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Elements of Company Law - II

Appointment of Directors

According to the Companies Act, only an individual can be appointed as a member of the board of directors. Usually, the appointment of directors is done by shareholders. A company, association, a legal firm with an artificial legal personality cannot be appointed as a director. It has to be a real person.

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Importance of Directing
Introduction of Business Laws
Introduction of Companies Act 2013
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Appointment of Directors

In public or a private company, a total of two-thirds of directors are appointed by the shareholders. The rest of the one-third remaining members are appointed with regard to guidelines prescribed in the Article of Association.

In the case of a private company, their Article of Association can prescribe the method to appoint any and all directors. In case the Articles are silent, the directors must be appointed by the shareholders.

The Companies Act also has a clause that permits a company to appoint two-thirds of the company directors to be appointed according to the principle of proportional representation. This happens if the company has adopted this policy.

Nominee directors will be appointed by third party authorities or the Government to tackle mismanagement and misconduct. The duties of directors are to act honestly, exercise reasonable care and skill while performing their duties on behalf of the organization.

                                                     Learn the power of board directors here. 

appointment of directors

Appointment of Managing Directors

A managing director must be an individual (a real person) and can be appointed for a maximum period of five years.

A managing director of a pre-existing company can be appointed as a managing director of another company as long as the board of directors of the first company are aware and approve of this new appointment.

Conditions for Appointing Directors

The following conditions are applicable when appointing a director:

  1. He or she should not have been sentenced to imprisonment for any period, or a fine imposed under a number of statutes.
  2. They should not have been detained or convicted for any period under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974.
  3. He or she should have completed twenty-five (25) years of age, but be less than the age of seventy (70) years. However, this age limit is not applicable if the appointment is approved by a special resolution passed by the company in general meeting or the approval of the Central Government is obtained.
  4.  They should be a managerial person in one or more companies and draws remuneration from one or more companies subject to the ceiling specified in Section III of Part II of Schedule XIII.
  5. He or she should be a resident of India. ‘Resident’ includes a person who has been staying in India for a continuous period of not less than twelve (12) months immediately preceding the date of his or her appointment as a managerial person and who has come to stay in India for taking up employment in India or for carrying on business or vocation in India.

Removal of Directors

The following authorities are responsible for the process of removal of directors from the board of directors.

The company in general meeting

A company can remove a director from the board before his term of office expires. They can pass a resolution in a general meeting upon special notice. However, there are certain exceptions :

  • This does not apply to a director appointed by the Central Government.
  • This does not apply to companies who have adopted two-thirds of its directors by the principle of proportional representation.
  • Directors appointed by financial institutions under an agreement like IDBI, IFCI under their respective acts.
  • Directors that have been appointed by the Board for Industrial and Financial Reconstruction.

Removal by the Government 

A director can be removed from office under advice from Central Government. The Central Government chooses to use this power on the recommendation of the Company Law Board/National Company Law Tribunal.

appointment of directors

(source – rapid formations)

Removal by Company Law Board/National Company Law Tribunal 

The Company Law Board or the National Company Law Tribunal may remove a director from the board. If found guilty of any inappropriate conduct like fraud, harassment, oppression or any other justifiable cause, he will be removed. The terminated director cannot assume the position of director in any other company for the next five years.

                                                           Learn the Role of Secretory in the Company 

Solved Question for you

Question: Mention any three conditions applicable when appointing a director to the board of directors. 

Answers – Three conditions applicable when appointing a director to the board of directors are as follows –

  1. He or she should not have been sentenced to imprisonment for any period. Otherwise, a fine will be imposed under a number of statutes.
  2. They should not have been detained or convicted for any period under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974.
  3. She or he should have completed twenty-five (25) years of age. However, must be less than the age of seventy (70) years. However, there is an exception. this age limit is not applicable if the appointment is approved by a special resolution passed by the company in general meeting or the approval of the Central Government is obtained.
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