This article has been written by Anurima Malakar, from Guru Gobind Singh Indraprastha University

Table of Contents

INTRODUCTION:

This article broadly speaks about corporate governance, especially appointment, disqualification, and the role of directors under the Companies Act^[1]. The appointment of independent directors plays a crucial role in upholding transparency, accountability, and ethical decision-making within a company. The Company Act, a cornerstone of corporate law, intricately regulates the process of appointing independent directors.

The Legal Framework of Appointment:

Section 149^[2] of the Companies Act lays the foundation for directorial appointments, mandating that every company constitutes a Board of Directors comprised of individuals.

Independent directors, crucial for effective corporate governance, undergo stringent selection processes outlined in Section 150^[3]. The Companies Act further mandates the creation and maintenance of a data bank containing vital information about eligible individuals willing to serve as independent directors. The legal framework also delineates tenure, reappointment, and term limitation for directors, emphasizing the importance of continuity and fresh perspectives. The Companies Act ensures a structured and transparent approach to directorial appointments.

Disqualification as a Safeguard: Grounds and Implications:

Section 164^[4] of the Companies Act provides explicit grounds for directorial disqualification, aiming to ensure that only individuals with a track record of integrity, financial prudence, and regulatory compliance hold directorial positions. Grounds for disqualification include criminal offenses, insolvency, and non-compliance with filing obligations.

Removal and Resignation:

Removal is of director is mentioned under Section 169^[5] by shareholders, section 242(2)(h) by tribunals, and under section 168^[6] by resignation of director.

In essence, the Companies Act weaves a comprehensive tapestry governing corporate governance, balancing the appointment, disqualification, removal, and resignation of directors to ensure the integrity, transparency, and sustainability of corporate structures.

THE LEGAL FRAMEWORK OF APPOINTMENT OF DIRECTORS:

Eligibility Criteria:

Under Section 149^[7] of Companies Act, 2013:

Every company is mandated to constitute a Board of Directors, consisting of individuals rather than artificial entities. According to Section 149, the minimum number of directors varies based on the type of company:

Public Company: Must have at least 3 directors.
Private Company: Should have at least 2 directors.
One Person Company: Requires a minimum of 1 director.

While a company can appoint up to 15 directors, exceeding this limit requires the passage of a special resolution. Additionally, the Central Government may specify certain classes of companies that must appoint at least one-woman director.

Moreover, each company must ensure that at least one director has resided in India for a duration of 182 days or more in the preceding year. This emphasizes the significance of having a director with a tangible connection to the Indian context.

Independent Director:

Commencing the journey is Section 149 of the Companies Act, 2013, laying out eligibility criteria for independent directors. This section mandates qualities such as integrity, relevant expertise, and a track record of ethical standards, forming the bedrock for selecting individuals for this pivotal role.

The Companies Act, 2013, outlines provisions for Independent Directors primarily in Section 149(4)^[8]. Here are the key points elaborated:

Minimum Representation in Listed Companies:

At least one-third of the total directors in every listed company must be independent directors.

Government Prescriptions for Public Companies:

The Central Government holds the authority to prescribe the minimum number of independent directors in public companies.

Definition of Independent Director (Section 149(6)):

An independent director is a director other than a managing director, whole-time director, or a nominee director.

Qualifications of an Independent Director:

Possesses integrity, relevant expertise, and experience.
Has not been a promoter of the company, its subsidiary, or holding company in the past or present.
Neither the director nor their relative has a pecuniary relationship with the company, its holding or subsidiary company, directors, or promoters.
Does not hold a position in key managerial personnel nor is an employee of the company.

Declaration of Independence:

An independent director is required to declare their independence at the initial Board meeting and subsequently annually at the first meeting of the Board in the financial year.

Term of Office:

An independent director holds office for a term of five years on the Board.

Reappointment Eligibility:

An independent director can be reappointed after passing a special resolution.

Term Limitation:

No independent director can hold the office for more than two consecutive terms.

These provisions collectively aim to ensure that independent directors bring relevant expertise, unbiased judgment, and a commitment to ethical governance to the boards of companies, promoting transparency and accountability.

Election of Independent Directors:

The selection process of independent directors involves several key steps outlined under Section 150^[9] of the Companies Act, 2013. Here’s a concise reframe:

1.Data Bank Requirement:

Independent directors are selected from a data bank containing essential information such as names, addresses, and qualifications of individuals eligible and willing to serve in this capacity.

2.Maintenance of Data Bank:

The data bank is maintained by any body, institute, or association possessing expertise in creating and managing such databases. These entities are duly notified by the Central Government.

3.Due Diligence in Selection (Section 150):

Companies are mandated to exercise due diligence in the selection process. Section 150 of the Companies Act specifies this requirement.

4.Approval in General Meeting:

The appointment of independent directors must receive approval in a company’s general meeting.

5.Prescribed Manner and Procedure:

The Central Government has the authority to prescribe the manner and procedure for the selection of independent directors who meet the qualifications specified under Section 149.

4.Regulatory Disclosures – Section 134:

Regulatory compliance is integral to corporate governance. Section 134^[10] of the Companies Act, 2013, mandates disclosures in the annual report regarding the appointment of independent directors. This includes details about qualifications, experience, and any relationships affecting independence, with intimation sent to stock exchanges.

Procedure of appointment of directors in accordance with Companies Act, 2013:

Director Elected by Small Shareholders (Section 151):

Listed companies are mandated to elect one director chosen by small shareholders under Section 151 of the Companies Act, 2013.
Small shareholders, in this context, refer to those holding shares with a total value not exceeding Rs. 20,000.

First Directors:

The initial directors of a company are appointed by the subscribers of the memorandum.
The names of these directors are typically listed in the articles of the company.
In the absence of the appointment of the first director, all subscribers automatically become directors.
The first director’s term lasts until the first annual general meeting. Subsequent appointments follow the guidelines in Section 152^[11].

Appointment at General Meeting (Section 152):

Section 152 stipulates that directors must be appointed by the company during General Meetings.
The appointed individual receives a director identification number and must confirm their eligibility during the meeting.
Within 30 days, the appointed director must file their consent to act with the registrar.

Annual Rotation:

The company’s articles can prescribe the retirement of directors through annual rotation.
If not specified, only one-third of the directors can be permanently appointed, with the tenure of the rest determined by rotation.
At each annual general meeting, one-third of such directors retire, with those in office for the longest period retiring first.
In cases where multiple directors have served an equal duration, retirement is decided through mutual agreement or by lot.

By adhering to these regulations, companies ensure a structured and transparent process for the appointment and rotation of directors, contributing to effective corporate governance.

Reappointment under Section 152:

Filling Vacancies (Section 152):

Vacancies created by retiring directors must be filled at the same general meeting.
The general meeting can adjourn the reappointment for up to a week.
If no fresh appointment is made, and there is no resolution for the appointment, retiring directors are considered reappointed.

Exceptions to Automatic Reappointment:

Retired directors are not considered reappointed if:

The appointment was put to a vote and lost.
The retiring director has expressed unwillingness to continue in writing.
The director is disqualified.
An ordinary or special resolution is required for the appointment.
A motion for the appointment of two or more directors in a single resolution is void due to lack of unanimous consent under Section 162.

Fresh Appointment Procedure (Section 160):

A written notice for the new director’s appointment must be submitted to the company’s office at least 14 days before the meeting, along with a deposit of Rs.1,00,000.
The deposit is refunded if the person is elected as a director or receives more than 25% of the total valid votes cast.

Nomination in Articles:

Directors can be appointed as per the company’s articles, allowing shareholders with over 10% shares to nominate themselves.
Board appointment of a person nominated by a legal institution is permissible, subject to the company’s articles.

Individual Voting at General Meeting (Section 162):

Directors are appointed through individual voting at the general meeting, as per Section 162 of the Companies Act, 2013.

Each proposed director’s appointment is voted on individually to reflect the shareholders’ preferences.

Appointment by Proportional Representation (Section 163):

Section 163 of the Companies Act, 2013, allows a company’s articles to facilitate director appointment through proportional representation voting.
This system aims to empower minority votes effectively.
Proportional representation can be achieved through a single transferable vote, cumulative voting, or other approved means.

Appointment:

Appointment of Directors by Board:

While the customary avenue for appointing directors is the annual general meeting, there are scenarios where the Board holds the authority to make appointments:

The Board is entitled to appoint additional directors if the company’s articles confer such power and specify the maximum allowable number.
This provision grants the Board flexibility in responding to specific needs or strategic considerations by supplementing the existing directorial team.

Filling Casual Vacancies (Section 161):

Section 161 of the Companies Act, 2013, empowers the Board to fill casual vacancies in director positions.
This provision is particularly relevant when a director resigns or is unable to continue, allowing the Board to promptly address the vacancy without waiting for the next annual general meeting.
Filling casual vacancies ensures the continuity of the board’s functionality and decision-making processes.

Appointment by Tribunal

Under section 242(j)^[12] of the Companies act 2013, the Company Law Tribunal has the power to appoint directors.

Nomination and Remuneration Committee

Section 178 of the Companies Act, 2013, establishes the Nomination and Remuneration Committee (NRC), a central body in the appointment process. The NRC is tasked with identifying and nominating potential independent directors based on criteria such as independence, qualifications, and alignment with the company’s objectives.

In essence, the appointment of independent directors is a meticulous process guided by legal frameworks, committees, and regulatory compliance, ensuring that individuals with the right qualifications and ethical standards contribute to the governance and success of the company.

GROUNDS FOR DIRECTOR DISQUALIFICATION UNDER COMPANIES ACT:

Directors play a vital role in steering the governance and management of a company. However, recognizing that not all individuals are suitable for such responsible positions, the Companies Act in India provides specific grounds for the disqualification of directors.

Section 164^[13] of the Companies Act, 2013, establishes essential eligibility criteria for directorship. Key disqualifications include:

Criminal Offenses –

an individual faces disqualification from directorship if convicted of any offense leading to imprisonment for at least six months.

Insolvency –

Individuals declared insolvent by a competent court or those unable to settle debts are barred from directorial appointments.

Non-Filing of Financial Statements or Annual Returns –

disqualifies individuals who served as directors in a company failing to file financial statements or annual returns for three consecutive financial years.

Unsound Mind –

disqualifies individuals declared of unsound mind by a competent court.

Removal Of Directors By:

Shareholders: Under Section 169^[14] of the Companies Act 2013, a director can be removed from office before the term’s expiration through an ordinary resolution. The process requires a special notice, indicating the intention for removal, served at least 14 days before the meeting. Upon receiving the notice, a copy is given to the concerned director, who retains the right to present their case during the general meeting. If a director makes a representation, copies are circulated among members, ensuring transparency in the removal process.

Company Law Tribunal: Section 242(2)(h)^[15] of the Companies Act empowers the Company Law Tribunal to remove directors in cases of oppression or mismanagement. If an application is filed seeking relief from such issues, the tribunal has the authority to terminate any agreement between the company and a director.

Resignation: Section 168 outlines the resignation process for directors:

Directors can resign by providing written notice to the company.
The resignation details must be included in the director’s report at the subsequent general meeting.
Within 30 days of resigning, the director must submit a copy of the resignation, along with detailed reasons, to the registrar.
Despite resignation, directors remain accountable for any issues linked to them during their tenure.

LANDMARK JUDGMENTS:

Case: Mother Care (India) Pvt. Ltd. v. Ramaswamy P Aiyar-^[16]

(Matter of Resignation)

The court made a significant ruling regarding the effectiveness of a director’s resignation, even when they are the sole director in the office. The court held that the resignation should be considered valid and effective, irrespective of the director’s status as the only director.

This decision emphasized the principle that an individual has the right to resign from a position voluntarily. The court recognized that the law doesn’t require a director to continue in office against their will, and a resignation, when properly submitted, should be acknowledged and acted upon.

Case: Moriarty v. Regent’s Garage Co.^[17]

(Director is not a servant)

The court made a notable determination regarding the nature of a director’s relationship with a company. The ruling clarified that a director is not to be considered as a servant of the company but rather as a controller of the company’s affairs.

Case: Ferguson v. Wilson, ^[18]

(Director is an agent)

The court held that, directors are legally recognized as the agents of a company. This recognition is grounded in the principle that, being an artificial legal entity, a company can only operate and make decisions through its appointed directors. The court underscored that the relationship between directors and the company mirrors the conventional association of principal and agent.

Case: Bath v. Standard Land Co. Ltd.^[19]

Neville J. delivered a significant judgment, metaphorically characterizing the board of directors as the “brain” of the company. This metaphorical depiction underscores a fundamental legal principle – a company, being an artificial legal entity, lacks a physical body or mind. Instead, it acts through the individuals appointed as directors who collectively form the guiding intellect and will of the company.

This characterization aligns with the legal concept that directors are the primary decision-makers and controllers of a company’s affairs. Their role extends beyond mere representation; they are integral to the functioning of the company, responsible for making strategic decisions, formulating policies, and ensuring the overall well-being of the corporate entity. The metaphor of the board as the “brain” highlights the centrality of directors in the governance and operation of a company.

CONCLUSION:

The grounds of disqualification outlined in the Companies Act serve as guardians of corporate governance. By preventing individuals with a history of financial misconduct, criminal offenses, or regulatory non-compliance from holding directorial positions, the law ensures that companies are steered by individuals of integrity and competence.

Directors are entrusted with the responsibility of making critical decisions that impact not only the company but also its stakeholders. Disqualification provisions act as a deterrent against individuals who may compromise the principles of corporate governance. In essence, these provisions reinforce the commitment to ethical conduct, financial prudence, and regulatory compliance, contributing to the sustained growth and credibility of the corporate sector in India.