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SUBJECT- CORPORATE GOVERNANCE

TOPIC – APPOINTMENT, REMOVAL, RIGHTS AND

OBLIGATION OF DIRECTOR

Supervised By:
Mr. AMARJEET RANJAN

NAME: WASIM AKRAM MOLLICK

ROLL NO: Admit Card No- 102/LLB3/17063
Class Roll No- 48
COURSE: LLB 3YEARS (6TH SEMESTER
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ACKNOWLEDGEMENT

With profound gratitude and sense of indebtedness I place on record my sincerest thanks to Mr.

Amarjeet Ranjan, Assistant Professor in Law, Indian Institute of Legal Studies, for her

invaluable guidance, sound advice and affectionate attitude during the course of my studies.

I have no hesitation in saying that he molded raw clay into whatever I am through his incessant

efforts and keen interest shown throughout my academic pursuit. It is due to his/her patient

guidance that I have been able to complete the task.

I would also thank the Indian institute of Legal Studies Library for the wealth of information

therein. I also express my regards to the Library staff for cooperating and making available the

books for this project research paper.

Finally, I thank my beloved parents for supporting me morally and guiding me throughout the

project work.

Date: WASIM AKRAM MOLLICK

(LLB 3YEARS 6TH SEMESTER)_

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RESEARCH METHODOLOGY

Research Methodology

This project is based upon doctrinal method of research. This project has been done after a
thorough research based upon intrinsic and extrinsic aspects of the project.

Sources of Data:

The following secondary sources of data have been used in the project-

1.
2. Books
3. Websites

Method of Writing:

The method of writing followed in the course of this research project is primarily analytical and
based on secondary source of data.

Research Questions

1) Explain the various provision of appointment of Directors under Companies Act 1956 and
2013 ?

2) Discuss the legal relationship of Directors with Company ?

3) What are the distinctive points of appointment of directors in Companies Act 1956 and 2013?

Objectives

1) To discuss about procedure of appointment of Directors.

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2) To analysis the new provisions of Companies Act 2013

3) To know the Legal relationship of Director with company.

Review of Literature

Directors have been described as a company’s ‘directing mind and will’. They are the human
agents of a company tasked with its management. Although the office they hold also resembles
that of a trustee or a managing partner, directors remain creatures of statute, occupying a position
‘peculiar to themselves’.( M S Blackman Commentary onthe Companies Act (2002) at 8-11; P M
Meskin (ed) Henochsberg on theCompanies Act (5 ed 1994) at 393).

“ Only individual should be appointed as directors does not extend to deemed directors coming
within the provision of section 7 of the Companies Act , for instance , a holding company will be
deemed to be director for purpose of section 7 , where all or the majority of the directors of a
subsidiary company are accustomed to act according to its direction.”
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INTRODUCTION

A corporation is an artificial being, invisible, intangible and existing only in contemplation of

law.”[ii] “It has neither a mind nor a body of its own.” “A living person has a mind which can
have knowledge or intention and he has hands to carry out his intention. A corporation has none
of these,it must act through living persons.” This makes it necessary that the company’s business
should be entrusted to some human agents. Hence the necessity of directors. Section 252 of the
Act, therefore, requires that “every public company shall have at least three directors and every
private company shall have at least two directors”. By an amendment of the section by
Amendment Act, 2000 it has been provided that a public company having a paid up share capital
of rupees five crore or more and one thousand or more small shareholders, should have a director
elected by the small shareholders. The manner of such election is to be presented. A small
shareholder for this purpose means having shares of the nominal value of twenty thousand rupees
or less m a public company.

Section 2(13) of the Companies Act, 1956 defines a ‘director’ as including “any person
occupying the position of a director by whatever name called “. Thus, it is not the name by
which a person is called but the position he occupies and the functions and duties which he
discharges that determine whether in fact He is a director or not. In Re, Forest of Dean Coal
Mining Co. it was stated that function is everything; name matters nothing. So long as a person
is duly appointed by the company to control the company’s business and authorised by the
articles to contract in the company’s name and on its behalf , he functions as a director. A
company is Indeed a person but juridical person and the directors as a body endow the juridical
person with human face that can act and react.

Section 303(1) of the Companies Act ( through for the limited purpose of maintenance of
Register of directors, etc.) provides that any person with whose directions or instructions the
Board of Directors is accustomed to act is also deemed to be a director.
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CHAPTER-I: APPOINTMENT OF DIRECTOR

The success of the company depends, to a very large extent , upon the competence and integrity
of its directors. It is , therefore , necessary that management of companies should be in proper
hands.[vi] The appointment of directors is accordingly strictly regulated by the act. There are
now special provisions for preventing management by undesirable persons.

One evil which has been abolished by the Act is that of a company or a firm acting as a director
of another company. Now, according to Section 253 , only an individual can be the director of a
company. No company or firm or association can be appointed as a director. A proviso has been
added to the section by the amendments of 2006 which says that no company is to appoint or
appoint individual as a director unless he has been allotted a Director Identification Number
under S.266-B.

Appointment of first directors –

The first directors are usually appointed by name in the articles or in the manner provided
therein. Where the articles do not provide for the appointment of first directors, the subscribers
to the memorandum, who are individuals, shall be deemed to be the first directors of the
company subject to the regulations of the company’s articles. The first directors can hold office
until the directors are duly appointed in accordance with the provisions of section 235) (Section
254). It may, however, be noted that in case of a public company, a list of persons who are to be
the first directors of a company along with their consent in writing must be delivered to the
Registrar of Companies.

Appointment of directors at general meeting –

According to section 255, the director must be appointed by the company in general meeting. In
the case of a public company or of a private company which is a subsidiary of a public company,
unless the articles provide for the retirement of all directors at every annual general meeting, at
least two-third of total number of directors must be persons whose period of office is liable to
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determination by rotation. In other words, only one third of the total number of directors can be
non-rotational directors.

Appointment of directors in case of a private company which is not a subsidiary of a public

company-In case of a private company, which is not a subsidiary of a public company, if the
articles are silent as to the appointment of directors, or do not specifically provide for
appointment of directors otherwise than in a general meeting, then the directors are to be
appointed in general meeting by the shareholders[Section 255(2)] as interpreted by the Calcutta
High Court in the case of Swapan Das Gupta v. Navin Chand Suchiantij .

Appointment of a director other than a retiring director [Sec. 257]-

Section 257 provides for the procedure of appointment of a person other than retiring director. If
any person other than the retiring director wishes to stand for directorship or any member
proposes a person for directorship, he must signify his intention to do so by giving 14 days’
notice to the company before the general meeting and the company must inform the members not
later than seven days before the general meeting either by individual notices or by advertisement
of this fact in at least two newspapers circulating in the place where its registered office is
located of which one must be in English and the other in the regional language of that place.
Also, the candidate or the member who intends to propose him as director has to deposit a sum
of Rs. 500 which shall be refunded to such person or the member , as the case may be, if the
candidate succeeds is being elected . In case such person is not elected as director, he or the
memner, as the case may be , will not be entitle to the refund of Rs. 500 and the amount
deposited shall stand forfeited by the company.

Appointment by Board of directors –

The Board of directors can exercise the power to appoint directors in the following three cases :

1. Additional Directors (Section 260)

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2. Filling up the Casual Vacancy (Section 262)

3. Alternate Directors (Section 313).

APPOINTMENT OF ADDITIONAL DIRECTORS – If the Articles authorise, the Board may

appoint additional directors. Such additional director together with the directors constituting the
Board should not exceed the maximum number fixed by the articles. Also, the additional
directors are entitled to hold office only up to the date of the next annual general meeting of the
company (Section 260),

In Krishna Pd. Pilani V. Colaba Land and Mills , it was held that a director appointed as

an additional director vacates his office, at the latest, on the last day on which the annual meeting
could have been called as requires by section 166 or could not be called within the time
prescribed by that section.

It may thus be noted that without a power given by the Articles, the Board cannot appoint
additional directors. The section applies to all companies, public as well as private – Needle
Industries (India) Ltd. V. Needle Industries Newey (India) Holdings Ltc[ix].

Appointment directors by proportional representation [Section 265]

Ordinarily, directors are appointed by simple majority vote on the resolutions moved for their
appointment. As a result majority shareholders controlling 51 per cent or more votes may elect
all directors and a substantial minority, as high as 49 per cent, may find no representation on the
Board. In order to enable the minority shareholders to have a proportionate representation on the
Board, section 265 of the Companies Act gives an option to companies to appoint directors
through a system of proportional representation.).

Appointment of directors by the Central Government( Section 408)

The Central Government has been empowered to appoint directors on an order passed by the
Company Law Board . CLB may so order either on a reference by the Central Government or on
the application of not less than 100 member of the company or of members holding not less than
1/10th of the total voting power. Such appointments shall be so ordered by the CLB where it
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finds that the affairs of the Company have been conducted in a manner oppressive to any
member of the company or in a manner prejudicial to the interests of the company or to the
public interest .

Appointment of Directors

 Director to be approved in general meeting [Section 152(2)]–

Save as otherwise expressly provided in this act, every director shall be appointed by the
Company in General Meeting.

 DIN mandatory for appointment as director[152(3)]

Company shall not appoint a person as a director unless he has been allotted a Director
Identification Number under Section 154.

 Person proposed to be appointed as director to furnish DIN and a declaration

[Section152(4)]

Every person proposed to be appointed as a director of a company shall furnish to it his DIN. He
shall also furnish a declaration to the company that he is not disqualified j to become a director
of the company.

 Consent to act as director to be given to the company[sec.152(5)]

A person appointed as a director of a company shall not act as a director! unless he has given to
the company his consent to hold the office as such director.

 Filling of consent with the Registrar[Sec.152(5)]

The person appointed as a director shall file his consent as above with the Registrar of
Companies within thirty days of his appointment and in such manner as may be prescribed.

Appointment of Additional Director , Alternate Director and Nominee Director-

Nominee director 161(3)

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If the articles of a company authorize, the Board of Directors of a company may appoint any
person as a director nominated by any institution in pursuance of the provisions of any law for
the time being in force or of any agreement or by the Central Government the State Government
by virtue of its shareholding in a Government Company.

Additional Director [Section 161]–

A conjoint reading of section 260 and 262 of the Act 1956 0 and Section 161 of 2013 Act shows
that it enables the board of the company to appoint the additional director . Such additional
director holds office only up to the date of next annual meeting . In the instant case the
appointment of additional director in the board meeting to complete the quorum was , thus, valid
being permissible and in accordance with Section 260 of 1956 Act and Section 161 of 2013 Act-
Maharashtra Power Development Corporation Ltd. V. Dabhol Power Co.

Alternate Director (Section 161)

Ross Porter V. Pioneer Sed Co. Ltd[xiii], held that a temporary injunction was to be granted in
plaintiff’s favour though it was true that under section 313 of the 1956 Act{ corresponding to
section 161 of 2013 Act} it had not been made mandatory that the board of directors of the
company were bound to accept nomination of alternate director . However, irreparable harm was
likely to be caused to the plaintiff if he was not allowed to nominate an alternate director as he
might cease to be a director on his not attending the board meeting for three months. Indian
Companies act provides for service of notice of the board of directors. So , keeping all these
facts in view, the interest of justice required that a temporary injunction should be granted in
favour of the plaintiff .

Appointment of director by Proportional representation( Section 163)-

A company may appoint its director by Proportional representation-

1. If its articles provide for the appointment of not less than two-third of the total number of
directors in accordance with the principle of proportional representation.
2. The proportional representation may be by the single transferable vote or by a system of
cumulative voting or otherwise.
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CHAPTER-II: REMOVAL OF DIRECTOR

A director may be removed by the shareholders or by the Central Government or by the Court.
Procedure for removal of Director of a company according to the Companies Act 1956 are
briefly discussed below

1. Removal of Director by Shareholders

The removal of a director or appointment of a director in the place of a removed director needs a
resolution requiring special notice. Hence, the proposer has to send a notice to the company not
less than 14 days before the meeting and the company has to send the proposed resolution to the
concerned director and the members. The director has a right to make representations and to
speak at that general meeting.
He may also request that these representations be notified to the members of the company. Under
such circumstances, the company shall

a. state the fact of the representations having been made in any notice of the resolution given
to the members of the company; and
b. send a copy of the representations to every member of the company to whom notice of the
meeting is sent (whether before or after receipt of the representations by the company).
If a copy of the representations is not sent as aforesaid because they are received too late or
because of the company’s default, the director may (without prejudice to his right to be heard
orally) require that the representations shall be read out at the meeting. The removed director
may get compensation or damages for the termination of his appointment. If the vacancy is not
filled at the same meeting, the Board may fill it as if it is a casual vacancy. But the removed
director cannot be reappointed.

2. Removal of Director by the Central Government

As per Sec 388 B to 388 E of Companies Act 1956, the Central Government has power to
remove managerial personnel on the recommendations of the National Company Law Tribunal.
The Central Government may refer the case to the National Company Law Tribunal if it is of the
opinion that:
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1. the director or directors is or are guilty of fraud, misfeasance, negligence or default in carrying
out his/their functions, or
2. the business is carried on against sound business principles or commercial practices, or

3. the company is carried on in a manner likely to cause injury to the interest of the trade,
industry or business to which it belongs, or

4. the concerned director manages the company for defrauding the creditors or members or for a
fraudulent or unlawful purpose.

If the National Company Law Tribunal after inquiry decides against the director or directors, the
Central Government may remove him/them from office. In this case, no compensation is payable
for the loss of office.

3. Removal of Director by National Company Law Tribunal

As per Sec. 402 of Companies Act 1956, if, on hearing an application for prevention of
oppression or mismanagement, the National Company Law Tribunal feels that a relief ought to
be granted, it may set aside, terminate or modify any agreement of the company with a director.
Such a terminated director cannot get compensation for the loss of office
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CHAPTER-III: RIGHTS AND OBLIGATION OF THE DIRECTOR

Rights of Directors

Rights can be categorized into individual and collective rights.Individual rights are such as right
to inspect books of accounts {Section 209(4)},Right to receive notices of board meetings
(Section 285),right to participate in proceedings and cast vote in favour or against
resolutions(Section 300),right to receive circular resolutions proposed to be passed.(Section
289),right to inspect minutes of board meetings.

Collective rights are as follows:-

Right to refuse to transfer shares: According to Section 111 of the Act, directors of private
companies and deemed public companies are entitled to refuse registration of transfer of shares
to a person whom they do not approve.

Right to elect a Chairman: Regulation 76(1) of Table-A provides that the directors are entitled to
elect a chairman for the board meetings.

Right to appoint a Managing director: The Board has the right to appoint the managing director/
manager (as defined in the Act) of the company.

Right to recommend dividend: The Board is entitled to decide whether dividend is to be paid or
not. Shareholders cannot compel the directors to pay dividend. However they can reduce the rate
of recommended dividend. Payment of dividend is the prerogative of the board

Duties of Directors

Directors as individuals have a duty to attend board meetings and contribute to the deliberations
of the board and ultimately to the decision making leading to formulation of policies. Directors
are under obligation to disclose their interest whether directly or indirectly in contracts or
arrangements with the company (Section299). They are also duty bound to disclose their
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directorships in other companies within 20 days of appointment or relinquishment of his office in

other companies (Section 305).As per Section 308, directors are also required to disclose their
shareholding in the company.

The following are some of those duties exercised collectively:-

Approval of annual accounts and authentication of annual accounts

Directors report to shareholders highlighting performance of the company, transfers to reserves,

investment of surplus funds, borrowings

Appointment of First Auditors

Issuance of Notice and Holding of Board meetings and shareholders meetings

Passing of resolutions at board meetings or by circulation.

Directors are paid remuneration for their efforts in formulating policies and for devoting their
valuable time for the company. Directors remuneration consists of sitting fees as per provisions
in Articles of association, and Commission as a fixed percentage of net profits or as a fixed
monthly sum as decided by the shareholders in the general meeting. As per the provisions in the
new companies bill,2009 independent directors can not receive any remuneration other than
sitting fees, expenses for attending board meetings and commission linked to profits.

Liabilities of Directors

Directors are liable for violation of the provisions of the Companies Act and other Acts which
may expose them to punishment with fine or imprisonment or with both. The Hon’ble Supreme
Court of India held in the case of Maksud Saiyed Vs State of Gujarat and others that the
vicarious liabilities of the Managing Director and Director would arise provided any provision
exists in that behalf in the statute. If directors are guilty of negligence or found to be misusing
their position, they will be liable for civil as well as criminal liability. For e.g.; if directors make
any untrue statements in the prospectus, or do not maintain books of account as per provisions of
Section 209 or falsify accounts, criminal liability also arises. Even for cheque bouncing, Section
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141 of the Negotiable Instruments Act imposes vicarious liability on the directors provided an
averment is made to that effect in the complaint. The Directors of a company incur a personal
liability, if they contract in their own names or where it is ambiguous as to capacity in which
they signed the contract. However directors can seek protection against a liability for acts done in
good faith. Director will also relieved of the offence, provided he is able to show that he was not
in charge or control of the day to day affairs of the company or Offence in question was
committed without his consent/knowledge/connivance and he was not negligent in ensuring that
laws are complied.

Under the existing Act, all directors, including independent directors are held responsible for a
company’s actions. However in the Companies Bill 2009, it is proposed to protect independent
directors. An independent directors will be held responsible for any action only if motive and
criminal intent is established in his actions. This is welcome otherwise highly qualified
professional would be reluctant to Join the Board’s of company as independent directors.
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CHAPTER-IV: CONCLUSION

In the present scenario, we see that there are a lot of companies and for every company, it is

necessary to have a director or a board of director so that it is able to function properly. The

director has to be very disciplined and has to make use of his powers honestly. A director has

the responsibility of the all it’s members so if a director does anything which is in

contradiction to the clauses mentioned in Section 166 then he will liable and will be

subjected to the removal or being fired. So here I have explained the procedure on how to

fire a Director.