Who Is a Director in a Company?
A director in a company serves as a key figure appointed by shareholders to oversee the company’s operations, in alignment with the guidelines set out in the Memorandum of Association (MOA) and Articles of Association (AOA). Since a company is a legal entity and cannot act independently, it operates through natural persons, namely the directors. These directors form the Board of Directors, entrusted with the company’s overall management.
Directors are particularly crucial in a Private Limited Company, where they are responsible for daily decision-making and managing the company’s affairs. Shareholders entrust directors with the significant task of managing their investments efficiently, and the shareholders’ needs and demands often drive the directors’ appointment.
Appointing Directors in a Private Limited Company
In a Private Limited Company, the law mandates a minimum of two directors and permits up to fifteen. Should the company require more than this cap, it can appoint extra directors by passing a special resolution, which requires the approval of more than 75% of voting shareholders. Sometimes, a company may need to augment its board of directors to cater to evolving business requirements or to address shareholder expectations. Nonetheless, every appointment must be conducted following the stipulations of the Companies Act 2013 to maintain legal compliance.
Reasons for Adding or Changing Directors in a Company
- Fresh Expertise: With growth, a company may need to infuse new skills and perspectives into its board to navigate the challenges and opportunities accompanying expansion.
- Strategic Control: By adding more directors, shareholders can distribute operational tasks more broadly, enabling them to focus on strategic oversight without diluting their ownership stakes.
- Improving Board Performance: When current directors cannot perform optimally due to personal circumstances such as health issues or retirement, introducing new directors can help sustain the board's effectiveness.
- Legal Compliance: To adhere to the mandates of the Companies Act 2013, companies must ensure they have the requisite number of directors. Due to unforeseen circumstances, new appointments become necessary to meet these statutory obligations if the board's size falls below the mandated minimum.
Procedure for Director Appointment or Addition in a Company
Step 1: Reviewing the Articles of Association (AOA)
Start by examining the company's AOA to verify if a clause allows for the appointment or addition of directors. If such a clause is missing, the AOA must be amended to include it.
Step 2: Resolution at a General Meeting
Annual General Meeting (AGM): Typically, director appointments are made during the AGM. If an appointment is needed at another time, it necessitates an Extraordinary General Meeting (EGM).
Convening an EGM: To call an EGM, the board first needs to meet and pass a resolution for the EGM. At the EGM, another resolution is passed to appoint the new director. This resolution must be filed with the Registrar of Companies on Form MGT-14 within 30 days of passing.
Step 3: Application for DIN and DSC
The individual chosen for directorship must obtain a Digital Signature Certificate (DSC) and a Director Identification Number (DIN) if they don't already have them. The nominee must then furnish the DIN to the company along with a declaration stating they are not disqualified from being a director under the Companies Act, 2013.
Step 4: Obtaining Director's Consent (Form DIR-2)
The proposed director must officially agree to their appointment by providing their consent through Form DIR-2. This form serves as a formal acknowledgement of their willingness to take on directorial responsibilities.
Step 5: Issuing the Letter of Appointment
Upon completing all regulatory requirements, the company issues a formal Letter of Appointment to the new director. This document outlines the director's responsibilities, role, and terms of compensation, among other relevant details.
Step 6: Regulatory Filings with the ROC
Post the director's appointment, the company must file the director's consent (Form DIR-2) and the particulars of the appointment (Form DIR-12) with the Registrar of Companies (ROC). This filing should occur within 30 days of the director's appointment to ensure regulatory compliance.
Step 7: Updating the Register of Directors
The company needs to update its Register of Directors and Key Managerial Personnel with the new director's details, keeping an accurate and current record of its board members.
Step 8: Updating Regulatory and Tax Records
The final step involves updating the director's details with the GST Network and other relevant tax authorities. This step is crucial for maintaining compliance with tax regulations and ensuring that all company records are accurate and up-to-date.
Each of these steps requires careful attention to detail and adherence to the legal requirements set forth by the Companies Act 2013 to ensure that the appointment of a director is valid and compliant with all regulatory obligations.