RIGHTS DUTIES RESPONSIBILITES LIABILITIES OF A DIRECTOR

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 l Section 1 – FAQ’s, Appointment, Remuneration & Exit of a Director. l Section 2 – Role, Responsibilities, Duties & Powers. l Section 3 – Liabilities of a Director. l 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 Sitting Fees not to exceed Rs. free reserves of Rs. 10 Crores and 20, 000 above or turnover of Rs. 50 Crores and above 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 Ro. C. 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? l Companies Act - “Any person occupying the position of a director by whatever name called. ” l Managing Director – Person vested with “substantial powers of management”. l Whole-time Director – includes a person in whole-time employment.

QUALIFICATIONS OF A DIRECTOR l Educational Qualification - ? ? l Share Qualification – Check Articles of Association of the Company. l 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 l Appointment by Incorporation documents. l Appointment by Board – Additional Director – Alternate Director – Casual Vacancy l Appointment by Shareholders – General Meeting – Retirement by rotation.

APPOINTMENT OF A DIRECTOR l Appointment by Financial Institutions. l Appointment by Government.

REMUNERATION OF A DIRECTOR l Private Limited Company – No restrictions. l Public Limited Company – Remuneration of MD / ED / WTD Maximum of 11% of the Net Profits of a Company l Where there is only 1 MD / ED / WTD – 5% of NP l Where there is more than 1 MD / ED / WTD – 10% for all of them put together. l

REMUNERATION OF A DIRECTOR l Public Limited Company – Remuneration of MD / ED / WTD l 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, 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, 000

REMUNERATION OF A DIRECTOR l 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 l Alternate structuring l – Pay 1% Commission with approval of the Shareholders.

EMPLOYING A RELATIVE IN THE COMPANY l 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 l Salary, Fees, Commission, Perquisites, Rent Free Accommodation – All are to be taken into account for computing the limits. l 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 l 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 l 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 l Public Limited Company – Closely held and widely held. l Private Company which is a subsidiary of a Public Company. l For Private Company this provision is exempt.

REQUIREMENT OF COMPANIES ACT l Approval of the Board of Directors l Approval of Central Government. Not required for a Private Company. l Entry in Register under Section 301. l Housing Loan to Director is exempt by a notification. l 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 1 A; (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. Service availed Purchase of Goods & Materials by Company from-

REQUIREMENT OF THE COMPANIES ACT l Approval of the Board. l If Capital of the Paid-up Company is in excess of Rs. 1 Crore, then prior approval of the Central Government. l Making entry in Register maintained under Section 301.

EXIT FOR A DIRECTOR l 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 l Removal l 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 l Primary role – To develop business and add value to the Company l Value to the Enterprise – Fiduciary Duties. – Statutory Duties. – Business Duties.

DUTIES, RESPONSIBILITY & LIABILITY l Duty – Task or an action that a person is bound to perform for moral or legal reasons. l Responsibility – the state or position of being responsible; the ability or authority to act on one’s own, without supervision. l Liability – A state of being liable (legally obliged or responsible)

POSITION OF DIRECTOR VIS-À-VIS THE COMPANY l Director l His is a Trustee of the Company 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. ii. Provisions of The Companies Act, 1956. (The Act) Provisions of Memorandum and Articles of Association. iii. Shareholder’s approval wherever required.

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: l 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. l One or more Whole-time Directors can assist a Managing Director, if required. (section 269) l 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 293 A]. 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 l 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. l Power to invest in shares or debentures of any other body corporate under Section 372 A. – Not Applicable for a Private Company.

EXERCISABLE ONLY WITH THE CONSENT OF THE COMPANY IN GENERAL MEETING (Section 293): l To sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking. l To remit or give time for the re-payment of any due by a Director. l To invest, otherwise than in trust securities, the amount of compensation received by the Company on compulsory acquisition of its property or undertaking. l To Borrow money where aggregate borrowing exceeding company’s paid up share capital and free reserves. l 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 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 ØActs ultra vires their power or the Company ØBreach of trust

LIABILITIES TO THE SHAREHOLDERS l 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 l Failure to distribute dividend within 30 days of declaration (imprisonment upto 3 years) – section 207 l Knowingly participating / voting in Board proceedings u/s 300 (fine upto Rs. 50, 000) – section 300(4) l Fails to disclose interest u/s 299 (fine upto Rs. 50, 000) – Section 283(1)(l) l Knowingly become party by contravening section 295 (fine upto Rs. 50, 000 or imprisonment upto 6 month)

CRIMINAL LIABILITY l REMEMBER ALL OFFENCES UNDER ANY ECONOMIC LEGISLATION IS TRIED IN A CRIMINAL COURT l Section 44(4)- Filing of prospectus containing untrue statements – two years imprisonment and/or fine upto Rs. 50, 000. Section 58 A(6)(b)- Inviting deposits in contravention of the Rules, or manner or conditions-five years imprisonment and fine. Section 58 A(10)- Failure to repay deposits as ordered by the CLB Three years imprisonment. Section 63 – Criminal liability for mis-statement in prospectus. Imprisonment upto two years or fine upto Rs. 50, 000 or both. Section 68 - Fraudulently inducing persons to invest money. Imprisonment upto five years, or fine Rs. 1, 000. l l

CRIMINAL LIABILITY l Section 73 - Failure to repay excess application money-imprisonment upto one year and fine upto Rs. 50, 000. l Section 105 -Concealing name of creditor-Imprisonment upto one year or fine or both. l Section 202(1)-Undischarged insolvent acting as director- Imprisonment upto two years or fine upto Rs. 50, 000 or both. l Section 207 – Default in distributing dividends- imprisonment upto 3 years and fine upto Rs. 1, 000 for every day. l Section 209 A- Failure to assist Registrar or any officer so authorised by the Central Government in inspection of books of account, etcimprisonment upto one year and fine not less than Rs. 50, 000.

CRIMINAL LIABILITY l Section 210(5)- Failure to lay balance sheet etc. at annual general meetingimprisonment upto six months or fine upto Rs. 10, 000 or both. l 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. l 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. l Section 221(4)- Failure to supply information to auditor-Imprisonment upto six months, or fine upto Rs. 50, 000 or both. l Section 250(9))- Improper issue of shares- imprisonment upto six months or fine upto Rs. 50, 000 or both.

LIABILITY UNDER OTHER ENACTMENTS l 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 l 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 1 st 3, all Directors.

LIABILITY UNDER OTHER ENACTMENTS l 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 l Income-tax Act – Kerala HC – Company’s arrears of tax dues cannot be recovered from directors personally. l 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 l Perjury – Cal HC – allowed prosecution of MD for false statements made in a civil action initiated by the Company. l 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 l Annual Report-last three years l Do an inspection / search on the company at the Roc. l Visit the website l Do a google search about the company for newspaper reports

ROLE OF AN INDEPENDENT DIRECTOR l Statutory Role – Audit Committee – Sec. 292 A – 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 l 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 l Monitor the reporting of performance. l 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 seshwar@eshwars. com www. eshwars. com