Types of Directors in a Company

Directors refer to the part of the collective body known as the Board of Directors, that is responsible for controlling, managing and directing the affairs of a company. Directors are considered the trustees of the company’s property and money, and they also act as the agents in transactions that are entered into by them on behalf of the company.

Directors are expected to perform their duties and obligations as rationally diligent persons with skill, knowledge, and experience as the person carrying out functions of a director and of that himself. He/she plays multiple roles in the company, such as an agent, as an employee, as an officer and as a trustee of the company.

Minimum and Maximum Number of Directors in a Company

The Companies Act, 2013 ('Act') prescribes the minimum and maximum number of directors in a company. The minimum number of directors is as follows:

• In the case of public limited companies - 3 directors
• In the case of private limited companies - 2 directors
• In the case of One-Person Companies - 1 director

The maximum number of directors a company can have is 15 directors. However, a company can appoint more directors by passing a special resolution in its general meeting.

Types of Directors

Residential Director

As per the Act, every company needs to appoint a director who has been in India and stayed for not less than 182 days in a previous calendar year. Such a director will be a residential director.

Independent Director

Independent directors are non-executive directors of a company and help the company to improve corporate credibility and enhance the governance standards. In other words, an independent director is a non-executive director without a relationship with a company which might influence the independence of his judgment.

The tenure of the independent directors is five consecutive years; however, they shall be entitled to reappointment by passing a special resolution with the disclosure in the Board’s report. Every listed public company must have at least one-third of a total number of directors as independent directors. Following unlisted public companies need to appoint at the least two independent directors:

• Public Companies with Paid-up Capital of Rs.10 Crores or more,
• Public Companies with Turnover of Rs.100 Crores or more,
• Public Companies with total outstanding loans, deposits, and debenture of Rs.50 Crores or more.

Small Shareholders Directors

A listed company, could upon the notice of a minimum of 1000 small shareholders or 10% of the total number of the small shareholder, whichever is lower, shall have a director which would be elected by small shareholders.

Women Director

A company, whether be it a private company or a public company, would be required to appoint a minimum of one woman director in case it satisfies any of the following criteria:

• The company is a listed company and its securities are listed on the stock exchange.
• The paid-up capital of such a company is Rs.100 crore or more with a turnover of Rs.300 crores or more.

Additional Director

A person could be appointed as an additional director and can occupy the post until the next Annual General Meeting. In absence of the AGM, such term would conclude on the date on which such AGM should have been held.

Alternate Director

Alternate director refers to personnel appointed by the Board, to fill in for a director who might be absent from the country, for more than 3 months.

Nominee Directors

Nominee directors could be appointed by a specific class of shareholders, banks or lending financial institutions, third parties through contracts, or by the Union Government in case of oppression or mismanagement.

Executive Director

An executive director is the full-time working director of the company. They look after the affairs of the company and have a higher responsibility towards the company. They need to be diligent and careful in all their dealings.

Non-executive Director

A non-executive director is a non-working director and is not involved in the everyday working of the company. They might participate in the planning or policy-making process and challenge the executive directors to come up with decisions that are in the best interest of the company.

Managing Director

A managing director means a director entrusted with the substantial powers of management of the company by virtue of the articles of a company, agreement with the company, resolution passed in the company general meeting or by the board of directors.

Qualification Required to be a Director

Only a natural person can be a director in a company. Thus, an artificial person, such as a company, corporation, firm, entity or association, cannot be appointed as a director. The following persons are eligible to be appointed as a director in a company: 

• The person should be above 21 years and below 70 years.
• The person should have a sound mind. 
• The person should not be an undischarged insolvent.
• The person should not have applied to be adjudicated as an insolvent. 
• The person should not have been convicted by a court of an offence and sentenced to imprisonment for more than six months, and a period of five years should have elapsed from the expiry of the sentence. 
• There should not be any order in force passed by a court or tribunal disqualifying the person for director appointment.  
• The person should have paid any calls in respect of any shares of the company held by him/her within six months from the last day fixed for the payment of the call.
• The person should not have been convicted of the offence dealing with related party transactions under section 188 at any time during the preceding five years. 
• The person must have a Director Identification Number (DIN).
• The person should not be appointed as a director in more than 19 companies or nine companies in the case of public companies since the maximum number of companies in which a person can act as a director is 20 companies or ten companies in the case of public companies.  
• A person cannot be appointed as a director if he/she is a director in the following companies:
  • A company that has not filed financial statements or annual returns for a continuous period of three financial years.
  • A company that has failed to repay the deposits, interest on deposits, failed to redeem any debentures on the due date, pay interest on debentures, or pay the dividend declared for more than one year.

Independent Director Qualifications

• The person should possess appropriate experience, skills and knowledge in one or more fields of law, finance, management, marketing, sales, research, administration, technical operations, corporate governance, or other disciplines related to the company’s business.
• The relatives of an independent director should not -
  • be indebted to the company, its subsidiary, holding or associate company or their director or promoters.
  • have given a guarantee or security in connection with the indebtedness of a third person to the company, its subsidiary, holding or associate company or their directors or promoters of such holding company, for an amount of Rs.50 lakhs, at any time during the two immediately preceding financial years or during the current financial year.
• The person is not:
  • A promoter of the company or its subsidiary, holding or associate companies.
  • Related to the directors or promoters in the company, or any of its subsidiary, holding or associate companies.
• The person should not have any financial relationship (other than remuneration as a director or having
  transaction not exceeding 10% of the total income) with company or any of its subsidiary, holding or associate companies or their directors or promoters, during the current financial year or the last two immediately preceding financial years.
• The person or his/her relatives should not:
  • Held or holds the position of Key Managerial Personnel (KMP) or has been the employee of the company or any of its subsidiary, holding or associate companies in any of three financial years immediately preceding the financial year in which such person is proposed to be appointed.
  • Be or has been and employee, proprietor or a partner in any three financial years immediately preceding the financial year in which such person is proposed to be appointed – as an auditor firm, cost auditor, legal consultant or company secretary of the company or any of its subsidiary, holding or associate companies.
  • Holds together with relatives a total voting power exceeding 2% in the company.
  • Be a Chief Executive or director of any non-profit organisation that receives 25% or more of its receipts from the company, any of its promoters or directors or its subsidiary, holding or associate companies or that holds 2% or more of the total voting power of the company.

Liabilities of a Director

The liability of a director arises because of his position as officers or agents of the company and also for being the trustees and having a fiduciary relationship with company and its shareholders. Since a company and its director are two separate entities, a director does not have personal liabilities on behalf of a company. Though, under certain scenarios a director might be held liable, which are as follows:

Liability for tax

Under the Indian Income Tax Act, where there’s tax due from any private company with respect to an income of any previous year which isn’t recovered from the private company, every director of such company during the relevant previous financial year is liable, severally and jointly, for payment of such tax.

Misstatement in company’s prospectus

Civil liability could be imposed on the directors for any false statement in the company’s prospectus if he/she was the director while issuing the prospectus, unless:

• The director proves that he withdrew his consent before prospectus was issued, or
• That the prospectus was issued without his consent or authority or without his knowledge, or
• That, once he became aware of the false statement, he withdrew his consent and gave public notice of the same, or
• He proves that he believed the doubted statements to be true.

Debts of the company

Usually, a director isn’t liable personally for any of the debt of a company until and unless fraud on part of the director could be established.

Fraudulent business conduct

A director might be held liable personally, for debts or other liabilities of a company in case he/she was knowingly a party to the fraud(s) while carrying on the business.

Share application money refund

Directors of a company are personally liable together with the company for repaying the share application money or the surplus share application money received if it is not repaid within the specified time period.

Liability to pay for qualification shares

In case the director hasn’t acquired the qualification shares within the stipulated time frame and such company goes into the liquidation after the expiry of this period, such director would be called upon by official liquidator for paying for such shares he was supposed to acquire.

Concept of Lifting of the Corporate Veil

The lifting of the corporate veil refers to disregarding corporate personality and looking at the individuals (directors) who are controlling the company. In simple words, where a legal entity is used for dishonest and fraudulent purposes, the persons concerned cannot take shelter under the cloak of corporate personality.

The court would break through this corporate veil. Once this corporate veil is lifted, it’s permitted to show that individuals hiding behind the company are liable for discharging their obligations disregarding the concept of the company as a legal entity.

Frequently Asked Questions

Is it mandatory to appoint a director residing in India?

Every company should have at least one director who stays in India for a total period of not less than 182 days during the financial year. A company established in India cannot consist of all foreign directors.

Can a company appoint more than 15 directors?

Yes. If a company wants to appoint more than 15 directors, they can do so by passing a special resolution in the company. 

Do all the directors require a Director Identification Number (DIN)?

Yes. Every individual intending to be appointed as director of a company should apply for allotment of Director Identification Number (DIN) to the Central Government. Every existing director should intimate his/her DIN within one month of its receipt to the company or all companies where he/she is appointed as a director. Every company should intimate the DIN of all the directors of the company to the Registrar of Companies.

Who is not eligible to be a director of a company? 

Following persons are not eligible to be appointed as directors of a company:

• A person of unsound mind, undischarged bankrupt/insolvent or convicted of any offence
• A person disqualified for appointment as a director by an order passed by a court or Tribunal 
• A person who has not paid any calls in respect of any shares of the company held by him/her and six months have elapsed from the last day fixed for the payment of the call
•  A person convicted of the offence dealing with related party transactions 

What is the difference between executive and non-executive directors?

An executive director is the one involved in the routine management of the company and is a full-time employee of the company. A non-executive director is a member of the company’s board but he/she does not possess the management responsibilities.

What is the responsibility of the directors?

The responsibility of the directors are as follows:

• Determining the company’s strategic policies and objectives.
• Monitoring progress towards achieving the policies and objectives of the company.
• Appointing senior management.
• Accounting for the company’s activities to relevant parties, e.g. shareholders.

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