Question

1. Discuss how 4 individuals may approach the appointment of Directors to their company and whether or not any or all of them should become Directors given their specialisations and years of experience. Discuss how they may address real or potential conflicts of interest.

Answer 1

Appointment of a Director is not only a crucial administrative requirement, but is also a procedural requirement that has to be fulfilled by every company. Under the Companies Act, only an individual can be appointed as a Director; a corporate, association, firm or other body with artificial legal personality cannot be appointed as a Director.

An individual who is appointed or elected as the member of the board of Directors of a Company, who, along with the other directors, has the responsibility for determining and implementing the policies of the company.

Director is an individual who directs, manages, oversees or controls the affairs of the Company.

A director is a person who is appointed to perform the duties and functions of a company in accordance with the provisions of The Company Act, 2013.

As per Section 149(1): Every Company shall have a Board of Directors consisting of Individuals as director.

They play a very important role in managing the business and other affairs of Company. Appointment of Directors is very crucial for the growth and management of Company.

Appointment of Directors

Generally, in a public company or a private company subsidiary of a public company, two-thirds of the total numbers of Directors are appointed by the shareholders and the remaining one-third is appointed in accordance with the manner prescribed in Articles failing which, the remaining one-third of the Directors must be appointed by the shareholders. The Articles of a public company or a private company subsidiary of a public company may provide for the retirement of all the Directors at every AGM.

In a private company, which is not a subsidiary of a public company, the Articles can prescribe the manner of appointment of any or all the Directors. In case the Articles are silent, the Directors must be appointed by the shareholders.

The Companies Act also permits the Articles to provide for the appointment of two-thirds of the Directors according to the principle of proportional representation, if so adopted by the company in question.

Nominee Directors can be appointed by a third party or by the Central Government in case of oppression or mismanagement.

TYPE OF COMPANY	APPOINTMENT MADE
Public Company or a Private Company subsidiary of a public company	1.       2/3 of the total Directors appointed by the shareholders. 2.       Remaining 1/3 appointment is made as per Articles and failing which, shareholders shall appoint the remaining.
Private Company which is not a subsidiary of a public company	1.       Articles prescribe manner of appointment of any or all the Directors. 2.       In case, Articles are silent, Directors must be appointed by the shareholders

Appointment of Managing Directors

A Managing Director must be an individual and can be appointed for a maximum term of five (5) years at a time.

A person who is already a Managing Director / Manager of a public company or a private company subsidiary of a public company can become the Managing Director / Manager of only one other company (whether private or public) with the prior unanimous approval of the Board of such company. However, no such restrictions are applicable to a Manager or a Managing Director of "pure" private companies.

In case of a public company or a private company that is a subsidiary of a public company, if the appointment is not in accordance with Parts I and II of Schedule XIII of the Companies Act, such appointment must be approved by the Central Government.

Remuneration

In the case of a public company or a private company which is a subsidiary of a public company, the remuneration payable is subject to the provisions of the Companies Act, and may be determined either by the Articles or, if the Articles so provide, by a special resolution of the company in general meeting.

Qualifications for Directors

The Companies Act does not prescribe any qualifications for Directors of any company. An Indian company may, therefore, in its Articles, stipulate qualifications for Directors. The Companies Act does, however, limit the specified share qualification of Directors which can be prescribed by a public company or a private company that is a subsidiary of a public company, to be five thousand rupees (Rs. 5,000/-).

FOLLOWING DOCUMENTS ARE REQUIRED FOR APPOINTMENT OF AN INDIVIDUAL AS DIRECTOR

1. No person shall be appointed as a Director of a Company unless he has been allotted the (DIN) DIRECTOR IDENTIFICATION NUMBER under section 154 of the Companies Act, 2013.

2. So, foremost requirement is to have DIN i.e. DIRECTOR IDENTIFICATION NUMBER, and to apply for DIN in Form DIR- 3 there is a requirement of DSC i.e. Digital Signatures.

Step 1: Apply for DSC and most importantly associate the DSC as Director on MCA portal.

Step 2: Now, Fill form DIR-3 (application for DIN), affix DSC on it and file it on MCA portal, along with fees of Rs. 500. Documents include:

1. Passport Size Photograph

2. ID Proof

• Copy of Passport
• National ID where he is a National and that attested by
• Indian Embassy / Consulate / High Commission /Apostille,
• Person of Indian Origin (PIO) card : – A foreign nation of Indian Origin
• can produce POI issued by Government of India
• Copy of Overseas Citizen of India (OCI) card issued by GOI)

3. Address Proof

• Copy of Passport
• Other National ID attested by Indian Embassy / Consulate /High Commission /Apostille
• Bank account statement in country of residence, duly attested by Indian Embassy /High Commission / Consulate / Apostille in the country where applicant is located
• Person of Indian Origin (PIO) card issued by Government of India or
• NRE bank account statement
• Overseas Citizen of India (OCI) card issued by GOI)

Step 3: As now DIN is allotted, prepare documents for appointment of an individual as the director of the company and file these documents in form DIR- 12.

Documents include:

1. DIR-2(Consent to act as Director of the Company)
2. DIR-8 (Intimation by Director about his interest in other entities and Disqualification under section 164 of the Companies Act, 2013)
3. Letter of Appointment form the company
4. Resolution passed by the Company for his/her appointment

Step 4: File e-form DIR-12 with ROC along with above-mentioned documents within a period of 30 days from the date of his/her appointment.

New Categories of Director

Resident Director:

This is one of the most important changes made in the new regime, particularly in respect of the appointment of Directors under section 149 of the Companies Act, 2013. It states that every Company should have at least one resident Director i.e. a person who has stayed in India for not less than 182 days in the previous calendar year.

Woman Director

Now the legislature has made mandatory for certain class of the company to appoint women as director. As per section 149, prescribes for the certain class of the company their women strength in the board should not be less than 1/3. Such companies either listed company and any public company having-

1. Paid up capital of Rs. 100 cr. or more, or
2. Turnover of Rs. 300 cr. or more.

Foreign National as a Director under Companies Act, 2013

Under Indian Companies Act, 2013, there is no restriction to appoint a foreign national as a director in Indian Companies along with six types of Directors which are appointed in a company, i.e., Women Director, Independent Director, Small Shareholders Director, Additional Director, Alternative and Nominee Director. By complying with the Companies Act, 2013 (hereinafter referred as “The Act”) read along with the Companies (Appointment and Qualifications of Directors) Rules, 2014 (hereinafter referred as “The Rules”)

More about appointment of Foreign National as a director refer link:

https://taxguru.in/company-law/appointment-resident-foreign-national-director-board.html

Restrictions on number of Directorships

The Companies Act prevents a Director from being a Director, at the same time, in more than fifteen (15) companies. For the purposes of establishing this maximum number of companies in which a person can be a Director, the following companies are excluded:

A “pure” private company;

An association not carrying on its business for profit, or one that prohibits the payment of any dividends; and

A company in which he or she is only appointed as an Alternate Director.

Failure of the Director to comply with these regulations will result in a fine of fifty thousand rupees (Rs. 50,000/-) for every company that he or she is a Director of, after the first fifteen (15) so determined.

Conditions for appointment of managing / Whole-time Directors; Disqualifications

The Companies Act, under Schedule XIII, also prescribes certain other conditions that are to be fulfilled for the appointment of a Managing or a Whole-time Director or Manager in case of a public company and a private company that is a subsidiary of a public company. Accordingly, no person shall be eligible for appointment as a Manager, a Managing Director or a Whole-time Director if he or she fails to satisfy the following conditions:

1. He or she should not have been sentenced to imprisonment for any period, or a fine imposed under any of the following statutes, namely:

i. The Indian Stamp Act, 1899;

ii. The Central Excise Act, 1944;

iii. The Industries (Development and Regulation) Act, 1951;

iv. The Prevention of Food Adulteration Act, 1954;

v. The Essential Commodities Act, 1955;

vi. The Companies Act, 1956;

vii. The Securities Contracts (Regulation) Act, 1956;

viii. The Wealth Tax Act, 1957;

ix. The Income Tax Act, 1961;

x. The Customs Act 1962;

xi. The Monopolies and Restrictive Trade Practices Act, 1969 – now the Competition Act, 2002;

xii. The Foreign Exchange Regulation Act, 1973 – now the Foreign Exchange Management Act, 1999;

xiii. The Sick Industrial Companies (Special Provisions Act) 1985;

xiv. The Securities Exchange Board of India Act, 1992; and / or

xv. The Foreign Trade (Development and Regulation) Act, 1973.

2. He or she should not have been detained or convicted for any period under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974.

3. He or she should have completed twenty-five (25) years of age, but be less that the age of seventy (70) years. However, this age limit is not applicable if the appointment is approved by a special resolution passed by the company in general meeting or the approval of the Central Government is obtained.

4. He or she should be a managerial person in one or more companies and draws remuneration from one or more companies subject to the ceiling specified in Section III of Part II of Schedule XIII.

5. He or she should be a resident of India. 'Resident' includes a person who has been staying in India for a continuous period of not less than twelve (12) months immediately preceding the date of his or her appointment as a managerial person and who has come to stay in India for taking up employment in India or for carrying on business or vocation in India. However, this condition is not applicable for companies in the Special Economic Zone, as notified by Department of Commerce from time to time.

Restrictions on number of Directorships

The Companies Act prevents a Director from being a Director, at the same time, in more than fifteen (15) companies. For the purposes of establishing this maximum number of companies in which a person can be a Director, the following companies are excluded:

1. A "pure" private company;

2. An association not carrying on its business for profit, or one that prohibits the payment of any dividends; and

3. A company in which he or she is only appointed as an Alternate Director.

Failure of the Director to comply with these regulations will result in a fine of fifty thousand rupees (Rs. 50,000/-) for every company that he or she is a Director of, after the first fifteen (15) so determined.

Director Identification Numbers

All Directors of Indian companies are required to obtain Director Identification Numbers ("DINs"). Primarily, DINs are required to authenticate any electronic filings made by the company.

Additional disqualifications in case of a public company

In addition to the requirements mentioned above, the Companies Act further provides that a person shall not be eligible to be appointed as a Director of any other public company for a period of five (5) years from the date on which the public company, in which he or she is a Director, has failed to file annual accounts and annual returns or has failed to repay its deposits or interest thereon or redeem its debentures on the due date or pay dividends declared.

Additional disqualification in case of a "pure" private company

A private company that is not a subsidiary of a public company can, by its Articles, provides that a person shall be disqualified for appointment as a Director on any grounds in addition to those specified in the Companies Act.

Additional disqualifications for Managing and Whole-time Directos

An individual cannot be appointed as a Managing or a Whole-time Director of a company if he or she:

1. is an undischarged insolvent, or has at any time been adjudged an insolvent;

2. suspends, or has at any time suspended, payment to his or her creditors, or makes, or has at any time made, a composition with them; or

3. is, or has at any time been, convicted by a court of an offence involving moral turpitude.

These requirements are not only more stringent than the requirements for an ordinary Director, but are also of an absolute and mandatory nature.

Retirement of Directos

In any public company or a private company that is a subsidiary of a public company, one-third of the Directors must retire at every AGM. However, every retiring Director is eligible for re-appointment. If the vacancy is not filled and the meeting has not expressly resolved to fill such vacancy, he or she shall be deemed to have been re-appointed until the next election meeting, unless he or she is not otherwise disqualified or is unwilling to so act as a Director or no resolution for such appointment has been put to the meeting and lost.

Removal of Directors

A Director can be removed by an ordinary resolution of the general meeting after a special notice has been given, before the expiry of his term of office. However, this is not applicable to Directors appointed by proportional representation or the Directors appointed by the Central Government.

Vacation of Office

The office of a Director of a public company, or of a private company which is a subsidiary of a public company, becomes vacant if he or she:

1. Becomes subject to any of the three (3) disqualifications mentioned above (with regard to disqualifications for a Managing or a Whole-time Director) during his or her term of office;

2. Fails to obtain within any time period as may be specified in the Articles (two months in case of a public company), or at any time thereafter ceases to hold, the necessary share qualification if any as prescribed by the Articles;

3. Absents himself or herself from three (3) consecutive meetings of the Board, or from all meetings of the Board for a continuous period of three (3) months, whichever is longer, without obtaining leave of absence from the Board;

4. Whether by himself or herself, or by any person on his or her account or any firm in which he or she is a partner or company in which he or she is a Director, accepts a loan or guarantee or security for a loan from the company in contravention of the requirements governing loans etc to Directors;

5. Acts in contravention of the requirements regarding disclosure of interests;

6. Is removed from office under the Companies Act; or

7. Having been appointed as Director by virtue of his or her holding an office or other employment in the company (for instance, that of Managing Director), he or she fails to hold such office or other employment.

Also, in such public companies and private companies that are subsidiaries of public companies, if a Director or his or her relative holds an office of profit without the consent of the company, and with such Director's knowledge, such Director shall be deemed to have vacated his or her office.

In addition to these reasons for the Director's office becoming vacant, a "pure" private company may prescribe other such reasons in its Articles.

If a person continues to act as a Director, despite knowing that his or her office has become vacant, he shall be punishable with a fine up to five thousand rupees (Rs. 5,000/-) for every day that he or she continues to function and act as such.

Resignation

The Companies Act is silent with respect to resignation of Directors. However, in a majority of cases, the Articles provide for Directors to resign. Even in cases where the Articles are silent, there is no absolute bar on Director's resigning, which becomes effective upon submission of such resignation letter and the filing of the necessary form for such resignation with the Registrar of Companies (whether or not the Board formally accepts the same, unless the Articles provide otherwise). The filing of such resignation related form with Registrar of Companies is an obligation to be discharged by the company in question.

The only exception to the above rule is in the case of Managing, Whole-time and Executive Directors who are employees of the company, and where the terms of their respective service contracts will ordinarily refer to resignations, notice periods and / or compensation in lieu thereof.

Compensation of Loss of Office

Only a Managing Director, a Director holding the office of a Manager and Wholetime Directors can receive compensation for loss of office or consideration for retirement, subject to the conditions specified by the Companies Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances

Discuss how they may address real or potential conflicts of interest.

Conflicts of interest abound at the board level. They constitute a significant issue in that they affect ethics by distorting decision making and generating consequences that can undermine the credibility of boards, organizations or even entire economic systems.

We are segmented conflict into 4 tiers:

A tier-I conflict is an actual or potential conflict between a board member and the company. The concept is straightforward: A director should not take advantage of his or her position. As the key decision makers within the organization, board members should act in the interest of the key stakeholders, whether owners or society at large, and not in their own. Major conflicts of interest could include, but are not restricted to, salaries and perks, misappropriation of company assets, self-dealing, appropriating corporate opportunities, insider trading, and neglecting board work. All board members are expected to act ethically at all times, notify promptly of any material facts or potential conflicts of interest and take appropriate corrective action.

Tier-II conflicts arise when a board member’s duty of loyalty to stakeholders or the company is compromised. This would happen when certain board members exercise influence over the others through compensation, favors, a relationship, or psychological manipulation. Even though some directors describe themselves as “independent of management, company, or major shareholders,” they may find themselves faced with a conflict of interest if they are forced into agreeing with a dominant board member. Under particular circumstances, some independent directors form a distinct stakeholder group and only demonstrate loyalty to the members of that group. They tend to represent their own interest rather than the interests of the companies.

A tier-III conflict emerges when the interests of stakeholder groups are not appropriately balanced or harmonized. Shareholders appoint board members, usually outstanding individuals, based on their knowledge and skills and their ability to make good decisions. Once a board has been formed, its members have to face conflicts of interest between stakeholders and the company, between different stakeholder groups, and within the same stakeholder group. When a board’s core duty is to care for a particular set of stakeholders, such as shareholders, all rational and high-level decisions are geared to favor that particular group, although the concerns of other stakeholders may still be recognized. Board members have to address any conflicts responsibly and balance the interests of all individuals involved in a contemplative, proactive manner.

Tier-IV conflicts are those between a company and society and arise when a company acts in its own interests at the expense of society. The doctrine of maximizing profitability may be used as justification for deceiving customers, polluting the environment, evading taxes, squeezing suppliers, and treating employees as commodities. Companies that operate in this way are not contributors to society. Instead, they are viewed as value extractors. Conscientious directors are able to distinguish good from bad and are more likely to act as stewards for safeguarding long-term, responsible value creation for the common good of humanity. When a company’s purpose is in conflict with the interests of society, board members need to take an ethical stand, exercise care, and make sensible decisions.