Appointment of Directors in Company
Are you looking to add new talent to the board of directors in your Indian company? As your company grows and expands, you may need to appoint additional directors to meet new challenges and requirements. However, it’s important to understand the legal process for appointing a director in India to ensure it is valid and compliant with the Companies Act 2013. In this blog post, we’ll cover everything you need to know about the appointment of directors in a private limited company, including reasons for adding or changing directors, documentation requirements, and the step-by-step process for appointment.
Explanation of the role of directors in a company :
Directors play a crucial role in ensuring the smooth running of a company. They are appointed to manage the Board of Directors, and their actions are guided by the company’s Memorandum and Article of Association. According to the Companies Act, a director is defined as a person appointed to the Board of a company. The Board of Directors is collectively known as the company’s supreme executive authority, controlling its management and affairs. Directors are essentially agents of shareholders representing their interests and promoting the company’s objectives while ensuring legal compliance. The type of directors varies from whole-time to non-executive, independent, and nominee directors based on the company’s needs and compliance requirements. They must exercise their duties and reasonable care, skill, and diligence while exercising independent judgment. Directors are accountable to shareholders and other stakeholders and may face penalties under various legal statutes for non-compliance. Therefore, it’s important to appoint directors wisely, as they can make or break a company’s fortunes. Companies should adhere to the guidelines of the Companies Act for appointing directors, as they significantly impact a company’s long-term success.
Reasons for appointing or changing directors :
Appointing or changing directors in a company is a crucial decision that affects the overall performance and growth of the business. There are several reasons why a company may want to appoint or change directors. One reason is to bring new talent to the board of directors. As a company grows and expands, it may require new perspectives and expertise to manage the additional requirements and challenges. By appointing additional directors, shareholders can assign extra operational responsibilities without losing any strategic control.
Another reason for appointing or changing directors is the inefficiency of existing directors. In some cases, current directors may not be able to meet the work requirements due to family problems, physical ailments, retirement, or other personal reasons. Additionally, sudden death or retirement of existing directors may leave the company with fewer directors than the minimum statutory limit, requiring companies to appoint new directors to meet the legal requirements.
It’s essential to follow the Companies Act 2013 guidelines while appointing or changing the directors. It involves checking the Article of Association (AOA) for director appointment provision, passing a resolution in a general meeting, filing the resolution with the Registrar of Companies (ROC), obtaining Director Identification Number (DIN) and Digital Signature Certificate (DSC), and ensuring the eligibility of the director. Follow these guidelines to execute a smooth and legal director appointment process. As per the Companies Act 2013, a minimum of two directors and a maximum of fifteen directors can be appointed in a private limited company. Remember, it’s crucial to follow the guidelines to avoid legal and financial consequences.
II. Provisions of Companies Act 2013
Eligibility criteria for appointing a director :
In India, companies must adhere to the eligibility criteria for appointing a director as specified in the Companies Act 2013. To become a director in a company, a person must fulfill certain requirements, which include:
– Only a natural person may be appointed as a director, and they must have a Director ID number (DIN).
– The person must also receive a Digital Signature Certificate (DSC) from the accrediting authority for appointment as a director.
– Every person nominated for appointment as a director must submit their DIN and a declaration that they are eligible for appointment as a director under the Companies Act 2013.
– Additionally, a person may not be eligible for appointment as a director if they do not qualify under subsection (1) of Section 164 of the Companies Act 2013.
– If a person holds a directorship in more than 20 companies at the same time, they may not be considered for appointment as a director.
– The Companies Act 2013 does not set any educational or professional qualifications, but company articles may include such provisions.
– Company articles provide that every director should have a certain number of shares, known as qualification shares. The director must receive the required number within two months of being appointed.
– Finally, a person may not be appointed as a director if they are not mentally stable, are insolvent, or have a criminal record.
Therefore, it is important to familiarize oneself with the Companies Act guidelines and ensure compliance to appoint a director that meets the eligibility criteria. By adhering to the regulations, companies can ensure transparency, accountability,y and good governance in their operations.
Types of directors (executive, non-executive, rotational, non-rotational) :
The Companies Act 2013 recognizes various types of directors in a company, including executive, non-executive, rotational, and non-rotational directors. Executive directors are those who are internal professionals in the organization and are involved in the daily functions of the company. The two types of executive directors are managing directors and whole-time directors. A managing director is responsible for the overall management and day-to-day operations of the company, while a whole-time director is a director who is in full-time employment with the company.
Non-executive directors, on the other hand, are those who are not involved in the daily operations of the company and are mainly responsible for providing external and independent oversight of the management. The two types of non-executive directors are independent directors and nominee directors. An independent director is a person who is not related to the company or its management and brings an impartial view to the board. A nominee director is appointed by a shareholder to represent its interests on the board.
Rotational directors are directors whose period of office is liable to retire by rotation at every Annual General Meeting and are eligible for reappointment by the provision of section 152 of the Companies Act 2013. Rotational directors are also known as retiring directors or temporary directors. Non-rotational directors, on the other hand, are those directors whose period of office is not liable to retire by rotation. They are usually appointed by the Articles of Association of the company and are generally appointed for a fixed term or are permanent.
Minimum and maximum number of directors allowed :
According to the Companies Act 2013, the minimum and maximum number of directors allowed in a company varies based on the type of company. A public company should have a minimum of three directors and a maximum of 15 directors, and if more directors are required, a special resolution must be passed. On the other hand, a private limited company should have a minimum of two directors and a maximum of 15 directors. One Person Company’s minimum director requirement is one, and the maximum number of directors is 15, the same as a private limited.
A Limited Liability Partnership can have an unlimited number of partners, while a producer company must have at least five directors and a maximum of 15 directors. It is imperative to note that the number of directors mustcomplye with the prescribed limit of the Companies Act, and any deviation may lead to legal consequences. It is the founder’s responsibility to ensure that the articles of association mention the names of the first directors.
“While considering the director(s) for your company, the number of directors is a crucial factor. As a company owner, it is essential to understand the regulations and limitations around appointments and changes in directorship. It is advisable to consult the experts’ services for a hassle-free and compliant process of appointment or removal of directors.”
III. Appointment of a new director
Checking the AOA for appointment provision :
Before appointing a director, it is necessary to check the AOA of the company. The AOA should have a provision for adding or appointing a director in case of any requirement. If such a provision is not mentioned in the AOA, the same needs to be modified to include a provision for the same. As per the Companies Act, 2013, a private company must have a minimum of two directors at all times.
As per the Act, there can be a maximum of fifteen directors in a company. In case of sudden death or retirement, a company may not meet the minimum statutory limit of directors. In such circumstances, the company must immediately appoint directors to meet the statutory requirements, which is a minimum of two directors for a private limited company.
“Incorporating specific clauses in the AOA for the appointment of a director is critical for any company. Companies must ensure that the AOA is compliant with the provisions of the Companies Act, 2013,” says an industry expert. Thus, checking the AOA for appointment provisions is the first step in the process of appointing a director in a company.
Passing a resolution in a general meeting :
Passing a resolution for the appointment of a director is a crucial step in a company’s operations. This requires obtaining the consent of the individual proposed as the director, ensuring that the person meets the eligibility criteria, and conducting a general meeting to pass the resolution. The passing of the resolution for the appointment of a director is important because it gives the individual the authority to manage the company’s matters and work towards achieving its goals and strategies.
As per the Companies Act 2013, a general meeting of the company’s shareholders must be held for the passing of the resolution. The resolution should be an ordinary resolution if the person to be appointed is not a member of the company and a special resolution if the person is a member. The shareholders must give their consent for the appointment of the director and authorize an authorized person to file Form DIR-12 with the Registrar of Companies and make necessary entries in the Statutory registers of the company.
It’s important to ensure that the resolution for the appointment of a director is passed in a proper manner and compliance with the Companies Act guidelines. Failure to comply with the guidelines can result in penalties and legal consequences. Therefore, it’s crucial to check the AOA for appointment provisions, ensure the eligibility criteria for the director, obtain DIN and DSC, and file the resolution with the ROC. Following the proper procedure will ensure that the company operates smoothly and efficiently with qualified and capable directors.
Filing the resolution with the ROC :
After passing a resolution in a general meeting, it is necessary to file it with the Registrar of Companies (RoC). This can be done through the MGT-14 form Section 94(1) and 117(1) of the Companies Act 2013 and the rules made thereunder. Private companies are exempted from filing board resolutions, as per the rules laid out in the Companies (Meetings of Board and its Powers) Rules 2014. However, it is essential to check the Articles of Association (AOA) for any appointment provision before filing the resolution.
The list of resolutions that need to be filed with MGT-14 is divided into three categories. Annexure A includes board resolutions related to the approval of the board’s report, financial statements, and appointment of whole-time key managerial personnel and managing directors. Annexure B includes special resolutions regarding changing the office location, altering the Memorandum or Articles of Association, endorsing a buy-back of securities, and diversifying the business, among others. Annexure C pertains to routine or ordinary resolutions.
To file a resolution with the RoC, the company needs to obtain DIN (Director Identification Number) and DSC (Digital Signature Certificate). Once filed, the RoC validates and approves the form, after which the appointment of the director becomes valid. It is important to follow the Companies Act guidelines while filing the resolution to ensure compliance with the law and avoid any legal issues. As per the IndiaFilings website, “any non-filing of forms or delay in filing of forms has serious consequences and results in fines and penalties.”
Obtaining DIN and DSCToo to become a director in an Indian company, obtaining a Director Identification Number (DIN) and Digital Signature Certificate (DSC) is necessary. The DIN is a unique identification number allotted by the Ministry of Corporate Affairs to individuals who wish to become directors. The process of obtaining a DIN involves filling up a form and submitting it along with proof of identity and address. This can all be done online through the MCA21 portal. The application fee for a DIN is INR 500.
Similarly, a DSC is also mandatory for individuals who want to become directors. This certificate is used to digitally sign electronic documents and is issued by certifying authorities. The application process for a DSC can take up to 2 weeks. Once an individual has the DIN and DSC, they can be nominated by the board of the company for the position of director.
It’s important to note that the DIN and DSC are valid for life and do not need to be renewed. However, it may be necessary to update the details provided in the DIN application in case of any changes. Non-compliance with DIN requirements can lead to fines and penalties.
“An applicant for DIN is required to provide accurate details and information in the DIN application form. Doing so is not only a legal requirement but also a part of due diligence that needs to be exercised while applying for DIN,” states the Ministry of Corporate Affairs. Following the correct process for obtaining a DIN and DSC is crucial for anyone looking to become a director in an Indian company.
IV. Disqualification of a director
Reasons why a person may not be eligible to be a director :
There are several reasons why a person may not be eligible to be a director of a company in India. These reasons are laid out by the Companies Act and include:
– Being of unsound mind or an undischarged insolvent
– Having a pending application to be adjudicated as an insolvent
– Being convicted by a court of any offense involving moral turpitude or sentenced to imprisonment for not less than six months
– Being disqualified by a court or tribunal from being a director
– Not paying any calls in respect of any shares they hold in the company for six months or more
– Being convicted of an offense dealing with related party transactions under section 188 within the last five years
– Being a director of a company that has not filed financial statements or annual returns for three consecutive financial years
– Failing to repay deposits, pay interest, or redeem debentures or dividends for one year or more
It is important to note that if a person is disqualified from acting as a director, they may not be eligible to be appointed in any other company for five years. The government has also recently cracked down on companies that do not file financial statements and has disqualified many directors associated with such companies. It is crucial to check a person’s eligibility before appointing them as a director to ensure compliance with the Companies Act.
Summarising the process of appointing a director :
To summarize the process of appointing a director in a private limited company in India, there are a few key steps that must be followed. First, obtain the consent of the proposed director and ensure they have a Digital Signature Certificate (DSC) and a Director Identification Number (DIN), which can be obtained for any person above the age of 18 regardless of nationality or education qualifications. Then, the company must file a resolution with the Registrar of Companies (ROC) and attach the necessary forms, such as DIR-2 and DIR-3. The company should also obtain all necessary KYC documents and educational qualifications.
Once the resolution is passed, the new director will be officially appointed and can begin managing the affairs of the company. It’s important to note that while the Companies Act 2013 provides guidelines for appointing directors, the company’s Articles of Association (AOA) may have specific provisions that must also be followed. Additionally, there are eligibility criteria to consider, such as not being an undischarged insolvent or having any conflict of interest with the company. Following the guidelines set by the Companies Act and the AOA is crucial to ensure a smooth and legally compliant appointment process.
As the Forbes article states, “appointing additional directors can be strategically preferable to gain control of the board.” Therefore, while the appointment process may seem straightforward, it is crucial to consider the potential implications of adding new directors and ensure all necessary steps are taken to protect the best interests of the company and its shareholders.
Importance of following the Companies Act guidelines :
Following the guidelines laid out by the Companies Act is critical for businesses in India. The Act outlines the obligations and responsibilities that companies and directors must fulfill while conducting their operations. Failure to comply with these guidelines can result in legal repercussions and damage to the company’s reputation. It is essential to understand and meet the requirements set forth by the Companies Act to ensure proper governance, accountability, and transparency in the company’s affairs.
As per the Act, the Board of Directors plays a crucial role in ensuring compliance with the legal framework and maintaining credibility through proper and timely disclosures of financial accounting and reporting systems. The Act lays out the eligibility criteria for appointing a director and provides details about the types of directors, such as executive, non-executive, rotational, and non-rotational. Additionally, the Act stipulates the minimum and maximum number of directors allowed in a company. Companies must ensure that they meet these criteria while appointing or changing directors.
The appointment of directors requires passing a resolution in a general meeting and filing the resolution with the ROC. Additionally, obtaining DIN and DSC is essential for directors before being appointed. It is also crucial to check the AOA for appointment provisions and reasons that may disqualify a person from being a director.
In conclusion, adhering to the Companies Act guidelines ensures proper governance, accountability, and transparency in a company’s affairs. Companies must make every effort to follow these guidelines and maintain their credibility among stakeholders. As the Ministry of Corporate Affairs states, “The Board of Directors has to be vested with a reasonable level of discretion. While corporate governance may comprise both legal and behavioral norms, no written set of rules or laws can contemplate every situation that a director or the board collectively may find itself in. Besides, the existence of written norms in itself cannot prevent a director from abusing his position while going through the motions of proper deliberation prescribed by written norms.”