All About Rights

8/12/2019 All About Rights

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All about rights, duties and liabilities

of a Director.

Prosecution of Mr. Keshub Mahindra, for the Bhpoal gas tragedy which resulted in loss ofseveral lives, sent shock waves in the Corporate world. Mr. Kesub Mahindra was nonExecutive Chairman on the Board of Union carbide. A debate started all over the countryas to whether non executive chairman or part time directors have any liability in suchcases. Even the Ministry Corporate Affairs has sought suggestions from all quarterswhether there should be amendment to the effect to exclude part time directors from theambit of liability. In this article an attempt has been made to convey to the prospective

directors their rights, duties and obligations in a lucid manner.

Section 2(13) of the Companies Act, 1956, defines a Director as any person,occupying the position of Director, by whatever name called. The Articles ofassociation generally contains provisions as to their appointment, retirementrights duties and remuneration.

ROLE OF THE BOARD OF DIRECTORS

The Board of Directors are elected representatives of the shareholders of the company.The Board of Directors of a company collectively are responsible for making policies andgood governance process The Board has a fiduciary position and holds the position oftrusteeship to protect and enhance shareholder value through strategic managementand governance. The Board should have complete freedom to think, decide and act inthe best interest of the Company and stakeholders. Boards r esponsibilities inherentlydemand the exercise of judgment for which the Board necessarily has to be vested withpowers and a reasonable level of discretion.

COMPOSITION OF BOARD

The Board of directors consists of part time directors and whole time directors. Part timeDirectors are those who only attend board meetings and contribute to the framing ofpolices and decision making in the board meetings. Whole time directors as the nameitself implies devote whole time and are treated as employees. Similar is the position ofManaging director and this category of directors are entrusted with substantial powersof management to look after the day to day affairs of the company.

Listed companies have to comply with Clause no.49 which deals with Corporate Governance.

As per Corporate Governance clause, the Board of directors of the company shall have anoptimum combination of executive and non-executive directors with not less than fifty


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percent of the board of directors comprising of non-executive directors. If chairman of theBoard is a non-executive director, at least one-third of the Board should comprise ofindependent directors and in case he is an executive director, at least half of the Board shouldcomprise of independent directors.

Independent directors are those who do not have any material pecuniary relationships ortransactions with the company and are not related to the promoters or person on theboard or senior management and not an executive in the past 3 years. The directorsfrom the above criteria can be classified as follows :-

Non- executive independent : They can exercise their judgment without anyinfluence of promoters.

Executive Non independen t: These are those who are in full time employment andare subject to influence of promoters or its group. Normally designated as Chairmancum Managing Director or whole time director.

Non executive Non independent : These directors are those who lose theirindependence or susceptible for influence by promoters for e.g., if any director is relatedto promoters or group company, or has material pecuniary interest in transactions withthe company, or a past employee elevated as director etc.

APPOINTMENT OF DIRECTORS

If first directors are not named in the Articles of Association, the subscribers to thememorandum of association shall be deemed to be the first Directors. The power toappoint directors is exercised by the shareholders in First Annual General meeting as perthe provisions of Section 255 and regulations in the Articles of Association. At the FirstAnnual General meeting shareholders will appoint not less than 2/3 rd of the totalstrength as directors liable for retirement and every year 1/3 of such retiring directorsshall be liable for retirement. The directors who retire as per provisions of Section 256are those who have been longest in the service and get elected automatically(retiringdirectors) unless they decide not to continue and have expressly given by noticeexpressing such intention.

The Board of directors can also appoint directors as per the provisions of theCompanies Act,1956 in the following cases:-

a) Additional Directors u/s 260 who hold office up to the ensuring Annual generalmeeting.

b) Director in a vacancy caused by resignation /death of a regular director u/s 262 tohold office up to the term of original director in whose place he is appointed.

c) Alternate Directors u/s 313 to represent original director who is away and suchdirector holds office till the original director returns.


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LIMIT ON NUMBER OF DIRECTORSHIPS :

A director can hold office in 15 companies. In computing this limit, directorship in privatecompanies, associations carrying on business not for profit, alternative directorshipsare excluded in counting this limit. .The more the number of directorships held, the lessis the availability of the time and the quality of contribution. Therefore the Act has fixedthe limit on number of directorships. Any violation of this will attract fine up toRs.50,000/ for each directorship held in excess of limit. Even Clause no.49 stipulatesthat a director shall not be a member of in more than10 committees or act as Chairmanin more than 5 companies across all companies in which he is a director.

DIRECTORS POWERS, DUTIES, RIGHTS AND RESPONSIBILITIES:

Directors should have a vision to frame policies to achieve high level of performance. Toachieve high level of performance, they must set the goals of the company. They musthave powers to carry on objectives of the company. Then comes duties andresponsibilities of directors. Directors also have certain rights which can be exercised toprotect themselves and also the interest of the company. The provisions of CompaniesAct and the articles of association of the company spell out rights, duties powers andresponsibilities of Directors. Section 291 of the Act provides that subject to theprovisions of the Act, the board of directors shall be entitled to exercise all such powersand to do all such acts and things as the company is authorized to exercise and do.

Powers which can be exercised only at Board meeting by means of passing ofresolutions(Section 292)

power to make calls on shareholders in respect of money unpaid on their shares power to issue debentures power to borrow moneys otherwise than on debentures power to invest the funds of the company Power to make loans

Certain restrictions can be imposed on general powers of the Board and invariably they

have to seek the approval of shareholders in the General meetings in such cases. Thesections which deal with restrictions are 293, 294AA etc.

There are certain powers which can be exercised only with the approval of theshareholders and also Central Government for eg: Sec.294AA(appointment of soleselling agents), Section 295 (Loans to Directors ) etc.

Powers which can be exercised either at Board meeting or by passing aresolution by circulation as per provisions of u/s 289.


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Power to appoint the first Auditor of the company within 30 days from the date ofincorporation of the company (Section 224(6)].

Power to fill up casual vacancy in the office of an Auditor if such vacancy is not caused by resignation [Section 224(6)].

Power to appoint Additional Directors if the Articles permit [Section 260].

The Board can exercise certain other powers conferred by articles such as forfeiture of shares,to pay interim dividend, preliminary expenses, use of foreign seal, to capitalize profits andissue bonus shares

In cases where Individual director does any act without being empowered to do so bythe Board, such acts can be ratified by the Board, if thought fit, by passing anappropriate resolution having retrospective effect

RIGHTS OF DIRECTORS:

Rights can be categorized into individual rights and collective rights.

Individual rights are such as right to inspect books of accounts {Section209(4)},Right to receive notices of board meetings (Section 285),right to participate inproceedings and cast vote in favour or against resolutions(Section 300),right to receivecircular resolutions proposed to be passed.(Section 289),right to inspect minutes ofboard meetings.

Collective rights are as follows:-

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

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

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


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

DUTIES :

Directors act as agents of the shareholders and act as a trustees of shareholders. Thusthey have a fiduciary duty to protect the property of the company. Simply stated thefollowing are the duties of Directors.

Directors must exercise all care and due diligence as a man of ordinary prudence wouldexercise. It must be noted that Managing or whole time director expected to showgreater degree of professional expertise and skill in discharge of their duties. If they failor gross negligence is evident from their action or non action then they will be liablefor punishment.

Directors as individuals have a duty to attend board meetings and contribute to thedeliberations of the board and ultimately to the decision making leading to formulation ofpolicies. Directors are under obligation to disclose their interest whether directly orindirectly in contracts or arrangements with the company(Section299). They are alsoduty bound to disclose their directorships in other companies within 20 days of

appointment or relinquishment of his office in other companies(Section 305).As perSection 308, directors are also required to disclose their shareholding in the company.

Directors as a part of Board perform certain duties collectively. The following are someof those duties exercised collectively:-

Approval of annual accounts and authentication of annual accounts Directors report to shareholders highlighting performance of the company, transfers toreserves, 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 REMUNERATION

Directors are paid remuneration for their efforts in formulating polices and for devotingtheir valuable time for the company. Directors remuneration consists of sitting fees asper provisions in Articles of association, and Commission as a fixed percentage of netprofits or as a fixed monthly sum as decided by the shareholders in the generalmeeting.


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In Companies Act, there are three sections which deal with remuneration and limits onremuneration. These are Section 198( fixes over all limits ) Section 309(remuneration tonon hole time directors) Section 269 (deals with remuneration of whole time director

/Managing Director)

Whole time directors and Managing directors are in the same footing as theirappointment and remuneration is governed by specific Section 269 read with scheduleXIII of companies Act,1956 Manger/MD/WTD are the persons vested with substantialpowers to carry out day to day functions,

Section 309 lays the ceilings on non executive Directors remuneration

If there is a Managing Director/ WTD /Manager ceiling on remuneration to nonexecutive Directors is 1% of the net profits of the company

If there is no MD/WTD/manager then ceiling to all non executive directors is 3% netprofits of the company

Directors are entitled to receive sitting fees for attending Board meetings also which isnot treated as part of remuneration.. Directors are entitled to receive remuneration byway of a fee for each meeting of the Board, or a committee thereof, attended by them:

Section 198 lays down over all ceiling limits on managerial remuneration, which is 11%of the net profits for all kinds of directors together.

RESIGNATION OF A DIRECTOR (WHEN IT TAKES EFFECT?

Resignation is a voluntary act and is different from the removal from directorship whichis an involuntary act. When there is a change in the directorship, a return in Form no.32is filed within 30 days from the effective date of resignation. In the former case Directorhimself has to ensure that Form no.32 is filed by the company and insist for a copy ofthe same for his records to protect himself from any criminal cases for offences thathave been committed after his resignation. In the case of removal of director, thecompany usually informs the concerned person about his removal from directorship and

also files Form no.32 without fail.

On the issue as to when the resignation of a director needs to be accepted by the Board ofDirectors of the concerned company there is no clarity in the Companies Act, 1956 andgenerally the Articles of Association of the companies also do not contain any specific

provision to that effect. However when a company files Form No.32 about the resignation ofdirector, it invariably puts a date in the column meant to record the date of the change andsuch a date happens to be either the date of resignation letter or date of the Board meeting

where the resignation letter was placed/discussed.


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In a number of cases courts held that where the resignation letter states that it has to takeeffect immediately, the date of the resignation letter is taken as the date on which the directorhas resigned. Thus, unless the Articles of Articles of the company concerned contain anyspecific provision about acceptance of resignation by the Board of Directors of the company,the resignation from directorship takes effect immediately, i.e., from the date of theresignation letter. A director who has resigned would not be liable for anything that happenssubsequently. However it is very important to note that the mere act of sending/posting ofthe resignation letter by the company director will not by itself relieve the director of hisresponsibilities for possible future prosecutions, but such a director must insist the companyto file necessary Form No. 32 with the Registrar of Companies and ask for a copy of the saidForm No. 32 and the ROC Receipt for having deposited the said Form and to preserve suchdocuments carefully so that his liability gets restricted.

VACATION OF OFFICE:

A director vacates his office in the following events:-

if he fails to obtain within the time the share qualification, if any, required of him bythe articles of the company;

if he is found to be of unsound mind or he is adjudged an insolvent by a Court ofcompetent jurisdiction;

if he is convicted by a Court of any offence involving moral turpitude and sentenced inrespect thereof to imprisonment for not less than six months;

if he fails to pay any call in respect of shares of the company held by him, within sixmonths from the last date fixed for the payment of the call;

if he absents himself from three consecutive meetings of the Board of directors, orfrom all meetings of the Board for a continuous period of three months, whichever islonger, without obtaining leave of absence from the Board;

if he fails to disclose his interest in contracts or arrangements in contravention ofsection 299.

REMOVAL OF DIRECTORS: A director can be removed by a company before expiry ofhis term of office. For removing a director, Company has to give a special notice beforemoving any resolution to remove a director u/s 284.On receiving such notice Directorconcerned can make a representation in writing and notice removing director must statethe fact of representation.


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LIABILITIES OF DIRECTORS

Director's are liable for violation of the provisions of the Companies Act and other Actswhich may expose them to punishment with fine or imprisonment or with both. The HonbleSupreme Court of India held in the case of Maksud Saiyed Vs State of Gujarat andOthers that the vicarious liability of the Managing Director and Director would arise

provided any provision exists in that behalf in the statute. If directors are guilty of negligenceor found to be misusing their position, they will be liable for civil as well as criminal liability.For eg; if directors make any untrue statements in the prospectus, or do not maintain books ofaccount as per provisions of Section 209 or falsify accounts, criminal liability also arises.Even for cheque bouncing, Section 141 of the Negotiable Instruments Act, imposes vicariousliability on the directors provided an averment is made to that effect in the complaint. TheDirectors of a company incur a personal liability, if they contract in their own names orwhere it is ambiguous as to capacity in which they signed the contract. However directors canseek protection against a liability for acts done in good faith. Director will also relieved ofthe offence, provided he is able to show that he was not in charge or control of the day to dayaffairs of the company or Offence in question was committed without hisconsent/knowledge/connivance and he was not negligent in ensuring that laws are complied.

CONCLUSION : Under the existing Act, all directors, including independent directors areheld responsible for a companys actions. However in the Companies Bill 2009, it is

proposed to protect independent directors. An independent director will be held responsiblefor any action only if motive and criminal intent is established in his actions. This is welcomeotherwise highly qualified professional would be reluctant to Join the Boards of company asindependent directors.

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All About Rights