Directors are the Brain of Company

TANMOY MUKHERJI INSTITUTE OF JURIDICAL SCIENCE

Dr. Tanmoy Mukherji

Advocate

 

Directors are the Brain of Company-

Tanmoy Mukherji

Advocate

A company is an artificial legal person. It has no physical body, mind, or intelligence of its own. Therefore, it acts through human beings.

→The Board of Directors functions as the brain, mind, and controlling authority of the company.

→In H.L. BOLTON (Engineering) Co. Ltd. Vs. T.J. Graham & Sons Ltd., Lord Denning stated:

"A company may in many ways be likened to a human body.”

He explained that directors and managers constitute the "directing mind and will" of the company.

Appointment of Directors-

The appointment of directors is primarily governed by the provisions of the Companies Act, 2013. Since a company acts through its directors, proper appointment is essential for the validity of corporate decisions.

Meaning of Directors-

Section 2(34) of the Companies Act defines a director as: "A director appointed to the Board of a Company.

"The Board of Directors collectively manages the affairs of the company.

Methods of Appointment of Directors-

First Directors-

According to Sec 152, the first directors are usually named in the Articles of Association (AOA).

If the articles do not name any directors:

→Subscribers to the Memorandum become the first directors.

→They hold office until directors are formally appointed at the first general meeting.

Flow Chart-

Appointment by shareholders in general meeting-

According to sec 152 sub sec 2, directors are generally appointed by shareholders through an ordinary resolution.

Procedure-

Reference Case-

Appointment of Independent Directors-

According to sec 149 (4), certain classes of companies must appoint Independent Directors.

Appointment of Addition directors-

According to sec 161(1) the Board may appoint an additional Director if authorized by the Articles.

Tenure → Holds office up to next Annual General Meeting (AGM).

Flow Chart-

Appointment of Alternate Directors-

According to sec 161 (2) an Alternate Director may be appointed when a director is absent from India for at least 3 months.

Features-

→Acts in place of the original director.

→Vacates office upon return of the original director.

Appointment of Nominee Director-

According to sec 161 (3) a financial institution, lender, government or investor may nominate a director.

Example- Banks frequently nominate directors on companies receiving substantial loans.

Reference Case-

Appointment of Directors to fill Casual Vacancy-

According to sec 161 (4) a casual vacancy arises because of-

→Death   

→Resignation

→Disqualification

The board may fill the vacancy.

Tenure- The new director serves the remaining term of the original director.

Appointment by small shareholders-

According to sec 151 listed companies may appoint a small shareholders director.

Appointment by the Tribunal-

According to sec 242 the Tribunal may appoint directors in cases of-

→Oppression

→Mismanagement

Reference Case-

Director Identification No. (DIN)-

Flow Chart-

Qualification of Directors-

Disqualification of Directors-

Sec 164 — A person cannot be appointed if-

→Undischarged Insolvent

→Unsound mind

→Convicted of specified offences

→Has not obtained DIN

→Disqualified by Court.

Reference Case-

Power of Directors-

A company is an artificial legal person & therefore cannot act on its own. The Board of directors exercises the powers of the company & manages its affairs.

Sources of Directors Power-

General Power of the Board-

Exceptions-

The board cannot exercise powers specifically reserved for shareholders.

Types of Powers of Directors-

Management Powers-

Financial Powers-

Administrative Powers-

Reference Case-

Contractual Powers-

Reference Case-

Powers Requiring Board Resolution-

Sec 179(3) — Powers which can be exercised only through board resolution-

→Authorize buy-back

→Issue Securities

→Borrow money

→Make calls on shareholders

→Invest Company funds

→Grant Loans / Guarantees

→Approve financial statement

→Diversify Business

→Approve managers acquisitions

Powers Requiring Shareholders Approval-

Section- 180→ Certain powers require approval by Special Resolution.

Example-

Sale of Undertaking → Directors cannot sell substantially the whole undertaking without shareholders’ approval.

Borrowing beyond Limits → The borrowing beyond prescribed limits requires shareholder’s consent.

Fiduciary Nature of Directors Powers-

Directors are fiduciaries-

Reference Case-

Limitations of Directors Powers-

Directors cannot-

→Committee fraud

→Act ultravires the company

→Oppressed minority shoulders.

→Divert Company Opportunities.

→Abuse powers.

→Secret profits.