The well-being of a company lies in the hands of the directors, who are also accountable for the firm’s and the shareholders’ interests. Directors are fundamentally fiduciary agents who owe responsibilities to the company. Directors are hired by the company’s shareholders to administer the company’s operations in the best interests of the shareholders. Furthermore, no company can achieve success without having excellent and honest directors, therefore corporate success can only be reached if the company’s directors fulfill their obligations and completely enforce the director’s duties. As a result, directors play a critical role in every corporate governance mechanism. The general obligations of the director are founded on certain common law norms and equitable principles.
Modern shareholders are more conscious of their obligations than ever before and they wield more influence than anybody can imagine. With the arrival of the Shareholders Revolution, there has been a democracy in business matters in which the shareholders are the supreme power that selects its cabinet in the form of directors to run the show and create money for them. The directors are given the appropriate authority, but also additional responsibilities, during the process. The Companies Act of 2013 has guaranteed that this balance of power and duties is preserved to the greatest degree possible for the benefit of the shareholders and to ensure corporate governance. It employs both regulatory and punitive measures, including rigorous judicial measures, to guarantee that regulations are effectively obeyed and to avoid any mishaps in corporate governance, as well as to protect the organization’s legal integrity.
Corporate governance refers to a collection of principles, ethics, values, morals, rules, laws, and processes, among other things. Corporate governance provides a structure in which directors of a company are charged with the tasks and responsibilities pertaining to the management of the company’s activities.
The term “governance” denotes “control,” as in “controlling a company, an institution, etc.,” or “corporate governance,” as in “governing or controlling corporate entities,” such as ethics, values, principles, and morals. To have excellent corporate governance, the director must satisfactorily perform his/her duties towards the company’s owners (shareholders), creditors, staff, clients, government, and society at large. Corporate governance aids in the establishment of a system in which a director is entrusted with the tasks and obligations of the company’s operations. For successful corporate governance, its rules must be such that the company’s directors do not abuse their authority, but rather understand their obligations and responsibilities towards the company and act in the best interests of the firm in the largest context.
The idea of ‘corporate governance’ is not a goal in itself; it is only the beginning of a company’s growth for long-term profitability.
The term “director” is defined under Section 2 (34) of the Companies Act 2013 as “a director appointed to the Board of a company,” where “Board of Directors” or “Board” in relation to a Company refers to the collective body of the firm’s directors. According to Chapter XI, Section 149 of the Companies Act 2013, every company must have a Board of directors, the composition of which should be as follows:
In every Company format, a maximum of 15 directors can be appointed (OPC, Public, Private). By passing a special resolution in the company, the number of directors can be increased above 15. Out of all the appointed directors, one must have resided for more than 182 days in India in the preceding calendar year. Also, at least one of the directors among all the directors should be a woman director.
The Companies Act of 2013 recognizes the concept of an independent director, which was previously solely part of the listing agreement. It refers to a director who is not a full-time director, the Managing director, or a nominee director and meets the qualifications outlined in Section 149 of the Act.
According to sections 266A and 266B of the Companies Act of 1956, a Director Identification Number (DIN) is a one-of-a-kind identification number assigned to existing and/or future directors of any incorporated company. According to the requirements of the Companies Act, every director shall be selected by the company in general meetings, provided they have been assigned the Director Identification Number (DIN) and have submitted a statement that he/she is not disqualified to become a director.
The Board of Directors appoints an additional director to serve until the next general meeting using the Board’s inherent power. The Board of Directors may designate an alternate director to function as a director in absence for a term of not less than three months and not more than the allowed period for the director who is being replaced.
The Board may appoint as a director any individual nominated by any institution in accordance with the terms of any extant legislation or other government regulation or shareholdings, such directors are known as nominated directors.
As per Principle of Proportional, representation the articles of a company may allow for the appointment of not less than two-thirds of the total number of directors of a company, and such appointments may be made once every three years and casual vacancies of such directors shall be addressed as specified in sub-section (4) of Section 161.
A company’s board of directors is largely responsible for:
Most corporations have not included a separate article or passed a resolution stating that directors do not have the authority to conduct certain tasks. However, the Act requires a resolution at a general meeting to specify this sort of power. The following decisions should be taken by the directors, but generally also requires shareholder approval through a resolution:
The directors are granted the above-mentioned powers collectively. Actually, the board is to delegate authority to the concerned director in order to do this. This is permitted by both the Model Articles and Table A of the Act.
According to Section 149(3) of the Companies Act of 2013, every company must have one director who has spent at least 182 days in India in the previous calendar year.
According to Section 149(6), an independent director with reference to a company is one who is not a managing director, whole-time director, or nominee director. Companies that must appoint an independent director are mentioned in Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014. The following companies must nominate at least two independent directors:
Individuals qualified for independent directorship:
2. Who is not connected to the company’s promoters or directors, or its HSA companies;
F. Who holds any other qualifications that may be needed.
Some general points:
An independent director can serve for up to 5 consecutive years. He is also eligible for reappointment by passing a special resolution, and this requires his reappointment in the Board’s Report. However, he may not hold office for more than two consecutive terms, and he shall be ineligible to be appointed after three years after ceasing to be an independent director.
According to Section 149(9) of the Act, an independent director is not eligible for stock options. They may, however, be remunerated in the form of a fee as per Section 197(5) of the Act. Sitting fees for Board of Directors and other committee meetings must not exceed Rs. 1,00,000 per meeting.
A single director can be appointed by small shareholders in a listed company. However, this action requires an appropriate procedure, such as issuing a notice to at least 1000 shareholders, or one-tenth of the total shareholders.
According to Section 149 (1) (a) second proviso, certain kinds of corporations must have at least one female director on their board. Such companies include any listed company and any public company, having:
Section 161(1) of the 2013 Act allows a company to designate any individual as an additional director.
According to Section 161(2), a company may appoint an alternate director if the Articles of Incorporation grant such authority to the company or if a resolution is approved. An alternate director is appointed if one of the company’s directors is abroad from India for at least three months and in his/her absence, the alternate director is appointed.
A person who is not appointed to the Board but whose instructions the Board is accustomed to act is responsible as a director of the company unless he or she is offering advice in his or her professional role.
They can be nominated by certain shareholders, third parties via contracts, lending public financial institutions or banks, or the Central Government in cases of tyranny or mismanagement.
An executive director of a company can be either a whole-time director (one who devotes his whole working hours to the company and has a significant personal interest in the company as his source of income) or a managing director (i.e., one who is employed by the company as such and has substantial powers of management over the affairs of the company subject to the superintendence, direction, and control of the Board). A non-executive director, on the other hand, is a director who is neither a whole-time director nor a managing director.
Section 166 of the Companies Act 2013 stipulates the following duties of the directors of a Company:
The Companies Act of 2013 additionally assigns specific obligations to independent directors in order to ensure the Board’s independence and fairness. An independent director is a member of the Board of Directors who does not own any shares in the company and has no financial ties to it other than receiving the sitting fees. According to the Companies Act of 2013, Schedule IV, an independent director should:
For any and all acts harmful to the company’s interests, the directors might be held jointly or collectively liable. Despite the fact that the director and the Company are different entities, the director may be held responsible on behalf of the Company in the following situations:
A person is ineligible to be appointed as a director of a corporation if:
It is a case involving the responsibilities of directors of a company in which it was discovered that the directors of the insurance company had delegated almost entirely the administration of the company’s operations onto the chairman of the company, which was the primary cause for the commission of frauds. It was thus decided that in the course of their work, the directors of the firm must observe the duties of care and skill required.
In this case, the Court held that directors are liable to the company if it can be proven:
The firm borrowed money in excess of its borrowing capacity, resulting in ultra vires debts. The directors were found to have breached their warranty. When the directors made an ultra vires contract with a connected person and the members failed to rectify the same, the directors were held responsible. Such a contract was not held to bind the company and such a connected individual was given the liberty to sue the directors for breach of warranty.
The main issue in this case, was, when presented before a court, was there a distinction between a person’s personality and that of a company. It was therefore held that the board of directors was the corporation’s only brain and that the company could only act via them. Nonetheless, the company could be a legal person like a natural person, in many instances. It has the ability to engage in contracts and sue or be sued in its name, either by its members or by outsiders. However, it is not a citizen who may enjoy the Fundamental Rights guaranteed by the Indian Constitution.
An analysis of the provisions of the 2013 Companies Act reveals that the 2013 law is effective in addressing the gaps left by the preceding legislation, the 1956 Act. Though the 2013 Act was implemented in a phase-wise manner, and it wasn’t until 2019 that the 1956 Act was entirely abolished. The 2013 Act has effectively modernized India’s corporate law framework, putting it on par with corporate regulation throughout the world. Moreover, the 2013 Act’s provisions relating to the directors of a company are more clear and evident when compared to those of the 1956 Act.
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