By Tashmayee Sarkhel
Published on: 04 September 2022 at 13:53 IST
The content of the article consists of the definition of the company, and the rights, and duties of the director of the company.
Because a company is an artificial person, it is unable to function independently. As a result, every company must appoint a director. A director is someone who is appointed to a company’s board of directors. A director is accountable for the company’s management. The Board of Directors refers to the group of directors who are responsible for the smooth operation of the company.
The Companies Act and the company’s articles of association outline the rights, functions, powers, and obligations of directors. Section 291 of the Act provides that, subject to the Act’s restrictions, the board of directors has the authority to exercise all of the corporation’s powers and do all of the actions and things that the corporation is permitted to do.
A business, abbreviated as co., is a legal body that represents a group of people with a common goal, whether natural, legal, or a combination of both. Members of the company share a shared goal and work together to achieve it. Companies come in a variety of shapes and sizes, including:
- Non-profit organizations may be included in voluntary associations.
- Corporate entities whose primary goal is to make a profit.
- Banks and financial institutions.
- Programs or educational establishments.
A legal entity can be formed such that the company’s liability is restricted as members do or fail to perform their duties by the publicly stated incorporation or published policy. When a business closes, it may be necessary to liquidate it to avoid further legal responsibilities. Corporations can band together and form new companies; the resulting entities are commonly referred to as corporate groups.
Managing a company is a difficult endeavor. As a result, there are some requirements for becoming a director. A person can only be appointed as a Director of the Company. A person who is not a natural person is not entitled to be a director.
Furthermore, a minor cannot become a director of the company since he is ineligible for a DIN and cannot file legal consent to operate as a director. A resident of India should be at least one of the company’s directors. In addition, the individual functioning as Director should be able to:
- in good mental health
- capable of concluding a contract
- not a bankrupt individual
- Section 292 outlines the rights that can only be exercised by passing resolutions at a Board meeting.
- Power to make calls on shareholders for money owed to them on their unpaid shares.
- The power to create debentures.
- Ability to borrow money in a non-debenture manner.
- The power to invest the company’s assets.
- Being able to make loans is a valuable asset:
- Certain restrictions on the Board’s broad powers can be imposed, and the Board must get shareholder approval at General Meetings in those cases. Parts of Sections 293, 294AA, and so on deal with restrictions.
- Section 294AA (appointment of sole selling agents) and Section 295 (Loans to Directors) are examples of such powers that can only be exercised with the permission of the shareholders and the Central Government.
According to Section 180 of the Companies Act 2013, the Board can only exercise certain functions if the jeopardizing authorizes it:
- To sell, lease, or otherwise dispose of all or portion of the company’s assets.
- Otherwise, to invest in trust securities.
- To obtain a loan for the company’s requirements.
- To give the director time to repay or avoid repaying any debts
- When a director violates the restrictions set under the provisions, the title of lessee or purchaser is jeopardized unless the director acts in good faith and with reasonable care and effort.
- This provision, however, does not apply to businesses whose major activity is the selling or leasing of real estate.
Forming an Audit Committee is a legal right
The board of directors can form an audit committee under Section 177. At least three directors are required, one of whom must be an independent director. The majority of the committee must be made up of independent directors. The chairperson and members of the audit committee should be competent to read and comprehend financial statements. The audit committee must operate by the Board’s approved terms of reference.
The ability to create Nomination and Remuneration Committees, as well as a Stakeholder Relationship Committee.
The Nomination and Remuneration Committee and the Stakeholders Relationship Committee can be formed by the Board of Directors under Section 178. The Nomination and Remuneration Committee shall consist of three or more non-executive directors, with one-half of them being independent directors.
If there are more than 1,000 shareholders, debenture holders, or other security holders on the board of directors, the Stakeholders Relationship Committee may be constituted by the board of directors. This committee is in charge of reviewing and resolving shareholder grievances.
Rights that can be exercised at a Board meeting or by approving a resolution that is then published under the provisions of Section 289
- Within 30 days of the company’s incorporation, Section 224(6) gives the board of directors the authority to choose the company’s first auditor.
- If a casual vacancy in the Auditor’s office is not created by resignation, Section 224(6) gives the Auditor the ability to fill it.
- If the Articles allow [Section 260], more Directors can be nominated.
- Revocation of securities, payment of interim dividends, preliminary expenditures, use of a foreign seal, capitalization of earnings, and the issuing of bonus shares are among the other rights conferred under the articles.
- If the Board believes it necessary, individual directors who act without being empowered by the Board may be ratified by the Board by passing an effective resolution with retrospective effect.
Right to donate to a charity or other fund
Under Section 181, the company’s Board of Directors is entitled to donate to genuinely fide charity and other funds. When the total amount of donation surpasses 5% of the firm’s average net profit for the two most recent financial years, the company must first approve the contribution in a public meeting.
Possession of the right to make a political contribution
Section 182 of the Companies Act, 2013 allows businesses to make a political gift. A government organization or one that has been in operation for less than three years should not make a political donation. Furthermore, the overall contribution does not exceed 7.5 percent of the company’s net profit during the previous three fiscal years.
Contribution to the National Defense Fund is a legal right
The Board of Directors has the right to make contributions to the National Defence Fund or any other fund established by the Central Government for national defense under Section 183 of the Companies Act, 2013. The amount of the donation might be whatever you feel is suitable. This total contribution should be accounted for in the profit and loss statement for the current fiscal year.
Individual and group director rights are two types of director rights
- The right to review books of accounts (Section 209(4)) is one of the individual privileges.
- The right to receive board meeting notices (Section 285).
- The ability to participate in proceedings and vote for or against initiatives (Section 300).
- The right to obtain draught circular resolutions (under Section 289) and to inspect board meeting minutes.
Right to Refuse to Transfer Shares:
Directors of private and presumed public corporations have the right under Section 111 of the Act to refuse to register a transfer of shares to anyone they don’t want.
Right to choose a Chairman:
Regulation 76(1) gives directors the power to elect a chairperson for board meetings.
Right to appoint a Managing Director:
The Company’s managing director/manager is appointed by the Board of Directors (as specified in the Act).
The ineffectiveness of the Company Act 1956 in enforcing corporate governance has been demonstrated repeatedly in recent years by major corporate failures such as Kingfisher, Sahara, and Satyam. The Directors are always to blame for failing to achieve Shareholder expectations and, on occasion, violating stakeholder feelings under the garb of charisma, so manipulating corporate systems for personal advantage.
Nearly 50 years after the previous update to address this issue, the Companies Act of 2013 was passed. It is based on the following principles: board responsibility, shareholder protection, self-regulation, and disclosure transparency.
The 2013 amendment ensured several effective actions by laying out the Directors’ responsibilities and liabilities, as well as the penalties that would be enforced if they were not fulfilled. The obligations of directors are enumerated in Section 166 of the 2013 Act, and they apply to all types of directors, including independent directors.
In Section 166 of the 2013 Act, the directors’ responsibilities are outlined as follows:
- A director must follow the company’s Articles of Association when acting as a director.
- A director must operate in the best interests of the company’s stakeholders and work diligently to achieve the company’s goals.
- In carrying out his obligations with due consideration, competence, and diligence, a director must exercise impartial judgment.
- In the best interests of the firm, a director should always be aware of any conflicts of interest and seek to avoid them.
- Before allowing transactions with linked parties, the Director must ensure that sufficient consultations have taken place and that the transactions are in the best interests of the company.
- To ensure that the vigilance system and users of the company are not affected as a result of this use.
- Confidentiality of confidential proprietary knowledge, company secrets, inventions, and undisclosed prices must be kept and should not be revealed unless the board has given its approval or the law mandates it.
- A director of a company cannot nominate his or her own office, and any such assignment is void.
- A company director who breaches this section would be punished not less than one lakh rupees but not more than five lakh rupees.
- Toto ensures the Board’s independence and justice, the Companies Act of 2013 allocates several tasks to Independent Directors. An Independent Director is a member of the Board of Directors who does not own stock in the firm and has no financial ties to it other than the remuneration he or she receives for serving on the board. Schedule IV of the Companies Act of 2013 protects and promotes the interests of all stakeholders, particularly minority shareholders.
- Acting as a mediator in the event of a conflict of interest among the stakeholders.
- Assisting the Board of Directors in reaching an unbiased and fair conclusion.
- Transactions involving connected parties are given sufficient consideration.
- Any unethical behavior, violation of a code of ethics, or suspected violation of a code of ethics.
The directors may be held jointly or collectively accountable for any conduct detrimental to the company’s interests. Even though the Director and the Company are separate entities, the Director can be held liable on the Company’s behalf in the following circumstances: SEBI can take legal action against directors who fail to make the required disclosures under the SEBI (Acquisition of Shares & Takeovers) Regulations, 1997, and SEBI (Prohibition of Insider Trading) Regulations, 1992; return of a share application fee or a refund of a portion of a share application fee; to cover the cost of qualification shares; civil Liability for misrepresentation in a prospectus.
The board of directors is the company’s heart and soul, as well as its most important asset. Because more power comes with more responsibility, firm management should be in the hands of competent people who know how to utilize their power wisely. The firm is governed by a board of directors, who convene in an organizational meeting to make all of the company’s decisions.
Even though there have been several instances of corporate mismanagement. In this situation, the directors are the first to be held accountable.
Author – Tashmayee Sarkhel, currently pursuing a B.A.LL.B. (Hons.) at University Law College and Department of Studies in Law, Bangalore University.
- The Companies Act ↑
- The Companies Act, Sec. 291 ↑
- The Companies Act, Sec. 292 ↑
- The Companies Act, Sec. 293 ↑
- The Companies Act, Sec. 294AA ↑
- The Companies Act, Sec. 295 ↑
- The Companies Act, 2013, Sec. 180 ↑
- The Companies Act, Sec. 177 ↑
- The Companies Act, Sec. 178 ↑
- The Companies Act, Sec. 289 ↑
- The Companies Act, Sec. 224(6) ↑
- The Companies Act, Sec. 260 ↑
- The Companies Act, Sec. 181 ↑
- The Companies Act, 2013, Sec. 182 ↑
- The Companies Act, 2013, Sec. 184 ↑
- The Companies Act, Sec. 209 ↑
- The Companies Act, Sec. 285 ↑
- The Companies Act, Sec. 300 ↑
- The Companies Act, Sec. 289 ↑
- The Companies Act, Sec. 111 ↑
- The Companies Act, Sec. 76(1) ↑
- The Company Act, 1956 ↑
- The Companies Act, 2013, Sec. 166 ↑
- The Companies Act, 2013, Schedule IV ↑
- The SEBI (Acquisition of Shares & Takeovers) Regulations, 1997 ↑