All about Director, their Disqualification and its Vaccation

DEFINITION & MEANING OF DIRECTOR

 

Section 2 (34) of the Companies Act, 2013 defines a director. As per this, “director’ mean a director appointed to the Board of a Company.

 

Further, Section 2(10) provides that the “Board of Directors” or “Board”, in relation to a company, means the collective body of the directors of the company.

 

A company is an artificial person, So, it acts through an agency of human beings. The directors of a company serve the purpose of agency for the company i.e., they act as an agent for performing various activities of the company.

 

LEGAL POSITION OF DIRECTORS

 

The true position of company directors is that of agent and their real relationship with the company is governed by the arrangement of agency as governed by the Contract Act. This position was established long back in Ferguson v. Wilson.

 

To some extent, directors are also trustees for properties of the company and of the rights, which are conferred on them by law and conventions. Directors stand in fiduciary position towards the company in regard to the powers, conferred by them on the Companies Actor by the articles of the company; and also with regard to the funds of the company, which are under their control. [Smith v. Anderson]

 

It must, however, be noted that directors are not trustees for the company in the strict legal sense, as they manage the property of the company which is not vested in them. Whereas the property of a trust is vested in its trustees and they manage the same.

 

TYPES OF DIRECTORS

There are two types of company directors. They are :

1. Full-time directors (Executive Directors) with their designations as managing directors, whole-time directors, technical directors, etc.; and

 

2. Part-time directors (Non-executive Directors) who are professionals and for their livelihood do not depend upon one company but serve on the Board of Directors of a large number companies.

 

ALL WAYS IN WHICH DIRCTOR CAN LEAVE FROM THE POST OF DIRECTORSHIP

 

1. DISQUALIFICATIONS OF DIRECTOR [SECTION 164]

Section 164(1) provides that a person shall not be eligible for appointment as a director of a company, if —

1. he is of unsound mind and stands so declared by a competent court;

2. he is an undischarged insolvent;

3. he has applied to be adjudicated as an insolvent and his application is pending;

4. he has been convicted by a court of any offence, whether involving moral turpitude 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.

 

However, if a person has been sentenced to imprisonment for not less than six months and a period of seven years or NCLT and the order is in force;

1. an order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force;

2. he has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call;

3. he has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years; or

4. he has not complied with sub-section (3) of section 152; or

5. he has not complied with the provisions of Section 15(1).

 

It may be noted that the disqualifications referred in clauses (d), (e) and (g) shall continue to apply even if the appeal or petition has been filed against the order of conviction or disqualification.           

 

Section 164(2) provides that no person who is or has been a director of a company which-

1. has not filed financial statements or annual returns for any continuous period of three financial years; or

2. has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more, shall be eligible to be re-appointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to do so.

 

It may be noted that where a person is appointed as a director of a company which is in default of aforesaid clause (a) or clause (b), he shall not incur the disqualification for a period of six months from the date of his appointment.

 

Rule 14 of Companies (appointment and Qualification of Directors) Rules, 2014 Provides that every director who is disqualified u/s 164(2), shall inform to the company concerned in Form DIR-8 (Intimation by Director) before he is appointed or re-appointed.

 

Whereas company fails to file the financial statements/annual returns/fails to repay any deposits, interest, dividends/fails to redeem its debentures as specified u/s 164(2), the company shall immediately file Form DIR-9 (Report by the Company to Registrar), to the Registrar furnishing therein the names and addresses of all the directors of the company during the relevant financial years. But when a company fails to file the Form DIR-9 within a period of 30 days of the aforesaid failure, officers of the company as specified u/s 2(60) shall be the officers in default. Upon receipt of the Form DIR-9 the Registrar shall immediately register the document and place it in the documents file for public inspection.

 

Any application for removal of disqualification of directors shall be made in Form DIR-10.

 

Section 164(3) provides that a private company may, by its articles, provides that a person shall be disqualified for appointment as a director on any grounds in addition to those specified in Section 164(1) and (2).

 

1. VACATION OF OFFICE OF DIRECTORS [SECTION 167]

a.The office of a director shall become vacant in case—

b. he incurs any of the disqualifications specified in section 164;

 

Provided that where he incurs disqualification under Section 164(2), the office of the director shall become vacant in all the companies, other than the company which is in default under Section 164(2);

1. he absents himself from all the meetings of the Board of Directors held during a period of twelve months with or without seeking leave of absence of the Board;

2. he acts in contravention of the provisions of section 184 relating to entering into contracts or arrangements in which he is directly or indirectly interested;

3. he fails to disclose his interest Pin any contract or arrangement in which he is directly or indirectly interested, in contravention of the provisions of section 184;

4. he becomes disqualified by an order of a court or the Tribunal;

5. he is convicted by a court of any offence, whether involving moral turpitude or otherwise and sentenced in respect thereof to imprisonment for not less than six months:

 

Provided that the office shall be vacated by the director in case of orders referred to in clauses (e) and (f)-

1. for thirty days from the date of conviction or order of disqualification;

 

2. where an appeal or petition is preferred within thirty days as aforesaid against the conviction resulting in sentence or order, until expiry of seven days from the date on which such appeal or petition is disposed of; or

 

3. where any further appeal or petition is preferred against order or sentence within seven days, until such further appeal or petition is disposed of;

 

4. he is removed in pursuance of the provisions of this Act;.

 

5. He, having been appointed a director by virtue of his holding any office or other employment in the holding, subsidiary or associates company, ceases to hold such office or other employment in that company.

 

6. If a person, functions as a director even when he knows that the office of director held by him has become vacant on account of any of the disqualifications specified in subsection (1), he shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both.

 

7. Where all the directors of a company vacate their offices under any of the disqualifications specified in sub-section (1), the promoter or, in his absence, the Central Government shall appoint the required number of directors who shall hold office till the directors are appointed by the company in the general meeting.

 

8. A private company may, by its articles, provide any other ground for the vacation of the office of a director in addition to those specified in sub-section (1).

 

STEPS ARE REQUIRED TO BE TAKEN BY THE COMPANY IN SUCH A CASE

 

Step1:  Due intimation to Director about the vacation of his office as a Director.

As a matter of good corporate governance, the company should inform the Directors about such vacation.

 

Step 2: Disclosure by listed Company to Stock Exchange

If Company is listed, it is required to disclose the occurrence of such an event to stock exchange not later than twenty hours from the occurrence of such an event as per Regulation 30 of SEBI (LODR) Regulations, 2015.

 

Step 3: Filing Form DIR-12 

The Board will File Form DIR-12 within 30 days of vacation of office of Director with Registrar of Companies.

 

Step 4:  Noting of such vacation in next meeting of Board of Directors

The Board will note such vacation of office of Director in the next meeting of Board of Directors immediately held after such vacation.

 

Step 5: Disclosure of such vacation in Director Report

The Board of Directors must disclose such vacation of office of Director in their report.

 

Important points to be kept on part of the Company:

1. Proper notice of the Meetings of Board of Directors should be issued to the Director concerned.

 

2. Sending Draft Minutes and Circulation of Final Minutes of the Board Meeting held till the date of his automatic vacation of office to Director concerned.

As cited in guidance note on Secretarial Standard on the meeting of Board of Directors issued by ICSI   “A Director, who ceases to be a Director after a Meeting of the Board is entitled to receive the draft Minutes of that particular Meeting and to offer comments thereon, irrespective of whether he attended such Meeting or not. The fact that the Director has vacated his office, by any reason whatsoever, shall not affect his right to receive such Minutes.” These provisions are mutatis mutandis applicable for circulating a copy of the signed Minutes of that Meeting to the Director(s) so appointed or ceased.
Consequently, the Company is required to send draft minutes and circulate final minutes of the meeting of Board of Directors held till the date of vacation of office of director to Directors concerned.