The Companies Act, 2013 mandates a minimum of 2 directors to incorporate a private limited company for a wide number of reasons, the predominant one being, to prevent the likelihood of abuse of power under a single directorship. In this article we shall see are two directors required to register a company as a pvt ltd.
Are Two Directors Required To Register A Company As a PVT LTD : Introduction
The private limited company, established by virtue of the Companies Act, 2013 is one of the most sought-after corporate structures, especially for businesses that grow faster. The members and the directors are the core of a private limited company. The directors of the company play a pivotal role in the management and the working of the company.
Are Two Directors Required To Register A Company As a PVT LTD: Directors of a Private Limited Company:
According to the Companies Act, 2013, the directors of a private limited company are appointed by the board of the company. The Board of Directors is constituted by a group of elite individuals who are elected by the shareholders of the company. The Board’s chief function is to administer and manage the affairs of the company. Although a private limited company is a separate legal entity, it needs a natural person to act on its behalf to perform various transactions. The Directors of the company play that role on the part of the company.
Therefore, a director of a private limited company is a person authorized by the law and predominantly supervises, controls, and supports the proceedings of the company.
Number of Directors in a Private Limited Company:
Section 149(1) of the Companies Act, 2013 mandates a minimum of 2 directors as a prerequisite in order to incorporate a private limited company. The Act allows a maximum of up to 15 directors and can be further increased by passing a special resolution. The special is made compulsory here to keep a check on the unwarranted increase in the number of directors. The exception to this rule is a One Person Company (OPC), wherein the company should have at least one director.
Further, it’s pertinent to note that only an individual, a natural person, can be elected as a director of the company. A corporate body or another company cannot hold the post of a director in a private limited company.
Logic Behind Minimum Directorship in a Private Limited Company:
The most reasonable logic behind having a minimum of 2 directors in a private limited company, is that the drafters of the Act wanted to segregate the control of affairs of the company at multiple levels. This was facilitated, mainly to prevent fraudulent activities that may possibly take place by handing over the entire management to a single independent director.
Having more than one director would essentially make both of them act with a sense of collective responsibility toward the business transactions dealt with within the company. As pointed out, an one person company has been kept out of this generalization, to enable single entrepreneurs to incorporate their business into a private limited company. Mandating a requisite number of directors in an OPC would defeat the intent of the special provision, which enables an individual to incorporate a private company.
It is rather interesting to note that the earlier versions of the Companies Act, say, the Companies Act, 1913, did not mandate such minimum directorship. However, subsequently, under the Companies Act, 1956, the stated exemption was withdrawn and the Act summoned the private companies to have a minimum of two directors, on the recommendations of the Bhabha committee. This mandate of a minimum number of directors subsists not only with private limited companies but also with public limited companies, wherein a minimum of 3 directors should be present.
Inclusion of a Foreign Director:
The Companies Act, 2013 does not prohibit a foreigner or an NRI (Non-resident Indian) from becoming a director of a private limited company in India. However, the Act mandates that at least one of the directors should be an Indian resident.
Liability of Directors:
The most striking feature of a private limited company is that it possesses a separate legal identity. The members and directors of the company are therefore not liable for the debts and liabilities of the company. However, the directors are solely liable in the following cases:
- When they enter into a contract by themselves, in a personal capacity with a third party.
- They act as an agent for the principal, wherein the principal is not disclosed.
- When a contract is entered by a director who acts on behalf of a prospective company.
- When the contract entered by the director is above and beyond the legal competence of the company.
- When any mis-statement is present in the prospectus.
- When the director has a hand in the irregular allotment of shares.
- When the application money is not repaid as per the instructions in the prospectus.
The directors are also held liable on behalf of the company in the following instances:
- When the actions of the director are in contradiction with the interest of the company, or against the MoA (Memorandum of Association) and AoA (Articles of Association).
- Any act of negligence by the director, especially while performing the duties pertaining to the role and the same affects the company’s interests.
- Any fraudulent action that results in a breach of trust or results in financial loss to the company, for instance, the revealing of any confidential information.
- In case of any act of criminal conduct, the director will be dealt with by the appropriate law and will be penalized by way of fine or imprisonment or both.
Thus, the role of a director in a private limited company is rather delicate mainly because it is vested with enormous powers and responsibilities. A careful reflection on the same may make one realize that the company is better off when more than 1 director shoulders these challenges rather than making a single person haul the entire load.
The drafters of the Companies Act, 2013 and the earlier Companies Acts, must have been far too foresighted to have struck the right chord with respect to the likelihood of abuse of power that might have occurred, had, the act allowed single directorship or not mandated a minimum of 2 directors in the case of a private limited company.
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