Management of Company

Topics covered under this chapter

• Directors - Appointment, Qualification, Rights, Duties, & Liabilities,

• Directors - Disqualifications

• Removal of Directors - Managing Director, Whole Time Director, Independent

Director

• Corporate Governance;

• Company Secretary – Role, Qualification, Appointment, and Responsibilities.

Directors / Board of Directors
The company is an artificial person and is managed by the human beings.
Individually known as Directors and Collectively known as Board of Directors.

The directors play a very important role in the day to day functioning of the
company. It is the board, who is responsible for the company’s overall performance.

To enable a company to live and to achieve its objects as mentioned in the objects
clause of its MOA, it has to depend upon an agency, known as Board of Directors.

Board of directors of a company is a core team, selected according to the procedure

prescribed in the Articles of Association.
Minimum/Maximum Number of Directors in a Company

Minimum Number of Directors

• Public Company - 3 Directors

• Private Company - 2 Directors
• One Person Company(OPC) 1 Director
-
• Maximum Number of Directors is 15, which can be increased by passing a
Special Resolution.
Appointment of Directors
• As provided in the Companies Act 2013, every director shall be appointed
by the company in general meeting.
• Director Identification Number (DIN) is compulsory for appointment
of director of a company.
• Every person proposed to be appointed as a director shall furnish
his Director Identification Number (DIN) and a declaration that he is
not disqualified to become a director under the Companies Act
2013.
• A person appointed as a director shall on or before the appointment give
his consent to hold the office of director in physical form DIR-2 i.e. Consent
to act as a director of a company.
• Articles of the Company may provide the provisions relating to retirement of
the all directors.
Appointment of Directors
1. By the Promoters of the
Company 5. By the Central Government

2. By the Subscribers to the 6. By Proportional

Memorandum Representation

3. By the Shareholder in a 7. By Third Parties

General Meeting

4. By the Board of
Directors
Roles of Directors
• Governing the organization by establishing policies and objectives

• Selecting, Appointing, Supporting and Reviewing the performance of the chief

executive

• Ensuring the availability of adequate financial resources

• Approving annual budgets

• Accounting to the stakeholders for the organization’s performance

• Setting the salaries and compensation of company management

Duties of Directors
 Act in accordance with the articles of the company.

 Act in good faith in order to promote the objects of the company

for the benefit of its members as a whole and in the best
interests of the company, its employees, the shareholders, the
community and for the protection of environment.

 Exercise his/her duties with due and reasonable care, skill and
diligence and shall exercise independent judgment.
Duties of Directors
 Not involve in a situation in which he/she may have a direct or indirect
interest that conflicts or possibly may conflict, with the interest of
the company.

 Not achieve or attempt to achieve any undue gain or advantage either to

self or to relatives, partners or associates and if such director is found guilty
of making any undue gain, he/she shall be liable to pay an amount equal
to that gain to the company.

 Not assign his/her office to anyone and if any assignment so made shall be
void.
Liabilities of Directors

 Liability to Outsiders

 Liability to Company

 Liability to Shareholders

 Criminal Liability
Liabilities of Directors

Liability to Outsiders

• If they enter into a contract which is ultra vires the company

• If they fail to sign a negotiable instrument without mentioning the
company’s name
• If they act in their own name
• If they have made any mis-statement in the prospectus
• If they are guilty of committing a fraud
• If they have made irregular allotment in contradiction
Liabilities of Directors
Liability to Company

• If they are negligent in the performance of their duties

• If they commit an act which is ultra vires their powers

• If they commit any illegal act

• If they commit any breach of trust

Liabilities of Directors
Liability to Shareholders

• Position of directors in respect of the property of the company is

that of a trustee.
• If they commit any breach of trust and if as a result of that, the
company suffers loss, they have to make good that loss.
• If the directors are negligent and fail to use reasonable care and
skill and because of this, the shareholders suffer a loss, they have
a right to claim damages from the directors.
Liabilities of Directors
Criminal Liability – Directors may be awarded two years imprisonment and a
fine of Rs.5,000 for the filing of prospectus containing false statement.

Criminal proceeding against directors may be instituted:

• For fraudulently obtaining credit for the company
• For acting as a director after removal by court
• For failure to supply information to auditor of the company
• For improper issue of shares
• For failure to produce the balance sheet before the annual general meeting
Disqualification of Directors
(a) Unsound mind and stands so declared by a competent court;
(b) An undischarged insolvent;
(c)Has applied to be adjudicated as an insolvent and his application is
pending;
(d)Been convicted by a court of any offence, whether involving moral issues
or otherwise and sentenced in respect thereof to imprisonment for not less
than six months and a period of five years has not elapsed from the date of
expiry of the sentence.
If a person has been convicted of any offence and sentenced in respect
thereof to imprisonment for a period of seven years or more, he/she shall not
be eligible to be appointed as a director in any company;
Disqualification of Directors
(e)An order disqualifying him/her for appointment as a director has been
passed by a court or Tribunal and the order is in force;

(f)Has not paid any calls in respect of any shares of the company held,
whether alone or jointly with others, and six months have elapsed from the
last day fixed for the payment of the call;

(h) Has not got the DIN - Director Identification Number.

Removal of Directors
A director may be removed before the expiry of his term of
appointment by:

1. Removal by Shareholders

2. Removal by the Central Government

3. Removal by the Company Law Board

Removal of Directors
1. Removal by Shareholders
• A special notice of 14 days is required to be given to the company to move an
ordinary resolution to remove the director and to appoint another director as
replacement
• On receipt of notice, the company must inform all the members of the
proposed resolution. It must also send a copy of the notice to the director
proposed to be removed
• If the director wishes to make a representation he may send it to the company
and the company in turn sends copies of the representation to the members,
together within the notice of a meeting
• If the representation is not received by the company within a reasonable time,
the representation may be read out at the meeting. Director can speak at the
meeting against his removal.
• At the meeting, two ordinary resolutions will have to be passed. One for
removal and another for replacement.
Removal of Directors
2. Removal by the Central Government
The Central Government may order the removal of a director if an
adverse finding has been made by the Company Law Board against
him/her, after making an enquiry into these cases such as fraud,
persistent negligence, default in carrying out his obligations in such a
way as to cause damage to the business.

3. Removal by the Company Law Board

Company Law Board on receiving application for prevention of
oppression of mismanagement may enquire into the matter and on
enquiry, if it finds that relief ought to be granted, it may by an order,
remove the director.
Types of Directors
Managing Director - A Managing Director is a Director who has substantial
powers of management of the affairs of the company subject to the
supervisory, control and direction of the Board.

Whole Time Director / Executive Director - A Whole-time Director includes a

Director who is in the whole-time employment of the company, devotes his
whole-time of working hours to the company and has a significant personal
interest in the company as his source of income.

Independent Director - An Independent director (also known as an outside

director) is a director (member) of a board of directors who does not have a
material or regular relationship with company or related persons, except
sitting fees.
Corporate Governance
• It is a process set up for the firms based on certain systems and
principles by which a company is governed.
• The guidelines provided ensure that the company is directed and
controlled in a way so as to achieve the goals and objectives to add
value to the company and also benefit the stakeholders in the long
term.
• Transparency in corporate governance is essential for the growth,
profitability and stability of any business.
• The need for good corporate governance has intensified due to
growing competition amongst businesses in all economic sectors at
the national, as well as international level.
Importance of Corporate Governance
• A company that has good corporate governance has a much higher
level of confidence amongst the shareholders associated with that
company.

• Active and independent directors contribute towards a positive

outlook of the company in the financial market, positively
influencing share prices.

• Corporate Governance is one of the important criteria for foreign

institutional investors to decide on which company to invest in.
Importance of Corporate Governance
• The corporate practices emphasize the functions of audit and
finances that have legal, moral and ethical implications for the
business and its impact on the shareholders.

• The rules and regulations are measures that increase the

involvement of the shareholders in decision making and introduce
transparency in corporate governance.

• Corporate governance safeguards not only the management but

the interests of the stakeholders.