Doctrine of Ultra-Vires

The word ultra means beyond, and vires means the powers. The Latin term ultra-vires
therefore means to describe an act which is beyond the powers. Any transaction, which is not
set out in the object clause of the company’s memorandum, and is not necessarily or
reasonably incidental to the attainment of the object(s), is ultra-vires the company and
therefore void (i.e., of no legal effect).
Consequences of an ultra-vires Act
As stated earlier since an ultra-vires act is devoid of any legal effect:
• The company cannot sue any person for enforcement of any of its rights and vice versa.
• The directors of the company may be held personally liable to outsiders for an ultra-vires act.
Exceptions. However, the doctrine of ultra-vires does not apply in the following cases:
1. If an act is ultra-vires of directors’ powers but intra-vires of company, the company can
ratify the same and make it valid.
2. If an act is ultra-vires the articles of the company but it is intra-vires of the memorandum,
the articles can be altered to rectify the error.
3. If an act is within the powers of the company but is irregularly done, consent of the
shareholders will validate it.
4. Where there is ultra-vires borrowing by the company or it obtains delivery of the property
under an ultra-vires contract then the third party has no claim against the company on the
basis of the loan but it has a right to follow its money or property if it exists as it is, and
obtain an injunction from the court restraining the company from parting with it.
5. The lender of the money to a company under the ultra-vires contract has a right to make
directors personally liable.
 Doctrine of Constructive Notice
Under Section 399 of the Act-2013, both Memorandum of Association and
the Articles of Association are public documents. Once these documents
are registered with the registrar of companies, these are accessible by any
member of the public by paying the requisite fees. Therefore, notice about
the contents of memorandum and articles is said to be within the
knowledge of both members and non-members of the company. Such
notice is a deemed notice in case of members and a constructive notice in
case of non-members.
Thus, every person dealing with the company is deemed to have
knowledge of the contents of the memorandum and articles of the
company. An outsider dealing with the company is presumed to have read
the contents of the registered documents of the company. The further
presumption is that he has not only read the documents but has also
understood them fully in proper sense. This is known as the rule of
constructive notice. So, the doctrine or rule of constructive notice is a
presumption operating in favour of the company against the outsider. It
prevents the outsider from alleging that he did not know that the
constitution of the company rendered a particular act or a particular
delegation of authority ultra-vires.
 Doctrine of Indoor Management
The doctrine of indoor management or internal management of company’s affairs is an
exception to the rule of constructive notice and imposes an important limitation on it.
According to this doctrine ‘persons dealing with the company are entitled to presume that
internal requirements prescribed in the Memorandum and Articles have been properly
observed’. The Doctrine is partly dictated by practical necessity - persons contracting with a
company are not expected to spend their time checking that any required resolution has
properly been passed, that meetings have been duly convened by directors whose
appointments have been duly made. They can presume that all that is being done regularly
and in keeping with the memorandum and articles.
The Indian courts have been
Implications of the Doctrine of Indoor Management: .
applying the doctrine of indoor management quite frequently and interpreting
it according to cases in hand. The object being the same i.e., to protect the
third party transacting with the company in good faith and being unaware of
the complex internal management of the company.
• In Monark Enterprises vs Kishan Tulpule and Ors , the Company Law Board (now
NCLT) held :- ‘That the validity of the impugned transaction was not affected
even if no resolution for entering into it was actually passed by the board of
the company as the company had entered into and adopted the transaction
throughout and implemented it after receiving consideration thereof. The
doctrine of indoor management protected the transferee and the transferor.’
• The Royal British Bank v Turquand : Directors of a banking company were
authorised by the Articles to issue Bonds for borrowing money by passing
resolution of the company. But the Directors issued Bonds to Turquand without
the resolution of the company. It was held that Turquand has right to sue for
money and will succeed as he is not supposed to know about the internal
resolution.
 Certificate of Incorporation

Once all the required documents have been filed along with
the registration fee, filing fee, stamp duty, as specified and
they are found to be in order, the ROC will issue, under his
seal and signature, the Certificate of Incorporation of the
company. The certificate of incorporation is the conclusive
evidence that the requirements of the Companies Act have
been complied with and the company bearing a specific
name with a specific number called the Corporate
Identification Number(CIN) is duly registered.
This document is the birth certificate of the company and is
the proof of the existence of the company. Once this
certificate is issued, the company cannot cease its existence
unless it is dissolved by order of the NCLT or otherwise.
On obtaining the incorporation certificate a company is
eligible to carry out its business immediately..
 RAISING/FLOTATION OF CAPITAL
Public companies generally wish to transact business by
raising capital from the public. The process of raising
capital from the public is carried out in this stage.
For the purpose of raising capital from the public, the
company needs to prepare and issue a document known
as ‘Prospectus’ Sec-25 of the Act 2013. Sec-26 stipulates
matters to be stated in the prospectus. It includes a
report from an Expert inter-alia other stipulations.
Dematerialisation of shares is a must- sec-29
Shelf Prospectus sec-31 :- It is issued in respect of
securities that will be raised in one or in more
installments without further Issue of Prospectus.
Red-Herring Prospectus Sec-32 :- Which does not
include complete particulars of the quantum or the
price of thee securities included therein.
 Prospectus
• Sec-23 to 42 of the Act 2013 deals with it.
• Part –I deals with Public Issue
• Part-II deals with Private Placements; Subrat Ray
case in the Sahara Issue
• It has to reveal the names of the Directors,
objects of the company, purpose of the funds,
names of CFO, CS, Legal Advisors, Bankers,
Auditors and the Risk factors for the company.
• The prospectus must be submitted to the RoC for
registration before the same is published in the
media. This must be specified in the front page of
the advertisement that the prospectus has been
filed with the RoC.
 Other Formalities Before or After Incorporation

Besides categorically meeting the terms of the above discussed

procedure to form a company, there are some other formalities
which must be fulfilled by every company before or after obtaining
the certificate of incorporation to carry out its operations smoothly.
These include the following:

1. Obtaining a Permanent Account Number (PAN) from the Income

Tax Department.
2. Complying provisions of Shop and Establishments Act, if required.
3. Registration for Import Export code from Director General of
Foreign Trade, if required.
4. Software Technologies Parks of India registration (STPI) if required.
5. RBI approvals, if required.
 Share Capital
Two types : Equity & Debt
• Owners capital- Equity shares
• Borrowed Capital /Debt Capital
• Kinds of Share Capital: sec 60
• Authorised Capital
• Issued Capital
• Subscribed Capital
• Paid – up – capital
 Debt Capital
• Preference Shares: Un secured Creditors

• Debentures : Bond Holders – creditors

• Loans and Borrowings : Creditors ( secured or

un-secured)
 Types of Preference Shares
• Based on redeemability – Redeemable Pref
shares and Irredeemable pref shares –not
allowed . It has to be redeemed by 20 years
max
• Based on Cumulative dividends; The dividend
which is fixed in the preference shares may
accumulate for more than one year. If it is not
paid for three consecutive years they get the
right to attend the meetings of the
shareholders which they are usually not
entitled.
 Types of Issue of Equity Shares
• Initial Public Offers: IPO
• Further Public Offers : FPO
• Rights Issue: Sec-62- Option to existing share holders to
subscribe to new shares.
• Bonus Issue :Sec-63- Fully paid up shares issued to the
existing share holders
• Sweat Equity: Sec 2(88) Issued to the
Directors/Employees at a discount or for consideration
other than cash- for their contribution in technology,
know-how, value addition to the company by
Intellectual property etc
• Employee Stock Option Scheme :ESOP: sec62(1)(b)
 Types of Debentures

• On convertibility basis : Non convertible ,

Partly convertible, Fully convertible, Optionally
convertible
• On security basis : Secured and Non-secured
debentures
• On redeemabilty basis : Redeemable and
Perpetual or Non-redeemable Debentures (not
allowed)
• On Registration basis : Registered and Bearer
debentures
 Alteration of share capital
• It can be both way : Increase or decrease and sub
divided or consolidated.
• Increase of authorised Capital : Requires BoD
approval and an ordinary resolution of the
members
• Reduction of the Authorised Capital: Sec-66
requires BoD approval, Special Resolution of the
members and approval of the Tribunal (NCLT)
• Diminution of capital; Sec-61(1)(e): Company may
cancel the unsubscribed part of the capital by an
ordinary resolution
 Shares and Stocks
• Stocks are fully paid up shares and
consolidated into a stock for which it does not
have a nominal value.

• Stocks held by different persons may have

different denominations.

• Stocks can be broken /split into any value

unlike a share
 COMPANY MANAGEMENT

A company being a separate legal personality

ought to be operated at a distance from its
members (the shareholders). To facilitate this,
they (the members) elect and appoint their
representatives – directors - who can be
entrusted with the responsibility of running the
company.
 WHO CAN BE A DIRECTOR?

Only individuals barring minors can be directors.

No body corporate, association, or firm can be
appointed as a director of a company .
Persons having the disqualifications cannot be
Director- Sec-164.
An Individual can not be Director in more than 20
companies out of which max 10 can be public ltd.
The Director must have a DIN or obtain the DIN
Any person who is disqualified must inform the
company before he is appointed or re-appointed.
 Disqualification of Directors -Sec-164
The law is very clear on persons who are specifically disqualified from being
appointed as directors. According to it persons declared by courts to be either of
unsound mind, insolvent or awaiting declaration to that effect, convicted for moral
depravity and having served a prison term of six months or more not less than five
years ago, are debarred from being appointed as directors.
Accordingly, a person shall not be capable of being appointed director of a company
under the following circumstances:
(a) If he has been found to be of unsound mind by a court of competent
jurisdiction and the finding is in force;
(b) If he is an un-discharged insolvent;
(c) If he has applied to be adjudicated as an insolvent and the application is
pending;
(d) If he has been convicted by a court for any offence whether involving moral
turpitude and sentenced in respect thereof to imprisonment for not less than six
months, and a period of five years has not elapsed from the date of expiry of the
sentence.
If any person is sentenced for a period of seven years or more, he shall not be
eligible to be appointed as Director in any company
(e) If an order disqualifying him for appointment as director has been passed by a
court or Tribunal and is in force, unless the leave of the court has been obtained for
his appointment in pursuance of that section.
(f) If he has not paid any call in respect of shares of the company held by him,
whether alone or jointly with others, and six months have elapsed from the last day
fixed for the payment of the call; or Contd.
 Disqualification of Directors

g. He has been convicted of the offence dealing with related Party

transactions u/s 188 at any time during the last preceding Five years
h. He has not got the DIN
I. He is a director of a public company that (i) has not filed its annual
accounts for any three consecutive financial years commencing on or
after 1 April, 1999, or (ii) has failed to repay its deposit or interest on
due date, or redeem its debentures on due date or pay dividend, and
such failure continues for one year or more. Such a person is
disqualified to act as director of any other public company for a period
of five years from the date on which the public company in which he is
a director makes default as specified in (i) or (ii) above Sec-164 (2)
Moreover, Section 164(3) allows a private company to lay its own
grounds for disqualifying a director by stating so in its Articles of
Association in addition to those stated in Section 164sec-179(3) & (2).
However, these disqualifications as in (d) (e) (g) shall not be
effective for 30 days of occurrence or the person has appealed
within30 days or 7 days has elapsed after the judgment , or a further
appeal is preferred and after 7 days of such appeals against sentence is
disposed of .
 APPOINTMENT OF DIRECTORS
Appointment of directors can be discussed under the following heads:
1. Appointment of First Directors. Generally, the names of the first directors of a
new company are named in its Articles. However, if the Articles are silent on this
count then the subscribers of the memorandum are deemed to be the first
directors subject to the regulations of the articles.
2. Appointment by the Company . The first directors appointed by the Articles or
otherwise shall act until the first Annual General Meeting (AGM) Sec 152
In the first AGM the shareholders shall elect and appoint the directors on a
regular basis. In the case of a public company or a private company, which is a
subsidiary of a public company, unless the article otherwise provides, at least
two-third of the total number of directors shall be liable to retire by rotation.
Thus, only one-third of total number of directors shall be non-rotational.
Consider a Co. X , which has 10 directors (who are first directors as per articles of
association). As per Section 152 (6)(a), not less than two-third of the directors
are eligible to retire by rotation at the AGM. In our example thus, seven
directors become liable to retire by rotation. These seven directors, unless
otherwise become incompetent to act as directors, shall be appointed at the
general meeting. The remaining three directors shall also be appointed at the
general meeting. Two directors shall retire from office at every AGM, out of the
seven directors who are eligible to retire by rotation.
The person who is the longest in the post of Director shall retire first and being
eligible or not may or may not be appointed again as a director.
Contd.
 ….APPOINTMENT OF DIRECTORS
3. Re-appointment of retiring directors .When a director retires, s/he can be
reappointed. or another person can be appointed as director. Meeting can
also resolve that the vacancy may not be filled. However, if the post of a
retiring director is not filled at the meeting, and the meeting does not even
pass a resolution for not filling the vacancy, the general meeting will be
adjourned till next week at the same time and same place. If that day
happens to be public holiday, the meeting will be held next day. If even on
that day, if the vacancy is not filled, or a resolution not to fill the vacancy is
passed, then the retiring director is deemed to have been re-appointed.
However, he will not be deemed to be re-appointed under any of the
following conditions. EX: HDFC –Mr Parekh, Mr Bimal Jalan and Mr Roy
(a) A resolution for his re-appointment has been specifically lost;
(b) The director expresses his inability to continue as director,
(c) He is not qualified for appointment,
(d) A specific resolution is required for the appointment of that director, or
(e) A single resolution for appointing more than one director was passed in
earlier meeting, in contravention of section. [Section 152(6)]
However in the recent amendment in 2015 a Pvt company is allowed to
nominate more than one directors in one resolution
Contd.
 APPOINTMENT OF DIRECTORS

4. Appointment by Board of Directors. The Board of directors is

empowered to appoint directors in the following three categories
(i) Additional directors (Section 161sec-179(3)
(ii) Casual directors (Section 161(4))
(iii) Alternate directors (Section 161(2))
Additional directors . The Board of directors either at the meeting of
the Board or by passing a resolution can appoint additional director(s)
on the Board, within the ceiling prescribed, if so authorized by the
articles of association. Model articles as per Table A do provide such an
authority. Such additional director(s) should not suffer from any
disqualification. They will although enjoy the same powers and rights as
other directors but shall hold office only up to the date of the next
annual general meeting. They may, however, be re-elected at the AGM
and then continue as directors. Since the additional directors shall hold
office only till the date of the next AGM, if the AGM is adjourned for
any reason, they shall still vacate their office on the due date,
notwithstanding the adjournment of AGM. Contd.
 ….APPOINTMENT OF DIRECTORS
Casual director . A ‘casual vacancy’ is one that is caused by death; resignation;
disqualification; or failure of an elected director to resume his office, and not by
retirement in normal course. In the case of a public co., or a private co., which is a
subsidiary of a public co., if the office of any director, appointed by the company in
general meeting, is vacated before the expiry of his/her term in the normal course,
the resulting casual vacancy may be filled by the Board of directors at a Board
meeting. However, this power of Board is in default of and subject to any
regulations in the articles of the company. [Section 161(4)]
Any person so appointed shall hold office till the expiry of the term of the director,
whose post s/he has filled. Simplistically put, the appointment of a casual director
can be described as a stop-gap arrangement.
Alternate directors. At times, a director of a public co. or a private co., which is a
subsidiary of a public co., may be out of India or out of the state in which Board
meetings are usually held, for more than three months. In such circumstances, a
person can be appointed as an ‘Alternate Director’ by the Board if the articles of
company so authorise, or by a resolution passed at a general meeting. According
to Section Sec161(3), which provides for such an appointment, s/he shall act as
director in the absence of the director (called the original director and for whom
s/he is alternate) for the above-stated reasons.
An alternate director is subject to all statutory obligations and responsibilities of
other directors. Since the alternate director only fills a temporary vacancy in the
office of a director, he ceases to function when the original director returns to
India or to the state where meetings of the Board are ordinarily held. Contd.
 ….APPOINTMENT OF DIRECTORS

5. Appointment by the Central Government . The Companies Act empowers the

Central Government to appoint directors on the Board on an order passed
by the NCLT (National Company Law Tribunal). This action is initiated in
the event of shareholders making a representation to the NCLT for
prevention of oppression and mismanagement of a company. Requisite
number of shareholders (not less than 100 members of the company or of
numbers holding not less than 1/10th of total voting rights) can make
application to Tribunal for prevention of oppression and mismanagement of
the company. If the Tribunal is satisfied after making the enquiry, it can
specify the number of directors that can be appointed. On the basis of such
an order, the Central Government is authorized to appoint any number of
directors on the Board of the company for up to three years at a time.
[Section 408sec-179(3) of Co. Act 1956]
6. Appointment by Third Parties Sec-161(3). The memorandum or the articles of a
company may empower third parties (debenture holders, banks, financial
institutions, government etc.) under certain circumstances to have their
representation on the Board of directors. However, the number of directors
appointed so by third parties, known as ‘Nominee Directors’, should not
exceed one-third of total strength of the Board. Moreover, such directors are
not subject to retirement by rotation. Nominee directors act in the same
capacity and are subject to same regulations as any other director in the
company. Contd.
 ….APPOINTMENT OF DIRECTORS
7. Appointment to be voted individually. Sec-162sec-179(3) Now
w.e.f July 2015 ,Pvt Ltd companies can appoint two directors by
one resolution.

8. Proportional representation for appointment of Directors. Sec-163 : The

Articles must provide for this that not less than 2/3rd of the total
numbers can be appointed under this system under a single
transferable vote or system of cumulative voting or otherwise for a
period of three years at a time .
9. The directors must have or obtain a DIN without which no
appointment will be valid.

10. The Director must give his consent to be a Director otherwise no one
can be a Director
11. Director elected by the small share holders: Sec-151 . Every listed
companies shall, for the share holders having shares worth Rs 20,000/-
keep a provision for directors to be appointed by them.
 Minimum and Maximum Number of Directors
Every public co. must have at least Three directors. A private limited co.
should have a minimum of Two directors and One for OPC.
[Section 149sec-179(3)]
As far as maximum number of directors is concerned, it depends on the
Articles of the company. As per model articles in Table A, the number of
directors and names of first directors should be decided in writing by
subscribers to the Memorandum. It also indicates that their number
should not exceed 15 . Furthermore, if the strength is to be increased
beyond 15, the company can do so by passing a special resolution to this
effect. [Section 149]
Every Listed company shall have at least 1/3rd of the total nos as
Independent Director who should not be the MD / WTD / Nominee
Director. All Public Company having Paid-up share capital of Rs 10 cr. and
more, Turn over of Rs100 cr. or more and outstanding debt of Rs 5o Cr. and
more also shall appoint Ind. Directors.
Independent means : 1. Has no pecuniary relation with the company by
himself or along with his relatives and do not receive any money except
the sitting fees and the share of profit if distributed as a percentage of
managerial remuneration.
 Ceiling on Directorships
Section 165 of the Act-2013 debars a person from becoming a
director in more than 20 companies simultaneously of which
Max-10 Public companies and rest others Sec-165.
If he is already a director in more than 20 companies on the date
of the new Act was enforced, he must ,within one year choose from
which ones he may withdraw his directorship
At least one Director should be a resident in India for at least
180 days in the previous year Sec149(3).
The following companies must have one Woman Director
Sec-149
• Every Listed company
• Other Public Ltd Companies having Paid–up share
capital of more than Rs100 crores
or
• Turnover of more than 300 crores.
 APPOINTMENT OF KEY MANAGERIAL PERSONS

• Sec-2(51) of 2013 Act for the first time required appointment

of the following KMPs . As per sec 203 of the Co Act 2013
read with Rule 8 thereof mandates appointment of the
KMPs by all listed companies and all public Ltd Companies
having paid up share capital of more than Rs Ten Crores
1. Managing Director
2. The Company Secretary
3. The whole time Director
4. The Chief Financial Officer
5. Such other persons as may be prescribed
No company can appoint both the MD and the Manger.
The company must inform the ROC within 60 days about
such appointment of the KMPs in the specified Forms i:e
Form-MR-1
 Managing Director
• Sec-2(54) defines the MD as a Director who,
by virtue of the Art of Association or an
Agreement with the company or a resolution
passed in the General Meeting or by the
Board , is entrusted with substantial powers
of management of the affairs of the company
and includes a director occupying the
position of MD by what so ever name called.
• But this excludes administrative acts of
routine nature when so authorised by the
Board ,such as to affix the common seal ,
endorsement of a negotiable instrument
Disqualification of the MD-Sec 196(3)

• If he is below 21 years and above 70

years. Above 70 years person can be
appointed by passing a special resolution.
• If he is an un-discharged insolvent
• At any time suspended payments to
creditors
• Has been convicted and sentenced for
more than six months
 WHOLE TIME DIRECTOR and MANAGER

• Whole time Director : Sec 2(94) of the

Companies Act 2013 defines the WTD as
a Director in the whole time employment of
the company.
• Manager : Sec 2(53) defines Mgr as an
individual subjected to superintendence
and control and direction of the Board, has
the management of the whole or
substantially the whole of the affairs of the
company and includes a Director .
 CEO and CFO and CS

• CEO and CFO under section 2(18 & 19 )

have been defined as an officer who has
been designated as such by the company.
• Company Secretary : Sec 2(24) defines
Company Secretary or Secretary as
defined in the Company Secretaries Act
1980 who is appointed to perform the
functions of a Company Secretary under
the Companies Act 2013.
 Appointment of MD with approval of the Central govt

• The company may appoint the MD with

remuneration as the Board and the members
approve when the company is making adequate
profit and fulfilling the conditions of Schedule V.
But when the same is not the position then the
appointment requires approval of the Central Govt
if the company desires to pay a higher
remuneration prescribed under Schedule V of the
Act-2013
 Duties of the Directors-Sec 166
For the first time 2013 Act defines duties of the
directors.
• Act in accordance with the AoA
• Act in good faith to promote the object of the company
• Act with due and reasonable care, skill , and diligence
and shall exercise independent judgment
• Not involve in a situation in which he may have a
direct interest that conflicts or may conflict with the
interest of the company
• Not to achieve any undue gain either to himself or to
his relatives, partners, associates
• Not to involve in Insider trading activities- Rajat Gupta
CEO of Goldman Satchs
 Vacation of office of the director-167
• In case he incurs any disqualifications u/s 164
• He absents from all the meetings held in a year with
or without seeking leave of absence
• Enters into contracts in which he is directly or
indirectly interested.
• He fails to disclose his interest in any contract
• He becomes disqualified by an order of a court
• He is convicted in a case involving moral turpitude or
otherwise and sentenced for more than 6 months.
• If knowing about his ineligibility he continues as a
director he is liable for imprisonment for a period of
one year and fine not less than 1,00,000/- which
may extend to Rs 5,00,000/-
 Resignation of a Director- 168 and Rule 15,16

• If a Director resigns before his term, under the new

Act, he has to give reason for his resignation and
also he would file DIR-11 within 30 days with the
ROC beside the company filing the Form DIR-12.

• A Director also can be removed from his post by

giving him a reasonable opportunity of being heard
before passing an ordinary resolution- Sec 169
 Independent Director-Sec 149
• In the opinion of the board he should be person
of high integrity and possess relevant expertise
and experience,
• Who was or is not a promoter of the company or
holding or subsidiary or an associate company
• Who has or had no pecuniary relationship with
the company , holding , subsidiary or associate
company or with the promoters, directors,
during last TWO years preceding the current
financial year
 Contd.
• None of his relatives has or had any pecuniary
relation or transaction with the company
,holding subsidiary or associate amounting to
more than TWO percent or more of the gross
turn over / total income or Rs 50 lakhs whichever
is lower during preceding two financial years
• None of his relatives or himself holds a KMP in
any aforementioned companies within last 3
preceding FY
• Holds 2% or more of the total voting powers in
the company
• He should not be a CEO or Director by any other
name
 Which companies to have Ind. Directors

• All listed companies

• All Public Ltd companies- At least TWO
• Having 10 crores or more paid up capital
• Having Turn-over of more than 100 crores
• Aggregated outstanding loans , debentures, and
deposits exceeding 50 crores.
• How many for Listed companies?.... One third or half of
the total nos of the BoD depending on Chairman-
Executive or Non Exceutive
• They have to be appointed for a period of Five years
and can be appointed for a term of two terms
consecutively after which cooling necessary.
• Nominee Directors are not Independent Directors
 Committees under the Act

There has to be following committees in every

companies as specified,
1.Audit committee-177
2.H.R.Committee- (optional)
3.Nomination and remuneration Committee -178
4. CSR committee-135
5.Stake holders Relationship committee-178(5)
Role and Term of Managing Director
It is stipulated that a Managing Director function concurrently as an
‘executive director’ or Chief Executive Officer of the company and shall
have substantial powers of management albeit subject to the control and
general direction of the Board. Others on the board may consider
themselves to be ‘non-executive’ directors and to be largely concerned
with policy formulation and strategic decision-making rather than the
nitty-gritty of the day to day administration of the company.
No company can appoint or employ any individual as its managing director
for a term exceeding five years at a time. However, a person may be re-
appointed, re-employed, or his term of office extended by further periods
not exceeding five years on each occasion. Such re-appointment, re-
employment or extension cannot be sanctioned earlier than one year
from the date on which it is to come into force.

The above regulation, however, does not apply to a private company

unless it is a subsidiary of a public company.
 MANAGER
Manager, as per Section 2(53), ‘means an individual (not being the managing agent) who,
subject to the superintendence, control and direction of the Board of directors, has the
management of the whole, or substantially the whole, of the affairs of a company, and
includes a director or any other person occupying the position of a manager, by whatever
name called, and whether under a contract of service or not.’
Who can be a Manager? As per section 384, only an individual can be appointed a manager
of a company. No company shall employ a firm, or a body corporate or association as its
director. Moreover, the appointee should not suffer from any of the disqualifications as laid
down under Section 385. Accordingly, no company shall appoint or employ, or continue the
appointment or employment of, any person as its manager who -
(a) is an undischarged insolvent, or has, at any time within the preceding five years, been
adjudged an insolvent; or
(b) suspends, or has at any time within the preceding five years suspended, payment to his
creditors; or makes, or has at any time within the preceding five years made, a composition
with them; or
(c) is, or has at any time within the preceding five years been, convicted by a court in India of
an offence involving moral turpitude.
The Central Government may, however, by notification in the Official Gazette, remove any of
the above-mentioned disqualifications incurred by any person either generally or in relation
to any company or companies specified in the notification. [Section 385(2)]
Moreover, no company can employ or appoint any person as manager, if he is already the
manager or managing director of any company. [Section 386(2)]
 Individual Ceiling on Managerial Remuneration
Whole-time director or managing director. A director who is in whole time
employment of the company or a managing director may be paid remuneration either
by way of a monthly payment, or at a specified percentage of net profits of the
company, or partly by one and partly by the other. Such remuneration cannot exceed 5
per cent of the net profits of the company, except with the approval of the Central
Government in case of one director, and 10 per cent for all such directors.
The total managerial remuneration payable by a public co. or a private co., which is a
subsidiary of a public co., to its directors and its manager in any financial year must not
exceed 11 per cent of the net profits of the company calculated in accordance with the
provisions of sections 198 of the Act 2013
Director other than whole-time director or managing director. Except with the
approval of the company in a General meeting , the remuneration payable to Directors
who are neither M.D nor W.T.D shall not exceed
• (1) one per cent of the net profits of the company if the company has a managing or
whole-time director or a manager;
• (3) three percent of the net profits of the company in any other case.
• If the company is not making profit or the profit is inadequate then the company shall
not pay any remuneration to all such Directors beyond the rate mentioned in the
Schedule V of the Act-2013
• Central Govt approval will be required to pay higher than the limit when the company is
not making or has inadequate profit
 ….Managerial Remuneration

Remuneration earned in other capacity such as a professional advise

will not be included in the limit. Sec197(4)
Sitting Fees earned will be excluded in the calculation of the limit
Stock option(ESOP) are not allowed to the Independent Directors.
Commission received by a Director from any other holding or
subsidiary company has to be disclosed in the Board report.
Insurance premium paid by the company for the
MD/Directors/CS/CFO /CEO in respect of any negligence, default,
misfeasance ,breach of duty or of trust etc shall not be calculated
towards the limit. But if found guilty, then this would be counted
for the limit.
Any excess amount to which a Director is not entitled has to refund
to the company and the company cannot waive this.sec 197(9)(10)
Remuneration for Directors of Private Companies

The provisions pertaining to remuneration discussed in

previous slides do not apply to a private company
unless it is a subsidiary of a public company. An
indication to this effect is contained in Sections 198 , Sec-
179(3) and 309(9) of the Companies Act. Hence a private
company enjoys more independence while fixing the
managerial remuneration. The only compliance required
is the company may pass such resolution as a special
resolution.
 REMOVAL OF DIRECTORS, Sec-169
Removal of directors can be discussed under the following three heads:
• Removal by the company,
• Removal by the Central Government, and
• Removal by Tribunal
Removal by the Company . Under Section 169, a company (i.e., the shareholders)
may, by ordinary resolution requiring special notice, remove a director from the
Board before the expiration of his term of office notwithstanding anything in
agreement between it and him. However, the director concerned shall be entitled
to receive a notice of the resolution of his removal from the company and shall be
entitled to be heard on the same.
Exceptions . The absolute power apparently given to the general meeting to
remove a director under Section 169, does not apply in respect of the following
directors:
(i) a director appointed by the Central Government in pursuance of Section
408;
(ii) nominee directors;
(iii) directors appointed by NCLT;
(iv) director(s) appointed by means of proportional representation system.
Contd.
 ….
REMOVAL OF DIRECTORS

2. Removal by the Central Government . Section 388 B empowers Central

Government to make a reference to the National Company Law Tribunal (NCLT )
with a request that the latter may inquire into the case and record a decision
against any managerial personnel as to whether or not such person is a fit and
proper person to hold the office of director or any other office connected with the
conduct and management of any company. This power can be exercised, where in
the opinion of the Central Government, there are circumstances suggesting any of
the following:
(a) that any person concerned in the conduct and management of the affairs of a
company is or has been in connection therewith guilty of fraud, misfeasance,
persistent negligence or default in carrying out his obligations and functions under
the law, or breach of trust; or
(b) that the business of a company is not or has not been conducted and managed
by such person in accordance with sound business principles or prudent
commercial practices; or
(c) that the company is or has been conducted and managed by such person in a
manner which is likely to cause, or has caused, serious injury or damage to the
interest of the trade, industry or business to which such company pertains; or
Contd.
 ….
REMOVAL OF DIRECTORS

(d) that the business of the company is or has been conducted and managed
by such person with intent to defraud its creditors, members or any other
persons or otherwise for a fraudulent or unlawful purpose or in a manner
prejudicial to public interest.
The person against whom a case is referred to Tribunal shall be joined as a
respondent to the application.
On the basis of the Tribunal findings and decision, the Central Government
may by order, notwithstanding any other provision contained in the Act,
remove the offending director) from his office. [Section 388 E]

3. Removal by NCLT . Where on an application to the Tribunal under

Section 397 or 398 against oppression and mismanagement of a
company’s affairs, the Tribunal finds that the relief should be granted, it
may order the termination, setting aside, or modification, of any
agreement between the company and any of its directors.
 DIRECTOR’S RESIGNATION -Sec-168

A new provision has been inserted in the Companies Act 2013

on the resignation of the Director. Sec-168
A director may give a notice to the company about his
resignation and taking note of the same the company shall
inform the RoC about his resignation in a specified form and
within a specified time. The Director also is required to file the
Form with detail reason of his resignation within 30 days of
his resignation.
The resignation is effective from the date of his resignation or
the date ,if any , indicated by the Director.
In case all the Directors resign or vacate the office on a
single date , the Promoter or the Central Govt. shall
appoint the required numbers of Directors who shall hold
office till the next General meeting when the new
Directors are appointed. Contd.
 POWERS OR RIGHTS OF DIRECTORS
Powers or rights of directors can be discussed under the following two heads:
• General powers; and
• Powers to be exercised at Board meetings.
General Powers of Board (Section 179) . The general powers of the directors are
described in Section 179 of the Companies Act 2013. According to sub-section sec-
179(3), ‘the Board of directors of a company shall be entitled to exercise all such
powers, and to do all such acts and things, as the company is authorized to
exercise and do’. However, as per proviso attached to the Section 179, the Board
shall not exercise any power which is to be exercised by the company in the
general meeting or which shall be inconsistent, if exercised, with the regulations
contained in that behalf in the Act, or in the memorandum or articles of the
company. Simply put, the directors are not empowered to take action on issues
that are stipulated to be the purview of the general meeting of the company, or
are counter to regulations contained in the Act, or the memorandum and articles
of the company.
Directors derive their powers or rights mainly from provisions in the company’s
Articles, as the Act provides little guidance as to which actions are within the
director’s powers. Contd.
 ….
POWERS OR RIGHTS OF DIRECTORS
Powers to be Exercised at Board Meetings (Section 179) . The Board of
directors is the principal organ of a company. Section-179(3) of the
Companies Act, 2013 empowers it to exercise the following powers on
behalf of the company, but it can 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 buy-back its shares under Section 68
(c) the power to issue debentures;
(d) the power to borrow monies other than on debentures.
(e) the power to invest the funds of the company;
(f) the power to grant loan or give guarantee or provide security .
(g) Approve the Financial statements and the Board’s report
(h) Diversify the business of the company
(i) approve amalgamation , merger or reconstruction
(j) to take over a company or acquire a controlling or substantial stake
in other company
(k) any other matter which may be prescribed by the central govt.
 Restrictions on Powers of Board sec-180
Section 180 provides that the Board of directors of a company, shall
exercise the following powers only with the consent of the company by
way of a special resolution passed in the general meeting :
(a) Sell, lease, or otherwise dispose of the whole, or substantially the
whole, of the undertaking of the company, or where the company owns
more than one undertaking, of the whole, or substantially the whole, of
any such undertaking.
(b) to Invest, other than in trust securities, the amount of compensation
received by the company in respect of the merger or amalgamation
© Borrow money after the commencement of this Act, where the
money to be borrowed, together with the money already borrowed by the
company will exceed aggregate of its paid –up capital and free reserve
(apart from temporary loans obtained from the company's bankers in
the ordinary course of business.
(d) Remit, or give time for the re-payment of, any debt due by a director
However the company may fix an upper limit upto which the board can
exercise powers in relation to © above.
Contd.
 Restrictions on Powers of Board
Sec-181: With a prior permission of the company the
board can contribute to bona-fied charitable and other funds
if the amount exceeds 5% of the average net profit of last
three years.
Sec-182: Prohibition to contribute to Political Parties;
Other than Govt. companies and companies with less than 3
(three ) years existence can contribute to any political parties
amount not exceeding 7.5% of the averages of net profit of
the last three years. This has been changed to any amount
w.e.f 2017- June after the amendment in the Finance Bill -
2017
 DUTIES AND OBLIGATIONS OF DIRECTORS
For the first time the Companies Act-2013 has defined the duty of the
Directors in the Act. Sec-166
- Act in accordance with the Articles of association
- Act in good faith to promote the objects of the company for the benefit
of the members as a whole and in the best interest of the company, its
employees, the shareholders , the community and for protection of the
Environment
- Exercise his duties with due and reasonable care , skill, and diligence and
shall exercise independent judgment.
- Not involve in a situation in which he may have a direct or indirect
interest that conflicts or possibly may conflict with interest of the company
- Not achieve or attempt to achieve any undue gain or advantage either to
himself or to his relatives ,partners or associates and if such director is found
guilty of making any undue gain , he shall be liable to pay an amount equal to
that gain to the company.
- Not assign his office and any assignment so made shall be void.
Contd.
 ….
DUTIES AND OBLIGATIONS OF DIRECTORS

2. To disclose interest (Sections 299-300) . Directors are trustees as they control and
manage the affairs of the company and hence are expected to perform
their duties and functions in the larger interest of the company. A director
must therefore disclose the nature and extent of the interest to the Board
when a transaction is proposed between a director and the company.
Further, disclosure must be made where a director is considered ‘ought to
be reasonably aware of’ the conflicting interest. Non-disclosure of such a
conflicting interest would render the contract voidable and the concerned
director subjected to fine which may extend up to Rs 50,000. Particularly if
he has investment along with his relatives more than 2% of the equity of
the other company. He has to maintain an ARM’s Length in the decision
taking process.
2. To attend Board meetings [Section 283 sec-179(3) (g)]. While a director is not bound
to attend all the meetings, if he absents himself from three consecutive
meetings of the Board of directors, or from all meetings of the Board for a
continuous period of three months, whichever is longer, without
obtaining leave of absence from the Board, his office shall automatically
become void. Hence the duty to attend Board meetings has been imposed
on the directors.
Contd.
 ….
DUTIES AND OBLIGATIONS OF DIRECTORS

4. To disclose receipt from transfer of undertaking or property (Section

319) If the directors of a company receive any payment, by way of
compensation for loss of office, or as consideration for retirement from
office from the transfer of the company’s property or undertaking, , it
must be disclosed to the members of the company and approved by the
company in general meeting.
5. Other statutory duties. Besides the above-mentioned duties,
directors of a company are to perform inter alia the following statutory
duties.
(a) Convene statutory, annual general and extra-ordinary general meetings
(b) Authenticate and approve annual financial statements
(c) Appoint the first auditor of the company
(d) Appoint additional directors of the company
(e) Prepare and place at the AGM the balance sheet and profit and loss
a/c, and the report of the board of directors. Contd.
 ….
DUTIES AND OBLIGATIONS OF DIRECTORS
General Duties. Other than the statutory duties, the directors are also expected to
control and manage the affairs of the company and perform the following general
duties:
1. Duty of good faith. Directors must act in good faith in the best interest of the
company, which includes interest of present and future members. Directors should
not make secret profits from the company or derive a benefit from a third party by
reason of (a) being a director; or (b) by doing or not doing anything as a director. All
their interests have to be disclosed to the members.
2. Duty of care . The directors should discharge their duties/assigned work with due
care. The degree of ‘care, skill and diligence’ expected from a director implies the
general knowledge, skill and experience that may reasonably be expected of a person
of his knowledge and status. [Re City Equitable Fire Insurance Co] However, the
subjective test requires a director to carry out his duty with the general knowledge,
skill and diligence he in fact possess (Dorchester Finance Co vs Stebbing).
3. Duty not to delegate. A Director being an agent is bound by the maxim ‘delegatus
non-protest delegare’ which means a delegatee cannot further delegate. However, in
the following cases the directors are allowed to delegate:
a) When permitted by the Act or the articles of the company
b) Having regard to the existence of business certain functions may be delegated
to other officials of the company.
 Loans to Directors-Sec-185

• No company can give any kind of loan to any Director

or his relatives or to any organisation where he is
directly or indirectly involved, except to the
Managing Director with a special resolution to be
passed in general meeting for giving the loan to him
which is usually given to employees in the same
terms and conditions.
• Penalty: Not less than Rs 5 (Five lakhs) which may
extend to Rs25 (twenty Five ) lakhs . The Director to
whom loan is given be punished with 6 months
imprisonment or with both.