CHAPTER 2

APPOINTMENT OF DIRECTORS THEIR DISQUALIFICATION

AND REMOVAL
INTRODUCTION:
Who is the DIRECTOR? Director includes any person occupying the position of the
director by whatever name called. Director may be defined as an individual who directs
controls or manages the affairs of the company. The directors of the company collectively
are referred to as the board of directors or board
1
.
Women Director
A new provision has been added in the companies Act 2013, that at least one women
director shall be in the board of such class or classes of companies.
Director to stay in India
Every Company shall have at least one director who has stayed in India for a total period
of not less than 182 days in a previous calendar year.
Qualification of Directors
No educational or other qualifications are required in order to become director of the
company whether public or private. Similarly, the Companies act, 2013, does not
prescribe any requirement as to age limit for becoming a director. The only condition is
as per section 149. Nobody corporate, firms or associates can become a director. Only
individual can be a Director of a company because the office of a director is office of
responsibility, accountability and position of trust. Section 164 negatively stipulates the
eligibility requirement for becoming a director by providing certain disqualifications.

1
Sec. 2(13) of Indian companies Act, 2013.

Number of Directors As per section 149, every public company shall have 3 directors and
every other company shall have at least 2 directors and one in one person company.
Maximum no. of directors in case of private company shall be 15. It could be Central
Govt. approval not required in case of any increase in number. The act does not prescribe
any maximum number of directors for public company also but if the maximum no of
directors exceed 12, prior approval of central Govt. would be required. Thus the approval
of central government will be necessary for the increase in number of directors, and not
for the appointment.
Appointment of Directors: The appointment of directors is accordingly regulated by ihe
act. Directors may be appointed in following ways:-
By the articles as regard first directors
2

By the company in general meeting
3

By the Directors
4

By the third parties
5

By the principle of proportional representation
6

By the articles as regard first director's section 152: The first directors are usually
named in the articles. The articles may also provide that both the number and the
names of the first directors shall be determined in writing by the subscribers of the
memorandum. Where the company has no articles or the articles are silent regarding
the appointment of directors, the subscribers to the memorandum who are individuals
shall be deemed to be first director until the directors are appointed at first annual
general meeting. If all the subscribers to the memorandum happen to be bodies
corporate, none of the subscribers can be deemed to be directors and the company

2
Sec. 152 of Indian Companies Act, 2013
3
Sec 152 of Indian Companies Act, 2013
4
Sec 161 of Indian Companies Act, 2013.
5
Sec 151 of Indian Companies Act, 2013.
6
Sec 163 of Indian Companies Act, 2013.
will have no directors until the first directors are appointed under section 255.Where
the person named in the list of first directors do not assume the office, for any reason
for example, death, then it is the duty of the subscribers of the memorandum to hold a
meeting for appointment of directors.
Appointment by the company Section 152: Appointment of subsequent directors is
made at every annual general meeting of the company. Section 152 provides that not
less than two third of the total number of directors of a public company or a private
company must be appointed by the company in general meeting. These directors must
be subject to the retirement by rotation. Section 151 prohibits the placing f the
composite motion for the election of two or more directors before the general
meeting. The purpose of prohibition of composite motion is that it will enable
shareholders to accept or reject a particular individual standing for directorship
without being compelled to accept or reject all of them.
Section 152 of the companies Act requires every director to give his consent to the
directorship. There are two types of Consents:
1. Consent of the candidate for Directorship to be filed with the company 1524( 1)
2. Consent to act as director to be Hied with the registrar 152(2) . The consequence
of a director continuing to act as such without filing his consent within the period
specified would attract the penalty under section 629A i.e. Rs. 500 Every day.
Such consent may however be filled after the expiry of the said period on
payment of additional fees as contemplated by section 611(2). It is further open to
the central government u/s 637B to condone the delay in filling consent.
BY THE DIRECTORS The directors are empowered to appoint :-
Additional directors
Alternate directors
Directors filling casual vacancy
ADDITIONAL DIRECTORS The board of director may appoint additional directors
from time to time if so authorized by the articles .The number of directors and additional
directors must not exceed the maximum strength fixed for the board by the articles. The
additional directors shall hold office only up to the date of next annual general meeting.
ALTERNATE DIRECTORS The board of directors may appoint an alternate director if
authorized-By the articles-By a resolution of the company at general meeting An
alternate director acts in the place of a director who is absent for more than three months
from the state in which board meetings are held. He must vacate the office on the return
of the original director.
CASUAL VACANCY Where the office of any director appointed by the company in
general meeting is vacated before the expiry of his term the director may fill up the
vacancy at the meeting of board. Any vacancy other than one caused by retirement of a
director by rotation is a casual vacancy. Such a vacancy may occur by reason of death,
resignation, bankruptcy, or disqualification. The director so appointed will hold office till
the end of the term of the director in whose place he is appointed.
Appointment by the third parry
7
: Section 151 permits that one third of the total
number of directors of a public company or a private company which is subsidiary of a
public company to be appointed by parties other than share holders on a non-rotational
basis. The articles may give right to debenture holders, financial corporations or banking
companies who have advanced loans to the company to nominate directors on the board
of company. The number of directors so nominated should not exceed one third of the
total strength of the board. They are not liable to retire by rotation.
Appointment by proportional representation: Directors of the company are generally
appointed by a simple majority of shareholders and a substantial minority cannot succeed
in placing even a single director on the board. Section 163 intends to protect the interests
of minority shareholders by giving them an opportunity to place their nominees on the
board. The articles of the company may provide that the appointment of not less than 2/3

7
Section 255 of Companies Act, 2013
of the total number of directors of the public company shall be according to the principle
of proportional representation.
Appointment by small shareholder: A small shareholders means a shareholder holding
shares nominal value of Rs.20, 000 or less he may be a holder of equity share or
preference share or both. Appointment of Small Shareholder director is not mandatory as
per sec 151 of the Companies Act 2013 Applicability: The Provisions relating to
appointment of a small shareholder Director apply to a company only if all the following
conditions are satisfied: (a) The Company is Public Company(b) The Paid Up Capital of
Company is Rs. 5 crore or more ( c) The number of Small Shareholders in such a
company is 1000 or more
Appointment of independent Directors: Manner of selection of independent directors
and maintenance of data bank in independent directors.(1) Subject to the provisions
contained in subsection (5) of section 149, an independent director may be selected from
a data bank containing names, addresses and qualifications of persons who are eligible
and willing to act as independent directors, maintained by anybody, institute or
association, as may by notified by the Central Government, having expertise in creation
and maintenance of such data bank and put on their website for the use by the company
making the appointment of such directors:
Provided that responsibility of exercising due diligence before selecting a person from the
data bank referred to above, as an independent director shall lie with the company
making such appointment.
(2) The appointment of independent director shall be approved by the approved by the
company in general meeting as provided in sub-section (2) of section 152 and the
explanatory statement annexed to the notice of the general meeting called to consider the
said appointment shall indicate the justification for choosing the appointee for
appointment as independent director.
(3) The data bank referred to in sub-section (1), shall create and maintain data of persons
willing to act as independent director in accordance with such rules as-may be prescribed.
The Central Government may prescribe the manner and procedure of selection of
independent directors who fulfil the qualifications and requirements specified under
section
Different Kinds of Directors in Company
Managing Director: Managing Director means a director who: a By Virtue of an
agreement with the company or by resolution passed by the company. By Resolution
passed by its Board of Directors. By virtue of its MOA or AOAIs entrusted with the
substantial powers of management which would not otherwise exercisable by him, and
includes a director occupying the position of managing director, by whatever name
called. Provided further that a managing director of a company shall exercise his power
subject to control & directions of its Board of Directors.
Whole Time Director: whole time director is not defined by the companies act. As per
Section 196, whole time director includes a director in whole time employment of a
company. The Department of Company Affairs Clarified that a whole time employee
appointed as a director will be a whole time director only if substantial powers of
management are vested with him.
Manager: Manager means an individual who subject to the control & direction of board
of directors has the management of the whole or subs the whole of the affairs of the
company. And includes the director or the any other person occupying the position of
manager, by whatever name called, and whether under a contract of service or not. A
manager may or may not be a director of a company. Company cannot have
simultaneously two managers. A Company cannot at a same time employ a managing
Director and a manager. However companies can simultaneously manage the whole time
director. Only an individual can be appointed as a manager. No firm or body corporate
can be appointed as a manager.
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www.companylawclub.co.uk/topics/directors_duties.shtml
Disqualification of Director Under Section 164 of The Companies Act, 2013
The Company has no physical existence but only legal existence. In view of this the
management of its affairs is entrusted to its directors. The Board of Directors may
appoint a person to an office lo carry out certain functions. Such a person can be regarded
as an Officer. Both the word Director and Officer are defined under the Companies Act,
2013.
9

Director includes any person occupying the position of a director.
10
According to the
clarification of Department of Company Affairs, the Scheme of the Companies Act, 2013
shows that the ultimate control and management of the affairs of the company vests in the
Board of Directors.
Section 2 (59) states Officer includes any director, manager or secretary or any person in
accordance with whose terms or instructions, the Board of Directors or any one or more
of the Directors is or are accustomed to act. A person who is accustomed to act under the
directions or instructions of director is referred to as Shadow Director.
The scheme of the Companies Act, 2013 is such that it attempts to transfer the ultimate
authority to the shareholders and vests effective authority in day-to-day matters in their
elected representatives viz. Directors.
To ensure that the management of the company vests in the right kind of people, Section
of the Companies Act, 2013, lays down grounds on which a person becomes disqualified
for being director of a company. A person cannot be disqualified for appointment as a
director of a public company on any other ground. However, a private company may by
its Articles of Association, provide for additional grounds for disqualification of
directors.
The Companies (Amendment) Act 2000 has prescribed additional disqualification of a
director by-introduction of sub-section (g) to the section 169 (i) of the Companies Act,
2013. The purpose of the amendment is to disqualify certain persons from directorship in

9
34 Grundy v. Briggs, (1910)1 Ch 444
10
Sec 2(13) of Companies Act, 2013.
public companies. Section 169 of the Companies Act, 2013 states that a person shall not
be capable of being appointed as director of a company, if (a) he is of unsound mind; (b)
he is an undischarged solvent; (c) he has applied to be adjudicated as an insolvent and his
application is pending; (d) he has been convicted by a court for any offence involving
moral turpitude; (e) he has not paid any call in respect of the shares of the company held
by him; (f) an order disqualifying him for appointment as director has been passed by the
Court in pursuance of Section 188 of the Companies Act 2013 and is in force; (g) such
person is already a director of a public company.
(A) has not filed the annual accounts and annual returns for any continuous three
financial years commencing on and after the first day of April, 1999: or
(B) has failed to repay its deposit or interest thereon on due date or redeem its
debentures on due date or pay dividend and such failure continues for one year or more:
Provided that such person shall not be eligible to be appointed as a director of any public
company for a period of five years from the date on which such public company in which
he is a director failed to file annual accounts and annual returns under sub-clause (A) or
has failed to repay its deposit or interest or redeem its debentures on due date or pay
dividend referred to in clause (B).
Thus, a company proposing to appoint or reappoint any person as director will have to
satisfy itself as to whether any such person has attracted disqualification in terms of
Section 164 (I) (g). The Auditors' Report shall also state that whether any director is
disqualified from being appointed as a director under Section 164 (1) (g). Auditor should
require the director to submit the written representation in Form DD-A as prescribed
under The Companies (Disqualification of Directors Under Section 164 (1) (g) of The
Companies Act, 2013) Rules, 2003, as on the balance sheet date as to whether or not each
public company of which he is a director has not defaulted in terms of Section 164 (1)
(g). Auditors should also insist that the written representation should be taken on record
by the Board of Directors of the Audited Company.

Disqualification Applicable For Appointment of A Director Of a Private Company
Disqualification under section 164 (3) is applicable for appointment of directors both in
public as well as private companies. Thus, a person who has attracted disqualification,
will not be capable of being appointed as a director even of a private company.
Date on Which The Disqualification Has To Be Considered:
Disqualification u/s 164 (3) should be considered on the following dates:
1. A Company intending to appoint any person as an additional director will have to
determine whether such person has attracted disqualification as on the date of
board meeting at which the appointment is considered.
2. Any company, which intends to appoint any person as a director for the first time
or reappoint any director, by resolution at the general meeting, will have to
determine whether such person has attracted disqualification as on the date of
such general meeting.
3. The Auditor is required to report on the accounts as on the balance sheet date.
Disqualification Entail Vacation of Office
Section 167, prescribes only the disqualification of director, while Section 167 prescribes
when the office of director shall become vacant. Since Section 283 is not amended, the
disqualification u/s 164 (3) will not entail vacation of an office by a director. Only
implication will be that he cannot be appointed as a fresh director in any company nor
can he be re-appointed after he retires by rotation or otherwise.
Duty of the Company to Intimate
Whenever a company fails to file the annual accounts and returns, or fails to repay any
deposit, interest, dividend, or fails to redeem its debentures, as discussed above, the
company shall immediately file a return in duplicate in Form DD-B prescribed under
The Companies (Disqualification of Directors Under Section 167 of The Companies Act,
2013) Rules, 2003, to the Registrar of Companies, furnishing therein the names &
addresses of all the Directors of the Company during the relevant financial years, within
30 days of the failure that would attract disqualification u/s 164.
Remuneration of Director:
Meaning of remuneration
The remuneration includes pay, compensation, or reward for work, etc. The word
remuneration is defined in the explanation appended to section 197 of the Companies
Act. Accordingly, for the purposes of sections 197, remuneration shall include the
following:
(a)any expenditure incurred by the company in providing any rent free accommodation,
or any other benefit or amenity in respect of accommodation, free of charge, to any of the
company's directors and manager;
(b)Any expenditure incurred by the company in providing any other benefit or amenity
free of charge or at a concessional rate to any of the company's directors and manager;
(c)Any expenditure incurred by the company in respect of any obligation or service,
which, but for such expenditure by the company, would have been incurred by any of the
company's directors and manager
11
; and
(d)any expenditure incurred by the company to effect any insurance on the life of, or to
provide any pension, annuity or gratuity for, any of the company's directors and manager
or his spouse or child.
Expenditure incurred on maintenance of vehicles would fall within the meaning of the
expression remuneration and once remuneration is fixed as provided under section 309
it is not possible to state that the expenditure incurred by the company on personal use of
car by directors would not be allowable deduction. In so far as the company is concerned

11

36
Astley v. New Trivoli, (1899) 1 Ch 151.
the expenditure is business expenditure, which could not be disallowed as such. As laid
down under Sayaji Iron & Engineering Co. v CIT
12
Section 198 in the Companies Act, 2013
Section 198, Remuneration of directors
1) The remuneration payable to the directors of a company, including any managing
or whole-time director, shall be determined, in accordance with and subject to the
provisions of section 198 and this section, either by the articles of the company, or
by a resolution or, if the articles so require, by a special resolution, passed by the
company in general meeting and the remuneration payable to any such director
determined as aforesaid shall be inclusive of the remuneration payable to such
director for services rendered by him in any other capacity: Provided that any
remuneration for services rendered by any such director in any other capacity
shall not be so included if-
a) the services rendered are of a professional nature, and
b) In the opinion of the Central Government, the director possesses the
requisite qualifications for the practice of, the profession.
2) A director may receive remuneration by way of a fee for each meeting of the
Board, or a committee thereof, attended by him: Provided that where immediately
before the commencement of the Companies (Amendment) Act, 1960 , (65 of
I960 .) fees for meetings of the Board and any committee thereof, attended by a
director are paid on a monthly basis, such fees may continue to be paid on that
basis for a period of two years after such commencement or for the remainder of
the term of office of such director, whichever is less, but no longer.
3) A director who is either in the 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 the net profits of the company or partly by one way

12
2002, Comp Cases 675 (Guj).
and partly by the other: Provided that except with the approval of the Central
Government such remuneration shall not exceed five per cent, of the net profits
4) A director who is neither in the whole- time employment of the company nor a
managing director may be paid remuneration- either
a) by way of a monthly, quarterly or annual payment with the approval of the
Central Government; or
b) by way of commission if the company by special resolution authorises such
payment: Provided that the remuneration paid to such director, or where there
is more than one such director, to all of them together, shall not exceed-
i. one per cent, of the net profits of the company, if the company has a
managing or whole- time director, a managing agent or secretaries and
treasurers or a manager;
ii. three per cent, of the net profits of the company, in any other case:
Provided further that the company in general meeting may, with the
approval of the Central Government, authorize the profits.
(2)The percentage aforesaid shall be exclusive of any fees pay- able to directors under
subsection (2) of section 309.
(3)Within the limits of the maximum remuneration specified in sub- section (I). a
company may pay a monthly remuneration to its managing or whole- time director in
accordance with the provisions of section 309 or to its manager in accordance with the
provisions of section 387.
(4)Notwithstanding anything contained in sub- sections (I) to (3). but subject to the
provisions of section 269, read with Schedule XIII, if, in any financial year, a company
has no profits or its profits are inadequate, the company shall not pay to its directors,
including any managing or whole- time director or manager, by way of remuneration any
sum exclusive of any fees payable to directors under sub section (2) of section 309,
except with the previous approval of the Central Government.
Explanation - For the purposes of this section and sections 309, 310. 311, 348, 352, 381
and 387, remuneration shall include,-
(a)any expenditure incurred by the company in providing any rent- free accommodation,
or any other benefit or amenity in respect of accommodation free of charge, to any of the
persons specified in sub- section (1);
(b)any expenditure incurred by the company in providing any other benefit or amenity
free of charge or at a concessional rate to any of the persons aforesaid;
(c)any expenditure incurred by the company in respect of any obligation or service
which, but for such expenditure by the company, would have been incurred by any of the
persons aforesaid; and
(d)any expenditure incurred by the company to effect any insurance on the life of, or to
provide any pension, annuity or gratuity for, any of the persons aforesaid or his spouse or
child.
Removal of Permanent Directors:
Many family owned businesses or the proprietary ship concerns were converted into
Companies and when these conversion takes place, there can be specific regulation in the
articles about the appointment of directors and certain persons are even named in the
Articles as the Permanent Directors at times. In all these cases, unless the Competent
Court feel it appropriate to keep some payment of such remuneration at a rate exceeding
one per cent, or, as the case may be, three per cent of its net profits.
(5) The net profits referred to in sub- sections (3) and (4) shall be computed in the
manner
referred to in section 198, sub- section (1).
(5A) 2 If any director draws or receives, directly or indirectly, by way of remuneration
any such sums in excess of the limit prescribed by this section or without the prior
sanction of the Central Government, where it is required, he shall refund such sums to the
company and until such sum is refunded, hold it in trust for the company.
(5B) The Company shall not waive the recovery of any sum refund- able to it under sub-
section (5A) unless permitted by the Central Government.
(6)No director of a company who is in receipt of any commission from the company and
who is either in the whole- time employment
(7)The special resolution referred to in sub- section (4) shall not remain in force for a
period of more than five years; but may be renewed, from time to time, by special
resolution for further periods of not more than five years at a time: Provided that no
renewal shall be effected earlier than one year from the date on which it is to come into
force.
(8)The provisions of this section shall come into force immediately on the
commencement of this Act or, where such commencement does not coincide with the end
of a financial year of the company, with effect from the expiry of the financial year
immediately succeeding such commencement.
(9)The provisions of this section shall not apply to a private company unless it is a
subsidiary of a public company.
13


Section 198 in the Companies Act, 2013
198. Overall maximum managerial remuneration and managerial remuneration in case of
absence or inadequacy of profits. (1) The total managerial remuneration payable by a
public company or a private company which is a subsidiary of a public company, to its
directors and its managing agent, secretaries and treasurers or manager in respect of any

13
Bare Act of Indian Companies Act, 2013.
financial year shall not exceed eleven per cent, of the net profits of that company for that
financial year computed in the manner laid down in sections 349, 350 and 351, except
that the remuneration of the directors shall not be deducted from the gross one in the
Board in the interests of the shareholders or the Company, the shareholders in fact
controls the directors and decide the issues of appointment and removals. There can be
exceptions in law like a director appointed by the Central Government or nominee
directors appointed by Public Financial Institutions. In many cases, where a permanent
director named in the Articles is removed, it will lead to litigation. The shareholders in
the closely held companies or the family companies lay emphasis on the principles of
equity and agreed understandings rather the concept of company law and the provisions
governing the functioning of Companies. Dealing with the issue of removal of permanent
director, the Honble Delhi High Court, in Tarlok Chand Khanna And Another vs Raj
Kumar Kapoor And Others
14
, was pleased to observe as follows:
The question still remains, if petitioner, a permanent director of the company, could have
been removed by the company in a general meeting in spite of the provision in the
articles. If neither of the two meetings were valid, because petitioner had no notice of
these, even though he was intended to be removed from the board, his removal is bad in
law irrespective of the way one looks at the power of the company in a general meeting
to remove a permanent director, who is appointed as such by name in the articles. I
would, however, consider the question since was raised. No doubt, petitioner was a
permanent director named in art. 10 to hold office for life. In terms of art. 14, he also had
a right during his life time to nominate his successor on the board in the event of his
death. He could, nevertheless, be removed under 169 of the Act. Section 169 is based on
s. 184 of the English Act and applies to all types of companies, public and private, and
the only exceptions are those that are built into the section itself. A person appointed as a
life director by the articles or by any agreement is, nevertheless, removable by the
company in general meeting and has no security of tenure in office. While the
shareholders have no power, apart from that given in the statute or the articles, to
intervene in the management of the company's affairs, this section was designed to enable

14
ILR 1982 Delhi 156

them to control the directors by their removal. The only exceptions are the directors
appointed by the Central Govt. under s. 408, and life directors holding office on April 1,
1952.
Conclusion
The purpose of the provisions of Section 164 of the Companies Act, 2013, is not to
punish those who are disqualified but to save the community from the consequences of
mismanagement. The wider impact of this section is to protect the shareholders as well as
the public against the future conduct by persons whose past record as director show them
to be a danger to creditors and others.
Thus, the intention and purpose of the provisions of Section 164 of the Companies Act,
2013 is to disqualify the errant director, protect the investors from mismanagement,
ensure compliance in filling of annual accounts and annual returns which are the means
of disclosure to all the stakeholders, increase the compliance rate of filing the statutory
documents and infuse good corporate governance in the regulation of corporate affairs in
the country

Recovery of remuneration in certain cases.
15
Without prejudice to any liability
incurred under the provisions of this Act or any other law for the time being in force,
where a company is required to re-state its financial statements due to fraud or non-
compliance with any requirement under this Act and the rules made thereunder, the
company shall recover from any past or present managing director or whole-time director
or manager or Chief Executive Officer (by whatever name called) who, during the period
for which the financial statements are required to be re-started, received the remuneration
(including stock option) in excess of what would have been payable to him as per
restatement of financial

15
Section 199 Companies Act, 2013
Government or company to fix limit with regard to remuneration
16
-
Notwithstanding anything contained in this chapter, the Central Government or a
company may, while according its approval under section 196, to any appointment or to
any remuneration under section 197 in respect of cases where the company has
inadequate or no profits, fix the remuneration within the limits specified in this Act, at
such amount or percentage of profits of the company, as it may deem fit and while fixing
the remuneration, the Central Government or the company shall have regard to
(a). the financial position of the company;
(b). the remuneration or commission drawn by the individual concerned in any other
capacity;
(c). the remuneration or commission drawn by him from any other company;
(d). professional qualifications and experience of the individual concerned;
(e). such other matters as may be prescribed.


Resignation of director
17
.(1) A director may resign from his office by givmg a notice
in writing to the company and the Board shall on receipt of such notice take note of the
same and the company shall intimate the Registrar in such manner, within such time and
in such form as may be prescribed and shall also place the fact of such resignation in the
report of directors laid in the immediately following general meeting by the company:
Provided that a director shall also forward a copy of his resignation along with detailed
reasons for the resignation to the Registrar within thirty days of resignation in such
manner as may be prescribed.
(2) The resignation of a director shall take effect from the date on which the
notice is received by the company or the date, if any, specified by the director in
the notice, whichever is later:

16
Section 200 Companies Act, 2013
17
Section 168 Companies Act, 2013
Provided that the director who has resigned shall be liable even after his resignation for
the offences which occurred during his tenure.
(3) Where all the directors of a company resign from their offices, or vacate
their offices under section 167, the promoter or, in his absence, the Central
Government shall appoint the required number of directors who shall hold office
till the^rrectors are appointed by the company in general meeting.