CS Foundation Elements of Company Law-II Notes
→ Director is a person who directs as the head of an organized group. Section 2(34) of the Companies Act, 2013 prescribed that “director” means a director appointed to the Board of a company. A director is a person appointed to perform the duties and functions of director of a company in accordance with the provisions of the Companies Act, 2013.
→ Section 2 (10) of the Companies Act, 2013 defined that “Board of Directors” or “Board”, in relation to a company, means the collective body of the directors of the company.
→ Provisions regarding person to be appointed as director:
- Under the Companies Act, only an individual can be appointed as a Director; a corporate, association, firm or other body with artificial legal personality cannot be appointed as a Director.
- The Companies Act does not prescribe any qualifications for Directors of any company but certain disqualifications have been given in the Act.
- A person appointed as director shall not act as director unless he gives his written consent to hold office of director and such consent has been filed with the registrar within thirty days of his appointment.
Section 149(3) of the Companies Act, 2013 has provided for residence of a director in India as a compulsory i.e. every company shall have at least one director who has stayed in India for a total period of not less than 182 days in the previous calendar year.
The Act imposes a specific obligation on listed companies to have at least one third of the total number of directors as independent directors
The following class or classes of companies shall have at least two directors as independent directors
- the Public Companies having paid up share capital often crore rupees or more; or
- the Public Companies having turnover of one hundred crore rupees or more; or
- the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees
Section 149(6) of the Act prescribes the criteria for independent directors which are as follows
- such individuals must possess integrity and relevant industrial expertise;
- such individuals must not have any material or pecuniary relationship with the company or its subsidiaries;
- they or their relatives should not have had any pecuniary’ relationship with the company or its subsidiaries, amounting to 2% or more of its gross turnover or total income or INR 5 million (approximately US$ 80,645), whichever is less, during the two immediately preceding financial years or in the current financial year;
- such appointees or their relatives should not have any key managerial position in the company or its subsidiary companies during any of the three preceding financial years;
- such persons or their relatives should not have been an employee of the company or its subsidiary companies during any of the three preceding financial years;
- they or their relatives must not be a director of a nonprofit organization, which receives 25% or more of its receipts from the company or its subsidiary companies or its promoters/directors or from anyone who holds 2% of voting rights in such companies;
- such individuals must not be a promoter of the company or its subsidiaries;
- they must not hold more than 2% voting rights in the company either by themselves or together with their relatives.
Duties of independent directors: Companies Act, 2013 includes a guide to professional conduct for independent directors, which crystallizes the role of independent directors by prescribing facilitative roles, such as offering independent judgment on issues of strategy, performance and key appointments and taking an objective view on performance evaluation of the board. Independent directors are additionally required to satisfy themselves on the integrity of financial information, to balance the conflicting interests of all stakeholders and, in particular, to protect the rights of the minority shareholders.
→ Appointment of director
Director may be appointed in the following ways:
- By the articles as regards first directors.
- By the company in general meeting.
- By the directors,
- By small shareholders
- By third parties
→ First directors:
First Directors of the company is appointed by either subscribers of the Memorandum (if the Articles so provide), or in the absence of any such clause, the individuals who are subscriber to the Memorandum of Association (MOA) will be first directors of the Company till the appointment of directors in the general meeting.
→ Appointment by company in general meeting:
Appointment of subsequent directors is made at every annual general meeting of the company. At the annual general meeting of a public company one-third of such of the directors for the time being as are liable to retire by rotation, or if their number is neither three nor a multiple of three, then, the number nearest to one-third, shall retire from office. The directors to retire by rotation at every annual general meeting shall be those who have been longest in office since their last appointment. 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.
→ Appointment by Directors:
The directors are empowered to appoint
- Additional directors.
- Alternate directors.
- Directors filling casual vacancy.
The director to be appointed by board of directors exercising the power so conferred in them by the Articles of the company should not be such a person who has failed to get appointed as a director in a general meeting.
→ Appointment of Directors by Small shareholders:
(1) A listed company, may upon notice of not less than one thousand small shareholders or one-tenth of the total number of such shareholders, whichever is lower, have a small shareholders’ director elected by the small shareholders: Provided that nothing in this sub-rule shall prevent a listed company to opt to have a director representing small shareholders suo motu.
→ Appointment by third parties:
Companies Act, 2013 defines nominee director as a director nominated by any financial institution in pursuance of the provisions of any law for the time being in force, or of any agreement, or appointed by the Government or any other person to represent its interests. Companies Act, 2013 states that a nominee director cannot be an independent director.
→ Additional compliance requirements for private companies:
There are certain increased compliance requirements mandated for private companies which, till now, were mandated only for public companies and private companies which are subsidiaries of public companies. These include the following:
- Appointment of director to be voted individually
- Option to adopt principle of proportional representation for appointment of directors
- Ineligibility on account of non-compliance with section 274(1 )(g) now extended for appointment or reappointment as a director in a private limited company also.
→ Duties of directors:
Companies Act, 2013 has set out the following duties of directors:
- To act in accordance with company’s articles;
- To act in good faith to promote the objects of the company for benefit of the members as a whole and the best interest of the company, its employees, shareholders, community and for protection of the environment;
- Exercise duties with reasonable care, skill and diligence and exercise of independent judgment;
The director is not permitted to:
- Be involved in a situation in which he may have direct or indirect interest that conflicts, or may conflict, with the interest of the company;
- Achieve or attempt to achieve any undue gain or advantage, either to himself or his relatives, partners or associates.
→ Powers of Board
Board means Board of Directors who are entitled to do all such acts as the company is authorised to exercise and do. Subject to the provisions of the Act, the Board of directors of a company shall be entitled to exercise all such powers and to do all such acts and things, as the company is authorised to exercise and do.
Provided that the Board shall not exercise any power or do any act or thing which is directed or required, whether by this or any other Act or by the memorandum or articles of the company or otherwise, to be exercised or done by the company in general meeting.
No regulation made by the company in general meeting shall invalidate any prior act of the Board which would have been valid if that regulation had not been made.
Thus a director can do all the acts which a company can do under its memorandum and is infra vires the company. A director cannot do any act which is intra vires the company but is outside the powers of the director. Section 179 of the Companies Act, 2013 provides that the Board of directors of a company shall exercise the following powers on behalf of the company and it shall do so only by means of resolution passed at meeting of the Board:
(a) the power to make calls on shareholders in respect of money unpaid on their shares;
(b) the power to authorize the buy-back securities under section 68.
(c) the power to issue debentures;
(d) the power to borrow moneys otherwise than on debentures;
(e) the power to invest funds of the company;
(f) the power to make loan;
(g) the power to approve financial statement and the Board’s report;
(h) the power to diversify the business of the company;
(i) the power to approve amalgamation, merger or reconstruction;
(j) the power to take over a company or acquire a controlling or substantial stake in another company;
(k) the power to make political contributions;
(l) the power to appoint or remove key managerial personnel (KMP);
(m) the power to take note of appointment(s) or removal(s) of one level below the Key Management Personnel;
(n) the power to appoint internal auditors and secretarial auditor;
(o) the power to take note of the disclosure of director’s interest and shareholding;
(p) the power to buy, sell investments held by the company (other than trade investments), constituting five percent or more of the paid-up share capital and free reserves of the investee company;
(q) the power to invite or accept or renew public deposits and related matters;
(r) the power to review or change the terms and conditions of public deposit;
(s) the power to approve quarterly, half yearly and annual financial statements or financial results as the case may be.
→ Board Meetings
Section 173 of the Companies Act, 2013 deals with Meetings of the Board. The provisions related to board meeting are as under:
- First board meeting of a company to be held within 30 (thirty) days of incorporation;
- Notice of minimum 7 (seven) days must be given for each board meeting. Notice for board meetings may be given by electronic means. However, board meetings may be called at shorter notice to transact “urgent business” provided such meetings are either attended by at least 1 (one) independent director or decisions taken at such meetings on subsequent circulation are ratified by at least 1 (one) independent director.
- One third of total strength or two directors, whichever is higher, shall be the quorum for a meeting.
- If due to resignations or removal of director(s), the number of directors of the company is reduced below the quorum as fixed by the Articles of Association of the company, then, the continuing Directors may act for the purpose of increasing the number of Directors.
- Companies Act, 2013 has permitted directors to participate in board meetings through video conferencing or other audio visual means which are capable of recording and recognising the participation of directors. Participation of directors by audio visual means would also be counted towards quorum.
- Minimum 4 (four) meetings have to be held each year, with a gap of not more than 120 (one hundred and twenty) days between 2 (two) board meetings.
- In case of One Person Company (OPC), small company and dormant company, at least one Board meeting should be conducted in each half of the calendar year and the gap between two meetings should not be less than Ninety days
- Certain new actions have been identified, that require approval by directors in a board meeting. These include issuance of securities, grant of loans, guarantee or security, approval of financial statement and board’s report, diversification of business etc.
- Approval of circular resolution will be by a majority of directors or members who are entitled to vote on the resolution, irrespective of whether they are present in India or otherwise.
→ Managing Director and Manager:
As per Section 2(54) of the Companies Act, 2013 The term “Managing Director” mans a director who, by virtue of an agreement with the company or of a resolution passed by the company in a general meeting or by its Board or by virtue of its memorandum or articles of association, is entrusted with substantial powers management which would not otherwise be exercisable by him and includes a director occupying the position of a managing director, by whatever name called.
Section 2(53) contains the definition of – “manager11, means an individual (not being the managing agent) who, subject to the superintendence, control and direction of the Board of directors, has the management of the whole, or substantially the whole, of the affairs of the company and includes a director or any other person occupying the position of a manager, by whatever name called and whether under contract of service or not.
→ Whole-time director, Chief Financial Officer, Chief Executive Officer and Company Secretary
- Section 2 (94) of the Companies Act, 2013 defines “whole-time director” as a director in the whole-time employment of the company.
- Section 2(19) of the Companies Act, 2013 defined “Chief Financial Officer” means a person appointed as Chief Financial Officer of a company
- Section 2(18) of the Companies Act, 2013 defined “Chief Executive Officer” means an officer of a company, who has been designated as such by it.
- Section 2(24) of the Companies Act, 2013 defines “company secretary” or “secretary” means a company secretary as defined in clause (c) of sub-section (1) of section 2 of the Company Secretaries Act, 1980 who is appointed by a company to perform the functions of a company secretary under this Act
→ Appointment of key managerial personnel:
The term Key Managerial Personnel is contained in Section 2(51) of the Companies Act, 2013. The said Section states as under: “key managerial personnel”, in relation to a company, means
(a) the Chief Executive Officer or the managing director or the manager;
(b) the company secretary;
(c) the whole-time director;
(d) the Chief Financial Officer; and
(e) such other officer as may be prescribed;
As per section 203 of the Companies Act, 2013 Act provides for mandatory appointment of following whole time key managerial personnel for every listed company and every other company having a paid-up share capital of ten crore INR or more:
- Managing director, or chief executive officer or manager and in their absence, a whole-time director
- Company secretary
- Chief financial officer
Further, the 2013 Act also states that an individual cannot be appointed or reappointed as the chairperson of the company, as well as the managing director or chief executive officer of the company at the same time except where the articles of such a company provide otherwise or the company does not carry multiple businesses.
→ Manner of Appointment of KMP:
- Every whole-time key managerial personnel of a company shall be appointed by means of a resolution of the Board containing the terms and conditions of the appointment including the remuneration.
- If the office of any whole-time key managerial personnel is vacated, the resulting vacancy shall be filled-up by the Board at a meeting of the Board within a period of 6 months from the date of such vacancy.
→ Company Secretary:
- A Company Secretary is a senior position in a private sector company or public sector organisation, normally in the form of a managerial position or above.
- Company Secretary is an important member of corporate management and acts as an advisor to the management of a company on legal and business matters. Company Secretary is an indispensable professional in the efficient management of an organization, whose affairs are conducted by board of directors or a council or any other corporate structure. As per Rule 8A of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 provides that a company which has a paid up capital of
- Five crore rupees or more shall have a whole-time company secretary.
- Only those persons who are Company Secretaries within the meaning of Section 2( 1 )(c) of the Companies Secretaries Act, 1980 and individuals possessing the prescribed qualifications can be appointed as Secretary of a Company.
→ Functions of Company Secretary:
The functions of the company secretary shall include:
- to report to the Board about compliance with the provisions of this Act, the rules made there under and other laws applicable to the company;
- to ensure that the company complies with the applicable secretarial standards;
- to discharge such other duties as may be prescribed.
→ Role of Secretary in a company can be divided into three heads
- As a statutory officer: Secretary is required to comply with the various laws. According to Section 203 of the Companies Act, 2013 read with Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 mandates the appointment of Key Managerial Personnel and makes it obligatory for a listed company and every other public company having a paid up share capital of rupees ten crores or more, to appoint whole-time key managerial personnel.
- As a coordinator: Secretary has to ensure that the policies laid down by the board are effectively followed. He is not only the communicating channel between the Board and the executives but he also co-ordinates the actions of other executives vis-a-vis the Board
- As an administrative officer: Secretary has to ensure that the company is running within company’s policies. The role of company secretary as an administrative can be subdivided into organisational, financial, office and personnel administration.
→ Member’s Meetings:
A company is composed of members, though it has its own entity distinct from members. A company is required to hold meetings of the members to take approval of certain business items, as prescribed in the Act.
Difference between members and shareholders
- A registered shareholder is a member but a registered member may not be shareholder because the company’ may not have share capital.
- A person who owns a beare share warrant is a shareholder but not a member as his name does not appear in the register of members. This means a person can be a share holder without being a member.
- A legal representative of a deceased member is not a member until he applies for registration. He is a shareholder but not a member as his name does not appear in register of members
→ Members meetings are classified into
- Annual General Meeting
- Extraordinary General Meeting
- Class Meeting
1. Annual General Meeting:
As the term denotes, annual general meeting is the meeting which has to be held annually. It is the meeting of the members through which they get the opportunity to express their views on the management of the company. Through this meeting, the shareholders can exercise control over the affairs of the company. The ‘Annual General Meeting’ is sometimes called “Ordinary General Meeting” as it usually deals with the so-called ‘Ordinary Business’.
Every company is required to hold this meeting. But, there are certain legal provisions which have to be followed, relating to the annual general meeting.
- The annual general meeting must be held once in each year in addition to other meeting.
- First annual general meeting of the company should be held within 9 months from the closing of the first financial year. Hence it shall not be necessary for the company to hold any annual general meeting in the year of its incorporation
- The members of the company have to get at least 21 days before the meeting is held. The notice may be given either in writing or through electronic mode.
- A general meeting may be called after giving a shorter notice also if consent is given in writing or by electronic mode by not less than 95% of the members entitled to vote at such meeting.
- The meeting must be held during the business hours and on any day which should not be a National holiday.
- Subsequent annual general meeting of the company should be held within 6 months from the closing of the financial year.
- The Registrar may extend the time period for holding Annual General Meeting maximum upto 3 months for any special reason.
- The gap between two annual general meetings should not exceed 15 months.
- A statement of the business to be transacted at the general meeting should be given in the notice. In case, the meeting is to transact a special business, a explanatory statement should be attached about such item.
- A company may give notice through electronic mode.
- Section 99 of the Companies Act, 2013 provides that if any default is made in complying or holding a meeting of the company, the company and every officer of the company who is in default shall be punishable with fine which may extend to Rs. 1 lakh.
The main purpose to hold this meeting are, like
- To submit the annual account, balance sheet, director’s report and auditor’s report.
- To declare the dividend.
- To appoint auditors and fix their remuneration.
- To elect directors are that liable to retire by rotation.
Special business – any other business other than specified above to be transacted will be deemed special business likes
- To increase share capital
- To alter Article of Association
2. Extraordinary General Meeting
A General meeting other than the statutory meeting and the annual general meeting is called ‘Extraordinary General Meeting’. Due to some urgent or special business purpose, the extraordinary general meeting is held between two consecutive annual general meetings. Here, ‘special business’ means, all the business transacted at any meeting except in the annual general meeting. But, every ‘Extraordinary General Meeting’ has to be informed to the members through a notice accompanied by an ‘Explanatory Statement’, which explains the objective of the meeting.
All general meetings other than annual general meetings are called extraordinary general meetings. Extraordinary General Meetings shall called by:
- By Board:
Board my call EGM whenever it deems fit and required
- By Board on requisition of shareholders:
Board may call EGM on the requisition of members
(a) in the case of a company having a share capital: members who hold, on the date of the receipt of the requisition, not less than one-tenth of such of the paid-up share- capital of the company as on that date carries the right of voting;
(b) in the case of a company not having a share capital: members who have, on the date of receipt of the requisition, not less than one-tenth of the total voting power of all the members having on the said date a right to vote
- By Requisitionists:
If Board does not call meeting within 21 days of receiving a valid requisition than the requisitionists themselves may call meeting not later than 45 days from the date of receipt of such requisition. However in such case, the meeting should be held within a period of 3 months from the date of the requisition.
- By Tribunal:
Section 98 of the Companies Act, 2013 provides that if for any reason it is impracticable to call a meeting of a company or to hold or conduct the meeting of the company, the Tribunal may, either suo motu or on the application of any director or member of the company who would be entitled to vote at the meeting.
3. Class Meetings:
Class meetings are those meetings which are held by holders of a particulars class of shares/debenture holders/creditors. Class meeting are basically held for taking consent of a particular class of shareholders. Through this meeting, the rights and privileges of the shareholders can be altered, or conversion of one class to another can be done. If the article permits, the right of the different classes of the shareholders can be altered from the class of holder of that share, only when a resolution is passed in a separate meeting.
The Government of India launched the National e-Govemance Plan (NeGP) with the intent to support the growth of e-govemance within the country. With the launch of this programme many government services were available to the citizens of India via electronic media.
There are many electronic governance projects run by government of India. The Ministry of Corporate Affairs (MCA), Government of India, has initiated the MCA21 project, which enables easy and secure access to MCA services in an assisted manner for corporate entities, professionals and general public.
MCA 21 has helped in the following way:
- Enable the business community to register a company and file statutory documents quickly and easily.
- Public will get easy access to relevant records and get their grievances redressed effectively.
- Professionals will be able to offer efficient services to their client companies.
- Financial institutions will find registration and verification of charges easy.