22

Companies Act, 2013: Management of Company

22.1 DEFINITION OF DIRECTOR

Section 2(34) of the Companies Act, 2013, defines a ‘director’ as a person appointed to the board of a company. It means that the person cannot be considered as director unless he is appointed by any method (i.e., either by the board or by shareholders) to the board of company.

22.2 DISQUALIFICATION OF DIRECTOR—SECTION 164

Section 164(1) of the Companies Act, 2013, provides that the following persons shall not be capable of being appointed as directors of a company:

1. A person found by a competent court to be of unsound mind and such finding remaining in force.
2. An undischarged insolvent.
3. A person who has applied to be adjudged an insolvent.
4. A person who has been convicted by a court of an offence whether involving moral turpitude or otherwise and sentenced in respect thereof to imprisonment for not less than 6 months, and a period of 5 years has not elapsed from the date of the expiry of the sentence. Court, here, means either an Indian court or a court outside India.
5. If a person has been convicted of any offence and sentenced for period of 7 years or more, he shall not be eligible to be appointed as director in any company.
6. A person who has been disqualified by a court or tribunal, unless permission of the court or tribunal has been obtained for his appointment.
7. A person who has not paid any call in respect of shares of the company held by him, whether alone or jointly with others and 6 months have elapsed from the last date fixed for the payment of the call.
8. A person who has been convicted of offence dealing with related party transactions under Section 188 at any time during the preceding 5 years.
9. A person who has not obtained director identification number.

As per Section 164 (2), a person who is or has been director of a company shall become disqualified if the company:

1. has not filed the financial statements or annual returns for any continuous 3 financial years; or
2. has failed to repay deposit or interest thereon on due date or redeem its debentures on due date or pay dividend and such failure continues for 1 year or more.

On default of Section 164(2), director of defaulting company becomes disqualified to act as director of any other company for 5 years. He cannot be re-appointed as director in the defaulting company for a period of 5 years. However, he may continue as director in any other company.

A public company cannot add additional disqualification to the director, but an independent private company may add more disqualifications.

22.3 LEGAL POSITION OF DIRECTOR

Companies Act does not mention anything on legal position of directors. They have, at various times, been described by judges as agents, trustees or managing partners

22.3.1 Directors as Agents

Directors may correctly be described as agents of the company. The ordinary rules of agency will, therefore, apply to any contract or transaction made by them on behalf of the company. Thus, where the directors contract in the name and on behalf of the company, it is the company which is liable on it and not the directors.

However, directors incur a personal liability in the following circumstances:

1. Where they contract in their own names. Where the chief executive of the company executed a promissory note and borrowed an amount for the company’s sake, it could not be said that amount was borrowed by him, in his personal capacity.
2. Where they use the company’s name incorrectly, e.g., by omitting the word ‘Limited’
3. Where the contract is signed in such a way that it is not clear whether it is the principal (the company) or the agent who is signing.
4. Where they exceed their authority—Weeks vs Propert (1873)

22.3.2 Directors as Trustees

Directors are regarded as trustees of the company’s assets and of the powers that vest in them because they administer those assets and perform duties in the interest of the company and not for their own personal advantage.

22.3.3 Directors as Employees of the Company

Where a director accepts employment under the company under a separate contract of service, in addition to the directorship, he is also treated as an employee or servant of the company.

22.4 DUTIES OF A DIRECTOR—SECTION 166

Section 166 of the Companies Act, 2013, prescribes the duties of a director. The duties provided under Section 166 are applicable to all type of companies and to all directors. It includes:

1. To act in accordance with the articles of the company.
2. To act in good faith 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.
3. To exercise his duties with due and reasonable care, skill and diligence and exercise independent judgment.
4. Not to 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.
5. Not to make or attempt to make any undue gain or advantage either to himself or to his relatives, partners, or associates.
6. Not to assign his office. If any assignment is made, it shall be void.

If a director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company. Further, if a director of the company contravenes the provisions of this section such director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

22.5 APPOINTMENT OF DIRECTORS

The director of a company may be appointed by any one of the following methods:

Appointment of first directors – By Article Of Association

Appointment at general meeting

Appointment by the board of directors

Appointment by third parties

Appointment by central government.

22.6 APPOINTMENT OF FIRST DIRECTORS—SECTION 152

Article of association contains the name of the first directors. As per Regulation 60 of Table F of Companies Act, 2013, the names of first directors are determined in writing by subscribers to the memorandum or their majority. Where the articles do not contain the names of the first directors, the subscribers to the memorandum, who are individuals, shall be the first directors of the company.

The first directors hold office until the directors are appointed as per provisions of Section 152 of Companies Act, 2013. In the case of a One-person Company, an individual being a member shall be deemed to be its first director until the director(s) are duly appointed by the member in accordance with the provisions of Section 152. Section 152 is applicable to all companies.

If all the subscribers to the memorandum are body corporate, the company will have no directors until the first directors are appointed under Section 152.

22.7 APPOINTMENT OF DIRECTORS AT GENERAL MEETING OR DIRECTORS RETIREMENT BY ROTATION—SECTION 152

Directors of a public company must be appointed in a general meeting. Article of public company may provide for the retirement of all directors at every annual general meeting.

If the articles do not provide for the retirement of all directors at every annual general meeting, at least 2/3^rd of the total number of directors must be persons whose period of office is liable to determination by rotation. Any fraction, while calculating 2/3^rd, shall be rounded off to the one. Alternatively, it can be said that only 1/3^rd of the total number of directors can be non-rotational directors. Here, total directors mean directors appointed by company.

Independent directors are not included for the calculation of total directors for counting rotational directors. Independent directors are not liable to retire by rotation.

One-third of rotational directors shall retire at every general meeting. Any fraction in calculation of 1/3rd should be rounded off the nearest of one.

The directors who have been longest in office since their last appointment are liable to retire by rotation at every annual general meeting. If two or more directors were appointed on the same day, retirement by rotation will be decided between persons as under:

1. As per agreement if any or
2. As per mutual consent or
3. By lots.

If AGM is held in time but could not be held for disturbances or unavoidable reason beyond control of company, the retiring director will not be retired on the last day on which AGM should have been held but will retire in the adjourned meeting when held.

The company has following options with respect to director retiring by rotation:

1. To re-appoint the retiring director.
2. To appoint some other person as director in place of the retiring director.
3. Not to re-appoint the retiring director or any other person as director in his place.

Directors of private company are appointed as per provision of its article. If the article is silent, directors are appointed in a general meeting by the shareholders. It is not compulsory under the law for a private company to appoint rotational directors unless the articles of association of the company so required.

22.8 DEEMED APPOINTMENT OF RETIRING DIRECTOR—SECTION 152

The vacancy caused by retirement of a director by rotation should be filled up at the same meeting or at an adjourned meeting. If, in the adjourned meeting, the vacancy is not filled in nor it is expressly provided not to fill in the vacancy, then the retiring director shall be deemed to be reappointed. However, in the following cases retiring director will not be deemed to be reappointed:

1. At any previous meeting, a resolution for the appointment of director was put to vote, but was lost.
2. If the retiring director has expressed his unwillingness to continue in writing.
3. If the retiring director is disqualified.

22.9 APPOINTMENT OF DIRECTOR OTHER THAN A RETIRING DIRECTOR—SECTION 160

A person who is not a retiring director may give notice to the company to stand for directorship. It means following persons are eligible for appointment of director under Section 160:

1. Additional director
2. Alternate director
3. Nominee director
4. Director appointed to fill casual vacancy
5. Any other person.

Whenever a company wants to appoint any person as regular director, the procedure of Section 160 is applicable. To appoint any person as director (known as regular director) other than a retiring director, the following steps should be taken:

1. Any member of the company or person proposing himself for candidature of director should give at least 14 days’ notice to the company before the general meeting.
2. The notice should be deposited at the registered office of the company with a deposit of ₹ 1 lakh. If the candidate is elected as director or gets more than 25% of the total valid votes cast, either on show of hands or on poll on such resolution, the deposit will be refunded.
3. The company must inform the members at least 7 days before the general meeting, either by email or by individual notices where company has no email ids available. If it is not possible to email or issue individual notice, the company shall place an advertisement of this fact in at least two newspapers circulating in the place where its registered office is situated, of which one must be in English and the other in the regional language of that place. Notice is also to be placed on the website of the company, if any.

Section 160 is not applicable to a private company. A private company can appoint a person as director as per the provisions of its article. If the article is silent in this matter, a person can be appointed as director at the general meeting directly and no special notice is required to be given.

22.10 CONSENT OF DIRECTOR WITH ROC AND COMPANY—SECTION 152

The consent to act as director is given by the proposed director to the company before he is appointed as director. A person proposed to be appointed as director should file his consent to act as director in Form DIR-2 to company. On receipt of consent to act as director, the company, in turn, is required to file such consent in Form DIR-12 with the registrar within 30 days of appointment of director.

Provisions of consent of director are applicable to all companies and to all types of directors. A person whose name is included as first director in article is also required to file consent to act as director at the time of incorporation of company. However, the consent of the registrar shall not be required to be filed if:

1. a director is re-appointed after retirement by rotation or immediately on the expiry of his term of office.
2. a director appointed by the tribunal.

22.11 DIRECTOR IDENTIFICATION NUMBER—SECTION 153–159 AND RULE 9

Every individual, who is to be appointed as director of a company shall make obtained a director identification number (DIN). Person cannot hold more than one DIN. Every person or company is required to quote the DIN in such return, forms or particulars relating to the director while filing forms.

22.11.1 Procedure to Obtain DIN

To obtain DIN the following steps are required to be taken:

1. An application for allotment of director identification number to the central government in Form DIR-3.
2. An application is made online.
3. Form DIR-3 shall be signed and submitted electronically by the applicant using his or her own digital. The signature certificate shall be verified digitally by a practicing professional (CA, CS, CWA) or company secretary in whole-time employment or by a director of the existing company.
4. The user is required to get registered on portal of mca.gov.in and obtain a user id and password.
5. Form DIR-3 should be uploaded on the website of mca.gov.in along with fees. The fee is paid online. The system generates a provisional DIN.
6. When provisional DIN has been generated, the central government shall process the application received for allotment of DIN and decide on the approval or rejection. If the central government, on examination, finds any defects or incompleteness, then it may intimate such defects by placing it on the website. In case of defect, the applicant is required to resubmit the application within 15 days.
7. The director is intimated his DIN.
8. The director, on receipt of director identification number, intimates it to all companies that he is a director in Form DIR-3B within one month of intimation.
9. The company shall intimate DIN to the Registrar within 15 days of receipt of Form DIR-3C from the director.
10. If there is any change in the particulars of director, after obtaining DIN, the director should intimate such changes online in DIR-6 within 30 days.

22.11.2 Documents to be Attached

The following scanned documents shall be attached with the DIN application form:

1. High resolution photograph of the applicant
2. Proof of identity;
3. Proof of residence;
4. Proof of date of birth
5. Proof of father’s name. Proof of father’s name is not required in the case of foreign nationals
6. Verification by the applicant in Form DIR-4.
7. Specimen signature duly verified and the digitally signed form.
8. Copy of passport in the case of foreign nationals.
9. Permanent account number.

22.12 APPOINTMENT OF DIRECTOR BY BOARD OF DIRECTORS—SECTION 161

The board of a company may appoint:

1. Additional directors—Section 161(1)
2. Director to filling up the casual vacancy—Section 161(4)
3. Alternate directors—Section 161(2).
4. Nominee directors—Section 161(3)

22.13 APPOINTMENT OF ADDITIONAL DIRECTOR—SECTION 161(1)

Section 161(1) is applicable to all companies. If the articles authorise, the board may appoint additional directors. Regulation 66 of Table F of Companies Act, 2013 authorises the board to appoint additional directors. Additional directors, together with the directors, should not exceed the maximum number fixed by the articles. A person who fails to get appointed as a director in a general meeting cannot be appointed as an additional director.

Additional directors hold office only up to the date of the next annual general meeting of the company. If the AGM is not held, the additional director is deemed to vacate office on last day on which AGM should have been held. Additional directors will enjoy the same powers and rights as other directors. The appointment of additional directors may be made either at a meeting of the board or by passing a resolution by circulation. If the board is unable to appoint an additional director, he can be appointed through a general meeting.

22.14 FILLING UP CASUAL VACANCY—SECTION 161(4)

It means a vacancy in the office of a director appointed by the shareholders in a general meeting and caused by the death, resignation, insolvency or disqualification. It does not include vacancy created because of retirement of a director by rotation. If the term of a director reaches expiry, it does not create casual vacancy.

If a director appointed in a general meeting vacates office before the expiry of his term, the board in its meeting can fill in the vacancy. However, if a director appointed by the board vacates before his term, it is not casual vacancy. The person appointed in casual vacancy will hold office until the time the person in whose place he has been appointed could have held office.

Section 161(4) does not apply to a private company. A private company can fill casual vacancies as per provision of its articles or by passing a resolution in a general meeting.

22.15 ALTERNATE DIRECTOR—SECTION 161(2)

If any director of a company is absent or is on leave for a period of three or more months from India, the company may appoint any other person as director in his place. Such a director is called as alternate director. The board of directors may appoint an alternate director if authorised by its articles or by resolution at a general meeting. The board can appoint an alternate director either at its meeting or passing resolution by circulation.

A person shall not be appointed as alternate director for an independent director unless he is qualified to be appointed as independent director under Companies Act, 2013. The person appointed as alternate director shall not hold any alternate directorship for any other director in the company. Section 161(2) is applicable to all companies. An alternate director cannot be counted towards maximum number of directorship.

An alternate director is subject to the same liability and supposed to perform the same duties as any other director. He is neither agent nor proxy of the original director. An alternate director appointed as such for the first time shall be required to file his consent with the registrar.

22.15.1 Tenure of Alternate Director

An alternate director vacates his office where:

The original director returns to India.

The tenure of the original director is complete.

The original director dies

The original director vacates his office.

The original director resigns from his office.

If the original director is a non-retiring director, an alternate director appointed in his place can continue till the time original director vacates his office or returns to India. If the original director is a rotational director and his term expires before he returns to the state where board meetings are ordinarily held, the provision of automatic reappointment is applicable to the original director and not the alternate director.

22.16 NOMINEE DIRECTOR—SECTION 161(3)

The board of directors can appoint a director nominated by:

1. Any financial institution in pursuance of any law or agreement or
2. Central government or state government by virtue of its shareholding in a government company.
3. Any other person who represent its interest.

The directors appointed by any private equity investor may be covered in the above third category. The board may appoint a nominee director subject to provisions in its article of association.

22.17 WHO IS AN IDEPENDENT DIRECTOR?—SECTION 149(6)

An independent director is someone who does not have any material or pecuniary relationship with the company or directors. The managing director or whole-time director of the company cannot be considered as independent director. Section 149(6) of the Companies Act, 2013, prescribes the criteria for independent directors, which are as follows:

1. Such individuals must possess integrity and relevant industrial expertise;
2. Such individuals must not have any material or pecuniary relationship with the company or its subsidiaries;
3. They or their relatives should not have had any pecuniary relationship with the company or its subsidiaries, amounting to 2% or more of its gross turnover or total income or ₹ 5 lakh, whichever is less, during the two immediately preceding financial years or in the current financial year;
4. Such appointees or their relatives should not have any key managerial position in the company or its subsidiary companies during any of the three preceding financial years;
5. Such persons or their relatives should not have been an employee of the company or its subsidiary companies during any of the three preceding financial years;
6. They or their relatives must not be a chief executive or director of a non-profit organisation which receives 25% or more of its receipts from the company or its subsidiary companies or its promoters or directors or from anyone who holds 2% of voting rights in such companies;
7. Such individuals must not be a promoter of the company or its subsidiaries;
8. They must not hold more than 2% voting rights in the company either by themselves or together with their relatives.

22.18 PROVISIONS RELATING TO INDEPENDENT DIRECTOR—SECTION 149

22.18.1 Minimum number of independent director—Section 149(4)

The central government may prescribe the minimum number of independent directors for various classes of public companies. A listed public company shall have at least one-third of the total number of directors as independent directors. Rule 4 of Companies (Appointment and Qualification of Directors) Rules, 2014, provides that the following public companies shall have at least two independent directors:

1. Which is having a paid-up share capital of ₹10 crore or more; or
2. Which is having turnover of ₹100 crore or more; or
3. Which have, in aggregate, outstanding loans, debentures and deposits, exceeding ₹ 50 crore.

22.18.2 Qualification—Rule 5 of Companies (Appointment and Qualification of Directors) Rules, 2014

An independent director shall possess appropriate skills, experience and knowledge in one or more fields of finance, law, management, sales, marketing, administration, research, corporate governance, technical operations or other disciplines related to the company’s business.

As per Section 149(6) the following person can be appointed as independent director:

1. A person who is not a managing director or whole-time director or nominee director.
2. A person of integrity who possesses relevant experience and expertise in the opinion of the board.
3. A person who is not a promoter of the company, its holding, subsidiary or associated company.
4. A person who is not related to the promoter or director of the company, its holding or subsidiary or associate company.
5. A person who or whose relative has pecuniary relationship with company, its holding company or subsidiary company or associate company or their promoters, or directors, amounting to 2% or more of its gross turnover or total income or ₹ 50 lakhs, whichever is lower, during the last two financial years.
6. Who, neither himself nor any of his relatives:
   • holds or has held the position of a key managerial personnel or employee of the company or its holding, subsidiary or associate company in any of the three immediate preceding financial years;
   • 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 firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or
     • any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to 10% or more of the gross turnover of such firm;
   • holds together with his relatives 2% or more of the total voting power of the company; or
   • is 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.

22.18.3 Tenure

Independent directors are not required to be retired by rotation. The tenure of the independent directors must not exceed two consecutive periods of 5 years each, and can be extended for a second term only after the board passes a special resolution and discloses such appointment in the board’s report. Section 149(11) mandates that reappointment after the expiry of second term can be done only after a cooling period of 3 years. During the cooling-off period of 3 years, independent directors cannot be appointed in or be associated with the company in any other capacity, either directly or indirectly.

22.18.4 Remuneration

The Act expressly disallows independent directors from obtaining stock options and remuneration other than sitting fees and reimbursement of travel expenses for attending the board and other meetings. Profit-related commission may be paid to them, but subject to the approval of the shareholders.

22.19 MINIMUM AND MAXIMUM NUMBER OF DIRECTORS—SECTION 149

Section 149 of the Companies Act, 2013, provides that every public company must have at least three directors, every private company must have at least two directors and a one-person company (OPC) must have at least one director.

A company can appoint a maximum of 15 directors. A company may appoint more than fifteen directors after passing a special resolution in general meeting and approval of central government is not required.

Rule 3 of Companies (Appointment and Qualification of Directors) Rules, 2014, prescribes the following class of companies shall appoint at least one woman director:

1. every listed company
2. every other public company having:
   1. a paid-up share capital of one hundred crore rupees or more; or
   2. a turn-over of three hundred crore rupees or more.

According to Section 151 of the Act, every listed company may have one director elected by small shareholders (discussed in detail in the next section)

22.20 SMALL SHAREHOLDERS’ DIRECTORS—SECTION 151 ALONG WITH RULE 7 OF COMPANIES (APPOINTMENT AND QUALIFICATION OF DIRECTORS) RULES, 2014

‘Small shareholder’ means a shareholder (including a preference shareholder) holding shares of nominal value of twenty thousand rupees or less in a public listed company. Equity or preference shareholder who is satisfying the above requirement will be considered as small shareholder.

The Ministry of Company Affairs, in this regard, has prescribed the Companies (Appointment and qualification of Directors) Rules, 2014. Every listed company may have one director elected by small shareholders. The company may appoint a small shareholder on its own or on application by the small shareholder.

22.20.1 Procedure for appointment—Rule 7 of Companies (Appointment and qualification of directors) Rules, 2014

1. The company may appoint a small shareholder director (SSD) if notice in writing is given by at least 1000 small shareholders or 1/10^th of small shareholders, whichever is less.
2. Notice should be given at least 14 days before the general meeting. Notice should contain the name, address and the number of shares held by the person proposed to be appointed as small shareholders’ director.
3. Notice should be accompanied by a statement signed by the person whose name is proposed for post of small directors stating:
   1. his director identification number (DIN)
   2. that he is not disqualified to become director.
   3. his consent to act as director to the company.
4. If the proposer does not hold any shares in the company, the details of shares held and folio number need not be specified in the notice.
5. Listed public companies shall elect the small shareholders’ nominee through a postal ballot.
6. Small shareholders’ director can be appointed for maximum of 3 years and he need not retire by rotation. The person can be elected for another period of 3 years on expiry of his tenure. He cannot be reappointed more than once.
7. A person shall not hold office as small shareholders’ director in more than two companies at same time.
8. A person who is small shareholders’ director in one company cannot be appointed as small shareholders’ director in a second company if it is in competition business or in conflict with the business of the first company.
9. Small shareholders’ director shall directly or indirectly not be appointed or associated in any other capacity with the company for a period of 3 years from the date of his cessation as a small shareholders’ director.

22.20.2 Disqualifications of SSD

A person shall not be capable of being appointed as small shareholders’ director of a company if he is disqualified. Provision of Section 164 is equally applicable to small shareholders’ director.

22.20.3 Vacation of Office

A person appointed as small shareholders’ director shall have to vacate the office if:

1. He incurs any of the disqualification as per Section 164.
2. The office of directors becomes vacant as per Section 176.
3. He is appointed as independent director and ceases to meet the criteria of independency.
4. Removed under Section 169 by members.

22.21 MINIMUM AND MAXIMUM NUMBER OF DIRECTORS—SECTION 149(1)

Section 149(1) of the Companies Act, 2013, provides that every public company must have at least three directors, every private company must have at least two directors and every one-person company (OPC) must have at least one director. A company can appoint more than 15 directors usually. A company may appoint more than 15 directors after passing a special resolution in general meeting and approval of the central government is not required.

22.22 NUMBER OF DIRECTORSHIP—SECTION 165

A person cannot hold office at the same time as a director in more than 20 companies. Further, a person cannot hold directorship at the same time in more than 10 public companies and a private company which is a subsidiary of a public company. While counting 20 directorships of a person, alternate directorship is included. The members of a company may, by special resolution, specify any lesser number of companies in which a director of the company may act as director.

Any person holding office as director in more than 20 companies immediately before the commencement of the Companies Act, 2013, shall within 1 year (i.e., one year from 1-4-2014) from such commencement:

1. select not more than 20 of those companies in which he wishes to continue as director.
2. resign his office as director in the other companies. Here, resignation will take immediate effect on the dispatch.
3. intimate the choice to each of the companies in which he was holding the office of director before such commencement and to the registrar having jurisdiction in respect of each such company.

If a person is already holding directorship in 20 companies and appointed as director in one or more other companies, all new appointments will be not take effect and will be regarded as void.

22.22.1 Penalty

If a person acts as director in more than 20 companies at a time, he is liable for a fine which is not less than ₹ 5,000 but which may extend up to ₹ 25,000 for every day.

22.23 VACATION OF OFFICE OF DIRECTOR—SECTION 167

As per Section 167, the office of a director shall become vacant if:

1. If he incurs any disqualification as specified in Section 164.
2. He is convicted by a court of any offence involving moral turpitude or otherwise and sentenced in respect thereof to imprisonment for not less than 6 months. Provided that office shall be vacated by the director even if he has filed an appeal against order of such court.
3. He absents himself from all the meetings of the board of directors held during a period of 12 months with or without seeking leave of absence of the board. Attendance at board meeting may be by physical presence or virtually through the audio-visual mode (as in a conference call).
4. He acts in contravention of Section 184 of the Companies Act, 2013.
5. He fails to disclose his interest in any contract or arrangement in which he is directly or indirectly interested.
6. He becomes disqualified by an order of court or tribunal.
7. He is removed as per Section 169 of the Companies Act, 2013.
8. 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.

A private company which is not a subsidiary of a public company may, by its articles, provide that the office of director shall be vacated on any grounds in addition to those specified above. Where all the directors of a company vacate their offices under any of the disqualifications specified above, the promoter or, in his absence, the central government shall appoint the required number of directors who shall hold office until the directors are appointed by the company in the general meeting. Under Section 167, vacating office is automatic. It does not require the issue of any notice on part of company or passing of board resolution.

A director who acts after vacating office is punishable with imprisonment for a term which may extend to one year or with pay which shall not be less than ₹ 1,00,000 but which may extend to ₹ 5,00,00 or, with both.

22.24 REMOVAL OF DIRECTOR BY SHAREHOLDER—SECTION 169

Section 169 empowers shareholders to move proposal for removal of director. To remove a director, it is not necessary to prove any kind of breach of trust or misconduct on part of the director. Article of association cannot take away the right of shareholders to remove directors. Right to remove director is a statutory right of shareholders. To remove a director under Section 169, an ordinary resolution should be passed at the general meeting. The following steps should be taken:

1. Special notice must be given by member(s) holding not less than 1% of total voting power or holding shares on which an aggregate sum of not less than ₹ 5,00,000 has been paid as on date of notice.
2. Notice must be given at least 14 days before meeting. The notice must disclose the grounds on which the director is proposed to be removed, and it should be signed by the members.
3. The company should notify to its members about the notice at least 7 days before the meeting and intimate to the concerned director immediately.
4. The director concerned is entitled to make a representation in writing against his removal at the meeting. The company is bound to send a copy of the representation to every member. If the representation is received too late or could not be sent, the concerned director may request the company to read in the general meeting.
5. The representation made by the concerned director is neither required to be sent to members nor need to be read out at a meeting, if on application, the tribunal has permitted waiver. An application for this purpose can be made either by the company or by any other aggrieved party. The tribunal may grant permission if it is satisfied that if right of representation is availed, it can create needless publicity or become defamatory to the company.
6. At the general meeting, the proposal is discussed and an ordinary resolution is passed.

The directors appointed by the tribunal under Section 242 of Companies Act, 2013, cannot be removed by the shareholders in a general meeting.

The shareholders may recommend appointment of any other director in place of the removed director through special notice. Such a director can hold office only for the tenure of removed director. If a new director is not appointed as aforementioned, then board may fill the position through casual vacancy.

22.25 COMPENSATION FOR LOSS OF OFFICE—SECTION 202

Compensation for loss of office can be paid to the managing director, whole-time director or manager. An ordinary director is not entitled to get compensation under this section. However, in the following situation no compensation is payable to the managing director or whole-time director or manager:

1. Where a director resigns the office due to reconstruction or amalgamation of the company with another company and he is appointed as manager or managing director or whole-time director of the other office in the resulting company.
2. Where a director resigns otherwise than on reconstruction or amalgamation.
3. Where a director vacates office under Section 203 of Companies Act, 2013, or 283 of Companies Act, 1956
4. Where winding up of the company is due to negligence or default of the director in question.
5. Where a director has been guilty of any fraud or breach of trust or gross negligence or mismanagement of the affairs of company.
6. Where a director has taken part in bringing about the termination of his office.

As per Rule 17 of Companies (Meetings of board and its powers) Rules, 2014, a company cannot pay any compensation for loss of office to its managing director, whole-time director or manager, if:

1. The company is in default in repayment of deposit, redemption of debenture or interest on it.
2. The company is in default in repayment of any liability payable to any bank or financial institution.
3. The company is in default in payment of any dues to central government, state government, statutory authority or local authority. (i.e., income tax, sales tax, municipal tax, VAT, or excise duty)
4. There are outstanding statutory dues to employees or workmen other than disputed amount.
5. The company has not paid dividend on preference shares or not redeemed preference shares on due date.

22.25.1 Quantum of Compensation

The quantum of compensation is calculated on the remuneration, which he would have earned, if he had been in office for the unexpired residue period or 3 years, whichever is shorter. The amount of compensation is calculated on the basis of average remuneration actually earned during period of 3 years immediately before termination or on the basis of average remuneration actually earned by him during the period he has been in office.

22.26 RESIGNATION BY DIRECTOR—SECTION 168 AND RULE 15-16

A director can resign from his office by giving notice in writing. On receipt of resignation, the board shall:

1. intimate the registrar in Form DIR-12 within 30 days and
2. include the fact of resignation in the directors’ report of the next general meeting of the company and
3. post the information on its website (if any).

The director should also forward a copy of his resignation along with detailed reasons for the resignation to the registrar in Form DIR-11 within 30 days from the date of resignation. The resignation becomes effective from the date on which the notice is received by the company or the date specified by the director in the notice, whichever is later. Provided that the director who has resigned shall be liable, even after his resignation, for the offences which occurred during his tenure, the resignation shall be effective even when no other director is in office.

Where a director has tendered his resignation, he cannot be held liable for liability incurred by the said company after the date of acceptance of his resignation. For the resignation to be valid, it must be addressed to the company. A director can resign by writing a letter either to the chairman or secretary of the company. Where a director has contracted to act for a fixed period, he may resign subject to payment of damages for premature termination. Once a director has given a notice of resignation, he cannot withdraw it.

If all the directors of a company resign from their office or vacate their office, the promoter or, in his absence, the central government shall appoint the required number of directors to hold office until the directors are appointed by the company in a general meeting.

22.27 VALIDITY OF THE ACTS OF THE DIRECTOR WHERE HIS APPOINTMENT IS INVALID—SECTION 176

The acts done by a director shall be valid even if his appointment is discovered to be invalid because of any defect or disqualification or where his appointment had been terminated by virtue of any provision contained in the Companies Act or in the articles.

22.28 POWER OF BOARD OF DIRECTORS

Companies Act, 2013, provides for general powers of the board of directors. The board of directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorised to exercise and do.

Shareholders, by amending the articles, may restrict the powers of the board. However, such amendment cannot be made retrospectively and a meeting of shareholders cannot therefore invalidate any act validly done by the board.

22.28.1 Exception

In the following cases, however, the general meeting of shareholders is competent to intervene and act in respect of a matter delegated to the board of directors:

22.28.2 Directors Acting Mala Fide

Where the directors act for their own personal interests in complete disregard to the interests of the company or where the personal interest of the directors clashes with their duties towards the company

22.28.3 Directors Themselves Wrong Doers

Where the directors themselves the wrong doers and have acted mala fide.

22.28.4 Incompetency of the Board

When the board has become incompetent to act, e.g., where all the directors constituting the board are interested in dealing or where none of the directors was validly appointed, the majority of shareholders may exercise powers in a general meeting of the company.

22.28.5 Deadlock in Management

When there is a deadlock in the management such that the directors cannot exercise some of their powers.

It is the collective wisdom of the directors which has been conferred the privilege of managing the affairs of the company. Individual directors do not have any general powers.

22.29 RELATED PARTY TRANSACTION—SECTION 188

Section 188 requires a company to obtain approval of the board and of the members in certain situations, prior to any transaction or entering into an agreement with a related party. Section 188 is applicable to all companies.

22.29.1 Who is a Related Party?

Section 2(76), read with Rule 3 of Companies (specification of definitions details) Rules, 2014, defines a related party as under:

‘Related party’, with reference to a company, means:

1. a director or his relative;
2. a key managerial personnel or his relative;
3. a firm, in which a director, manager or his relative is a partner;
4. a private company in which a director or manager is a member or director;
5. a public company in which a director or manager is a director or holds, along with his relatives, more than 2% of its paid-up share capital;
6. any body corporate whose board of directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;
7. any person on whose advice, directions or instructions, a director or manager is accustomed to act;
8. any company which is:
   • a holding, subsidiary or an associate company of such company; or
   • a subsidiary of a holding company to which it is also a subsidiary;
9. a director or key managerial personnel of the holding company or his relative.

22.29.2 Related Party Transactions

The following transactions between a company and its related party are known as related party transactions:

1. sale, purchase or supply of any goods or material;
2. selling or otherwise disposing of, or buying property of any kind;
3. leasing of property of any kind;
4. availing or rendering of any services;
5. appointment of any agents for purchase or sale of goods, materials, services or property;
6. appointment to any office or place of profit in the company, its subsidiary company or associate company; or
7. under-writing the subscription of any shares in or derivatives thereof.

22.29.3 What is ‘Office’ or ‘Place of Profit’?

‘Office’ or ‘place of profit’ means any designation or post under a company which carries any remuneration apart from any remuneration a person is getting from the company as director. Remuneration means any salary, fees, commission, perquisites or right to occupy any premises.

Section 188 suggests an office or place of profit in following manner:

1. Office or place of profit held by director: In case of office or place held by the director, it shall be deemed to be an office or place of profit if the director holding it obtains from the company anything by way of remuneration over and above the remuneration to which he is entitled as director.
2. Office or place of profit held by a person other than director: In case of office or place held by any person other than director, it shall be deemed to be an office of place of profit if such person obtains from the company anything by way of remuneration over and above the remuneration, by whatever name called.

22.29.4 Exemption or Non-applicability

The above-mentioned provisions will not be applicable in case of transactions entered into by the company in its ordinary course of business, which are on arm’s length basis. ‘Arm’s length transaction’ means a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest.

Example

Let us assume a bank whose normal course of business provides 9% interest rate to its customers for placing fixed deposit for a two-year tenure. It offers 9.25% – a higher rate – to all its group employees. One may argue that the higher rate is not at arm’s length. Alternatively, one may argue that banks devise different strategies for various categories of customers. Employee population of the entire group provides a significant customer-base for the bank and hence providing higher rate is in accordance with business strategy and meets the criteria of arm’s length. The arm’s length assessment is a subjective exercise and requires judgment after considering various parameters.

Section 188 is not applicable where transaction is arising out of corporate restructuring or amalgamation etc. as per Ministry of Corporate Affairs (MCA) Circular 30/2014.

22.29.5 Approval or Permission

If related party transaction is at arms’ length and in the ordinary course of business, it is approved by the audit committee. If a related party transaction is not at arm’s length or not in the ordinary course of business or both, the following permissions are needed:

• Audit committee approval
• Prior consent of the board by a resolution at a board meeting irrespective of capital of company or value of transaction.

Related party transactions by a company having paid-up capital of ₹ 10 crore or more, or exceeding value of transactions as mentioned below will require prior approval of shareholders by ordinary resolution:

1. Sale, purchase or supply of any goods or materials directly or through appointment of agents exceeding 10% of the annual turnover or ₹ 100 Cr., whichever is lower.
2. Selling or otherwise disposing of, or buying property of any kind, directly or through appointment of agents, exceeding 10% of net worth or ₹ 100 Cr., whichever is lower.
3. Leasing of property of any kind exceeding 10% of the net worth or 10% of turnover or ₹ 100 Cr., whichever is lower.
4. Availing or rendering of any services, directly or through appointment of agents, exceeding 10% of the turnover or ₹ 50 Cr., whichever is lower.
5. Appointment to any office or place of profit in the company, its subsidiary company or associate company, at a monthly remuneration exceeding ₹ 2.5 lakhs.
6. Remuneration for under-writing the subscription of any securities or derivatives thereof of the company exceeding 1% of the net worth.

22.29.6 Disclosure

The notice or agenda of the board meeting at which the resolution of related party transaction is proposed to be moved shall disclose details as per the Act. Every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered into:

1. with a body corporate in which such director or such director in association with any other director, holds more than 2% shareholding of that body corporate; or
2. with a body corporate in which such director is a promoter, manager, chief executive officer of that body corporate; or
3. with a firm or any other entity in which, such director is a partner, owner or member, as the case may be,

shall disclose the nature of his concern or interest in contract at the meeting of the board in which the contract or arrangement is discussed.

Every related party transaction or contract shall be disclosed in the board’s report along with the justification for entering into such contract or arrangement. The company shall maintain a register in Form MBP 4 and shall enter therein, the particulars of contracts or arrangements with a related party under Section 188. In addition to the above, in the case of listed company:

1. Details of all materials pertaining to related party transaction are to be disclosed quarterly along with the compliance report on corporate governance.
2. Policy on dealing with related party transaction is to be disclosed on the company’s website and annual report

22.29.7 Penalty

The company may proceed against a director or employee, who had entered into contract or arrangement in contravention of the provisions, for recovery of any loss sustained by it as a result of such contract or arrangement. Such a director shall be disqualified for a period of 5 years. In case of a listed company, such director or employee may be punishable with imprisonment for a term up to 1 year and/ or with fine of ₹ 25,000 to ₹ 5,00,000. In case of any other company, such director or employee may be punishable with fine of ₹ 25,000 to ₹ 5,00,000.

22.30 DISCLOSURE OF DIRECTOR’S INTEREST—SECTION 184

Section 184 is applicable to all companies. It specifies the following two types of disclosure:

1. General disclosure
2. Specific disclosure

‘Disclosure of interest’ means making aware about interest but where all other directors are aware about interest, formal notice of disclosure is not required.

22.30.1 General Disclosure—Section 184(1)

General disclosure is given before the first board meeting in which a person participates as director. An existing director should disclose his direct or indirect interest in any contract or arrangement by giving general notice to the board at the first board meeting held after the beginning of the financial year. Notice is given in Form MBP-1. If there is any change in interest, it is required to be disclosed in the next board meeting held after change has taken place. The notice should specify that he:

1. is a director or a member of a specified body corporate or is a member of a specified firm and is to be regarded as concerned or interested in any contract or arrangement entered into with that company or firm.
2. is a promoter, manager, chief executive officer of body corporate or with a firm or any other entity in which such director is a partner, owner or member as the case maybe.

22.30.2 Specific Disclosure—Section 184(2)

If the director has not given general notice of his interest, he can give notice before or after board meeting in which such contract has been entered into or is likely to be discussed.

Every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered into:

1. with a body corporate in which such director or such director in association with any other director, holds more than 2% shareholding of that body corporate, or
2. with a body corporate in which such director is a promoter, manager, chief executive officer of that body corporate; or
3. with a firm or any other entity in which, such director is a partner, owner or member, as the case may be,

shall disclose the nature of his concern or interest at the meeting of the board in which the contract or arrangement is discussed.

Section 184 will not apply to a contract between two companies where one or more directors of one company holds not more than 2% of the paid-up capital of the other company. A limit of 2% is considered at the point of time when the contract is entered in to and not at the time when disclosure is made.

The interested director cannot participate or vote at a board meeting where contract or arrangement is discussed in which he is interested. His presence will not be counted for the purpose of quorum at the time of discussion and at the time of voting. If he casts vote, his vote shall be void.

Such notices are preserved for a period of 8 years at the registered office and are to be kept in custody of the secretary of the company or any other person authorised by the board on his behalf.

22.30.3 Penalty

Following are the effects of contravention of Section 184:

1. The director will vacate office under Section 167 of Companies Act, 2013.
2. The contract becomes voidable at the option of the board.
3. The director is punishable with imprisonment up to one year or with fine which shall not be less than ₹ 50,000 but which may extend to ₹ 1 lakh, or with both.
4. Any secret profit made is liable to refunded to company.

22.31 LOAN TO DIRECTORS—SECTION 185

Section 185 provides that, a company cannot give, directly or indirectly, any loan to or give any guarantee or provide any security for any loan taken or given by:

1. any director of the lending company or of a company which is its holding company
2. any partner or relative of the director.
3. any firm in which any such director or relative is a partner.
4. any private company in which any such director is a director or member.
5. any body corporate at a general meeting of which 25% or more voting power is controlled by one or more directors collectively.
6. any body corporate where the board of directors, managing director or manager whereof is accustomed to act according to the directions of directors of the lending company.

Section 185 is applicable to public and certain private companies. At the same time, if one company has to lend money to another company, Section 185 is required to be followed by the lending company as well as the borrowing company. Section 185 is applicable to a loan represented by a book debt.

Section 185 is not applicable to any loan made, guarantee given or security provided by:

1. a banking company during its ordinary course of business(if interest is charged at rate not less than the bank rate declared by RBI).
2. a holding company to its subsidiary company.

Section 185 is not applicable when the advance salary is given as per the policy of the company to the wife of the managing director if the wife of the managing director is an employee of the company. Section 185 is not applicable for giving any loan to a managing director or a whole-time director:

1. As part of the conditions of service extended by the company to all its employees.
2. Pursuant to any scheme approved by the members by special resolution. Such scheme may include housing loan scheme, education loan scheme, employee stock ownership plan (ESOP) etc.

22.31.1 Penalty

For contravention of Section 185:

1. The company is liable to pay fine not less than ₹ 5 lakhs but not more than ₹ 25 lacs.
2. The director and every other person who was party to the loan or guarantee is punishable for:
   • imprisonment up to 6 months or
   • fine of not less than ₹ 5 lakhs but not more than ₹ 25 lakhs or
   • both.
3. The person who was party is liable for repayment of loan.

For contravention of Section 185, both lender of loan and receiver are liable for punishment.

22.32 MANAGING DIRECTOR—SECTION 2(54)

Section 2(54) defines ‘managing director’ as a director who, by virtue of an agreement with the company or of a resolution passed by the company in a general meeting or by its board of directors, or by virtue of its memorandum or articles of association, is entrusted with substantial powers of management which would not otherwise be exercisable by him. The expression includes the director occupying the position of a managing director, by whatever name called.

22.32.1 Appointment of Managing Director

A managing director may be appointed either by way of:

1. an agreement with the company
2. a resolution passed by the company in a general meeting
3. a resolution passed by the board of directors
4. a memorandum or articles of association.

If the appointment of MD and whole-time director (WTD) is within Schedule V, no permission of central government is required to be obtained.

A person, who is either the managing director or a manager of one company, cannot be appointed as a managing director of another public company or private company which is a subsidiary of a public company unless such an appointment is approved by unanimous resolution of the BOD of the other company.

A person may be managing director of any number of private companies.

22.32.2 Tenure of Appointment—Section 196

The MD or WTD or manager cannot be appointed for more than 5 years at a time. Appointment includes re-appointment. However, he may be re-appointed or re-employed for periods not exceeding 5 years on each occasion. Further, such reappointment or extension shall not be sanctioned earlier than 1 year before the expiry of his term. If re-appointment is not within Schedule V, permission of central government is needed for reappointment. The provisions of Section 196 are applicable to all companies.

22.33 DISQUALIFICATION OF MANAGING DIRECTOR OR WHOLE-TIME DIRECTOR OR MANAGER—SECTION 196

A person cannot be appointed or continued to be employed as managing or whole-time director or manager by a company, who:

1. is below age of 21 years or has attained the age of 70 years.
2. is an undischarged insolvent, or has at any time been adjudged an insolvent.
3. suspends, or has at any time suspended, payment to his creditors, or makes or has at any time made a composition with them.
4. has, at any time, been convicted by a court of law for an offence involving moral turpitude and sentenced for a period of more than 6 months.

A person who has attained age of 70 years can be appointed as managing director, whole-time director or manager by passing a special resolution with an explanatory statement that includes justification for appointment of such person. A person who is disqualified to be appointed as a director under Section 164 of Companies Act, 2013, cannot be appointed as managing director or whole-time director. Section 196 is applicable to all companies.

22.34 WHOLE-TIME DIRECTOR—SECTION 2(94)

Section 2 (94) of the Companies Act, 2013, defines ‘whole-time director’ as a director in the whole-time employment of the company. He is required to be a director first. A person cannot act as whole-time director in more than one company. Additional director can be appointed as whole-time director.

22.35 DISTINCTON BETWEEN MANAGING DIRECTOR AND WHOLE-TIME DIRECTOR

Managing Director	Whole-time Director
A managing director is entrusted with substantial powers of management which are not otherwise exercisable by a director.	A whole time director means a director in whole-time employment of the company.
Managing director is not considered as whole-time employee of company	Whole-time director is considered in whole time employment of the company

22.36 MANAGER—SECTION 2(53) OF COMPANIES ACT 2013

‘Manager’ means an individual who, subject to the superintendence, control and directions of the board of directors, has the management of the whole or substantially the whole of the affairs of the company, and includes a director or any other person occupying the position of a manager, by whatever name called and whether under a contract of service or not.

22.37 DISTINCTION BETWEEN MANAGING DIRECTOR AND MANAGER

A ‘managing director’ is entrusted with substantial powers of management. A ‘manager’, on the other hand, has the management of the whole or substantially the whole of the affairs of a company.

A managing director is appointed either under an agreement or by a resolution of the board or general meeting or under the provisions of the memorandum or articles. A manager, on the other hand, is usually appointed either under a contract of service or by the board of directors though the articles may also provide for his appointment.

A managing director must be a director whereas a manger may or may not be a director.

A managing director, on his ceasing to be a director, shall automatically cease to be the managing director as well. A manager–director, however, can continue as a manager even though he creases to be a director.

The grounds of disqualifications of a managing director, as given in Section 267, remain effective for whole life and cannot be waived by the central government. Most of the grounds for disqualification of a manager are only for five years and these can also be waived by the central government.

22.38 APPOINTMENT OF KEY MANAGERIAL PERSONNEL—SECTION 203

22.38.1 Who is a Key Managerial Perosnnel?

As per Section 2(51), key managerial personnel,(KMP) in relation to a company, means:

1. the chief executive officer or managing director or the manager;
2. the company secretary;
3. the whole-time director;
4. the chief financial officer; and
5. such other officer as may be prescribed.

22.38.2 Companies Required to Appoint KMP

Section 203 of the Companies Act, 2013, read with Rule 8 provides the appointment of key managerial personnel and makes it compulsory for a listed company and every other public company having a paid- up share capital of ₹ 10 or more, to appoint following whole-time key managerial personnel:

1. managing director, or chief executive officer or manager and in their absence, a whole-time director;
2. company secretary; and
3. chief financial officer.

22.38.3 Manner of Appointment

Whole-time key managerial personnel of a company are appointed by board resolution. It should contain and approve the terms and conditions of the appointment including the remuneration. Any vacancy in the office of any whole-time key managerial personnel is filled-up by the board within a period of 6 months from the date of such vacancy.

22.38.4 Restrictions Regarding Appointment of KMP

An individual shall not be appointed, at the same time, as the chairman of the company, as well as:

1. the managing director or
2. chief executive officer.

However, in the following circumstances, the above restriction will not apply:

1. the articles of the company contain provision for appointment of the same person, or
2. the company carries only a single business, or
3. the company is engaged in multiple businesses and has appointed one or more chief executive officers for each such business as may be notified by the central government.

A whole-time key managerial personnel shall not hold office in more than one company at the same time, except:

1. in the company’s subsidiary company,
2. as a director in any other company with the permission of the board,

A person, who is managing director of one company, may be appointed as a managing director or manager of not more than one another company, if following conditions are satisfied:

1. The appointment is approved by unanimous resolution of board of the other company with consent of all directors present at meeting.
2. Specific notice is given to all directors in India.
3. Specific notice should state that such resolution shall be moved at the board meeting.

A whole-time key managerial personnel holding office in more than one company at the same time, shall, within a period of 6 months from such commencement, choose one company in which he wishes to continue to hold the office of key managerial personnel.

22.38.5 Other Provisions Relating to KMP

A KMP is included within the meaning of ‘Officer in Default’ under the Act. A document or proceeding requiring authentication by a company, or contracts made by or on behalf of a company, may be signed by any key managerial personnel or an officer of the company, duly authorised by the Board, on its behalf. Details regarding KMP, changes therein and the remuneration paid to them are required to be disclosed in the annual return of the company. A person whose relative is employed as a KMP in a company is disqualified to be appointed as auditor in that company.

A person is disqualified to be appointed as an independent director if he either himself or through his relative holds or has held the position of a key managerial personnel 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.

The key managerial personnel shall have a right to be heard in the meetings of the audit committee when it considers the auditor’s report but shall not have the right to vote.

22.39 MANAGERIAL REMUNERATION

The term ‘managerial remuneration’ is not defined under Companies Act, 2013. It means remuneration paid to the person holding managerial position. Managing directors, whole-time directors, directors and managers hold managerial positions. Managerial remuneration includes any form of payment made or expenditure incurred by the company. It may be paid in any of following forms:

1. Monthly payments (salary)
2. Specified percentage of net profits
3. Commission.

Remuneration includes any expenditure incurred by company:

1. in providing any rent-free accommodation, or any other benefit in respect of accommodation free of charge
2. in providing any other benefit or amenity free of charge or at a concessional rate
3. to effect any insurance on the life of, or to provide any pension, annuity or gratuity.

If sitting fees is paid to the whole-time director or managing director, then it is also included in the managerial remuneration.

22.39.1 Schedule V-Part II-Section IV—Perquisite not Included in Managerial Remuneration

Besides the aforesaid remuneration, managerial personnel of a company having no profits or having inadequate profits shall also be eligible to the following perquisites:

1. Contributions to provident fund, superannuation fund or annuity fund to the extent these, either singly or put together, are not taxable under the Income-tax Act, 1961.
2. Gratuity payable at a rate not exceeding half-a-month salary for each completed year of service.
3. Encashment of leave at the end of the tenure.

In addition to the aforesaid perquisites, an expatriate managerial person (including a non-resident Indian) shall also be eligible to the following perquisites:

1. In case of children studying in or outside India, an allowance limited to a maximum of ₹ 12,000 per month per child or actual expenses incurred, whichever is less. Such allowance is admissible up to a maximum of two children.
2. Return holiday passage once in a year by economy class or once in two years by first class to children and to the members of the family from the place of their study or stay abroad to India if they are not residing in India with the managerial person.
3. Return passage for self and family in accordance with the rules specified by the company where it is proposed that the leave be spent in home country instead of anywhere in India.

22.40 METHODS OF DETERMINATION OF REMUNERATION

The company may determine managerial remuneration payable to its managing director or whole-time director or manager in any of the following ways:

1. By article of association of company
2. By passing an ordinary resolution
3. By passing special resolution, if the article provides so.

The board has not power to fix the remuneration unless authorised by shareholders at a general meeting or as per the provisions of the article.

22.41 OVERALL LIMITS ON MANAGERIAL REMUNERATION

Managerial remuneration which a company can pay to its managerial personal can be discussed under the following two heads:

1. Where the company has profit
2. Where the company has no profit or inadequate profit.

22.42 MANAGERIAL REMUNERATION WHERE THE COMPANY HAS PROFIT

A public company and its subsidiary company cannot pay remuneration exceeding 11% net profit to its managerial personnel in any financial year. Net profit is calculated as per Section 198. Net profit is arrived at after charging depreciation.

A director who is neither in the whole time employment of the company nor a managing director may be paid remuneration subject to the following:

1. 1% of the net profits of the company, if the company has a managing, or a whole-time director or a manager.
2. 3% of the net profits of the company in any other case.

However, the company may, in a general meeting, with the approval of the central government authorise the payment of such remuneration at a rate exceeding 1% or, as the case may be, 3% of its net profits.

If the company has one managing director or whole-time director or manager, the remuneration payable shall not exceed 5% of net profit. However, if the company has more than one executive director (MD, WTD), the overall remuneration limit is 10% of net profit.

A company can pay managerial remuneration in excess of limit with the permission of central government. There is no restriction relating to managerial remuneration for a private company.

22.43 MANAGERIAL REMUNERATION WHERE COMPANY HAS NO PROFIT OR INADEQUATE PROFIT

If a company has no profit or inadequate profit for any financial year, it may pay managerial remuneration as per Schedule V of Companies Act, 2013.

Every public company and its subsidiary company shall follow Schedule V of Companies Act, 2013. If company can pay managerial remuneration beyond that stipulated in Schedule V, it can do so with the permission of central government.

22.44 SALIENT FEATURES OF SCHEDULE-V OF COMPANIES ACT, 2013

If the appointment of managing director or whole-time director or manager satisfies the conditions specified in Schedule V, no permission of central government is required. Schedule V is divided into four parts. The following chart shows framework of Schedule V:

22.44.1 Part-I–Conditions for Appointment

A person shall not be eligible for appointment as a managing or whole-time director or a manager, if he had been sentenced to imprisonment for any period, or to a fine exceeding ₹ 1,000, for the conviction of an offence under any of the following Acts:

1. The Indian Stamp Act, 1899
2. The Central Excises Act, 1944
3. The Industrial (Development and Regulation) Act, 1951
4. The Prevention of food Adulteration Act, 1954
5. The Essential Commodities Act, 1955
6. The Companies Act, 2013
7. The Securities Contracts (Regulation) Act, 1956
8. The Wealth-tax Act, 1957
9. The Income-tax Act, 1961
10. The Customs Act, 1962
11. The Competition Act, 2002
12. The Foreign Exchange Management Act, 1999
13. The Sick Industrial Companies (Special Provisions) Act, 1985
14. The Securities and Exchange Board of India Act, 1992
15. The Foreign Trade (Development and regulation) Act, 1992
16. The Prevention of Money Laundering Act, 2002

He had not been detained for any period under the Conservation of Foreign Exchange and Prevention of Smuggling Activities (COFEPOSA) Act, 1974.

He has completed the age of 21 years and has not attained the aged of 70 years.

Where he is a managerial person in more than one company he draws remuneration from one or more companies subject to the ceiling provided in Schedule V of Part II.

He is resident of India.

22.44.2 PART II-Section I—Remuneration Payable by Companies having Profits

A company having profits in a financial year may pay any remuneration, by way of salary, dearness allowance, perquisites, commission and other allowances, which shall not exceed 5% of its net profits for one such managerial person, and if there is more than one such managerial person, 11% for all of them together.

22.44.3 PART II-Section II—Remuneration Payable by Companies having no Profits or Inadequate Profits without Approval of Central Government

In any financial year where a company has no profits or its profits are inadequate, it may pay higher of following two options (either A or B) as remuneration to a managerial person:

22.44.3.1 Option—(A)

The company can pay remuneration as per limits shown in the following table by passing an ordinary resolution:

Where effective capital of company is	Yearly remuneration (in ₹)
Negative or Less than ₹ 5 cr.	60,00,000
₹ 5 Cr or more but less than 100 Cr.	84,00,000
₹ 100 Cr or more but less than 250 Cr.	1,20,00,000
₹ 250 Cr and more	1,20,00,000 plus 0.01% of the effective capital in excess of ₹ 250 crore.

If special resolution is passed instead of ordinary resolution by the shareholders, the above limits can be doubled for payment of managerial remuneration.

22.44.3.2 Option—(B)

Approval of Central Government is not required in case of managerial person who is functioning in a professional capacity, if he is not having any:

1. Direct or indirect interest in capital of company or its holding company or its subsidiary company or through statutory structure
2. Director or indirect interest or related to directors or promoters of company or its holding company or its subsidiary company,

at any time during last 2 years from appointment, on date of appointment and during appointment

Statutory structure refers to any kind of entity, which is entitle to hold shares in any company formed under any statute. He should possess minimum graduate qualification with expertise and specialized knowledge in the field in which company operates.

22.44.3.3 Procedure or Conditions for Payment of Remuneration for Part II-Section II

Managerial remuneration should be approved by a resolution of the board of directors and also by the nomination and remuneration committee, if applicable.

The remuneration shall be approved by a resolution of shareholders in a general meeting.

The company has not made any default in repayment of its debt or debenture or interest thereon for a continuous period of 30 days in preceding financial year.

The approval of remuneration by special resolution (SR) should be for not more than 3 years. (SR is required only when the remuneration given is double the limit mentioned.)

The statement, along with the notice of this resolution, should provide information mentioned in the schedule.

The auditor or company secretary of company or company secretary in practice should certify that the requirement of the schedule has been complied with and such certificate shall be incorporated in the return filed with the registrar.

22.44.4 PART II-Section III—Remuneration Payable by Companies having no Profits or Inadequate Profits without Central Government Approval in Certain Special Circumstances

In the following circumstances a company may, without central government approval, pay remuneration to a managerial person in excess of the amount specified in Part II:

1. It is a foreign company or any other company which has got approval for such payment by passing a special resolution and total managerial remuneration payable to such other company is within limit specified under Section 197; or
2. The managerial person of the company is not receiving remuneration from any other company, and:
   • the company is a newly incorporated company within a period of 7 years from the date of its incorporation or
   • the company is declared a sick company within 5 years from sanction of scheme of revival.
   • where remuneration is fixed by BIFR and NCLT.
3. An unlisted company in SEZ may pay up to ₹ 240 Lakh yearly if, the company has not raised any money by public issue of shares or debenture in India or has not made any default in repayment of any of its debt or debenture or interest payable thereon for a continuous period of 30 days.

22.44.4.1 Procedure or Conditions for Payment of Remuneration for Part II-Section III

An auditor or company secretary of the company or company secretary in practice certifies that:

1. All secured creditors and term lenders have stated in writing that they have no objection for the appointment of the managerial person as well as the quantum of remuneration and such certificate is filed along with the return as prescribed
2. There is no default on payments to any creditors, and all dues to deposit holders are being settled on time.

22.44.5 Part II-Section IV—Perquisite not Included in Managerial Remuneration.

Besides the remuneration, managerial personnel of a company having no profits or having inadequate profits shall also be eligible to the following perquisites:

1. Contribution to provident fund, superannuation fund or annuity fund to the extent these either singly or put together are not taxable under the Income-tax Act, 1961.
2. Gratuity payable at a rate not exceeding half a month salary for each, completed year of service.
3. Encashment of leave at the end of the tenure.

22.44.6 Part II-Section V—Remuneration Payable to Managerial Personnel from two Companies

A person who is a managerial person in more than one company shall be able to draw remuneration from one or more of those companies provided that the total remuneration drawn from the companies does not exceed the higher maximum limit admissible from any one of the companies of which he is a managerial person.

22.44.7 Companies Exempted

The restrictions with regard to managerial remuneration contemplated under Sections 197 (including Schedule V) do not apply to independent private companies. Directors of private companies can be paid remuneration as per their provisions of article.

22.45 EFFECTIVE CAPITAL

Remuneration to the managerial personnel under Schedule V is paid according to the effective capital of the company. Effective capital is calculated as under:

Particular	Amount
Paid-up share capital (excluding share application money or advances against shares)
Add: Reserve and surplus (Excluding revaluation reserve)
Add: Securities premium account
Add: Long-term loans
Add: Deposits repayable after one year (excluding working capital loan, overdraft, interest due on loan, bank guarantee)
Less: Investments
Less: Accumulated loss and preliminary expenses not written off
Total

Negative effective capital means effective capital less than zero.

22.45.1 Time when Effective Capital shall be Calculated

Where the appointment of the managerial person is made in the year in which company has been incorporated, the effective capital shall be calculated as on the date of such appointment. In any other case, the effective capital is calculated as on the last date of the financial year preceding the financial year in which the appointment of the managerial person is made.

LIST OF LANDMARK JUDGEMENTS

1. Oriental Metal Pressing (p) Ltd. vs B. K. Thakoor (1961)

   Only an individual can be appointed as director of a company.

2. Dean Dayal vs Sri. B. P. Reddy (1984)

   A manager or any other managerial person is however not a director.

3. R. R. Kothandarnan vs CIT (1957)

   Generally, directors are not employees or servants of a company but there is nothing in law to prevent a director from accepting employment under company by special contract.

4. Swapan Dasgupta vs Navin Chand Suchanti (1988)

   If the article of a private company is silent about appointment of director, then directors are to be appointed by shareholders at a general meeting.

5. Vineent Kumar Mathur vs UOI (1996)

   Directors, as agents, can make a company liable even for contempt of court.

6. Rolta India Ltd vs Venire Industries Ltd (2000)

   A company cannot be restrained from appointing a new director because of an agreement between some groups of shareholders.

7. Vijay Krishan Jaidka vs Jaidka Motor Co. Ltd (1996)

   Where there is no proof that notices of board meeting were served on a director, the director could not be removed on the ground that he abstained from attending meetings.

8. Krisna Prasad Pilani vs Colaba Land and mills Co. (1959)

   The additional director vacates office either on the day on which the next AGM is held or on the last day on which meeting should have been held in accordance with the provisions of the Act, whichever is earlier.

9. Namita Gupta vs Cachar Native Joint Stock Co. Ltd (1999)

   Normally, there should be an individual resolution relating to rejection of election of a retiring director and a separate resolution for election of a new director in that place.

10. Cricket Club of India vs Madhav L. Apte (1975)

    A public company cannot provide for any additional disqualification for the appointment of director

11. Needle Industries (P) Ltd vs Needle Industries Neway (i) Holding Ltd (1981)

    Unless the article authorises, the board of directors cannot appoint an additional director.

12. M. K. Srinavasam vs W. S. Subrahamanya Ayyar (1932)

    No casual vacancy arises if a director appointed by the company in a general meeting does not assume office.

13. Madhvan Nambiar vs ROC (2000)

    There is no distinction between whole-time director, part-time director and nominee director and liability for acts of omission or commission is equal under the companies act.

14. Queen Kuries and Loans (P) Ltd vs Sheena Jose (1993)

    For removal of a director under Section 169 (Similar to Section 285 of Companies Act, 1956), special notice has to be given of a resolution seeking to remove a director. The notice must disclose the ground on which the director is proposed to be removed.

15. Labh Singh vs Panaser Mech. Works (P) Ltd (1987)

    In absence of any provisions in the article of association, the director of an independent private company is entitled to continue until removed by general body.

16. Chaterbridge Corpration Ltd vs Loyds Banks Ltd (1970)

    If irregularities constituting invalidity is brought to the notice of the director, any act done by the director shall not be valid.

17. Ador Samia Ltd vs Indocom Engineering Sys Ltd (1999)

    A director due to retire by rotation must vacate office at the last day on which AGM ought to have been held.

18. Registrar vs Orissa Paper Products Ltd (1988)

    Resignation must be submitted either to the company or to the board of directors. A resignation sent to a third party is not effective.

19. Tarlok Chand Khanna vs Rajkumar Kapoor (1983)

    A permanent director can be removed by members from the office.

20. Venkatachalpati vs Guntur Mills (1929)

    Where the whole body of directors is aware of interest of directors, a formal disclosure is not necessary.

21. Sussen Textiles bearing Ltd vs Union of India (1984)

    Guarantee commission paid to a director is not managerial remuneration

22. Hannibal (E) and Co. vs Frost (1988)

    The MD of a company used the funds of the company for paying bribes; the court held that he had no authority to use company’s fund for an illegal purpose. The company can recover the money from the MD.

23. D. Ross Porter vs Pioneer Seed Co. Ltd (1989)

    Company cannot refuse to appoint an alternate director for malafide reasons.

TEST YOUR KNOWLEDGE

1. Explain the term ‘director’.

   (Ref. Para-22.1)

2. What are the disqualifications of directors?

   (Ref. Para-22.2)

3. State the legal position of directors.

   (Ref. Para-22.3)

4. Explain, in brief, about the various methods of appointment of directors of a company.

   (Ref. Para-22.5)

5. How are the first directors of a company appointed?

   (Ref. Para-22.6)

6. Explain the circumstances under which a director retiring at an annual general meeting shall be deemed to have been reappointed even though no such appointment has been made.

   (Ref. Para-22.8)

7. Can a person who is not a member of the company become its director? State the procedure in this regard.

   (Ref. Para-22.9)

8. Which directors are not required to file consent with ROC?

   (Ref. Para-22.10)

9. Write short note on Director Identification Number.

   (Ref. Para-22.11)

10. Can a company appoint additional directors? How?

    (Ref. Para-22.13)

11. Additional directors appointed hold office for their life-time. Comment.

    (Ref. Para-22.13)

12. How is casual vacancy filled if it arises in the office of directors?

    (Ref. Para-22.14)

13. A director filling a casual vacancy is not a retiring director. Comment.

    (Ref. Para-22.14)

14. Explain in detail the provisions relating to appointment of an alternate director.

    (Ref. Para-22.15)

15. State the provisions relating to minimum and maximum number of directors.

    (Ref. Para-22.19)

16. Explain, in detail, the provisions relating to the appointment of small shareholders’ directors.

    (Ref. Para-22.20)

17. How can the number of directors be increased?

    (Ref. Para-22.21)

18. How can the number of directors be decreased?

    (Ref. Para-22.21)

19. One person can be a director in any number of companies. Comment.

    (Ref. Para-22.22)

20. State the provisions and restrictions on the number of directorship that a person can hold.

    (Ref. Para-22.22)

21. When shall a director vacant his office?

    (Ref. Para-22.23)

22. Who can remove a director?

    (Ref. Para-22.24)

23. Explain briefly the provisions of the Companies Act, relating to the removal of a director in case of receipt of an appropriate special notice by the company for this purpose.

    (Ref. Para-22.24)

24. Can a company pay compensation to its directors for loss of office? Explain briefly the provisions in this regard.

    (Ref. Para-22.25)

25. State the circumstances in which a director can resign from his office.

    (Ref. Para-22.26)

26. When does the resignation of a director become effective?

    (Ref. Para-22.26)

27. Can a managing director be relieved immediately on tendering resignation?

    (Ref. Para-22.26)

28. State the provisions relating to approval of contracts in which a director is interested.

    (Ref. Para-22.29)

29. Outline the provisions with regard to disclosure of interest by directors. What are the consequences of non-disclosure?

    (Ref. Para-22.30)

30. An interested director cannot attend the board meeting. Comment.

    (Ref. Para-22.31)

31. State the provisions relating to making loans to directors.

    (Ref. Para-22.31)

32. Define managing director.

    (Ref. Para-22.32)

33. State the provisions relating to managing director.

    (Ref. Para-22.32)

34. Can a person be appointed as managing director of two companies?

    (Ref. Para-22.32)

35. Is it necessary to appoint a managing director for every company?

    (Ref. Para-22.32)

36. What are the disqualifications for managing director?

    (Ref. Para-22.33)

37. Define manager.

    (Ref. Para-22.36)

38. What are the disqualifications for vacation of office of a manager?

    (Ref. Para-22.33)

39. Distinguish between managing director and manager.

    (Ref. Para-22.37)

40. Explain, in detail, the remuneration to which directors and managers are entitled under the Companies Act, 2013.

    (Ref. Para-22.39)

41. Explain Schedule V of the Companies Act, 2013.

    (Ref. Para-22.44)

MULTIPLE-CHOICE QUESTIONS

1. Private company must have at least _____ directors.
   1. 3
   2. 2
   3. 5
   4. 7
2. A private company must have at least _____ directors.
   1. 3
   2. 2
   3. 5
   4. 7
3. Until the directors are duly appointed, all signatories to the _____ of the company are deemed to be directors of company.
   1. prospectus
   2. memorandum
   3. appointment letter
   4. consent letter
4. Directors liable to retire by rotation to retire every _____ years.
   1. one
   2. two
   3. three
   4. four
5. Proposal for appointment of a person who is not a retiring director, can be made by _____.
   1. any person interested in his appointment
   2. any member
   3. Either (a) or (b)
   4. Neither (a) nor (b)
6. Appointment of additional director can be made by _____.
   1. any other director
   2. board of directors
   3. shareholders
   4. general meeting
7. The managing director shall be necessary to be a _____.
   1. director
   2. member of company
   3. shareholder
   4. all of the above
8. Any director may be removed by _____.
   1. board resolution
   2. special resolution
   3. resolution by circulation
   4. ordinary resolution
9. Director appointed by which authority can be removed by an ordinary resolution?
   1. Director appointed by the board
   2. Director appointed by the company at a general meeting
   3. Either (a) or (b)
   4. Neither (a) nor (b)
10. The office of the director shall become vacant immediately when _____.
    1. the director adjudged insolvent
    2. the director is convicted in an offence involving moral turpitude
    3. the director disqualified by an order of court/tribunal
    4. all of the above
11. Disclosure of interest by director does not apply to _____.
    1. private company
    2. public company
    3. government company
    4. None of the above
12. A managing director cannot be appointed at a time for a term exceeding _____.
    1. 10 years
    2. 5 years
    3. 3 years
    4. 1 year
13. Simultaneous appointment of _____ and _____ is prohibited.
    1. director and managing director
    2. managing director and whole-time director
    3. managing director and manager
    4. All of the above.
14. A managing director must be a _____ first.
    1. director
    2. shareholder
    3. all of the above
    4. none of the above
15. Out of the following, which power can be exercised by directors only at the board meeting?
    1. Power to issue debenture
    2. Power to borrow money otherwise than on debenture
    3. Either (a) or (b)
    4. Neither (a) nor (b)
16. Out of the following, which power can be exercised by directors only at the board meeting?
    1. Power to invest fund of company
    2. Power to make loan
    3. Power to make calls on shares
    4. All of the above
17. Out of following, which power of the board can be exercised with approval in a general meeting?
    1. Sell or lease undertaking of company
    2. Borrow money in excess of its paid-up capital and free reserve
    3. Either (a) or (b)
    4. Neither (a) nor (b)
18. Consent of _____ is required for certain contracts in which particular directors are interested.
    1. board of directors
    2. shareholders
    3. state government
    4. central government
19. An interested director is not allowed to _____
    1. participate in the discussion
    2. vote
    3. both (a) and (b)
    4. None of above
20. No person shall be appointed manager of a company if _____.
    1. he is an undischarged insolvent
    2. he has been convicted of any offence involving moral turpitude in the last 5 years
    3. he has suspended payment to creditors in the last 5 years
    4. All of the above
21. _____ provides guidelines for remuneration of managing personnel.
    1. Schedule V
    2. Schedule II
    3. Schedule VI
    4. Schedule III
22. Approval of the central government is required in case the remuneration payable to the managing director or whole-time director exceeds _____ % of net profit for one such director.
    1. 1%
    2. 5%
    3. 3%
    4. 11%

ANSWER KEYS

1. i
2. ii
3. ii
4. iii
5. iii
6. ii
7. i
8. iv
9. iii
10. iv
11. iv
12. iii
13. iii
14. i
15. iii
16. iv
17. iii
18. i
19. iii
20. iv
21. i
22. ii