“A corporation is an artificial being, invisible, intangible and existing only in contemplation of law.”1 A corporation does not have a body or mind of its own. A director is a person appointed to the Board of a company and he uses his mind and knowledge to take the decisions of the company. This makes it necessary that the company has to be entrusted to some human resources who can take the decisions effectively by applying their mind.
Section 2(34) of the Companies Act, 2013 defines directors. A director is a person appointed to the board of a company. In case of a one person company, there shall be at least one director. Every public company shall have three directors and every private company shall have two directors appointed to it.
POSITION OF DIRECTORS
“The position acquired by the directors in a company is not easy to explain.” 2 Directors are not the owners or servants of the company. Directors are professionals that are hired by the company in order to carry out the functions of the company. It was held in the case of Moriarty v Regent’s Garage Co3, that a director is not a servant of a company and is a controller of the affairs of the company.
1. Directors as Agents
The directors were recognized as the agents of the company in the landmark case of Ferguson v Wilson4. The company can only act through their directors as it is a artificial person. The relation between the director and the company is that of an ordinary agent and a principal relationship respectively.
All the directors are agents of the company and when a director signs on behalf of the company i.e., the principal, the company becomes liable and not the director. In the case named Indian Overseas Bank v RM Marketing5, it was held that the directors cannot be made liable for the loan of the company unless the director has given any personal guarantee to the bank.
2. Directors as Trustees
The Nigerian Act contains the provisions on the position of directors as trustees.6 Directors are considered as the trustees of the company as the money and the property of the company in under the direct control of the directors. In the case of Ramaswamy Iyer v Brahamayya & Co7, it was held that the directors are the trustees of the company and they can be held liable for the misuse of funds as trustees and the cause of action against can survive against their legal representatives in case of death of the director.
The nature of the office of a director makes them the trustee of the company. “The directors manage the affairs of the company for the benefit of the beneficiaries i.e., the shareholders. It is an office of trust, which if they undertake, it is their duty to perform fully and entirely8. There is nothing common between a trustee of will or of a marriage settlement and a director. A director is a paid officer of the company.
In the case named Percival v Wright 9, it was held that the directors are not the trustees of the shareholders but are of the company. The same principle was reiterated in the case of Peskin v Anderson10 , that the directors hold no fiduciary to the shareholders.
3. Directors as organs of Corporate Body
Directors are organs of the corporate body as the company acts through them. In the landmark case of Bath v Standard Land Co Ltd11, it was held that the Board of directors are the brains of the company and the company acts through it. The brain functions and the corporation is said to function12.
A corporation is an artificial person and thus it acts through its limbs i.e., the directors. For some purposes even the secretaries have been recognized as the organs of the corporate body. In the case named, Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd13, it was held that the company will be made liable for the personal hire of taxis by the secretary of the company while operating from the office of the company.
APPOINTMENT OF DIRECTORS
The management of the company should be in proper hands14 as the success of a company depends largely on the competence and integrity of the directors. The appointment of the directors is strictly regulated by the provisions of the Companies Act, 2013. One evil that was removed by the act is that a company cannot act as a director of another company. No company or firm should be appointed as the director of another company.
No company can appoint any individual as the director unless that individual has received his Director Identification Number under section 154 of the Act.
Company to have Board of Directors- Section 149
According to section 149 of the Act, every company should have a board of directors. These directors should not be artificial person but should consist of individuals. Section 149 also lays down the minimum number of directors required by a company:
1. Public Company – At least three directors
2. Private Company – At least two directors
3. One Person Company – At least one director
The maximum number of directors that can be appointed to the board can be 15. A special resolution has to be passed in order to have more than 15 members. The director appointed to the board should have stayed in India in the previous year for a period of 182 days or more.
Independent Directors- Section 149(4)
According to Section 149(4) of the Act, at least one third of the total number of directors should be independent directors. Any fraction contained in the one third number is to be rounded of
Reappointment
The vacancies caused due to retirement or resignations have to be filled in the general annual meeting. Adjournment can be provided in the general meeting and the reappointment can be postponed by a week. The retiring directors are reappointed if there is no fresh appointment made by the company in the general annual meeting.
The retired directors will not be taken into consideration for reappointment, with the following exceptions:
1. The vote to approve the appointment of the director was unsuccessful.
2. If the departing director has communicated in writing his desire to step down to the company’s board and management.
3. If he is rejected.
4. When his appointment requires an ordinary or extraordinary resolution.
5. When a move to appoint more than two directors in a single resolution is invalid because it was passed without unanimous consent in accordance with section 162.
Appointment by Nomination
Directors can be appointed by the articles of the company as well. They can be nominated as a director if an agreement amongst the shareholders has been included into the articles of incorporation and grants every shareholder with more than 10% share the right to be selected as a director.
Appointment by voting on an individual basis
According to section 162 of the Companies Act, 2013 the directors shall be appointed by voting in the general meeting. The individual votes and the wishes of the shareholders will be taken into consideration for appointment of the directors.
In the case named Raghunath Swarup Thakur v. Raghuraj Bahadur Mathur15, when two or more directors are appointed on the basis of single resolution and voting then it is considered to be void in the eyes of law.
Appointment by Directors of Board
The board can appoint the director under two circumstances:
1. If the board is empowered by the articles of association of the company.
2. Section 1611 of the Act authorises the Board to fill in certain vacancies caused due to
Appointment by Tribunal
Company law has empowered the tribunal to appoint the directors under section 242(j) of the companies act, 2013.
POWERS OF THE DIRECTORS
General powers are vested in the directors. Directors are empowered under Section 149 of the Act. A director is authorized to exercise general powers that a company is authorized to exercise. The powers of the directors are co-extensive with that of the company and an appointed director has almost every power within authority to exercise. These powers are also restricted by certain regulations and restrictions.
There are two important limitations on the powers of the directors:
1. The Board is not competent to do what the act, memorandum of association or articles of association requires the shareholders to do in the general meeting.
2. The powers of the directors have to be in compliance with the Memorandum and Articles of the company.
In the case named Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuningham16, it was held that directors are agents of the company and not of the majority shareholders. If the powers of the management are vested in the directors of the company, then they can alone exercise these powers.
Intervention of shareholders in exceptional circumstances
The shareholders can intervene in the general meeting under the following circumstances:
1. Directors acting in Mala Fide nature – In the case named Marshall’s Valve Gear Co Ltd v Manning Wardle & Co Ltd17, it was held that the majority shareholders have the right to control the action of the directors if they act in a mala fide manner and put their interests over the interests of the company.
2. Board Incompetent – Majority shareholders can intervene and exercise their powers of the board becomes incompetent to act in certain circumstances. In the case named BN Viswanathan v Tiffins Baryt Asbestos (P) Ltd18, the appointment made by the majority shareholders was held to be valid as the directors were not available in the office at that material time.
3. Deadlock – Shareholders are authorized to intervene if the directors are unwilling to act or there is a situation of a deadlock which is restricting the board to enact. In the case named Barron v Potter19, it was held that if there is a situation of a deadlock in the administration then the shareholders are authorized to act in order to ensure the working of the company and to appoint additional directors for the purpose.
4. Residuary Powers – “The residuary powers of the company reside in the general meeting of the shareholders”20. In a case named Bamford v Bamford21, a residuary inherent power to allot the shares remains in the company to validate the allotment by an ordinary resolution in general meeting of the company.
Conclusion
A company’s board of directors is akin to its brain. Their position is crucial for the firm and they significantly contribute to its growth and development. The Companies Act of 2013 grants them specific authority so they can give the company their all. To prevent the abuse of these powers, certain limitations are also placed on their use.
Note:-
1 Dartmouth College v Woodward, 4 L Ed 629
2 Ram Chand & Sons Sugar Mills (P) Ltd. v Kanhayalal Bhargava, AIR 1996 SC 1899
3 (1921) 1 KB 423
4 (1866) LR 2 Ch App 77
5 AIR 2002 Del 344
6 Companies and Allied Matters Act, 1990 (Nigeria), S. 283
7 (1966) I Comp Lj 107
8 York & North Midland Railway & Co v Hudson, (1853) 16 Beav 485
9 [1902] 2 Ch 401
10 [2000] EWCA Civ 326
11 (1910) 2 Ch 408, 416
12 State Trading Corpn of India Ltd v CTO, AIR 1963 SC 1811
13 (1971) 2 QB 711
14 Indian States Bank Ltd v Sardar Singh, AIR 1934 All 855
15 AIR 1967 All 145
16 (1906) 2 Ch 34
17 (1909) 1 Ch 267
18 AIR 1953 Mad 520
19 (1914) 1 Ch 895
20 Article 80, English Companies Act
21 1970 Ch 212
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