Appointment of Directors and their retirement by rotation of the company

Appointment of Directors and their retirement by rotation of the company

Section 255 of the 1956 Act dealt with the appointment of directors and their retirement by rotation. The amendment in section 255(1) of the 1956 Act vide Companies (Amendment) Act, 1960 (relating to retirement by rotation) was based on the recommendations of the Companies Act Amendment Committee, which stated that: “ A suggestion was made that guarantee companies should be exempted from the operation of section 225. In Chambers of Commerce, trade associations, clubs and companies licensed under section 25, all directors generally retire simultaneously every year. A general provision may, therefore, be made by adding the following words at the beginning of Section 255(1). Unless the articles provide for the retirement of all directors at every annual general meetings.  Prior to this amendment not less than two thirds the total number of directors of a public company or private company which was a subsidiary of a public company were required to retire by rotation. At every Annual General Meeting at least one third of the number of directors retired from amongst the directors liable to retirement by rotation. The directors to retire by rotation were directors who were longest in office and amongst those appointed on the same day, unless there was any agreement between them, were to be determined by lot. A director retiring by rotation was eligible to be reappointed and if the vacancy of the retiring director was not filed up by appointing any other person then the director retiring by rotation was deemed to have been reappointed unless certain specific circumstances as referred to in section 256(4) of the 1956 Act were attracted.

First Directors of a Company

Section 152(1) of the 2013 Act relates to first directors of the company and is a modified version of section 254 of the 1956 Act. Section 254 of the 1956 Act referred to “in default of and subject to any regulation in the articles” while section 152 of the 2013 Act refers to the Articles to the Articles simpliciter. This makes the drafting more concise and the option now available to companies is to name the first directors in the articles of association. If they do not do so, as per the deeming provision of section 152 of the 2013 Act, the subscribers who are individuals shall become the first directors and companies filing of consent, DIN requirements etc. relating to directors will need to be ensured for such persons. This as a natural corollary will mean that in case the first directors are not named in the articles of association then the subscribers who are individually need to necessarily have DIN. Unless the articles of association names a director, the first director in a One Person Company shall be the member (in case of an OPC as per the rules only a natural person can be a member) until director or directors are duly appointed by such a member. In case of a One Person company provisions of Annual General Meeting are not applicable. A resolution is deemed to have been passed once:

• It is communicated to the company
• Entered in the minutes books and
• Signed and dated by the member

The date shall be deemed to be the date of the meeting for the purpose of the 2013 Act. So in a one person company a director would be deemed to be appointed once the minutes duly entered in the minute book are signed and dated by the sole member. Therefore until directors are appointed by the member in a One Person Company, such member shall continue to act as its director.

Appointment of Director in General Meeting

Section 152(2) of the 2013 Act is a new provision. All directors except the first director, additional director, nominee director, alternate director and director appointed in casual vacancy shall be appointed by the company in a general meeting. Whether the date of appointment of an additional director or director appointed in casual vacancy should be the date of appointment by the shareholders in the general meeting or the date of appointment by the Board will need to be clarified by the Central Government. It is also not clear as to whether the causal vacancy caused in the office of an Independent Director will be filled in the Board under section 161 (4) or will be required to be filed by the shareholders under section 152(2) read with section 150(2) and schedule 4 clause 4(2) of the 2013 Act. While clause 6(2) of schedule 4 of the 2013 Act refers to a period of one hundred eighty days within which the vacancy must be filled up any intermittent vacancy in the office of Independent director. Based on a combined reading of Rule 4 along with section 161(4) of the 2013 Act, 2013 a director appointed by the board to fill in the intermittent vacancy of an independent Director shall hold office up to the date up to which the director in whose place he is appointed would have held office if it had not been so vacated.

Director Identification Number

Section 152(3) of the 2013 Act corresponds to provision to section 253 and to section 266B of the 1956 Act which provides that a person shall not be appointed unless he is allotted a DIN. The 2013 Act provides that a person cannot hold office as a director and cannot be appointed till such time allotment of DIN is made by the Central Government. However, in the context of the 1956 Act, section 266A provided that a person could be appointed as a director if he had made an application for allotment of DIN and was awaiting the DIN to be allotted. Section 152(4) of the 2013 Act is a new provision and is consequential to section 152(3) of the 2013 Act. Since, a person shall not be appointed as a director unless he or she holds a DIN, the obligation to intimate the LLP company of DIN is on the person intending to be appointed as a director. Further such person is required to furnish a declaration in Form DIR 8 confirming that he is not disqualified to become a director. Hence every director including a director retiring by rotation as well as an additional director and alternate director will need to furnish his DIN and a declaration that he is not disqualified to become a director or be reappointed under this Act. While 1956 Act contained provisions under Section 274 dealing with disqualifications, there was no statutory obligation to give such a declaration that he is not disqualified to become a director, before being appointed in a General Meeting or by the Board, although as a good practice companies obtained such declaration.

Consent to act as Director

A person appointed as a director shall not act as a director unless the following two  conditions are satisfied:

• He gives his consent to hold office as director
• Such consent is filed with the Registrar within 30 day of appointment

The 2013 Act consent may be given by the person appointed as director on or before such appointment. The filing of such consent with the Registrar is to be effected by the company within 30 days of such appointment in Form DIR 12 along with Form DIR 2, as provided under the Companies (Appointment and Qualification of Directors) Rules, 2014.In case of appointment of an Independent Director; there are some additional compliance requirements. Section 102 of the 2013 Act, requires explanatory statement  for appointment of an Independent Director to include a statement that in the opinion of the Board the person proposed to be appointed as an Independent Director fulfills the conditions specified in the 2013 Act for such appointment. The explanatory statement shall also contain jurisdiction for choosing the person for appointment as an Independent Director. Section 264(2) of the 1956 Act also required consent to be sought from directors. However, under the 1956 Act private companies were not subject to this condition. The 1956 Act required consent to be given to the company before the appointment while filing with the Registrar was required to be done by the director concerned after such appointment. Further section 264(2) of the 1956 Act exempted a retiring director, an additional director, an alternate director from the requirement of filing consent to act as a director. However there is no similar exemption available under sub-section (5) of section 152 of the 2013 Act.

Retirement by rotation

Section 152(6)(a) and (b)  of the 2013 Act is a reproduction of section 225 of the 1956 Act with a minor change which makes it clear that retirement by rotation is not applicable to private companies unless the articles of association of the company specifies otherwise. As per section 2(71) of the 2013 Act, which defines a public company, a private company which is a subsidiary of a public company will be deemed to be a public company will be deemed to be a public company and hence will be required to comply with the requirement of directors retiring by rotation although the company may otherwise continue to be a private company in its articles. Section 2(87) of the 2013 Act defines the term subsidiary and as per explanation (c) to the said section, the expression company includes a body corporate. However, section 2(71)of the 2013 Act which defines the term public company refers to a company which is a subsidiary of a company and as the term company refers only to companies incorporated under the provisions of the 2013 Act or under any previous company law the term subsidiaries will not include any body corporate incorporated outside India. Hence private companies incorporated outside India will not be deemed to be public companies.

Reappointment of retiring directors

Section 152(7)(a) and (b) of the 2013 Act relates to automatic reappointment of the retiring director. Section 152(7) (a) of the 2013 Act provides that the general meeting shall stand adjourned to the same day in the next week if the vacancy of the retirement of director is not filled up. However this provision will be attracted only id the meeting has not expressly resolved not to fill up the vacancy. At the adjourned meeting the retirement of director shall be deemed to be reappointed except in the following cases:

• Where the meeting has expressly decided not to fill up the vacancy.
• Where the resolution for reappointment of the retiring director has been put to vote and has been defeated.
• Where the retiring director has by notice in writing addressed to the company expressed his unwillingness to be reappointed.
• Where the retiring director is not qualified or is disqualified for appointment.
• Where a resolution is required for such reappointment.
• Where a proposal for appointment of two or more directors by one single resolution as per section 162 is proposed for consideration at the meeting.

A retiring director means a director retiring by rotation and hence an Independent Director cannot be deemed to be reappointed after completion of his tenure.

Appointment and reappointment for small shareholder’s Director

Rule 7(5) of the Companies (Appointment and Qualification of Directors) Rules, 2014 provides three specific exclusions. Accordingly, such director shall not be liable to

1. Retirement by rotation and
2. His/her tenure of office as a director shall be a period not exceeding three consecutive years and
3. On expiry of his/her tenure he shall not be eligible to be reappointed.

As per Rule 7(9) a small shareholders director shall not be associated with the company in any capacity whatsoever for a period of 3 years after completion of his tenure.

Multiple appointments

A person shall not hold office as a small shareholders’ director in more than two companies subject to the condition that the second company shall not be in a competing business or in conflict with the business of the first company in which he is a director. While a person shall not hold office as a small shareholders’ director in two competing businesses, the rule does not prohibit holding of office as a director in a competing business immediately after completion of tenure as a small shareholders’ director. This may affect issues of confidentiality of a company. Further the restriction of competing business is applicable only if he is proposed to be appointed as a small shareholders’ director in both the companies. If he considers appointment otherwise than as a small shareholders’ director in the second company then the restriction is not attracted. This is a lacuna which needs to be addressed as it is not in line with the spirit of the provision law.

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