Directors under Companies Act: Position, Appointment and Removal
DIRECTORS UNDER THE COMPANIES ACT: POSITION, APPOINTMENT, AND REMOVAL
The Companies Act, 2013 (and earlier Companies Act, 1956) governs the regulation of directors in Indian companies. Directors are essential to corporate governance as they manage and control the company’s affairs.
1. POSITION OF DIRECTORS
Who is a Director?
A director is a person appointed to the board of a company to manage its business.
The director acts as an agent of the company and is entrusted with powers to run its day-to-day operations.
Directors owe fiduciary duties and must act in the company’s best interests.
Nature of Directorship:
A director is a fiduciary and a trustee of the company.
Acts as a representative of the company, bound by the law and the Articles of Association.
Not an employee but has powers and responsibilities as delegated by the company.
Legal Position:
Section 2(34) of the Companies Act, 2013 defines “director.”
Directors collectively form the Board of Directors which is the company's central management authority.
The Board exercises powers and controls the company, subject to company law and Articles of Association.
2. APPOINTMENT OF DIRECTORS
Eligibility:
Must be a natural person (not a company).
Must be at least 18 years old (21 in case of a company in which a minor is a shareholder).
Must not be disqualified under the Companies Act (e.g., undischarged insolvent, convicted of an offence involving moral turpitude, etc.).
Must have a Director Identification Number (DIN).
Modes of Appointment:
First Directors: Named in the Articles or appointed by the subscribers of the Memorandum.
Subsequent Directors: Can be appointed by:
Shareholders at a General Meeting (ordinary resolution).
Board of Directors, if authorized.
Nominee Directors appointed by lenders or investors.
Government Appointed Directors (in certain companies).
Provisions under Companies Act, 2013:
Section 149(1) specifies the minimum number of directors (private company - 2; public company - 3).
Section 152 deals with appointment of directors:
Directors appointed by the company in general meeting hold office until the next Annual General Meeting (AGM).
One-third of directors (or nearest to one-third) shall retire by rotation at every AGM (except managing directors).
Section 161 deals with appointment of directors to fill casual vacancies or additional directors.
Appointment by Shareholders:
Usually done in the Annual General Meeting (AGM) by passing an ordinary resolution.
New directors must consent in writing and disclose interests.
Appointment of Independent Directors:
Section 149(4) mandates certain classes of companies to have independent directors.
Appointment by the Board, subject to approval of shareholders.
3. REMOVAL OF DIRECTORS
Modes of Removal:
By Shareholders (Section 169, Companies Act, 2013)
By the Board (in specific circumstances like resignation or disqualification)
By Tribunal or Court (for reasons like mismanagement, fraud)
Automatic Disqualification (due to insolvency, non-attendance)
Removal by Shareholders:
Shareholders can remove a director before expiry of term by passing an ordinary resolution in a General Meeting.
Director must be given special notice of the resolution.
The director has the right to be heard and to make representation.
The company must send a copy of the representation to shareholders.
Resignation:
Director can resign by giving notice in writing to the company.
Effective from the date of receipt or the specified date.
Disqualification:
Section 164 lists grounds for disqualification such as:
Unsound mind
Undischarged insolvent
Convicted of offences involving moral turpitude or fraud
Failure to attend board meetings for 12 months
Prohibition by court or SEBI
KEY CASE LAWS ON DIRECTORS’ POSITION, APPOINTMENT & REMOVAL
1. Automatic Self-Cessation of Director - K.K. Verma v. Union of India (1972)
Held that a director who becomes disqualified automatically ceases to hold office.
Disqualification leads to automatic vacation without any formal removal.
2. Tata Engineering & Locomotive Co. Ltd. v. State of Bihar (1965) AIR 1576
The Board of Directors holds real power and control over the company.
Directors act as agents of the company and exercise powers in its interest.
3. G. Sreenivasan v. Sahara India Financial Corporation Ltd. (2007)
Courts recognized the rights of shareholders to remove directors by passing ordinary resolution.
Emphasized procedural fairness in removal process, including notice and right to be heard.
4. Industrial Finance Corporation of India Ltd. v. G. Sankaraiah (1967)
The appointment of directors is subject to the provisions of the Companies Act and Articles of Association.
Appointment cannot be arbitrary; must follow legal formalities.
5. Canara Bank v. Canara Sales Corporation (1996)
Clarified that a director is a fiduciary and must act in good faith and in the best interest of the company.
Any breach can lead to removal or disqualification.
SUMMARY TABLE
| Aspect | Provision/Principle | Key Points |
|---|---|---|
| Position of Director | Defined under Section 2(34); fiduciary and agent role | Board controls company, director owes duty |
| Appointment | Sections 149, 152, 161 of Companies Act, 2013 | By shareholders in AGM; first directors; Board can fill casual vacancies |
| Removal | Section 169 - Removal by shareholders; resignation | Special notice required; director right to be heard |
| Disqualification | Section 164 | Unsound mind, insolvency, conviction, non-attendance |
| Case Law | K.K. Verma, Tata Engg, G. Sreenivasan, Canara Bank | Clarify duties, removal, and powers |
CONCLUSION
Directors are central to the governance and management of companies. The Companies Act provides clear mechanisms for their appointment and removal to ensure accountability. Courts have reinforced these provisions by emphasizing fiduciary duties, shareholders' rights, and due process in removal. Understanding these principles is crucial for balancing control between the board and shareholders while safeguarding the company’s interests.
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