Page 227 - DCOM404_CORPORATE_LEGAL_FRAMEWORK

Corporate Legal Framework

Notes therefore, they enter into contracts on behalf of the company and in the name of the company.
On the other hand, in the case of a trust, the legal ownership of the trust property is transferred
to the trustee and therefore, he can enter into contract in his own name, but whatever he does, he
does for the benefit of the benefi ciaries.

Although directors are not trustees in the real sense of the term, they occupy an office of the trust

and are in certain respects in the position of trustees for the company. Such cases are:
(i) They are trustees of money which comes to their hands or which is actually under their
control. If they misapply company’s money, they have to make good the same as if they
were trustees.

(ii) They are trustees for exercising powers conferred on them for the benefit of the company.
For instance, powers to allot shares, to make calls, forfeit shares should be exercised bona

fide in the interests of the company.

(iii) They stand in a fiduciary relationship to the company and, therefore, whenever there
is clash of his personal interests with that of the company, he should keep in mind the
company’s interests.
A director is in no way a trustee for individual shareholders except when the former induces the
latter by misrepresentation to sell the shares to him.

The directors are also sometimes described as managing partners. They manage the affairs of the
company on their own behalf and on behalf of other shareholders who elect them.
Are the directors employees of the company? They are not employees of the company or
employed by the company, nor are they servants of the company, or members of “Company’s
staff”. A director can, however, hold a salaried employment or an office in addition to that of his

directorship which may, for these purposes, make him an employee or servant and in such a case
he would enjoy rights given to employees as such; but his directorship and his rights through
that directorship are quite separate from his rights as employee.
10.7.3 Legal Provisions as Regards Directors

Some of the important legal provisions as regards directors are summarised as follows:
(1) Number of directors. Every public company must have at least three directors. Every
private company must have at least two directors (s.252). However, a public company
having: (a) a paid-up capital of ` 5 crore or more; (b) 1000 or more small shareholders may
have a director elected by such small shareholders in the manner as may be prescribed.
The phrase ‘small shareholders’ means a shareholder holding shares of nominal value of `
20,000 or less in a public company to which this section applies. This is the minimum legal
requirement of the number of directors. The Articles of a company may and usually do,

fix the minimum and maximum number of directors of its Board. For instance, the articles

may fix 5 as the minimum and 9 as the maximum number of directors of the Board. Also,

the articles may fix, within these limits, the number which will constitute the Board for
the time being. For instance, in the above example, the number of directors constituting a
Board may be fixed at 7.

(2) Increase in number of directors. A company in general meetings may, by ordinary

resolution, increase or reduce the number of its directors within the limits fixed in that
behalf by its articles (s.258).
In certain cases, the increase in number of directors also requires the approval of the
Central Government. Section 259 provides that if a public company, or a private company
which is subsidiary a public company wishes to increase the number of its directors
beyond the maximum fixed by its articles, the increase even though decided upon by

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