Management of companies

Director

• Director is a person elected by the shareholders to manage the affairs of the co.

• Directors collectively are called board of directors

Appointment of directors

• Appointment of first directors – by the subscriber to the memorandum and are generally named in the article of a co.

• Such directors shall retire at the first AGM of the co when directors will be appointed in accordance with provisions of Sec 255

• Appointment by co in general meeting – Sec 255 lays down that not less than 2/3 of the total number of directors of co must be appointed by the co in general meeting

• The rotation for retirement shall be determined by the length of office of directors and if all the directors were appointed at one and the same date. The retiring directors are also eligible for reappointment

• The retiring director is deemed to have been reappointed at the adjourned meeting unless

1) The resolution for reappointment of such director was lost

2) The director in writing has expressed his unwillingness to be reappointed

3) He is disqualified for appointment.

• A notice in writing at least 14 days before meeting must be given top the co. The co shall give 7 days notice to the members about the post of directorship

• Appointment of directors by board –

1) Additional director Sec 260 if article permit additional directors can be appointed by the board to hold office until the next annual general meeting.

2) Casual vacancy Sec 262 can fill up casual vacancy by appointing director in case a director has resigned or has died

• Alternate director Sec 313 – if director is absent for more than 3 months and hold office until the original director’s term expires

• Appointment of directors by third parties Sec 255 if article provide not more than 1/3 of the total number of directors of a public co may be appointed by creditors,debentureholders or financial corporation

• Appointment of directors by central govt Sec 408 in case of oppression or mismanagement

• To appoint such number of directors as it consider necessary to protect the interest of the co at the request of 100 members or holding not less then 1/10 of the total voting power

• Appointment of directors by proportional representation Sec 265 – if article provides not less than 2/3 of its directors may be appointed by proportional representation either by single transferable note or by a system of cumulative voting

Powers of directors (Sec 291)

• BOD is entitled to exercise all such powers and to do all such acts and things as the co is authorised to exercise

1) The board shall not do any act which is to be done by the co in general meeting

2) It shall exercise its powers subject to the provisions contained in the co act

Powers to be exercised at board meetings

• Make calls on shareholders in respect of money unpaid on their shares

• Issue debentures

• Borrow money otherwise than on debentures

• Invest the funds of the co

• Make loans

Powers to be exercised with the approval of the co in general

meeting (Sec 293)1) Sale or lease of the co undertaking2) Extension of the time for payment of a debt due

by a director3)Appointing a director, his partner or relative to an

office of profit under Sec3144)Appointing sole selling agents for a term

exceeding five years at a time5) Borrowing of money in excess of paid up capital

of the co

• To contribute to charitable and other funds not directly relating to the business of the co amounts exceeding in any financial year Rs 50000

Powers

• Power to give loan, guarantee or security in connection with a loan made by any other person

• Power to increase remuneration of any director, manager

• Power to appoint or reappoint manager or whole time director

• Power to amend any provision relating to appointment or remuneration of manager or whole time director

Duties and liabilities of directors

• As trustee their duty is to act bonafide in the best interest of the co

• As officers of the co they are bound to comply with the various provisions of the act

Liabilities of directors

• They are required to act within their power

• He will be liable to make good the loss suffered by the co

• He is required to act in the best interest of the co

• They will be liable to surrender the secret profit to the co

• They are liable to comply with the various provision of the act

1) Liability to third parties

Directors may incur personal liability

1) On their failure to pay application money if minimum subscription has not been subscribed

2) On an irregular allotment of shares to an allottee

• On their failure to repay application money if application for securities to be dealt in recognised stock exchange is not made

2) Independently of the act – directors as agent of a co are not personally liable on contracts entered in to as agent on behalf of the co

• He is personally liable to the holder of such instrument if he acts in his own name.

3) Liability to the co – may arise from

1) Ultra vires acts

2) Negligence – it is essential in an action for negligence that the co suffers some damage. Damage without negligence is not actionable

• Breach of trust – they must discharge their duties as such trustees in the best interest of the co as he hold the position of trustees as regards its money and property which comes in to their hands

• Misfeasance – which means wilful misconduct of the directors for which they may be sued in a law court. Incase of misfeasance proceedings the directors may apply for relief under Sec 633

• Liability for breach of statutory duties – most of their duties relate to maintenance of proper accounts, filing of returns or observance of certain statutory formalities. If they fail to perform they are liable to penalties

• Liability for acts of his co directors – he is not liable for the acts of his co directors provided he has no knowledge and he is not a party.

Criminal liability

• Liability incurred by the directors may be civil as well as criminal. If he fraudulently induce persons to invest money is punishable with 5 years imprisonment or a fine of Rs 5000 or both

Duties of directors

• Fiduciary duties• Duties of care, skill and diligence1) Fiduciary dutiesa) Exercise their powers honestly and

bonafide for the benefits of the co as a whole

b) Not place themselves in a position in which there is a conflict between their duties and their personal interests

• Duties of care, skill and diligence –

• There are various standards of care depending upon

1) The type and nature of work

2) Division of powers between directors and other officers

3) General usages and customs in that type of business

4) Whether directors work gratuitously

Other duties of directors

1) To attend board meetings

2) Not to delegate his functions except to the extent authorised by the act

3) To disclose his interest

Managerial remuneration

• Overall maximum managerial remuneration Sec 198

• Remuneration not to exceed 11 % - not to exceed 11% of the net profit of the co in the manner laid down in Sec 349,350,351.The percentage shall be exclusive of fees payable to directors for meeting of the board of directors

• If in any financial year a co has no profit then co shall not pay to its directors except with the previous approval of the central govt subject to the provision of Sec 269

Rules regarding directors remuneration

• It cannot exceed 11% of the net profit

1) The remuneration payable to the directors shall be determined in accordance with the provisions of Sec 198 and 309 either by the articles or by a resolution passed by the co

2) He may receive remuneration by way of fee for each meeting

• A whole time or managing director may be paid remuneration either by way of a monthly payment or at specified percentage of the net profit of the co

• A part time director may be paid remuneration either

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

• By way of commission if the co by a special resolution authorises such payment

• The remuneration paid to part time director shall not exceed

i) 1% of the net profits of the co if the co has a managing or whole time director or a manager

ii) 3% of the profits in any other case

Can increase these rates with approval of the central govt

• The net profit of the co shall be computed in the prescribed manner without deducting the director’s remuneration from the gross profit

• A whole time director or managing director who receives commission from the co shall not be entitled to receive commission from any subsidiary of the co

• If any director receives any sum in excess of remuneration due to him he shall hold the excess amount in trust for the co and shall refund it to the co

• A co shall not pay to any officer or employees remuneration free of tax

• The above rules do not apply to a private co unless it is a subsidiary of a public co