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 company’s property and money, and they also act as the agents in transactions which are entered into by them on behalf of the company.
Directors are expected to perform their duties and obligations as a rationally diligent person with skill, knowledge, and experience as the person carrying out functions of a director and of that himself. Hence, a director plays several roles in a company, 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 law requires that every company must have at least 3 directors in case of public limited companies, minimum 2 directors in case of private limited companies and minimum 1 director in case of one person companies. A company can have maximum 15 directors. The company could appoint more directors by passing the special resolution in its general meeting.
Types of Directors
As per the law, 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.
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 the hall up to 5 consecutive years; however, they shall be entitled to reappointment by passing a special resolution with the disclosure in the Board’s report. Following companies need to appoint at the least two independent directors:
- Public Companies with Paid-up Capital of INR 10 Crores or more,
- Public Companies with Turnover of INR 100 Crores or more,
- Public Companies with total outstanding loans, deposits, and debenture of INR 50 Crores or more.
Small Shareholders Directors
A listed company, could upon the notice of minimum 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.
A company, whether be it a private company or a public company, would be required to appoint minimum 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 company is INR 100 crore or more with a turnover of INR 300 crores or more.
A person could be appointed as an additional director and can occupy his post until 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 refers to a 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 could be appointed by a specific class of shareholders, banks or lending financial institutions, third parties through contracts, or by Union Government in case of oppression or mismanagement.
Qualification required to be an Independent Director
- Who, in view of the Board, possesses relevant experience and expertise, and is a person of integrity;
- Isn’t a promoter of such Company or any of its Holding, Subsidiary or Associate Companies;
- Isn’t related to the directors or promoters in the company, or any of its Holding, Subsidiary or Associate Companies;
- Who doesn’t have any financial relationship with Company or any of its Holding, Subsidiary or Associate Companies or their directors, promoters, during the current financial year or the last two immediately preceding financial years;
- A person who neither himself nor his relative(s):
- Has held or holds the position of Key Managerial Personnel (KMP) or has been the employee of the Company or any of its Holding, Subsidiary or Associate Companies in any of three financial years immediately preceding the financial year in which such person is proposed to be appointed;
- He or any of his relative has a partner or an employee in any three financial years immediately preceding 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 Holding, Subsidiary or Associate Companies;
- He who holds together with relatives total voting power exceeding 2 percent in such 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 (mentioned below), a Director might be held liable:
- 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 company’s prospectus if he was the Director while issuing of 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 a 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 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 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.
The lifting of the corporate veil
The lifting of 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.