CHAPTER 2

APPOINTMENT OF DIRECTOR’S THEIR DISQUALIFICATION

AND REMOVAL

INTRODUCTION:

Who is the DIRECTOR? “Director includes any person occupying the position of the

director by whatever name called”. Director may be defined as an individual who directs

controls or manages the affairs of the company. The directors of the company collectively

are referred to as the “board of directors” or “board”1.

Women Director

A new provision has been added in the companies Act 2013, that at least one women

director shall be in the board of such class or classes of companies.

Director to stay in India

Every Company shall have at least one director who has stayed in India for a total period

of not less than 182 days in a previous calendar year.

Qualification of Directors

No educational or other qualifications are required in order to become director of the

company whether public or private. Similarly, the Companies act, 2013, does not

prescribe any requirement as to age limit for becoming a director. The only condition is

as per section 149. Nobody corporate, firms or associates can become a director. Only

individual can be a Director of a company because the office of a director is office of

responsibility, accountability and position of trust. Section 164 negatively stipulates the

eligibility requirement for becoming a director by providing certain disqualifications.

1 Sec. 2(13) of Indian companies Act, 2013.

Number of Directors As per section 149, every public company shall have 3 directors and

every other company shall have at least 2 directors and one in one person company.

Maximum no. of directors in case of private company shall be 15. It could be Central

Govt. approval not required in case of any increase in number. The act does not prescribe

any maximum number of directors for public company also but if the maximum no of

directors exceed 12, prior approval of central Govt. would be required. Thus the approval

of central government will be necessary for the “increase” in number of directors, and not

for the “appointment”.

Appointment of Directors: The appointment of directors is accordingly regulated by ihe

act. Directors may be appointed in following ways:-

By the articles as regard first directors2

By the company in general meeting3

By the Directors4

By the third parties5

By the principle of proportional representation6

By the articles as regard first director's section 152: The first directors are usually

named in the articles. The articles may also provide that both the number and the

names of the first directors shall be determined in writing by the subscribers of the

memorandum. Where the company has no articles or the articles are silent regarding

the appointment of directors, the subscribers to the memorandum who are individuals

shall be deemed to be first director until the directors are appointed at first annual

general meeting. If all the subscribers to the memorandum happen to be bodies

corporate, none of the subscribers can be deemed to be directors and the company

will have no directors until the first directors are appointed under section 255.Where

2 Sec. 152 of Indian Companies Act, 20133 Sec 152 of Indian Companies Act, 20134 Sec 161 of Indian Companies Act, 2013.5 Sec 151 of Indian Companies Act, 2013.6 Sec 163 of Indian Companies Act, 2013.

the person named in the list of first directors do not assume the office, for any reason

for example, death, then it is the duty of the subscribers of the memorandum to hold a

meeting for appointment of directors.

Appointment by the company Section 152: Appointment of subsequent directors is

made at every annual general meeting of the company. Section 152 provides that not

less than two third of the total number of directors of a public company or a private

company must be appointed by the company in general meeting. These directors must

be subject to the retirement by rotation. Section 151 prohibits the placing f the

composite motion for the election of two or more directors before the general

meeting. The purpose of prohibition of composite motion is that it will enable

shareholders to accept or reject a particular individual standing for directorship

without being compelled to accept or reject all of them.

Section 152 of the companies Act requires every director to give his consent to the

directorship. There are two types of Consents:

1. Consent of the candidate for Directorship to be filed with the company 1524( 1)

2. Consent to act as director to be Hied with the registrar 152(2) . The consequence

of a director continuing to act as such without filing his consent within the period

specified would attract the penalty under section 629A i.e. Rs. 500 Every day.

Such consent may however be filled after the expiry of the said period on

payment of additional fees as contemplated by section 611(2). It is further open to

the central government u/s 637B to condone the delay in filling consent.

BY THE DIRECTORS The directors are empowered to appoint :-

Additional directors

Alternate directors

Directors filling casual vacancy

ADDITIONAL DIRECTORS The board of director may appoint additional directors

from time to time if so authorized by the articles .The number of directors and additional

directors must not exceed the maximum strength fixed for the board by the articles. The

additional directors shall hold office only up to the date of next annual general meeting.

ALTERNATE DIRECTORS The board of directors may appoint an alternate director if

authorized-By the articles-By a resolution of the company at general meeting An

alternate director acts in the place of a director who is absent for more than three months

from the state in which board meetings are held. He must vacate the office on the return

of the original director.

CASUAL VACANCY Where the office of any director appointed by the company in

general meeting is vacated before the expiry of his term the director may fill up the

vacancy at the meeting of board. Any vacancy other than one caused by retirement of a

director by rotation is a casual vacancy. Such a vacancy may occur by reason of death,

resignation, bankruptcy, or disqualification. The director so appointed will hold office till

the end of the term of the director in whose place he is appointed.

Appointment by the third parry7: Section 151 permits that one third of the total

number of directors of a public company or a private company which is subsidiary of a

public company to be appointed by parties other than share holders on a non-rotational

basis. The articles may give right to debenture holders, financial corporations or banking

companies who have advanced loans to the company to nominate directors on the board

of company. The number of directors so nominated should not exceed one third of the

total strength of the board. They are not liable to retire by rotation.

Appointment by proportional representation: Directors of the company are generally

appointed by a simple majority of shareholders and a substantial minority cannot succeed

in placing even a single director on the board. Section 163 intends to protect the interests

of minority shareholders by giving them an opportunity to place their nominees on the

board. The articles of the company may provide that the appointment of not less than 2/3

7 Section 255 of Companies Act, 2013

of the total number of directors of the public company shall be according to the principle

of proportional representation.

Appointment by small shareholder: A small shareholders means a shareholder holding

shares nominal value of Rs.20, 000 or less he may be a holder of equity share or

preference share or both. Appointment of Small Shareholder director is not mandatory as

per sec 151 of the Companies Act 2013 Applicability: The Provisions relating to

appointment of a small shareholder Director apply to a company only if all the following

conditions are satisfied: (a) The Company is Public Company(b) The Paid Up Capital of

Company is Rs. 5 crore or more ( c) The number of Small Shareholders in such a

company is 1000 or more

Appointment of independent Directors: Manner of selection of independent directors

and maintenance of data bank in independent directors.—(1) Subject to the provisions

contained in subsection (5) of section 149, an independent director may be selected from

a data bank containing names, addresses and qualifications of persons who are eligible

and willing to act as independent directors, maintained by anybody, institute or

association, as may by notified by the Central Government, having expertise in creation

and maintenance of such data bank and put on their website for the use by the company

making the appointment of such directors:

Provided that responsibility of exercising due diligence before selecting a person from the

data bank referred to above, as an independent director shall lie with the company

making such appointment.

(2) The appointment of independent director shall be approved by the approved by the

company in general meeting as provided in sub-section (2) of section 152 and the

explanatory statement annexed to the notice of the general meeting called to consider the

said appointment shall indicate the justification for choosing the appointee for

appointment as independent director.

(3) The data bank referred to in sub-section (1), shall create and maintain data of

persons willing to act as independent director in accordance with such rules as-may be

prescribed.

The Central Government may prescribe the manner and procedure of selection of

independent directors who fulfil the qualifications and requirements specified under

section

Different Kinds of Directors in Company

Managing Director: Managing Director means a director who: a By Virtue of an

agreement with the company or by resolution passed by the company. By Resolution

passed by its Board of Directors. By virtue of its MOA or AOAIs entrusted with the

substantial powers of management which would not otherwise exercisable by him, and

includes a director occupying the position of managing director, by whatever name

called. Provided further that a managing director of a company shall exercise his power

subject to control & directions of its Board of Directors.

Whole Time Director: whole time director is not defined by the companies act. As per

Section 196, whole time director includes a director in whole time employment of a

company. The Department of Company Affairs Clarified that a whole time employee

appointed as a director will be a whole time director only if substantial powers of

management are vested with him.

Manager: Manager means an individual who subject to the control & direction of board

of directors has the management of the whole or subs the whole of the affairs of the

company. And includes the director or the any other person occupying the position of

manager, by whatever name called, and whether under a contract of service or not. A

manager may or may not be a director of a company. Company cannot have

simultaneously two managers. A Company cannot at a same time employ a managing

Director and a manager. However companies can simultaneously manage the whole time

director. Only an individual can be appointed as a manager. No firm or body corporate

can be appointed as a manager.8

Disqualification of Director Under Section 164 of The Companies Act, 2013

The Company has no physical existence but only legal existence. In view of this the

management of its affairs is entrusted to its directors. The Board of Directors may

appoint a person to an office lo carry out certain functions. Such a person can be regarded

as an Officer. Both the word Director and Officer are defined under the Companies Act,

2013.9

“Director includes any person occupying the position of a director.”10 According to the

clarification of Department of Company Affairs, the Scheme of the Companies Act, 2013

shows that the ultimate control and management of the affairs of the company vests in the

Board of Directors.

Section 2 (59) states “Officer includes any director, manager or secretary or any person in

accordance with whose terms or instructions, the Board of Directors or any one or more

of the Directors is or are accustomed to act. A person who is accustomed to act under the

directions or instructions of director is referred to as “Shadow Director.”

The scheme of the Companies Act, 2013 is such that it attempts to transfer the ultimate

authority to the shareholders and vests effective authority in day-to-day matters in their

elected representatives viz. Directors.

To ensure that the management of the company vests in the right kind of people, Section

of the Companies Act, 2013, lays down grounds on which a person becomes disqualified

for being director of a company. A person cannot be disqualified for appointment as a

director of a public company on any other ground. However, a private company may by

its Articles of Association, provide for additional grounds for disqualification of

directors.8 www.companylawclub.co.uk/topics/directors_duties.shtml9 34 Grundy v. Briggs, (1910)1 Ch 44410 Sec 2(13) of Companies Act, 2013.

The Companies (Amendment) Act 2000 has prescribed additional disqualification of a

director by-introduction of sub-section (g) to the section 169 (i) of the Companies Act,

2013. The purpose of the amendment is to disqualify certain persons from directorship in

public companies. Section 169 of the Companies Act, 2013 states that a person shall not

be capable of being appointed as director of a company, if (a) he is of unsound mind; (b)

he is an undischarged solvent; (c) he has applied to be adjudicated as an insolvent and his

application is pending; (d) he has been convicted by a court for any offence involving

moral turpitude; (e) he has not paid any call in respect of the shares of the company held

by him; (f) an order disqualifying him for appointment as director has been passed by the

Court in pursuance of Section 188 of the Companies Act 2013 and is in force; (g) such

person is already a director of a public company.

(A) has not filed the annual accounts and annual returns for any continuous three

financial years commencing on and after the first day of April, 1999: or

(B) has failed to repay its deposit or interest thereon on due date or redeem its

debentures on due date or pay dividend and such failure continues for one year or more:

Provided that such person shall not be eligible to be appointed as a director of any public

company for a period of five years from the 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 its debentures on due date or pay

dividend referred to in clause (B).”

Thus, a company proposing to appoint or reappoint any person as director will have to

satisfy itself as to whether any such person has attracted disqualification in terms of

Section 164 (I) (g). The Auditors' Report shall also state that whether any director is

disqualified from being appointed as a director under Section 164 (1) (g). Auditor should

require the director to submit the written representation in Form ‘DD-A’ as prescribed

under The Companies (Disqualification of Directors Under Section 164 (1) (g) of The

Companies Act, 2013) Rules, 2003, as on the balance sheet date as to whether or not each

public company of which he is a director has not defaulted in terms of Section 164 (1)

(g). Auditors should also insist that the written representation should be taken on record

by the Board of Directors of the Audited Company.

Disqualification Applicable For Appointment of A Director Of a Private Company

Disqualification under section 164 (3) is applicable for appointment of directors both in

public as well as private companies. Thus, a person who has attracted disqualification,

will not be capable of being appointed as a director even of a private company.

Date on Which The Disqualification Has To Be Considered:

Disqualification u/s 164 (3) should be considered on the following dates:

1. A Company intending to appoint any person as an additional director will have to

determine whether such person has attracted disqualification as on the date of

board meeting at which the appointment is considered.

2. Any company, which intends to appoint any person as a director for the first time

or reappoint any director, by resolution at the general meeting, will have to

determine whether such person has attracted disqualification as on the date of

such general meeting.

3. The Auditor is required to report on the accounts as on the balance sheet date.

Disqualification Entail Vacation of Office

Section 167, prescribes only the disqualification of director, while Section 167 prescribes

when the office of director shall become vacant. Since Section 283 is not amended, the

disqualification u/s 164 (3) will not entail vacation of an office by a director. Only

implication will be that he cannot be appointed as a fresh director in any company nor

can he be re-appointed after he retires by rotation or otherwise.

Duty of the Company to Intimate

Whenever a company fails to file the annual accounts and returns, or fails to repay any

deposit, interest, dividend, or fails to redeem its debentures, as discussed above, the

company shall immediately file a return in duplicate in Form ‘DD-B’ prescribed under

The Companies (Disqualification of Directors Under Section 167 of The Companies Act,

2013) Rules, 2003, to the Registrar of Companies, furnishing therein the names &

addresses of all the Directors of the Company during the relevant financial years, within

30 days of the failure that would attract disqualification u/s 164.

Remuneration of Director:

Meaning of remuneration

The remuneration includes pay, compensation, or reward for work, etc. The word

remuneration is defined in the explanation appended to section 197 of the Companies

Act. Accordingly, for the purposes of sections 197, remuneration shall include the

following:—

(a) any expenditure incurred by the company in providing any rent free

accommodation, or any other benefit or amenity in respect of accommodation, free of

charge, to any of the company's directors and manager;

(b) Any expenditure incurred by the company in providing any other benefit or

amenity free of charge or at a concessional rate to any of the company's directors and

manager;

(c) Any expenditure incurred by the company in respect of any obligation or service,

which, but for such expenditure by the company, would have been incurred by any of the

company's directors and manager11; and

(d) any expenditure incurred by the company to effect any insurance on the life of, or

to provide any pension, annuity or gratuity for, any of the company's directors and

manager or his spouse or child.

11 36Astley v. New Trivoli, (1899) 1 Ch 151.

Expenditure incurred on maintenance of vehicles would fall within the meaning of the

expression ‘remuneration’ and once remuneration is fixed as provided under section 309

it is not possible to state that the expenditure incurred by the company on personal use of

car by directors would not be allowable deduction. In so far as the company is concerned

the expenditure is business expenditure, which could not be disallowed as such. As laid

down under Sayaji Iron & Engineering Co. v CIT12

Section 198 in the Companies Act, 2013

Section 198, Remuneration of directors

1) The remuneration payable to the directors of a company, including any managing

or whole-time director, shall be determined, in accordance with and subject to the

provisions of section 198 and this section, either by the articles of the company, or

by a resolution or, if the articles so require, by a special resolution, passed by the

company in general meeting and the remuneration payable to any such director

determined as aforesaid shall be inclusive of the remuneration payable to such

director for services rendered by him in any other capacity: Provided that any

remuneration for services rendered by any such director in any other capacity

shall not be so included if-

a) the services rendered are of a professional nature, and

b) In the opinion of the Central Government, the director possesses the

requisite qualifications for the practice of, the profession.

2) A director may receive remuneration by way of a fee for each meeting of the

Board, or a committee thereof, attended by him: Provided that where immediately

before the commencement of the Companies (Amendment) Act, 1960 , (65 of

I960 .) fees for meetings of the Board and any committee thereof, attended by a

director are paid on a monthly basis, such fees may continue to be paid on that

basis for a period of two years after such commencement or for the remainder of

the term of office of such director, whichever is less, but no longer.

12 2002, Comp Cases 675 (Guj).

3) A director who is either in the whole- time employment of the company or a

managing director may be paid remuneration either by way of a monthly payment

or at a specified percentage of the net profits of the company or partly by one way

and partly by the other: Provided that except with the approval of the Central

Government such remuneration shall not exceed five per cent, of the net profits

4) A director who is neither in the whole- time employment of the company nor a

managing director may be paid remuneration- either

a) by way of a monthly, quarterly or annual payment with the approval of the

Central Government; or

b) by way of commission if the company by special resolution authorises such

payment: Provided that the remuneration paid to such director, or where there

is more than one such director, to all of them together, shall not exceed-

i. one per cent, of the net profits of the company, if the company has a

managing or whole- time director, a managing agent or secretaries and

treasurers or a manager;

ii. three per cent, of the net profits of the company, in any other case:

Provided further that the company in general meeting may, with the

approval of the Central Government, authorize the profits.

(2) The percentage aforesaid shall be exclusive of any fees pay- able to directors

under subsection (2) of section 309.

(3) Within the limits of the maximum remuneration specified in sub- section (I). a

company may pay a monthly remuneration to its managing or whole- time director in

accordance with the provisions of section 309 or to its manager in accordance with the

provisions of section 387.

(4) Notwithstanding anything contained in sub- sections (I) to (3). but subject to the

provisions of section 269, read with Schedule XIII, if, in any financial year, a company

has no profits or its profits are inadequate, the company shall not pay to its directors,

including any managing or whole- time director or manager, by way of remuneration any

sum exclusive of any fees payable to directors under sub section (2) of section 309,

except with the previous approval of the Central Government.

Explanation - For the purposes of this section and sections 309, 310. 311, 348, 352, 381

and 387, “remuneration” shall include,-

(a) any expenditure incurred by the company in providing any rent- free

accommodation, or any other benefit or amenity in respect of accommodation free of

charge, to any of the persons specified in sub- section (1);

(b) any expenditure incurred by the company in providing any other benefit or

amenity free of charge or at a concessional rate to any of the persons aforesaid;

(c) any expenditure incurred by the company in respect of any obligation or service

which, but for such expenditure by the company, would have been incurred by any of the

persons aforesaid; and

(d) any expenditure incurred by the company to effect any insurance on the life of, or

to provide any pension, annuity or gratuity for, any of the persons aforesaid or his spouse

or child.

Removal of Permanent Directors:

Many family owned businesses or the proprietary ship concerns were converted into

Companies and when these conversion takes place, there can be specific regulation in the

articles about the appointment of directors and certain persons are even named in the

Articles as the Permanent Directors at times. In all these cases, unless the Competent

Court feel it appropriate to keep some payment of such remuneration at a rate exceeding

one per cent, or, as the case may be, three per cent of its net profits.

(5) The net profits referred to in sub- sections (3) and (4) shall be computed in the

manner

referred to in section 198, sub- section (1).

(5A) 2 If any director draws or receives, directly or indirectly, by way of remuneration

any such sums in excess of the limit prescribed by this section or without the prior

sanction of the Central Government, where it is required, he shall refund such sums to the

company and until such sum is refunded, hold it in trust for the company.

(5B) The Company shall not waive the recovery of any sum refund- able to it under sub-

section (5A) unless permitted by the Central Government.

(6) No director of a company who is in receipt of any commission from the company

and who is either in the whole- time employment

(7) The special resolution referred to in sub- section (4) shall not remain in force for a

period of more than five years; but may be renewed, from time to time, by special

resolution for further periods of not more than five years at a time: Provided that no

renewal shall be effected earlier than one year from the date on which it is to come into

force.

(8) The provisions of this section shall come into force immediately on the

commencement of this Act or, where such commencement does not coincide with the end

of a financial year of the company, with effect from the expiry of the financial year

immediately succeeding such commencement.

(9) The provisions of this section shall not apply to a private company unless it is a

subsidiary of a public company.13

Section 198 in the Companies Act, 2013

13 Bare Act of Indian Companies Act, 2013.

198. Overall maximum managerial remuneration and managerial remuneration in case of

absence or inadequacy of profits. (1) The total managerial remuneration payable by a

public company or a private company which is a subsidiary of a public company, to its

directors and its managing agent, secretaries and treasurers or manager in respect of any

financial year shall not exceed eleven per cent, of the net profits of that company for that

financial year computed in the manner laid down in sections 349, 350 and 351, except

that the remuneration of the directors shall not be deducted from the gross one in the

Board in the interests of the shareholders or the Company, the shareholders in fact

controls the directors and decide the issues of appointment and removals. There can be

exceptions in law like a director appointed by the Central Government or nominee

directors appointed by Public Financial Institutions. In many cases, where a permanent

director named in the Articles is removed, it will lead to litigation. The shareholders in

the closely held companies or the family companies lay emphasis on the principles of

equity and agreed understandings rather the concept of company law and the provisions

governing the functioning of Companies. Dealing with the issue of removal of permanent

director, the Hon’ble Delhi High Court, in Tarlok Chand Khanna And Another vs Raj

Kumar Kapoor And Others14, was pleased to observe as follows:

The question still remains, if petitioner, a permanent director of the company, could have

been removed by the company in a general meeting in spite of the provision in the

articles. If neither of the two meetings were valid, because petitioner had no notice of

these, even though he was intended to be removed from the board, his removal is bad in

law irrespective of the way one looks at the power of the company in a general meeting

to remove a permanent director, who is appointed as such by name in the articles. I

would, however, consider the question since was raised. No doubt, petitioner was a

permanent director named in art. 10 to hold office for life. In terms of art. 14, he also had

a right during his life time to nominate his successor on the board in the event of his

death. He could, nevertheless, be removed under 169 of the Act. Section 169 is based on

s. 184 of the English Act and applies to all types of companies, public and private, and

the only exceptions are those that are built into the section itself. A person appointed as a

14 ILR 1982 Delhi 156

life director by the articles or by any agreement is, nevertheless, removable by the

company in general meeting and has no security of tenure in office. While the

shareholders have no power, apart from that given in the statute or the articles, to

intervene in the management of the company's affairs, this section was designed to enable

them to control the directors by their removal. The only exceptions are the directors

appointed by the Central Govt. under s. 408, and life directors holding office on April 1,

1952.

Conclusion

The purpose of the provisions of Section 164 of the Companies Act, 2013, is not to

punish those who are disqualified but to save the community from the consequences of

mismanagement. The wider impact of this section is to protect the shareholders as well as

the public against the future conduct by persons whose past record as director show them

to be a danger to creditors and others.

Thus, the intention and purpose of the provisions of Section 164 of the Companies Act,

2013 is to disqualify the errant director, protect the investors from mismanagement,

ensure compliance in filling of annual accounts and annual returns which are the means

of disclosure to all the stakeholders, increase the compliance rate of filing the statutory

documents and infuse good corporate governance in the regulation of corporate affairs in

the country

Recovery of remuneration in certain cases.15 —Without prejudice to any liability

incurred under the provisions of this Act or any other law for the time being in force,

where a company is required to re-state its financial statements due to fraud or non-

compliance with any requirement under this Act and the rules made thereunder, the

company shall recover from any past or present managing director or whole-time director

or manager or Chief Executive Officer (by whatever name called) who, during the period

for which the financial statements are required to be re-started, received the remuneration

15 Section 199 Companies Act, 2013

(including stock option) in excess of what would have been payable to him as per

restatement of financial

Government or company to fix limit with regard to remuneration16 -

Notwithstanding anything contained in this chapter, the Central Government or a

company may, while according its approval under section 196, to any appointment or to

any remuneration under section 197 in respect of cases where the company has

inadequate or no profits, fix the remuneration within the limits specified in this Act, at

such amount or percentage of profits of the company, as it may deem fit and while fixing

the remuneration, the Central Government or the company shall have regard to—

(a). the financial position of the company;

(b).the remuneration or commission drawn by the individual concerned in any other

capacity;

(c). the remuneration or commission drawn by him from any other company;

(d).professional qualifications and experience of the individual concerned;

(e). such other matters as may be prescribed.

Resignation of director17.—(1) A director may resign from his office by givmg a notice

in writing to the company and the Board shall on receipt of such notice take note of the

same and the company shall intimate the Registrar in such manner, within such time and

in such form as may be prescribed and shall also place the fact of such resignation in the

report of directors laid in the immediately following general meeting by the company:

Provided that a director shall also forward a copy of his resignation along with detailed

reasons for the resignation to the Registrar within thirty days of resignation in such

manner as may be prescribed.

16 Section 200 Companies Act, 201317 Section 168 Companies Act, 2013

(2) The resignation of a director shall take effect from the date on which the

notice is received by the company or the date, if any, specified by the director in

the notice, whichever is later:

Provided that the director who has resigned shall be liable even after his resignation for

the offences which occurred during his tenure.

(3) Where all the directors of a company resign from their offices, or vacate

their offices under section 167, the promoter or, in his absence, the Central

Government shall appoint the required number of directors who shall hold office

till the^rrectors are appointed by the company in general meeting.