Directors under the Companies Act of 2013 have the core function of guiding and leading a company strategically. Directors are assigned fiduciary duties, compelling the company to maintain the law, ethics, and sustainable growth. Directors are seen as the intellectual brain and decision-making center of the company, taking strategic decisions that drive the direction and success of the company.
The Act classifies directors into four types, namely executive, non-executive, independent, and nominated directors, each with specific functions and roles. The Companies Act of 2013 has placed an overriding emphasis on board effectiveness, transparency, and accountability by furnishing detailed guidelines regarding nomination, qualifications, disqualifications, roles, and responsibilities of directors.
Directors are required to act in good faith, exercise care, avoid conflict of interest, and promote the interests of the company, the shareholders, and other stakeholders. The Board of Directors is also required to discharge adequate standards of corporate governance and legal and regulatory compliance. Their stewardship not only better performs the corporations but also makes the company reputable and reliable with investors, regulators, and society. Directors, as under the Companies Act, 2013, are pillars of effective business management through ethical stewardship and sound decision making.
First Directors (Section 152)
According to Section 2(34) of the Companies Act, 2013, a director shall be a person appointed to the board of a company. Directors control the business of the company and hold it as its agents and as trustees. Together referred to as the Board of Directors, they make the key decisions for the well-being of the company both in terms of strategy and operation.
The first director is the person whose name is mentioned in the memorandum of incorporation of the company as the first member of the Board of Directors. The persons who subscribe to the Memorandum of Association (MoA) are, by virtue of Section 152(1) of the Companies Act, 2013, considered to be the first directors until they are formally appointed under the Act. If the AoA specifies the first directors, such individuals shall assume office from the date of incorporation.
In the absence of such a provision, the subscribers to the MoA become the first directors by default. The initial directors have a central role to establish the governing and operational framework of the company, such as the appointment of additional directors, conducting the first board meeting, and upholding the initial statutory obligations. Their term runs on until directors are appointed at the first general meeting of the shareholders.
Deemed First Directors
According to the Companies Act of 2013, the term ‘deemed first directors’ applies to the situation where a company’s Articles of Association (AoA) fail to mention its first directors.
According to Section 152(1) of the Act: ‘Where there are no provisions in a company’s Articles for the appointment of first directors, the persons who sign the Memorandum shall be treated as the first directors of the company until directors are appointed formally in a general meeting.’
The idea of constructive initial directors provides that a new company is not left without any governing body. It gives the company a legal framework that allows it to operate as soon as it is incorporated, even though there may be no directors referred to in the Articles. It facilitates continuous operation and avoids administrative deadlock in the early stages.
Vital Factors for Deemed First Directors
- Scope: It mostly refers to private or unlisted public companies upon incorporation.
- Default Provision: As long as there are no provisions in the Articles of Association (AoA) for first directors’ appointments, the subscribers to the Memorandum of Association (MoA) are known as deemed first directors.
- Term of Office: The interim first directors shall continue in their respective posts until they are duly appointed by the members in the first general meeting.
- Exclusion of Entities: Only natural persons can act as first directors. No corporate entity having subscribed to the MoA can be appointed as a director.
- Notified Companies’ Obligations: Some companies, for example, listed or regulated ones, can have various appointment processes and more disclosure or compliance obligations.
- Rights and Obligations: Deemed first directors have the same duties, rights, and obligations as normally appointed directors. They are tasked with calling the first board meeting, holding statutory registers, and ensuring they comply with the Act.
Eligibility of First Directors under the Companies Act, 2013
The Companies Act, 2013 defines the conditions of the appointment of the first directors, who are the first members of the board of a company upon its registration. The directors can be defined in the Articles of Association (AoA) or, if not so defined, would be taken to mean the individual subscribers to the Memorandum of Association (MoA) under Section 152(1). The Act gives a clear provision to ensure that the persons who are appointed as first directors are competent, responsible, and accountable.
The legislation is made to maintain the integrity and governance of the company from the very beginning. These eligibility standards must be followed for legal incorporation and operation of the company.
1. Natural person – Individuals alone can be appointed as directors and not corporations, firms, or associations. This provision is applicable to both new and fresh appointments.
2. Resident Director Requirement – According to Section 149(3), each company is required to have a minimum of one director who has stayed in India for a period of at least 182 days during the financial year. This also applies to the first directors, requiring at least one to satisfy this residency requirement.
3. Age Limit – The Act is silent on a minimum or maximum age for directors, but the individual must be capable of entering into contracts, i.e., he should be above 18 years of age. Section 196(3)(a) permits public companies to appoint whole-time or managing directors between the ages of 21 and 70 years, with the approval of a special resolution.
4. Director Identification Number (DIN) – All the directors, including the first directors, as under Section 152(3), must possess a valid Director Identification Number (DIN). DIN may be obtained by submitting Form DIR-3 to the Registrar of Companies.
5. Disqualification under Section 164 – Directors should not be disqualified under Section 164 of the Act. There are considerable reasons for disqualification:
- declared of unsound mind by a court of competent jurisdiction,
- an undischarged insolvent, or
- conviction under an offense of moral turpitude and imprisonment for six months.
- In default for failure to present financial accounts or annual returns for three consecutive years, or
- a disqualification order from a tribunal or court.
6. Agreement to Act as Director – As mandated under Section 152(5), directors (including first directors) must give their written agreement to act as a director by filling in Form DIR-2 and submitting it to the Registrar together with Form DIR-12 within 30 days of appointment.
Appointment of First Directors
The Companies Act of 2013 provides that a company must form a valid board structure upon incorporation. It is possible to achieve this either by specifying the preliminary directors in the Articles of Association or by treating the subscribers to the Memorandum as the directors when the Articles are silent on this issue. Appointment of the first directors is regulated by Section 152 of the Companies Act, 2013.
The first directors shall look after the company as soon as it is incorporated, before holding the first general meeting. This organisation maintains the rule of governance and legality right from the commencement of the existence of the company.
1. Appointment through Articles of Association (AoA)
The first directors’ names can be put into the Articles of Association during incorporation. Those listed are duly recognised as being the initial directors of the company. They will remain until the first general meeting, when shareholders can appoint regular directors.
2. Appointment by Default (Where Names are Missing in the Articles of Association)
Where there is no mention of the appointment of directors in the Articles of Association, Section 152(1) states that those signing the Memorandum of Association shall be deemed to be the first directors of the company until directors are appointed at the general meeting. This provision applies only to individual signatories. These directorially appointed individuals will hold office until the first general meeting.
3. Document and Compliance
Before their appointment, the initial director should have a valid Director Identification Number (DIN). Directors have to give their written consent to act as directors on Form DIR-2. The firm should also submit Form DIR-12 with the Registrar of Companies (ROC) within 30 days from the date of appointment, mentioning details of the appointment and consent.
4. Resident Director Requirements
According to Section 149(3), at least one director should be a resident of India and should have lived in India for a period of not less than 182 days during the last year. This provision takes effect from the date of incorporation.
5. Duration of Office
The first directors will remain in office until the first Annual General Meeting (AGM) or until the members appoint new directors.
Tenure of First Directors
Under the Companies Act of 2013, the work of the first directors and deemed first directors plays an instrumental part in the initial control of a company. Their terms are mostly governed by Section 152(1) and related provisions of the Act. Both types of directors are temporary and transitional in nature, ending when the first permanent directors are elected by shareholders. This structure affords direct leadership on company formation while allowing members to choose a stable board.
1. First Directors (As Provided in the Articles of Association)
If the Articles of Association (AoA) of the company specify the names of its initial directors, these are appointed as from the date of incorporation.
They continue to be in office until directors are elected at the company’s first general meeting, usually the first Annual General Meeting (AGM) or any general meeting convened for the purpose of electing the board. After the general meeting, shareholders may appoint new directors to constitute a normal board.
2. Deemed First Directors (Where There Are No Provisions in the AoA)
Where the Articles of Association (AoA) do not state the initial directors, Section 152(1) provides that the individual subscribers of the Memorandum are deemed to be the initial directors of the company.
- These specified initial directors will hold office until normal directors are elected at the first general meeting.
- Note that only individual subscribers, and not corporations or legal persons, can be eligible as directors.
3. Termination of Tenure
The tenures of the initial and appointed directors end if and when shareholders appoint directors at the first general meeting, or when they are reappointed or removed by a new board resolution adopted at the meeting.
Conclusion
The selection of the first directors under the Companies Act of 2013 ensures that a company has an effective board of directors from the time of its incorporation. Their function, whether defined in the Articles or which is to be implied from the Memorandum, is critical for providing initial governance until elected directors are filled by the shareholders.
