Page 151 - DCOM106_COMPANY_LAW

Company Law

Notes 10.1.2 Small Shareholders’ Director

A public company having (a) a paid up capital of five crore rupees or more, and (b) one thousand
or more small shareholders may have a director elected by such small shareholders in the
manner as may be prescribed. For this purpose, “small shareholder” means a shareholder
holding shares of nominal value of twenty thousand rupees or less (i.e. up to 20,000) in a public
company to which this section applies. The Department of Company Affairs, has prescribed the
Companies (Appointment of the Small Shareholders’ Director) Rules, 2001. Such a director will
be elected by the majority of the small shareholders. The tenure of such director shall be a
maximum of three years and he need not retire by rotation. However, he can be re-elected for a
period of three years on the expiry of his tenure. Such a director can be removed in pursuance of
s. 284. A person cannot hold office as small shareholders’ director in more than 2 companies.
Further, the person proposed to be elected must be a small shareholder of the company.
Furthermore, such a director is not eligible for appointment as whole time or managing director
of the company. If he ceases to be a small shareholder, he is deemed to have vacated his office as
‘small shareholders director’.

Example: The Board of directors of ABC Ltd., an unlisted company, having a paid up
share capital of 6 crores consisting of equity share capital of 5 crores and preference share
capital of 1 crore and also having 11,000 small shareholders holding equity shares propose to
appoint a director to represent the small shareholders.
Under s. 252, a public company, if it has a paid up capital of 5 crores or more, and one thousand
or more small shareholders may have a director elected by such small shareholders. It is obvious,
that the appointment of such a director is not mandatory; it is discretionary for the company.

Example: In a company, there are more than one thousand small shareholders, and it has
a paid up capital of more than five crore rupees. The small shareholders have exercised their
right to appoint a director on the board of the company. The company wants to remove him
before the expiry of his period of appointment. The company can do so under s. 284 without the
consent of the small shareholders.

10.2 Legal Position of Directors

The exact position of ‘Director’ is hard to define, as no formal definition, either statutory or
judicial, of the term has been given. However, judicial pronouncements have described them as
(i) agents, (ii) trustees, or (iii) managing partners. But each of these expressions is used not as
exhaustive of their power and responsibilities but as indicating points of view from which they
may for the moment and for the particular purpose be considered.

10.2.1 Directors as Agents

The directors act as agents of the company and the ordinary rules of agency apply. They exercise
the powers that are subject to the duties within the framework of the company’s articles, and the
Act. For instance, they may make contracts on behalf of the company and they will not be
personally liable as long as they act within the scope of their authority. But if they contract in
their own name, or fail to exclude personal liability, they also will be liable. If the directors
exceed their authority, the same act may be ratified by the company. But if they do something
beyond the objects clause of the company, then the act is ultra vires and the company cannot
ratify the same. But directors are not agents for the individual shareholders; they are the agents
of the company – the artificial person.

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