Islamabad High Court Judges wrote a letter to Supreme Judicial Council.pdf
Company management
1. P R E P A R E D B Y :
P R I Y A M V A D A J H A ( 2 4 7 9 )
( M F C P A R T I )
Company
Management
2. Subjects to be covered
BOARD OF DIRECTORS
MANAGING DIRECTOR
MANAGER
COMPANY SECRETARY
3. Board of Directors
Definition: “any person occupying the position of a director by
whatever name called.” (u/s 2(13))
Only individuals to be directors (u/s 253)
Responsible for directing, governing or controlling the policy or
management of a company
Minimum number of 3 directors for Public Limited company and 2
directors for private limited company (u/s 252)
Maximum Limit for directors in a company increased to 15. (Previously
the limit of directors was 12 directors as per Act, 1956).
4. Qualifications of Directors
A director is not necessarily required to be a shareholder of the company.
Financial Prudence, however, requires that directors must have some
stake in the company. The articles provide for certain qualification
shares:
U/S 270, the directors must obtain their qualification shares, within 2
months after their appointment
W.R.T a newly floated company, directors must pay for their
qualification shares before the certificate to commence business is
obtained (U/S 149)
The nominal value of the qualification shares must not exceed five
thousand rupees
Bearer shares will not count for purposes of qualification shares (U/S
270)
The qualification of being a director of a company limited by shares is
the holding of at least one share in the company (Regulation 66)
5. Disqualifications of Directors
A person shall not be eligible for appointment as a director of a company, If-
He is of unsound mind and stands so declared by a competent Court
He is an undischarged insolvent
He has been convicted by a Court of any offence
He has failed to pay any calls on his shares for six months
He has been disqualified by the court for fraudulent activities in company
promotion or management under Section 203
He is already a director of a public company which:
Has not filed the annual accounts and annual returns for any continuous three financial years
commencing on or after 1st April 1999; or
Has failed to repay its deposits or interest thereon on due date or redeem its debentures on due
date or pay dividend and such failure continues for one year or more
The new provisions regarding disqualification of directors are
The person has not obtained DIN. (Directors Identification Number)
The person has been convicted of any offence and sentenced for imprisonment for a
period extending up to 7 years or more
6. Appointment of Directors
Any individual, with a valid Director Identification Number (DIN),
competent to contract who is not disqualified under Section 274 and who
holds the minimum shares, if any, may be appointed as director of a
company.
First Directors: As per the subscribers to the memorandum
Subsequent Directors: Directors appointed by shareholders in
general meetings. Public company- Directors appointed on rotational
basis, Private company- Non rotational basis
Appointment by proportional representation: Done in order to
take into account the minority interests. Such appointments are to be
made only once in every three years as no form of proportional
representation can work on the basis of an annual renewal of portion of
directorate
Appointment of Directors by the Board: Done in the following
circumstances-
1. Casual Vacancies: If the office of a director falls vacant for some reason
7. AoD Contd.
(i.e. Death/resignation) before his term expires, it has to be filled by the
Board of directors. Such a director will cease to act the moment the term of
the original director is completed
2. Additional Directors- The board of directors can also appoint additional
directors, subject to maximum number fixed in the articles
3. Alternate Directors- During the absence of a director for more than 3
months, the articles may empower the Board to appoint an alternate
director
Appointment of Directors by Central Government: In order to
effectively safeguard the interests of the company, the central govt may
appoint directors to a company. Such directors shall neither be required to
hold any qualification shares nor they shall be subject to retirement by
rotation
Appointment by third parties: The articles may give a right to
debenture holders or other specified creditors to appoint the directors
9. Duties of Directors
Statutory Duties:
To see that all the moneys received from applicants for shares is deposited
in a scheduled bank until the ‘certificate to commence business’ is obtained
U/S 149 or the money is returned to the applicants U/S 69(5)
To forward a copy of the statutory report at least 21 days before the
statutory meeting to every member of the company and to the Registrar
(U/S 165)
To call an extraordinary general meeting of the company on the
requisition of the specified number of members (U/S 169(1))
To lay a Balance Sheet and a Profit and Loss Account before the company
at every Annual General Meeting (U/S 210(1))
To make a ‘declaration of solvency’ of the company in the case of members
voluntary winding up (U/S 488)
10. Duties of Directors Contd.
General Duties:
To always act bona fide for the benefit of the company and not make any
secret profits
To discharge their duties with such care as is reasonable in a person of
their knowledge and experience
To not be negligent towards attending Board’s meetings unless impossible
otherwise
To perform their duties personally and not delegate any of their powers to
some other person
11. Powers of Directors
The Directors of a company have the power to do all such Acts as the
company is authorised to do (u/s 291(1)). The shareholders of the company
cannot interfere and control the way in which the directors choose to act,
provided they act within the scope of the authority conferred upon them and
exercise the powers bona fide in the best interests of the company. However,
shareholders may intervene when:
a. The directors act for their own personal interests in complete disregard to
the interests of the company
b. The board has become incompetent to act, e.g. where all the directors are
interested in a dealing
c. The directors are either unable or unwilling to act
12. Powers of Directors Contd.
Statutory Provision regarding Directors’ Powers:
The power to make calls;
The power to authorise the company to buyback its own shares or other
specified securities up to 10% of the total of its paid-up equity capital and
free reserves;
The power to issue debentures;
The power to borrow moneys otherwise than on debentures;
The power to invest the funds of the company; and
The power to make loans
13. Contd.
Restrictions on the Powers of Directors:
In case of public companies, the Board of Directors cannot exercise any of
the following powers without the consent of the shareholders in general
meeting:
1. Sell, lease or otherwise dispose of the whole or substantially the whole of
the undertaking of the company;
2. Remit or give time for the repayment of any debt due by a director;
3. Investment of any fixed assets of the company, in securities other than
trust securities;
4. Borrow moneys exceeding the aggregate of the paid-up capital of the
company and its free reserves;
5. Contributions in any year to charitable and other funds not directly
relating to company’s business or the welfare of its employees , of amount
exceeding Rs 50,000 or 5% of the average net profits for the last three
financial years, whichever is greater
14. Liability of Directors
For ultra vires acts: where they enter into contracts ultra vires the
memorandum or ultra vires their powers, e.g., selling the whole undertaking
For breach of trust: where they make secret profits or use company’s funds
for their personal use
For acting dishonestly e.g., purchasing property in their own name first
and then selling it to the company at a higher price with an intention to make
profits
For gross negligence in the performance of their duties, e.g., delegation of
power when the articles do not permit or paying dividends when there are no
profits
For wilful misconduct, e.g., misappropriation of the company’s assets
wilfully
15. Meetings of Board of Directors
As per Section 285 it has been made obligatory on the part of every
company to hold a meeting of its board of directors at least once in every
three months and at least four such meetings must be held in every year.
Notice: The notice of every Board’s meeting has to be sent in writing to
every Director and should specify the place, time and date of the meeting.
According to the Companies Act, the items of business requiring
unanimous resolution of the directors present at the meeting and entitled
to vote, must be mentioned in the notice of the meeting.
Quorum: It is the minimum number of qualified persons whose presence
is necessary for transacting legally binding business at the meeting. It
should be one-third of its total strength for a board meeting. The directors
who are not interested in any of the resolutions to be included in the
quorum. The quorum must be present throughout the Board’s meeting
(Henderson vs Louttit).
16. Contd.
Resolution by circulation: As per Section 289, it shall be passed at the
Board’s meeting if its draft together with necessary papers is circulated
among all the directors and it has been approved by a majority of them as
are entitled to vote on the resolution.
Manner of conducting business at a Board’s meeting: All
resolutions at a Board meeting are passed by a simple majority. For the
following matters unanimous consent is required:
For approval of prospectus;
For appointment of a person as Managing Director who is already a
Managing Director or manager of another company;
For inter-corporate loans and investments;
For appointment of a person as the manager who is already a managing
director or manager of another company
17. Remuneration of Directors
Directors are not the servants of the company and have no right to
remuneration unless
there is a specific provision to that effect in the articles or,
the shareholders resolve for the same in a general meeting
The articles, however, generally provide for directors’ remuneration which
is in the nature of honorarium
According to Section 198, in the case of a public company total managerial
remuneration in respect of any financial year should not exceed eleven per
cent of the net profits of that company for that financial year
if any director has been paid in excess of the limits provided by Section
309, he shall refund such sums to the company and until such sum is
refunded, hold it in trust for the company
18. RoD Contd.
Meaning of the term ‘remuneration’:
The term remuneration apart from the basic salary includes the following
perquisites also:
Any expenditure incurred by the company in providing any rent-free
accommodation or any other benefit or amenity in respect of accommodation free
of charge;
Any expenditure incurred by the company in providing any other benefit or
amenity free of charge or at a concessional rate;
Any expenditure incurred by the company in respect of any obligation or service
which but for such expenditure by the company would have been incurred by the
person himself; and
Any expenditure incurred by the company to effect any insurance on the life of,
or to provide any pension, annuity or gratuity for, the person or his spouse or child
The term remuneration shall not include:
Any sitting or attendance fees payable to directors for attending each meeting of
19. Contd.
the Board or a Committee thereof
Remuneration payable for acting as technical expert
A company is not allowed to make any tax free payment of remuneration
If the articles do not provide for the payment of travelling expenses
incurred in attending meeting of the Board or a Committee thereof or
general meeting
According to Section 310 the maximum amount of sitting or attendance fee
payable to directors for attending each meeting of the Board or a Committee
thereof must not exceed Rs. 5,000 without the approval of the Central
Government.
20. Chart showing the overall Picture of Managerial
Remuneration
Persons entitled to remuneration Maximum percentage of
annual net profits
1. All directors, when assisted by MD(s) or manager
and/or WTD(s)
1 per cent
2. All directors when not assisted by MD(s) or
manager and/or WTD(s)
3 per cent
3. Managing Director (when there is one MD) 5 per cent
4. Manager (there is no provision of having more
than one manager)
5 per cent
5. Whole-time director (when there is one WTD) 5 per cent
6. MDs or WTDs (when there are more than one of
either category or of both categories)
10 per cent
7. Total managerial remuneration to all directors,
MD(s) or manager and/or WTD(s)
11 per cent
21. Vacation of Office (Sec. 283)
Apart from the happening of any of the seven disqualifications enumerated under
Sec 274, the director’s office shall become vacant in the event of:
He does not purchase the qualification shares within two months of his
appointment or does not possess such shares at any time thereafter;
He absents himself from three consecutive meetings of the Board, or from all
meetings of the Board for a continuous period of three months, whichever is longer,
without obtaining leave of absence from the Board;
He or his firm or any private company of which he is a director, borrows from the
company without the approval of Central Government;
He does not disclose his interest in any contract with the company before the Board;
He ceases to hold such office in the company by virtue of which he was appointed a
director;
He or his associate accepts an office of profit under the company or a subsidiary
thereof without the sanction of shareholders by a special resolution;
He has been removed from office for fraud, misfeasance, breach of trust, etc., by
Central Government
22. Removal of Directors
1. Removal by shareholders: In order to move a resolution for the removal of a
director, the shareholders must give a notice to the company at least 14 days
before the meeting, specifying the intention to move the resolution so that
proper notice may be sent to the director concerned and other members. The
director sought to be so removed shall have the right of being heard at the
general meeting. The shareholders cannot remove the following types of
directors:
a. A director appointed by the central government
b. A director of a private company holding office for life on 1 April 1952
c. A director representing special interest e.g., debenture holders director
d. A director elected by proportionate representation
2. Removal by Central Government: The Central Government may remove
from office any director against whom an adverse judgement has been given by
the Company Law Board, on a reference made by Government under Section
388B, for an alleged fraud misfeasance, gross negligence or breach of trust, etc.,
in carrying out his legal obligations
23. Contd.
3. Removal by Company Law Board: The CLB can remove a director on an
application made to it for prevention of oppression (U/S 397) or mismanagement
(U/S 398). The person so removed is disabled from holding a managerial office in
the company for a period of five years without the leave of the CLB and he cannot
claim compensation for the termination of his appointment.
24. Resignation of Office by Director
If there is any provision in the articles of association giving right to a director to
resign any time, a director may resign his office in the manner provided in the
articles
If there is no such provisions in the articles, a resignation once made takes effect
immediately when the intention to resign is made clear
Case in point: T. Murari vs State
25. Managing Director/Whole-time Director
Definition:
Managing Director means a director who by virtue of an agreement with
the company , or of a resolution passed by the company in general meeting
or by its Board of Directors ,or by the virtue of its memorandum or articles
of association , is entrusted with substantial powers of management which
would not otherwise be exercisable by him.
26. Appointment of MDs
A managing director may be appointed in any of the following ways :
by agreement with the company;
by a resolution passed by the company in general meeting;
by a resolution passed by the Board of Directors;
by memorandum of associations;
by articles of association
27. Appointment of MDs (Statutory Restrictions)
Appointment of managing director or whole-time director:
(u/s 269, 268 & 317)
On and from 5.06.1988, every public company, or a private company which
is a subsidiary of a public company, having paid-up share capital of rupees
five crores or more, shall have a managing or whole-time director
No appointment of a person as a managing or whole-time director in a
public company or a private company which is a subsidiary of a public
company shall be made except with the approval of the Central
Government unless such appointment is made in accordance with the
conditions specified in Parts 1& 2 (subject to provision of Part 3) of
Schedule 13 & a return in the prescribed form is filled within ninety days
from the date of such appointment
Every application seeking approval to the appointment of amanaging or
whole-time director or a manager shall be madeto the Central Government
within a period of ninety days fromthe date of such appointment
Company Law Board
28. Powers of managing director or whole-time director
power to affix the common seal of the company to any document; or
to draw and endorse any cheque on the account of the company in any
bank; or
to draw and endorse any negotiable instrument; or
to sign any certificate of share; or
to direct registration of transfer of any share
29. Manager
Section 2(24) defines a manager as an “individual who, subject to the
superintendence, control and direction of the Board of Directors, has the
management of the whole or substantially the whole affairs of a company, and
includes a director or any other person occupying the position of a manager, by
whatever name called, and whether under a contract of service or not.
Differences between a Manager and a Managing Director:
1. A manager need not be a director of the company whereas a managing director
must be a director of the company.
2. There cannot be more than one manager in a company whereas there may be
more than one MD in a company, each incharge of only a division or activity of
the business.
3. An MD does not enjoy the whole powers of management whereas a manager
does. An MD exercises only such powers of management as the Board or the
articles entrust him. Thus, a managing director’s powers are rather more
restricted than that of a manager.
30. Company Secretary
Definition: (Section 2(45))
“Secretary means a person who is a member of the Institute of Company
Secretaries of India (within the meaning of clause (c) of sub-section (1) of
section 2 of the Company Secretaries Act, 1980) and includes any other
individual possessing the prescribed qualifications and appointed to perform
the duties which may be performed by a secretary under this Act and any other
ministerial or administrative duties.”
Three important facts:
Only an individual may be appointed as a company secretary and any firm or
body corporate cannot be so appointed
He/she should either be a person who is a member of the Institute of Company
Secretaries of India or has requisite qualifications to be prescribed by the
Central Government
The duties of secretary are ministerial or administrative, they are not of the
affairs of the company