Brief note on the appointment and removal of director of a company in India

Section 252 provides that every public company (other than a public company which has become such by virtue of Section 43-A) must have at least 3 directors and every private company must have at least 2 directors. Subject to the minimum number of directors a company should have, the articles of a company may prescribe the maximum and the minimum number of directors for its board of directors. A company in a general meeting may by ordinary resolution increase or reduce the number of its directors within the limits fixed in that behalf by its article. A public company or a private company which is a subsidiary of a public company cannot increase the number of directors beyond the permissible maximum under its articles without the approval of the central government. However, no approval of the central government is required if such permissible maximum is twelve or less than twelve, and the increase in the number of its directors does not exceed twelve.

Appointment of Directors :

Director may be appointed in the following ways:

1. By the articles as regards first directors.

2. By the company in general meeting.

3. By the directors,

4. By third parties

5. By the principle of proportional representation

6. By the central government

1. First directors :

The first directors are usually named in the articles. The articles may also provide that both the number and the names of the first directors shall be determined in writing by the subscribers to the memorandum or a majority of them. Where the articles are silent regarding the appointment of directors, the subscribers of the memorandum who are individuals shall be deemed to be the first directors of the company. They shall hold office until the directors are appointed at the first annual general meeting.

2. Appointment by company :

Appointment of subsequent directors is made at every annual general meeting of the company. Section 255 provides that not less than two-thirds of the total number of directors of a public company must be appointed by the company in general meeting. These directors must be subject to retirement by rotation. The remaining directors of such a company and the directors generally of a purely private company must also be appointed by the company in general meeting. In other words, not more than one-third of the total number of directors can act as non-retiring directors i.e not subject to retirement by rotation.

At every subsequent annual general meeting one-third of the directors of a public company are liable to retire by rotation. If the number is not three or a multiple of three, then the number nearest to one-third must retire from office. The directors to retire by rotation at every annual general meeting must be those who have been longest in office since their last appointment. As between person who become directors on the same day, those who are to retire will, subject to any agreement among themselves, be determined by lot.

At the annual general meeting at which a director retires, the company may fill up the vacancy by appointing the retiring director or some other person thereto. If the place of the retiring director is not so filled, and the meeting has not expressly resolved not to fill the vacancy, the meeting shall stand adjourned. If at the adjourned meeting also the vacancy is not filled, and the meeting has not expressly resolved not to fill the vacancy, the retiring director shall be deemed to have been re-appointed at the adjourned meeting unless:

1. At the meeting or at the previous meeting a resolution for the re-appointment of such director has been put to the meeting and lost;

2. He has by a notice in writing, addressed to the company or its board, expressed his unwillingness to be re-appointed;

3. He is not qualified or disqualified for appointment;

4. A special or ordinary resolution is necessary for his appointment or re-appointment.

A person other than a retiring director is also eligible for appointment to the office of director subject to his necessary qualification. A notice in writing signifying his candidature must be left at the office of the company at least fourteen days before the date of the meeting. The notice may be given either by the candidate himself or by his proposer. The company shall inform the members at least seven days before the meeting about the candidature. It is not necessary for the company to serve individual notices upon the members if the company advertises such candidature not less than seven days before the meeting, in at least two newspapers. One of the newspapers must be in English language and the other in the regional language of the place where the registered office of the company is located.

These provisions do not apply to a private company, unless it is a subsidiary of a public company.

A person who is being proposed as a candidate for the office of a director must sign and file with the company his consent in writing to act as a director if appointed. This requirement does not apply to a director retiring by rotating.

Appointment of directors of a public company must be voted individually by separate ordinary resolutions.

3. Appointment by Directors :

The directors are empowered to appoint

i) Additional directors.

ii) Alternate directors.

iii) Directors filling casual vacancy.

Additional Directors:

The board of directors may appoint additional directors from time to time. The number of directors and additional directors must not exceed the maximum strength fixed for the board by the articles. The additional directors shall hold office only up to the date of the next annual general meeting.

Alternate directors:

The board of directors may appoint an alternate director if authorized by the articles or by a resolution of the company in general meeting. An alternate director acts in the place of a director who is absent for more than three months from the state in which board meetings are held. He cannot hold office for a period longer than that permissible to the original director in whose place he has been appointed. He must vacate office on the return of the original director.

Casual vacancy:

Where the office of any director appointed by the company in general meeting is vacated before the expiry of his term, the directors may fill up the vacancy at a meeting of the board. The director so appoint will hold office till the end of the term of the director in whose place he is appointed. These provisions are applicable only to a public company and a private company which is a subsidiary of the public company.

4. Appointment by third parties :

The articles may gives right to debenture-holders, financial corporations or banking companies who have advanced loans to the company to nominate director on the board of the company. The number of directors so nominated should not exceed one-third of the total strength of the board. They are not liable to retire by rotation.

5. Appointment by proportional representation :

The articles of a company may provide that the appointment of not less than2/3 of the total number of director of a public company shall be according to the principle of proportional representation, either by the single transferable vote or by a system of cumulative voting or otherwise. Such appointments shall be made once in three years and interim casual vacancies may be filled up according to section 262.

6. Appointment by the central government :

According to section 408 of the companies act, the central government has the power to appoint directors for the purpose of prevention of oppression and mismanagement. It provides that the central government may appoint such number of directors on the board of the company as it may think fit to effectively safeguard the interest of the company, its shareholders, or public interest. Such an appointment shall be for a period not exceeding three years, and shall be made on the application of not less than 100 member or members holding not less than 1/10th of the voting power of the company. Such directors will not be required to hold any qualification shares, not they shall be liable to retire by rotation.

Restriction on appointment of directors:

A person shall not be capable of being appointed a director by the articles or named as a director or proposed director of the company or intended company in a prospectus or statement in lieu of prospectus unless he or his agent in writing has signed and filed with the registrar consent in writing to act as such director and has:

(a) Signed the memorandum for his qualification shares; or

(b) Taken his qualification shares from the company and paid or agreed to pay for them; or

(c) Signed and filed with the registrar an undertaking in writing to take from the company his qualification shares and pay for them; or

(d) Field with the registrar an affidavit that his qualification share, if any, are registered in his name.

The provisions of section 266 do not apply to a private company.

Position of directors :

The exact position of directors with regard to the company is difficult to define. They are not servants of the company. Some describe the directors as trustees, agents or managing partner. Jessel, M.R. has observed, “ it does not matter much what you call them so long as you understand what their true position is, which is that are merely commercial men managing a trading concern for the benefit of themselves and all other share-holders in it. They stand in a fiduciary position towards the company in respect of their posers and capital under their control.”

Directors as agents :

Directors are in the eyes o law agents of the company for which they act. The general principals of the law of agency apply to the company and its directors. The position has long been established in Ferguson v. Wilson wherein cairns L. J. said.

Directors are merely agents of a company. The company itself cannot act in its own for it has no person; it can only act through directors and the case is as regard those directors merely the ordinary case of principal and agent. Whenever as agent is liable those directors would be liable; where the liability would attach to the principal and principal only, the liability is the liability of the company.”

Where directors make contracts on behalf of the company they incur no personal liability provided they act within the scope of their authority. In such a case company alone would be liable.

Where directors contact in their own name, but really principal can sue the company as undisclosed the real principal can on the contract where director act in excess of their authority, in entering in to a contract, the company can be subsequent resolution ratify the act but if the director do something which is ultra vires the company, such s act cannot be ratified.

Director as Trustees :

Directors are not only agent but they are to some extent trustees also. They are trustees of the company’s money or property which comes into their hands or which is actually under their control and also of the power entrusted to them.

As trustees of the company’s money and property directors are accountable for their proper use and required to refund or restore the same if improperly used. Such property must be applied for the specified purpose of the company has not earned any profit; they are liable for the breach of trust.

Directors are the trustees of the powers conferred upon them and they must exercise those powers bonafide and for the benefit of the company as a whole.

Disqualification of directors :

The circumstances in which a person cannot be appointed as a director of a company are enumerated in section 247. According to this section, a person cannot be appointed as a director of a company, if

(i) He has been found to be of unsound mind by a competent court and the finding is in force;

(ii) He is an undischarged insolvent;

(iii) He has applied to be adjudicated as an insolvent and his application is pending;

(iv) He has been convicted of an office involving moral turpitude and sentence to imprisonment for not less than 6 months and a period of 5 year has not elapsed since the expiry’s of his sentence;

(v) He has not paid any call in respect of share of the company held by him for period of six month from the last day fixed for the payment;

(vi) He has been disqualified by an order of the court under section 203, of an office in relation to promotion, formation and management of the company or fraud or misfeasance in relation to the company.

The central government may by notification in the official Gazette remove the disqualification enumerated in clauses(iv) and (v) above.

A private company which is not a subsidiary of a public company may be its articles provide for additional grounds for disqualification.

Restriction on number of Directorship :

No person can be a director in more than twenty companies. The following companies of which a person may be director:

(a) a private company which is neither a subsidiary nor a holding company of a public company;

(b) an unlimited company;

(c) an association not carrying on business for profit or which prohibited the payment of a dividend;

(d) a company in which such person is only an alternate director.

Where a person already holding the office of director in 20 companies is appointed as a director of any company, the appointment will not take effect unless such person has with in fifteen days thereof, effectively vacated his office as a director in any of the companies in which he was already a director. His new appointment will become void if he does not make a choice within fifteen days as aforesaid.

Any person who holds office or act as a director or more than 20 companies in contravention of the above provision shall be punishable with fine which may extend to Rs5, 000 in respect of each of those companies after the first 20

Vacation of office by Directors

The office of a director shall become vacant if

(a) he fails to obtain or ceases to hold the share qualification required of him by the articles of the company;

(b) he is found to be of unsound mind by a component court;

(c) he applies to be adjudicated an insolvent;

(d) he is adjudged an insolvent;

(e) he is convicted by a court of an offence involving moral turpitude and sentence to imprisonment for not less than 6 months;

(f) he fails to pay any calls on the shares held by him within six months from the date fixed for payment; unless the central Government has by notification in the official Gazette removed this disqualification;

(g) he absent himself from three consecutive meetings of the board of directors or from all the meetings of board for a continuous period of 3 months whichever is longer without obtaining leave of absence from the board;

(h) he (whether by himself or by any person for his benefit or on his account) or any firm in which he is a partner or any private company of which is a director; accepts a loan or any guarantee or security for a loan from the company is contravention of section 295;

(i) he does not disclose to the board of directors of his interest in any contract or proposed contract with the company;

(j) he is restrained by court from being a director for committing fraud or misfeasance in relation to the company under section 203;

(k) he is removed by the company in general meeting in pursuance of section 284;

(l) Having been appointed a director by virtue of his holding any office or the other employment in the company, he ceases to hold such office or other employment in the company.

A person who acts as a director knowing fully well of his disqualification is subject to a penalty which may extend to Rs. 500 for each day on which he so acts as a director.

A private company which is not a subsidiary of a public company may by its articles provide for additional ground for vacating the office of a director.

Removal of directors :

A director of a company can be removed by

(a) shareholders

(b) central government, or

(c) the court

Removal by shareholder :

Section 284 empowers the company to remove a director by ordinary resolution before the expiry of his period of office except in the following cases:

(a) A director appointed by the central government under section 408.

(b) A director in case of a private company, holding office for life on the 1st day of April 1952. (A director for life subsequent to that day may be removed).

(c) Director appointed in accordance with the principal of proportional representation, under section 265. This is to ensure that the directors appointed by the minority are not removed by a bare majority.

Special notice is required of any resolution to remove a director or to appoint somebody in his place at the meeting at which he is removed. On receipt of such notice, the company will immediately send a copy thereof to the director concerned. He may make any representation in writing and the copy of such representation may be sent by the company to every member. Where the copy of the representation is not sent to the members, in that case the director concerned may require the representation to be read at the meeting.

A vacancy created by the removal of a director as aforesaid can be filled up at the meeting at which he is removed provided special notice of the proposed appointment was also given. The director so appointed shall hold office till the date the director removed would otherwise have hold office. If the vacancy is not filled, it shall be filled up as casual vacancy except that the director removed shall not be re-appointed.

The director so removed is entitled to claim compensation or damages for branch of contract.

Removal by the central government :

A director can also be removed at the initiative of the central government. The companies act enables the central government to remove managerial personnel (including a director) from office on the recommendation of the high court. The central government may refer to the high court cases against managerial person on any of the ground mentioned in section 388-B. Every such reference will be made in the form of an application which must contain a statement of material facts. The person against whom such reference is made must be joined as a respondent to the application.

The High court in the interests of creditors, members or the publish suo motu or on the application of the central government, may his duties until further orders direct the respondent not to discharge any of his duties until further orders. The court may also appoint a suitable person in place of the respondent. Every person so appointed is deemed to be a public servant.

At the conclusion of hearing of the case, the high court shall record its decision stating specifically whether or not the respondent is a fit and proper person to hold the office of director. If the finding of the high court is against the respondent the central government shall by order remove such a person from office.

The person who is so removed cannot hold office of a director for a term of five years unless the period is remitted. The person removed cannot claim any compensation for loss or termination of office.

Removal by the court:

On an application to the court for prevention of oppression and mismanagement the court may terminate or set aside or modify any agreement between the company and the managing director, or any other director or manager. On such termination, the director cannot serve the company in a managerial capacity for a period of five years from the date of the order of termination, without the permission of the court. The director on removal cannot sue the company for damages or compensation for loss of office.