TYPES OF DIRECTORS & REGULATORY PROVISIONS
Table of Contents
DIRECTORS AND ITS COMPLIANCES
REGULATORY PROVISIONS
A company is made by law and is an artificial judicial person having its distinct entity. Though the corporate is bestowed with the characteristic of a separate legal entity, it cannot make the choices on its own. Here the foremost crucial role is played by the administrators of the corporate.
Directors are the eyes and brain of an organization. to hold out all the required functions and do all the effective decision making, an individual is required and expected to possess expertise within the field to which the corporate belongs. But other than this, many requirements are needed to be complied with in line with the laws prevailing in our country. This article covers an summary of almost all the provisions, compliances and regulations that a corporation or a director must befits and follow while dealing in matters associated with a directorship during a company with variety of landmark judgements for more understanding.
TYPES OF DIRECTORS
- FIRST DIRECTOR– First directors are the administrators who hold office from the date of incorporation of the corporate. Minimum of 3, 2 and 1 director(s) would be required to incorporate a public, private and OPC, respectively.
- EXECUTIVE DIRECTOR-An executive could be a director who is in whole-time employment of an organization.
- NON-EXECUTIVE DIRECTOR-A Non- executive director is basically a Non- working director of a corporation that’s not an administrator.
- RESIDENT DIRECTOR-Every company shall have a minimum of one director whose stay in India isn’t less than 182 days (for the previous calendar year) to be referred to as a resident director.
- WOMEN DIRECTOR- Every Listed Companies along with public companies having paid-up capital of Rs. 100 crore or more, or having turnover of Rs 300 crores or more, shall have a woman director in their Board of Directors.
- ADDITIONAL DIRECTOR– Additional Director may be a director who is appointed during a board meeting (except an individual who fails to induce appointed within the general meeting) who shall hold office up to the subsequent annual general meeting or the date on which the AGM should have been held, whichever is earlier.
- ALTERNATE DIRECTOR- An alternate director is one, who is appointed as a substitute director, as against a director not present in India for a minimum period of three months. But a director of the same company and an individual holding an alternate directorship for any other director within the same company cannot be appointed as an alternate director.
- SMALL SHAREHOLDER DIRECTOR- The listed company may have a small shareholder director appointed by the small shareholders of the corporate. A small shareholder is basically a shareholder not holding shares of the face value more than Rs. 20,000.
- NOMINEE DIRECTOR-A Nominee Director could be a Director appointed to the Board to represent the interest within the Company. The Nominee Director be appointed as per the provisions provided under the law for the time in force.
- DIRECTOR IN CASUAL VACANCY- They are the directors appointed in case of casual vacancy of a director (who was elected in a very general meeting), who vacated the office before completing the tenure.
- PROFESSIONAL DIRECTOR- Director having expertise and skill in a very particular field and contributing to the board’s decision-making could also be appointed as an expert director.
- INDEPENDENT DIRECTOR-An independent director means a director aside from a decision maker or a whole-time director or a nominee director having no material or financial interest within the company or with the administrators. this sort of director is gaining enormous attention nowadays thanks to the frauds done by the board of the companies in India.
- SHADOW DIRECTOR-This form of director isn’t appointed as a director officially, but the board of the corporate acts on his directions.
- DE-FACTO DIRECTOR-De-facto director isn’t appointed as a director but acts as a director and is additionally held accountable by the corporate for his acts within the position of a director.
DUTIES AND RESPONSIBILITIES
- The erstwhile Companies Act, 1956 (‘CA 1956’) contained no statement of statutory duties of directors, and acts of directors were usually reviewed within the context of their powers as per the section 291 of the CA 1956 and other applicable laws.
- The companies Act, 2013 provides for the duties of directors and the same is provided in detailed format under Section 166. The general duties of directors are as follows:
- To act in accordance with the articles of the corporate, in other words, to act within powers;
- To act in straightness so as to market the objects of the corporate for the advantage of its members as a whole;
- To act within the best interest of the corporate, its employees, shareholders, community and for the protection of environment;
- To exercise due and tutelage, skill and diligence and independent judgment
- To avoid any sought of direct or indirect conflicts of interest;
- To avoid any sought of undue gain or advantage, that accrues either to himself or to any of their relatives, partners or associates; and
- Not to assign his office to the other person;
- A Director is an element of a collective body of Directors called the Board, which is liable for the superintendence, control and direction of the affairs of the corporate. As per the common law rules and equitable principles, director’s duties have been largely derived from the law of agency and trusts. On the opposite hand, law of trusts imposes fiduciary duties on directors. Accordingly, directors are the trustees of the company’s money and property, and also act as agents within the transaction which they enter into on behalf of the corporate. Directors are liable as trustees for breach of trust, if they misapplied the funds or committed breach of byelaws of the corporate. A director is predicted to perform his duties as a fairly diligent person having the knowledge, skill and experience both of as person completing that director’s function and of that person himself. Therefore, a director plays various crucial roles within the company, and the same may act as an agent, an employee (when appointed on the rolls of the company), an official and/or a trustee of the corporate entity.
LIABILITIES OF DIRECTORS
- Under CA 2013, directors could also be held liable as “officers” of the corporate. The word “officer” has been defined to incorporate, inter-alia, directors of the corporate. CA 2013 provides for ‘officer who is in default’ in order to affix the liability on such person, where any contravention of the provisions of the CA 2013 by the corporate takes place. The ambit of ‘officer who is in default’ is sort of wide and includes, inter alia:
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- every whole-time director;
- every Key Managerial Personnel (‘KMP’);
- where there is no KMP, then in such a case, the director(s) as specified by the Board, in its behalf or all directors, shall be the KMP;
- any one that is charged with any responsibility by the board or any KMP, actively participates in, knowingly permits, or knowingly fails to require active steps to stop any default;
- any person in accordance with whose advice, directions or instructions the Board of the corporate is at home with act, aside from someone who gives advice to the Board in an exceedingly professional capacity; and
- every director, in respect of a violation of any of the provisions of the CA13, who is attentive to such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings without objecting to the same, or where such contravention had taken place along with his consent or connivance.
- A director may also be made answerable for fraud. “Fraud” in relevancy affairs of an organization includes “any act, omission, concealment of any fact or abuse of position committed by someone or the other person with the connivance in any manner, with intent to deceive, to realize undue advantage from, or to injure the interests of, the corporate or its shareholders or its creditors or the other person, whether or not there’s any wrongful gain or wrongful”.
- Financial obligation of Independent director and non-executive directors: CA 2013, however, limits the liability of an independent director or of non-executive directors (not being a promoter or KMP), who shall be liable, only in acts of omission or commission by an organization, which (i) occurs along with his knowledge, attributable through board processes, and (ii) with their consent or connivance or where they’d not acted diligently.
COMPOUNDABLE VS. NON-COMPOUNDABLE OFFENCES
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Compoundable Offences:
Many of the contraventions under CA 2013 are within the nature of non-compliances (such as failure to file annual return, contravention of provisions with reference to related party transactions, acceptance of deposits, giving of loans to directors etc. by the company) which attract either fine (or in some cases are punishable with fines or imprisonment or both). Such offences will be remedied or compounded, subject to relevant provisions within the Act, by paying late fees/penalties/fines as applicable.
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Non-Compoundable Offences:
On the other hand, there are certain serious contraventions being punishable with imprisonment only or with imprisonment and with fines. Thus, in such cases, where officers in default or persons concerned with formation of the corporate or the management of its affairs become liable and hence can’t be remedied/compounded merely by depositing fines/penalties. These liabilities may be imposed on the administrators if they’re in default (including non-executive directors) no matter the very fact that they’re the executive directors of the corporate or not.
Directors Liability Under Other Legislations
- Being designated as a director in a company, contains a cascading effect with relevance exposure of the director to liabilities under various other legislations. From a short study of some other legislations, we note that the duties and liability thereof, for non-compliances by a corporation typically vests with the person to blame of the conduct of business/management of the corporate.
- Other directors/officers (whether executive or non-executive) of the corporate may be held liable in certain cases:
- where the offence has been committed with the consent/connivance of, or is owing to, any neglect on the part of such director; or
- Such a director has been designated by the corporate to blame the management of the corporate and accountable for compliances (as occupier/owner) under certain legislations which permit for such nomination, failing which all directors of the corporate.
Because the liability under such legislations would typically fall on persons who are accountable of, and responsible to, the corporate for the conduct of the business of the corporate, as a safeguard, companies often designate (and notify the relevant government authorities) a selected person to be to blame for compliances of relevant unit/factory with relevancy certain legislations.
SAFEGUARDS OF INTEREST
To safeguard their interest and avoid undue liability, it’s advisable that directors adopt a precautionary approach. some of the safeguards which will be considered and implemented are as follows:
- To attend meetings regularly;
- To be inquisitive and peruse agendas for unusual items and seek additional information in writing, if necessary;
- To make sure that disagreements/dissenting views are recorded within the minutes;
- To act with honesty and with reasonable justifications, in running business operations;
- To report on the concerns related to unethical behavior, actual or suspected fraud or violation of the company’s code of conduct or ethics policy;
- To seek some sought of professional advice, by establishing audit committees, or engaging external agencies, if situation demands;
- To engage external agencies in order to address whistleblowing issues. The corporate may consider appointing an external agency for whistleblowing reporting;
- To provide for the requisite disclosures in respect of interests/conflicts,
- In respect of ongoing as well as day to day compliances, they need to have a competent compliance team and establish committees and
- To include indemnity provisions within the letter of appointment and seek Directors & Officers insurance from the corporate to shield against malicious actions.
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