The Companies (Amendment) Act, 1956

Definition of a Company:

“It is an incorporated association which is an artificial person (an association of

natural persons) created by law having a common seal and perpetual
succession.”

Classification on the basis of INCORPORATION:

1. Statutory Companies: These are companies which are created by a special Act of
Legislature, e.g., the Reserve bank of India, the State Bank of India, Life Insurance
Corporation, etc. The provisions of the Companies Act, 1956 apply to them, if they are not
inconsistent with the provisions of the special Acts under which they are formed.
2. Registered Companies: These are the companies which are formed and registered under
the Companies Act, 1956, or were registered under any of the earlier Companies Acts.

Classification on the basis of NO. OF MEMBERS:

1. Private Company: Acc to Sec 3 (1) (iii), ‘A ‘private company’ means a company which has
a min. paid-up capital of Rs. 1,00,000/- or such higher paid-up capital as may be
prescribed, and by its Articles- there are min 2 and max 50 members

(a) it restricts the right to transfer its shares, if any.

(b) limits the no of members to 50 not including its employees-members
(c) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the
company
(d) prohibits any invitation or acceptance of deposits from persons other than its members,
directors or their relatives

2. Public Company: A Public Company means a company which- has min 7 and no max limit
(a) It is not a private company
(b) It has a minimum pain-up capital of Rs. 5 lakhs and above
(c) is a private company which is a subsidiary of any public company

Classification on the basis of CONTROL:

1. Holding Company: [Sec 4(iv)] A company is known as a holding company of another

company if it has control over other company
2. Subsidiary Company: [Sec 4(i) ] A company is known as a subsidiary of another company
when control is exercised by the latter (called holding company) over the former called a
subsidiary company.
3. Independent Company: Where there is relation of Holding or Subsidiary Company.
4. Banking Company: If there is a formation of a banking company, it will be formed under
Banking Companies Act, 1949
 5. Insurance Company: When formed under the Insurance Company Act, 1938
6. Defunct Company: A company whose function has been stopped.
BOARD OF DIRECTORS :

Individual director has no power; they have to act as a Board. Any matter is decided in the board
meeting. But the board can delegate its power to an individual director or committee of directors.
A director may be defined as a person having control over the direction, conduct, management or
superintendence of the affairs of a company.
Only individuals can be directors (Sec 253) No body corporate, association or firm can be
appointed director of a company. Only an individual can be appointed.

1. Board finds a time for its meeting.

2. One meeting must be held every 3 calendar mths.
3. At least 4 meeting in 1 yr
4. Quorum of meeting – 1/3rd of the total no. of directors or 2 which ever is
greater
5. Unanimous or voting (decision)
ELECTION OF DIRECTORS:

The directors are elected by the shareholders in the general meeting.

1. First directors: The Articles usually name the first directors by their respective names or
prescribe the method of appointing them.
2. Appointment of directors by the company: In case of a public Co. or Pvt. Co which is a
subsidiary of a public Co., at least 2/3rd of the total no. of directors shall be liable to retire
by rotation. Such directors are called rotational directors.

3. Appointment of directors by directors: Any additional directors appointed by the directors

shall hold office only up to the date of the next annual general meeting of the company.
If for some reason the annual general meeting is not held,
then the additional director shall vacate the office on the day
on which the annual general meeting should have been held.
(In casual vacation) When the office of any director is vacated
it must be filled by the Board of directors at a meeting of the
Board. By ‘casual vacancy’ is meant any vacancy which
occurs by reason of death, resignation, disqualification, or
failure of an elected director to accept the office for any
reason other than retirement by rotation. A vacancy caused
by the retirement of a director by rotation is not a casual
vacancy; such a vacancy is filled by the annual meeting.
(As alternate director) An alternate director can be appointed
by the Board if it is so authorized by:-
(i) The Articles of the Co.
(ii) a resolution passed by the general meeting
4. Appointment of directors by third parties: The Articles under some circumstances give
power to the debenture-holders or other creditors, e.g., a banking co., etc. who have
advanced loans to the co. to appoint their nominees to the
Board. However, this no. cannot exceed 1/3rd of the total no. of
directors and they are not liable to retire by rotation.
 5. Appointment by proportional representatives: The Articles of a Co. may provide for the
appointment of not less than 2/3rd of the total no. of directors of a Co. or of a Pvt. Co.
which is a subsidiary of a Public Co. acc. To the principal of
proportionate representation. The appointment shall be made
once in 3 yrs. And interim casual vacancies shall be filled in
the manner as provided in the Articles.
6. Appointment of directors by the Central Government: Sec 408 empowers the Central Govt.
to appoint such no. of directors on the Board of a Co. as a Tribunal may, by order of
writing, specify as necessary to effectively safeguard the
interests of the Co. or its shareholders or the public interest.
The appointment will be for a period not exceeding 3 yrs.

KINDS OF DIRECTORS:

(1.) Wholetime Directors: the expression whole-time director includes a director in the whole time
employment of the company.
(2.)Part time Directors :

POSITION OF DIRECTORS :

Directors as:
1. Agents: A co., as an artificial person, acts thorough directors who are elected
representatives of the shareholders. They form a principal and agent relationship.
2. Employees: Even though the directors of the co. are its agents, they are not employees or
servants of the co. But a director can be a servant of the co by entering into a contract of
service which he may enter into with the co.
3. Officers: For certain matters the directors are treated as the officers of the co. As such,
they are liable to certain penalties if the provisions of the Companies Act are not strictly
followed.
4. Trustees: Directors are treated as trustees-
(i) of the company’s money and property – in the sense that, they must a/c for all the co’s
money and property over which they exercise control. They also have to pay off the
money which they have improperly paid away or transferred.

(ii) in the sense that they must, exercise their powers

of the powers entrusted in them –
honestly and in the interest of the co. and the shareholders and not in their own
interests.

NUMBER OF DIRECTORS:

Every public co. (other than a deemed public co.) shall have at least 3 directors and every other
company ; a pvt. Co. a deemed public co. at least 2 directors.
However, a public co having –
(i) a paid-up capital of Rs. 5 crores or more;
(ii) 1 thousand or more small shareholders ;
Shall have at least 1 director elected by such small shareholders in the manner as may be
prescribed.

REMUNERATION OF DIRECTORS:
Following are the new ceiling on remuneration to director/ manager by the Govt- (for new
appointment)
1. A ceiling of Rs. 90,000/- p.a. (Rs. 7,500/- p.m.) on salary including allowances
2. Ceiling of Rs.40,000/- on commission
3. Ceiling of perquisites to be 1/3 of the salary (COMPANY LAW BOARD)

DISQUALIFICATION OF DIRECTORS:

A director must be –
1) an individual
2) competent to contract , and
3) hold a share qualification , if so , required by the Articles.

The following persons are disqualified for appointed as directors of a company:

1. A person on unsound mind
2. An undischarged insolvent
3. An insolvent
4. Who has been convicted by a Tribunal of any offence (and sentenced to not less than 6
mths) and a period of 5 yrs. has not elapsed from the date of expiry of the sentence.
5. A person who is disqualified for appointment as a director by an order of the Tribunal
under Sec. 203
6. A person who is already a director of a public co. which –
(i) has not filed the annual accounts & annual returns for any 3 consecutive yrs
(ii) has failed to repay its deposits or interest there on due date

DUTIES OF THE DIRECTORS:

The statutory duties of the directors have been discussed below:-

1. Fiduciary duties: The directors must –
(i) exercise their powers honestly and bona fide for the benefit of the Co. as a whole ;
and
(ii) not place themselves in a position in which there is a conflict between their duties
to the company and their personal interests.
(iii) Not make any secret profit out of their position, if done , they have to a/c for it to
the company
(iv) Fiduciary duties owed to the Co. and not to the individual shareholders

2. Duties of care, skill and diligence: The directors should carry out their duties
with reasonable care & exercise such degree of skill and diligence that is expected of
persons like their knowledge and status. He is not bound to have any certain qualification.

There are various standards of care depending upon :-

(i) the type and nature of work

(ii) division of powers btw. Directors and other officers
(iii) general usage and customs in that type of business ; and
(iv) whether directors work gratuitously or remuneratively

3. Other duties of directors : The other duties of a director are :-

(i) to attend Board meetings
(ii) not to delegate his functions except to the extent authorized by the Act
(iii) to disclose his interest
LIABILITY OF DIRECTORS : The liabilities may be discussed under the following :-

1. Liability to third parties - Liability of directors to third parties may arise in connection
with the issue of a prospectus
UNDER THE ACT -
Directors may also incur personal liability –
(a) on their failure to repay application money if min subscription has not been
subscribed (sec 69)
(b) on an irregular allotment of shares to an allottee if loss not been subscribed (sec
71)
(c) on their failure to repay application money if the application for securities to be
dealt in on a recognized stock exchange is not made or is refused (sec 73)
(d) on failure of the co. to pay bill of exchange, promissory note, cheque or order for
goods wherein the name of the co. is not mentioned in legible characters (sec
147)
INDEPENDENTLY OF THE ACT –
Directors acting as agents of a co. are not personally liable on contracts entered into
as agents on behalf of the co. If a director fails to exclude personal liability, for
ex., by signing a negotiable instruments without mentioning the co’s name and
the fact that he is signing on co’s behalf, he is personally liable to the holder of
the instrument; and is also resp. if he acts in his own name.

2. Liability to the third company – The liability of directors towards the co. may arise from :
(i) Ultra vires acts – in this the directors are personally liable to the co. and it is not
necessary to prove fraud in such cases
(ii) Negligence – A director may incur liability for the negligence in the exercise of his
duties.
(iii) Breach of trust – directors in a co. being in a fiduciary position, hold the position
of trustees as regards its money and property which comes into their hands and
of the powers entrusted to them by the Articles.
(iv) Misfeasance – Directors are liable to the co. for misfeasance which means ‘willful
misconduct’ of directors for which they may be sued in a Law Court.

3. Liability for breach of statutory duties - There are a no. of statutory duties to be carried
out by directors. E.g., maintenance of proper accounts, filing of returns or observance of
of certain statutory formalities. If they fail to perform these duties, they are liable
to penalties.

4. Liability for acts of his co-directors - A director is not liable for the acts of his co-
directors provided he has no knowledge and he is not a party. His co-directors are not
servants or agents , who can , by their acts , impose liability on him.

DISABILITIES OF DIRECTORS : In order to protect the interest of a Co. and its shareholders the
Companies Act has imposed the following disabilities on the directors :

1. Avoidance of provisions relieving directors of liability

2. Undischarged insolvent disqualified from being appointed director
3. No person to be a director of more than 20 companies
4. Restrictions on powers of Board
5. Loans to directors
6. Board’s sanction fro certain contracts in which particular director are interested
7. Prohibition of assignment of office by director
8. Directors, etc, not to hold office or place of profit