THE LEGAL BRIDGE

Judiciary & Law Notes Series

THE COMPANIES ACT, 2013

CHAPTER XI

Appointment and Qualifications of Directors

Sections 149–172

For Judicial Service Aspirants & Law Students

RJS • DJS • PCS-J • HJS • UPJS • BJS • MPCJ

Board Composition • Independent Directors • Duties • Removal

— Enriched with landmark judgments and illustrative case law —

Chapter XI — Appointment and Qualifications of Directors

A company is a juristic person — it can only act through individuals who act on its behalf. These individuals, collectively called the Board of Directors, are the mind and will of the company. Chapter XI of the Companies Act, 2013 (Sections 149 to 172) provides the constitutional blueprint of the Board: who can be a director, how many there must be, how they are appointed and removed, their duties, their disqualifications, and their liability.

This chapter has undergone significant strengthening post-2013 — mandatory independent directors, mandatory woman directors, mandatory resident director, a statutory code of duties, and an unambiguous declaration that directors are 'officers' of the company liable for its acts.

Section 149 — Company to have Board of Directors

Minimum and Maximum Directors [149(1)]

Every company shall have a Board of Directors consisting of individuals as directors and shall have:

• A minimum of three directors in the case of a public company;
• Two directors in the case of a private company; and
• One director in the case of a One Person Company; and
• A maximum of fifteen directors (may be increased beyond 15 by special resolution).

Resident Director [149(3)]

Every company shall have at least one director who has stayed in India for a total period of not less than 182 days during the financial year. This is a critical requirement — ensuring at least one director is accessible for service of process and regulatory interaction.

Woman Director

The Central Government has prescribed (through Rule 3 of the Companies (Appointment and Qualification of Directors) Rules, 2014) that the following companies shall appoint at least one woman director:

• Every listed company;
• Every other public company having paid-up share capital of ₹100 crore or more; or turnover of ₹300 crore or more.

Independent Directors [149(4) to (13)]

Every listed public company shall have at least one-third of the total number of directors as independent directors. The Central Government has prescribed (Rule 4) minimum number of independent directors for the following public companies:

• Paid-up share capital of ₹10 crore or more; or
• Turnover of ₹100 crore or more; or
• Aggregate outstanding loans, debentures, and deposits exceeding ₹50 crore.

For such companies, at least two directors must be independent directors.

Definition of Independent Director [149(6)]

An independent director in relation to a company means a director other than a managing director or a whole-time director or a nominee director, who:

1. In the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;(a) Who is or was not a promoter of the company or its holding, subsidiary, or associate company; (b) who is not related to promoters or directors in the company, its holding, subsidiary, or associate company;Who has or had no pecuniary relationship, other than remuneration as such director or having transaction not exceeding 10% of his total income, with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year;None of whose relatives has or had pecuniary relationship or transaction with the company amounting to 2% or more of its gross turnover or total income;Who, neither himself nor any of his relatives, holds or has held the position of a key managerial personnel or is or has been an employee of the company or its holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed; or is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of (a) a firm of auditors or company secretaries in practice or cost auditors of the company, or (b) any legal or a consulting firm that has or had any transaction with the company amounting to 10% or more of the gross turnover of such firm;Who, together with his relatives, does not hold more than 2% of the total voting power of the company;Who is not a Chief Executive or director, by whatever name called, of any non-profit organisation that receives 25% or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds 2% or more of the total voting power of the company;Who possesses such other qualifications as may be prescribed.

Tenure of Independent Directors [149(10), (11)]

• An independent director shall hold office for a term up to five consecutive years on the Board of a company, but shall be eligible for reappointment on passing of a special resolution by the company and disclosure of such appointment in the Board's report.
• No independent director shall hold office for more than two consecutive terms. A three-year cooling-off period is required before appointment again (during which he shall not be associated with the company in any other capacity).

Code for Independent Directors — Schedule IV

The Act attaches Schedule IV, which contains a detailed code outlining the roles, functions, duties, manner of appointment, resignation, removal, and separate meetings of independent directors. At least one meeting of the independent directors shall be held in a year — without the attendance of non-independent directors and members of management.

Liability of Independent Directors [149(12)]

Notwithstanding anything contained in this Act, an independent director and a non-executive director (not being a promoter or key managerial personnel) shall be held liable only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.

Section 150 — Data Bank of Independent Directors

Subject to the provisions contained in 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 any body, institute, or association notified by the Central Government. The Indian Institute of Corporate Affairs (IICA) has been notified for this purpose, and every individual intending to be an independent director must pass an online proficiency self-assessment test.

Section 151 — Appointment of Director Elected by Small Shareholders

A listed company may have one director elected by such small shareholders in such manner and with such terms and conditions as may be prescribed. 'Small shareholders' means a shareholder holding shares of nominal value of not more than ₹20,000.

Section 152 — Appointment of Directors

(1) & (2) Appointment

Where no provision is made in the articles of a company for the appointment of the first director, the subscribers to the memorandum who are individuals shall be deemed to be the first directors of the company until the directors are duly appointed. Every director shall be appointed by the company in general meeting.

(3) Director Identification Number (DIN)

No person shall be appointed as a director of a company unless he has been allotted the Director Identification Number (DIN) under Section 154 or such other number as may be prescribed.

(4) Declaration

Every person proposed to be appointed as a director by the company in general meeting or otherwise, shall furnish his DIN and a declaration that he is not disqualified to become a director under the Act.

(6) Rotational Directors

Unless the articles provide for the retirement of all directors at every annual general meeting, not less than two-thirds of the total number of directors of a public company shall be persons whose period of office is liable to determination by retirement by rotation. At the annual general meeting of a public company, one-third of the rotational directors shall retire by rotation. The directors to retire by rotation at every AGM shall be those who have been longest in office since their last appointment. A retiring director shall be eligible for re-appointment.

Sections 153-159 — DIN, Disqualifications

Section 153 — Application for Allotment of DIN

Every individual intending to be appointed as director of a company shall make an application for allotment of DIN to the Central Government in Form DIR-3, along with such fees as may be prescribed.

Section 154 & 155 — Allotment and Prohibition

The Central Government shall, within one month from the receipt of the application allot a DIN to the applicant. No individual, who has already been allotted a DIN under Section 154, shall apply for, obtain, or possess another DIN.

Section 164 — Disqualifications for Appointment of Director

A person shall not be eligible for appointment as a director of a company, if:

1. He is of unsound mind and stands so declared by a competent court;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, whether involving moral turpitude or otherwise, and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the date of expiry of the sentence. If a person has been convicted of any offence and sentenced to imprisonment for a period of seven years or more, he shall not be eligible to be appointed as a director in any company;An order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force;He has not paid any calls in respect of any shares of the company held by him and six months have elapsed from the last day fixed for the payment of the call;He has been convicted of the offence dealing with related party transactions under Section 188 at any time during the last preceding five years;He has not complied with sub-section (3) of section 152 (DIN) or has not complied with sub-section (1) of section 165 (directorship limit);He has not complied with the provisions of sub-section (1) of Section 165.

Additionally, sub-section (2) of Section 164 disqualifies a person who has been a director of a company which has (a) not filed financial statements or annual returns for any continuous period of three financial years; or (b) failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more. Such a person shall not be eligible to be re-appointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to do so.

Section 165 — Number of Directorships

No person shall hold office as a director, including any alternate directorship, in more than 20 companies at the same time. Out of this limit of 20, the maximum number of public companies in which a person can be appointed as a director shall not exceed 10. For reckoning the limit of public companies, directorship in private companies that are either holding or subsidiary company of a public company shall be included. The limit of directorship of twenty companies does not include directorship in a dormant company.

• Listed entities shall have limit of 8 listed companies w.e.f. April 1, 2019 and 7 listed companies w.e.f. April 1, 2020 as per SEBI (LODR) Regulations, 2015 — in addition to the above cap.

Section 166 — Duties of Directors

This is among the most quoted sections in the Act — a statutory codification of fiduciary duties, previously scattered in common law. A director of a company shall:

1. Act in accordance with the articles of the company;Act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment;Exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment;Not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company;Not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company;Not assign his office and any assignment so made shall be void.

Contravention is punishable with fine which shall not be less than ₹1 lakh but may extend to ₹5 lakh.

Section 167 — Vacation of Office of Director

The office of a director shall become vacant in case:

1. He incurs any of the disqualifications specified in section 164;He absents himself from all the meetings of the Board of Directors held during a period of twelve months with or without seeking leave of absence of the Board;He acts in contravention of the provisions of section 184 relating to entering into contracts or arrangements in which he is directly or indirectly interested;He fails to disclose his interest in any contract or arrangement in which he is directly or indirectly interested, in contravention of the provisions of section 184;He becomes disqualified by an order of a court or the Tribunal;He is convicted by a court of any offence, whether involving moral turpitude or otherwise and sentenced in respect thereof to imprisonment for not less than six months;He is removed in pursuance of the provisions of this Act;He, having been appointed a director by virtue of his holding any office or other employment in the holding, subsidiary or associate company, ceases to hold such office or other employment in that company.

Section 168 — Resignation of Director

A director may resign from his office by giving 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 (Form DIR-12 within 30 days) and shall also place the fact of such resignation in the report of directors laid in the immediately following general meeting by the company. The resigning director shall also forward a copy of his resignation along with detailed reasons for the resignation to the Registrar within 30 days of resignation (Form DIR-11) — though the onus to file DIR-11 is no longer mandatory for the director post-2018 amendment.

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.

Section 169 — Removal of Directors

A company may, by ordinary resolution, remove a director, not being a director appointed by the Tribunal under section 242, before the expiry of the period of his office after giving him a reasonable opportunity of being heard. Nothing contained in this sub-section shall apply where the company has availed itself of the option given to it under section 163 to appoint not less than two thirds of the total number of directors according to the principle of proportional representation.

• Special notice is required for a resolution to remove a director or to appoint somebody in place of a director so removed.
• On receipt of notice of a resolution to remove a director, the company shall forthwith send a copy thereof to the director concerned, and the director, whether or not he is a member of the company, shall be entitled to be heard on the resolution at the meeting.
• Where a director is removed, the vacancy may be filled by the company in general meeting at which he is removed, and the director so appointed shall hold office till the date up to which his predecessor would have held office if he had not been removed.

An independent director re-appointed for second term shall be removed by the company only by passing a special resolution and after giving him a reasonable opportunity of being heard.

Section 170 — Register of Directors and Key Managerial Personnel

Every company shall keep at its registered office a register containing such particulars of its directors and key managerial personnel as may be prescribed, which shall include the details of securities held by each of them in the company or its holding, subsidiary, subsidiary of company's holding company or associate companies.

Section 171 — Members' Right to Inspect

The register kept under sub-section (1) of section 170 shall be open for inspection during business hours and the members shall have a right to take extracts therefrom and copies thereof, on a request by the members, be provided to them free of cost within thirty days. The register shall also be kept open for inspection at every annual general meeting of the company and shall be made accessible to any person attending the meeting.

Section 172 — Punishment

If a company contravenes any of the provisions of this Chapter and for which no specific punishment is provided therein, the company and every officer of the company who is in default shall be punishable with fine which shall not be less than ₹50,000 but which may extend to ₹5,00,000.