A company is an artificial judicial person managed and run by natural persons known as directors. A company’s management is entrusted to its board of directors. A board of directors is a collective body of individual directors of a company.
Situations may arise where a company may be required to appoint more directors to its board from time to time based on the requirements of the business or company shareholders. However, the appointment of directors must be according to the Companies Act, 2013 for it to be legally valid.
This article covers how a director is appointed in a company, reasons for adding or changing directors and the documents required for director appointment.
A director is someone elected by the company shareholders to manage the company affairs as per the Memorandum of Association (MOA) and Articles of Association (AOA). The person wishing to be a director must have a Digital Signature Certificate (DSC) and Director Identification Number (DIN).
Any person above 21 years can become a director of a company. The AOA of a company should contain provisions for adding a director. The Companies Act, 2013 prescribes the procedure that a company must follow to add a new director. A private company should have a minimum of two directors at all times. However, the company can have a maximum of only fifteen directors.
Below are the common reasons why a company may want to add or change directors:
As the company grows and expands, it will need to bring new talent to its board of directors to help it meet the additional requirements and challenges. It is natural to add or change the top-level management as the company grows.
Directors are primarily responsible for the day-to-day management and operations of a company. Appointing an additional director will help the shareholders assign extra operational responsibilities to them without having to lose any strategic control.
A company may want to change its directors by appointing new directors to the board due to the inefficiency of the existing directors. Sometimes, the current directors may not be able to meet the work requirements due to family problems, physical ailments, retirement or other personal reasons. In such cases also, the company needs to add new directors.
Every company must maintain a certain number of directors per the Companies Act, 2013. In case of sudden death or retirement of existing directors, the company may not meet the minimum statutory limit of directors. In such a situation, the company must immediately appoint directors to meet the statutory limits (minimum of two directors for a private limited company).
The first step is to check the AOA of the company before appointing a director. The AOA should provide a clause for appointing or adding a director. If there is no provision in the AOA for adding a director, the AOA should be modified to contain a provision that allows adding additional directors.
The company must appoint a director by passing a resolution in a general meeting. The company may pass a resolution to appoint a director in an Annual General Meeting (AGM). If the company decides to appoint a director in the middle of the year, it may appoint a director by passing a resolution in an Extraordinary General Meeting (EGM).
In such a case, a company must conduct a board meeting to pass a resolution for conducting an Extraordinary General Meeting (EGM). The company must pass a resolution for appointing a new director. The company should file the resolution for the appointment of the director in Form MGT-14 with the Registrar of Companies (ROC) within 30 days of passing the resolution.
After the company passes a resolution for appointing a director in a general meeting (AGM or EGM), the proposed director should apply for DSC and DIN (if an individual does not have a DSC and DIN). After obtaining the DIN, the proposed director should furnish his/her DIN and a declaration that he/she is not disqualified from being a director under the Companies Act, 2013 to the company.
After obtaining the DIN, the person proposed to be added as a company director must give his/her consent to act as the director in Form DIR-2. A person cannot be appointed as a director unless he/she gives consent to the company to hold the office as the director.
After passing the resolution for director appointment and obtaining the DIR-2 from the director, the company can appoint the person as a director. The company must file the DIR-2 and DIR-12 (Particulars of appointment of the director) after the appointment of the director. The company must file Form DIR-2 and DIR-12 with the ROC within 30 days of the appointment.
In addition, listed public companies should also disclose the proceedings of the general meeting regarding the appointment of directors to the Stock Exchange within 24 hours from the conclusion of the meeting as per the SEBI (LODR) Regulations, 2015 and put up a post regarding the appointment on the company website within two working days.
Step 1: The proposed director should obtain a DSC if they do not have a DSC.
Step 2: The proposed director should obtain a DIN in Form DIR-3 if they do not have an active DIN.
Step 3: The company should conduct a general meeting to pass a resolution for appointing the new director.
Step 4: The proposed director should give consent to the company for their appointment as a director in Form DIR-2. Once the company obtains the DIR-2 from the proposed director, the person is appointed as a director.
Step 5: After the director is appointed, the company should issue the appointment letter to the director.
Step 6: After the letter of appointment is issued, the company must file form MGT-14, DIR-2 and DIR-12 with the ROC about the appointment within 30 days.
Step 7: The company must make necessary entries in the Register of Director and Key Managerial Personals maintained by the company.
Any individual above 21 years can be appointed as a director. However, an artificial person, such as a corporation, company, firm, association or entity, cannot be appointed as a director.
The following are the eligibility criteria to become a director:
No, the director is not required to hold the company shares. A person with no company shares can also be appointed as a director unless the AOA specifies that the company director must have shares in the company.
The procedure for removing a director is as follows:
A company must file the following forms with the ROC to add a new director:
After the resolution is passed for the appointment of an individual as director and the DIN is obtained, it takes one day to appoint him/her as the company director.