ora managing director shall be entitled to receive a ny commission or otherremuneration from any subsidiary of such company.

The above provisions pertaining to remuneration do not apply to a privatecompany unless it is a subsidiary of a public company.

Provision for increase in remuneration to require Government sanction In the case of a public company, or a private company which is a subsidiary of apublic company, any provision relating to the remuneration of any director orany amendment thereof, which purports to increase or has the effect of increasing, whether directly or indirectly, the amount of remuneration shallnot have any effect unless :-

i. is within the limits specified in Schedule XIII, where Schedule XIII isapplicable ; or

ii. approved by the Central Government

and the amendment shall become void if, and in so far as, it is disapproved bythe Government.

Increase in remuneration of managing director on reappointment orappointment after Act to require government sanction In the case of a public company, or a private company, which is a subsidiary o f a public company, if the terms of any re-appointment or appointment of amanaging or whole-time director, purport to increase or have the effect of increasing, whether directly or indirectly, the remuneration which themanaging or whole-time director or the previous managing or whole-timedirector, as the case may be, was receiving immediately before suchappointment, the or appointment shall not have any effect unless : -

i. is within the limits specified in Schedule XIII, where Schedule XIII isapplicable ; or

ii.

approved by the Central Governmentand the amendment shall become void if, and in so far as, it is disapproved bythe Government.

Director cannot to hold office or place of profit Except with the previous consent of the company accorded by a specialresolution :-



i. No director of a company can hold any office or place of profit in thatcompany

ii. No partner or relative of such a director ( i.e. a director holding an officeor place of profit in the company ), no firm in which such a director orrelative is a partner, no private company of which such a director is adirector or member, and no director, or manger of such a privatecompany can hold any office or place of profit carrying monthlyremuneration in excess of the prescribed amount ( Rs. 10000/-).

However, the above restrictions are not applicable to the office of managingdirector, manager, banker, or trustee for the holders of debentures of thecompany either :-

i. in the company ; orii. in any subsidiary of the company, unless the remuneration received

from such subsidiary in respect of such office or place is paid over to thecompany or its holding company.

The special resolution required for the above purpose may be passed at thefirst general meeting after the appointment. Such special resolutions willrequired at subsequent re-appointments also on a higher remuneration notcovered by the earlier special resolution.

However, if the monthly remuneration is not less than Rs. 20000/- per month,the special resolution mentioned above has to be obtained prior to theappointment and in addition to the special resolution, approval of the CentralGovernment will also be required for the appointment.

If any office or place of profit under the compa ny or a subsidiary thereof is heldin contravention of the above provisions, the director, partner, relative, firm,private company or, manager shall be deemed to have vacated his office, witheffect from the day following the date of general meeting menti oned above.Such person will also be liable to refund to the company any remunerationreceived, or the monetary equivalent of any perquisites or advantage enjoyed

by him, in respect of such office or place of profit. The company will not beable to waive recovery of such amounts, except with the approval of theCentral Government.

Any office or place in a company shall be deemed to be an office or place orprofit under the company for these provisions :-



a. in case the office or place is held by a director, if the director holding itobtains from the company anything by way of remuneration over andabove the remuneration to which he is entitled as such director,whether as salary, fees, commission, perquisites, the right to occupy freeof rent any premises as a place of residence, or otherwise;

b. in case the office or place is held by an individual other than a director orby any firm, private company or other body corporate, if the individual,firm private company or body corporate holding it obtains from thecompany anything by way of remuneration whether as salary, fees,commission, perquisites, the right to occupy free of rent any premises asa place of residence, or otherwise.

None of the above provisions apply to a director appointed by the CentralGovernment u/s 408 of the Companies Act, 1956

1 3. Managing Director

Managing Or Whole-time Director Or ManagerA managing director, as defined in Section 2(26), means a director who isencrusted with substantial powers of management which would not otherwisebe exercisable by him. The "substantial powers" of management may beconferred upon him by virtue of an agreement with the company, or by aresolution of the company or the Board or by virtue of its memorandum andarticles. The powers so conferred are alterable by the company. He is alsoremovable the same way as he was appointed irrespective of the fact that hisappointment has been approved by the Central Government. But if he isprematurely removed from office he is entitled to compensation. A managingdirector is an employee of the company, but not to the extent so as to beentitled to preferential payments.

It is an essential requirement of his office as "managing director" that heshould hold the office of a director. A managing director who is not a direc tor

is contradiction in terms.

A managing director occupies the dual capacity of being a director as well asemployee of the company. Thus for example, the Supreme Court observed thathe can be regarded as a principal employer for the purposes of the ESI Act,1948.



The day to day management is entrusted to the managing director who canexercise powers of management without referring to the Board. It is necessarythat the articles must provide for such an appointment being made .

A managing director who was prosecuted for default under S. 220 contended

that he was not liable as he had resigned before the last date for filingaccounts. The court held that a managing director combines in himself twocapacities, namely, manager and director. The capacity as manager cannot beterminated by merely sending up resignations. It becomes effective only whenthe company accepts the resignation and relieves him from his duties (on factsheld that despite resignation, he continued to be managing director).

In our view the observation that a managing director holds two offices namelythat of manager and of a director is not correct. The concept of a 'manager' asdefined by the Act is different from that of managing director. A managingdirector as defined by the Act is a director who is entrusted with substantialpowers of management. It is, however, true that a managing dir ector mayresign his office and continue to be an ordinary director. His resignation asmanaging director becomes effective only when accepted by the company.

A managing director cannot be equated with an ordinary director. Section2(26) and S. 2(13) show the intention of the legislature to treat the two asseparate categories. Therefore, when the term of a managing director expires,he cannot continue as a managing director without being reappointed. Sishu

Ranjan Dutta v. Bhola Nath Paper House Ltd., (1983) 53 Com Cases 883, 898(Cal).

A person does not acquire the status of a manager or managing director onlyon being appointed as a director. Deen De yalu, T. v. Sri Bezwada Papi Reddy,(1984) 2 Comp LJ 396 (AP).

The question whether a managing director, inasmuch as he is both a 'director'and 'employee' should in his capacity of employee be considered a 'servant' oragent of the company is unimportant for purposes of the Companies Act,

though it may be relevant for determining whether his remuneration is salaryor business income for purposes of the Income-tax Act.

The Civil Court will not grant an injunction to restrain the company frominterfering with a managing director carrying out the duties of managingdirector who is removed from his office. Joginder Singh Palta v.Time Travels(P.). Ltd., (1984) 56 Corn Cases 103 (Cal).



Where, for recovery of dues from the company, a decree was passed againstthe company as well as its managing director, it was held that the managingdirector was not the judgment-debtor in his individual capacity and, therefore,he was not liable to be arrested and detained in civil prison for enforcement of the decree. Maruti Lid. v. Pan India Plastic P, Ltd., (1995) 83 Com Cases 888(P&H).

Managing Or Wholetime Director, Link With Nature Of Duties, NotDesignations Department's Clarification:

Whether a director is to be regarded as a whole-time director or as a managingdirector of the company would depend on the nature and extent of the dutiesentrusted to him and that the designation under which the appointment ismade would no! make any difference in this regard. Thus, if a director isentrusted with managerial functions, he would be in the position of aManaging Director notwithstanding the fact that he ma y be designated as atechnical adviser or as a technical director of the company. [Fou rth AnnualReport Year ended 31st March, 1960.

Company May Have More Than One Managing Director Department'sClarification-

"Section 2(26) defines "Managing director" as a director who is entrusted withsubstantial powers of management which term refers to the nature of the

powers and not the quantum thereof. Section 2(24) of the Companies Act,1956, on the other hand has defined the word manager' as an individual whohas the management of the whole or substantially the whole of the affairs of acompany. Thus the managing director of a company may be entrusted withsubstantial power of management but not necessarily of the whole orsubstantially the whole of the affairs of a company. A company may, therefore,have more than one managing director. [Departmen t's Clarification F. No.8/16/(1)/61-PR].

Other Statutory Provisions.-Section 269 makes it obligatory for a company

having capital of a sum as may be prescribed (w.e.f. 18 -9-1990 Rs. Five croresor more) to appoint a managing director or wholetime director or manager.Section 267 disqualifies certain persons from being appointed as managingdirector. Section 316 prescribes the number of companies inwhich a person can be appointed as managing director at the same time;section 317 restricts the maximum term of appointment to five years. Theremuneration of a managing director is now governed by section 309 and



Schedule XIII.

Procedure Of Appointment Section 269 has been recast by the amendment of 1988. In the case of publiccompanies or their subsidiary private companies, Teaching a figure of paid -upshare capital which may be prescribed [Rs 5 crores or more] the appointmentof a managing director, whole -time director or manager has been madecompulsory. The appointment has to correspond with the conditions specifiedin Parts I and II of Schedule XIII, which parts are subject to the provisions of Part III. The appointment and remuneration require approval of shareholdersin general meeting. The auditor of the company or company secretary has tocertify that requirements have been complied with. A return of theappointment in a prescribed form must be filed with the Government within90 days. Approval of the Central Government is not necessary in such cases.

But if the appointment does not comply with the sche dule, the approvalbecomes necessary. Application for approval must be made within 90 days.The Central Government may not accord the approval if it is satisfied that thecandidate is not a fit and proper person for the post and his appointment is notin public interest and the terms and conditions of the appointment are not fair.The Government may accord the approval for a shorter period than proposed.

If there is no approval, the appointee should vacate the office from the date of the communication of the refusal to the company, failing which he incurs apenalty of Rs 500 for every day of usurpation of the office.

Disqualification (1) A person who is an undischarged insolvent or has at any time beenadjudged insolvent. (2) A person who suspends or has at any time suspended,payment to his creditors or makes or has made a composition with them. (3) Aperson who is or has been convicted by a court of an offence involving moralturpitude. The first Part of Schedule XIII gives the list of statutes and providesthat any person convicted for violating them and sentenced to imprisonmentor fine up to Rs 1000 shall not be appointed without the approval of theCentral Government.

Where a person is already a managing director of another company he can beappointed only with the unanimous resolution of the board of directors. 16The Central Government may permit Any person to be appointed managingdirector of more than two companies if the Government is satisfied that it isnecessary that the companies should, for their proper working, function as asingle unit and have a common managing director [S 316(2), proviso]



The maximum term of appointment can be five years at a time and a new termcannot be sanctioned earlier than two years from the date on which it is tocome into force. The terms of appointment can be changed, when they are tobe different from those prescribed by Schedule XIII, only with the approval of the Central Government.

The remuneration of a managing director cannot exceed five per cent of thenet profits and if there are more than one managing directors, ten per cent forall of them together, [S. 309] Where a managerial personnel is working in morethan one company, he can draw remuneration from one or both companiesprovided that the total remuneration drawn from the companies does notexceed the higher maximum limit admissible from any one of the companies of which he is a managerial personnel.

Conclusion: - Accountability is an important element of Board effectiveness. There should besome mechanism for evaluating the performance of the directors. The extentof liability of a director would depend on the nature of his directorship. Inapplying the general equitable principles to company directors, four separaterules have emerged. They are (1) that directors must act in good faith in whatthey believe to be the in the best interest of the company (2) they must notexercise powers conferred upon them for purposes different from those forwhich they are conferred. (3) that they must not fetter their disc retion as tohow they shall act and (4) that without the informed consent of the company,

they must not place themselves in a position in which their personal interestsor duty to other persons are liable to conflict with the duties to the company.Three propositions in regard to the duties and responsibilities of directors:

(1 ) a director need not exhibit, in the performance of his duties, a greaterdegree of skill than may reasonably be expected from a person of hisknowledge and experience(2 ) a director is not bound to give continuous attention to the affairs of hiscompany, his duties being of an intermittent nature to be performed atperiodical board meetings or committee meetings.(3) in respect of such duties as may be properly left to some other officialhaving regard to the exigencies of business or the articles of association of thecompany, a director is, in the absence of grounds for suspicion, justified intrusting that official to perform such duties honestly.



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