Ch3 Directors - Sheet1 Flashcards
Definition: Director [Section 2(25)]
“Director” includes any person occupying the position of a director, by whatever name called.
* The definition above focuses on function and position and not on specific designation
* The word ‘director’ in a job title does not necessarily mean that a person is legally a director.
* Appointed by members to manage affairs of the company
Director to be Natural person [Section 154]
- Only natural persons shall be directors of a company.
- A company or body corporate (even if it is subscriber to the memorandum) shall not be a director of another company.
Director not to be variable representative
- A director cannot claim to be variable representative of the company.
- It means that a director cannot claim relief from his responsibility as a director on the basis that he is not concerned with any particular area of the company’s business.
- When he is a director, he is a director in entirety.
Director to be member
- Directors must be member of the company except where law specifically allows the non-members as directors.
- In the board of directors meeting, every director shall have one vote but the same persons while sitting in a general meeting as members may have different voting rights based on the number of shares they hold.
Authority of Director
- Directors act collectively or by majority, every decision by the directors is made in a board meeting of the directors or by passing a resolution by circulation and every director has got one vote in decision making.
- It means when appointed as a director, every director is an equal director and there is no difference in their authority.
Role of Directors:
* As Agent
* As Fiduciary
- Directors of the company are agents of the company and they act in accordance with articles of the company on behalf of the members.
- They must be vigilant and not be negligent in performance of their duties.
In other words directors have fiduciary relationship with the company.
* They are supposed to make decisions/act in the best interest of the company and its stakeholders.
* A fiduciary relationship is generally established only when the confidence given by one person is accepted by the other person.
* No director can hold office of a director if he is declared as lacking fiduciary behaviour by the court.
Consent to act as director [ Section 167]
No person shall be appointed or nominated as a director or chief executive unless such person has given his consent in writing to the company for such appointment or nomination.
The company shall file such consent with the registrar within 15 days of appointment or nomination.
Number of directorships [Section 155]
No person shall hold office as a director, including as an alternate director at the same time in more than such number of companies as may be specified
_Exception:_ However, this limit shall not include the directorships in a listed subsidiary.
Minimum number of directors [Section 154]
(similar to minimum number of members)
A company may require a larger number of directors by its articles.
Single member company One
Other private company Two
Public unlisted company Three
Public listed company Seven
Note: Companies Act 2017 does not specify maximum number of directors. Articles or directors may decide any number of directors
Eligibility / ineligibility of certain persons to become director
- Only a natural person shall be a director
- Must be a member of the company. However this shall not apply in the case of:
- a whole-time director who is an employee of the company;(ED)
- a chief executive (deemed director by law if not already a director being member).(ED)
- a person representing a member who is not a natural person (Govt / Body Corporate); (NED)
- a person representing a creditor or other special interests through contractual arrangements; (NED)
- The company may by its articles fix any conditions to become the director of the company including
- holding a specific number of shares as a minimum (qualification shares) or
- specific educational requirements.
Criteria to be met at the time of appointment and as well as during tenure of directorship
Ineligibility [Section 153]
Note: (following can be share holder but not director)
No person shall be appointed as a director of a company if he:
- is a not a natural person (body corporate / company)
- does not meet criteria specified by articles
a) is a minor;
b) is of unsound mind;
c) has applied to be adjudicated as an insolvent and his application is pending;
d) is an undischarged (unsettled) insolvent (imprisonment 2 years or fine or both);
e) has been convicted by a court of law for an offense involving moral turpitude (conduct that is believed to be contrary to community standards of honesty, good morals, or justice, e.g. murder, kidnapping, etc.);
f) has been debarred (disqualified) from holding such office under Companies Act (non-payment of declared dividend within 10 days);
g) is lacking fiduciary behaviour and a declaration to this effect has been made by the Court at any time during the preceding 5 years;
h) does not hold National Tax Number. The Commission may grant exemption from this requirement;
i) is not a member. However, this shall not apply in the case of:- a whole-time director who is an employee of the company;
- a chief executive; or
- a person representing a member who is not a natural person;
- a person representing a creditor or other special interests through contractual arrangements.
Further for listed companies only, a person shall not be appointed as a director if he:
a) has been declared by a court as defaulter in repayment of loan to a financial institution (even if defaulted, not bankrupt);
b) is engaged in the business of brokerage or is a spouse of such person or is a sponsor, director or officer of a corporate brokerage house.
Criteria to be met at the time of appointment and as well as during tenure of directorship
Ineligibility of bankrupt [Section 177] & Penalty
If any person being an undischarged insolvent acts as chief executive or director of a company, he shall be liable to imprisonment for a term not exceeding two years or to a fine, or to both.
Term of directors [Section 157, 158 & 161]
(First Director) At incorporation: The names and number of first directors shall be decided by the subscribers of memorandum (not members), and their specified particulars shall be submitted along with the documents for incorporation.
Additional directors: Number of first directors may be increased (by members) by appointing additional directors in general meeting.
Retirement of first directors: The first directors shall hold office until the election of directors in the first annual general meeting of the company.
Term of office of subsequent directors: An elected director shall hold office for a period of three years unless he earlier resigns or otherwise ceases to hold office.
However, the term of office of directors of a company limited by guarantee and not having share capital may be a period of less than three years as provided in the articles.
The retiring directors shall continue to perform their functions until their successors are elected.
Duty of retired directors: The directors so continuing to perform their functions shall:
* take immediate steps to hold the election of directors; and
* in case of any impediment, report such circumstances to the registrar within 45 days before the due date of the annual general meeting or extra-ordinary general meeting, as the case may be, in which elections are to be held.
Such AGM or EGM shall not be delayed for more than 90 days from the due date of the meeting or such extended time as may be allowed by the registrar, for reasons to be recorded, only in case of exceptional circumstances beyond the control of the directors or in compliance of any order of the court.
Direction by registrar: The registrar, may on expiry of period (for election), either:
a) on its own motion; or
b) on the representation of the members holding at least 10% of total voting powers in a company having share capital; or
c) on the representation of the members holding at least 10% of total members of the company not having share capital of the company, directs the company to hold annual general meeting or extra-ordinary general meeting for the election of directors on such date and time as may be specified in the order.
Procedure for election of subsequent directors
[Section 159]
(For Subsequent Directors Only: Not Nominee, First or Casual Vacancy)
(For Companies having Share Capital Only: In case of a company limited by guarantee and not having share capital, the procedure for election of directors shall be mentioned in its articles.)
Fixing the number of directors: The existing directors of a company shall fix the number of directors to be elected in the general meeting, not later than 35 days before convening of such meeting. Such number once fixed (in board meeting) shall not be changed except with the prior approval of the general meeting in which election is to be held.
Notice of Meeting: The notice of the meeting shall expressly state, among other matters, the number of directors to be elected (fixed as above) and the names of retiring directors. (not later than 21 days before the meeting)
Notice of contesting the election: Any member (including retiring director) who seeks to contest the election of directors shall file the notice of his intention to the company, at least 14 days before the date of meeting at which election is to be held. However, any such person may withdraw such notice at any time before the election.
List of Candidates to be transmitted to members: The company shall transmit such notices (of intention to contest the election of directors) to the members not later than 7 days before the date of the meeting, in the same manner as a notice of general meeting is given to the shareholders.
In case of a listed company, it shall also be published in at least one issue of a daily newspaper in English and Urdu language having wide circulation.
Elected unopposed (Contesters<= Number) : If the number of persons offering themselves to be elected as director is not more than the number of directors fixed for election by the directors, the directors shall stand elected unopposed.
(Voting by Poll: In case of Directors not by Show of Hand)
(if Contesters>Number)
Number of votes
During a poll for election of directors every member is entitled to cast the number of votes equal to the product of number of voting shares or securities held and the number of directors to be elected.
A member can give all his votes to any one candidate or he may divide them between more than one candidate as he deems appropriate.
Result of polling
The candidate getting the highest number of votes shall be declared elected as a director then the candidate who gets the next highest number of votes shall be so declared and so on until the total number of directors to be elected has been so elected.
All directors are equal
After election as a director, every director shall have equal authority and they shall not be superior or inferior on the basis of number of votes they got in election or on any other grounds.
Nominee directors [Section 164 & 165]
Nominated by creditors
In addition to directors elected, a company may have directors nominated by the company’s creditors or other special interests by virtue of contractual arrangements.
Nominated by Government or body corporate
The directors may be nominated by a body corporate or a company or Federal Government or Provincial Government if they have made investment in the company.
Such person shall be considered to be an elected director termed as ‘deemed to have been elected director’ and shall be considered for the calculation of minimum number of directors required for any company.
Such nominated director shall hold office during the pleasure of the nominating body.
The number of votes as are proportionate to the number of votes required to elect the director if they had offered themselves for election, shall stand excluded from the total number of votes available to the nominating body at an election of director.
Fresh election of directors: Criteria, Time Limit & Procedure
[Section 162]
Criteria
Where a person acquires the requisite shareholding to get him elected as a director on the board of a company, he may require the company to hold fresh election.
However, the number of directors fixed in the preceding election shall not be decreased.
Time limit and procedure
The board shall, upon receipt of such requisition, as soon as practicable but not later than 30 days, proceed to hold fresh election of directors of the company.
A listed company for the purpose of fresh election of directors shall follow such procedure as may be specified by the Commission.
Powers of the court to declare election invalid [Section 160]
Appeal criteria
Members holding at least 10% of the voting power in the company may apply to the court to declare the election of all directors or any one or more of them invalid.
Time limit
Such appeal may be made within 30 days of the date of election.
Decision of court
The court shall declare the elections invalid if it is satisfied that there has been material irregularity in the holding of the elections and incidental or relating matters.
Validity of acts of directors [Section 168]
Validity of acts already done
The acts of a person acting as a director are valid even if it is afterwards discovered that there was a defect in his appointment; or he was disqualified from holding office; or he had ceased to hold such office.
When defect is noticed
However, as soon as any such defect has come to notice, the director shall not exercise the right of his office till the defect has been removed.
Casual vacancy [Section 161 & 155]
Term of office
Any casual vacancy occurring among the directors may be filled up by the directors and the person so appointed shall hold office for the remainder of the term of the director in whose place he is appointed.
Appointment not necessary
If the number of directors of the company is equal or above the minimum number of directors required for that company, even after the casual vacancy, such directors may not fill in the casual vacancy and complete the term without filling such vacancy.
Time limit (listed company)
Any casual vacancy on the board of a listed company shall be filled up by the directors at the earliest but not later than 90 days from the date of vacancy. There is no time limit specified in Companies Act for other companies.
Vacation of office [Section 171]
A director shall be treated to have vacated the office of director if:
* he becomes ineligible to be appointed as director;
* he absents himself from three consecutive meetings of the board without seeking leave of absence;
* he, his partnership firm in which he is a partner or any private company in which he is a director, accepts
any loan or guarantee from the company in contravention of Companies Act; or
* accepts any office of profit (other than that of chief executive or a legal or technical adviser) without
sanction of the company in a general meeting.
A company may include additional grounds for vacation of office in its articles.
Removal of directors [Section 163]
A director may be removed from the office by the members of the company by passing a resolution. The director
shall not be considered to have been removed if votes against removal equal or exceed as follows:
Elected director: Not removed if votes against removal equal to or exceed Minimum number of votes which were enough to qualify a person as a
director in the last election of directors.
Elected unopposed
First directors
Casual vacancy: Not removed if votes against removal equal to or exceed Average votes i.e.
= 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑖𝑟𝑒𝑐𝑡𝑜𝑟𝑠 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑡𝑒𝑟𝑚 × 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑣𝑜𝑡𝑖𝑛𝑔 𝑠ℎ𝑎𝑟𝑒𝑠 / 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑖𝑟𝑒𝑐𝑡𝑜𝑟𝑠 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑡𝑖𝑚𝑒 𝑏𝑒𝑖𝑛𝑔
Powers of board [Section 183]
The business of a company shall be managed by the board, who may exercise all such powers of the company as
are not by Companies Act, or by the articles, or by a special resolution, required to be exercised by the company
in general meeting.
Power to be exercised by passing a board resolution
The board shall exercise the following powers by ‘passing a resolution’ in board meetings:
* to issue shares, debentures or other redeemable capital or to otherwise borrow money or invest the
funds of the company;
* to make loans. This restriction of passing a board resolution does not apply to banking company
advancing loans in ordinary course of its business;
* to approve annual and periodical accounts and to approve bonus for employees;
* to incur capital expenditure on any single item or dispose of a fixed asset in accordance with the limit as
may be specified;
* to undertake obligations under leasing contracts exceeding such amount as may be notified;
* to declare interim dividend;
* to authorize the following to enter into any contract with the company for making sale, purchase or
supply of goods or rendering services with the company:
* a director;
* the firm of which a director is a partner or any partner of such firm; or
* a private company of which such director is a member or director;
* if the amount is material as per Generally Accepted Accounting Principles:
* to write off bad debts, advances and receivables;
* to write off inventories and other assets; and
* to determine the terms of and the circumstances in which a law suit may be compromised and a claim
or right in favour of a company may be released, extinguished or relinquished.
* to take over a company or acquiring a controlling or substantial stake in another company;
* any other specified matter.
Authorisation of general meeting
The board of a company shall not except with the consent of the general meeting either specifically or by way of
an authorisation, do any of the following things, namely:
* sell, lease or otherwise dispose of the undertakings or a sizeable part thereof unless the main business
of the company comprises of such selling or leasing; and
* sell or otherwise dispose of the subsidiary of the company;
* remit, give any relief or give extension of time for the repayment of any debt outstanding against any
director of the company or of its holding company; or to any of this relatives.
A listed company is not entitled to sell or otherwise dispose of the undertaking, which results in or may lead to
closure of business operation or winding up of the company, without there being a viable alternate business plan
duly authenticated by the board.
Any resolution passed (authorisation of general meeting) if not implemented within one year from the date of
passing shall stand lapsed.
