[Opinion] Consequences for Irregular Appointment of an Additional Director

1. Introduction

As per the provisions of the Companies Act 2013, if the Articles of Association of a company may confer on its board of directors, such power is to appoint an additional director. A person who has failed to be appointed through a general meeting shall not be appointed as an additional director and an additional director so appointed by the board, shall hold office only up to the date of the next annual meeting or the last day, on which the annual general meeting should have been held, whichever is earlier. The only care to be taken is that one should keep in mind that the total number of directors including additional directors should not exceed the maximum strength fixed by the Act.

One more important thing to be noted here is that if an additional director, during his tenure had been appointed as managing director of the company, his appointment as managing director also ceases simultaneously with the termination of his directorship at the commencement of the annual general meeting. On the contrary, if such a person was elected as a full-fledged director at the annual general meeting by the members, he will continue to be a director of the company and also as its managing director for the period for which his appointment as managing director had been made under section 196 of the Companies Act 2013 which deals with the appointment of managing director, whole-time director or manager.

2. Relevant Provision on this under the Companies Act 2013

The following are the relevant provisions under the provisions of Companies Act 2013, relating to this case.

3. Penal provisions for violation

The relevant section for penal provisions is spelt out in section 172 of the Companies Act 2013. As per the provisions of section 172 of the Companies Act 2013 (as amended from time to time) if a company is in default in complying with any of the provisions of this chapter (i.e. Chapter XI) and for which no specific penalty or punishment is provided therein, the company and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees and in case of continuing failure with a further penalty of five hundred rupees for each day during which such failure continues, subject to a maximum of three lakh rupees in case of a company and one lakh rupees in case of an officer who is in default.

4. Consequences of default/violation

To understand the consequences relating to default in complying with section 161 of the Companies Act 2013 read with the relevant rules of Companies (Appointment and Qualification of Directors) Rules of 2014 relating to the appointment of additional director/director, let us go through one of the decided case law on this matter decided on 5th July 2022 – by the Registrar of Companies Karnataka, Bangalore along with order-in-appeal passed by the Regional Director (SER) Hyderabad on 29th December 2022.

Click Here To Read The Full Article