Fintelligence 15 Induction Duties Powers Liabilities of Directors

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Issue 15 (dated 10 September 2014). Contact us at [email protected]

In our previous newsletter, we presented an update RBI’s recommendations for Credit Information Companies

to improve credit reporting and the impact that the recommendations have for MFIs. In this newsletter, we

present aspects of the Companies Act 2013 pertaining to governance.

Effective April 1, 2014, the Companies Act 1956 has been replaced by the Companies Act, 2013. The new Act

was assented by the President of India on August 29, 2013 and published in the Official Gazette on August 30,

2013. The new Act makes several changes in the governance framework of companies, requires additional

measures to be put in place and also aligns itself with certain good international practices. We propose to cover

some relevant topics of the Companies Act in this newsletter series. In one of our earlier newsletters we

covered the provisions of the CSR rules. In this edition we broadly cover the induction, duties, powers, liabilities

etc., of Directors1.

Appointment of a Director

*This section will be covered in more detail in a forthcoming newsletter.

1

This is a compilation of relevant sections pertaining to Directors as per the Companies Act 2013. Not all of these sections may apply to directors of private companies. This newsletter may be used for reference purposes and is not exhaustive. Kindly refer to the MCA website ( www.mca.gov.in ) for

the entire Act.

•The board candidate should possess a valid Director IdentificationNumber (DIN)

DIN

•A letter of consent from the board candidate to be obtained prior toappointment

•Declarations under Sections 184 and 164 to be provided by the boardcandidate prior to appointment

Consent to act asDirector

•Board to appoint the candidate till the ensuing Annual GeneralMeeting (AGM) of the Company

•Director's appointment to be ratified by the members at the next AGM

Appointment by the

Board

•Cannot be appointed/re-appointed for a term exceeding 5 years at atime

•Age limit of 21 - 70 years applicable for wholetime / managingdirectors

Wholetime andManaging Directors

•Overall directorships restrictred to 20, excluding foreign companies

•Directorships in public limited companies (including private limitedcompanies that are either holding or subsidiary of a public limitedcompany) restricted to 10

Limit on directorships

•At least one director should have stayed in India for 182 days or morein the previous calendar year

Resident Director

•Prescribed classes of companies to have at least one woman directoron their boards

Woman Director

•The Act defines an independent director as a director other than themanaging director, whole time director or a nominee director

Independent Directors*

http://investments.ifmr.co.in/wp-content/uploads/2014/06/FINTELLIGENCE-14-13-August-2014-RBIs-Recommendations-to-improve-credit-reporting-by-CICs.pdfhttp://investments.ifmr.co.in/wp-content/uploads/2014/06/FINTELLIGENCE-14-13-August-2014-RBIs-Recommendations-to-improve-credit-reporting-by-CICs.pdfhttp://investments.ifmr.co.in/wp-content/uploads/2014/06/FINTELLIGENCE-14-13-August-2014-RBIs-Recommendations-to-improve-credit-reporting-by-CICs.pdfhttp://ia.ifmr.co.in/wp-content/uploads/2013/11/FINCLUSION-30-The-New-CSR-Rule-and-Social-Venture-AIFs.pdfhttp://ia.ifmr.co.in/wp-content/uploads/2013/11/FINCLUSION-30-The-New-CSR-Rule-and-Social-Venture-AIFs.pdfhttp://www.mca.gov.in/http://www.mca.gov.in/http://www.mca.gov.in/http://www.mca.gov.in/http://ia.ifmr.co.in/wp-content/uploads/2013/11/FINCLUSION-30-The-New-CSR-Rule-and-Social-Venture-AIFs.pdfhttp://investments.ifmr.co.in/wp-content/uploads/2014/06/FINTELLIGENCE-14-13-August-2014-RBIs-Recommendations-to-improve-credit-reporting-by-CICs.pdf


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Duties of directors as laid down under Section 166 of the Companies Act 2013:

If a director of the company contravenes the provisions of this section such director shall be punishable with

fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

Powers of directors as specified under Section 179 of the Companies Act 2013:

Circumstances that may lead to the vacation of office of director (Section 167 of Companies Act 2013):

If the director is disqualified as specified under section 164;

If the director absents himself from all the meetings of the Board held during the preceding twelve

months with or without seeking leave of absence;

A director shall act in accordancewith the Articles of the Company

A director shall act in good faithand in the best interest of the

company, its shareholders,employees and the community

A director shall exercise dutieswith due and reasonable care,skill and diligence, exercisingindependent judgement as

required

A director shall avoid situationsof conflict of interest. In cases ofsuch conflicts, the director shalldisclose the same to the Board

A director shall not achieve orattempt to achieve any undue

gain or advantage either tohimself or his relatives, partners

or associates

A director shall not assign hisoffice and any such assignments

made shall be void

Entitled to exercise all such powers, and to do all such acts and things, as the company is authorised toexercise and do, subject to the provisions of the Memorandum and Articles of Association of the Companyand the applicable regulations and except those that require the specific consent of the shareholders

No new regulation made by the company in a general meeting shall invalidate any prior act of the Boardwhich would have been valid if that regulation had not been made

•to make calls on shareholders in respect of money unpaid on their shares;

•to authorise buy-back of securities under section 68;

•to issue securities, including debentures, whether in or outside India;

•to borrow monies;

•to invest the funds of the company;

•to grant loans or give guarantee or provide security in respect of loans;

•to approve financial statements and the Board's report;

•to diversify the business of the company; and to approve amalgamation,merger or reconstruction;

•to take over a company or acquire a controlling or substantial stake inanother company;

•any other matter which may be prescribed:

The Board ofDirectors of acompany shall

exercise the powerson behalf of the

company by meansof resolutions

passed at meetingsof the Board


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If the director acts in contravention of the provisions of Section 184 relating to entering into contracts or

arrangements in which he is directly or indirectly interested and fails to disclose his interest in such

contract or arrangement;

If the director becomes disqualified by an order of a court or the Tribunal;

If the director is convicted by a court of any offence, and sentenced to imprisonment for not less than

six months (office shall be vacated by the director even if he has filed an appeal against the order of

such court);

If the director is removed in pursuance of the provisions of the Companies Act;

If the director ceases to hold such office or other employment if he is appointed a director by virtue of

his holding such office or other employment in the holding, subsidiary or associate company

A private company may, by its Articles, provide any other ground for the vacation of the office of a

director

Resignation of director (Section 168 of Companies Act 2013):

A director may resign from his office by giving a notice in writing to the company and the Board shall

take note of the same. The company shall intimate the Registrar of the resignation in the prescribed

format within the stipulated time. The resignation shall form part of the report of directors laid in the

immediately following General Meeting by the company; The director shall also forward a copy of his

resignation along with detailed reasons for the resignation to the Registrar

The resignation of a director shall take effect from the date on which the notice is received by the

company or the date, if any, specified by the director in the notice, whichever is later: However, the

director who has resigned shall be liable even after his resignation for the offences which occurred

during his tenure

Where all the directors of a company resign from their offices, or vacate their offices under section 167,

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


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Liabilities of a Director:

We welcome your feedback to us at [email protected] and would be happy to revert in case you

need any further details.

•Penalty: If the company contravenes ,all the directors shall bepunishable with imprisonment for a term which may extend to oneyear or with fine which shall not be less than fifty thousand rupeesbut which may extend to five lakh rupees, or with both.

Section 129(1) -Financialstatements to give a true andfair view of the state ofaffairs of the company;compliance with theaccounting standards.

•Penalty: imprisonment for a term which may extend to one yearor with fine which shall not be less than fifty thousand rupees butwhich may extend to five lakh rupees, or with both.

Section 129 (2) - Failure tolay financial statements atthe AGM and failure tosupply information toauditors

•Penalty - The company shall be punishable with fine which shallnot be less than fifty thousand rupees but which may extend totwenty-five lakh rupees and every officer of the company who isin default shall be punishable with imprisonment for a term whichmay extend to three years or with fine which shall not be lessthan fifty thousand rupees but which may extend to five lakhrupees, or with both.

Section 134(3) - Failure toattach to balance sheet areport of the Board ofdirectors and statement ondeclaration given byindependent directors.

•Penalty - If a company contravenes, the company and every officerof the company who is in default shall be punishable with finewhich shall not be less than fifty thousand rupees but which mayextend to five lakh rupees

Sections 170 and 172 -Failure to maintain registersand disclose shareholdingsof Directors and KeyManagmeent Personnel and

filing of returns

•Penalty - Any director or any other employee of a company, whohad entered into or authorisedthe contract or arrangement inviolation of the provisions of this section shall be punishable withfine which shall not be less than twenty-five thousand rupees butwhich may extend to five lakh rupees

Section 184 - Failure todisclose interest in acontract or arrangement

•Penalty- Any director of a company making a declaration underthis section without having reasonable grounds for the opinionthat the company will be able to pay its debts in full from theproceeds of assets sold in voluntary winding up shall be punishablewith imprisonment for a term which shall not be less than three

years but which may extend to five years or with fine which shallnot be less than fifty thousand rupees but which may extend tothree lakh rupees, or with both.

Section 305- Falsedeclaration of company's

solvency

mailto:[email protected]:[email protected]


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Fintelligence 15 Induction Duties Powers Liabilities of Directors