Directors – Appointment, Duties, Rights, Liabilities – Company Law

A director is the member of the Board of Directors.

“Director means a director appointed to the board of a company” sec 2(34)

According to the companies act states the board of directors in relation to a company refers to a collective body of the directors of the company. Sec 2(10)

Meaning of Director

A director is one of those persons, who are responsible for directing, governing and controlling the policy or management of a company. All directors collectively are called as Board of Directors or Board.  They are the top administrative organ and the company can operate only through them. They are the brain of the organization responsible for all policy making and decision making activities.

Appointment of Directors

The following guidelines have been established by the companies act regarding the appointment of directors. 

  1. The articles of a company may list the names of the first directors in its articles of association, if no names are mentioned in the articles, the subscribers of the memorandum become the first directors.

  2. Directors can be appointed by the initial members of the company at its first general meeting.

  3. A company may appoint an additional director if it needs.

  4. An Alternate Director may be appointed by the board during the absence of a director for a period not less than 3 months

  5. A vacant position of director can be filled by the members of the board on temporary terms.

  6. Nominee Director – It refers to any person nominated as director by a financial institution or a government body who holds shares in the company. He must be appointed by the company.

  7. On complaint against oppression or mismanagement in a company, the tribunal may order the company to appoint the required number of directors as directed by the Tribunal.

  8. A director may be appointed by the central government under certain circumstances.

  9. A director may be appointed by a single transferable vote system or cumulative transferable vote system

Powers of Directors

Statutory Powers of Directors

Powers must be exercised by Board of Directors in the general meeting of the company by passing a resolution.

  1. The power to make call on shares in respect of unpaid money.

  2. The power to authorize lack of shares

  3. The power to issue debentures, whether in or outside india.

  4. The power to invest in funds

  5. The power to borrow money otherwise than on debentures

  6. The power to make loans or give guarantee in respect of loans. But a banking company does not require any resolution by the board.

  7. The power to approve the financial statement and board’s report.

  8. The power to diversify the business of the company.

  9. The power to approve amalgamation, merger or reconstruction.

  10. The power to take over a company or acquire a company or substantial stake in another company.

Other powers –

  1. Power to fill casual vacancy 9sec 161)       

  2. Power to appoint the first auditor of the company

  3. Power to make political contribution.

  4. Power to appoint alternate directors. (sec 161)

  5. Power to appoint additional directors. (sec 161)

  6. Power to declare interim dividend. ( 123(3))

  7. Power to appoint or remove key managerial personnel (KMP)

  8. Power to declare solvency , where the company winds up voluntarily.

  9. Power to recommend the rate of dividend on the shares of the company subjected to approval by shareholder of the company

Powers only with a resolution – 

  1. To sell or lease any asset of the company

  2. To allow time to the director for the repayment of the loan

  3. To borrow money in excess of paid up capital and free reserves

  4. To appoint a sole agent for more than 5 years

  5. To issue bonus shares and for reorganization of share capital

  6. To contribute money for charitable purposes exceeding Rs. 50,000 or 5% of the average profits of 3 years whichever is greater

Managerial powers of Directors

The Board acts in the interest of shareholders with the following powers – 

  1. Power to contract with the third party

  2. Power to recommend dividend

  3. Power to allot, forfeit or transfer shares of company

  4. Power to take decision regarding terms and conditions for the issue of debentures

  5. Power to form policy and to issue instructions for the efficient running of the business

  6. Power to appoint Managing Director, Manager, Secretary of the company.

  7. Power of control and supervision of work of subordinates

Duties of Directors

General Duties of Directors.

  1. To form policy and determine objectives of a company

  2. To delegate power to any committee if the Articles permit

  3. To issue instructions to subordinates for the implementation of policy to review company’s progress

  4. To appoint their subordinate officer, managing director, Manager, Secretary, other employees

  5. To act in accordance with the Articles of the company providing that articles are subject to the provisions of this Act. (sec 166(1))

  6. To act in Good faith in order to promote the objects of the company. However the promotion of the objects should be for the benefit of the company.

  7. To perform duties with Due and reasonable care and Diligence.

  8. Duty to not to achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives.

Specific Duties of Directors

  1. Must disclose his shareholding in a company.

  2. Must disclose his interest in contracts of the company

  3. Must disclose their name, address and occupation

  4. Duty to take up qualification shares within 2 months after his appointment

  5. Decide the minimum subscription and issue prospectus. It must not contain any false or misleading statement

  6. The Board of Directors or requisition must be ready to call on an extraordinary general meeting       

  7. Duty to call statutory and annual general meeting of the company

  8. To ensure full and correct disclosure in prospectus of all matters as required by law.

  9. To sign the prospectus before it has been delivered to the Registrar.(sec 26)

  10. To deliver the prospectus to the Registrar before the prospectus is issued to the public.

  11. To deposit application money in a scheduled Bank. They shall not utilize money other than purposes mentioned in the Act.

  12. To file Return of Allotment of securities with the Registrar.

  13. To declare dividend and arrange for the payment

  14. To file with registrar the reports and resolutions as required by the act.

  15. To issue forfeit and transfer shares

  16. To perform all other duties as assigned by the Act

Liabilities of a Director

Liability against Company

The directors will have to make good for any loss on account of –

  1. an ultra vires act where the directors have entered into a contract beyond their powers. In such case directors are personally liable for the loss caused to the company.

  2. breach of trust where the directors make a secret profit out of the business

  3. for negligence or for not performing his duties honestly and carefully

  4. For dishonest act to make personal profits

  5. For the activity of the co-directors

Liability toward 3rd parties

The directors will be personally liable towards the 3rd parties –

  1. For any mis-statement in the prospectus for acting fraudulently, the directors shall be liable to pay compensation to every person who subscribe for shares on the faith of such prospectus.

  2. For the failure to repay application money on non- receipt of minimum subscription.

  3. Failure to repay Application money on refusal to list shares by the stock exchange.

  4. For acting in their own name without mentioning the name of the company

  5. For acting beyond the powers of the company

  6. When the liability has been made unlimited by the Memorandum

  7. For any liability at the company at the time of winding up

Criminal liability of Directors

Will be liable with a fine and imprisonment or both for fraud of non-compliance of any statutory provision.

  1. For mis-statement in prospectus

  2. Failure to file return on allotment with the registrar

  3. Failure to give the notice to the registrar for conversion of share into stock

  4. Failure to issue share certificate and debenture certificate

  5. Failure to maintain register of the members and register of debenture holders

  6. Default is holding Annual General Meeting

  7. Failure to provide Annual accounts and Balance Sheet

  8. For holding the office of di