Company Law: Directors and Meetings

Director (s.2(34)): a director appointed to the Board of a company. Directors are agents of the company in their contracts, trustees of its property and funds in their custody, and fiduciaries in their dealings. A director is not an employee unless he is a whole-time director under a contract of service. Types: executive and non-executive; managing director (s.2(54)) (substantial powers of management, subject to the Board’s superintendence), whole-time director (s.2(94)), manager (s.2(53)), independent director, nominee director, additional, alternate and woman director. Key Managerial Personnel (s.2(51)): the CEO, MD or manager; the company secretary; the whole-time director; the CFO; and other prescribed officers.

Composition (s.149):

• Minimum directors: public 3; private 2; OPC 1. Maximum: 15, which can be increased by a special resolution.

• One resident director (at least 182 days in India in the previous year).

• Woman director: at least one for every listed company and every other public company with paid-up share capital of Rs. 100 crore or more, or turnover of Rs. 300 crore or more.

• Independent directors (IDs): one-third of the total number of directors in a listed public company; and every public company with paid-up capital of Rs. 10 crore or more, or turnover of Rs. 100 crore or more, or aggregate outstanding loans, debentures and deposits exceeding Rs. 50 crore must have at least two independent directors.

Independent director (s.149(6)): a person of integrity, expertise and experience, who is not a promoter or related to the promoter or a director of the company; has no pecuniary relationship with the company (other than remuneration as ID) in the previous two financial years; none of his relatives has a pecuniary relationship exceeding 2% or more of the gross turnover or total income, or Rs. 50 lakh whichever is lower; and has not been an employee, auditor, or professional in the company in the preceding three years. Tenure (s.149(10)–(11)): up to five consecutive years; may be re-appointed for one more term of five consecutive years by special resolution; a cooling period of three years before being appointed in any other capacity; no stock options; not liable to retire by rotation. Schedule IV contains the Code for Independent Directors; s.150 provides for a data bank; s.149(12) limits an ID’s liability to acts of omission or commission which occurred with his knowledge, attributable through board processes, and with his consent or connivance or where he had not acted diligently.

Appointment (ss.152–161):

• DIN (s.153–155): every director must obtain a Director Identification Number (an 8-digit number); a person cannot hold more than one DIN. Consent to act (Form DIR-2) is needed before appointment.

• First directors are named in the articles; if none, the subscribers are deemed to be the first directors until directors are appointed.

• Appointment in general meetings by ordinary resolution (each director by a separate resolution, s.162, unless unanimously approved otherwise).

• Retirement by rotation (s.152(6)): two-thirds of the total number of directors of a public company must be liable to retire by rotation (independent directors are excluded); one-third of those retire at each AGM.

• s.161: the Board may appoint additional directors (up to the articles’ maximum), who hold office until the next AGM; an alternate director (for a director absent from India for not less than three months); and fill a casual vacancy (until the term of the vacated director would have expired). Nominee director by an institution or the Government.

• s.165: a person may hold directorships in at most 20 companies, of which not more than 10 can be public companies (a private company that is a subsidiary of a public company counts as public). SEBI’s LODR limits the number of listed company directorships to seven.

• s.196–197 and Schedule V: the managing director, whole-time director or manager must be aged between 21 and 70 years (70 or above by special resolution); the term shall not exceed five years at a time.

Disqualification (s.164): a person cannot be appointed as a director if he: (a) is of unsound mind declared by a court; (b) is an undischarged insolvent; (c) has applied to be adjudicated insolvent and the application is pending; (d) has been convicted by a court of any offence involving moral turpitude and sentenced to imprisonment for not less than six months, and a period of five years has not elapsed since the sentence ended; (e) has been disqualified by a court or Tribunal order; (f) has not paid any call on shares held for six months from the last day fixed for payment; (g) has been convicted of an offence dealing with related party transactions (s.188) at any time in the preceding five years; and (h) has not complied with s.152(3) (no DIN). s.164(2): a director of a company that has not filed financial statements or annual returns for any continuous period of three financial years, or that has failed to repay deposits, redeem debentures on due date or pay interest/dividend and the failure continues for one year or more, is disqualified for five years from being re-appointed in that company and appointed in other companies (Mukul? v? – see *Union of India v Rajeev Kumar? * for upheld striking-off cases; check recent judgments).

Vacation of office (s.167): the office of a director becomes vacant on: disqualification under s.164; absence from all board meetings held in twelve months (with or without leave); acceptance of an office of profit in contravention of s.188; being disqualified by a court; resignation (s.168), which takes effect from the date of receipt of the notice or the date stated in the notice, whichever is later; and removal (s.169).

Removal (s.169): by ordinary resolution passed after special notice (s.115: 14 days), in a general meeting. The director has a right to be heard and to have a written representation circulated. Not applicable to directors appointed by the Tribunal under s.242 or by the principle of proportional representation (s.163). A vacancy so created can be filled by the meeting at which the director is removed.

Duties of directors (s.166): (1) act in accordance with the articles; (2) act in good faith to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, shareholders, the community and the protection of the environment; (3) exercise due and reasonable care, skill and diligence and independent judgment; (4) avoid conflict of interest; (5) not achieve or attempt to achieve any undue gain or advantage, and if found guilty, pay an amount equal to the gain to the company; and (6) not assign the office (assignment is void). Penalty (s.166(7)): fine of not less than Rs. 1 lakh, which may extend to Rs. 5 lakh.

Powers of the Board (s.179): the Board may exercise all powers of the company except those required to be exercised in a general meeting. s.179(3): the Board can exercise by resolutions passed at meetings certain powers: to make calls; to buy back shares; to issue securities (including debentures); to borrow money; to invest the funds of the company; to grant loans or give guarantee; to approve financial statements and the Board’s report; to diversify the business; to approve amalgamation, merger or reconstruction; to take over a company; and other prescribed matters. s.180: powers requiring a special resolution: to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking; to invest compensation received on compulsory acquisition; to borrow money in excess of the aggregate of the paid-up share capital, free reserves and securities premium; and to remit or give time for repayment of any debt due from a director.

Restrictions and related-party rules:

• s.184: Disclosure of interest: every director must disclose his concern or interest in any contract or arrangement at the first meeting of the Board in which he participates as a director (and annually, in the first meeting of each financial year, Form MBP-1). An interested director must not take part in the discussion or vote (s.184(2)). Contravention is punishable with imprisonment up to one year or a fine of Rs. 50,000 to Rs. 1 lakh, or both.

• s.185: Loans to directors and persons in whom they are interested are generally prohibited, except as allowed after the 2017 amendment (for example, loans to a wholly owned subsidiary, and guarantees for loans to a subsidiary company, with a special resolution, for principal business activities).

• s.186: Loans and investments: limited to 60% of the paid-up share capital, free reserves and securities premium, or 100% of free reserves and securities premium, whichever is more; beyond this requires a special resolution. Loans to be charged at interest not lower than the prevailing yield of the one-year, three-year, five-year or ten-year Government security closest to the tenor.

• s.188: Related-party transactions: approval by the Board (with the interested director not voting) and, beyond the prescribed thresholds, by ordinary resolution of the shareholders (related parties do not vote). The company’s transactions at arm’s length and in the ordinary course of business are exempt from board approval (but not from shareholder approval for listed entities under the SEBI LODR). s.189: register of contracts.

Liabilities: a director may be liable for breach of fiduciary duty, negligence, ultra vires acts, misfeasance, misstatement in prospectus, fraud (s.447), and as an ‘officer who is in default’ (s.2(60)). s.447: punishment for fraud: imprisonment of six months to ten years, and a fine of not less than the amount involved in the fraud, which may extend to three times that amount; where the fraud involves public interest, imprisonment is not less than three years.

Case law:

• Re City Equitable Fire Insurance Co. (1925): the standard of care expected is that of a reasonable person with the director’s own knowledge and experience; a director need not give continuous attention.

• Regal (Hastings) Ltd. v Gulliver (1942): a fiduciary must account for secret profits made by use of his position, even if the company could not have taken the opportunity. Cook v Deeks (1916): directors cannot take a corporate opportunity for themselves.

• Foss v Harbottle (1843): the rule of majority; the company (not the shareholder) is the proper plaintiff for wrongs done to it. Exceptions: ultra vires acts, fraud on the minority, acts requiring a special majority, infringement of personal rights, and oppression.

• Oppression and mismanagement (ss.241–244): a member may apply to the Tribunal (NCLT); eligibility (s.244): in a company with a share capital, not less than 100 members or one-tenth of the total number of members, whichever is less, or members holding not less than one-tenth of the issued share capital; the Tribunal may waive these requirements. Cases: Shanti Prasad Jain v Kalinga Tubes (1965); Needle Industries (India) Ltd. v Needle Industries Newey (India) Holding Ltd. (1981); Tata Consultancy Services v Cyrus Investments (2021: the Supreme Court restored Mr. Cyrus Mistry’s removal as chairman and rejected the oppression claims; the Court held that the removal of a director or chairman for loss of confidence is within the Board’s powers, and no oppression was found).

• Class action (s.245) and derivative suits by members or depositors.

Kinds of meetings: general meetings (annual and extraordinary), Board meetings, class meetings, creditors’ meetings (schemes of arrangement, s.230), meetings of committees. The statutory meeting (s.165 of the 1956 Act) was abolished by the 2013 Act.

Annual General Meeting (s.96):

• Every company other than an OPC must hold an AGM in each year, and not more than fifteen months may elapse between two AGMs.

• The first AGM must be held within nine months from the closing of the first financial year; subsequent AGMs within six months of the close of the financial year. The Registrar may extend the time (by up to three months) for AGMs other than the first.

• The AGM must be held during business hours (9 a.m. to 6 p.m.) on a day that is not a national holiday, at the registered office or any place within the city, town or village where the registered office is located. Under MCA circulars, virtual AGMs have been permitted, a measure first introduced during Covid-19 and extended.

• Default (s.99): fine up to Rs. 1 lakh and a further fine up to Rs. 5,000 per day for continuing default. s.97: the Tribunal can call an AGM on the application of any member if default occurs.

• Ordinary business at AGM: consideration of financial statements and reports of the Board and auditors; declaration of dividend; appointment of directors in place of those retiring; and appointment and fixing of remuneration of auditors. Everything else is special business, which requires an explanatory statement (s.102).

Extraordinary General Meeting (s.100): called by the Board on its own, or on a requisition by members holding not less than one-tenth of the paid-up share capital carrying voting rights (or, if no share capital, one-tenth of the total voting power). The Board must proceed to call a meeting within 21 days from the date of receipt of the requisition, to be held within 45 days of the receipt. If it fails, the requisitionists may call the meeting themselves, within three months from the date of the requisition, and the company must reimburse their expenses.

Notice (s.101): at least 21 clear days (in writing or electronic mode), to every member, director, auditor, and others entitled. A meeting may be called on shorter notice if consented to by not less than 95% of the members entitled to vote (in the case of an AGM, in number; in other meetings, 95% of the paid-up share capital carrying a right to vote or of the total voting power). Contents: day, date, hour, place, and a statement of the business (with explanatory statement for special business). Omission to give notice to any member invalidates proceedings, but accidental omission does not (s.101(3)). Special notice (s.115) is required for resolutions to remove a director (s.169) or appoint an auditor other than the retiring auditor (s.140): 14 days before the meeting.

Quorum (s.103): (a) public company: five members personally present if the number of members is not more than 1,000; 15 if between 1,000 and 5,000; 30 if more than 5,000; (b) private company: two members personally present. If a quorum is not present within half an hour, the meeting is adjourned to the same day in the next week at the same time and place (or such other date as the Board determines); at the adjourned meeting, the members present are a quorum (s.103(2)). A meeting called on a requisition by members is dissolved if quorum is absent.

Proxies (s.105): any member entitled to attend and vote may appoint another person (need not be a member) as proxy; a member of a company without share capital cannot appoint proxy except as allowed; the proxy has no right to speak and cannot vote on a show of hands but may demand or join in demanding a poll; the instrument (Form MGT-11) must be deposited at least 48 hours before the meeting; a person can act as proxy for not more than 50 members, and for members holding not more than 10% of the total voting share capital; proxy is revocable until the commencement of the meeting.

Voting (ss.107–109) and resolutions (s.114):

• Show of hands (s.107): each member has one vote. Poll (s.109): may be demanded by members having not less than 10% of the total voting power or holding shares on which an aggregate sum of not less than Rs. 5 lakh has been paid up; votes are in proportion to the share capital held. E-voting (s.108) is mandatory for listed companies and companies with 1,000 or more shareholders (Companies (Management and Administration) Rules, 2014, Rule 20). Postal ballot (s.110).

• Ordinary resolution: simple majority (votes cast in favour exceed votes cast against). Special resolution: the votes cast in favour must be not less than three times the votes cast against (75% of the votes cast), and the intention to propose it as a special resolution must be specified in the notice. Resolutions must be filed with the Registrar within 30 days (s.117, Form MGT-14) for special resolutions and certain others.

• Resolution by circulation (s.175): Board resolutions may be passed by circulation, and must be approved by a majority of directors (unless the directors demand a meeting); noted at the next Board meeting.

Board meetings (ss.173–175):

• First Board meeting within 30 days of incorporation.

• A minimum of four meetings per year, with a gap of not more than 120 days between two consecutive meetings. OPC, small companies and dormant companies must hold at least one meeting in each half of the calendar year, with a gap of not less than 90 days.

• Notice: at least seven days in writing to every director; a meeting may be convened at shorter notice if at least one independent director (if the company has any) is present (if absent, decisions are final only on ratification by at least one independent director).

• Quorum (s.174): one-third of the total strength or two directors, whichever is higher. Participation through video conferencing counts toward the quorum. Certain matters cannot be dealt with via video conference: approval of the annual financial statements, the Board’s report, the prospectus, the audit committee matters, and the approval of takeover, merger or amalgamation (Rule 4 of Companies (Meetings of Board and its Powers) Rules, 2014, until relaxed by MCA circulars; check the present position).

• Interested director must not vote (s.184); decisions are by majority, and the chairman has the casting vote if the articles provide.

Minutes (s.118) and Secretarial Standards: minutes of all general and Board meetings must be recorded within 30 days of the conclusion of the meeting, in minute books, with each page signed and the last page signed and dated by the chairman (or the next chairman). Minutes are conclusive evidence of the proceedings, unless contradicted (s.118(7)). The ICSI issued Secretarial Standards SS-1 (Board Meetings) and SS-2 (General Meetings) under s.118(10), which are mandatory.

Committees of the Board: Audit Committee (s.177) (every listed company and public companies with paid-up capital of Rs. 10 crore or more, turnover of Rs. 100 crore or more, or aggregate outstanding loans, debentures and deposits above Rs. 50 crore): minimum three directors, with independent directors forming a majority; Nomination and Remuneration Committee (s.178); Stakeholders Relationship Committee; CSR Committee (s.135); Risk Management Committee (SEBI LODR).

Other officers: Company Secretary (s.203): mandatory for listed companies and public companies with paid-up capital of Rs. 10 crore or more; KMP.