DIRECTORS

22. Qualifications of Directors; The Companies Act does not require any specific
educational qualification to become a director. However, certain rules exist to prevent
dishonest persons from becoming directors.
Requirements to become a director:
1. A person can be selected from the Director Database for appointment as an
independent director.
2. Director Identification Number (DIN):
o As per Sections 153-159, a person who wants to become a director must apply
for a DIN from the central government.
o A DIN is issued only once and is unique to the person.

3. No requirement of qualification shares in the Companies Act, 2013.

o Under the old Companies Act (Section 270), directors had to acquire
qualification shares within two months if stated in the Articles of Association
(AoA).
o The new Act removes this requirement.

23. Disqualifications of Directors (Section 164) (Short question internal important)

A person cannot be appointed as a director if:
1. Declared of unsound mind by a competent court.
2. Undischarged insolvent (a person who has not paid off their debts).
3. Applied for insolvency and the case is still pending.
4. Convicted of any offence and sentenced to at least six months in jail. Such a person
cannot become a director for five years after their sentence ends.
o If sentenced to seven years or more, they can never become a director.

5. Court or tribunal disqualified them from being a director.

6. Has not paid for shares they own, and six months have passed since the due date.
7. Convicted for violating Section 188 (Related Party Transactions) in the last five years.
8. Does not have a Director Identification Number (DIN).
Additional disqualification under Section 164(2):
  A person cannot be appointed as a director if the company where they were a director:
o Did not file financial statements or annual returns for three years in a row.

o Failed to repay public deposits or interest for more than one year.

A person cannot be a director in more than 20 companies at the same time.

24. Appointment of Directors

A director can be appointed in different ways under the Companies Act:
1. Appointment of First Directors (Section 152)
 The Articles of Association (AoA) mention the names of first directors.
 If the AoA is silent, then the subscribers to the Memorandum of Association (MoA)
automatically become the first directors.
 First directors hold office until the first Annual General Meeting (AGM) when new
directors are appointed.
 The Articles of Association can specify the duration of their term.
Conditions for appointment:
 Must have a Director Identification Number (DIN) under Section 154.
 Must declare that they are not disqualified from being a director.
 Must give written consent to act as a director.
 The company must file the consent with the Registrar of Companies (RoC) within 30
days of appointment.
2. Appointment by Shareholders in a General Meeting (Section 152)
 Shareholders appoint directors in the Annual General Meeting (AGM).
 Different types of directors appointed this way include:
o Minority Directors (Section 151)

o Rotational Directors

o Independent Directors

Rotational Directors (Section 152)

 Two-thirds of the total directors must retire by rotation at every AGM.
 The remaining one-third can be non-rotational directors (as per the AoA).
 Directors who have been in office the longest must retire first.
  If multiple directors were appointed on the same day, retirement is decided by lottery.
 If a retiring director’s position is not filled, then:
o The meeting is postponed (adjourned) to the next week.

o If no director is appointed in the next meeting, the retiring director is

automatically reappointed.
Appointment of Directors in Private Companies
 If the company's AoA does not mention anything, then:
o All directors are appointed in a general meeting by a majority vote of
shareholders.
o No director is required to retire by rotation.

o Directors hold office until death, resignation, removal, or disqualification.

3. Appointment by the Board of Directors (Section 161)

 The Articles of Association (AoA) can allow the Board to appoint additional directors.
Types of Directors Appointed by the Board:
 Additional Directors (Section 161(1))
o Can be appointed only if the Board is allowed by the AoA.

o Can hold office only until the next AGM.

o If a person was rejected as a director in a general meeting, they cannot be

appointed as an additional director.
 Alternate Directors (Section 161(2))
o If a director is out of India for more than three months, an alternate director
can be appointed.
o The alternate director must meet the same qualifications as the original
director.
o The alternate director’s term ends when the original director returns.

 Casual Vacancy Directors (Section 161(4))

o If a director dies, resigns, or is disqualified, the Board can appoint another
person to fill the vacancy.
o The new director can only hold office for the remaining term of the original
director.
o Casual vacancy does not apply to private companies unless allowed by their
Articles of Association.
4. Appointment by the Central Government / NCLT
 A nominee director is appointed by financial institutions or the government to protect
their interests.
 Section 161(3) allows the Board to appoint directors nominated by institutions under:
o Any law in force.

o Any agreement between the company and the institution.

o The Central or State Government’s shareholding in a government company.

Appointment by National Company Law Tribunal (NCLT)

 Earlier, the Central Government had the power to appoint nominee directors in cases
of oppression and mismanagement under Section 408 of the old Companies Act.
 Now, this power is given to the NCLT under Section 242.
5. Appointment by Third Parties
 A company’s Articles of Association (AoA) may allow third parties to appoint
directors to protect their interests.
 These may include:
o Debenture holders

o Creditors

o Bankers

o Foreign collaborators

o Holding companies

 These directors ensure that the money given by lenders is used properly and
repayments are secured.

25. Vacancy of Directorship (Section 167)

A director’s office becomes vacant if:
1. Disqualified under Section 164 due to reasons such as being of unsound mind,
declared insolvent, or convicted of an offence. For example, if the director is of
unsound mind, declared insolvent, or convicted of an offence involving moral
turpitude.
2. Absent from Board meetings for 12 months without permission.
3. Fails to disclose their interest in a contract or arrangement, violating Section 184.
 4. Disqualified by a court or tribunal, even if they appeal.
5. Removed as per the Act.
6. No longer holds the employment-based directorship in the holding, subsidiary, or
associate company.
A private company may include additional reasons for director removal in its Articles of
Association.
Punishment for continuing as a director after disqualification
 Imprisonment of up to 1 year or
 Fine between ₹1 lakh to ₹5 lakh, or
 Both imprisonment and fine.

26. Resignation of Director (Section 168)

 A director may resign by giving written notice to the company and the Board.
 The vacancy is filled by the promoter or the Central Government if required.
 Even after resigning, the director may still be liable for actions taken during their
tenure.

27. Removal of Director (Section 169)

A director can be removed before their term ends by:
1. National Company Law Tribunal (NCLT) (Section 242) – In cases of oppression
and mismanagement.
2. Shareholders (Section 169) – By passing an ordinary resolution in a general meeting.
The director must be given an opportunity to be heard.
Reasons for removal
 No specific grounds are mentioned in the Act, but a director may be removed if they:
o Commit fraud or misfeasance.

o Fail to perform their duties repeatedly.

o Act against business interests.

o Harm the company’s financial position.

o Defraud creditors.

Exception
  A director appointed by NCLT cannot be removed by shareholders.

30. Powers of the Board: Directors exercise certain powers in two ways:
Powers that require Board approval (Section 179)
A resolution must be passed in a Board meeting for:
1. Calling money on unpaid shares.
2. Approving buy-back of securities.
3. Issuing securities, including debentures.
4. Borrowing money.
5. Investing company funds.
6. Granting loans or guarantees.
7. Approving financial statements.
8. Diversifying the business.
9. Approving mergers, amalgamations, or reconstructions.
10. Taking over another company or acquiring a controlling stake.
Delegation of powers
 The Board can delegate certain powers like unpaid shares, buy-backs, and issuing
securities to a committee of directors.
 Major decisions like borrowing, mergers, and business diversification cannot be
delegated.
Powers that require shareholder approval (Section 180)
The Board must get approval from shareholders through a special resolution in a general
meeting for:
1. Selling, leasing, or disposing of the company’s business.
2. Investing merger compensation funds in non-trust securities.
3. Borrowing beyond the company’s paid-up share capital and free reserves.
4. Extending loan repayment time for any director.

31. Duties of Directors (Short question internal important)

Directors have two main types of duties:
General duties of directors (Section 166)
1. Act in good faith to promote the company’s objectives.
2. Use reasonable skill, care, and diligence in business transactions.
3. Ensure that decisions benefit the company and stakeholders.
4. Avoid making personal gains at the company’s expense.
5. Not transfer or assign their office to someone else.
Statutory duties of directors
Directors must comply with various legal obligations under the Companies Act, including:
1. Not misleading investors in offer documents (Sections 34 & 35).
2. Not influencing investors to buy shares using false statements (Section 36).
3. Not issuing irredeemable preference shares (Section 55).
4. Filing annual returns with the Registrar (Section 92).
5. Conducting statutory meetings (Section 96).
6. Maintaining and auditing company books (Section 128).
7. Complying with Corporate Social Responsibility (CSR) requirements (Section 135).
8. Obtaining a Director Identification Number (DIN) (Sections 156 & 159).
9. Attending Board meetings (Section 173).
10. Following limits on political contributions (Section 182).
11. Disclosing personal interest in company transactions (Section 184).
12. Not taking loans from the company (Section 185).
13. Receiving remuneration only as per legal limits (Section 197).
14. Declaring solvency before winding up the company (Section 305).

32. Liabilities of Directors

Directors are responsible for the company's actions. Their liabilities can be classified into
three types:
Liability to Outsiders
Directors are not personally liable for company debts, but they can be held liable if they:
 1. Sign documents in their own name instead of the company’s name.
2. Make transactions beyond the company’s powers (ultra vires acts).
3. Issue a prospectus with false statements, misleading investors.
4. Fail to return application money if shares or debentures are not allotted.
5. Do not return money collected for listing shares if the shares are not listed.
Liability to the Company
Directors are responsible to the company if they:
1. Exceed their authority or act outside the company’s rules.
2. Are negligent in performing their duties.
3. Misuse company assets or funds.
4. Engage in misfeasance (wrongful use of power for personal benefit).
5. Take decisions that cause financial loss to the company.
Liability of Co-Directors
1. A director is an agent of the company but not of other directors.
2. A director is not liable for another director’s wrongdoing unless they:
o Participated in the wrongful act.

o Later approved or supported it.

33. Criminal Liability of Directors

A director can be held criminally liable if they violate company laws. They may face fines,
imprisonment, or both for:
1. Filing false incorporation documents.
2. Issuing a prospectus with false information (Section 35).
3. Fraudulently inducing investors to buy shares (Section 36).
4. Failing to return application money within the specified time.
5. Illegally issuing bonus shares or shares at a discount.
6. Not filing annual returns (Section 92).
7. Granting loans to directors in violation of the Act (Section 185).
8. Not maintaining proper books of accounts.
 9. Failing to pay declared dividends (Section 127).
10. Not filing annual financial statements (Section 129).
11. Not obtaining a Director Identification Number (DIN) (Section 159).
12. Holding more directorships than allowed (Section 165).
13. Not fulfilling statutory duties (Section 166).
14. Accepting company deposits illegally.
15. Failing to disclose financial interest in company contracts (Section 184).
16. Engaging in fraud, forgery, or providing false evidence (Sections 339, 447, 449 &
450).

34. Board Committees

The Board of Directors (BoD) forms committees to manage different tasks efficiently.
Purpose of Board Committees
1. Improve decision-making and corporate governance.
2. Handle specialized business functions.
3. Ensure compliance with legal and financial regulations.
4. Reduce the workload of the main Board.
Mandatory Committees
1. Audit Committee
2. Nomination and Remuneration Committee
3. Risk Management Committee

Audit Committee (Section 177)

Applicability
An Audit Committee is mandatory for:
1. All listed companies.
2. Public companies that meet any of the following criteria:
o Paid-up share capital of ₹10 crore or more.

o Turnover of ₹100 crore or more.

 o Outstanding loans, borrowings, or deposits exceeding ₹50 crore.

Composition
1. Minimum three directors, with a majority being independent directors.
2. The Chairperson must be an independent director.
Functions
1. Reviews company financial reports before they are submitted to the Board.
2. Works with auditors to ensure financial accuracy.
3. Ensures there are no conflicts of interest between auditors and the company.

36. Remuneration of Directors (Section 197) + Schedule V (Short question internal

important)
The remuneration of directors is determined based on:
1. Articles of Association (AoA).
2. Approval by shareholders in a general meeting.
3. Special resolution if required by the AoA.
Directors cannot decide their own remuneration unless the AoA allows it.
If adequate profit, max limit of remuneration given in Section 197 and
incase of inadequate profit, max limit of remuneration given in Schedule V

Maximum Limits on Remuneration in adequate profit:

Maximum Remuneration
Position
Allowed

One Managing Director (MD), Whole-Time Director (WTD), or

5% of net profits
Manager

More than one MD, WTD, or Manager 10% of net profits

Non-Executive Directors (if MD/WTD exists) 1% of net profits

Non-Executive Directors (if no MD/WTD exists) 3% of net profits

Remuneration to all directors put together= 11% of net profit.

If a director receives more than the permitted limit, they must refund the excess amount to the
company.
Remuneration in Case of No Profit or Loss
If a company has no profit or inadequate profit, remuneration can still be paid within these
limits:

Effective Capital Maximum Yearly Remuneration (₹)

Negative or less than ₹5 crore 60 lakh

₹5 crore to ₹100 crore 84 lakh

₹100 crore to ₹250 crore 120 lakh

Above ₹250 crore ₹120 lakh + 0.01% of the excess capital

38. Board Meetings (Section 173) (Short question internal important)

Frequency of Board Meetings for public and private both 173(5)
1. The first Board meeting must be held within 30 days of incorporation.
2. At least four Board meetings must be held every year.
3. The gap between two Board meetings cannot exceed 120 days.
Frequency of Small company, opc 173(5)
1. At least two Board meetings must be held every year.
2. Minimum 90 days gap between two consecutive board meeting.
3. If OPC, having only 1 director then no board meeting is required.
Notice of Meeting section 173(3)
1. At least 7 days’ written notice must be given to all directors at their registered
addresses with the company and this notice to be sent by hand delivery or by post or
by electronic means.
2. For urgent matters, a shorter notice can be given, but:
o At least one Independent Director must be present.

o If no Independent Director attends, the decision must be ratified later in

another meeting when independent director attends it.
3. Penalty: every officer of company who had the duty to give notice and didn’t give
notice will be held liable for penalty of twenty thousand rupees. 173(4)
Quorum for Board Meetings (Section 174)
1. Minimum quorum: One-third of total directors or two directors, whichever is higher.
2. Directors attending via video conferencing are counted in the quorum.
3. If a meeting lacks quorum, it is automatically postponed to the same day and time
next week.
Question 1: XYZ Pvt. Ltd. (Small Company Scenario)
Situation:
XYZ Pvt. Ltd., a small company, held only one Board meeting on 10th April 2024 and
another on 20th December 2024. Additionally, the Board meeting on 20th December was
attended by only two directors, and one director attended through video conferencing but did
not receive the meeting notice.
Answer:
1. Board Meetings Frequency: For small companies, under Section 173(5), at least two
Board meetings are required annually, with a minimum 90 days gap between them.
o Gap between 10th April and 20th December = 254 days ❌ (Not compliant
with the 90-day requirement).
2. Notice Requirement: As per Section 173(3), a 7-day notice is mandatory. The
director who did not receive the notice makes the company non-compliant, and the
officer responsible may face a ₹20,000 penalty under Section 173(4).
3. Quorum Compliance:
o Minimum quorum required: One-third of total directors or two directors,
whichever is higher.
o Video conferencing attendees count toward the quorum, but since the notice
was not served correctly, the director’s attendance might not be valid, risking
invalidity of decisions made in that meeting.
Consequences:
 Penalty: ₹20,000 penalty for failure to send notice.
 Decisions Invalid: Decisions made in the meeting might be voidable.
 Non-compliance with Meeting Frequency: Could lead to regulatory actions by the
Registrar of Companies (RoC).

Question 2: PQR Ltd. (Frequency and Quorum Scenario)

Situation:
PQR Ltd. was incorporated on 15th March 2024. It held its first Board meeting on 20th
April 2024. Subsequent meetings were held on 10th July, 15th November, and 25th
February 2025. During the 15th November meeting, only two directors were present, and
the meeting was adjourned. The adjourned meeting was held on 22nd November, but again
only two directors were present.
Answer:
1. First Board Meeting:
o The first meeting was held within 30 days of incorporation (15th March to
20th April = 36 days). ❌ (Non-compliant)

2. Frequency of Meetings:
o Four meetings were held in the financial year, meeting the requirement of four
meetings annually. ✅

o Gaps between meetings:

 20th April to 10th July = 81 days ✅

 10th July to 15th November = 128 days ❌ (Exceeded the 120-day

limit)
 15th November to 25th February = 102 days ✅

3. Quorum and Adjourned Meeting:

o The adjourned meeting on 22nd November also did not meet the quorum
requirement (Minimum: 1/3rd or 2 directors), but since it was an adjourned
meeting, the quorum requirement is relaxed as per Section 174(4). ✅

Consequences:
 First Meeting Delay: Possible penalties for not holding the first meeting within 30
days.
 Exceeding 120 Days Between Meetings: Non-compliance could attract penalties or
scrutiny from regulatory authorities.
 Adjourned Meeting Validity: Decisions in the 22nd November meeting are valid
despite the low attendance.

39. Register of Contracts in Which Directors Are Interested (Section 189)

To prevent conflict of interest, directors must disclose any financial interest in company
contracts.
Rules for Directors' Financial Interest in Contracts
1. Directors must inform the company if they have a financial interest in a contract.
2. The company must maintain a register of such contracts.
3. Failure to disclose interest can lead to legal penalties.