FEW MISCELLANEOUS SECTIONS

CONTRACT OF EMPLOYMENT WITH MANAGING OR WHOLE TIME DIRECTOR [SECTION 190]

A Company may enter into a contract of employment with managing or whole-time directors. Section 190 of the Act contains provisions relating to keeping of such contract of employment. These provisions are stated as under:

(i) Maintenance of copy of contract of employment: Every company shall keep at its registered office —

(a) where a contract of service with a managing or whole-time director is in writing, a copy of the contract; or

(b) where such a contract is not in writing, a written memorandum setting out its terms.

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(ii) Inspection: The copies of the contract or the memorandum shall be open to inspection by any member of the company without payment of fee.

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(iii) Penalty for non-compliance [Section 190 (3)]: If any default is made in complying with Section 190, the penalty shall be as under:

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(iv) Exception [Section 190 (4)]: The provisions of Section 190 shall not apply to a private company.

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RESTRICTION ON NON-CASH TRANSACTIONS INVOLVING DIRECTOR [SECTION 192]

Section 192 of the Act places restrictions on the non-cash transactions involving directors and the company or vice-versa. The provisions of Section 192 also operate if non-cash transactions involve a person who is a director of the company’s holding, subsidiary or associate company. A person connected with any such director is also included. These provisions are discussed as under:

(i) Restriction on acquiring assets for consideration other than cash: According to Section 192 (1), no company shall enter into an arrangement by which—

(a) a director of the company or its holding, subsidiary or associate company or a person connected with him acquires or is to acquire assets for consideration other than cash, from the company; or

(b) the company acquires or is to acquire assets for consideration other than cash, from such director or person so connected.

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(ii) Relaxation of restriction: The above restriction shall be relaxed i.e. the company may enter into an arrangement involving non-cash transactions as stated in clause (i) above, if prior approval for such arrangement is accorded by a resolution of the company in general meeting.

Where the director or connected person is a director of its holding company, approval shall also be required to be obtained by passing a resolution in general meeting of the holding company.

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(iii) Contents of notice issued for approval of resolution: The notice for approval of the resolution in general meeting issued by the company or holding company shall include the particulars of the arrangement. It shall also include the value of the assets involved in such arrangement duly calculated by a registered valuer.

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(iv) What happens if Section 192 is contravened: Any arrangement entered into by a company or its holding company in contravention of the provisions of Section 192 shall be voidable at the instance of the company. The arrangement shall not be voidable;

(a) if the restitution of any money or other consideration which is the subject-matter of the arrangement is no longer possible and the company has been indemnified by any other person for any loss or damage caused to it; or

(b) if any rights are acquired bona fide for value and without notice of the contravention of the provisions of this section (i.e. Section 192) by any other person.

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CONTRACTS BY ONE PERSON COMPANY (OPC) [SECTION 193]

Section 193 of Act contains provisions in respect of contracts entered into by a One Person Company (OPC) which is limited by shares or by guarantee. This section becomes applicable when such OPC enters into a contract with its sole member who is also its director. Section 193 operates in the following manner:

(i) Preferably, such contract should be in writing.

(ii) If not in writing, the OPC shall ensure that the terms of the contract or offer are contained in a memorandum or are recorded in the minutes of the first meeting of the Board of Directors of the company held next after entering into contract.

(iii) Exception: If the contracts are entered into by the company in the ordinary course of its business, then provisions of Section 193 are not applicable.

(iv) Submission of information to the registrar: The company shall inform the Registrar about every such contract entered into by the company and recorded in the minutes of the meeting of its Board of Directors. This shall be done within a period of 15 days of the date of approval by the Board.

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DISCLOSURE OF INTEREST BY DIRECTOR: [SECTION 184]

The office of director in a company is that of ‘trust’. A person holds the directorship in a fiduciary capacity. As trustee of the assets of the company, the director is duty bound to pass on the benefits accruing from all such transactions which belong to the company. At any stage if he becomes interested in a transaction the benefits of which rightfully accrue to the company, he must disclose his interest so that the Board and if required, the company, may take a rational decision whether to continue with that transaction or not. The disclosure of interest to be made by a director includes both ‘general disclosure of interest’ and ‘specific disclosure of interest’. Section 184 of the Act, which contains provisions in respect of ‘disclosure of interest’ by the directors, is applicable to all the companies and their directors. These provisions are discussed as under:

(i) General disclosure of interest [Section 184(1)]: Every director shall disclose his concern or interest in any company or companies or bodies corporate, firms, or other association of Individuals which shall include the shareholding, in the manner prescribed in Rule 9 of the Companies (Meetings of Board and its Powers) Rules, 2014. The intention of law behind such disclosure is to make known the other directors of the company about the interest of concerned director in other companies, firms, etc.

When to make general disclosure of interest:

Every director shall disclose his interest:

(a) At the first meeting of the Board in which he participates as a director, and

(b) Thereafter, at the first meeting of the Board in every financial year, or

(c) Whenever there is any change in the disclosures already made, then at the first Board meeting held after such change.

Provisions of Rule 9:

As regards manner of disclosure and certain other matters, the provisions of Rule 9 are given as under:

• Every director shall disclose his concern/interest by written notice.

• In Form MBP-1.

• Such Director shall cause it to be disclosed at the meeting held immediately after the date of the notice.

• All notices shall be kept at the registered office of the company.

• Preserved for eight years from the end of the financial year to which they relate.

• They shall be kept in the custody of the Company Secretary, or any other person authorized by the Board.

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(ii) Specific disclosure of interest:

According to Section 184 (2), a director of a company shall make a specific disclosure of interest whenever he, in any way, whether directly or indirectly, is concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered into:

(a) With a body corporate in which such director or such director in association with any other director holds more than two per cent shareholding of that body corporate.

(b) With a body corporate in which such director is a promoter, manager, Chief Executive Officer.

(c) With a firm or other entity in which such director is a partner, owner, or member.

When to make specific disclosure of interest: The disclosure shall be made as under:

. The interested director shall disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed for the first time; and

. He shall not participate in such meeting. ‘Non-participation’ implies that he shall not discuss the matter relating to such contract and also shall not vote if there happens to be a voting in this connection.

. It may happen that any director is not so concerned or interested at the time of entering into such contract or arrangement. However, if he becomes interested after the contract or arrangement is entered into, he shall disclose his concern or interest
forthwith when he becomes so or at the first meeting of the Board held after his
becoming concerned or interested.
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Exception/Modification

1. In case of a private company which has not committed a default in filing its financial statements under Section 137 or Annual Return under Section 92 with the Registrar, the provisions of Section 184 (2) shall apply with the exception that the interested director may participate in such meeting after disclosure of his interest. [Notification No. G.S.R. 464(E), dated 5th June, 2015 as amended by Notification No. G.S.R. 583 (E), dated 13th June, 2017.]

2. In respect of a Section 8 company which has not committed a default in filing its financial statements under Section 137 or Annual Return under Section 92 with the Registrar, the provisions of Section 184(2) shall apply only if the transaction with reference to Section 188 on the basis of terms and conditions of the contract or arrangement exceeds one lakh rupees. [Notification No. G.S.R. 466(E), dated 5″ June 2015 as amended by Notification No. G.S.R. 584 (E), dated 13th June, 2017.]

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(iii) Contract voidable at the option of company if there is non-disclosure [Section 184(3)]:
A contract or arrangement entered into by the company shall be voidable at its option if the interested director who has a direct or indirect concern or interest in such contract or arrangement, does not disclose his interest as required by Section 184 (2) or if such director participates in the meeting where such contract or arrangement is discussed.

It may be noted that the contract is voidable and not void and the option of rescinding the contract lies with the company and not with the interested director. Thus, if the company decides to honour the contract, the interested director cannot rescind it because of irregularity.

(iv) Punishment for contravention [Section 184(4)]: If a director of the company contravenes the provisions of Section 184 (1) and (2) i.e. does not disclose his interest or furnishes wrong information in this respect, he shall be liable to a penalty of one lakh rupees.

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(v) No restriction on directors: Nothing in Section 184 shall be taken to prejudice the operation of any rule of law restricting a director of a company from having any concern or interest in any contract or arrangement with the company.

(vi) Exemption from disclosure if the holding is up to two per cent: According to Section 184 (5) (b), the provisions of Section 184 regarding disclosure by interested director shall not apply to any contract or arrangement entered into or to be entered into between two companies where any of the directors of the either company or two or more of them together holds or hold not more than 2% of the paid-up share capital in the other company.

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DIRECTORESHIP- SECTION 165

Directors play a vital part in the company management. Every company needs to appoint directors at time of incorporation. One person company needs at least one director. A Private company needs to have at least two directors, and a Public company must have at least three directors. A company can have maximum 15 directors.

A person appointed as director will perform all his duties and functions of a director as per the provisions of the Companies Act, 2013. The Companies Act, 2013 lays down the provisions regarding the appointment, rights and duties of a directors. Any person appointed as a director of a company has the freedom to be a director in any other company. However, Section 165 of the Act states the provisions relating to the number of directorships a person can hold at a given time.

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NUMBER OF DIRECTORSHIPS OF A DIRECTOR

Section 165(1) of the Act states that a person can hold the office of director simultaneously in 20 companies. The number of 20 companies include the office of alternate directorship. A person cannot be a director in more than 20 companies at a given point of time. However, the maximum number of public companies in which a person can be director simultaneously is 10. An individual cannot be appointed as a director in more than 10 public companies at a given time.

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For calculating the number of Public companies, the directorship in private companies that are either holding or subsidiary of public company is included. However, the directorship in a dormant company is not included in calculating the limit of directorship of 20 companies.

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The purpose of prescribing the number of the office of directorship is that the person who is appointed as a director can give proper and sufficient time to a company. The Act prohibits a person from holding the office of a director in more than 20 companies to provide quality time to the companies in which he is a director and discharge his function as a director in an efficient manner.

REDUCTION IN THE NUMBER OF DIRECTORSHIP

Section 165(2) of the Act provides a reduction in the number of directorships held by a person. A company can specify any number less than 20 in which the directors of their company can act as a directors in other companies. The members of a company can specify a smaller number of the office of directorship for its directors by passing a Special resolution.

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Example: – Klath Consultancy Private Limited has appointed Mr. Tanmay as a director in the company. Klath Consultancy has passed a Special Resolution stating that Klath Consultancy’s Directors can hold office of directorship in 10 companies. Then, Mr. Tanmay can be a director in only 10 companies simultaneously and not beyond it. Though the Act provided that a person can hold a director’s office in 20 companies, Mr. Tanmay can be a director in 10 companies due to the resolution passed by Klath Consultancy reducing the number to 10. If he holds the office of director in more than 10 companies, it will amount to contravention of the Act.

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DIRECTORSHIP BEFORE COMMENCEMENT OF THE COMPANIES ACT, 2013

Section 165(3) and 165(4) of the Act is a transitional provision that provides a time limit to the directors to comply with the provisions of Companies Act, 2013. Before the commencement of this Act  , the number of directorships followed by a director was according to the Companies Act, 1956. The Companies Act, 1956, did not include private companies and unlimited companies in the number of directorships held by a person. But the Companies Act, 2013 include private companies and unlimited companies under the limit of 20 companies.

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A person holding the office of director in more than 20 companies before the commencement of this Act shall follow the limits prescribed under this Act within one year. Any director holding the office of directorship in more than 20 companies shall choose 20 companies he wants to continue as a director within one year from the commencement of this Act.

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Section 165(5) of the Act provides that a person shall not act as a director in more than 20 companies after dispatching his resignation to the remaining companies or after one year from the commencement of this Act, whichever is earlier.

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PENALTY FOR NON-COMPLIANCE OF SECTION 165?

Section 165(6) of the Act provides a penalty for a person who holds the office of a director in contravention of this Act. If a person accepts an appointment as a director in more than 20 companies, then he will be liable to a penalty of Rs. 2,000 for each day during which the violation continues subject to a maximum penalty of Rs. 2,00,000. This penalty provision was included in the Act from 21.12.2020 to prevent person from holding office of directors in more than 20 companies.

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FREQUENTLY ASKED QUESTIONS

Q. Who can be appointed as Director in a company?

A. Only an individual can be appointed as Director in a company, including a foreign national. However, a minor cannot be appointed as Director.

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Q. Does Section 165 of the Companies Act, 2013 apply to Section 8 Company?

A. No, Section 165 does not apply to Section 8 companies. Thus, a person who has exhausted the limit of 20 companies can still be appointed as director in Section 8 Company.

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Q. Does Section 165 of the Companies Act, 2013 apply to foreign subsidiaries?

A. Yes, as per Section 165, a person cannot hold office as a director, including any alternative directorship, in more than 20 companies at the same time. Therefore, such 20 companies include every company including foreign subsidiaries registered under the Companies Act,2013.

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Q. What is the maximum limit of directors a Company can appoint?

A. The maximum number of directors a company can appoint is 15. However, the maximum number of directors in a company can be increased beyond 15 by passing a special resolution.

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DIRECTOR IDENTIFICATION NUMBER (DIN) [SECTION 153 TO SECTION 159]

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Director Identification Number (DIN) means an identification number allotted by the Central Government to any individual, intending to be appointed as a director or to any existing director of a company, for the purpose of his identification as a director of a company.

It is provided that the Director Identification Number (DIN) obtained by the individual prior to notification of the “Specification of Definition Details Rules” shall be the DIN for the purpose of the Companies Act, 2013.

Further, it is to be noted that DIN shall include the Designated Partnership Identification Number (DPIN) issued under section 7 of the Limited Partnership Act, 2008 and rules made thereunder.

SECTION 153

Section 153 deals with the filing of application for allotment of DIN. Accordingly, every individual intending to be appointed as director of company shall make an application for allotment of DIN in the prescribed form and manner and along with the prescribed fees.

Further, Rule 9 of the Companies (Appointment and Qualifications of Directors) Rules, 2014 states that the following procedure for making an application for allotment of DIN before appointment in an existing company:

SECTION 154

According to Section 154, the Central Government shall allot a DIN to the applicant in the prescribed manner within one month from the receipt of application.

Rule 10 of Companies (Appointment and Qualifications of Directors) Rules, 2014 provides the following procedure for allotment or rejection of DIN.

SECTION 155  

According to Section 155, no individual, who has been already allotted a DIN under Section 154, shall apply for, obtain or possess another DIN.

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SECTION 156

According to Section 156, every existing director shall, within one month of the receipt of DIN from the Central Government, intimate the DIN to the company or all the companies wherein he is a director.

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SECTION 157

According to Section 157, every company shall, within 15 days of the receipt of intimation under Section 156, furnish the DIN of all its directors to the Registrar or any other officer of authority as may be prescribed by the Central Government with such fees or additional fees as may be prescribed.

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SECTION 158

According to Section 158, every person or company, while furnishing any return, information, or particulars as are required to be furnished under the Companies Act, 2013, shall mention the Director Identification Number in such return, information or particular in case such return, information or particular relate to the director or contain any reference of any director.

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SECTION 159

Section 159 provides that if any individual or director of a company makes any default in complying with any of the provisions of Section 152, Section 155 & Section 156, such individual or director of the company shall be liable to penalty as under:

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CONDUCT OF INSPECTION AND REPORT ON INSPECTION MADE [SECTION 207 & 208]

CONDUCT OF INSPECTION AND INQUIRY (SECTION 207):

Section 207 of the Companies Act, 2013 provides for the conduct of inspection and inquiry as follows:

(i) Duty of director, officer or employee [Sub-Section (1)]: Where a Registrar or inspector calls for the books of account and other books and papers under sub section (1) of section 206, it shall be the duty of every director, officer or other employees of the company:

(a) to produce all such documents; and

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(b) to furnish with such statements, information or explanations in such form as may require; and

(c) to render all assistance in connection with such inspection.

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(ii) Powers of the Registrar or inspector [Sub-section (2) and (3)]:

(a) The Registrar or inspector making an inspection or inquiry under section 206 may, during the course of such inspection or inquiry, as the case may be,—

(1) make or cause to be made copies of books of account and other books and
papers; or

(2) place or cause to be placed any marks of identification in such books in token
of the inspection having been made.

(b) The Registrar or inspector making an inspection or inquiry shall have all the
powers as are vested in a civil court under the Code of Civil Procedure, 1908, while trying a suit in respect of the following matters, namely:—

(1) the discovery and production of books of account and other documents, at
such place and time as may be specified by such Registrar or inspector making
the inspection or inquiry;

(2) summoning and enforcing the attendance of persons and examining them on
oath; and

(3) inspection of any books, registers and other documents of the company at any
place.

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(iii) Penalty for Contravention [sub-section (4)]: If any director or officer of the company disobeys the direction issued by the Registrar or the inspector under this section, the director or the officer shall be punishable with imprisonment which may extend to 1 year and with fine which shall not be less than 25,000 rupees but which may extend to 1 lakh rupees.

If a director or an officer of the company has been convicted of an offence under
this section, the director or the officer shall, on and from the date on which he is so convicted, be deemed to have vacated his office as such and on such vacation of office, shall be disqualified from holding an office in any company.

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REPORT ON INSPECTION MADE (SECTION 208):

Section 208 of the Companies Act, 2013 provides for the submission of the report on inspection made. According to this section:

The Registrar or inspector shall, after the inspection of the books of account or an inquiry under section 206 and other books and papers of the company under section 207, submit a report in writing to the Central Government. The registrar or inspector may recommend in report that there is the need of further investigation. The said recommendation has to be given with reasons in support.

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The said report has to be submitted to Regional Director (RD). [Powers delegated vide Notification F No. 3/76/2015-CL-Il dated 31-12-2015]

If the punishment is less than two years, RD himself can sanction launching of prosecution. In other cases, he should forward the report to the Central Government for sanctioning prosecution.

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SECTION 161 OF COMPANIES ACT, 2013

ADDITIONAL DIRECTOR: SECTION 161(1)

According to the Section:

With a view to meet the requirements of the management, the board of directors is empowered to appoint any person as an additional director at any time if such power is granted by articles.

The person to be appointed as an additional director should possess DIN and must not be the person who fails to get appointed at the general meeting.

Term of office of additional director: The tern of additional director is limited to the holding of ensuring Annual General Meeting (AGM). Even if the AGM is not held on the last due date, the term ends there itself and it cannot be extended to a date when the AGM, in actuality shall be held in future after its due date.

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ALTERNATE DIRECTOR: SECTION 161(2)

According to this Section:

An alternate director is appointed in place of regular director who has gone out of India. The period of absence of such original director from India must be minimum there months or more. A short absence of less than three months does not entitle the board to appoint alternate director.

Term of office of alternate director: The term of office of an alternate director coincides with the permissible term applicable to the original director in whose place he has been selected. Thus, the term shall not be longer than the term which is permissible to the original director. Further, the alternate director shall also vacate the office immediately on the return of the original director to India.

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NOMINEE DIRECTOR: SECTION 161(3)

Subject to the articles of a company, the board may appoint a person as a director nominated by any institute in pursuance of the provisions of any law for the time being in force or of any agreement or by the Central Government or the State Government by virtue of its shareholding in a Government company.

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Simply stated, a nominee director is not like any other director, He represents the body which makes nomination for appointment as a director in the company. Whenever a company obtains financial assistance from some financial institution or bank, such institution invariably nominates its representative for safeguarding its interest till the loaned amount is completely repaid. The Board od Director are empowered to appoint a nominee director subject to the articles and the shareholder cannot interfere with such appointment. Further, by virtue of shareholding in a Government company, the Central Government or the State Government may also nominate a person for appointment as nominee director and the Board shall have to follow the suit without any hinderance on its part.

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CASUAL VACANCY: SECTION 161(4)

According to this section:

In case a company has appointed a women director because of statutory requirement and an intermittent vacancy is created in the office of such woman director, the board shall fill such casual vacancy at the earliest but not later than immediate next board meeting or three months from the date of creation of such vacancy whichever is later. Same in case of Independent Directors also.

Term of office of a director appointed to fill a casual vacancy: The term of office of a director appointed to fill a casual vacancy continues till such time up to which the term of the director because of whom casual vacancy was created would have continued.

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COMPANY LIQUIDATOR – APPOINTMENT, REMOVAL & REPLACEMENT

COMPANY LIQUIDATOR AND THEIR APPOINTMENT: [SECTION 275]

REMOVAL AND REPLACEMENT OF LIQUIDATOR: [SECTOR 276]

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SECTION 277: INTIMATION TO COMPANY LIQUIDATOR, PROVISIONAL LIQUIDATOR AND REGISTRAR

The intimation to company liquidator, provisional liquidator and registrar will be as follows:

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SUBMISSION OF REPORT BY COMPANY LIQUIDATOR AND DIRECTION OF TRIBUNAL ON SUCH REPOST [SECTION 281 & 282]

SUBIMISSION OF REPORT BY COMPANY LIQUIDATOR [SECTION 281]

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DIRECTION OF TRIBUNAL ON REPORT OF COMPANY LIQUIDATOR [SECTION 282]:

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SECTION 290: POWERS AND DUTIES OF COMPANY LIQUIDATOR

Power of a Company Liquidator is as follows:

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