CORPORATE Law
Directors Secretary and Auditors
Chalana Perera
Attorney-at-Law
• As per Sec.529 “director” includes a person occupying the position of director of the company, by whatever
name called. As per this definition, whether a person is a director or not does not depend on his name, but it
depends on his function. The main function of a director is attending board meetings and taking part in decision
making. Anyone who does these functions is treated as a director even though he is called by some other name.
• As per Section 201, a company shall have at least one director, except a public company which should have at
least two directors. There is no maximum limit in the Companies Act. The minimum number stated above can be
increased by the articles but cannot be reduced.
• Section 184
• The definition given to Directors in the Act also includes ‘shadow directors’. (Section 529 – extended meaning)
Shadow Directors
• As per Sec.529, the word “director” includes a person in accordance with whose directions or instructions the
board of the company is accustomed to act.
• If a person instructs the board of directors how to act and if the board of directors has the habit of acting in
accordance with such instructions, such a person will be treated as a shadow director. Therefore a shadow director
is not appointed to the director board, but he directs the board of directors from outside.
•
• According to the Companies Act a shadow director is liable similar to a validly appointed director for the
purposes of directors’ duties and obligations. However, a consultant is not a shadow director by reason only of
the fact that he gives advice to directors in a professional capacity.
Qualification of Directors
As per section 202(1) any person who is not disqualified under section 202(2) may be appointed as a director of a
company.
(a) a person who is under eighteen years of age;
(b) a person who is an undischarged insolvent;
(c) a person who is prohibited from being a director under the Companies Act, No. 17 of 1982 [PFM];
(d) A person who is prohibited from being a director or promoter under section 213 or section 214 of this Act [PM];
(e) A person who has been adjudged to be of unsound mind;
(f) A person that is not a natural person;
(g) A person who does not comply with any qualifications contained in the articles of a company.
Sec 202(3) - If a disqualified person acts as a director, he will be treated as a director for the purposes of any provision of
the Companies Act that imposes a duty or any obligation on a director of a company.
Refer Section 213 and 214
Requirements of the Banking Act No. 33 of 1988
Appointment Procedure – Section 203 – 206
Section 203 - Any person appointed as director
must consent to the appointment in a
prescribed form and certify that he is not
disqualified from being appointed.
Section 204 - A person named as a director in
an application for incorporation shall hold
office as a director from the date of
incorporation until that person ceases to hold
office as a director.
Section 205 - Unless the articles provide
otherwise all subsequent directors of a company
shall be appointed by ordinary resolution. As
per Sec.205 appointment of directors to be
voted on individually in companies other than
private companies.
Retirement or removal of directors
Section 206 - Subject to the provisions contained in the articles of a company, a director may be removed from
office at a meeting by way of an ordinary resolution. In the notice calling the meeting the removal of the director
should be stated. Reason is not necessary.
When the notice is given, the concerned director has the right to make representation within 14days of such notice,
and the company is required to circulate the same to its shareholders or read it at the meeting, unless the company
obtain permission from court not to do so. Removal of a director is a power vested with the shareholders, hence the
court usually does not interfere. [Company needs to prove to the satisfaction of the Court that the director is
attempting to secure unnecessary publicity for a defamatory matter]
Section 207 – Vacation of Office
Section 208 - Where a company has only one director, that director may not resign office until that director has
called a meeting of shareholders to receive notice of the resignation, and to appoint one or more new directors.
Section 210 – Age Limit for Directors
Powers and Duties of Directors
Powers
Section 184 gives all the powers necessary for managing, directing and supervising the management of the business
and affairs of the company, subject to major transactions in Section 185.
Duties
Prior to 2007 Act, duties were based on Judicial Decisions. Now, the Companies Act has codified the fundamental
principles that govern the duties of directors. – Section 187, 188, 189, 190, 192, 197, 219, 220
Dorchester Finance Co. Vs Stebbings (1989) - The company had one executive director and two other non-
executive directors both of whom were accountants. The company had granted some loans, which were
irrecoverable due to non-compliance with the statutes. The non-executive directors used to sign blank cheques
without checking the other director’s work. Held that the executive director was liable for misappropriation of the
company’s funds and the non-executive directors too were liable in negligence for signing blank cheques.
• Section 190 - The directors are permitted to rely on information provided to them by employees, professional
advisors and experts within their areas of competence, or by other directors. However, in doing so, they should
act in good faith, make proper inquiries when there is reason to do so and not have reason to believe that such
reliance was unwarranted.
• Section 192 - A director shall enter in the company’s interests register, when he has an interest in a transaction or
proposed transaction with the company. Such disclosure must set out the nature and extent of such interest
• Section 219 - A director who believes that the company is unable to pay its debts as they fall due, should call a
meeting of the board to consider whether the board should apply to court for the winding up of the company or
carry on further the business of the company. Failure to do so may make the director liable for any loss suffered
by the creditors of the company.
• Section 220 - If at any time it appears to a director that the net assets of the company are less than half of its
stated capital, the board should within twenty working days of that fact becoming known to the director, call an
extraordinary general meeting of shareholders of the company to discuss the financial position of the company.
Division of Power Between Directors and Members
Members delegate certain powers to the company’s directors to run the company on their behalf.
• Section 49(2)
• Shareholders are the proprietors of a company and considered the owners of the company by owning a share
certificate. They provide the capital required and in lieu thereof they become stakeholders of the company.
• Management and control of the business affairs of a company are entrusted to the board of the company subject,
however, to the control of its shareholders in so far as their proprietary interests are affected.
• Articles is a contract. Shareholders can therefore exercise certain powers of the company where the Act
specifically provides for it or in the instances where the articles permit it. The shareholders' right to powers of
management in specific instances helped provide proper checks and balances on the activities of the directors. [at
a meeting of shareholders or by a resolution in lieu of meeting Section - 144]
Role of the Secretary
Every company must have a secretary and the position forms an integral part of the administration of a company.
Usually, the secretary of the company holds an administrative position, and his or her main function is to carry out
the directions of the board of directors. A secretary is not generally involved in the day to day management of the
company’s affairs. The role of the company secretary therefore has to be considered in any discussion on the
administration of a corporate body.
Appointment and Qualifications
• The board of directors to appoint the secretary of the company for such period, at such remuneration, and on
such conditions as the board thinks fit.
• In terms of section 221, the qualifications required of a secretary may be prescribed by the Registrar, depending
on the turnover and stated capital of a company and having regard to the nature of the duties that the secretary
will be called upon to discharge.
• As per sec.223, if the board appoints a new secretary that appointment must be notified to the Registrar of
Companies within 20 working days of his appointment.
• Form 19
A qualified person should be a citizen of Sri Lanka and ordinarily resident in Sri Lanka and he should have one or more
of the following qualifications
1. An Attorney at Law of the Supreme Court
2. Member of the Institute of Chartered Accountants of Sri Lanka (ICASL)
3. Member of the Institute of Chartered Secretaries and Administrators of Sri Lanka
4. Member of the Chartered Institute of Management Accountants (CIMA)
5. Member of an association or institute approved by the minister, which provides a course in Company Law or
company secretarial practice; or
6. A person who has obtained any special qualification in relation to company secretarial work from an institution or
other body approved by the minister; or
7. A person who, by virtue of his holding or having held any other position, or of his being a member of any other
body in the public or private sector for a period of not less than twenty years, appears to the Registrar to be capable of
discharging the functions of the secretary of a company; or
8. A person who has on the day immediately prior to the date of coming into operation of the companies act No.17 of
1982 held the office of secretary or deputy secretary or assistant secretary of a company and satisfied the Registrar of
his competence to discharge the duties of a secretary.
Early situation - Barnett & Company Vs South London Transways Company (1887) - In this case Lord Esher
said “A Secretary is a mere servant, his position is that he should do what he is told to do. No one can presume that
he has any authority to represent a company in making contracts”.
Current situation - Secretaries can enter into binding contracts on behalf of the company that are of binding nature.
**Panorama Developments Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711 **
In this case a company secretary hired a car stating it to be for the company purpose. But in fact he used the car for
his own private purposes. The company refused to pay for the hire. But court held that the company secretary may
hire cars on behalf of the company because it is an administrative contract. Therefore if he has hired a car, the
company is liable to pay even though it was used for his own purposes, because the secretary has an apparent
authority to make administrative contracts.
Lord Denning in giving the above judgment said that a “company secretary is a much more important person
nowadays than he was in 1887. He is an officer of the company with extensive duties and responsibilities. This
appears not only in the Company’s Act but also by the role he plays in the day to day business of Companies. He is
no longer a mere clerk. He is entitled to sign contracts with the administrative side of a company’s affairs”.
Company Auditor
Every company must have an auditor. The financial statements of a company are audited by an auditor, appointed
by the company in accordance with the provisions of section 154 - every company is required to appoint an auditor
at its annual general meeting by way of an ordinary resolution until the conclusion of the succeeding annual general
meeting. The role of an auditor is to act as a gatekeeper of a company in relation to the quality of the information
contained in a company’s financial statements. If the company failed to appoint an auditor at the annual general
meeting or fill a vacancy within one month of its occurring, the Registrar must be notified and then the Registrar will
appoint an auditor.
Section 157- the auditors are required to be members of the Charted Accountants of Sri Lanka. But private
companies and companies limited by guarantee are exempted from this requirement.
Removal - A qualified auditor is generally automatically re-appointed when his term of office ceases at the
conclusion of an annual general meeting. An auditor can resign or cease to hold office for any reason. In such
circumstances, he must deliver to the company a statement setting out any circumstances connected with his ceasing
to hold office. If there is no such reason, then he must deliver a statement to that effect. Failure to do so is an
offence under the Act.
