Company Management - Study Notes

Lesson summary

A company is an artificial person with an endless life. It is managed by a group of human beings called the Board of Directors; each member is a director. Directors control, guide, direct and manage the affairs of the company and are called its eyes, ears, brain, hands and nerves. Their appointment and qualifications are in Chapter XI of the Companies Act, 2013.

27.01 Meaning and definition

• A director is a member of the Board who leads or supervises the functioning of a company.
• Section 2(34): a director appointed to the Board of a company.
• A director need not hold shares or be an employee; directors act on Board resolutions within the powers in the Articles.
• General duties (not obligatory under the Act): act in good faith, act with utmost care, do not delegate work (except when the Act or Articles permit, or specialised expertise is needed).

27.02 Key Managerial Personnel (Section 2(51))

1. Chief Executive Officer
2. Managing Director or Manager
3. Company Secretary
4. Whole-time Director
5. Chief Financial Officer
6. Such other officer as may be prescribed

27.03 Board of Directors

• The governing body that sets policies, restructures objectives, evaluates the MD and senior executives, adopts bylaws, determines dividend and issues additional shares.
• Composition: optimum mix of executive and non-executive directors, at least one woman director, and not less than 50% non-executive directors.
• Non-executive chairperson: at least one-third independent directors; without a regular non-executive chairperson, at least half.
• Executive director: CEO or Managing Director responsible for decisions. Non-executive director: not in day-to-day management but in policy making and monitoring.
• Whole-time director devotes his whole working time to the company; Managing Director has substantial powers of management subject to the Board.

27.04 Types of directors

27.05 Number of directors

• Section 149(1): public company 3, private company 2, One Person Company 1.
• Maximum 15; more by special resolution, no Central Government approval needed.
• Section 165: up to 20 directorships, of which public companies are limited to 10. Excess: fine of Rs. 5,000 to Rs. 25,000 per day.

27.06 Legal position

• Agents: the company acts through directors; but they are not full-fledged agents, as they are elected while agents are appointed.
• Managing partners: elected by shareholders, like partners to them; no power can be delegated to a single director as managing partner.
• Trustees: of the company's money and property; not full-fledged trustees.
• Employees: when appointed whole-time under a contract of service.
• Officers: "officer" includes any director, manager or KMP.

27.07 Appointment (Section 152)

• In a public company, two-thirds of directors are appointed by shareholders; the remaining one-third as per Articles.
• Every director is appointed by the company in general meeting.
• Director Identification Number (DIN) is compulsory; written consent is needed.
• Particulars are filed with the Registrar within 30 days.
• First directors hold office from incorporation; in a One Person Company the member is the first director.

27.08 Qualifications

No direct provision in the Act. A director must be of sound mind, hold share qualification if the Articles require, be an individual, be solvent and not be convicted.

27.09 Disqualifications (Section 164)

Unsound mind, undischarged insolvent, conviction for an offence involving moral turpitude, unpaid calls, a court order of disqualification, conviction for related party transactions under Section 188, and no DIN.

27.10 Removal

• By shareholders (Section 169): special notice and ordinary resolution.
• By Central Government: on the recommendation of the Company Law Board for fraud, misfeasance, negligence or intent to defraud.
• By Company Law Board: on an application against oppression and mismanagement.

27.11 Remuneration

• Section 197; remuneration includes perquisites such as rent-free accommodation.
• Adequate profits: up to 11% of net profit; 5% if only one MD, WTD or manager (Section 198).
• No or inadequate profit: effective capital below 5 crore Rs. 30 lakh; 5 to 100 crore Rs. 42 lakh; 100 to 250 crore Rs. 60 lakh; above 250 crore Rs. 60 lakh plus 9.91% of the excess.

27.12 Powers

27.13 Rights

Individual: inspect books, receive notices, vote, receive circular resolutions, inspect minutes. Collective: refuse transfer of shares, elect a chairman, appoint a managing director, recommend dividend.

27.14 Duties

Collective duties (approve accounts, appoint first auditors, hold meetings), general duties (good faith, due care) and specific duties (disclose interest, hold qualification shares within two months, prospectus duties, file returns, call meetings).

27.15 Liabilities

• To outsiders: not liable within their powers; liable when contracting personally, for an undisclosed principal, for a prospective company, or ultra vires.
• To the company: ultra vires acts, breach of trust, misfeasance (wilful negligence).
• Criminal: mis-statement in prospectus, failure to file returns, issue certificates, keep registers, hold AGM or provide financial statements.

27.16 to 27.18

The register of directors and KMPs is kept under Rule 17. A manager is at middle level and implements plans; a director is at top level and formulates them. A Managing Director has substantial powers and cannot be appointed for more than five years at a time.