PREPARED BY:PRIYAMVADA JHA (2479)

(MFC PART I )

Company Management

Subjects to be covered

BOARD OF DIRECTORSMANAGING DIRECTORMANAGERCOMPANY SECRETARY

Board of Directors

Definition: “any person occupying the position of a director by whatever name called.” (u/s 2(13))

Only individuals to be directors (u/s 253) Responsible for directing, governing or controlling the policy

or management of a company Minimum number of 3 directors for Public Limited company

and 2 directors for private limited company (u/s 252) Maximum Limit for directors in a company increased to 15.

(Previously the limit of directors was 12 directors as per Act, 1956).

Qualifications of Directors

A director is not necessarily required to be a shareholder of the company. Financial Prudence, however, requires that directors must have some stake in the company. The articles provide for certain qualification shares: U/S 270, the directors must obtain their qualification shares, within 2 months after their appointmentW.R.T a newly floated company, directors must pay for their qualification shares before the certificate to commence business is obtained (U/S 149)The nominal value of the qualification shares must not exceed five thousand rupeesBearer shares will not count for purposes of qualification shares (U/S 270)The qualification of being a director of a company limited by shares is the holding of at least one share in the company (Regulation 66)

Disqualifications of Directors

A person shall not be eligible for appointment as a director of a company, If- He is of unsound mind and stands so declared by a competent Court He is an undischarged insolvent He has been convicted by a Court of any offence He has failed to pay any calls on his shares for six months He has been disqualified by the court for fraudulent activities in company

promotion or management under Section 203 He is already a director of a public company which:

Has not filed the annual accounts and annual returns for any continuous three financial years commencing on or after 1st April 1999; or

Has failed to repay its deposits or interest thereon on due date or redeem its debentures on due date or pay dividend and such failure continues for one year or more

The new provisions regarding disqualification of directors are The person has not obtained DIN. (Directors Identification Number) The person has been convicted of any offence and sentenced for

imprisonment for a period extending up to 7 years or more

Appointment of Directors

Any individual, with a valid Director Identification Number (DIN), competent to contract who is not disqualified under Section 274 and who holds the minimum shares, if any, may be appointed as director of a company. First Directors: As per the subscribers to the memorandum Subsequent Directors: Directors appointed by shareholders

in general meetings. Public company- Directors appointed on rotational basis, Private company- Non rotational basis

Appointment by proportional representation: Done in order to take into account the minority interests. Such appointments are to be made only once in every three years as no form of proportional representation can work on the basis of an annual renewal of portion of directorate

Appointment of Directors by the Board: Done in the following circumstances-

1. Casual Vacancies: If the office of a director falls vacant for some reason

AoD Contd.

(i.e. Death/resignation) before his term expires, it has to be filled by the Board of directors. Such a director will cease to act the moment the term of the original director is completed2. Additional Directors- The board of directors can also appoint additional directors, subject to maximum number fixed in the articles3. Alternate Directors- During the absence of a director for more than 3 months, the articles may empower the Board to appoint an alternate directorAppointment of Directors by Central Government: In order to effectively safeguard the interests of the company, the central govt may appoint directors to a company. Such directors shall neither be required to hold any qualification shares nor they shall be subject to retirement by rotationAppointment by third parties: The articles may give a right to debenture holders or other specified creditors to appoint the directors

Rights of Directors

Rights

Attend the meetings

Participate in the

managementTo receive

remuneration

Duties of Directors

Statutory Duties:To see that all the moneys received from applicants for shares is deposited in a scheduled bank until the ‘certificate to commence business’ is obtained U/S 149 or the money is returned to the applicants U/S 69(5)To forward a copy of the statutory report at least 21 days before the statutory meeting to every member of the company and to the Registrar (U/S 165)To call an extraordinary general meeting of the company on the requisition of the specified number of members (U/S 169(1))To lay a Balance Sheet and a Profit and Loss Account before the company at every Annual General Meeting (U/S 210(1))To make a ‘declaration of solvency’ of the company in the case of members voluntary winding up (U/S 488)

Duties of Directors Contd.

General Duties:To always act bona fide for the benefit of the company and not make any secret profitsTo discharge their duties with such care as is reasonable in a person of their knowledge and experienceTo not be negligent towards attending Board’s meetings unless impossible otherwiseTo perform their duties personally and not delegate any of their powers to some other person

Powers of Directors

The Directors of a company have the power to do all such Acts as the company is authorised to do (u/s 291(1)). The shareholders of the company cannot interfere and control the way in which the directors choose to act, provided they act within the scope of the authority conferred upon them and exercise the powers bona fide in the best interests of the company. However, shareholders may intervene when:a. The directors act for their own personal interests in complete

disregard to the interests of the companyb. The board has become incompetent to act, e.g. where all the

directors are interested in a dealingc. The directors are either unable or unwilling to act

Powers of Directors Contd.

Statutory Provision regarding Directors’ Powers:The power to make calls;The power to authorise the company to buyback its own shares or other specified securities up to 10% of the total of its paid-up equity capital and free reserves;The power to issue debentures;The power to borrow moneys otherwise than on debentures;The power to invest the funds of the company; andThe power to make loans

Contd.

Restrictions on the Powers of Directors:In case of public companies, the Board of Directors cannot exercise any of the following powers without the consent of the shareholders in general meeting:1. Sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company;2. Remit or give time for the repayment of any debt due by a director;3. Investment of any fixed assets of the company, in securities other than trust securities;4. Borrow moneys exceeding the aggregate of the paid-up capital of the company and its free reserves;5. Contributions in any year to charitable and other funds not directly relating to company’s business or the welfare of its employees , of amount exceeding Rs 50,000 or 5% of the average net profits for the last three financial years, whichever is greater

Liability of Directors

For ultra vires acts: where they enter into contracts ultra vires the memorandum or ultra vires their powers, e.g., selling the whole undertaking

For breach of trust: where they make secret profits or use company’s funds for their personal use

For acting dishonestly e.g., purchasing property in their own name first and then selling it to the company at a higher price with an intention to make profits

For gross negligence in the performance of their duties, e.g., delegation of power when the articles do not permit or paying dividends when there are no profits

For wilful misconduct, e.g., misappropriation of the company’s assets wilfully

Meetings of Board of Directors

As per Section 285 it has been made obligatory on the part of every company to hold a meeting of its board of directors at least once in every three months and at least four such meetings must be held in every year.

Notice: The notice of every Board’s meeting has to be sent in writing to every Director and should specify the place, time and date of the meeting. According to the Companies Act, the items of business requiring unanimous resolution of the directors present at the meeting and entitled to vote, must be mentioned in the notice of the meeting.Quorum: It is the minimum number of qualified persons whose presence is necessary for transacting legally binding business at the meeting. It should be one-third of its total strength for a board meeting. The directors who are not interested in any of the resolutions to be included in the quorum. The quorum must be present throughout the Board’s meeting (Henderson vs Louttit).

Contd.

Resolution by circulation: As per Section 289, it shall be passed at the Board’s meeting if its draft together with necessary papers is circulated among all the directors and it has been approved by a majority of them as are entitled to vote on the resolution.Manner of conducting business at a Board’s meeting: All resolutions at a Board meeting are passed by a simple majority. For the following matters unanimous consent is required: For approval of prospectus; For appointment of a person as Managing Director who is already a Managing Director or manager of another company; For inter-corporate loans and investments; For appointment of a person as the manager who is already a managing director or manager of another company

Remuneration of Directors

Directors are not the servants of the company and have no right to remuneration unless there is a specific provision to that effect in the articles or, the shareholders resolve for the same in a general meetingThe articles, however, generally provide for directors’ remuneration which is in the nature of honorariumAccording to Section 198, in the case of a public company total managerial remuneration in respect of any financial year should not exceed eleven per cent of the net profits of that company for that financial year if any director has been paid in excess of the limits provided by Section 309, he shall refund such sums to the company and until such sum is refunded, hold it in trust for the company

RoD Contd.

Meaning of the term ‘remuneration’:The term remuneration apart from the basic salary includes the following perquisites also: Any expenditure incurred by the company in providing any rent-free accommodation or any other benefit or amenity in respect of accommodation free of charge; Any expenditure incurred by the company in providing any other benefit or amenity free of charge or at a concessional rate; Any expenditure incurred by the company in respect of any obligation or service which but for such expenditure by the company would have been incurred by the person himself; and Any expenditure incurred by the company to effect any insurance on the life of, or to provide any pension, annuity or gratuity for, the person or his spouse or child

The term remuneration shall not include: Any sitting or attendance fees payable to directors for attending each meeting of

Contd.

the Board or a Committee thereof Remuneration payable for acting as technical expert A company is not allowed to make any tax free payment of remunerationIf the articles do not provide for the payment of travelling expenses incurred in attending meeting of the Board or a Committee thereof or general meeting

According to Section 310 the maximum amount of sitting or attendance fee payable to directors for attending each meeting of the Board or a Committee thereof must not exceed Rs. 5,000 without the approval of the Central Government.

Chart showing the overall Picture of Managerial Remuneration

Persons entitled to remuneration Maximum percentage of annual net profits

1. All directors, when assisted by MD(s) or manager and/or WTD(s)

1 per cent

2. All directors when not assisted by MD(s) or manager and/or WTD(s)

3 per cent

3. Managing Director (when there is one MD)

5 per cent

4. Manager (there is no provision of having more than one manager)

5 per cent

5. Whole-time director (when there is one WTD)

5 per cent

6. MDs or WTDs (when there are more than one of either category or of both categories)

10 per cent

7. Total managerial remuneration to all directors, MD(s) or manager and/or WTD(s)

11 per cent

Vacation of Office (Sec. 283)

Apart from the happening of any of the seven disqualifications enumerated under Sec 274, the director’s office shall become vacant in the event of:

He does not purchase the qualification shares within two months of his appointment or does not possess such shares at any time thereafter;

He absents himself from three consecutive meetings of the Board, or from all meetings of the Board for a continuous period of three months, whichever is longer, without obtaining leave of absence from the Board;

He or his firm or any private company of which he is a director, borrows from the company without the approval of Central Government;

He does not disclose his interest in any contract with the company before the Board;

He ceases to hold such office in the company by virtue of which he was appointed a director;

He or his associate accepts an office of profit under the company or a subsidiary thereof without the sanction of shareholders by a special resolution;

He has been removed from office for fraud, misfeasance, breach of trust, etc., by Central Government

Removal of Directors

1. Removal by shareholders: In order to move a resolution for the removal of a director, the shareholders must give a notice to the company at least 14 days before the meeting, specifying the intention to move the resolution so that proper notice may be sent to the director concerned and other members. The director sought to be so removed shall have the right of being heard at the general meeting. The shareholders cannot remove the following types of directors:

a. A director appointed by the central governmentb. A director of a private company holding office for life on 1 April 1952c. A director representing special interest e.g., debenture holders

directord. A director elected by proportionate representation

2. Removal by Central Government: The Central Government may remove from office any director against whom an adverse judgement has been given by the Company Law Board, on a reference made by Government under Section 388B, for an alleged fraud misfeasance, gross negligence or breach of trust, etc., in carrying out his legal obligations

Contd.

3. Removal by Company Law Board: The CLB can remove a director on an application made to it for prevention of oppression (U/S 397) or mismanagement (U/S 398). The person so removed is disabled from holding a managerial office in the company for a period of five years without the leave of the CLB and he cannot claim compensation for the termination of his appointment.

Resignation of Office by Director

If there is any provision in the articles of association giving right to a director to resign any time, a director may resign his office in the manner provided in the articles If there is no such provisions in the articles, a resignation once made takes effect immediately when the intention to resign is made clear Case in point: T. Murari vs State

Managing Director/Whole-time Director

Definition:Managing Director means a director who by virtue of an agreement with the company , or of a resolution passed by the company in general meeting or by its Board of Directors ,or by the virtue of its memorandum or articles of association , is entrusted with substantial powers of management which would not otherwise be exercisable by him.

Appointment of MDs

A managing director may be appointed in any of the following ways :

by agreement with the company; by a resolution passed by the company in general meeting; by a resolution passed by the Board of Directors; by memorandum of associations; by articles of association

Appointment of MDs (Statutory Restrictions)

Appointment of managing director or whole-time director:(u/s 269, 268 & 317) On and from 5.06.1988, every public company, or a private company

which is a subsidiary of a public company, having paid-up share capital of rupees five crores or more, shall have a managing or whole-time director

No appointment of a person as a managing or whole-time director in a public company or a private company which is a subsidiary of a public company shall be made except with the approval of the Central Government unless such appointment is made in accordance with the conditions specified in Parts 1& 2 (subject to provision of Part 3) of Schedule 13 & a return in the prescribed form is filled within ninety days from the date of such appointment

Every application seeking approval to the appointment of amanaging or whole-time director or a manager shall be madeto the Central Government within a period of ninety days fromthe date of such appointment

Company Law Board

Powers of managing director or whole-time director

power to affix the common seal of the company to any document; or

to draw and endorse any cheque on the account of the company in any bank; or

to draw and endorse any negotiable instrument; or to sign any certificate of share; or to direct registration of transfer of any share

Manager

Section 2(24) defines a manager as an “individual who, subject to the superintendence, control and direction of the Board of Directors, has the management of the whole or substantially the whole affairs of a 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.

Differences between a Manager and a Managing Director:1. A manager need not be a director of the company whereas a

managing director must be a director of the company.2. There cannot be more than one manager in a company whereas there

may be more than one MD in a company, each incharge of only a division or activity of the business.

3. An MD does not enjoy the whole powers of management whereas a manager does. An MD exercises only such powers of management as the Board or the articles entrust him. Thus, a managing director’s powers are rather more restricted than that of a manager.

Company Secretary

Definition: (Section 2(45))

“Secretary means a person who is a member of the Institute of Company Secretaries of India (within the meaning of clause (c) of sub-section (1) of section 2 of the Company Secretaries Act, 1980) and includes any other individual possessing the prescribed qualifications and appointed to perform the duties which may be performed by a secretary under this Act and any other ministerial or administrative duties.”

Three important facts: Only an individual may be appointed as a company secretary and any

firm or body corporate cannot be so appointed He/she should either be a person who is a member of the Institute of

Company Secretaries of India or has requisite qualifications to be prescribed by the Central Government

The duties of secretary are ministerial or administrative, they are not of the affairs of the company