A Note on the Working of the Board of Directors

A NOTE ON THE WORKING OF THE BOARD OF DIRECTORS  by : DR. T.K. JAIN AFTERSCHO☺OL centre for social entrepreneurship sivakamu veterinary hospital road  bikaner 334001 rajasthan, india FOR – PGPSE PARTICIPANTS mobile : 91+9414430763 5 DECEMBER 09

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WHO IS A DIRECTOR?

SEC 2(13) : ANY PERSON WHO OCCUPIES THE POSITION OF A DIRECTOR – BY WHATEVER NAME CALLED

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CASE STUDY : FERGUSON V.S WILSON

Truely speaking the director of a company is an agent of the company

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Case study : Smith v/s Anderson

Directors are truely the trustees of the property fo the company

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DEEMED DIRECTOR ???

As per sec. 5 , 303, 372A : if directors act on advice of a person, that person is called deemed director. Sec. 7 : if that person is giving professional advice – that person will not be called deemed director. 5 DECEMBER 09

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Managing Director ???

Sec 2(26) : a person who has been given substantial powers of management is called managing director - he can be appointed – by - board resolution / articles / AGM / agreements

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Minimum number of directors

Sec. 252 : public company : 3, private company : 2 no maximum limit in law these limits can be set in articles of association sec. 259- when the number of direcors increase  beyond 12, it may require Govt. Permission 5 DECEMBER 09

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Directors representing small shareholders (only on public companies with Rs. 5 crore or  more) As per Companies (appointment of small shareholders' director) rules 2001 – there should director / s representing small shareholders. Small shareholders : holding upto Rs. 20000 nominal value (face value) of shares. 5 DECEMBER 09

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First directors (sec. 254)

May be appointed by articles of association. Regulation 64 of Table A of schedule I : the first directors are appointed by subscribers of  MOA & AOA .

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Subsequent Directors (sec. 255, 256)

They are appointed by AGM 2/3rd directors are retiring directors - 1/3rd may  be non-retiring directors. Thus if you have 12 directors, 8 directors have to retire by rotation.

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Case study : S. Jabh Singh vs Panesar Mech. Works P. Ltd.

Where no period for retirement is prescribed in AOA, then directors will retire when they are removed as per sec. 284.

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Case : Consolidated Nickel Mines Ltd. When AGM is not held, directors due to retire, will retire on their due date – similarly when AGM is adjourned, the directors due to retire, will retire on that that day retiring director may be reappointed. FIFO in retirements 5 DECEMBER 09

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How will you become a director? At least 14 day notice of willingness to become a director with fees of Rs. 500 (by the person or the person who is proposing someone as director). The person must also submit his accent to  become a director to to ROC at least 30 days  before appointment. 5 DECEMBER 09

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Can BoD (board of directors) appoint additional directors? Yes – IF AOA authorise it . But this appointment will be till next AGM. If AGM is not held, the director will retire on the date of AGM. (sec. 260) 5 DECEMBER 09

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Casual Appointments (Sec. 262)

If there is a vacancy, the board may appoint a director as per procedure in AoA. This is casual appointment.

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ALTERNATE DIRECTOR (SEC. 313) BoD may appoint alternate director in place of  a director who is going for a long vacation the alternate director will leave the position when original director returns. It must be for 3 months or more.

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Appointment by Central Govt. (sec. 408) If Company Law Board thinks it is necessary, then Central govt. May appoint a director for a  period upto 3 years. This director will not require qualification shares (minimum number of shares to be held  by every director to be eligible to become a director). While counting 2/3rd, we will not take this director into account. 5 DECEMBER 09

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Appointment by 3 parties

Financial institutions like IDBI/IFCI/ICICI/SBI etc. Can appoint addional nominee directors – their particulars have to be submitted in form no. 32.

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Appointment in AGM

As per sec. 263 – a director is appointed by shareholders – by simple majority. Each director will require separate resolution.

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Principle of Proportional Representation (sec. 265) In order to enable minority shareholders, this  principle has been introduced. The directors appointed by this principle should hold office for 3 years and cannot be removed by AGM as  per sec. 284. rd

(upto 2/3 directors may be appointed by this system – by single transferable vote / cumulative voting). 5 DECEMBER 09

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MD / whole time director (sec. 269)

Every public company having 5 crore or more capital must have an MD / whole time director. It requires permission of Central Government / or apply as per schedule XIII and submit return in form 25C within 90 days of appointment. 5 DECEMBER 09

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Schedule XIII – part I The person being appointed as MD must not have violated any act like Central Excise, Income Tax, Wealth Tax, Customs, FEMA etc. Age – between 25 and 70 (A major with less than 25 years age / more than 70 ,can also  become, if special resolution + govt. Permission is obtained). must not have violated COFEPOSA 5 DECEMBER 09

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Maximum period of term

The maximum period is 5 years reappointment is permitted.

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Maximum remuneration (sec. 198) 5% total managerial remuneration of the company = 11% of profit (computed as per sec. 349 and 350) for part time director : 1% (if MD is there, 3%, if there is no MD) 5 DECEMBER 09

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Sitting fees (sec. 309)

Maximum fees : 20000 for each meeting (when turnover is above 50 crore and capital + reserves at least 10 crores). Otherwise maximum : 10000 / per meeting.

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Qualification of directors (sec. 274) Qualifications are not mentioned, but disqualifications are mentioned in the law. A  person of unsound mind, undischarted insolvent, a person imprisoned for moral turpitude for 6 months or more is not eligible for directorship. 5 DECEMBER 09

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Case : Oriental Metal Pressing works P. Ltd vs. Bhaskar  kashinath

The court held that only individual can be director, a firm or association cant be director, as it is a position of trust.

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Case : People's bank of northern India

Articles of association may exempt persons of  technical / professional qualification from having qualification shares. Otherwise the articles may require the director to have qualification shares.

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Qualification shares (sec. 270)

Director must have qualification shares in 2 months from appointment the nominal value of qualification shares should not be more than Rs. 5000  bearer of share warrant cant be said to be holding qualification shres. 5 DECEMBER 09

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Penalty : sec 272

If a director doesnt acquire qualification shares in 2 months, he shall pay penalty Rs. 500 per  day. (all these provisions are applicable only on public companies)

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 Number of directorship (max.) sec. 275

 No person can become director of more than 15 companies (public companies)

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Sec. 278 – what to exclude from 15 companies Following are not counted in 15 companies :  private company unlimited company a company in which the person is alternate director  association association not for profit  penalty : (sec. 279) : upto 50000 if if you become director  of more than 15 public companies 5 DECEMBER 09

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Vacation of post of director (sec. 283) A director has to vacate if : he is of unsound mind, he doesnt acquire qualification shares in 2 months, he is judged insolvent, convicted for moral turpitude & imprisoned for 6 months or more, absents the 3 consecutive meetings or for 3 months (without leave), he doesnt disclose his interest in a contract (sec. 299), by court (sec. 203), when he is there as an employee, but he retires. 5 DECEMBER 09

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Removal of director (sec. 284, 388B, 402, ) Shareholders can remove a director by ordinary resolution. They have to send a special notice (14 day notice) for this meeting and pass the resolution. They cant remove a director appointed by Govt / financial institution. (sec. 284) 5 DECEMBER 09

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Removal by govt. In case of fraud If the director is engaged in fraud, mal practices, anti-social activities etc. Or the company is not managed properly or the company is working against the interest of  lenders / financers, or the company is following unsound business practices, The director can be removed by government as per  sec. 388B to 388E. 5 DECEMBER 09

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Removal by company law board

In order to prevent oppression and mismanagement, CLB can remove director  (sec. 397,398,402) – that director cant become director of another company for 5 years.

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Loans to director (sec. 295) Without prior permission from government, no company can give loan to its director / firm (where the director of this company is a partner  / proprietor ) / company of its director (its (its director is holding 25% voting power in that company), however, these provisions dont apply to private / banking / holding company 5 DECEMBER 09

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WHO MAY CALL BOARD MEETING ?

Any director can call a board meeting or he may make a requisition for a board meeting as  per Regulation 73 of table A of schedule I.

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 NUMBER OF BOARD MEETINGS? At least one in 3 months and at least 4 meetings in a year. At least 15 notice of the  board meeting must be given at the address of  the director / fax. There must be at least 7 days notice of agenda / notes to agenda of the board meeting.

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QUORUM (SEC. 287) It means the minimum number of persons who must be present in the board meeting. At least 1/3rd must be present (or two = whichever is more). Only those who are disinterested can come and participated. Those who are interested in the matters, cannot vote. If  quorum is not present, adjourn the meeting for  same day, next week. A fresh notice is required if it is sine de adjournment. 5 DECEMBER 09

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Validity of the act of directors (sec. 290) The powers of directors are defined in law and also in articles of association. They can act in their powers. Even if a director is disqualified or later on it is discovered that he was not appointed properly, his acts done earlier will remain valid and binding on the company. 5 DECEMBER 09

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Minutes of the meeting of the  board of directors Minutes of the board meetings must be  prepared in 30 days of the meeting and must be  preserved in minutes book – duly serial numbered. The chairman must sign each page of the minutes book. The minutes book should not have loose leaves. The chairman may remove the material which is irrelevant. 5 DECEMBER 09

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Minutes book as evidence

Minutes book is a legal evidence as per sec. 194, so it should be properly kept. Any director  can inspect the minutes book.

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Chairman of the board of directors meetings Chairman can be elected by the board of  director. If there is no chairman or he is absent, the meeting may select its chairman in 5 minutes of the meeting. As per regulation 74 of Table A of Schedule I, chairman has a casting vote. 5 DECEMBER 09

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Sudha Soni has said that she s he will not be able to attend  board meetings as she is going to the USA. Will you still send her notice for board meetings (she being a director). If alternate director is appointed, will you still send her a notice of the meeting?

Yes – in both the cases, notice has to be sent to the director. In the second case, to both the directors

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Is it necessary that the notice of  BOM must specify the business to  be discussed?

 No – it can be sent separately. (we have discussed - it requires only 7 days notice, but  board meeting requires 15 day notice).

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Can board meeting be held on  public holiday / after business hours?

Yes

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Case : as per law you have to have one meeting at least in every quarter. However, due to lack  of qorum (as your directors are mostly in the USA), no meeting is held. Have you violated the law?

 No – you made an efforts – the meeting was not held due to lack of quorum.

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Board held a meeting on 31 Jan, as every year you have a meeting on 31 Jan. No notice was given. Is it a valid meeting?

Yes, it is still a valid meeting.

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Audit committee ? ? ?

Sec. 292 A and clause 49 of listing agreement requires every company to appoint an audit committee of directors. It will look into the working of the company.

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Clause 49 It requires that audit committee must be appointed by all those companies which are listed companies. Audit committee can have only independent directors. The company secretary will be the secretary of the audit committee also. It must have meetings just like  board of directors. 5 DECEMBER 09

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Registers of directors (sec. 303) Every company must keep a register of the directors. The register must be a bound book. It will also prepare a form no. 32 and file with the registrar of the companies about the directors. (in 30 days of appointment of the dreictors) comapny must keep a resiter of all the contracts in which director is interested (sec. 301) register of shareholding of directors (sec. 307) is also necessary . 5 DECEMBER 09

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Offences and penalties (sec. 630, 621A, 633)

If directors commit any mistake / offence, he is  punishable by Rs. 10000 / with / without imprisonment upto 2 years as per sec. 630, however, court can grant relief as per sec. 633.

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Case : Rohit Samsukha wants to resign from the post of MD, can he do so ?  No, he has to follow the terms and conditions of the contract. He can resign only as per  terms. However, other directors can resign any time – even orally – whether the company accepts it or not, but Rohit is MD, he cant.

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Pankaj is not a member of our company,  but he wants to inspect our register of  directors, can he do so ?

Yes – during business hours. For members it is free, but for others (Pankaj), there is a fee of  Re. 1.

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ABC ltd and XYZ ltd. Make a contract, Sudha has interest in the contract, but she doesnt disclose it in the board meeting or in form 24AA , she holds .1% in both the companies. What will happen?

Ordinarily fine of 50000 , however, there are exceptions - so probably Sudha will escape due to these exceptions – like she has very small holding (less than 2%)

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Case : MR electronics components

Advance salary to the wife of a director will not come in sec. 295

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Case : Dr. Fredie Ardeshir 

Sale of flat on instalment to the director will not come under sec. 295

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Contract with firms related to director (sec. 297) A company cannot enter into a contract with another firm / company in which its own director is a partner / owner, unless it has been approved by the board. Exemptions : if it is cash transaction, or it is a ordinary transaction in banking / insurance firm or if the value of transaction is less than Rs. 5000 per annum. 5 DECEMBER 09

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Case study

Professional services (like auditing, consultancy) dont come in sec. 297.

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 Notice by director 

A director has to give notice in form 24AA when a company is about to enter into contract in which director is interested. The notice must  be given to the board of directors when they meet. (sec. 299)  penalty : Rs. 50000 5 DECEMBER 09

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Case : fire stone tyre & rubber co v/s synthetics and chemicals co.

Interest here means personal interest – not official interest and includes closeness of  relatives (like father – son).

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Director not to participate in some meetings (sec. 300)

A director cannot participate in a meeting in which a matter / contract related to his issue issue / in which he is interested, is discussed.

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Office of profit Sec. 314

Director / his relatives cannot hold an office of   profit having remuneration of Rs. 10000 or  more per month – without special resolution. Any firm / company in which director is a  partner / owner also cant hold a place of profit without special resolution 5 DECEMBER 09

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Restriction on the powers of the  board Sec. 293 restricts the powers of the board : it cant remit loan due to director or his firm, it cant invest compensation received otherwise than as per law, it cant dive charity of more than 5% of profit (or 50000) it cant borrow more than equity + reserves without  permission. 5 DECEMBER 09

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Can the directors keep accounts in other places than registered office? Yes – the board of directors have to take a decision and communicate it in 7 days to ROC (registrar of companies) in form23 AA. It can keep its accounts of branch offices at  branch office – but a summarised report should  be sent to the registered office at intervals of 3 months. 5 DECEMBER 09

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Can a director inspect any book of  accounts?

Yes - during business hours ( sec. 209 (4) )

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How long should the directors keep the books of accounts  preserved?

For 8 years.

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How should directors get the accounts and reports approved from shareholders? Within 6 months of date of closure of financial year,it must be adopted by AGM as per sec. 210 financial year can be extended upto 15 months and with permission of ROC, upto 18 months. 5 DECEMBER 09

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Signing of annual accounts Annual accounts must be signed by 2 direcotrs / manager / secretary if you have MD, he must sign it. Sec. 216 : P & L as per format must be attached with balance sheet. Sec. 217 : board of director must add his report on working of company with the annual account. 5 DECEMBER 09

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