Chapter 3: Directors Flashcards
(38 cards)
What is the Eligibility Criteria of a Director?
A director must:
be a natural person.
be a member (with certain exceptions).
meet additional criteria if specified by articles e.g. holding qualification shares, education and experience requirements in case of banking and insurance companies.
Chapter 3 LO 2
A director must be a member. List the situations when a non-member can be appointed as a director.
In following cases, a non-member can be a director:
a whole-time director who is an employee of the company (also called executive director).
a chief executive
a person representing a member who is government or a body corporate.
a person representing a creditor or other special interests through contractual arrangements.
Chapter 3 LO 2
Which persons are disqualified for appointment as a director of a company?
Act has specified that following persons cannot become directors of a company:
1. a person who is not a member (exceptions described above).
2. a body-corporate/Company.
3. a minor.
4. a person with unsound mind
5. a person who does not hold national tax number (Commission may grant exemption in this case).
6. a person who is undischarged insolvent or has applied to Court to be declared as insolvent and his application is pending.
7. a person who has been convicted by a Court for an offence involving immorality.
8. a person who lacks fiduciary behavior as declared by a Court during last 5 years.
9. a person who is disqualified from holding office under any provisions of the Act.
For listed companies, following persons are also disqualified:
1. a person who has been declared defaulter of a financial institution by a Court.
2. a person or his spouse is a broker or is an officer/director of a brokerage house.
Chapter 3 LO 2
What are the minimum number of directors prescribed by Companies Act?
Single member company (SMC) 1
Private company (other than SMC) 2
Public company – unlisted 3
Public company –listed 7
Chapter 3 LO 3
How first directors are appointed and what is their tenure?
First directors shall be appointed by subscribers of memorandum, and they shall hold office till the election of directors in first AGM.
Particulars of first directors shall be submitted alongwith documents for incorporation.
Number of first directors may be increased by appointing additional directors in a general meeting.
Chapter 3 LO 3
How second directors are appointed and what is their tenure?
Subsequent directors shall be elected by members at general meeting, and they shall hold office for three years, unless he earlier dies or is disqualified or resigns. (however, a company limited by guarantee not having share capital may reduce this period through its articles.)
Chapter 3 LO 3
How casual vacancy of directors is filled?
Casual vacancy (e.g. death, disqualification, resignation) is filled by directors, and person appointed shall hold office for the remainder term of the director in whose place he is appointed.
Filling casual vacancy is required if:
company is a listed company (to be filled within 90 days of occurrence), **or **
remaining directors are less than minimum number required by law/articles.
Chapter 3 LO 3
What is the Procedure for Election of Directors for a company having share capital:
- Fixation of number of directors to be elected.
- Send notice of meeting.
- Filing of intention to become director.
- List of candidates to be transmitted to members.
- If number of candidates is equal or less than number fixed by directors Unopposed Directors
- If number of candidates exceed number fixed by directors Election
**
Chapter 3 LO 4
How number of directors to be elected are fixed?
Existing Directors of the company shall fix the number of directors to be elected atleast 35 days before the general meeting.
*Once the number is fixed in the Board meeting, it shall not be changed except with the prior approval of the general meeting in which election is to be held.
*
Chapter 3 LO 4
What additional information shall be included in the notice of general meeting, if directors’ election is to be held in general meeting?
Notice shall expressly state number of directors to be elected, and names of retiring directors.
Chapter 3 LO 4
What should a member do if he intends to become director of a company?
A person (whether retiring director or otherwise) seeking to contest election shall file a notice of his intention in writing with company atleast 14 days before relevant general meeting. Such person may withdraw notice anytime before holding of election.
Chapter 3 LO 4
What is company’s responsibility if it receives notices of intention to become director from members?
All notices of intention received by company shall be transmitted to members atleast 07 days before general meeting in the same manner as of notice of AGM. In the case of a listed company such notices shall also be published in English and Urdu daily newspapers having wide circulation.
Chapter 3 LO 4
How directors are elected in general meeting?
If number of candidates is equal or less than number fixed by directors:
All directors shall stand elected unopposed without Poll.
If number of candidates exceed number fixed by directors:
Poll for election of directors shall be conducted.
Every member shall have votes equal to:
“Number of his shares x Number of directors to be elected”
A member can distribute his votes between different candidates in any way he thinks appropriate (even all votes can be given to one person).
Candidate getting highest votes shall be declared elected as director, and then next candidate, and so on until number of directors fixed have been elected.
Retiring directors shall continue to perform their functions until their successors are elected.
Chapter 3 LO 4
What should be done if there is irregularity in holding of election of directors?
Court may declare election of all directors or any one of them as invalid:
if member holding 10% or more voting powers
apply to Court within 30 days from the date of election, and
it is proved that there has been material irregularity in the holding of the elections and related matters.
Chapter 3 LO 4
What is the impact on a director if a defect is discovered in his appointment?
If a defect is discovered in the appointment of a director, such director shall not exercise any right as director from the date of discovery of defect (until defect is removed). However, his past acts as director will remain valid.
Chapter 3 LO 4
Can a member require company to hold fresh election?
If a person gets required shareholding to become a director, he may apply company to hold fresh election of directors.
Within 30 days of request, company shall proceed to hold fresh election (by calling general meeting with agenda of holding election of directors).
However, number of directors fixed in preceding election shall not be reduced.
To hold fresh election, a listed company shall follow procedures specified by Commission.
Chapter 3 LO 4
What are the circumstances when a director shall ipso-facto ceases to hold office?
A director shall ipso-facto cease to hold office if:
1. after appointment, he becomes subject to any of ineligibility criteria specified by Act.
2. he absents himself from three consecutive board meetings without seeking leave of absence.
3. He or any firm in which he is a partner or any private company in which he is a director:
a. obtains loan or guarantee from the company without fulfilling conditions of the Act.
b. accepts office of profit without approval of members. However, this restriction does not apply to office of chief executive or a legal or technical adviser.
Company may include additional grounds in its articles for vacation of office of director.
Chapter 3 LO 5
How can a director be removed if he is elected by members?
An elected director will NOT be removed if number of votes against the resolution equals or exceeds least number of votes obtained by any elected director in the last election.
Number of votes shall be calculated in the same manner as at time of election i.e. total votes of a member are equal to:
**“Number of Shares held by Member x Number of directors appointed at AGM”
**
Chapter 3 LO 5
How can a director be removed if he is first director, in casual vacancy or unopposed director:
An appointed director will NOT be removed if number of votes against the resolution equals or exceeds following number:
(Total Number of Ordinary Shares of Company x Number of directors appointed at AGM) ÷
Number of directors for the time being
Chapter 3 LO 5
What are Powers of Directors which can be exercised by board without obtaining approval in general meeting.
Following powers can be exercised by directors, but only after passing a resolution in board meeting:
1. To issue shares, debentures, other redeemable capital, or to borrow money.
2. To make loans. (however, in banking companies acceptance of deposits or placement of funds is not considered loan).
3. To make investment.
4. To approve quarterly financial statements and annual financial statements.
5. To declare interim dividend.
6. To approve bonus for employees
7. To incur capital expenditure on any single item or dispose of a fixed asset exceeding such amount as may be notified.
8. To undertake obligations under leasing contracts exceeding such amount as may be notified
9. To authorize a director of the company (or partnership firm in which he is a partner, or a private company in which he is a director) for entering into transactions with the company.
10. To write-off material debtors, inventories, advances and other assets.
11. To settle material litigations.
12. To take over a company or acquiring controlling stake in another company.
13. To appoint and remove chief executive.
14. To fill casual vacancy of director.
Further, a listed company cannot sell or dispose undertaking which results in closure of business operations or winding up of company, unless there is a viable alternate business plan duly authenticated by the board.
Chapter 3 LO 6
What are Powers of Directors which can be exercised by board after obtaining approval in general meeting:
Directors of a public company can also exercise following powers, but only after obtaining consent of general meeting:
1. sell or dispose a subsidiary of the company.
2. sell, lease or otherwise dispose of the undertaking (venture) or a sizeable part of it (i.e. 25% or more value of assets in that class), unless it is the company’s business.
3. remit, or give extension of time for repayment of debt against specified persons.
Authorization for such powers may be specific to transactions, or may be general. Any such resolution/approval of general meeting shall lapse, if not implemented within 1 year.
Chapter 3 LO 6
What is the Quorum of Board Meeting?
Listed Company:
1/3rd of total number or 4 whichever is higher. [articles may fix higher numbers]
Participation by video-conferencing or by other audio-visual means shall also be counted.
Other companies:
As per Articles.
Quorum to fill casual vacancy, If there not enough directors to form a quorum:
All the remaining directors shall be quorum for this limited purpose.
Chapter 3 LO 7
How frequently Board Meetings are required to be conducted.
Directors of a public company are required to meet at least once in each quarter of a year.
Chapter 3 LO 7
How can a Board resolution be passed by directors through circulation.
Validity:
A resolution through circulation approved by majority of directors/committee of directors, shall be as valid and effectual as if passed at a board meeting duly held.
Rules:
Directors can pass a resolution through circulation, provided:
Resolution shall be circulated to all directors alongwith necessary papers.
Resolution shall be signed in writing by directors (or committee of directors).
Once approved, a director cannot revoke his agreement to such resolution.
Such a resolution shall be noted in the minutes of subsequent board meeting.
Chapter 3 LO 7
