Directorships – Section 165 of Companies Act, 2013

Directors are a vital part of the company management. Every company needs to appoint directors at the time of incorporation. One person company needs to have at least one director. A private company needs to have at least two directors, and a public company must have at least three directors. A company can have a maximum of 15 directors.

A person appointed as a director will perform all the duties and functions of a director as per the provisions of the Companies Act, 2013 (“Act”). A person is appointed as a director for the Board of a company. The Board or Board of Directors of a company means the collective body of directors of a company. The company operates through the Board of Directors. The Board of Directors is responsible for the management of the company. They make decisions regarding company affairs.

The Act lays down the provisions regarding the appointment, rights and duties of the directors. Any person appointed as a director of a company has the freedom to be a director in another company. However, Section 165 of the Act states the provisions relating to the number of directorships a person can hold at a given time.

Number Of Directorships Of A Director

Section 165(1) of the Act states that a person can hold the office of director simultaneously in 20 companies. The number of 20 companies includes the office of alternate directorship. A person cannot be a director in more than 20 companies at a given time. However, the maximum number of public companies in which a person can be a director simultaneously is 10. An individual cannot be appointed as a director in more than 10 public companies at a given time.

For calculating the number of public companies, the directorship in private companies that are either holding or subsidiary of a public company is included. However, the directorship in a dormant company is not included in calculating the limit of directorships of 20 companies.

The purpose of prescribing the number of the office of directorship is that the person who is appointed as a director can give proper and sufficient time to a company. The Act prohibits a person from holding the office of a director in more than 20 companies to provide quality time to the companies in which he is a director and discharge his functions as a director in an efficient manner.

Reduction In The Number of Directorships

Section 165(2) of the Act provides a reduction in the number of directorships held by a person. A company can specify any number less than 20 in which the directors of their company can act as directors in other companies. The members of a company can specify a smaller number of the office of directorship for its directors by passing a special resolution.

For Ex – Abc is appointed as a director in Xyz company. Xyz company has passed a special resolution stating that Xyz company’s directors can hold the office of directorship in 10 companies. Then, Abc can be a director in only 10 companies simultaneously and not beyond it. Though the Act provides that a person can hold a director’s office in 20 companies, Abc can be a director in only 10 companies due to the resolution passed by Xyz reducing the number to 10. If he holds the office of director in more than 10, it will amount to the contravention of the Act.

Directorship Before The Commencement Of The Companies Act, 2013

Section 165(3) and 165(4) of the Act is a transitional provision that provides a time limit to the directors to comply with the provisions of the Companies Act, 2013. Before the commencement of this Act, the number of directorships followed by a director was according to the Companies Act, 1956. The Companies Act, 1956, did not include private companies and unlimited companies in the number of directorships held by a person. But the Companies Act, 2013 includes private companies and unlimited companies under the limit of 20 companies.

A person holding the office of a director in more than 20 companies before the commencement of this Act shall follow the limits prescribed under this Act within one year. Any director holding the office of directorship in more than 20 companies shall choose the 20 companies he wants to continue as a director within one year from the commencement of this Act.

After choosing to hold the office of a director in 20 companies, he shall resign from the office of director in the other remaining companies. The resignation made by a director in the remaining companies shall be effective immediately on the despatch of his resignation to the respective companies. A director shall intimate his choice of 20 companies to the registrar and the companies in which he held the office of directorship before the commencement of this Act.

Section 165(5) of the Act provides that a person shall not act as a director in more than 20 companies after dispatching his resignation to the remaining companies or after one year from the commencement of this Act, whichever is earlier.

Penalty For Non-compliance Of Section 165

Section 165(6) of the Act provides a penalty for a person who holds the office of a director in contravention of this Act. If a person accepts an appointment as a director in more than 20 companies, then he will be liable to a penalty of Rs.2,000 for each day during which the violation continues subject to a maximum of Rs.2 lakh. This penalty provision was included in the Act from 21.12.2020 to prevent persons from holding the office of directors in more than 20 companies.

Frequently Asked Questions

Who can be appointed as a director in a company?

Only an individual can be appointed as a director in a company, including a foreign national. However, a minor cannot be appointed as director.

Does Section 165 of the Companies Act, 2013 apply to Section 8 company?

No, Section 165 does not apply to section 8 companies. Thus, a person who has exhausted the limit of 20 can still be appointed as a director in a section 8 company or a dormant company. Both of these companies have no upper limit of 20 directorships.

Does Section 165 of the Companies Act, 2013 apply to foreign subsidiaries?

Yes. As per Section 165, a person cannot hold office as a director, including any alternate directorship, in more than 20 companies at the same time. Therefore, such 20 companies include every company including foreign subsidiaries registered under the Companies Act, 2013.

Is Section 165 of Companies Act 2013 applicable to a director holding directorship in various foreign companies?

No. Section 165 is applicable only to the companies incorporated under the Companies Act, 2013 or under the previous Indian company law. However, if foreign nationals register a company having an office address in India under the Companies Act, 2013 or as an offshore company in India, then Section 165 is applicable to such companies. The directors of such companies cannot hold directorship in more than 20 Indian companies.

What is the maximum limit of directors a company can appoint?

The maximum number of directors a company can appoint is 15. However, the maximum number of directors in a company can be increased beyond 15 by passing a special resolution.

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