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Director
A corporation is an artificial being,
invisible, intangible and existing only in
contemplation of law. It has neither a
mind nor body of its own. That is why a
corporation works trough living persona
not by itself. The human agencies that
mainly run the company’s business are
called directors.
According to Companies Act - 1994,
“Director includes any person occupying
the position of director by whatever
name called.”
According to section 90(1), every public
company must have at least three
directors and every private company
shall have at least two directors.
Legal Position of Directors:
1. Directors as Agents:
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It is a well established principle that
directors are the agents of the company.
Where the directors contract in the name
of the company and on behalf of the
company, it is the company which is
liable on it, not the directors personally.
Ferguson vs. Wilson – 1866—“The
company has no person; it can act only
through directors, merely the ordinary
case of principal and agent.”
In TR Pratt (Bombay) Ltd. Vs. MT Ltd
(1938) there were three companies
namely, S Co, MT Co and P Co. For a
number of years S Co had been
financing P Co. All the transactions of
loan were entered into through the
agency of MT Co, which held almost all
the shares in P Co, and its directors were
also the directors of P Co. This fact was
know to the directors of S Co. For a loan
granted by S Co to MT Co, an equitable
mortgage was created on the property of
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P Co. In the winding up of P Co it was
held that the official liquidator was
entitled to avoid the equitable mortgage
as the S Co through its directors had the
knowledge of the facts.
2. Directors as Trustees:
Directors are always considered to be
trustees of the property or assets of the
company, which comes to their hand and
which is actually under their control.
They are to make good of moneys which
they have misapplied as if they were the
trustees.
Again in the case of exercising their
powers, they are bound to act like a
trustee for the benefit of the company
and the company only.
3. Directors as Employees:
A director is not an employee or servant
of the company. However, a director
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may work as an employee in a different
capacity under a different contract. For
example, a managing director is an
employee of the company.
In Lee vs. Lee’s Air Farming Ltd. – 1961
the principal controller and a director of
a company was also working as its pilot.
Following his death while acting as a
pilot, his widow recovered compensation
under the Workmen’s Compensation
Act. However this principle will not
apply where no proof of employment
apart from being a director is available.
Thus in Parsons vs Albert J Parsons Ltd
(1978) a person who was removed from
directorship of a private company was
not allowed to recover compensation for
unfair dismissal.
Appointment of Directors:
1. Appointment of first directors:
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The first directors are normally named
by the company in its article. If no name
is given in the article, the subscribers to
the memorandum shall be the directors
of the company. The first directors act as
directors until the first annual general
meeting.
2. Appointment by share holders:
The shareholders to the company can
appoint directors in the annual general
meeting. The procedure of appointment
of directors by shareholders is normally
provided by the article. At least one third
of the directors shall be appointed and
removed in a way so that rotational
appointment can be maintained.
3. Appointment by the Board of
Directors:
If permitted by Article, the board of
directors can appoint directors on
following conditions—
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a) Board may appoint additional
directors, if required subject to the
maximum number
b) Board may appoint directors to fill
the casual vacancies
c) A director may appoint an alternate
directors if approved by special
resolution
4. Appointment by the Managing
Agent:
The managing agent of the company can
appoint director if permitted by article
but the number of these directors shall
not exceed one third of total directors.
5. Appointment by the third party:
If permitted by article third party
(normally creditors, debenture-holders,
etc) can appoint director in the Board.
This power cannot be barred by the
company by injunction.