Appointment and qualification of Directors under the New companies Bill 2012

New Companies Bill has been passed by the Lok Sabha in 18th December, 2012 and the Companies Bill, 2012 (the Bill) has directorsintroduced many amendments in the Companies Act,1956. The Bill when approved by the President of India would be known as the Companies Act 2013, which would replace the existing Companies Act, 1956.

One of the important aspects of the Company law is provision relating to Appointment and qualification of Directors under the New companies Bill 2012 as all companies are run by the directors and the directors have major role to play in company’s administration.

In Bill, Chapter IX relates to Appointment and qualification of Directors under the New companies Bill 2012 under which Sections 149 to 172 are prescribed. Let us go through the amendments made by the Companies Bill 2012 relating to the provision of appointment and qualification of directors.

The definition of ‘Board of Directors’ is modified by the Bill and, accordingly, ‘Board of Directors’ or ‘Board’ in relation to a company, means the collective body of the directors of the company (Section 2(10) of the Bill) and, thus, now it is expressly provided that board constitutes a collective body of directors.

Every individual intending to be appointed as director of a company shall make an application for allotment of DIN to the Central Government. The Central Government shall allot the DIN. Thus as per the Companies Bill, obtaining DIN is a prerequisite for appointment of a director now.

The Bill has introduced first time one person company in India. This will facilitate many proprietorship companies to convert into Limited Liability Company and avail advantages of benefits of corporate entity. In case of one person company, there will be only one director. In case of one person company an individual being member shall be deemed to be its first director until the director or directors are duly appointed.

The existing requirement of minimum number of 3 directors for Public Limited company and 2 directors for private limited company continues and remain unaltered.

However, the Maximum Limit for directors in a company is increased to 15. (Previously the limit of directors was 12 directors as per Act, 1956).

The Bill first time introduced the concept of woman director. At least one woman director shall be on the board of such class or classes of companies as may be prescribed.

The other key points in connection with appointment of directors are given below :

(i)

Where no provision is made in the articles of a company for the appointment of the director, the subscribers to the Memorandum who are individuals shall be deemed to be the first directors of the company.

(ii)

Articles of private company may now provide for appointment of Directors by way of proportional representation.

(iii)

Every person proposed to be appointed as a director by the company in general meeting shall furnish his DIN and a declaration that he is not disqualified to become a director.

(iv)

Every director shall be appointed by the company in general meeting.

(v)

Now every director in a private company has to give his consent for appointment as such and the consent shall be communicated to the Registrar of Companies.(ROC) .

(vi)

Every company shall have at least one director who has stayed in India for a total period of not less than 182 days, in the previous calendar year. For local directors there won’t be any difficulty in fulfilling this condition. However, if in a foreign company all the directors are abroad, they may have to appoint either new director or an alternate director.

 

The concept of independent directors has been introduced for the first time in Company Law by the Companies Bill. The following provisions have been introduced in this regard.

Every listed company shall have at least 1/3 of total number of directors as independent directors.
An Independent director shall not be entitled to any stock option.
The Companies Bill also prescribes for code of conduct to be complied with by the independent directors. Schedule lV has been added for the Code of Conduct of independent directors.
Subject to provisions contained in sub-section (5) of section 149 on independent director, may be selected from a data bank containing names, addresses, qualifications who are eligible and willing to act as Independent directors, maintained by anybody, Institution or association as may be notified by Central Government.
As per the Bill, 2012 now instead of public company having paid up capital of 5 crore or more or 1000 or more small shareholders, only listed companies may appoint one Director elected by small shareholders.

A person shall not be eligible for appointment as a director of a company, If-

(a)

He is of unsound mind and stands so declared by a competent Court.

(b)

He is an undercharged insolvent.

(c)

He has been convicted by a Court of any offence.

(d)

He has been convicted of the offence dealing with related party transactions. The person has been convicted of the offence dealing with related party transactions at any time during the last preceding 5 years.

The new provisions regarding disqualification of directors are given below:

i.

The person has not obtained DIN. (Directors Identification Number).

ii.

The person has been convicted of any offence and sentenced for imprisonment for a period extending up to 7 years or more.
No person after the commencement of this Act, shall hold office as a director, including any alternate directorship in more than 20 companies at same time.
The nature of punishment have been changed, wherein instead of punishment based as number of companies, the same will be levied on basis of number of days person continues to be director of more than 15 companies. This punishment appears to be serious as the penalty based on number of days, huge amount will be imposed.

 

The Companies Bill has first time introduced the provisions relating to duties of directors, though the same duties of directors are exercised by the director in practice.

A director of a company shall act in accordance with the articles of the Company and other duties of the directors as mentioned in the Bill are given below.

director of a company shall act in good faith in order to promote the object of the company.
A director of a company shall exercise his duties with due care, skill and diligence.
A Director of a company shall not assign his office and any assignments so made shall be void.

The Office of a Director shall become vacant in case:

(a)

He incurs any of the disqualifications specified in new section 164.

(b)

He absents himself from all the meetings of the board of directors held during the period of 12 months without seeking leave of absence of the Board. (Previously the disqualification attracts when a director absents himself for 3 consecutive Board Meetings).

(c)

He becomes disqualified by an order of a Court or Tribunal.

(d)

He is convicted by a court of any offence.

A new provision has been introduced here thatin case all the directors vacate their office under this clause, then promoters will appoint the minimum number of directors (or the Central Government will appoint directors till they are appointed by company in general meeting).

A Director may resign from his office by giving a notice in writing to the company and the board shall give receipt of such notice to take note of the same and the company shall intimate the ROC.

Under the Bill, directors are required to mandatorily forward their resignation along with detailed reason for resignation also to the ROC within 30 days of resignation in the manner prescribed by the Government. The resignation of a director shall take effect from the date on which the notice is received by the company or if any date is specified by the Director in the notice whichever is later. Provided that the director who has resigned shall be liable even after his resignation for the offences which occurred during his tenure.
Now the Bill very clearly provides that the director who has resigned shall be liable even after his resignation for the offences which incurred during his tenure.
Where all the directors of a company resign from their offices or vacate their offices 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 general meeting.

Removal of Directors

A company may, by ordinary resolution remove a director, not being a director appointed by the Tribunal before the expiry of the period of his office after giving him a reasonable opportunity of being heard.
A special notice shall be required for any resolution to remove a director.
On receipt of notice of a resolution to remove a director, the company shall forthwith send a copy thereof to the director concerned.

Register of Directors and Key Managerial Position and their shareholding

Every company shall keep at its registered office a register containing such particulars of its directors and KMP as may be prescribed which shall include the details of securities held by each of them in the company or its holding, subsidiary.

Register of Director and Register of Directors shareholding has been merged into one register.

The register kept

Shall be open for inspection during business hours and the members shall have a right to take extracts therefrom and copies thereof be provided to them free of cost within 30 days.
Shall also be kept open for inspection at every annual general meeting of the company.
If any inspection as provided in clause or of sub-section (1) is refused, or if any copy required under that clause is not sent within 30 days from the date of receipt of such request, the ROC shall on application made to him order immediate inspection and supply of copies required thereunder.
The Members have also given the right to take the extract of the register of directors and KMP along with their shareholding free of cost, which shall be provided within 30 days of the request.
In case inspection or copy is refused or the copy required is not sent within 30 days then the ROC on application can order for inspection or supply of copy.

Comparison of Old Sections with New Sections, under Companies Act and under the Companies Bill,2012

Sections under Companies Act,1956Clauses under New Companies Bill,2012
Section No.Section NameClause No.Clause Name
252,253,259Appointment and Qualifications of Directors149Appointment and Qualifications of directors
266AAllotment of Directors Identification Number153Application for allotment of Directors Identification Number
260,262,31Appointment of Additional Director161Appointment of Additional Director
274Disqualifications164Disqualifications
166Duties of Directors(New Provision)
283Vacation of Directors167Vacation of Directors
No Specific SecResignation of Director168Resignation of Director
284Removal of Director169Removal of Director
307,303Register of Directors and KMP170Register of Directors and KMP
304Members’ Right to inspect171Members’ Right to inspect

Deletion of sections from Companies Act,1956 in respect of Directors

The Companies Bill also deleted some sections from the Companies Act 1956 as follows.

Sec 258Right of Companies to increase or reduce the number of Directors.
Sec 268Amendment of Provisions relating to Managing Director, Whole time or Non- rotational Directors to require Government approval.
Sec 270Time within which share qualification is to be obtained and maximum amount thereof.
Sec 272Penalty in respect of qualification of shares.

Punishments under New Companies Bill, 2012.

Punishments Pertains to New ClausesSubject-matter of sectionNature of Punishments
Sec 149Maximum number of directorsWhich shall not be less than Rs.50000, but which may extend to Rs 5 lakhs.
Sec 151Small shareholdersWhich shall not be less than Rs.50000, but which may extend to Rs 5 lakhs
Sec 152Appointment of directorsImprisonment which may extend to 6 Months or with a fine which shall not be less than Rs. 50000,but which may extend to Rs.500 per every day after the first default continues
Sec 155Prohibition to obtain more than one DIN.Imprisonment which may exten to 6 months or with a fine which shall not be less than Rs.50000,but which may extend to Rs.500 per every day after the first default continues
Sec 161Appointment of Additional Director or alternate or nominee directorWhich shall not be less than Rs.50000, but which may extend to Rs 5 lakhs.
Sec 172Where no punishment is provided in respect of sections 149 to 172The Company and every officer of the Company who is in default shall be punishable with fine which shall not be less than Rs 50000, and but which may extend to Rs 5 lakhs.

The new/modified punishments have been introduced under New Companies Bill, 2012 for directors and its summery is given below :

Effects of Amendments on Directors

The amendments expect more discipline from the directors and liabilities of the directors are expressly provided. The Independent directors will have to be very careful while discharging his duties as director of the company. While resigning directorship, the directors should follow stipulated procedure otherwise they will be in trouble.

Conclusion

The Bill has made the directors highly responsible and it has cast duties on the directors explicitly and the punishment for offences committed by the directors as well as company has been increased tremendously. In view of this, the director should be careful not only on accepting an appointment but also at the time of resignation, so as to ensure proper forms are filled to the Registrar of Companies so as to absolve his liabilities.

In view of the amendments, the compliance of the provisions of the Companies Act would not be easy now and the need to depend on professionals for proper compliance is inevitable because of its cumbersome requirements.

Source & Reference – taxmann.com