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A company being a separate legal personality ought to be operated at a distance from its members (the shareholders). To facilitate this, they (the members) elect and appoint their representatives directors - who can be entrusted with the responsibility of running the company.
APPOINTMENT OF DIRECTORS
Appointment of directors can be discussed under the following heads: 1. Appointment of First Directors. Generally, the names of the first directors of a new company are named in its articles. However, if the articles are silent on this count then the subscribers of the memorandum are deemed to be the directors subject to the regulations of the articles. 2. Appointment by the Company . The first directors appointed by the articles or otherwise shall act until the first annual general meeting (AGM). As per Section 256, in the first AGM the shareholders shall elect and appoint the directors on a regular basis. In the case of a public company or a private company, which is a subsidiary of a public company, unless the article otherwise provides, at least twothird of the total number of directors shall be liable to retire by rotation. Thus, only one-third of total number of directors shall be non-rotational or permanent directors. As per Section 255, not less than two-third of the directors are eligible to retire by rotation at the AGM. Contd.
.APPOINTMENT OF DIRECTORS
3. Re-appointment of retiring directors . When a director retires, s/he can be reappointed. or another person can be appointed as director. Meeting can also resolve that the vacancy may not be filled. However, if the post of a retiring director is not filled at the meeting, and the meeting does not even pass a resolution for not filling the vacancy, the general meeting will be adjourned till next week at the same time and place. If that day happens to be public holiday, the meeting will be held next day. If even on that day, the vacancy is not filled, or a resolution not to fill the vacancy is passed, then the retiring director is deemed to be re-appointed. Contd.
.APPOINTMENT OF DIRECTORS
4. Appointment by Board of Directors. The Board of directors is empowered to appoint directors in the following three categories (i) Additional directors (Section 260) (ii) Casual directors (Section 262) (iii) Alternate directors (Section 313) Additional directors . The Board of directors either at the meeting of the Board or by passing a special resolution can appoint additional director(s) on the Board, within the ceiling prescribed, if so authorized by the articles of association. They will although enjoy the same powers and rights as other directors but shall hold office only up to the date of the next annual general meeting. They may, however, be re-elected at the AGM and then continue as directors. Contd.
.APPOINTMENT OF DIRECTORS
Casual director . A casual vacancy is one that is caused by death; resignation; disqualification; or failure of an elected director to presume his office, and not by retirement in normal course. In the case of a public co., or a private co., which is a subsidiary of a public co., if the office of any director, appointed by the company in general meeting, is vacated before the expiry of his/her term in the normal course, the resulting casual vacancy may be filled by the Board of directors at a Board meeting. However, this power of Board is in default of and subject to any regulations in the articles of the company. [Section 262(1)] Simplistically put, the appointment of a casual director can be described as a stop-gap arrangement. Alternate directors. At times, a director of a public co. or a private co., which is a subsidiary of a public co., may be out of India or out of the state in which Board meetings are usually held, for more than three months. In such circumstances, a person can be appointed as an Alternate Director by the Board if the articles of company so authorise, or by a resolution passed at a general meeting. According to Section 313, which provides for such an appointment, s/he shall act as director in the absence of the director (called the original director and for whom s/he is alternate) for the above-stated reasons. Contd.
.APPOINTMENT OF DIRECTORS
5. Appointment by Third Parties . The memorandum or the articles of a company may empower third parties (debenture holders, banks, financial institutions, government etc.) under certain circumstances to have their representation on the Board of directors. However, the number of directors appointed so by third parties, known as Nominee Directors, should not exceed onethird of total strength of the Board. Nominee directors act in the same capacity and are subject to same regulations as any other director in the company. 6. Appointment by the Central Government . The Companies Act empowers the Central Government to appoint directors. the Central Government is authorized to appoint any number of directors on the Board of the company for up to three years at a time. [Section 408(1)] Contd.
.APPOINTMENT OF DIRECTORS
7. Appointment by Proportional Representation. Section 265 states that the articles of a company may provide for the appointment of not less than two-third of the total number of the directors of a public company or of a private company which is a subsidiary of a public company, according to the principle of proportional representation. The proportional representation may be exercised by a single transferable vote or by a system of cumulative voting or otherwise. Such appointments shall be made once in every three years.
Position of Directors
Directors as Agents Directors as Managing Partners Directors as Employees Directors as Trustees
Ceiling on Directorships
Section 275 of the Act debars a person from becoming a director in more than 20 companies simultaneously. Section 278 further clarifies the kind of companies that would be considered while maintaining a count of directorships held by a person at a given time. Penalty for non-compliance. Any person who holds office or acts as a director of more than twenty companies in contravention of the foregoing provisions shall be punishable with fine that may extend to Rs 50,000 in respect of each of those companies after the first twenty.
REMOVAL OF DIRECTORS
Removal of directors can be discussed under the following three heads: Removal by the company, Removal by the Central Government, and Removal by Tribunal Removal by the Company . Under Section 284, a company (i.e., the shareholders) may, by ordinary resolution requiring special notice, remove a director from the Board before the expiration of his term. However, the director concerned shall be entitled to receive a notice of the resolution of his removal from the company and shall be entitled to be heard on the same. Exceptions . The absolute power apparently given to the general meeting to remove a director under Section 284, does not apply in respect of the following directors: (i) a director appointed by the Central Government in pursuance of Section 408; (ii) nominee directors; (iii) director(s) appointed by means of proportional representation under Section 265. Contd.
.REMOVAL OF DIRECTORS
2. Removal by the Central Government . Section 388 B empowers Central Government to make a reference to the National Company Law Tribunal (NCLT ) with a request that the latter may inquire into the case and record a decision against any managerial personnel as to whether or not such person is a fit and proper person to hold the office of director or any other office connected with the conduct and management of any company. This power can be exercised, where in the opinion of the Central Government, there are circumstances suggesting any of the following: (a) that any person concerned in the conduct and management of the affairs of a company is or has been in connection therewith guilty of fraud, persistent negligence or default in carrying out his obligations and functions under the law, or breach of trust; or (b) that the business of a company is not or has not been conducted and managed by such person in accordance with sound business principles or prudent commercial practices; or (c) that the company is or has been conducted and managed by such person in a manner which is likely to cause, or has caused, serious injury or damage to the interest of the trade industry or business to which such company pertains; or Contd.
.REMOVAL OF DIRECTORS
(d) that the business of the company is or has been conducted and managed by such person with intent to defraud its creditors, members or any other persons or otherwise for a fraudulent or unlawful purpose or in a manner prejudicial to public interest. The person against whom a case is referred to Tribunal shall be joined as a respondent to the application. 3. Removal by Tribunal . Where on an application to the Tribunal under Section 397 or 398 against oppression and mismanagement of a companys affairs, the Tribunal finds that the relief should be granted, it may order the termination, setting aside, or modification, of any agreement between the company and any of its directors.
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DIRECTORS LIABILITES
Directors are liable to the company and third parties, and are liable for breach of statutory duties and criminal liability. The liabilities of directors can be studied under the following heads: Liability to the company Liability to third parties Liability for breach of statutory duties Criminal liability Liability to the Company . Being agents of the company, the directors are required to act in good faith, care and due diligence. Thus, directors are liable for Breach of fiduciary duty A Director has to act honestly in the interests of the company or else s/he will be held liable for fiduciary duty. Ultra vires acts The directors will be held personally responsible for acts against the restrictions specified by the Companies Act, Memorandum and Articles of association of the company or agreement and contract with the company being ultra vires. Negligence Where the directors failed to exercise reasonable care, skill and diligence, they will be deemed to have acted negligently and shall be liable for any loss or damage emerging their off. Contd.
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.DIRECTORS LIABILITES
d) Mala fide acts Being the trustees of the properties and money, directors have to discharge their duties honestly and with due care. If they exercise their powers in a mala fide manner or dishonestly, they will be held liable. Also they are accountable for the secret profits made in the course of the performance of duties on behalf of the company. 2. Liability to Third Parties. This may arise under the provisions of the Companies Act or breach of warranty of authority. a) Liability under provisions of Companies Act Where the directors contravene any of the provisions of the Companies Act which directly or indirectly cause harm or loss to third parties, they may be proceeded against by the third parties. b) Liability for breach of warranty Where the directors transact business in the matters ultra-vires to the company or Memorandum and Articles of Association, they maybe proceeded against for any loss sustained by the third party. Contd.
.DIRECTORS LIABILITES
3. Liability for Breach of Statutory Duties . The Companies Act provides numerous statutory duties under various sections and non-compliance with the same will attract personal consequences. 4. Criminal Liability . As per the provisions of the Companies Act, directors are held liable for criminal liability in many cases such as failure to make compliance regarding annual accounts or for accepting deposits in contravention of the provisions. Criminal liability could result in a simple fine of prescribed amounts to simple imprisonment for specified periods.
MEETINGS OF COMPANY
A company is an association of several persons for some common object(s). Therefore, various issues have to be discussed and decided according to the view of the majority. These deliberations take place at various meetings which occur between members (shareholders) and between the directors.
Board Meetings
Board meetings refer to meetings of directors. The directors are supposed to act collectively as a single entity, called the board, hence the term board meetings. Rules relating to board meetings can be summarized as under: Periodicity of the Board meetings. Every companyprivate or publicshall hold at least one meeting of the Board in three months and four meetings in a year
Day of holding meeting. Though an original Board meeting should normally be held during business hours and only on a working day, it may be held on a public holiday too. Time of holding Board meetings. Board meetings can be held during business hours or outside business hours. There is no restriction on that matter under the Companies Act. Place for holding a Board Meeting. Board meetings can be held at any place, be it the companys registered office or head office, or any other premises within or outside the city, town, village, or state in which the registered office of the company is situated.
Meetings of Members
These are the meetings where shareholders of a company meet to discuss various matters and take decisions by means of passing resolutions. Members meetings may further be classified as general meetings and class meetings. General Meetings General meetings can further be discussed under the following three heads: Statutory Meeting Annual General Meetings and Extraordinary General Meetings Statutory Meeting This is the first meeting of the shareholders of a public co. and is held once in the life span of the company. A public co. limited by shares, or a company limited by guarantee and having share capital is required to hold a statutory meeting. Such a meeting must be held between one and six months from the date on which the company becomes entitled to commence business i.e., it obtains the certificate of commencement of business. A private limited co. is, however, exempt from holding a statutory meeting. [Section 165] Contd.
. Statutory Meeting
Purpose of Statutory Meeting. The purpose of the meeting is to enable members to know all the important matters pertaining to the formation of the company and its initial life history. The matters discussed include inter alia, which shares have been taken up, what money has been received, what contracts have been entered into, and what sums have been spent on preliminary expenses, etc. The members of the company present at the meeting may discuss any other matter relating to the formation of the company or arising out of the statutory report, even if no prior notice has been given for such discussions. Contd.
. Statutory Meeting
Notice of Statutory Meeting . A clear written notice at least 21 days before the meeting must be given to all the members of the company. The notice must clearly state that the meeting is the statutory meeting of the company. Statutory Report . The Board of directors must prepare and send to every member a report called the Statutory Report along with the notice 21 days before . But if all the members entitled to attend and vote at the meeting agree, the report could be forwarded later also. Contd.
. Statutory Meeting
Contents of Statutory Report . According to Section 165 (3) of the Companies Act, the statutory report must furnish the following particulars: The total number of shares allotted, distinguishing those fully or partly paid-up The total amount of cash received by the company in respect of all shares allotted. An abstract of the receipts and payments up to a date within seven days of the date of the report and the balance of cash and bank accounts in hand, and a description of preliminary expenses. Any commission or discount paid or to be paid on the issue or sale of shares or debentures must be separately shown in the aforesaid abstract.
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or private, limited by shares or by guarantee, with or without share capital or unlimited companyonce a year. Rules Relating to Annual General Meeting. Following are the rules regarding annual general meetings: i. A company may hold its first AGM within 18 months from the date of its incorporation. However, not more than 15 months must elapse between two AGMs. ii. In case there is any difficulty in holding any AGM (except the first one), the ROC may, for any special reasons shown, grant an extension of time for holding the meeting by a period not exceeding three months provided the application for the purpose is made before the due date of the annual general meeting. Contd...
iii. A notice of at least 21 days before the meeting must be given to the 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. iv. The notice of the meeting must be include with a copy of the annual accounts of the company, directors report on the position of the company for the year, and auditors report on the accounts.. v. 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. Contd.
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Class Meetings
Class meetings are meetings which are held by the holders of a particular class of shares (i.e., where the share capital of a company is divided into different classes of shares), e.g., preference shareholders. Such meetings are normally called when it is proposed to alter, vary or affect the rights of that particular class of shareholders. At such meetings, these members discuss the pros and cons of the proposal and vote accordingly Class meetings are held to pass resolutions, which will bind only the members of the shareholders class concerned, and therefore only members of that class can attend and vote. Unless the articles of the company or a contract binding on the persons concerned otherwise provides, all provisions pertaining to calling of a general meeting and its conduct do apply to class meetings in the same way as they apply with respect to general meetings of the members. However, all resolutions in a class meeting are required to be passed as special resolutions.
Other Meetings
Meeting of Debenture Holders. A company issuing debentures through its articles may provide for the holding of meetings of the debenture holders. At such meetings, generally matters pertaining to the variation in terms of security provided by the company against the debentures or to alteration of their rights are discussed. All matters connected with the holding, conduct and proceedings of the meetings of the debenture holders are normally specified in the Debenture Trust Deed. The decisions at the meeting made by the prescribed majority are valid and lawful and binding upon the minority. Meetings of Creditors. Sometimes, a company, as a running concern, has to make certain arrangements with its creditors. Hence, meetings of creditors may be called for this purpose. Similarly, in case of winding up of a company, a meeting of creditors and contributories is held to ascertain the total amount due by the company and also to appoint a liquidator to wind up the affairs of the company.
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PROXY
A member may appoint another person to attend and vote at a meeting on his behalf. Such other person is known as Proxy. The term is also applied to the instrument by which the appointment to act on his behalf is made by the member. In case of a company having a share capital and in the case of any other company, if the articles so authorise, any member of a company entitled to attend and vote at a meeting of the company shall be entitled to appoint another person (whether a member or not) as his proxy to attend and vote instead of himself. [Section 176] The member appointing a proxy must deposit with the company a proxy form at the time of the meeting or prior to it giving details of the proxy appointed. However, any provision in the articles which requires a period longer than forty-eight hours before the meeting for depositing with the company any proxy form appointing a proxy, shall have the effect as if a period of 48 hours had been specified in such provision. A proxy is not entitled to vote except on a poll. Therefore, a proxy cannot vote on show of hands. The proxy is automatically revoked by the death or insolvency of the member.
QUORUM
The term 'quorum' means the specified minimum number of qualified persons whose presence is necessary for transacting legally binding business at a meeting. A meeting without the quorum is invalid and decisions taken at such a meeting are not binding. the quorum for the Board meeting shall be one-third of its total strength, or two directors whichever is higher, while the quorum for any General meeting shall be five members personally present in case of public company, and two members personally present in the case of private company unless the articles of a company provide otherwise. [Section 174] It has been held by the courts that unless the articles otherwise provide, a quorum needs to be present only when the meeting commenced, and it was immaterial that there was no quorum at the time when the vote was taken. Further, unless the articles provide otherwise, if within half an hour from the time appointed for holding a meeting of the company, a quorum is not present in the person, the meeting :if called upon the requisition of members, shall stand dissolved; in any other case, it shall stand adjourned to the same day in the next week, at the same time and place, or to such other day and time 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.
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RESOLUTIONS
A motion, with or without amendments is put to vote at a meeting. A 'motion' when passed by requisite majority of votes by the shareholders becomes a company resolution. Thus, a resolution may be defined as the formal decision of a meeting on any proposal placed before it. Kinds of Resolutions. Broadly speaking there are three types of resolutions under the Companies Act, 1956: ordinary, special, and those requiring special notice. Ordinary resolution [Section 189(1)] . An ordinary resolution is one which can be passed by a simple majority. That is if the votes (including the casting vote, if any, of the chairperson), at a general meeting cast by members entitled to vote in its favour are more than the votes cast against it. Voting may be by way of a show of hands or by a poll provided 21 days notice has been given for the meeting. An ordinary resolution is required to transact such businesses as: declaring dividend, appointment of auditors, electing directors, or to pass the annual accounts. Contd.
.RESOLUTIONS
Special Resolution [Section 189(2)]. A special resolution is one which is passed by at least three-fourths clear majority i.e., the number of votes cast in favour of the resolution is at least three times the number of votes cast against it, either by a show of hands or by a poll in person or by proxy. The intention to propose a resolution as a special resolution must be specifically mentioned in the notice of the general meeting. Special resolutions are needed to decide on important matters of the company. Examples where special resolutions are required are: To alter the domicile clause of the memorandum from one state to another, or to alter the objects clause of the memorandum. To alter/change the name of the company with the approval of the Central Government. To alter the articles of association. To change the name of the company by omitting Limited or Private Limited. The Central Government may allow a company with charitable objects to do so by a special resolution under section 25 of the Companies Act, 1956. Contd.
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.RESOLUTIONS
Resolution Requiring Special Notice[Section 190] . Resolution requiring special notice is a species of ordinary resolution. There are certain matters specified in the Act which may be discussed at a general meeting for which a prior intention to move the resolution has to be given to the members. Such a prior intention in the form of special notice enables the members to be prepared on the matter to be discussed and gives them time to indicate their views on the resolution. The following matters, in order to be taken up for discussion, require special notice before the meeting: To appoint an auditor other than a retiring auditor at an annual general meeting. To resolve at an annual general meeting that a retiring auditor shall not be reappointed. To remove a director before the expiry of his period of office. To appoint another director in place of removed director. Where the articles of a company provide for serving a special notice for a resolution, in respect of any specified matter or matters. A resolution requiring special notice may be passed either as an ordinary resolution (with simple majority) or as a special resolution (with threefourths majority).
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MINUTES
Every company must keep minutes containing details of all proceedings at the meetings. The minutes are a gist of the discussions at the meeting and the final decisions taken there at. It normally includes only the resolutions actually passed. The pages of the minute books must be consecutively numbered and the minutes must be recorded therein within 30 days of the meeting. They have to be written directly on the numbered pages. Pasting or attaching of papers is not allowed. Each page of minute books must be initialed or signed and the last page of the record of proceedings of each meeting in such books must be dated and signed by the following: chairperson of that meeting or that of the succeeding meeting, in case of the meeting of the Board of directors or committee thereof, and chairperson of the same meeting in the case of a general meeting, within the aforesaid 30 days. In the event of the death or inability of that chairperson within the period, by a director duly authorized by the Board of directors for the purpose. Contd.
.MINUTES
The Tribunal (NCLT), however, may not object if the minutes are maintained in loose leaf form provided all other procedural requirements are complied with, and all possible safeguards against manipulation or interpolation of the minutes are ensured. The loose leaves must be bound at reasonable intervals. The chairman may exclude from the minutes any matters which are defamatory, irrelevant or immaterial or which are detrimental to the interests of the company. The discretion of the Chairman with regard to the inclusion or exclusion of any matter is absolute and unfettered. Every member will have a right to inspect, free of cost during business hours at the registered office of the company, the minute books. Further, any member shall be entitled to be furnished, within seven days after s/he has made a request to the company, with a copy of any minutes on payment of Rupee One for every hundred words or fraction thereof.