Directors of the Company

Definition of ‘director’ under the Companies Act 2017:

In Section 2(25), “director” includes any person occupying the position of a director, by whatever name called. Thus whatever terms the AOA use to describe the members of the board (e.g. governors, administrators), as far as the law is concerned they are directors.

Legal status

1. Agents of the company:

Company cannot act through its own and must act through human beings. Directors act on behalf of the company, making them the company’s agents. Agency law governs their relationship and they must act within the powers granted to them as agents as provided in the law and contained in the AOA.

2. Not agents of the shareholders:

Directors are only agents of the company and not of the shareholders. Their duty is towards the company and to look after the company’s interests (although arguably that may include shareholder interests – ref. corporate governance theories).

3. Trustees:

Trustees hold and manage property entrusted to them on behalf of beneficiaries of the property. Directors are not trustees in the strict sense because the company’s property vests in the company itself and not the directors. However just as trustees are in a fiduciary relationship towards beneficiaries, directors too have fiduciary duties towards the company and must act in good faith for the benefit of the company. Breach of such fiduciary duty may result in imposition of penalties under the law.

4. Like managing partners of a partnership:

Yes, in the sense that they are both responsible for management of their respective business organizations.

Imperial Hydropathic Hotel Co. v Hampson (UK case)

                “Directors are described as agents, sometimes as trustees and sometimes as managing partners. But each of these expressions is used not as exhaustive of their powers and responsibilities, but as indicating useful points of view from which they may, for the moment and for the particular purpose, be considered.”

Number of directors

There is no maximum number of directors in the Companies Act 2017. Subject to the minimum number provided in the Act, the minimum and maximum number of directors can be fixed in the AOA. Existing directors of a company shall fix the number of directors to be elected in the GM within 35 days prior to such meeting and such number fixed shall not be changed without prior approval of the GM in which election is to be held.

Number of first directors to be determined by the subscribers to the MOA. Number of first directors can be increased by appointing additional directors by the members in GM

Types of directors

Executive directors:

Executive directors are generally full-time officers of the company who carry out the management of the company’s business. The AOA provides extensive management powers to them and they will usually have separate service contracts with the company.

Non-executive directors:

Non-executive directors are usually appointed to the boards of larger companies to act as monitors of the executive management. These appointments are typically part-time.

De facto directors (cf. de jure):

Not formally appointed as such but acts as a director inasmuch as he openly undertakes a directorial role in the conduct of the company’s affairs.

First directors:

Directors who subscribe their name to the MOA and AOA at the time of registration

Nominee directors:

Directors nominated by an institution or organization to represent them and their interests

• Company’s creditors
  • Special interests by virtue of contractual arrangements
  • Body corporate or corporation owned or controlled by the Federal or Provincial Governments which has extended credit facilities

Independent directors:

“…a director who is not connected or does no have any other relationship, whether pecuniary or otherwise, with the company, its associated companies, subsidiaries, holding company or directors; and he can be reasonably perceived as being able to exercise independent business judgment without being subservient to any form of conflict of interest.”

Selection from the Pakistan Institute of Corporate Governance (PICG) databank containing names, addresses and qualifications of persons eligible and willing to act as such.

Qualifications

A director must:

• Be a natural person
• Not be a minor
• Not be of unsound mind
• Not have applied (application pending) to be adjudicated as insolvent
• Not be an undischarged insolvent (i.e. bankrupt)
• Not have been convicted by a court of law for an offence involving moral turpitude (vaguely defined as a depraved or immoral act, or a violation of the basic duties owed to fellow man)
• Not have been debarred from holding such office under the Act
• Not have been declared to lack fiduciary behavior

A director must:

• Have a National Tax Number (NTN) (SECP can grant exemption)
• Be a member/shareholder. Exceptions:
  • A person representing a member which is not a natural person
  • A whole-time director who is an employee of the company
  • A chief executive
  • A person representing a creditor or other special interests by virtue of contractual arrangements
• Not have been declared by a court as a defaulter in repayment of loan to a financial institution (for directors of listed companies only)
• Not be 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

Penalty for an unqualified/disqualified person acting as a director:

If such a director or chief executive describes or represents himself or acts as a director of chief executive respectively, allows or causes himself to be described as such, he shall be liable to a penalty under the Act.

Also read: Rights of Shareholders