Legal Position of a Company Director in India

Directors are the people chosen to direct and handle the dealings of a company under Section 2 subsection 34 of the Companies Act 2013. A person will be considered to be a director if they perform a director’s duties even though they may be named differently.

Legal Requirements for a Company Director (Section 149, Companies Act 2013)

Public Company It is compulsory to have at least 3 and a maximum of 15 directors.	Private Company There should be at least 2 and a maximum of 15 directors.
One-Person Company There should be at least 1 director in a one-person company.

Out of the directors appointed for a firm, at least one-woman director or a director should have resided in India for a period of 182 days.


The Board of Directors plays a vital role in the organization and is regarded as the  company’s primary agent. They are also the legal trustees of the assets held by the organization.

Section 149(1) of the Companies Act allows for increasing the number of directors. However, in some instances, a special resolution must be passed. Also, government companies or non-profit companies that are not licensed do not have the limitation of having a maximum of 15 directors.

Various Types of Directors in a Company

Companies may have different types of directors on their Board. We have listed all types of directors for your reference below:

• Shadow Director: Plays an essential role in the Board of Directors of a company and can have a significant impact on the company’s decisions from behind the scenes because they don’t play the part of a formal director.
• De-facto Director: Some people are ineligible to be official directors of the organization as they do not meet specific criteria. In these scenarios, they are not legally deemed as a director in the company with the associated authority, but they perform the tasks of the director.
• First Director: The promoters of a company select the first director right after the company’s incorporation, and either name them in the company’s articles or the individuals that are subscribers to the memorandum of the association are chosen or this role.
• Additional Directors: Performs the roles and functions of the company’s director until the next Annual General Meeting.
• Alternative Director: Selected by the Board in lieu of a director who has been and remains absent from the state where board meetings are generally held for more than a three-month period.
• Causal / Ad-hoc Director: In case any there is a vacancy in the director’s office due to reasons like death, resignation, insolvency, or the disqualification of a director, a casual/ad-hoc director shall be selected by the company’s Board.
• Executive and Non-Executive Directors: Executive directors are involved in the daily workings of an organization and are categorized as whole-time directors; for example – finance directors, marketing directors, etc.
• Rotational Director: Such directors are bound to retire by rotation from the Board. However, they may be appointed again after retiring once.
• Women Directors: The company shall elect at least one female director in accordance with The Company’s (Appointment and Qualifications of Director’s) Rules, 2014 – every listed and every other public company that has a paid-up share capital of INR 100 crore or more or a turnover of INR 300 crore or more.
• Independent Directors: One-third of all the directors in every listed company shall be independent directors, who will not be bound to retire by rotation. They shall receive no other remuneration apart from sitting fees, reimbursement of expenses for participation in the board meeting and profit related commission approved by the members. They are responsible to take impartial decisions and review the decisions of the management and majority shareholders.

Legal Positions of the Directors

Since Companies Act does not clearly define the legal position of directors in a company, they are referred as trustees, agents, managing partners, etc., in various instances. As such, a company’s director attains following roles as per their situation:

When entrusted with management of the company by the shareholders, directors are termed as the company’s ‘agents.’ Directors act on behalf of the company and when acting on behalf of the company, the company is liable for the decisions taken and the work done and not the directors themselves.

Note: These Directors cannot be responsible for any default; but they are accountable for all the company’s assets under their control and profits from such company assets and should not make gains at the expense of the company.

Directors are also defined as the company’s trustees as they stand in a fiduciary capacity towards the company. They are not to be mistaken as trustees in the legal sense, as the regulations under the trustee’s actions do not apply to the directors but to the assets and properties of the company.

Note: Directors must account for all the money over which they exercise control. They must not exercise their powers for their sectional interest but only in the interest of the company and its shareholders.

Directors are not regarded as ‘partners’ as per the Partnership Act, as a partner’s liability is unlimited. On the other hand, the director’s liability as a member is limited as an owner of the share. Most of the time directors are also shareholders of the company, with large shareholdings.

Note: The act of a director is not binding on other directors like a partner.

Directors can be employees when they work under a contract of service and receive remuneration as per that contract.

Directors have also been considered, in judicial decisions, as the organs of the company, for whose actions the company shall be held liable similar to how a natural person is liable for the actions of their limbs.

Note: Independent directors also fall under the scope of these legal provisions and are considered to be agents, trustees, partners, and organs of the company as well.

Who can be a Director of a Company?

• A person can only be appointed as a director if they are issued a Director Identification Number (DIN) or any other number as prescribed by Section 153 of the Companies Act, 2013.
• According to the amendment made in the year 2017, the Central Government may give an identification number to an individual that shall be regarded as DIN for the purposes of this Act.
• As per Section 153 of the Companies Act, 2013, an application for DIN allotment to the Central Government shall be made by a person who intends to be a company’s director.

Note: No professional qualifications are prescribed in the Companies Act for the appointment of a director, including independent directors. Unless mentioned in the company’s Articles of Association (AOA), a director may not be a shareholder unless they want to be voluntarily. The Act imposes no share qualifications on the directors. In a general scenario, the articles do provide for a minimum number of share qualifications.

Who can’t be a Director of a Company?

As per Section 164, Companies Act 1956, a person is not eligible for appointment as a director of a company in the following cases:

• Not of sound mind, as declared by a competent court.
• Applied to be adjudicated as an insolvent and their application is pending.
• Undischarged insolvent.
• An order disqualifying them for an appointment has been passed by a court or tribunal and the order is in force.
• Convicted by a court of any offense whether involving moral turpitude or otherwise and sentenced to imprisonment for not less than six months or a period of five years has not elapsed from the date of the expiry of such sentence, provided the person has been convicted of any offense sentence thereof to imprisonment for seven years or more.
• Convicted of an offense dealing with related party transactions under section 188 of the Act during the last proceeding of five years.
• Not complied with the requirement of DIN under Section 152 Subsection 3 of the Act.
• Not paid any calls in respect of any shares of the company held by them whether alone or jointly with others and six months has elapsed from the last day fixed for the payment of such calls.
• Been director of a company that has not hired financial statement or annual returns for any continuous period of three financial years or has failed to repay the deposits accepted by it or pay interest or to redeem any debentures on the due date or interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more.

In case the appointment is for an ‘independent director’, they may not be eligible if the individual has some kind of relationship with the company such as them being a shareholder, an employed officer or a direct partner, which can influence their decisions related to the same.

Liability of Directors in Case of Dishonor of Cheque

Typically, the individual who issues a cheque bears responsibility for its dishonor. Nonetheless, there are instances where company directors could also face liability for dishonored cheques issued by the company. Directors might be held accountable if they actively participated in the company's daily operations and wielded influence over its financial affairs. The subsequent phrases can exemplify the directors' responsibility concerning dishonored cheques:

a)    Director as a Signatory: In the event that a company director endorses a cheque on behalf of the company, and the cheque is returned due to insufficient funds, the director may be subject to liability. This stems from the director's role as the signatory of the cheque, thereby carrying the responsibility of ensuring that the company possesses ample funds to honor the cheque. As per Section 138 of the Negotiable Instruments Act, the director bears accountability in such circumstances.

b)    Financial director: In cases where both the company and its director oversee financial matters and exert control over the company and its finances, the reinstated director can face accountability. This arises from the director's role in managing the company's financial affairs and ensuring sufficient funds for cheque payments, particularly as the company's CFO. According to Section 138 of the Negotiable Instruments Act, the director is susceptible to prosecution in such instances.

c)    Director as  Guarantor: Under certain circumstances, a company and its director may jointly serve as guarantors for a loan acquired by the company. Should the loan remain unpaid, the guarantor may be called upon to settle the outstanding amount. If the guarantor's cheque subsequently fails to clear, Section 138 of the Negotiable Instruments Act stipulates that the director may be held accountable.

d)    Director with Knowledge of Dishonor: When a company director is aware of a dishonored cheque issued by the company and fails to address the issue, the director may incur liability. This responsibility stems from the director's obligation to rectify any known dishonors promptly. According to Section 138 of the Negotiable Instruments Act, legal action can be pursued against the director in such instances.

Case Analysis

In the case of R. Kalyani vs. Janak C. Mehta and Anr (2009), the Supreme Court established that a director may be held accountable under Section 141 of the Negotiable Instruments Act, 1881, for the dishonor of a cheque issued by a company, provided the director was overseeing the company's operations and business affairs at the time of the offense. The court emphasized that such liability emanates from the director's direct involvement in the company and the transaction.

Conclusion

The legal position of a company’s director is not certain, fixed or precise in India. They can be engaged in various legal capacities and held liable accordingly. Further, there are no professional qualifications prescribed in the Companies Act vis-à-vis appointment of a director.

A director can be appointed by a company’s promoters, shareholders, the Board of directors, the central government, and the tribunal. As for removal, the company director can be removed by the shareholders and a tribunal. Both these conditions are applicable in case of independent directors as well.


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