Meaning of a Director – Appointment, Qualifications, Legal Position, etc.

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  • Last Updated on 6 June, 2022

Table of Contents: 
1. Meaning of a Director
2. Who may be appointed as a Director?
3. Qualifications for Directors
4. Disqualifications of a Director
5. Legal position of directors

5.1 Directors as agents

5.2 Directors as trustees

5.3 Directors as managing partners

5.4 Are directors employees of the company?

6. Full time v. Part time Director
7. Appointment of Directors

7.1 Appointment of first directors [Section 152]

7.2 Appointment of directors at general meeting

7.3 Deemed re-appointment of a retiring director [Sec. 152]

7.4 Rotational and non-rotational directors vis-a-vis private company

7.5 Appointment of a director other than a retiring director [Sec. 160]*

7.6 Appointment by Board of directors [Section 161]

8. Resident Director
9. Independent Director**

9.1 Who is an Independent Director

Directors of a Company

Company Law & Practice is the most amended & updated book to represent an impressive and judicious blending of the provisions of the Companies Act, Judicial Decisions, Clarifications issued by SEBI, etc. The text is interspersed with interpretations, explanations & illustrations to help the reader assimilate the provisions better.

1. Meaning of a Director

Section 2(34) of the Companies Act, 2013 defines a ‘director’ to mean a director appointed to the Board of a company.

Under the scheme of the Companies Act, the company itself and its directors or the Board of directors are primary agents of the company to transact its operations. The Companies Act specifies where the company itself is to act both as principal and the agent and where the Board of directors is to act on its behalf. In respect of the properties and assets of the company the directors or the Board of directors act as Trustees. Therefore, the directors have different attributes in relation to the company depending upon the facts of each case.

As stated earlier, directors apart from being trustees for the assets and properties of the company are also the agents of the company as it is the directors, collectively as Board, act on behalf of the company on all matters except those specifically reserved for the company to act. However, it may be noted that even though the directors for certain purposes can be considered as the agent of the company, yet in respect of such matters for which the directors (i.e., the Board) are empowered to take a decision, the company in any manner, including in the general meeting, cannot direct the directors to take a particular decision. For example, allotment of shares, transfer of shares, investments etc. If the body of the shareholders did not approve the decision, they are free to change the directors in the manner given in the Act. As stated elsewhere in the chapter a director apart from being the agent and trustee of the company, can also be treated as officer of the company, hence an employee for purposes specified in the Act.

The articles of a company may designate its directors as governors, members of the governing council or the board of management, or give them any other title, but so far as the law is concerned they are simply directors.

Similarly, in the case of associations or other bodies registered as companies under section 8 (that is companies whose object is not profit making but furtherance of art, science, commerce, culture, etc.), the members of the executive committee or the governing body are directors for purposes of the Act, though they may not be called by that name.

A manager or any other managerial personnel, is however, not a director – Andhra Pradesh High Court in Deen Dayalu v. Sri B.P. Reddy [1984] 2 Comp. LJ 396.

According to section 2(59) of the Act, the definition of an “officer” includes a director as well as any person under whose directions or instructions the Board or any one or more of the directors are accustomed to act.

2. Who may be appointed as a Director?

Section 149 of the Companies Act provides that only an individual can be appointed as director. Thus, no body corporate, association or firm can be appointed director of a company.

However, no person shall be appointed as a director of the company unless he has been allotted a Director Identification Number (DIN) or such other number as may be prescribed under section 153. Section 153, as amended by the Amendment Act, 2017 provides that the Central Government may prescribe any identification number which shall be treated as Director Identification Number for the purposes of this Act. [Section 152(3)].

Section 153 requires that every individual intending to be appointed as director of a company shall make an application for allotment of Director Identification Number to the Central Government in such form and manner and along with such fees as may be prescribed. However, the Central Government may prescribe any other identification number as a DIN.

Application for allotment of Director Identification Number before appointment in an existing company:

As per the Companies (Appointment and Qualification of Directors) Amendment Rules, 2018,

(a) every applicant, who intends to be appointed as director of an existing company shall make an application electronically in Form DIR-3, to the Central Government for allotment of a Director Identification Number (DIN) along with such fees as provided under the Companies (Registration Offices and Fees) Rules, 2014. However, in case of proposed directors not having approved DIN, the particulars of maximum three directors shall be mentioned in Form No. INC-32 (SPICe) and DIN may be allotted to maximum three proposed directors through Form INC-32 (SPICe).

(b) Form DIR-3 shall be signed and submitted electronically by the applicant using his or her own Digital Signature Certificate and shall be verified digitally by a company secretary in full time employment of the company or by the managing director or director or CEO or CFO of the company in which the applicant is intended to be appointed as director in an existing company.

The Central Government shall, within one month from the receipt of the application under section 153, allot a Director Identification Number to an applicant in such manner as may be prescribed [Section 154].

No individual, who has already been allotted a Director Identification Number under section 154, shall apply for, obtain or possess another Director Identification Number [Section 155].

If any individual or director of a company makes any default in complying with any of the provisions of section 152 or section 155, such individual or director of the company shall be liable to a penalty which may extend to fifty thousand rupees and where the default is a continuing one, with a further penalty which may extend to five hundred rupees for each day after the first during which such default continues [Section 159, as amended by Companies (Amendment) Act, 2019]

Company is required to inform DIN of a director to the Registrar within 15 days [Section 157].

3. Qualifications for Directors

The Companies Act has not prescribed any academic or professional qualifications for directors. Also, the Act imposes no share qualification on the directors. So, unless the company’s articles contain a provision to that effect, a director need not be a shareholder unless he wishes to be one voluntarily. But the articles usually provide for a minimum share qualification.

4. Disqualifications of a Director

Section 164(1) of the Companies Act, 2013 provides that a person shall not be eligible for appointment as a director of a company, if —

(a) he is of unsound mind and stands so declared by a competent court;

(b) he is an undischarged insolvent;

(c) he has applied to be adjudicated as an insolvent and his application is pending;

(d) he has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and sentenced in respect thereof to imprisonment for not less than six months. However, this disqualification will last only up to five years from the date of expiry of the sentence.

But, if a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of seven years or more, he shall not be eligible to be appointed as a director in any company;

(e) an order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force;

(f) he has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call;

(g) he has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years;

(h) he has not complied with sub-section (3) of section 152; or

(i) he has not complied with the provisions of sub­section (1) of section 165.

Section 165(1) limits the number of directorships to 10 public companies and total companies to 20.

After 2017 amendment, the disqualifications referred to in clauses (d), (e) and (g) of sub-section (1) shall continue to apply even if the appeal or petition has been filed against the order of conviction or disqualification.

Sub-section (2) of section 164 further provides that no person who is or has been a director of a company which—

(a) has not filed financial statements or annual returns for any continuous period of three financial years*; or

(b) has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more,

shall be eligible to be re-appointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to do so.

However, as per the 2017 amendment, he shall not incur the disqualification for a period of 6 months from the date of his appointment.

Additional disqualifications for directors of a private company – **A private company may by its articles provide for any disqualifications for appointment as a director in addition to those specified above.

It is difficult to define the exact legal position of the directors of a company. The Companies Act makes no effort to define their position. They have at various times been described by judges as agents, trustees or managing partners. In the words of Bowen, L.J. :

“Directors are described sometimes 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 to be considered.”

5.1 Directors as agents

Directors may correctly be described as agents of the company. Cairns, L.J. observed : “The company itself cannot act in its own person; it can only act through directors, and the case is, as regards those directors, merely the ordinary case of principal and agent”. The ordinary rules of agency will, therefore, apply to any contract or transaction made by them on behalf of the company. Where the directors contract in the name and on behalf of the company it is the company which is liable on it and not the directors.

Thus, where chief executive of company executed promissory note and borrowed amount for company’s sake, it could not be said that amount was borrowed by him, in his personal capacity – Kirlampudi Sugar Mills Ltd. v. G. Venkata Rao [2003] 42 SCL 798 (AP).

But, where surety was furnished by directors in their personal capacities and not for and on behalf of company, company could not be sued for amount of surety – H.P. State Electricity Board v. Shivalik Casting (P.) Ltd. [2003] 115 Comp. Cas. 310 (H.P.).

Directors as agents make the company liable even for contempt of court [Vineet Kumar Mathur v. Union of India [1996] 20 CLA 213 (SC)]. However, directors incur a personal liability in the following circumstances :

    1. where they contract in their own names;
    2. where they use the company’s name incorrectly, e.g., by omitting the word ‘Limited’;
    3. where the contract is signed in such a way that it is not clear whether it is the principal (the company) or the agent who is signing; and
    4. where they exceed their authority, e.g., where they borrow in excess of the limits imposed upon them – Weeks v. Propert [1873] LR 8 CP 427.

Ratification of unauthorised acts of Directors

A transaction by the directors which is beyond their powers but within the powers of the company can be ratified by a resolution of the company or even by acquiescence – Bhajekar v. Shinkar [1934] 4 Comp. Cas. 434 (Bom.).

Shareholders can by their assent ratify acts of directors which are intra vires company, though they may not be intra vires the board of directors – Sri Balasaraswathi Ltd. v. A. Parameswara Aiyer [1956] 26 Comp. Cas. 298 (Mad.).

A non-existent entity cannot ratify any action which it could not have initiated. Therefore, where on the date of presentation of the suit, the company was admittedly struck off the register and dissolved, there could be no question of ratification of an action which a non-existent entity could not have initiated in the first instance – Floating Services Ltd. v. MV ‘San Fransceco Dipalola’ [2004] 52 SCL 762 (Guj.).

5.2 Directors as trustees

A trustee is a person in whom is vested the legal ownership of the assets which he administers for the benefit of another or others. Directors are regarded as trustees of the company’s assets, and of the powers that vest in them because they administer those assets and perform duties in the interest of the company and not for their own personal advantage. In Ramaswamy Iyer v. Brahmayya & Co. [1966] 1 Comp. LJ 107 (Mad.), the Madras High Court held that “The directors of a company are trustees for the company, and with reference to their power of applying funds of the company and for misuse of the power they could be rendered liable as trustees and on their death the cause of action survives against their legal representatives”.

Besides, almost all the powers of directors, e.g., of allotting shares, making calls, forfeiting shares, accepting or rejecting transfers, etc., are powers in trust. “They have been made liable to make good money which they have misapplied, upon the same footing as if they were trustees.”

Fiduciary capacity, within which directors have to act, enjoins upon them a duty to act on behalf of a company with utmost good faith, utmost care and skill and due diligence and in interest of company they represent – Dale & Carrington Investment (P.) Ltd. v. P.K. Prathapan [2004] 54 SCL 601 (SC).

5.3 Directors as managing partners

The persons holding this view consider a company as large partnership, directors being charged with the responsibility of managing the affairs. The other shareholders are virtually dormant partners. By virtue of the various provisions in the Memorandum and Articles, they enjoy vast powers of management and act as the supreme policy and decision making body.

5.4 Are directors employees of the company?

Ordinarily, a director is elected by the shareholders in general meeting, and once so elected, he enjoys well-defined rights and powers under the Act or the articles. Even the shareholders who elect them cannot interfere with their rights or powers except under certain circumstances. An employee appointed by the company under a contract of service is a servant of the company. He does not enjoy any powers other than those vested in him by the employer, who can always direct his actions and interfere in his work.

In Lee Behrens & Co., Re [1932] 2 Comp. Cas. 588, it was observed that directors are elected representatives of the shareholders engaged in directing the affairs of the company on its behalf. As such directors are agents of the company but they are not employees or servants of the company. However, there is nothing in law to prevent a director from accepting employment under the company under a special contract which he may enter into with the company – R.R. Kothandaraman v. CIT (1957).

Accordingly, where a director accepts employment under the company under a separate contract of service, in addition to the directorship, he is also treated as an employee or servant of the company. He shall, in such a case, be entitled to remuneration and other benefits admissible to employees, in addition to his remuneration as Director under the Act.

Besides, directors are also treated as officers of the company for certain matters and are bracketed with the manager, secretary, etc. for this purpose. As ‘officers in default’, they are liable to certain penalties for failure to comply with the provisions of the Act.

To sum up, we may quote Jessel, M.R., in Forest of Dean Coal Mining Co., Re [1878] 10 Ch. D. 450, who observed : “Directors have sometimes been called as trustees or commercial trustees, and sometimes they have been called managing partners; it does not matter much what you call them so long as you understand what their real position is, which is that they are really commercial men managing a trading concern for the benefit of themselves and of all the shareholders in it. They stand in a fiduciary position towards the company in respect of their powers and capital under their control.”

6. Full time v. Part time Director

Companies Act makes no distinction between a full time and a part time director. In Jagjivan Hiralal Doshi v. Registrar of Companies [1989] 65 Comp. Cas. 553 (Bom.), the Bombay High Court observed that the plain meaning of director is the person occupying the position of director – call him a part time director or a full time director. The rules of construction do not call for any modification or qualification of this meaning. ‘Any director’ is an officer of the company. The Legislature which defined the word ‘officer’ has made no distinction based on full time and part time performance of duty.

The powers of the company are exercised by the Board of directors. It shall not exercise any power or do any act which is required to be exercised or done by the company in general meeting. Here again, no distinction founded on part time participation as member of the Board is discernible. The meeting of the Board of directors shall be held at least once in three months. In such meeting, every member participates in voting and takes decision without distinction as to whether he is a part time or full time director.

At every annual general meeting of the company held in pursuance of section 96, the Board of directors is enjoined to lay before the company a balance sheet. Every balance sheet and every profit and loss account of a company shall be signed on behalf of the Board of directors by not less than two directors of the company, one of whom shall be the managing director where there is one. In this signing requirement also no distinction has been made as regards full time or part time director. In other words, where there is a managing director, he should be one of the signatories and the other being any director. Where there is no managing director, both the signatories can be any director.

In the matter of proceedings of negligence, default, breach of duty, misfeasance and breach of trust, the Act and the rules admit of no distinction between members of the Board of directors based on their part time or full time performance of duties. Their liability for any proceedings for such acts is equal. While all the directors are, in law, liable for their acts, the question of relieving them is still one of discretion.

When the responsibility of all the directors, both performing part time duties or full time duties is equal, should any of the directors be relieved from the liability in respect of negligence, breach of trust, misfeasance, etc., is always a question of judicial discretion.

What are the cases in which part time directors should be relieved ? The answer would depend upon the circumstances of each case and no rigid formula can be laid down. In some cases the directors who perform part time functions may be relieved from liability if no evidence of the fact that they had exercised any control in the particular matter has been brought forth. But, in a given case, evidence about their knowledge of the facts which constitute negligence, breach of trust, misfeasance, etc., may be brought forth. In such cases, they should not be relieved from liability for acts of negligence, misfeasance, etc. Part time directors, by reasons of their part time status, are not invariably, to be relieved from the liability of negligence, breach of duty, misfeasance, breach of trust, etc.

7. Appointment of Directors

The discussion on appointment of a director may be dealt with under the following heads :

    1. Appointment of first Directors,
    2. Appointment at general meeting,
    3. Appointment by the Board of Directors,
    4. Appointment of Resident Director
    5. Appointment of Independent Directors

7.1 Appointment of first directors [Section 152]

The first directors are usually appointed by name in the articles or in the manner provided therein. Where the articles do not provide for the appointment of first directors, the subscribers to the memorandum, who are individuals, shall be deemed to be the first directors of the company until the directors are duly appointed. In case of a One Person Company an individual being member shall be deemed to be its first director until the director or directors are duly appointed by the member in accordance with the provisions of this section.

Where, for any reason, for example, death, the persons named in the list of first directors do not assume office, it will be necessary for the subscribers of the Memorandum (who will then be the only members) to convene a meeting for the appointment of directors. To the extent to which the articles do not make any other provisions in that behalf, subscribers who would be entitled to requisition a meeting may call the meeting. Notice of the meeting must be served on every subscriber in the manner in which notices are required to be served by the Act1

No appointment without DIN – No person shall be appointed as a director of a company unless he has been allotted the Director Identification Number (DIN) under section 154 [Sub-section (3)].

Every person proposed to be appointed as a director by the company in general meeting or otherwise, shall furnish his Director Identification Number and a declaration that he is not disqualified to become a director under this Act.

Consent to act as Director – A person appointed as a director shall not act as a director unless he gives his consent to hold the office as director. The consent must be filed with the Registrar within thirty days of his appointment in the prescribed manner [Section 152(5)]*.

In the case of appointment of an independent director in the general meeting, an explanatory statement for such appointment, annexed to the notice for the general meeting, shall include a statement that in the opinion of the Board, he fulfils the conditions specified in this Act for such an appointment [Proviso to section 152(5)].

7.2 Appointment of directors at general meeting

According to section 152(2) every director shall be appointed by the company in general meeting except where the Act provides otherwise.

Sub-section (6) of section 152 provides that unless the articles provide for the retirement of all directors at every annual general meeting, not less than two-thirds of the total number of directors2  of a public company shall—

(i) be persons whose period of office is liable to determination by retirement of directors by rotation3; and

(ii) be appointed by the company in general meeting except where otherwise expressly provided in this Act.**

The remaining directors in the case of such a company (i.e. public company) shall, in default of, and subject to any regulations in the articles of the company, also be appointed by the company in general meeting.

Appointment of directors in case of a private company – In case of a private company if the articles are silent as to the appointment of directors, or do not specifically provide for appointment of directors otherwise than in a general meeting, then the directors are to be appointed in general meeting by the shareholders – Calcutta High Court in the case of Swapan Das Gupta v. Navin Chand Suchanti [1988] 3 Comp. LJ 76 (Cal.).

Manner of rotation –Section 152(6)(c) provides that at the first annual general meeting of a public company held next after the date of the general meeting at which the first directors are appointed and at every subsequent annual general meeting, one-third of such of the directors for the time being as are liable to retire by rotation, or if their number is neither three nor a multiple of three, then, the number nearest to one-third, shall retire from office.

The directors to retire by rotation at every annual general meeting shall be those who have been longest in office since their last appointment, but as between persons who became directors on the same day, those who are to retire shall, in default of and subject to any agreement among themselves, be determined by lot [Section 152(6)(d)].

If the directors do not hold a general meeting in time, can they continue till the meeting is held? The Delhi High Court in B.R. Kundra v. Motion Pictures Association [1976] 46 Comp. Cas. 339 held that directors cannot prolong their tenure by not holding a meeting in time. The directors due to retire by rotation must vacate office at the latest on the last day on which an annual general meeting ought to have been held. Retiring directors are, however, eligible for re-election.

7.3 Deemed re-appointment of a retiring director [Sec. 152]

At the annual general meeting at which a director retires as aforesaid, the company may fill up the vacancy by appointing the retiring director or some other person thereto [Section 152(6)(e)].

Section 152(7) provides that if the vacancy of the retiring director is not so filled-up and the meeting has not expressly resolved not to fill the vacancy, the meeting shall stand adjourned till the same day in the next week, at the same time and place, or if that day is a national holiday, till the next succeeding day which is not a holiday, at the same time and place.

If at the adjourned meeting also, the vacancy of the retiring director is not filled up and that meeting also has not expressly resolved not to fill the vacancy, the retiring director shall be deemed to have been re-appointed at the adjourned meeting, except in the following cases :

    1. at any previous meeting, a resolution for his re-appointment was put to vote, but was lost; or
    2. the retiring director has, in writing, expressed his unwillingness to continue; or
    3. he is not qualified or is disqualified for appointment; or
    4. a special or ordinary resolution is necessary for his appointment; or
    5. it is resolved to fill two or more vacancies by a single resolution (Sec. 162).

7.4 Rotational and non-rotational directors vis-a-vis private company

In reply to a query: “Whether under the law it is compulsory for the private companies to have rotational directors?”, the Department of Company Affairs [Now Ministry of Corporate Affairs] expressed the following views :

In the case of a private company which is not a subsidiary of a public company, it is not compulsory under the law that they must have rotational directors unless the Articles of Association of the company so require.

In the absence of any provision in the Articles, directors of an independent private company are entitled to continue until removed under section 284 [Now section 169] (i.e., through general body resolution) – S. Labh Singh v. Panaser Mech. Works (P.) Ltd. [1987] 61 Comp. Cas. 618.

7.5 Appointment of a director other than a retiring director [Sec. 160]*

Section 160 along with Rule 13 of Companies (Appointment and Qualification of Directors) Rules, 2014 lay down the procedure of appointment of a person other than retiring director.

If any person, other than the retiring director wishes to stand for directorship or any member proposes a person for directorship, he must signify his intention to do so by giving 14 days’ notice to the company before the general meeting and the company must inform the members at least seven days before the general meeting. The information shall be given:

(1) by serving individual notices, on the members through electronic mode to such members who have provided their email addresses to the company for communication purposes, and in writing to all other members; and

(2) by placing notice of such candidature or intention on the website of the company, if any:

However, it shall not be necessary for the company to serve individual notices upon the members as aforesaid, if the company advertises such candidature or intention, not less than seven days before the meeting at least once in a vernacular newspaper in the principal vernacular language of the district in which the registered office of the company is situated, and circulating in that district, and at least once in English language in an English newspaper circulating in that district.

Also, the candidate or the member who intends to propose him as director has to deposit a sum of Rs. 1 lakh or such higher amount as may be prescribed which shall be refunded to such person or, as the case may be, to the member, if the person proposed gets elected as a director or gets more than twenty-five per cent of total valid votes cast either on show of hands or on poll on such resolution.

However, requirements of deposit of amount shall not apply in case of appointment of an independent director or a director recommended by the Nomination and Remuneration Committee, if any, constituted under sub-section (1) of section 178 or a director recommended by the Board of Directors of the Company, in the case of a company not required to constitute Nomination and Remuneration Committee.

Time of tender of nomination – Since section 160 does not say that tender of nomination should be before a particular time on last day; rejection of nomination on ground that deposit was tendered one minute later than 3.30 p.m., i.e., office hours for cash transactions, would be erroneous inasmuch as it contravened provisions of section 257 [Now section 160] – Oriental Benefit and Deposit Society Ltd. v. Bharat Kumar K. Shah [2001] 30 SCL 246 (Mad.).

An additional director, or a director who has been appointed to a casual vacancy or an alternate director or a director nominated by any financial institution or any other similar body or by the Tribunal, if he seeks appointment by the shareholders at a general meeting he must satisfy the requirements of section 160, as any such director is not a ‘director retiring by rotation’. The expression ‘director retiring by rotation’ refers only to a director appointed by a company in general meeting and retiring.

Appointment of directors to be voted on individually Section 162 prescribes the mode of voting on appointment of directors. No motion can be made at the general meeting of a company for the appointment4 of two or more persons as directors by a single resolution, unless a resolution is first unanimously passed that it shall be so made. A resolution moved in contravention of this provision shall be void, whether or not any objection was taken when it was moved*.

7.6 Appointment by Board of directors [Section 161]

The Board of directors can exercise the power to appoint directors in the following three cases :

(i) Additional Directors

(ii) Filling up the Casual Vacancy

(iii) Alternate Directors

(iv) Nominee Directors

7.6a Appointment of Additional Director – The articles of a company may confer on its Board of Directors the power to appoint any person as an additional director at any time. However, a person who fails to get appointed as a director in a general meeting cannot be so appointed.

It may thus be noted that without a power given by the Articles, the Board cannot appoint additional directors. The section applies to all companies, public as well as private – Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holdings Ltd. AIR 1981 SC 1298.

Tenure of additional director – The person appointed as additional director shall hold office up to the date of the next annual general meeting or the last date, on which the annual general meeting should have been held, whichever is earlier.

The provision for an additional director is one which is meant to enable the companies to have the benefit of the services of a person, who otherwise is suitable for serving on the board, and whose presence in the board is desirable in the interests of the company, till the time the next AGM is scheduled to be held. That provision is not meant to enable the company to keep on its board a person as additional director for an indefinite period of time by not holding the AGM. Section 260 [now section 161], therefore, must necessarily be read with section 166 [now section 96] which stipulates that the AGM be held every year and not more than fifteen months shall elapse between the date of one AGM and the next – P. Natarajan v. Central Government [2004] 51 SCL 76 (Mad.).

Powers of Additional Directors Additional directors will enjoy the same powers and rights as other directors. Through this route, the Board of directors can therefore appoint competent persons on the Board who may find it difficult to come through election.

Is a resolution passed at Board meeting necessary for appointment of Additional Directors? Unlike in case of filling a casual vacancy which can be done only in a regular meeting of the Board [Section 161(4)], the appointment of additional directors may be made either at a meeting of the Board or by passing a resolution by circulation as provided in section 175.

Can an Additional Director be appointed as a Managing/Whole time Director? A managing director or whole time director, unless the articles of a company provide otherwise, is to be appointed by the Board of directors. However, since any director can be appointed as a managing or whole time director and there being nothing in the Companies Act suggesting that an additional director cannot be appointed as the managing/whole time director, there should be no objection to the appointment of an additional director as a managing or whole time director. But the tenure of an additional director being limited to the holding of the Annual General Meeting and if the company at the Annual General Meeting does not re-appoint him as a director, he will automatically vacate his office as managing or whole time director also. It is because no person who is not a director can function as a managing or whole time director. The aforesaid view has also been endorsed by the Department of Company Affairs [Now Ministry of Corporate Affairs].

7.6b Filling up Casual Vacancy – Section 161(4) as amended by the Amendment Act, 2017, empowers the Board to fill casual vacancies in the case of any company including a private company. A casual vacancy is one that arises otherwise than by retirement or the expiration of the time fixed for an appointment. Thus, if the office of any director appointed by the company in general meeting is vacated before his term of office expires in the normal course, the resulting casual vacancy may, subject to any regulations in the articles of the company, be filled by the Board of Directors at a meeting of the Board.

Tenure It has to be noted that as per sub-section (4) of section 161, if the director fills up a casual vacancy and the same has been approved in the immediately next general meeting, then the person appointed will hold office not until the next Annual General Meeting only but for the entire period for which the person in whose place he was appointed would have held office. Thus, if Ram had been elected a director and died a month later, Bharat appointed in his place would continue for the whole period for which Ram, if he had not died, would have continued. But though Bharat would continue for the whole of the unexpired term for which Ram had been appointed; on the expiry of that term, Bharat will not be eligible for re-appointment as ‘a director retiring by rotation’.

Director appointed in general meeting not assuming office – No casual vacancy arises if a director appointed by the company in general meeting does not assume office because it cannot be said that a casual vacancy arises by efflux of time. There is no question of someone vacating any office if he had never assumed that office. The words “director appointed by the company in general meeting” used in section 161(4) must be read with the words following, i.e., “is vacated before his term of office expires in the normal course” – M.K. Srinivasan v. W.S. Subrahmanya Ayyar [1932] 2 Comp. Cas. 147.

Vacancy in the office of a non-rotational director – Whether a casual vacancy – A vacancy in the office of a non-rotational director appointed otherwise than through general meeting cannot be regarded as a casual vacancy under section 161 and thus cannot be filled up by the Board of directors.

7.6c Alternate Director – The Board of directors of a company may, if so authorised by its articles or by a resolution passed by the company in general meeting, appoint an alternate director to act for a director during his absence for a period of not less than three months from India. However, a person holding any alternate directorship for any other director in the company shall not be appointed. Again, a person who is already a director of the company cannot be appointed as an alternate director for another director in the same company.

No person shall be appointed as an alternate director for an independent director unless he is qualified to be appointed as an independent director under the provisions of this Act.

An alternate director is not an agent of the original director.

Consent: It seems that an alternate director appointed as such for the first time shall be required to file his consent with the Registrar. However, on his regular appointment as a director in continuation, it would not be necessary to file the consent [Sec. 152(5)].

When does an alternate director vacate his office – An alternate director shall not hold office for a period longer than that permissible to the director in whose place he has been appointed and shall vacate the office if and when the director in whose place he has been appointed returns to India.

Where the original director is a non-retiring director, an alternate director appointed in his place can continue indefinitely subject only to the condition that he shall vacate the office as and when the original director returns to India.

If the term of office of the original director is determined before he so returns to India, any provision for the automatic re-appointment of retiring directors in default of another appointment shall apply to the original, and not to the alternate director.

8. Resident Director

For the first time the Companies Act, 2013 has introduced the concept of resident director. Sub-section (3) of section 149 provides that every company shall have at least one director who stays in India for a total period of not less than one hundred and eighty-two days during the previous financial year.

Due to the Covid-19 situation, non-compliance of minimum residency in India for a period of 182 days shall not be treated as a non-compliance for the financial year 2020-21.*

However, in case of a newly incorporated company the requirement shall apply proportionately at the end of the financial year in which it is incorporated.

9. Independent Director**

Sub-section (4) of section 149 requires every listed public company to have at least one-third5 of the total number of directors as independent directors and the Central Government may prescribe the minimum number of independent directors in case of any class or classes of public companies.

The Central Government vide Rule 4 of Companies (Appointment and Qualification of Directors) Rules, 2014 has prescribed as follows:

The following class or classes of companies shall have at least two directors as independent directors –

(i) the Public Companies having paid up share capital of ten crore rupees or more; or

(ii) the Public Companies having turnover of one hundred crore rupees or more; or

(iii) the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees.

However, in case a company covered under this rule is required to appoint a higher number of independent directors due to composition of its audit committee, such higher number of independent directors shall be applicable to it.

Any intermittent vacancy of an independent director shall be filled-up by the Board at the earliest but not later than immediate next Board meeting or three months from the date of such vacancy, whichever is later:

Explanation – For the purposes of this rule, it is hereby clarified that, the paid up share capital or turnover or outstanding loans, debentures and deposits, as the case may be, as existing on the last date of latest audited financial statements shall be taken into account.

_________________________

*In Sunther Srinivasagam Madurai v. Union of India [2021] 127 taxmann.com 300 (Madras)[21-01-2021], RoC disqualified petitioner as Director of company under section 164(2)(a) on ground that he had not submitted financial statements of company for three consecutive financial years. However, no notice was given to petitioner before disqualifying him as Director.

The Madras High Court held that impugned order passed by RoC was to be set aside.

**In cases where directors have been disqualified prior to 7-5-2018, proviso to section 167(1)(a) would not apply and directors would continue to be directors in companies other than defaulting company; disqualification of such directors would, therefore, be liable to be set aside and their DIN and DSC’s would be reactivated – Tapash Kumar Samaddar v. Ministry of Corporate Affairs [2021] 124 taxmann.com 388 (Delhi).

Also see Anjali Bhargava v. Union of India [2021] 125 taxmann.com 11 (Delhi).

Again, in Naresh Kumar Poddar v. Union of India [2021] 124 taxmann.com 88 (Calcutta), it was held that three years default contemplated in amended section 164(2) has to commence from financial year 2014-15 (1-4-2014 – 31-3-2015) and end in financial year 2016-17 (ending on 31-3-2017).

  1. A. Ramaiya, Guide to the Companies Act, 12th Edition, page 1215

*Not applicable to Government companies in respect of directors appointed by the Central Govt./State Govt. as well as directors appointed in section 8 companies—Vide MCA Notification dated 5-6-2015.

  1. For the purposes of this sub-section, “total number of directors” shall not include independent directors, whether appointed under this Act or any other law for the time being in force, on the Board of a company.
  2. In other words, only one-third of the total number of directors can be non-rotational directors.

**The aforesaid requirement of section 152(6) shall not apply to:

(a) a Government company in which entire paid up share capital is held by the Central Government or by any State Government(s) or by the Central Government and State Government(s);

(b) A subsidiary of a Government company, as aforesaid, in which entire paid up share capital is held by that Government company.

*A private company has been exempted from the provisions of section 160—Vide MCA Notification dated 5-6-2015.

  1. According to sub-section (3) a motion for approving a person for appointment, or for nominating a person for appointment as a director, shall be treated as a motion for his appointment.

*A private company has been exempted from the requirement of section 162. Accordingly, it may appoint two or more directors by passing a single resolution—Vide MCA Notification dated 5-6-2015. Again, (a) a Government company in which entire paid up share capital is held by the Central Government or by any State Government(s) or by the Central Government and State Government(s); or

(b) A subsidiary of a Government company, as aforesaid, in which entire paid up share capital is held by that Government company,

may appoint two or more directors by passing a single resolution.

* Vide General Circular No. 36/2020 dated 20 October 2020.

*Provisions of sections 149 and 150 relating to appointment of independent directors shall not apply to a section 8 company—Vide MCA Notification dated 5-6-2015.

†In case of a Government Company for the word ‘Board’, the words shall be Ministry or Department of the Central Government which is administratively in charge of the company, or as the case may be, the State Government.

  1. Any fraction contained in such one-third number shall be rounded off as one – Explanation.

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