Transcript SUPERFIL-GRUPPO DP JV

RIGHTS, DUTIES,
RESPONSIBILITES &
LIABILITIES OF A DIRECTOR
A PRESENTATION BY
S ESHWAR
MASTER CLASS FOR DIRECTORS, IOD
CHENNAI – HOTEL RADISSON – 08-08-08
HOW WE PROCEED
Section 1 – FAQ’s, Appointment,
Remuneration & Exit of a Director.
 Section 2 – Role, Responsibilities,
Duties & Powers.
 Section 3 – Liabilities of a Director.
 Section 4 – Role of an Independent
Director.

FAQ’s FROM DIRECTORS
1. Is there any limit on the total number of
Companies where I can be a Director?
Yes. A person can be a Director in a maximum of
15 Companies.
Exclusion in computing the Number:
Private Companies (other than subsidiaries of
Public Companies);
(b) Unlimited Companies;
(c) Non-profit Associations;
(d) Alternate Directorships.
(a)
FAQ’s contd…
2. Is there a distinction between the
designation of a Managing Director & an
Executive Director?
There is no distinction under the
Companies Act, 1956 in respect of the
powers.
FAQ’s contd…
3. Is there a limit on the total number of
Companies where I can be a Managing
Director?
If you are a Managing Director only in Private
Limited Companies and not in Public Limited
Companies, then there is no limit.
If you are a Managing Director in a Public
Company and a Private / Public Company,
the maximum is 2. (Sec. 316)
FAQ’s contd…
4. The Company where I am a Director is
paying me negligible amount that does not
even cover my conveyance as sitting fees.
What is the law regarding sitting fees?
Primarily sitting fees is governed by the
Articles of Association and Central
Government notifications.
FAQ’s contd…
SITTING FEES
Companies with paid-up capital and
free reserves of Rs. 10 Crores and
above or turnover of Rs. 50 Crores
and above
Sitting Fees not to exceed Rs.
20,000
Other Companies
Sitting Fees not to exceed Rs.
10,000
FAQ’s contd…
5. The Company where I am a Director
wanted me to get a DIN. What is this DIN?
DIN is the acronym for Director’s
Identification Number. Every person
who is a Director should have taken a
DIN by now and any person before
being appointed as a Director requires a
DIN now.
FAQ’s
6. Is there any declaration that I need to give the Company
where I am a Director at any time?
7. I have been appointed as a Director in another
Company, do I need to inform the other Companies where I
am a Director?
8. What should I do if there is a conflict of interest?
9. Can I enter into a contract for supply of materials /
provision of service to the Company?
10. Is there a ceiling on remuneration of a Director?
11. Can I borrow money from my Company?
12. My son has done his Software Engineering, is there
anything that I need to do before he joins the Software
Company where I am a Director?
FAQ’s
13. I sent in my resignation from the Board of
XYZ Ltd., they are yet to give me the Form 32
filed with RoC. Has my resignation taken
effect?
14. Me and my Partner are the Directors, I
feel that my Partner may chuck me out of the
Company, is it possible?
15. The Company where I am a Director has
started a business which is not there in its
Memorandum. Is that fine? Will there be any
liability on me?
WHO IS A DIRECTOR?
Companies Act - “Any person
occupying the position of a director by
whatever name called.”
 Managing Director – Person vested
with
“substantial
powers
of
management”.
 Whole-time Director – includes a
person in whole-time employment.

QUALIFICATIONS OF A
DIRECTOR
Educational Qualification - ??
 Share Qualification – Check Articles of
Association of the Company.
 Disqualification – Yes.

– Unsound mind, Insolvent, convicted for an
offence involving moral turpitude etc.,
– Not filed the annual accounts and annual
returns for a period of 3 years – Public
Company.
APPOINTMENT OF A DIRECTOR
Appointment by Incorporation documents.
 Appointment by Board

– Additional Director
– Alternate Director
– Casual Vacancy

Appointment by Shareholders
– General Meeting
– Retirement by rotation.
APPOINTMENT OF A DIRECTOR

Appointment by Financial Institutions.

Appointment by Government.
REMUNERATION OF A DIRECTOR

Private Limited Company
– No restrictions.

Public Limited Company
– Remuneration of MD / ED / WTD
 Maximum of 11% of the Net Profits of a Company
 Where there is only 1 MD / ED / WTD – 5% of NP
 Where there is more than 1 MD / ED / WTD –
10% for all of them put together.
REMUNERATION OF A DIRECTOR

Public Limited Company
– Remuneration of MD / ED / WTD
 Event of No Profit or Profit inadequate
– Law permits payment in excess of 5%, on a slab rate
based on effective capital – Paid-up Capital + Reserves
& Surplus + LT Loans (No WCL, OD etc) –
(Investments + accumulated losses + preliminary exps
not w/o.)
Less than Rs. 1 Crore (Effective Capital)
Rs. 75,000
More than 1 Less than Rs. 5 Crores
Rs. 1,00,000
More than 5 Less than Rs. 25 Crores
Rs. 1,25,000
More than 25 Less than Rs. 50 Crores
Rs.1,50,000
More than 50 Less than Rs. 100 Crores
Rs. 1,75,000
More than Rs. 100 Crores
Rs. 2,00,000
REMUNERATION OF A DIRECTOR

Public Limited Company
– Remuneration of a person who is not a MD
/ ED / WTD


To pay a monthly, quarterly or annual payment
– obtain approval of Central Government
Alternate structuring
– Pay 1% Commission
Shareholders.
with
approval
of
the
EMPLOYING A RELATIVE IN THE
COMPANY

Office or Place of Profit held by
– Partner of a Director.
– Relative of a Director.
– Firm in which the Director is a Partner.
– Firm in which a relative of a director is a
Partner.
– A Private Company where a Director is a
Director or a Member.
EMPLOYING A RELATIVE IN THE
COMPANY
 Salary, Fees, Commission, Perquisites,
Rent Free Accommodation – All are to
be taken into account for computing the
limits.
 Effect of not taking required approvals
– Where there is no Board Approval –
Appointment invalid.
– Where no Shareholder Approval obtained
– Vacates office.
EMPLOYING A RELATIVE IN THE COMPANY

Effect of not taking required approvals
– The person is liable to return the money and
monetary equivalent of the benefit /
perquisite.
– Company has no right to waive the recovery
unless Central Government approval is
obtained.
LOAN FROM COMPANY

Loan by a Company to its Director, to
his relative, to any person who is a
Partner of such Director, any firm in
which the Director or his relative is a
Partner, any private company where the
Director is a Director or Member – are
regulated.
LOAN FROM COMPANY
Public Limited Company – Closely held
and widely held.
 Private Company which is a subsidiary
of a Public Company.
 For Private Company this provision is
exempt.

REQUIREMENT OF COMPANIES ACT
Approval of the Board of Directors
 Approval of Central Government. Not
required for a Private Company.
 Entry in Register under Section 301.
 Housing Loan to Director is exempt by a
notification.
 Disclosure in the Balance Sheet – Debts
due by directors, firms or private
companies to stated separately.

CAN I SELL GOODS OR PROVIDE SERVICES TO THE COMPANY WHERE I AM A DIRECTOR?
Sale of
Goods &
Materials by
Company to-
Supply of Goods
& Materials by
Company to-
Provision
of
Service
by
Company to-
Underwriting
Contract with-
p
e
r
s
o
n
(a) A Director of the Company;
(b) Relative of a Director under Section 6 read with Schedule 1A;
(c) Partnership firm in which the Director is a Partner;
(d) Partnership firm in which the Relative (under Section 6) of a Director is a Partner;
(e) A Partner of the Partnership firm in which the Director is a Partner;
(f) A Partner of a Partnership firm in which the relative of a Director is a Partner;
(g) A Private Company in which the Director of the Company is a Member;
(h) A Private Company in which the Director of the Company is a Director.
Purchase
of
Goods
&
Materials
by
Company from-
Service availed
by
Company
from-
REQUIREMENT OF THE COMPANIES
ACT
Approval of the Board.
 If Capital of the Paid-up Company is in
excess of Rs. 1 Crore, then prior
approval of the Central Government.
 Making entry in Register maintained
under Section 301.

EXIT FOR A DIRECTOR

Resignation
– State the date from which Resignation should
be effective.
– Check Articles whether it states anything
about resignation.
– Resignation if nothing stated in Articles will be
effective from the date stated in the letter, and
if no date stated then will take effect from the
date of receipt by the company, if Articles
does not have a provision for resignation.
EXIT FOR A DIRECTOR
Removal
 Vacation of Office – Key items

– Qualification Shares not obtained.
– Absents from 3 consecutive Board Meetings
held over a period of 3 months without
obtaining leave of absence.
– Takes a loan from the Company in violation
of the Act.
– Fails to disclose interest in a contract /
arrangement.
ROLE & RESPONSIBILITY OF THE
BOARD

Primary role
– To develop business and add value to the
Company

Value to the Enterprise
– Fiduciary Duties.
– Statutory Duties.
– Business Duties.
DUTIES, RESPONSIBILITY &
LIABILITY
Duty – Task or an action that a person is
bound to perform for moral or legal
reasons.
 Responsibility – the state or position of
being responsible; the ability or authority to
act on one’s own, without supervision.
 Liability – A state of being liable (legally
obliged or responsible)

POSITION OF DIRECTOR VIS-À-VIS THE
COMPANY

Director is a Trustee of the Company

His position is that of an Agent to the
Company.
FIDUCIARY DUTIES
The directors have several duties to discharge under the common
law some of which have been evolved by Courts from time to time,
having regard to the position of directors in the company. Some of
these duties are:
1. To exercise his power in good faith, honesty and in the interest of the
Company.
2. Not to make secret profits.
3. Duty to take care.
4. Must avoid direct or indirect personal involvement in any transaction of the
Company.
FIDUCIARY DUTIES ..
5. In case of conflict between his own interest and the interest of the
Company, he must put the interest of the Company first.
6. Must exercise reasonable skill and diligence in the discharge of his duties.
7. Not to delegate their powers, which they are, required to exercise
personally.
8. To ensure that due compliance with the provisions of the Companies Act
and all other laws, by- laws, regulations, etc.
9. To ensure that the all Government dues are paid accordingly.
POWERS OF THE DIRECTORS
The Board has the power to do everything that a
Company can do, Subject to: –
i.
Provisions of The Companies Act, 1956. (The Act)
ii.
Provisions
of
Memorandum
and
Articles
Association.
iii.
Shareholder’s approval wherever required.
of
POWERS TO BE EXCERCISED BY
The Directors, collectively as Board are responsible for the conduct
of Management of the Company and have to exercise powers at
Board meetings.(section 291- 293)
(In case of emergency, by circular resolutions – section 289)
The Board can delegate its powers to: -
i.
Committee of Directors.
ii.
Any Single Director.
iii.
Managing director / Whole-time director.
iv.
Any Officer.
The Delegation of powers must be done by Board resolution.
POWERS OF DIRECTORS AS
INDIVIDUALS:

The Managing Director is entrusted with general powers of
management.
He
has
to
exercise
the
powers,
subject
to
superintendence, control and direction of the Board. (As per
definition under section 2(26) of the Act.

One or more Whole-time Directors can assist a Managing Director,
if required. (section 269)

The Non-executive Directors meet only at periodical Board
meetings and are not concerned with the day-to-day Management of
the Company. They involve in taking decisions, which are either
policy or the ones required to be taken by the Board under the law.
GENERAL POWERS OF THE BOARD
[Section 291]:
Except where express provisions are made that the powers of a company in
respect of any matter are to be exercised by the company in general meeting, in
all other cases the Board is entitled to exercise all its powers. They are
authorised to do what the company is authorised to do, unless barred by
restrictions on their powers by the provisions of the Companies Act, 1956, the
Memorandum or Articles of the company.
Thus, from the provisions of Section 291 and the exposition of the law stated
above, it is clear that subject to the restrictions contained in the Act,
Memorandum, Articles, the powers of the directors are co-extensive with those of
the company itself.
POWERS TO BE EXERCISED ONLY AT
BOARD MEETINGS [Section 292(1)]
The Board of directors of a company shall exercise the following powers on behalf of the
company, and it shall do so only by means of resolutions passed at meetings of the Board: a.
The power to make calls on shareholders in respect of money unpaid on their
shares;
b.
The power to authorise the buy-back (if it is or less 10% of the total paid-up equity
capital and free reserves of the company);
c.
The power to issue debentures;
d.
The power to borrow moneys otherwise than on debentures;
e.
The power to invest the funds of the company; and
f.
The powers to make loans.
The Board may by a resolution passed at a meeting, delegate to any committee of directors,
Managing Director, Manager or any other principal officer of the company or in case of a
branch office, a principal officer of that office, the powers specified in clauses (d), (e), (f).
OTHER POWERS TO BE EXERCISED
AT BOARD MEETINGS:
1.
The power to fill up casual vacancies in the office of directors [Section 262].
2.
The power to make donation to political parties [proviso to sub-section (2) of Section
293A].
3.
The powers to accord sanction for specified contracts in which one or more directors
are interested [Section 297(4)].
4.
Disclosure of interest by a director [Section 299(1)].
5.
The power to receive notice of disclosure of directors interest [Section 299(3)(c)].
6.
The power to receive notice of disclosure of directors' shareholding [Section 308(2)].
7.
The power to appoint or employ a person as Managing Director if he is the Managing
Director or manager of one and not more than one company [Section 316(2)].
8.
The power to appoint or employ a person as its manager if he is the manager or
Managing Director of other company [Section 386(2)].
9.
The power to make a declaration of solvency where it is proposed to wind up the
company voluntarily [Section 488(1)].
POWERS, WHICH MUST BE EXERCISED BY
UNANIMOUS VOTE AT BOARD MEETING

Power to appoint or employ a person as its Managing
Director under Section 316 or manager under section 386
if he is Managing Director or manager of one and not
more than one other company.

Power to invest in shares or debentures of any other body
corporate under Section 372A. – Not Applicable for a
Private Company.
EXERCISABLE ONLY WITH THE CONSENT
OF THE COMPANY IN GENERAL MEETING
(Section 293):

To sell, lease or otherwise dispose of the whole or substantially the
whole of the undertaking.

To remit or give time for the re-payment of any due by a Director.

To invest, otherwise than in trust securities, the amount of
compensation received by the Company on compulsory acquisition of
its property or undertaking.

To Borrow money where aggregate borrowing exceeding company’s
paid up share capital and free reserves.

To Contribute to charitable or other funds.
LIABILITIES OF DIRECTORS
Civil and Criminal liabilities grouped under the following heads:
Liabilities to outsiders
Liabilities to the Company
Liabilities to the shareholders
Liabilities for statutory defaults and violations
LIABILITIES TO OUTSIDERS
They are personally liable to outsider parties in the following cases:
a.
When they enter into contract on behalf of the Company if:
Contracts are ultra vires the Company
They act outside the scope of the scope of their own authority
They act in their own name and not “for and on behalf of the Company”
b.
When they issue Prospectus:
in violation of the provisions of the Companies Act which contains misstatements
c.
when they found guilty or fraud;
d.
when they allot shares in irregular manner.
e.
When their liability becomes unlimited under section 322 & 323.
LIABILITIES TO THE COMPANY
Cases:
Negligent in the performance of their duty
and the Company suffers loss
Acts ultra vires their power or the
Company
Breach of trust
LIABILITIES TO THE SHAREHOLDERS

They work as trustee of the Company’s
property. They will be liable if
– Breach of duty.
– Wrongful use of their rights.
– Personally liable if shareholders suffer
loss.
STATUTORY DEFAULTS
Directors are liable for consequences of the following
situations

Failure to distribute dividend within 30 days of declaration
(imprisonment upto 3 years) – section 207

Knowingly participating / voting in Board proceedings u/s 300
(fine upto Rs. 50,000) – section 300(4)

Fails to disclose interest u/s 299 (fine upto Rs. 50,000) – Section
283(1)(l)

Knowingly become party by contravening section 295 (fine upto
Rs. 50,000 or imprisonment upto 6 month)
CRIMINAL LIABILITY

REMEMBER ALL OFFENCES UNDER ANY ECONOMIC LEGISLATION IS
TRIED IN A CRIMINAL COURT

Section 44(4)- Filing of prospectus containing untrue statements –
two years imprisonment and/or fine upto Rs.50,000.
Section 58A(6)(b)- Inviting deposits in contravention of the Rules, or
manner or conditions-five years imprisonment and fine.
Section 58A(10)- Failure to repay deposits as ordered by the CLB Three years imprisonment.
Section 63 – Criminal liability for mis-statement in prospectusImprisonment upto two years or fine upto Rs.50,000 or both.
Section 68- Fraudulently inducing persons to invest moneyImprisonment upto five years, or fine Rs.1,00,000.




CRIMINAL LIABILITY

Section 73- Failure to repay excess application money-imprisonment
upto one year and fine upto Rs.50,000.

Section 105-Concealing name of creditor-Imprisonment upto one
year or fine or both.

Section202(1)-Undischarged
insolvent
acting
as
director-
Imprisonment upto two years or fine upto Rs.50,000 or both.

Section 207 – Default in distributing dividends- imprisonment upto 3
years and fine upto Rs.1,000 for every day.

Section 209A- Failure to assist Registrar or any officer so authorised
by the Central Government in inspection of books of account, etc-
imprisonment upto one year and fine not less than Rs.50,000.
CRIMINAL LIABILITY

Section 210(5)- Failure to lay balance sheet etc.at annual general meetingimprisonment upto six months or fine upto Rs.10,000 or both.

Section 211(8)- Failure to comply Section 211 regarding form of balance
sheet and matters to be stated- imprisonment upto six months or fine upto
10,000.

Section 217(5)- Failure to attach to balance sheet a report of the Board
imprisonment upto six months for each offence or fine upto Rs.20,000 or
both.

Section 221(4)- Failure to supply information to auditor-Imprisonment upto
six months, or fine upto Rs.50,000 or both.

Section 250(9))- Improper issue of shares- imprisonment upto six months or
fine upto Rs.50,000 or both.
LIABILITY UNDER OTHER
ENACTMENTS

Offences by Companies
– If the person contravening any of the said
provisions is a company, every person who at
the time of the offence was committed was in
charge of, and was responsible to, the
company for the conduct of the business of
the company, as well as the company, shall
be deemed to be guilty of the contravention
and shall be liable to be proceeded against
and punished accordingly.
DEFAULT UNDER COMPANIES
ACT

Officer in Default
– Managing Director(s)
– Whole-time Director(s)
– Manager
– Secretary
– Any person in accordance with whose directions or
instructions the Board is accustomed to act
– A person charged by the Board with responsibility of
complying with that provision.
– Where a company does not have 1st 3, all Directors.
LIABILITY UNDER OTHER
ENACTMENTS

Labour Laws –
– Factories Act – Only a Director can be
appointed as an Occupier.
– ESI – MD is prima facie incharge of and
responsible for company’s affairs and can be
prosecuted – Karnataka HC.
– EPF – Raj. HC allowed prosecution of MD as
he was responsible for and incharge of
company’s affairs.
LIABILITY UNDER OTHER
ENACTMENTS
Income-tax Act – Kerala HC – Company’s
arrears of tax dues cannot be recovered
from directors personally.
 Income-tax Act – SC – MD was held liable
in the capacity of a principal officer under
the IT Act, for false verification of incometax return.

LIABILITY UNDER OTHER
ENACTMENTS
Perjury – Cal HC – allowed prosecution
of MD for false statements made in a
civil action initiated by the Company.
 Pollution Laws – P&H HC – Persons
who are responsible for conduct of dayto-day business of the Company will be
liable to be prosecuted for offence.

BEFORE JOINING
Annual Report-last three years
 Do an inspection / search on the
company at the Roc.
 Visit the website
 Do a google search about the
company for newspaper reports

ROLE OF AN INDEPENDENT
DIRECTOR

Statutory Role
– Audit Committee – Sec. 292A – Only
Public Companies having Paid-up Capital
in excess of Rs. 5 Crores.
– Remuneration Committee – Sch. XIII –
Decide remuneration of MD / ED / WTD in
the event of Loss or Inadequate Profits.
ROLE OF AN INDEPENDENT
DIRECTOR

Expected Role
– Establish Governance Values and practices in
business model of companies.
– Bring an independent view on issues of
strategy, policy, performance, accountability,
resources, key appointments and standards of
conduct.
– Scrutinise the company’s performance in
achieving agreed corporate goals and
objectives.
ROLE OF AN INDEPENDENT
DIRECTOR

Monitor the reporting of performance.

How to be a good independent director – the
Derek Higgs definition:
– Non-executive directors need to be sound in
judgement and to have an inquiring mind. They
should
question
intelligently,
debate
constructively, challenge rigorously and decide
dispassionately. And they should listen sensitively
to the views of others, inside and outside the
board.
A Governance Model
Executive
Directors
Owner
Directors
Independent
Directors
Board of
Directors
Management
Supervisory &
enforcement
authorities
Company
Shareholders
Stakeholders
Creditors
THANK YOU
[email protected]
www.eshwars.com