Nomination of Majority Directors – Company Registration in Madurai
Section 255(1) of the Companies Act, 1956, which deals with the nomination and appointment of directors and the proportion of those who are to retire by rotation, read as under:-
“Unless the articles provide for the retirement of all the directors at every annual general meeting, not less than two-thirds of the total number of directors of a public company, or of a private company which is a subsidiary of a public company, shall –
a)be persons whose period of office is liable to determination by retirement of directors by rotation; and
b)save as otherwise expressly provided in this Act, be appointed by the company in general meeting”.
Thus, it is clear that not less than two-thirds of the total number of directors of a public company or of a private company which is subsidiary of a public company should be appointed by company in general meeting and that they should retire by rotation of nomination. In view of this, the majority of the directors be nominated by any other person or authority and majority of the directors cannot be excepted from the principle of “retirement by rotation”. As clause (b) of sub-section (1) of section 255 of the Act, uses the words ” save as otherwise expressly provided in this Act” the majority of the directors can be appointed otherwise than by the shareholders in the general meeting if any provision in the Companies Act expressly permits this.
An Examination of various sections of the Companies Act, 1956, reveals that the following sections permit appointment of directors otherwise than by shareholders in general meeting.a) Section 408 of the Act, authorizes the Central Government to appoint such number of persons for a period not exceeding three years on any one occasion to effectively safeguard the interests of the company or its shareholders or the public interest – in order to prevent the affairs of the company being either in a manner which is oppressive to any member of the company or in a manner which is prejudicial to the interests of the company or to public interest. As, under section 408 the Central Government has been authorized to appoint such number of persons as may be necessary to safeguard the interests of the company or its shareholders or public interest, the Central Government may appoint majority of the directors and if the Central Government does so, that will not contravene section 255 of the Companies Act, 1956. The directors appointed by Central Government under section 408 are also not liable to retire by rotation of nomination.
b) Section 260 of the Companies Act, 1956, authorizes the Board of Directors to appoint additional directors so empowered under the articles of association of the company concerned. The power conferred under section 260 is subject to the conditions that the number of the directors and additional directors together should not exceed the maximum strength fixed for the board by the articles and such additional directors shall hold office only up to the date of the nest annual general meeting. For instance, if the maximum strength fixed for the board by the articles is twelve and there are already five directors, the board can appoint seven additional directors in exercise of the power conferred by section 260.
c) Section 262 of the Companies Act, 1956, authorizes the board to fill casual vacancies. If the majority of the directors resign or their office is vacated on account of any other reason such as death, lunacy, insolvency etc., the board may appoint other persons as directors in their place and such appointments should be valid.
d) Section 313 of the Companies Act, 1956, authorizes the board, if so authorized by the articles or by a shareholder’s resolution, to appoint an alternate director to act for a director during his absence for a period of not less than three months from the state in which meetings of the Board are ordinarily held. If majority of the directors remain absent for a period of not less than three months from the State in which meetings of the Board are ordinarily held, the board may appoint alternate directors to such directors and such nomination and appointments would be perfectly value) Section 254 of the companies Act, 1956, provides that the subscribers to the memorandum of association of the company who are individuals , shall be deemed to be the directors of the company, until the directors are duly appointed in accordance with section 255. In view of this, so long the directors are not duly appointed in accordance with section 255, the subscribers to the memorandum of association, who are individuals, are fully authorized to act as directors of the company.
In this connection it may also be pointed out that section 25(2) of the Industrial Finance Corporation Act, 1948 as amended in 1972 authorizes the industrial Finance Corporation of India to nominate one or more directors on the board of company to which it has granted loans. As Section 41(A) of the Industrial Finance Corporation Act, 1948, expressly provides that the provisions of IFC Act shall have effect notwithstanding anything to the contrary contained in any other law for the time being in the force or in the memorandum of articles of association of an industrial concern, the appointment and nomination of directors made by IFC in exercise of powers conferred under section 25(2) would be valid, even if, the number of directors appointed by IFC exceeds two-thirds of the total number of directors and the directors so appointed are not liable to retire by rotation.
Section 30 A of IFC Act which deals with the power of IFC to appoint directors of an industrial concern when management is taken over, authorizes the IFC to appoint as many persons as it thinks fit to be the directors of that industrial concern and nothing in the companies Act, 1956, shall restrict the power of IFC to appoint directors in exercise or powers conferred under section 25(2) and 30 A of the IFC Act which are of over-riding nature. Section 255 of the Companies Act, 1956, will not apply in such cases and the nomination of majority of directors made by IFC in exercise of the power concerned under the IFC Act would be perfectly valid. Provisions similar to section 25(2) of the IFC Act has also been incorporated in section 19 A of the Unit Trust of India Act, Section 6 A of the Life Insurance Corporation Act, section 30 A of the Industrial Development Bank of India Act and section 21 of the State Finance Corporation Act.
The Kerala High Court has held in M. Velayudhan v. Registrar of companies that provisions of section 260 of the companies Act are not circumscribed by section 255 of the companies Act as the applicability of section 255 is expressly excluded by section 260 which reads as under:
Provided that such additional directors shall hold office only upto the date of the next annual general meeting of the company. Provided further that the number of directors and the additional directors together shall not exceed the maximum strength fixed for the board of the articles.”
The facts of the case decided by Kerala High Court were that : M\s. Sudarshan Trading Co. Ltd. was public limited company having more than 54 percent of the subscribed capital of M/s. West Coast Industrial Gases Pvt. Ltd. The company entered into an agreement with West Coast Gases where under the first party agreed to finance the second party to meet its requirement in consideration of which the second party agreed to empower the first party to have control over the composition of the Board of directors and to nominate the majority of the number of directors as per the articles of association of the second party. Clause 3 of the agreement for nomination provided for the right of the first party to have absolute power to nominate the majority of the number of directors.
Clause 5 of the agreement provided that the party of the second part shall immediately convene a meeting of the board of directors and co-opt the nominee of the party of the first part as the nomination of additional directors under section 260 of the companies Act and these nominated directors retiring at the next or subsequent annual general meeting shall be either re-appointed at the annual general meeting or co-opted to the board under section 260 in the following years as long as the this agreement subsists.
The Kerala High Court held that while sections 255 and 256 dealt with the appointment of directors, sections 260 provided that notwithstanding the provisions in section 255,258, or 259 the power conferred on the board of directors by the articles to appoint additional directors shall not be affected provided that such nomination of additional directors shall hold office only up to the next annual general meeting of the company.
From the aforesaid decision it is clear that in exercise of power conferred by the articles, the board of directors can appoint majority of the directors as additional directors under section 260 of the Companies Act and this will not be in contravention of section 255. However, the majority of the directors cannot be appointed in any manner other than by way of additional directors because that will be in contravention of clause (b) of the sub-section(1) of section 255.
In Oriental Industrial Investment Corporation Ltd. v. Union of India the Delhi High Court held that appointment of majority of the directors (regular directors and not additional directors as in Kerala Case) made by the Oriental Industrial Investment Corporation Ltd. in Poonam hotels in pursuance of a written contract was valid.
The facts were that by an agreement of nomination in writing between Oriental Ltd. on the one hand and Poonam Hotels on the other, the Oriented Ltd., was given full and absolute right to appoint five directors on the Board of directors of Poonam Hotels. This had given power to Oriental Ltd. to appoint majority of the board of directors of Poonam Hotels and also the power to remove any such director and to appoint another in his place. Poonam hotels agreed to make necessary changes in its articles of association and to incorporate therein the agreed rights of the Oriented Ltd., to appoint five directors.
By virtue of the power given under article 139A of the articles of association, Oriental Ltd., appointed five persons as directors as directors of Poonam Hotels. The question before Delhi High Court was whether article 139A of the articles of Association of Poonam Hotels Ltd., which authorized Oriental Industrial Investment Corporation Ltd., to appoint five directors on the board of directors of the company contravened sections 255,256 and 257 of the companies Act, 1956, whereas it was argued by Oriental Industrial Corporation Ltd., that article 139A did not contravene sections 255, 256 and 257 of the Companies Act as section 255 excluded from its purview cases which have been otherwise expressly provided for appointment of directors on the Board of a subsidiary company by the holding company.
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