Understanding the Role of a Director | Appointment, Qualifications, and Legal Position

Table of content

1. Meaning of Directors
2. Classification of Directors
3. Legal Position of Directors
4. Disqualification of Directors
5. Number of Directorships (Section 165)
6. Director Identification Number (DIN)
7. Appointment of Directors
8. Removal of Directors
9. Resignation by a Director

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1. Meaning of a Director

Directors are the persons appointed to direct and supervise the affairs of a company. As per section 2(34) of the Companies Act, 2013 director means a director appointed to the board of a company.

Section 149 of the Companies Act states that every company shall have a Board of Directors consisting of individuals as directors and shall have-

(a) A minimum number of 3 directors in the case of a public company, 2 directors in the case of a private company, and one director in the case of a One Person Company.

(b) A maximum of 15 directors. A company may appoint more than 15 directors after passing a special resolution.

(c) Such class or classes of companies as may be prescribed, shall have at least one woman director.

(d) Every company shall have at least one director who has stayed in India for a total period of not less than 182 days in a financial year.

(e) Every listed public company shall have at least one-third of the total number of directors as independent directors and the Central Government may prescribe the minimum number of independent directors in case of any class or classes of public companies.

2. Classification of Directors

Any person occupying the position of director by whatever name called may be termed as director in law.  Types of directors are :

2.1 Shadow Director

Any person, other than a professional adviser, whose instructions the directors of a company normally comply is a shadow director. In other words, where a person who is not a director exerts such an influence over the company’s directors that those directors are accustomed to act in accordance with that person’s instructions, that person is a shadow director. The significance of being a shadow director is that a shadow director has many of the legal responsibilities of a director.

Case Law: Secretary of State for Trade and Industry v. Deverell (2001)

Any person exerting real influence over the affairs of a company (apart from a professional advisor) is the shadow director. It is not necessary: that the influence (instructions and directions) is over the whole field of the company’s activities; that there is any degree of compulsion in accepting the influence; and that the shadow director is really in the shadow.

Shadow director may not be an individual. A holding company may be shadow director of its subsidiary company. That will be so when the directors of the subsidiary company are accustomed to act in accordance with the instructions of its holding company.

2.2 De facto Director

A de facto director is a person who has not been formally appointed or who is disqualified to be appointed as director but who is holding himself out as a director. Such director in effect occupies the position of, and acts as if he were, a director.

Difference between Shadow Director and De facto Director

De facto director is different from shadow director. De facto director makes it appear as if he is the director, discharges functions of a director. Shadow director, on the other hand is in the background, giving instructions to the directors who in turn are accustomed to follow those directions. Shadow director exercises real control (but clandestine) over the nominal directors of the company¹.

2.3 First Directors

These are the directors who act as the directors of the company immediately after the formation of the company. They are appointed by the promoters of the company.

2.4 Rotational Director

These are the directors who are liable to retire by rotation i.e. by turn. However, they may be re-appointed again after the retirement.

2.5 Permanent Director

These directors are not liable to retire by rotation. While a public company may appoint 1/3rd of the total directors as permanent directors, private companies may have all of their directors as permanent directors.

2.6 Additional Director

Additional directors are in addition to the directors of the company appointed at the annual general meeting. Powers, rights and duties of additional directors are at par with other directors. They hold the position of directors till the ensuing annual general meeting of the company.

2.7 Alternate Director

Alternate director means a person who is nominated to act in place of another director during his/her absence. The articles of association of a company may allow such an appointment with the agreement of a majority of the directors. An alternate director is not a representative or agent of the absentee director. While acting as a director, the alternate has the same rights and duties as other directors have under the law.

2.8 Woman Director on the Board

The following class of companies shall appoint at least one woman director [as laid down by section 149(1) of the Companies Act, 2013 and Companies (Appointment and Qualification of Directors) Rules, 2014]:

(i) every listed company;

(ii) every other public company having –

(a) paid-up share capital of ` 100 crore or more; or

(b) turnover of ` 300 crore or more:

Provided that a company, which has been incorporated under the Act, shall comply with the provisions of section 149(1) within a period of six months from the date of its incorporation.

A casual vacancy of a woman director shall be filled-up by the Board at the earliest but not later than immediate next Board meeting or three months from the date of such vacancy whichever is later.

2.9 Nominee Director

A nominee director is a director who is nominated to the board by a major/dominant shareholder or other contractual stakeholder such as a bank or financial institution to represent and safeguard their interests. The ‘nominee directors’, appointed by the public financial institutions (such as IDBI, IFCI, ICICI, LIC, UTI, and public sector banks) have been widely prevalent in the boards of most companies in India till recently.

2.10 Executive Directors

Executive directors are the directors who are also involved in the day to day management of the company. Also termed as whole-time directors, they are in full time employment with the company. As they are involved in the management of the company they may, in practice, have specific titles and managerial responsibilities within the company, for example, finance director, marketing director etc.

2.11 Managing Director

Managing director is one who is entrusted with substantial powers of management. He is generally the chief executive of the company. In cases when in a company there is more than one managing directors, each managing director is an executive-in-charge of a division or branch of the company. A managing director of a company has to exercise his powers subject to the superintendence, control and direction of the Board of directors.

2.12 Non-Executive Directors

Non-executive directors are not involved in the day to day management of the company and do not hold any executive management positions within the company. The rationale behind appointing non-executive directors is that, as they are not involved in the day to day management, they can bring an independent voice and perspective to the board. A non-executive director is also termed as outside director being not part of the internal management of the company.

2.13 Independent Director

An independent director in relation to a company, means a director other than a managing director or a whole-time director or a nominee director [Section 149(6)]:

(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;

(b) (i) who is or was not a promoter of the company or its holding, subsidiary or associate company;

(ii) who is not related to promoters or directors in the company, its holding, subsidiary or associate company;

(c) who has or had no pecuniary relationship other than remuneration as such director or having transactions not exceeding 10% of his total income with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year;

(d) none of whose relatives has or had pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors, amounting to two per cent or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;

(e) who, neither himself nor any of his relatives—

(i) holds or has held the position of a key managerial personnel or is or has been employee of the company or its holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed;

(ii) is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of—

(A) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or

(B) any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten per cent or more of the gross turnover of such firm;

(iii) holds together with his relatives 2 per cent or more of the total voting power of the company; or

(iv) is a Chief Executive or director, by whatever name called, of any non-profit organisation that receives 25 per cent or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds 2 per cent or more of the total voting power of the company; or

(v) who possesses such other qualifications as may be prescribed.

Term of Independent Director

(i) An independent director shall hold office for a term up to 5 consecutive years on the Board of a company, but shall be eligible for reappointment on passing of a special resolution by the company and disclosure of such appointment in the Board’s report.

(ii) No independent director shall hold office for more than two consecutive terms, but such independent director shall be eligible for appointment after the expiration of three years of ceasing to become an independent director, provided that an independent director shall not, during the said period of three years, be appointed in or be associated with the company in any other capacity, either directly or indirectly.

Qualification of Independent Director

As per rule 5 of the Companies (Appointment and Qualification of Directors) Rules, 2014, an independent director shall possess appropriate skills, experience and knowledge in one or two fields of finance, law, management, sales, market, corporate governance, research, administration, or technical operations related to company’s business.

Number of Independent Directors

Section 149(4) of the Companies Act, 2013 requires every listed public company to have at least one-third of the total number of directors as independent directors. As per rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014, the following class or classes of companies shall have at least two directors as independent directors —

(i) the Public Companies having paid-up share capital of ` 10 crore or more; or

(ii) the Public Companies having turnover of ` 100 crore or more; or

(iii) the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding ` 50 crore.

Manner of Selection of Independent Directors

Section 150 provides that an independent director may be selected from a data bank containing names, addresses and qualifications of persons who are eligible and willing to act as independent directors, maintained by any body, institute or association, as may be notified by the Central Government. The appointment of independent director shall be approved by the company in general meeting. The Central Government may prescribe the manner and procedure of selection of independent directors who fulfil the qualifications and requirements specified under section 149.

2.14 Small Shareholders’ Director

Section 151 of the Companies Act, 2013 provides that a listed company may have one director elected by small shareholders. “Small Shareholder” means a shareholder holding shares of nominal value of ` 20,000 or less in a public company.

The appointment of small shareholders’ director is not mandatory. The Companies (Appointment and Qualification of Directors) Rules, 2014 (Rule 7) provides that:

(1) A listed company may opt to have a director representing small shareholders suo motu or upon notice of not less than one thousand small shareholders or one-tenth of the total number of such shareholders, whichever is lower.

(2) The small shareholders intending to propose a person as a candidate for the post of small shareholders’ director shall have to give a notice of their intention with the company at least 14 days before the meeting under their signatures specifying the name and other details of the person whose name is being proposed for the post of director and of the small shareholders who are proposing such person for the office of director.

(3) The notice shall be accompanied by a statement signed by the person whose name is being proposed for the post of small shareholders’ director stating his DIN and his consent to act as director of the company.

(4) Such director shall be considered as an independent director in accordance of section 149(6) and is required to give a declaration of his independence.

(5) Small shareholders’ director shall not be liable to retire by rotation.

(6) Small shareholders’ tenure shall not exceed a period of three consecutive years; and on the expiry of the tenure, such director shall not be eligible for re-appointment.

(7) A person shall not be appointed as small shareholders’ director of a company, if the person is not eligible for appointment in terms of section 164.

(8) No person shall hold the position of small shareholders’ director in more than two companies at the same time. The second company in which he has been appointed as director shall not be in a business which is competing or is in conflict with the business of the first company.

(9) A small shareholders’ director shall not, for a period of three years from the date on which he ceases to hold office as a small shareholders’ director in a company, be appointed in or be associated with such company in any other capacity, either directly or indirectly.

3. Legal Position of Directors

Directors are the persons duly appointed by the company to direct and manage the affairs of the company. Their legal position is sometimes described as agents, sometimes as trustees, and sometimes as managing partners. But each of these is not exhaustive of their powers and responsibilities, but as indicating useful points of view from which they may for the moment and for the particular purpose be considered. So, the different points of view of legal position of directors are as follows:

3.1 Directors as Agents

Directors are viewed as agents of the company for the conduct of its business. A company cannot act by itself; it acts only through its directors. Directors act on behalf of the company and acting on behalf of the company make the company liable on it and not themselves. The directors cannot be held personally liable for any default of the company. Like agents, directors should conduct business of the company with care, skill and diligence possessed by them. They are accountable for all of company’s assets under their control, and the profits from assets of the company. Directors cannot deal on their own, and are required to disclose their personal interest, if any, in any transaction of the company. The position of directors is defined by Cairns L. J. in Ferguson v. Wilson:

“They are merely agents of the company. The company itself cannot act in its own person, for it has no person, it can only act through directors, and the case is as regards those directors merely the ordinary case of principal and agent, for wherever an agent is liable, those directors would be liable. Where the liability is of principal and principal only, the liability is the liability of the company.”

3.2 Directors as Trustees

Directors are also described as trustees of the company. They must account for all the moneys over which they exercise control. Their acts and dealings must be for the benefit of the company. They must exercise their powers honestly in the interest of the company and all the shareholders, and not their own sectional interest. The directors of a company are trustees for the company with reference to their power of applying funds of the company. For misuse of the power they could be liable as trustees. “Directors are the persons selected to manage the affairs of the company for the benefit of shareholders. It is an office of trust, which it is their duty to perform fully and entirely.”² Directors cannot exercise their powers of management against the interests of the company (Shubh Shanti Services Ltd. v. Manjula Agarwalla, 2005).

3.3 Directors as Managing Partners

Directors represent the shareholders to conduct the business of the company on their behalf. They enjoy vast power of management over the company and perform many functions which are in the nature of the proprietary, for example allotment of shares, raising of loans, investment of funds of the company. This gives the impression of directors being the active partners and the shareholders appointing them as dormant partners. The very fact that most of the times, directors themselves are the significant shareholders in the company strengthens the argument that directors are the managing partners of the company. But this may be true only partially as unlike partners directors cannot bind other shareholders by their dealing, and dissimilar to partners directors are elected and are subject to retirement also.

3.4 Conclusion

In the real sense the directors are not the agents completely nor the trustees nor the managing partners. The position of directors combines all the three and more than that also. Directors are paid agents or officers of the company and conduct business for the company without being the legal owners. In fact, the directors are commercial men managing a trading concern for the benefit of themselves and of all the shareholders in it.

Directors of a company have fiduciary relationship with the company as well as the shareholders when they act as agents or officers of a company. The position of directors being in the nature of fiduciary was affirmed by the Supreme Court of India in the case of Dale and Carrington Investment Pvt. Ltd. v. P.K. Prathapan (2004). Being in the fiduciary capacity utmost good faith is expected from the directors a company. The directors have to follow the articles of association and acts through meetings of the Board of Directors.

4. Disqualification of Directors

Following persons cannot be appointed as directors of a company (Sec. 164):

(i) A person found by a court to be of unsound mind and the finding is in force.

(ii) An undischarged insolvent.

(iii) A person who has applied to be adjudged as insolvent and his application is pending.

(iv) A person who has been convicted by a court, whether in India or elsewhere, of an offence involving moral turpitude and sentenced to six months’ imprisonment and a period of five years has not passed from the date of the expiry of the sentence:

Provided that if a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of seven years or more, he shall not be eligible to be appointed as a director in any company;

(v) An order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force;

(vi) He has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call;

(vii) He has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years; or

(viii) He has not complied with section 152(3) of the Act relating to Directors Identification Number.

(ix) He has not complied with the provisions of section 165(1) of the Act on maximum number of directorships.

(x) A person who is already a director of a public company which:

• • • has not filed the annual accounts and annual returns for any continuous 3 financial years commencing on and after the first day of April, 1999; or
    • has failed to repay its deposit 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.

A director of such company shall have to vacate the office in all the companies except in the company which has committed the default.

However, the person will not be disqualified for the first six months in the defaulting company after joining.

A private company may by its articles provide for more grounds, in addition to those referred above, on account of which a person shall not be appointed as director of the company. But in case of public companies and their subsidiaries provisions on additional disqualifications will be invalid.³

5. Number of Directorships (Section 165)

(1) No person, after the commencement of this Act, shall hold office as a director, including any alternate directorship, in more than twenty companies at the same time. However, directorship in a dormant company is not included in the limit of 20 companies.

Provided that the maximum number of public companies in which a person can be appointed as a director shall not exceed ten. For reckoning the limit of public companies in which a person can be appointed as director, directorship in private companies that are either holding or subsidiary company of a public company shall be included.

(2) Subject to the provisions of sub-section (1), the members of a company may, by special resolution, specify any lesser number of companies in which a director of the company may act as directors.

Who may be appointed as a Director?

(i) No body corporate, association or firm shall be appointed director of a company, and only individual shall be so appointed; and

(ii) Who has been allotted a Director Identity Number (DIN).

Note: Only individual can be appointed as director of a company. The Supreme Court clarified in the case of Oriental Metal Pressing Works Pvt. Ltd. v. Bhaskar Kashinath Thakoor (1961) that the office of a director is to a certain extent an office akin to trust. Therefore, some individual human being should be available for accountability.

6. Director Identification Number (DIN)

The concept of a Director Identification Number (DIN) has been introduced by the Companies (Amendment) Act, 2006. It is a part of the MCA 21 Project launched by the Ministry of Corporate Affairs. As such, all the existing and intending directors have to obtain DIN within the prescribed time-frame as notified.

The DIN is a unique identification number for an existing director or a person intending to become the director of a company. In the scenario of e-filing, DIN is a pre-requisite for filing of certain company related documents. It is mandatory for all directors to acquire a DIN.

To get the DIN, an online application is to be filed. A provisional DIN will be issued after online filing. Thereafter, the printed detail of the fields entered is to be generated. A photo is to be attached on the form with proof of the residence duly attested by Notary/Gazetted Officer/Cost Accountant/Company Secretary/Lawyer.

On resignation of the director from a company, the DIN obtained does not have to be cancelled. The DIN will remain with the individual only. Only a single DIN is required for an individual irrespective of number of directorships held by him. All the directorships of an individual are mapped in the database through DIN.

With the introduction of the concept of DIN, the offences committed by the directors can be immediately detected. It would also help in addressing the concerns of companies vanishing after raising funds from the public. Investors also get the chance to take more informed decision by knowing the top management of the company.

Provisions of the Companies Act, 2013 relating to Director Identification Number

(1) Application for allotment of Director Identification Number (Sec. 153). Every individual, intending to be appointed as director of a company; or director of a company appointed before the commencement of the Companies (Amendment) Act, 2006, shall make an application for allotment of Director Identification Number to the Central Government in the prescribed form, along with the prescribed fee.

(2) Allotment of Director Identification Number (Sec. 154). The Central Government shall, within one month from the receipt of the application, allot a Director Identification Number to the applicant.

(3) Prohibition to obtain more than one Director Identification Number (Sec. 155). No individual, who had already been allotted a Director Identification Number shall apply, obtain or possess another Director Identification Number.

(4) Obligation of director to intimate Director Identification Number to concerned company or companies. (Sec.156) Every existing director shall, within one month of the receipt of Director Identification Number from the Central Government, intimate his Director Identification Number to the company or all companies wherein he is a director.

(5) Obligation of company to inform Director Identification Number to Registrar (Sec. 157). Every company shall, within 15 days of the receipt of intimation under section 156, furnish the Director Identification Number of all its directors to the Registrar or any other prescribed authority. In case a company fails to furnish DIN to the Registrar of Companies, such company shall be liable to a penalty as prescribed by the Act.

(6) Obligation to indicate Director Identification Number (Sec. 158). Every person or company, while furnishing any return, information or particulars as are required to be furnished under the Act, shall quote the Director Identification Number in such return, information or particulars in case such return, information or particulars relate to the director or contain any reference of the director.

(7) Penalty for contravention (Sec. 159). If any individual or director or a company contravenes any of these provisions, every such individual or director or the company, as the case may be, who or which, is in default, shall be liable to a penalty which may extend to ` 50,000 and where the contravention is a continuing one, with a further fine which may extend to ` 500 for every day after the first during which the contravention continues.

7. Appointment of Directors

The appointment of directors is made in the following manner:

7.1 Appointment of First Directors

The first directors of a company are usually appointed by the promoters in the manner laid down by the company’s articles. Their names are usually given in the company’s articles. Where the articles do not provide for the appointment of first directors, the signatories to the memorandum, who are individuals, and in case of a One Person Company an individual being member shall be deemed to be the first directors of the company subject to the regulations of the company’s articles [Sec.152(1)]. The first directors can hold office only till the first annual general meeting of the company when they are replaced by the directors appointed by the company at this meeting.⁴

7.2 Appointment of Directors by Members

The subsequent directors, in the case of a public company, are appointed by the members of the company in the general meeting. Section 152 provides that unless the articles provide for the retirement of all directors at every annual general meeting, at least two-thirds of the total number of directors of a public company shall be persons who shall be subject to retirement by rotation and must be appointed by the company in general meeting. The remaining directors in the case of any such company and the directors of a private company may be appointed in accordance with the provisions of the company’s articles. In the absence of any such provision in the articles or in case of default in so appointing directors, these directors shall also be appointed by the company in general meeting. (Sec. 152)

7.2.1 Retirement of directors by rotation

In case of a public company, out of the two third directors liable to retire by rotation, one-third (or the nearest number to one-third) shall retire at every subsequent annual general meeting of the company. The turn for retirement shall be determined by the length of office of each director. Those who have been longest in office shall retire first. As between persons who become directors on the same day, retirement may be decided by lot.

7.2.2 Re-appointment of directors

The vacancies caused by the retirement of directors should be filled up at the same meeting. Retiring directors are eligible for re-election and may be re-appointed again. A person, other than the retiring director, can contest election for directorship only if he or any other member who intends to propose him has given at least 14 days’ nomination notice before the date of the meeting, in writing, to the company along with a deposit of ` one lakh or such higher amount as may be prescribed which shall be refunded to such person or, as the case may be, to the member, if the person proposed gets elected as a director or gets more than twenty-five per cent of total valid votes cast either on show of hands or on poll on such resolution. However, the requirement of deposit of ` 1 lakh is not applicable to an independent director or a director recommended by the Board of directors or Nomination & Remuneration Committee. The company shall inform its members of the candidature of a person for the office of director in such manner as may be prescribed.

If the vacancy caused by the retirement of a director by rotation is not filled up at the same general meeting, the meeting shall be deemed to be adjourned to the next week. If at the adjourned meeting also the vacancies are not filled up, the retiring director shall be deemed to have been re-appointed automatically except in the following cases [Section 152(7)]:

(a) a resolution for his re-appointment was put before the meeting, but was lost; or

(b) when such person has declined re-appointment in writing; or

(c) when he has been disqualified; or

(d) a resolution, whether special or ordinary, is required for his appointment or re-appointment in virtue of any provisions of this Act; or

(e) section 162 is applicable to such case

7.2.3 Appointment of directors to be voted individually (Section 162)

At a general meeting of a company, a motion for the appointment of two or more persons as directors of the company by a single resolution shall not be moved unless a proposal to move such a motion has first been agreed to at the meeting without any vote being cast against it.

7.3 Appointment of Directors by the Board

The Board of Directors may make the following appointments (Section 161):

7.3.1 Additional or co-opted directors

If authorised by the Articles, Board of Directors may appoint any person, other than a person who fails to get appointed as a director in a general meeting, as an additional director at any time who shall hold office up to the date of the next annual general meeting or the last date on which the annual general meeting should have been held, whichever is earlier. [Sec. 161(1)]

7.3.2 Casual vacancy

A casual vacancy occurring amongst the directors (on account of death, resignation or otherwise) may be filled up by the Board of Directors unless the Articles provide a different procedure. The person so appointed shall hold office only up to the time his predecessor would have continued. [Sec. 161(4)]

7.3.3 Alternate directors

The Board of Directors may, if so authorised by the Articles of Association or by a resolution passed by the company in the general meeting appoint an alternate director, to act for a director during his absence for a period of not less than 3 months from the State in which meetings of the Board are ordinarily held. Such a director will vacate office immediately on the return of the original director to the state. Such an alternate director will automatically vacate office on the expiry of the term of the original director even if the latter has not returned. [Sec. 161(2)]

Subject to the articles of a company, the Board may appoint any person as a director nominated by any institution in pursuance of the provisions of any law for the time being in force or of any agreement or by the Central Government or the State Government by virtue of its shareholding in a Government company. [Sec. 161(3)]

7.4 Appointment of Directors by the Tribunal

Where an application is made to the Tribunal under section 241 for relief against oppression and mismanagement of a company’s affairs, the Tribunal may, if satisfied, order for the appointment of such number of persons as directors, who may be required to report to the Tribunal on such matters as the Tribunal may direct.

The Tribunal may issue the order on a petition made to it by at least 100 members of the company or the member(s) holding at least 10% of the voting rights in the company. The ground on which such a petition can be filed is conduct of the affairs of the company in a manner oppressive to any member of the company or prejudicial to the interests of the company or public interest.

7.5 Appointment of Directors by the Central Government

Where all the directors of a company vacate their offices under any of the specified disqualifications the promoter or, in his absence, the Central Government shall appoint the required number of directors who shall hold office till the directors are appointed by the company in the general meeting. [Section 167(3)]

7.6 Appointment of Directors by Proportional Representation

Directors in a company may be appointed either by

(a) a system of straight majority of votes or

(b) a system of proportional representation.⁵

Section 163 of the Companies Act, 2013 gives an option to the company to adopt Principle of Proportional Representation for Appointment of Directors. The articles of a company may provide for the appointment of not less than two-thirds of the total number of the directors of a company in accordance with the principle of proportional representation, whether by the single transferable vote or by a system of cumulative voting or otherwise and such appointments may be made once in every three years.

8. Removal of Directors

A director can be removed from his office by:

• • Shareholders under section 169
  • Tribunal under section 402.

8.1 Removal by the Shareholders [Section 169]

(i) A company may, by ordinary resolution, remove a director, not being a director appointed by the Tribunal under section 242, before the expiry of the period of his office after giving him a reasonable opportunity of being heard.

(ii) However, a company cannot remove those where not less than two thirds of the total number of directors has been appointed according to the principle of proportional representation under section 163.

(iii) A special notice shall be required of any resolution, to remove a director under this section, or to appoint somebody in place of a director so removed, at the meeting at which he is removed.

(iv) On receipt of notice of a resolution to remove a director under this section, the company shall forthwith send a copy thereof to the director concerned, and the director, whether or not he is a member of the company, shall be entitled to be heard on the resolution at the meeting.

(v) Where notice has been given of a resolution to remove a director under this section and the director concerned makes with respect thereto representation in writing to the company and requests its notification to members of the company, the company shall, if the time permits it to do so, send a copy of the representation to every member of the company, and if a copy of the representation is not sent due to insufficient time or for the company’s default, the director may require that the representation shall be read out at the meeting. However, copy of the representation need not be sent out and the representation need not be read out at the meeting if, on the application either of the company or of any other aggrieved person, the Tribunal is satisfied that the rights conferred by this sub-section are being abused to secure needless publicity for defamatory matter.

(vi) A vacancy created by the removal of a director may be filled by the appointment of another director in his place at the meeting at which he is removed, provided special notice of the intended appointment has been given. A director so appointed shall hold office till the date up to which his predecessor would have held office if he had not been removed.

(vii) If the vacancy is not filled as per above, it may be filled as a casual vacancy in accordance with the provisions of this Act, provided that the director who was removed from office shall not be re-appointed as a director by the Board of Directors.

8.2 Removal by the Tribunal

Where an application is made to the Tribunal under section 241 for relief against oppression and mismanagement of a company’s affairs, the Tribunal may, if satisfied, order for the removal of any of the directors of the company (Section 242). The Tribunal may also pass the order for the termination or setting aside of an agreement which the company might have made with its directors. The effect of such order will be removal of such director or directors from his or their office. Such a director (including managing director) shall not be entitled to serve as a manager, managing director or director of any company for a period of 5 years from the date of the Tribunal’s order terminating or setting aside his contract with the company.

9. Resignation by a Director

(1) A director may resign from his office by giving a notice in writing to the company and the Board shall on receipt of such notice take note of the same and the company shall intimate the Registrar in prescribed manner, within prescribed time and shall also place the fact of such resignation in the report of directors laid in the immediately following general meeting by the company. The director shall also forward a copy of his resignation along with detailed reasons for the resignation to the Registrar within thirty days of resignation.

(2) The resignation of a director shall take effect from the date on which the notice is received by the company or the date, if any, specified by the director in the notice, whichever is later:

Provided that the director who has resigned shall be liable even after his resignation for the offences which occurred during his tenure.

(3) Where all the directors of a company resign from their offices, or vacate their offices the promoter or, in his absence, the Central Government shall appoint the required number of directors who shall hold office till the directors are appointed by the company in general meeting. (section 168)

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1. Ramaiya, A. (2010) 17th Edition Guide to the Companies Act Page 206.
2. York and North Midland Railway Co. v. Hudson.
3. Cricket Club of India Ltd. v. Madhav L. Apte (1975).
4. The members may appoint new directors to replace the first directors earlier than the annual general meeting.
5. For details refer to Anil Kumar (2012) Corporate Governance: Theory and Practice, International Book House, New Delhi.