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Directors

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LETTER OF TRANSMITTAL

7Th August, 2012

Mr. Muhammad Zia Kayani
Course Instructor for Company Law(MBA-R3Y)
Institute of Business Management

Dear Mr. Kayani:

We are pleased to submit our report on topic Directors of Company
While engaging ourselves in making this report, we gained useful information related to the procedures of election of directors and also find the eligibilty criteria for the election of directors other issue related to director of company.
We have worked hard in making this report. We hope that it will fully serve its purpose. We appreciate your support in making this report and we also look forward to your feedback which will be helpful for us. Please check the enclosed report.
Sincerely,
Syed Abid Haider
Mohammed Waqas Manzoor
Encl. (1)

LETTER OF ACKNOWLEDGEMENT

All thanks to Almighty GOD, who is most merciful, who granted and helped us to work on this report.
We would like to express our gratitude towards our parents for their kind co-operation and encouragement which helped us in completion of this report.
We would also like to extend our gratitude towards our faculty Mr. Muhammad Zia Kayani, who gave us an opportunity to do a research and to make a report related to our course outline. We have made a report on Directors of Company
Respectfully yours,
Syed Abid Haider (12784)
Mohammed Waqas Manzoor (12782)

TABLE OF CONTENTS

1. LETTER OF TRANSMITTAL 1
2. LETTER OF ACKNOWLEDGEMENT 2
3. TABLE OF CONTENT 3
4. DEFINITION OF DIRECTOR 4
5. KINDS OF DIRECTORS 8
6. APPOINTMENT OF FIRST DIRECTOR 11
7. ELECTION OF DIRECTOR 14
8. METHOD OF VOTING 17
9. LOANS TO DIRECTORS 19
10. POWERS AND DUTIES OF DIRECTORS 23
11. DISQUALIFICATION OF DIRECTORS 29
12. REMUNERATION, RETIREMENT AND REMOVAL OF DIRECTORS 31
13. APPENDIX 35

DEFINITION OF DIRECTOR

DIRECTORS
A company, through a legal entity in the eyes of the law, Is an artificial person. It being created by law, lack both body and mind. It cannot act in its own person. It can do so only through some human agency. The persons, through whom a company acts and does its business are term as board of directors (BOD).
The institution of the company is composed of two organs - 1. General Body of Share holders 2. Board of directors.
The board is the management body which is constituted by the general body. Constituting the board means appointing directors.
The Directors are brain of a company. They occupy a pivotal position in the structure of the company. They are in fact the mainspring of the company .the board of directors are the brain and the only brain of the company which is the body, and the company does nt only through them.
POSITION OF DIRECTORS
The position of directors in a company is difficult to define precisely. The Companies ordinance is also silent on the issue.
Directors have been described by authorites as 1. Agent 2. Trustees 3. Governers 4. Managing partners
Such expression are not used as exhaustive of powers and responsibilities of such persons but only as indicating useful points of view from which they may for the moment and for the particular purpose be considered.
Directors are both trustees and agent of the company. Directors are agents in the transaction which they enter into on behave of the company and trustees for the company’s money and property.
Directors neither servant nor the employees of the company
DIRECTORS AS AGENT
Directors are, in the eyes of law, agent of the company for which they act and general principles of law of agency apply to company and to directors..Directors are merely agent of the company as the company itself cannot act in its own person it can act only through directors whenever an agent is liable the directors would be liable, and where the liability attaches to principal the liability is the liability of company.
Where the directors make contracts on behalf of the company they incur no personal liability. If they make contracts ulta vires the company they will not be liable on them unless there is an implied breach of warranty of authority. If the act done is only ultra vires the directors, the contracts made * With a member is voidable * With an outsider who had no notice for want of authority is binding on company the member can either case , make it valid

DIRECTORS AS TRUSTEES
Directors have been described as trustees of the company. They are I. Trustees of company’s money and property II. Trustees of powers entrusted
(1) TRUSTEES OF COMPANY’S MONEY AND PROPERTY
Directors are accountable for the proper use of company’s money and property and are liable to compensate the same if properly used. Proper use means application for specified purposes and mis-applications is a breach of trust.
(2) TRUSTEES OF POWERS ENTRUSTED
Directors are the trustees of the powers conferred upon them and they must exercise such powers bonafide for the benefit of the company as whole. They should apply fund honestly without any misuse
NUMBERS OF DIRECTORS
The Companies Ordinance has fixed the minimum number of directors which a company must always have. Different limits are laid down according to the nature of the company namely a) Every single member company shall have at least 1 director b) Every other private company shall have not less than 2 directors c) Every public company (non listed) shall not have not less than 3 directors d) Every public listed company shall have not less than 7 elected directors

KIND OF DIRECTORS

KINDS OF DIRECTORS:
FIRST DIRECTORS
The number and names to be determined by the majority of subscribers to memorandum, to hold office till first Annual General Meeting.
ELECTED DIRECTORS
The number of elected directors to be fixed by directors within 35 days of conveying of general meeting.
APPOINTED DIRECTORS (to fill casual vacancy)
To hold office for the remaining terms of the directors in whose place he is appointed.
CREDITORS NOMINEE DIRECTORS
Directors nominated by companies creditors or other special interest by virtue of contractual arrangement.
SPECIAL INTEREST NOMINEE DIRECTORS 1. Directors nominated by a company/corporation owned by federal/provincial Government which has made investment/extended credit facility to such company. 2. Directors nominated by federal/provincial Government on the Board of Directors. 3. Directors nominated by foreign equity holders on the board of PICIC, or any other company set up under cooperation arrangement approved by Federal Government.
Directors nominated shall hold office during the pleasure of the corporation/company Government or authority nominating him.
ASSIGNEE DIRECTORS
A director may assign his office to any person if there is provision in the Articles or by arrangement between any person and company, if it is approved by a special resolution of the company.

ALTERNATE DIRECTORS
A director with the approval of other directors may appoint an alternate/ substitute directors to act during his absence from Pakistan for 3 months or more.
FULL TIME EMPLOYEE DIRECTORS Appointed as per term of his office A chief Executive of a company is a full time director of a company.

APPOINTMENT OF FIRST DIRECTORS

APPOINTMENT OF FIRST DIRECTORS In default of and subject to any provisions in the articles of a company and section 174, the number of directors and the name of the first directors shall be determined in writing by a majority of the subscribers of the memorandum, and until so determined, all the subscribers of the memorandum who are natural persons shall be deemed to be the directors of the company. The first director shall hold office until the election shall hold office until the election of directors in the first annual general meeting. APPOINTMENT THROUGH ARTICLES OF ASSOCIATION: First Board of Directors is mostly appointed by virtue of provisions of the Article of Association of a company and the names of the directors and their number are mentioned in the Articles Election by Subscribers: If the directors are not appointed by virtue of the Articles, subscribers elect directors within 15 days from the date of incorporation. Subscribers deemed to be Director: In absence of directors, all subscribers, who are natural person, are deemed to be the directors of the company. It may be mentioned that corporate bodies can become subscribers but cannot become directors. Tenure of First Board of Directors: First directors hold the offices uptil the holding of first Annual General Meeting and taking over the offices by next board of directors.

ELECTION OF DIRECTORS

PROCEDURE FOR ELECTION OF DIRECTORS:
(1) FIXATION OF NUMBER OF DIRECTORS
The directors of a company shall, subject to section 174, fix the number of elected directors of the company not later than thirty-five days before the convening of the general meeting at which directors are to be elected, and the number so fixed shall not be changed except with the prior approval of a general meeting of the company.
(2) NOTICE OF GENERAL MEETING
The notice of the meeting at which directors are proposed to be elected shall among other matters, expressly state :-
(a) the number of elected directors fixed under sub-section (1); and
(b) the names of the retiring directors.
(3) NOMINATION FOR CONTESTING ELECTION
Any person who seeks to contest an election to the office of director shall,whether he is a retiring director or otherwise, file with the company, not later than fourteen days before the date of the meeting at which elections are to be held, a notice of his intention to offer himself for election as a director:
Provided that any such person may, at any time before the holding of election, withdraw such notice.

(4) NOTICE OF CONTESTING CANDIDATES TO MEMBERS
All notices received by the company in pursuance of sub- section (3) shall be transmitted to the members not later than seven days before the date of the meeting, in the manner provided for sending of a notice of general meeting in the normal manner or in the case of a listed company by publication at least in one issue each of a daily newspaper in English language and a daily newspaper in Urdu language having circulation in the Province in which the stock exchange on which its securities are listed is situate.

(5) COMULATIVE VOTING
The directors of a company having a share capital shall, unless the number of persons who offer themselves to be elected is not more than the number of directors fixed under sub-section (1), be elected by the members of the company in general meeting in the following manner, namely:-
(a) a member shall have such number of votes as is equal to the product of the number of voting shares or securities held by him and the number of directors to be elected;
(b) a member may give all his votes to a single candidate or divide them between more than one of the candidates in such manner as he may choose; and
(c) the candidate who gets the highest number of votes shall be declared elected as director and then the candidate who gets the next highest number of votes shall be so declared and so on until the total number of directors to be elected has been so elected.
CIRCUMSTANCES IN WHICH ELECTION OF DIRECTORS MAY BE DECLARED INVALID:
The Court may, on the application of members holding not less than twenty per cent of the voting power in the company, made within thirty days of the date of election, declare election of all directors or any one or more of them invalid if it is satisfied that there has been material irregularity in the holding of the elections and matters incidental or relating thereto.

METHOD OF VOTING

METHOD OF VOTING No election of directors is required if the number of candidates is equal to or less than the number of directors fixed to be elected then they will be elected without any election procedures. In this case all the candidates shall be deemed to have equal votes. If the number of candidates is more than the number of directors to be elected then the following procedures shall be followed: Votes available to a member are the product of number of voting shares multiplied by the number of directors to be elected. Example: Number of shares held by the member = 50 Number of directors to be elected = 10 Total no. of votes = 50×10 = 500 A member may give all his votes to one person or may divided them between more than one persons. The candidate who gets the highest numbers of votes shall be so declared and so on until total number of directors has been elected.

LOANS TO DIRECTORS

LOANS TO DIRECTORS:
LOAN TO DIRECTORS NOT IN WHOLE TIME EMPLOYMENT :
A company cannot, directly or indirectly, make any loan to, or give any guarantee or provide any security in connection with a loan made by any other person to, or to any other person by:
(a) any director of the lending company or of a company which is its holding company or any partner or relative of any such director;
(b) any firm in which any such director or relative is a partner;
(c) any private company of which any such director is a director or member;
(d) anybody corporate at a general meeting of which not less than twenty-five per cent of the total voting power may be exercised or controlled by an such director or his relative, or by two or more such directors together or by their relatives; or
(e) anybody corporate, the directors or chief executive whereof are or is accustomed to act in accordance with the directions or instructions of the chief executive, or of any director or directors, of the lending company:
LOAN TO WHOLE TIME DIRECTORS:
A company with the approval of the Authority, make a loan or give any guarantee or provide any security in connection with a loan made by any other person to a director who is in the whole -time employment of the company for such purposes as are ordinarily made by a company to its employee , namely: a. acquisition or construction of a dwelling house or land b. defraying the cost of any conveyance for personal use or household effects c. defraying any expense on his medical treatment or the medical treatment of any relative
"Relative" in relation to a director means his spouse and minor children.
LOAN TO WHOLE TIME DIRECTORS:
The restrictions imposed by section195(1)shall not apply to:
(a) any loan made, guarantee given or security provided -
(i) by a private company, unless it is a subsidiary of a public company; or
(ii) by a banking company;
(b) any loan made by a holding company to its subsidiary; or
(c) any guarantee given or security provided by a holding company in respect of any loan made to its subsidiary.

RETURN OF LOAN BY DIRECTORS:
Every person shall within fourteen days of his appointment as director or chief executive of a company file with the registrar the particulars of any loan taken, or guarantee or security obtained, prior for to his becoming director or chief executive of the lending company which could not have been taken or obtained without the prior approval of the Authority had he at the time of taking the loan or obtaining the guarantee or security been the director or chief executive of the lending company.

PENALTY FOR UNAPPROVED LOANS :
Every person who is knowingly a party to any contravention of this section, including in particular any person to whom the loan is made or who has taken the loan in respect of which the guarantee is given or the security provided, shall be punishable with fine which may extend to five thousand rupees or with simple imprisonment for a term which may extend to six months:
Provided that where any such loan, or any loan in connection with which any such guarantee or security has been given or provided by the lending company, has been repaid in full, no punishment by way of imprisonment shall be imposed under this sub-section, and where the loan has been repaid in part, the maximum punishment which may be imposed under this sub-section by way of imprisonment shall be proportionately reduced.

POWER & DUTIES OF DIRECTORS

POWERS OF DIRECTORS
The powers of directors are classified as under: * Powers without Consent of General Meeting -Section 196 * Powers with Consent of General Meeting -Section 196(3)

POWERS WITHOUT CONSENT OF GENERAL MEETING:
Section 196 provides that the business of the company shall be managed by the directors, who may pay all expenses incurred in promoting and during registration of the company and may exercise all such powers of the company as are not by Companies Ordinance, or by the articles, or by a special resolution, required to be exercised by the company in general meeting.
Under Section 196(2), the directors shall exercise the following powers on behalf of the company and shall do so by means of a resolution passed at their meeting, namely: a. Make calls on shareholders in respect of moneys unpaid on their shares, b. Issue shares, c. Issue debentures, d. Borrow money otherwise than on debentures, e. Invest funds of the company, f. Make loans, g. For the purposes of entering into contracts of sale, purchase, supply of goods or rendering services authorize: i. A director, or ii. Firm of which he is a partner, or iii. Any partner of such firm, or iv. A private company in which he is a member or director. h. Approve annual or half yearly or other periodical accounts as are required to be circulated to members, or i. Approve bonus to employees, or j. Incur capital expenditure exceeding Rs.1,000,000 on any single item or dispose of a fixed asset of the value exceeding Rs. 100,000. k. To declare interim dividend l. In respect of the following if the same is considered material by BOD as per generally accepted accounting principles: i. To write off bad debts, advances and receivables ii. To write off inventories and other assets of the company iii. Circumstances in which a lawsuit may be compromised or a claim or right may be released or surrendered POWER WITH CONSENT OF GENERAL MEETING: Under Section 196(3), the directors of a public company or of a subsidiary of a public company shall, with the consent of the general meeting either specially or by way of an authorization, do any of the following things, namely: a. Sell lease or otherwise dispose of the undertaking or a sizeable part thereof, unless the main business of the company comprises of such selling or leasing, and b. Remit, give any relief or give extension of time for the repayment of any debt outstanding against any person specified under section 195. PENALTY FOR THE CONTRAVENTIONS OF POWERS: Whosoever contravenes the provisions of section 196 shall be punishable with fine exceeding to Rs. 5,000 and shall be individually and severally liable for losses or damages arising out of such action. DUTIES OF DIRECTORS
Behavior of directors when involved in the day-today running of the company should meet certain minimum standards. Such duties can be categorized as follows: * Duties of honesty and good faith; and * Duties of care and skill.
DUTIES OF HONESTY AND GOOD FAITH (Known as fiduciary duties):
These require the directors to: * Act in what they believe to be the best interest of their company; * Exercise their powers for the particular purposes for which they were conferred; and * Not put themselves in a conflict between duty and personal interest.
(a) Duty to act in good faith in the interest of the company:
This is a primary duty of director. The test of good faith is subjective, so that if a director honestly believes that he is exercising his power in the best interest of the company, a court will not declare him to be lack of fiduciary duties as his actions are in the interest of the company.
The directors must have regard to the interest of the company’s employees in general as well as the interest of it members. This duty, like directors’ other duties, is owed to the company itself and is not enforceable by individual employees. The scope of this duty does not alter the overriding requirement that directors must act in the interest if the company as a whole.
(b) Duty to use powers for their proper purpose:
The powers of directors, as granted in the Articles, are held in trust for the company and must not be exercised for any purpose other that that for which the powers was conferred.
A director who breaches this duty cannot argue that his action was done in good faith and in what he believes to be the best interest of the company.
(c) Duty not to exceed powers:
The directors must not do an act which is unlawful, or outside the company’s powers outside the powers conferred on the directors by the Articles. This is applicable even if they act honestly and believe that what they are doing is the best interest of the company. Directors may be personally liable if they dispose of the company’s property in an unauthorized manner e.g. by paying dividends out of the company’s capital.
(d) Conflicts of interest and duty:
A director must not take advantage if his position including the duty not to mistake a personal profit from his position and a number of statutory provisions are designed to eliminate conflicts of interest and abuses by directors of their position.
DUTIES OF CARE AND SKILL:
A director has duties of care and skill which are positive side to promote the welfare of the company.

(a) The test of skill:
The traditional test has been that a director need not display on the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. In other words, the degree of skill to expect of a director is judge subjectively by looking at his particular qualification and not according to an objective standard.
However, a conduct that might be expected of a person carrying out the same functions as a director and the general knowledge, skill experience that a director has, should be used to interpret the test of skill. (b) Attendance at broad meeting:
Traditionally, a director is not bound to give continuous attention to the affairs of the company. His duties may be of an occasional nature to be performed at periodical meetings of the board and any committee of the board on which he may sit. He should ideally attend all such meetings but he is not bound to.
A greater duty can be imposed upon the directors. This is often done in the case of an executive director through the service contract between the directors and the company. This often contrasts with the less formal arrangements for non-executive directors, who may not attend all board meetings and who will usually not bee a company employee. (c) Delegation:
A director may delegate his duties to employees or agents of the company provided he ensures that the relevant person is suitably qualified, but in the absence of authority from the company the directors must act collectively as a board and have general right to delegate their powers. However, the articles usually allow the directors to delegate their powers to managing or other executive directors or to a committee of the directors.
In recent case laws the courts have taken a view that the directors can delegate their powers as per the articles but such delegation does not abrogate their responsibilities to supervise the extent of that duty.
As regards liability between directors, the default of one director does not necessarily impose liability on the others. A director is not generally liable for the acts of other directors and is under no duty to supervise their conduct. However, a director who knows the default and participated to an extent or a director who has failed to supervise or enquire when there are suspicious circumstances, may be liable to the company.

DISQUALIFICATION
OF DIRECTORS

DISQUALIFICATION OF DIRECTORS
A person shall not become a director of a company if he: a. Is a minor b. Is of unsound mind c. Has applied to be adjudicated as an insolvent and his application is pending d. Is an undischarged insolvent e. Has been convicted by a court for an offence involving moral turpitude f. Has been debarred from becoming a director under any provision of the Companies Ordinance g. Has betrayed lack of fiduciary behavior and a declaration to this effect has been made by the court u/s 217 h. Is not a member. However, the following persons need not be a member to become a director: * A person representing government or an authority which is a member * A whole time employee director * A Chief Executive * A person representing a creditor

Additional ineligibility grounds in the case of a listed company are: i. Loan defaulter declared by a court of an amount exceeding such amount as notified by the SECP.
Note: The amount specified by the SECP in respect of loan defaulter is Rs. 1 million (SRO 922 dated 17.9.2003)

j. Is engaged in the business of brokerage, or is a spouse of such person or is a sponsor, director or officer of a corporate brokerage house. However, such a person may become a director of a stock exchange.

REMUNERATION OF DIRECTORS RETIREMENT OF DIRECTORS REMOVAL OF DIRECTORS VACATION OF OFFICE BY THE DIRECTORS

REMUNERATION OF DIRECTORS:
(1) The remuneration of a director for performing extra services, including the holding of the office of chairman, shall be determined by the directors or the company in general meeting in accordance with the provisions in the company's articles. (2) The remuneration to be paid to any director for attending the meetings of the directors or a committee of directors shall not exceed the scale approved by the company or the directors, as the case may be, in accordance with the provisions of the articles.
RETIREMENT OF DIRECTORS:
On the date of the first annual general meeting of a company all directors of the company for the time being who are subject to election shall stand retired from office and thereafter all such directors shall retire on the expiry of the term laid down in section 180: Provided that the directors so retiring shall continue to perform their functions until their successors are elected: Provided further that the directors so continuing to perform their functions shall take immediate steps to hold the election of directors and in case of any impediment report the circumstances of the case to the registrar within fifteen days of the expiry of the term laid down in section 180.

REMOVAL OF DIRECTORS:
A company may by resolution in general meeting remove a director before the expiry of his term: a) Who was appointed as first director by the subscribers to the memorandum under section 176 b) Who was appointed in a casual vacancy under section 180 c) Who was elected as director in the manner provided in section 178
The resolution for removing a director shall not be deemed to have been passed unless the number of votes cast in favor of such a resolution is not less than
(i) the minimum number of votes that were cast for the election of a director at the immediately preceding election of directors, if the resolution relates to removal of a director elected in the manner provided in sub-section (5) of section 178; or
(ii) the total number of votes for the time being computed in the manner laid down in sub-section (5) of section 178 divided by the number of directors for the time being, if the resolution relates to removal, of a director appointed under section 176 or section 180.
VACATION OF OFFICE BY THE DIRECTORS:
A director shall ipso facto cease to hold office if:
(a) he becomes ineligible to be appointed a director on any one or more of the grounds enumerated in clauses (a) to (h) of section 187;
(b) he absents himself from three consecutive meetings of the directors or from all the meetings of the directors for a continuous period of three months, whichever is the long, without leave of absence from the directors;
(c) he or any firm of which he is a partner or any private company of which he is a director -
(i) without the sanction of the company in general meeting accepts or holds any office of profit under the company other than that of chief executive or a legal or technical adviser or a banker; or
(ii) accepts a loan or guarantee from the company in contravention of section 195.

APPENDIX

* Company law ( luqman baig) * www.secp.com.pk * www.investopedia.com

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