COMPANY LAW - Management of a Company

MANAGEMENT OF A COMPANY

Directors

Minimum/Maximum Number of Directors in a Company

Minimum Number of Directors

The Maximum Number of Directors is 15, which can be increased by passing a special resolution

Appointment of Directors

• As provided in the Companies Act 2013, every Director shall be appointed by the company in a general meeting.
• Director Identification Number (DIN) is compulsory for appointment of a Director.
• Every person proposed to be appointed as a director shall furnish his Director Identification Number (DIN) and a declaration that he is not disqualified to become a director under the Companies Act 2013.
• A person appointed as a director shall on or before the appointment give his consent to hold the office of director in physical form DIR-2 i.e. Consent to act as a director of a company.

Appointment of Directors can be made as follows:

By the Promoters of the Company

By the Subscribers of the Memorandum of Association

By the Shareholders in a General Meeting

By the Board of Directors

By the Central Government

By Proportional Representation

By Third Parties

Role of Directors

• Governing the organization by establishing policies and objectives 
• Selecting,  Appointing, Supporting and Reviewing the performance of the Chief Executive 
• Ensuring the availability of adequate financial resources 
• Approving annual budgets 
• Accounting to the stakeholders for the organization’s performance 
• Setting the salaries and compensation of company management

Duties of directors

• Act in accordance with the articles of the company. 
• Act in good faith in order to promote the objects of the company for the benefit of its members as a whole and in the best interests of the company, its employees, the shareholders, the community, and for the protection of the environment. 
• Exercise his/her duties with due and reasonable care, skill and diligence and shall exercise independent judgment.
• Not involve in a situation in which he/she may have a direct or indirect interest that conflicts or possibly may conflict, with the interest of the company.
• Not achieve or attempt to achieve any undue gain or advantage either to self or to relatives, partners, or associates and if such director is found guilty of making any undue gain, he/she shall be liable to pay an amount equal to that gain to the company. 
• Not assign his/her office to anyone and if any assignment so made shall be void.

Liabilities of directors

Liability to Outsiders 

• If they enter into a contract which is ultra vires the company 
• If they fail to sign a negotiable instrument without mentioning the company’s name 
• If they act in their own name 
• If they have made any mis-statement in the prospectus 
• If they are guilty of committing a fraud 
• If they have made irregular allotment in contradiction of the articles

Liability to Company 

• If they are negligent in the performance of their duties 
• If they commit an act that is ultra vires their powers 
• If they commit any illegal act 
• If they commit any breach of trust

Liability to Shareholders

• The position of directors in respect of the property of the company is that of a trustee. If they commit any breach of trust and if as a result of that, the company suffers a loss, they have to make good that loss. 
• If the directors are negligent and fail to use reasonable care and skill and because of this, the shareholders suffer a loss, they have a right to claim damages from the directors.

Criminal Liability

• Directors may be awarded two years imprisonment and a fine of Rs.5,000 for the filing of a prospectus containing false statements. 
• Criminal proceeding against directors may be instituted: 
• For fraudulently obtaining credit for the company 
• For acting as a director after removal by court 
• For failure to supply information to auditor of the company 
• For improper issue of shares 
• For failure to produce the balance sheet before the annual general meeting

Disqualification of Directors

• Unsound mind and stands so declared by a competent court; 
• An undischarged insolvent; 
• Has applied to be adjudicated as an insolvent and his application is pending; 
• Been convicted by a court of any offense, whether involving moral issues or otherwise and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the date of expiry of the sentence. If a person has been convicted of any offense and sentenced in respect thereof to imprisonment for a period of seven years or more, he/she shall not be eligible to be appointed as a director in any company;
• An order disqualifying him/her for appointment as a director has been passed by a court or Tribunal and the order is in force; 
• Has not paid any calls in respect of any shares of the company held, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call; 
• Has not got the DIN - Director Identification Number.

Removal of directors

A director may be removed before the expiry of his term of appointment by: 

1. Removal by Shareholders 
2. Removal by the Central Government 
3. Removal by the Company Law Board

Removal by Shareholders 

• Special notice of 14 days is required to be given to the company to move an ordinary resolution to remove the director and to appoint another director as a replacement 
• On receipt of the notice, the company must inform all the members of the proposed resolution. It must also send a copy of the notice to the director proposed to be removed
• If the director wishes to make a representation he may send it to the company and the company, in turn, sends copies of the representation to the members, together with the notice of a meeting
• If the representation is not received by the company within a reasonable time, the representation may be read out at the meeting. Director can speak at the meeting against his removal.
• At the meeting, two ordinary resolutions will have to be passed. One for removal and another for replacement.

Removal by the Central Government 

The Central Government may order the removal of a director if an adverse finding has been made by the Company Law Board against him/her, after making an inquiry into these cases such as fraud, persistent negligence, default in carrying out his obligations in such a way as to cause damage to the business. 

Removal by the Company Law Board

Company Law Board on receiving an application for prevention of oppression of mismanagement may enquire into the matter and on inquiry, if it finds that relief ought to be granted, it may by order, remove the director.

Types of Directors

Managing Director - A Managing Director is a Director who has substantial powers of management of the affairs of the company subject to the supervisory, control, and direction of the Board. 

Whole Time Director / Executive Director - A Whole-time Director includes a Director who is in the whole-time employment of the company, devotes his whole-time of working hours to the company and has a significant personal interest in the company as his source of income. 

Independent Director - An Independent director (also known as an outside director) is a director (member) of a board of directors who does not have a material or regular relationship with the company or related persons, except sitting fees.

CORPORATE GOVERNANCE

Ideal corporate governance is characterized by a firm commitment to ethical practices by the entire organization in all of its dealings with a wide group of stakeholders encompassing employees, customers, vendors, regulators, and all shareholders.

Corporate governance rests on four pillars: 

• Transparency 
• Full disclosure 
• Independent Monitoring 
• Fairness to all stakeholders

Requirement for Independent Director

As per the Companies Act 2013, all listed public limited companies are mandatorily required to have at least one-third of the total number of directors as independent directors. Unlisted public companies should appoint at least two independent directors in the following situations:

• If the paid up share capital is in excess of Rs.10 crores;
• If the turnover is in excess of Rs.100 crores;
• If the total of all the outstanding loans, debentures, and deposits is in excess of Rs.50 crores.

Independent Director

An independent director is a non-executive director who does not have any kind of relationship with the company that may affect the independence of his/her judgment. 

An independent director should not have been a partner or executive director of the auditors/lawyers/consultants of the company in the preceding three years or should not hold 2% or more of shares of the company. 

Qualities of Independent Director

An independent director should preferably possess appropriate skills, experience and knowledge in one or more domains of finance, law, management, sales, marketing, administration, research, corporate governance, technical operations, or other disciplines that are related to the company’s business. Generally, one who wishes to qualify as an Independent Director has to possess the following qualities:

• Impartiality
• Loyalty
• Decision-making (judgment)
• Professional repute

Role of an independent director

Independent directors primarily provide inputs to all key decisions such as strategies, performance evaluation, and risk evaluation affecting the company 

Independent Directors are also part of Committees and are often Chairmen of Committees, thereby empowering their judgments and decisions

Responsibilities of an Independent Director 

• Thorough preparation for the meeting 
• A free and frank expression of opinions. 
• Being the conscience of the Board 
• Up-to-date information on laws and regulations governing the company 
• Last but not the least, responsibility to act in the larger interest of true growth and development of the company

Letter of Appointment

The selection of independent directors would be formalized by a letter of appointment.

The terms and conditions of the selection of independent directors should be open for inspection at the registered office of the company by any member during normal business hours. 

The terms & conditions of appointment of independent directors should also be posted on the company’s website.

The components of a letter of appointment is as follows:

• The term of appointment.
• The board-level committee in which the director is expected to serve his/her tasks.
• Directors and Officers insurance.
• The code of Occupational Ethics that the company expects from its directors and employee to follow.
• Enumerated actions that a director should follow while working in a company
• The remuneration, mentioning the periodic fee, compensation of expenses for contribution in the Boards and other meetings, and profit-related commission.

Re-appointment, Resignation, or Removal

The independent directors are subject to evaluation of their performance by other directors. Their re-appointment would be considered based on their performance appraisal report.

The independent director could resign or could be removed just like any other director. Upon resignation or removal, the vacancy is to be filled in by the Board within a period of 180 days from the date of either resignation or removal. 

The vacancy caused by resignation or removal is different from intermittent vacancy. In case of an intermittent vacancy, it must be occupied by the Board of Directors within a maximum period of 3 months or at the next Board meeting, whichever is earlier.

Duties of an independent director

The key role and functions of an Independent Director as listed under Schedule IV of the Companies Act, 2013 are described as follows:

Aid in bringing an independent judgment to bear on the Board’s deliberations particularly on issues of strategy, performance, risk management, resources, key appointments and standards of conduct;

Enable an objective view in the evaluation of the performance related to board and management;

Examine the performance of management in meeting the decided goals and objectives and examine the reporting of performance;

Satisfy themselves on the reliability of financial information and that financial controls and the systems of risk management are considered robust and defensible;

Protect the interests of all stakeholders, mainly the minority shareholders;

Balance the conflict of interest of the stakeholders;

Decide suitable levels of remuneration of executive directors, key managerial personnel and senior management and have a major role in appointing and where essential recommend removal of executive directors, important managerial personnel and senior management;

Moderate and adjudicate in the interest of the company as a whole, in the situations of conflict between the management as well as shareholder’s interest.

COMMITTEES MANDATORILY TO BE CONSTITUTED UNDER THE COMPANIES ACT, 2013

Audit Committee - Minimum 3 directors with independent directors forming a majority.

Nomination And Remuneration Committee - 3 or more Non-Executive Directors out of which not less than ½ shall be Independent Directors.

Stakeholders Relationship Committee - Chairperson who shall be a Non-Executive Director and such other members as may be decided by the Board.

CSR Committee – depends on the type of the company

Liabilities

The question of whether independent directors are held liable rose with the Bhopal Union Carbide case in which Mr. Keshub Mahindra, ex-chairman, Union Carbide India, guilty and was sentenced to two years of imprisonment in June 2010. (Since appealed)

A Chairman without any knowledge of the company activities, how can (he) preside over the meetings of the shareholders and higher officials? 

The judgment seemed to impute that the chairman of a company ‐ in this case, a nonexecutive chairman ‐ ought to be omnipresent, omnipotent, and omniscient.

SMS PHARMACEUTICALS Vs NEETA BALLA(2005): (Dishonor of cheque/bouncing of the cheque.) Any offense has been committed by a company and it is proved that the offense has been committed with the consent of, or is attributable to, any neglect on the part of, any director, manager, secretary or any other officer of the company, such director, manager, secretary or other officers shall also be deemed to be guilty of that offense and shall be liable to be proceeded against and punished accordingly.

SATYAM CASE The promoters inflated the revenue and profit figures of Satyam. the company had a huge hole in its balance sheet, consisting of non-existent assets and cash reserves that have been recorded and liabilities that are unrecorded. Mangalam Srinivasan, Vinod K Dham, Krishna who were the independent directors of Satyam were arrested.

The Circular from the ministry of corporate affairs says that penal action can only be initiated against the non‐executive directors when the ROC, after taking due care, has come to the conclusion that such directors are the officers in default and have not acted diligently in the Board process. 

The non‐executive directors cannot be prosecuted if the violation of the law or any omission is on the part of the company or by any other officers of the company and which have occurred without his knowledge and consent.

The directors who can be held liable are: 

• Independent Directors in listed companies. 
• Government nominees in PSUs. 
• Nominee directors of public sector financial institutions.
• Government director. 

The Circular adopts a principles‐based approach by avoiding the rigidity involved in complete immunity.

MEETINGS

Statutory Meeting

A public company limited by shares or a guarantee is required to hold a statutory meeting. The statutory meeting is held only once in the lifetime of the company. Such a meeting must be held within a period of not less than one month or within a period not more than six months from the date on which it is entitled to commence business i.e. it obtains a certificate of commencement of business.

Purpose: 

The purpose of the meeting is to enable members to know all important matters pertaining to the formation of the company and its initial life history.

Notice Period: 

A notice of at least 21 days before the meeting must be given to members unless consent is accorded to a shorter notice by members.

Contents: 

The Board of Directors must prepare and send to every member a report called the "Statutory Report" at least 21 days before the day on which the meeting is to be held. The report should be certified as correct by at least two directors, one of whom must be the managing director, where there is one, and must also be certified as correct by the auditors of the company. A certified copy of the report must be sent to the Registrar for registration immediately after copies have been sent to the members of the company.

Breach: 

If the default is made in complying with the above provisions, every director or other officer of the company who is in default shall be punishable with a fine. The Registrar or a contributory may file a petition for the winding-up of the company if the default is made in delivering the statutory report to the Registrar or in holding the statutory meeting on or after 14 days after the last date on which the statutory meeting ought to have been held.

Annual general meeting

Annual General Meeting must be held by every type of company, public or private, limited by shares or by guarantee, with or without share capital or unlimited company, once a year. Every company must in each year hold an annual general meeting. 

Not more than 15 months must elapse between two annual general meetings. 

However, a company may hold its first annual general meeting within 18 months from the date of its incorporation.

Notice: 

A notice of at least 21 days before the meeting must be given to members. The notice must state that the meeting is an annual general meeting. The time, date, and place of the meeting must be mentioned in the notice. 

The notice of the meeting must be accompanied by a copy of the annual accounts of the company, the director’s report on the position of the company for the year, and the auditor’s report on the accounts. 

Companies having share capital should also state in the notice that a member is entitled to attend and vote at the meeting and is also entitled to appoint proxies in his absence. 

A proxy need not be a member of that company. 

A proxy form should be enclosed with the notice. 

The AGM must be held on a working day during business hours at the registered office of the company or at some other place within the city, town or village in which the registered office of the company is situated. 

The Central Government may, however, exempt any class of companies from the above provisions. 

If any day is declared by the Central government to be a public holiday after the issue of the notice convening such meeting, such a day will be treated as a working day.

Each AGM takes up ordinary business and special business regarding the company.

Ordinary business covers the following issues:

1. Accounts, Balance Sheet, and Report of the Board of Directors and Auditors.
2. A decision on declaration of dividend.
3. Appointment of Directors in the place of retiring directors.
4. Appointments of Auditors and their remuneration.

In case of default in holding an annual general meeting, the following are the consequences :

• Any member of the company may apply to the Company Law Board.
• The Company Law Board may call or direct the calling of the meeting. 
• Fines may be levied and for continuing default, a further fine per day during which the default continues may be levied.

Every general meeting (i.e. meeting of members of the company) other than the statutory meeting and the annual general meeting or any adjournment thereof, is an extraordinary general meeting.

Such a meeting is usually called by the Board of Directors for some urgent business which cannot wait to be decided till the next AGM. Every business transacted at such a meeting is a special business. An explanatory statement of the special business must also accompany the notice calling the meeting.

Extraordinary General Meeting

The Articles of Association of a Company may contain provisions for convening an extraordinary general meeting. 

Eg. It may provide that "the board may, whenever it thinks fit, call an extraordinary general meeting" or it may provide that "if at any time there are not within India, directors capable of acting who are sufficient in number to form a quorum, any director or any two members of the company may call an extraordinary general meeting".

A meeting cannot be held unless proper notice has been given to all persons entitled to attend the meeting at the proper time, containing the necessary information. A notice convening a general meeting must be given at least 21 clear days prior to the date of meeting.

Requisites of a Valid Meeting

It must be properly convened. The persons calling the meeting must be authorized to do so. Proper and adequate notice must have been given to all those entitled to attend. The meeting must be legally constituted. There must be a chairperson. 

The rules of quorum must be maintained and the provisions of the Companies Act, 2013 and the articles must be complied with. 

The business at the meeting must be validly transacted. The meeting must be conducted in accordance with the regulations governing the meetings.

The chairman is the head of the meeting. Generally, the chairman of the Board of Directors is the Chairman of the meeting. Unless the articles otherwise provide, the members present in person at the meeting elect one of themselves to be the chairman thereof on a show of the hands. 

If there is no Chairman or he is not present within 15 minutes after the appointed time of the meeting or is unwilling to act as chairman of the meeting, the directors present may elect one among themselves to be the chairman of the meeting.

Without a chairman, a meeting is incomplete. The chairman is the regulator of the meeting. His duties include the following :

He must ensure that the meeting is properly convened and constituted i.e. that proper notice has been given, that the required quorum is present, etc. 

He must ensure that the provisions of the act and the articles in regard to the meeting and its procedures are observed.

He must ensure that business is taken in the order set out in agenda and no business which is not mentioned in the agenda is taken up unless agreed to by the members. 

Without a chairman, a meeting is incomplete. The chairman is the regulator of the meeting. His duties include the following :

He must impartially regulate the proceedings of the meeting and maintain discipline at the meeting.

He may exercise his powers of adjournment of the meeting, should he in good faith feel that such a step is necessary. 

The chairman has the power to adjourn the meeting in case of indiscipline at the meeting. 

Without a chairman, a meeting is incomplete. The chairman is the regulator of the meeting. His duties include the following :

Note:  A chairman however does not have the power to stop or adjourn the meeting at his own will and pleasure. If he adjourns the meeting prematurely, the members present may decide to continue the meeting and elect another chairman and proceed with the business for which it was convened.

Quorum

Quorum is the presence of a requisite number of members when a meeting can validly commence its business. It is the minimum number of members of a company whose presence is necessary for the transaction of business. In the case of a company, the quorum is usually fixed by the articles.

The Act provides that unless the articles of a company provide for a larger number, five members personally present in the case of the public company and two members personally present in the case of a private company shall be a quorum for a general meeting of a company.

Unless the articles otherwise provide, if within half an hour from the time appointed for holding a meeting of a company, a quorum is not present, the meeting, if called upon the requisition of members, shall stand dissolved. 

In any other case, the meeting shall stand adjourned to the same day in the next week, at the same time and place, or to such other day and at such other time and place as the Board may determine.

If at the adjourned meeting also, the quorum is not present within half an hour from the time appointed for holding the meeting, the members present shall constitute a quorum.

Resolution

A decision in a meeting is taken by a resolution of the members. 

A proposition for a decision at a meeting is called a motion.

It can be introduced by any member. 

A motion is always in writing and its notice is given in advance. 

When a motion is passed by the meeting by voting, it is called a resolution.

Special Resolution

Companies are required to pass a special resolution in various matters. Special resolution should be passed either under the Companies Act, 2013 or if duly authorized by the Articles of Association of the company. 

A special resolution is required for changing a foundational aspect of the company. 

Procedures

Convene a General Meeting – To propose a resolution as a special resolution call a general meeting or otherwise intimate the same to members complying with all requirements of notice for General Meeting.

Send notice – Notice should be sent to all members at least 21days before constituting the General Meeting. Along with the notice, an Explanatory Statement should be sent to members.

Pass the Resolution – In meeting for a resolution to be “special resolution” votes cast in favor of resolution whether by raising hands or on a poll by members, or proxies where allowed, by proxy, are not less than three times the number of votes cast against the resolution.

Matters requiring Special Resolution

Alteration of Memorandum

Change of registered office or Object clause

Change of name of the Company

Alteration of Articles

Issue of further shares without pre –emptive rights

Creation of Reserve Capital

Reduction of share capital

Removal of registered office outside the local limits

Commencement of new business

Keeping Register of members at a place other than registered office.

Payment of interest out of capital.

Investigation of affairs of the company

Authorizing a director to hold any office or place of profit

Making the liability of any director or manager unlimited where so authorized by the articles

Loans to other bodies corporate.

Winding up by the Court

Voluntary winding up

Authorizing Liquidator to accept shares etc.

Approval of arrangement with creditors.

Exercise of certain powers by liquidator in voluntary winding up.

Disposal of books and papers upon winding up.

Ordinary Resolution

Any matter for which a special resolution is not required can be accomplished through an ordinary resolution.

An ordinary resolution requires a simple majority of above 50% of the votes.

Some of the issues that require ordinary resolutions:

Alteration of the authorized capital of the company.

Declaration of dividend.

Appointment of Auditors.

Election of Directors.