Appointment of Directors in a Company : Complete Guide

Who is the Director of a Company?

A ‘director,’ according to Section 2(34) of the Companies Act of 2013, is a director appointed to a company’s Board of Directors.

The company itself and its directors or the Board of directors are the principal agents of the company to transact its activities within the framework of the Companies Act. The Companies Act states when the company acts as both principal and agent and when the Board of Directors acts on its behalf. The directors or the Board of Directors function as Trustees in relation to the company’s properties and assets. As a result, depending on the facts of each instance, the directors have varying qualities with respect to the firm.

As previously noted, directors, in addition to being trustees for the company’s assets and properties, are also the company’s agents, as the directors, collectively as the Board, act on behalf of the business on all issues save those explicitly reserved for the company to act. However, it should be noted that, while the directors can be considered the company’s agent for certain purposes, the company cannot, in any way, including in the general meeting, direct the directors to take a particular decision on matters for which the directors (i.e., the Board) are empowered to make a decision. For example, share allotment, share transfer, investments, and so on.

If the shareholders‘ body does not like the decision, they have the right to alter the directors in accordance with the Act. As noted above in the chapter, a director, in addition to being the agent and trustee of the company, might also be considered an officer of the company, and therefore an employee/staff for the Act.

A company’s articles may identify its directors as governors, members of the governing council, the board of management, or any other title, but they are simply directors under the law.

Similarly, in the case of associations or other bodies registered as companies under section 8 (that is, companies whose object is not profit but the advancement of art, science, commerce, culture, and so on), the members of the executive committee or governing body are directors for the Act, even if they are not referred to as such.

The term of an “officer” under section 2(59) of the Act includes a director as well as any person under whose orders or instructions the Board or any one or more of the directors are acquainted to act.

Appointment of Directors in a Company

Following are the heads that would give the base on the appointment of directors in a company:

1) Appointment of First Directors

The first directors are generally named in the articles or appointed in the manner specified in them. Where the articles do not allow for the appointment of first directors, the individual subscribers to the memorandum shall be assumed to be the company’s first directors until the directors are officially constituted. In the event of a One Person Company, the member is presumed to be the company’s initial director until the director or directors are appointed by the member in line with the provisions of this section.

If for whatever reason, such as death, the people specified in the list of initial directors do not take office, the subscribers to the Memorandum (who would then be the sole members) must hold a meeting to nominate directors. Subscribers who would be entitled to request a meeting may convene the meeting if the articles contain no additional provision in that regard. Every subscriber must be served with notice of the meeting in accordance with the Act’s notice requirements.

There will be no appointment without a DIN:

No one shall be appointed as a director of a company unless he has been assigned a Director Identification Number (DIN) in accordance with section 154, Subsection (3).

Every individual nominated to be appointed as a director by the company, whether in a general meeting or otherwise, must provide his Director Identification Number as well as a certification that he is not disqualified to become a director under this Act.

Acceptance to serve as Director:

A person designated as a director may not act as a director unless he consents to occupy the position. The permission must be lodged with the Registrar in the required way within thirty days after he is appointed per Section 152(5).

When an independent director is appointed at a general meeting, an explanatory statement affixed to the notice of the general meeting must include a declaration that, in the Board’s view, he meets the qualifications stipulated in this Act for such an appointment.

2) Appointment at the General Meeting

Except if the Act allows otherwise, every director must be selected by the company in a general meeting, according to section 152(2).

Section 152, sub-section (6), states that unless the articles allow for the retirement of all directors at each annual general meeting, not less than two-thirds of a public company’s total number of directors must be present.

These shall be individuals whose terms of office are subject to the rotational retirement of directors; and

In the event of such a corporate (i.e., public company), the remaining directors shall be selected by the company in a general meeting in the absence of, and subject to, any requirements in the articles of the company.

3) Appointment by the Board of Directors

The Board of directors can utilize its power and appoint directors in the following three cases :

(i) Additional Directors

A company’s articles may grant its Board of Directors the authority to designate any person as an extra director at any time. A person who is not elected as a director at a general meeting, on the other hand, cannot be elected.

As a result, without an authority granted by the Articles, the Board cannot select new directors. The section applies to all enterprises, whether public or private.

(ii) Filling up the Casual Vacancy

In the event of any corporation, including a private company, Section 161(4), as modified by the Amendment Act, 2017, authorizes the Board to fill casual vacancies. A casual vacancy is one that occurs for reasons other than retirement or the end of an appointment’s term limit. Thus, if the office of any director appointed by the company in a general meeting is vacated before his term of office expires in the normal course, the resulting casual vacancy may be filled by the Board of Directors at a meeting of the Board, subject to any regulations in the articles of the company.

(iii) Alternate Directors

The Board of Directors of a company may designate an alternate director to act for a director during his departure from India for a term of not less than three months if so, authorized by its articles or by a resolution passed by the company in a general meeting. A person holding an alternate directorship for another director in the firm, on the other hand, shall not be chosen. Again, an existing director of the business cannot be chosen as an alternate director for another director of the same firm.

No one may serve as an alternate director for an independent director unless he is eligible to serve as an independent director under the requirements of this Act.

An alternate director is not the original director’s agency.

4) Appointment of Resident Director

The notion of a resident director was introduced in the Companies Act of 2013. Section 149, sub-section (3), states that every firm must have at least one director who spent at least one hundred and eighty-two days / 182 days in India during the preceding fiscal year.

Due to the Covid-19 scenario, failure to meet the minimum residence requirement in India for 182 days would not be considered a failure for the fiscal year 2020-21.

However, if a firm is freshly formed, the requirement will apply proportionally at the end of the fiscal year in which it is formed.

5) Appointment of Independent Directors

Section 149, sub-section (4), mandates that every listed public company have at least one-third of its total number of directors be independent directors, and the Central Government may specify the minimum number of independent directors for any class or classes of public businesses.

The Central Government has required & mandated the below provided in Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014:

The following classifications or classes of corporations must have at least two independent directors:

• Public Companies with a paid-up share capital of at least 10 crore rupees; or
• Public Companies with a turnover of 100 crore rupees or more; or
• Public Companies with outstanding debts, debentures, and deposits totaling more than fifty crore rupees.

However, if a corporation covered by this regulation is compelled to nominate a greater number of independent directors owing to the composition of its audit committee, that greater number of independent directors must apply to it.

Any intermittent vacancy of an independent director should be replaced by the Board as soon as possible but no later than three months from the date of such vacancy, whichever is later:

Explanation – For this regulation, it is now specified that the paid-up share capital or turnover, or outstanding loans, debentures, and deposits, as applicable, as of the final date of the most recent audited financial statements, shall be considered.

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