APPOINTMENT AND QUALIFICATION OF DIRECTOR


UPDATE: on 30th August 2013: Companies Bill 2012 became the Companies Act, 2013 (Act 18 of 2013).

I discussed in my last post that it is first time that concept of “Key Managerial Personnel” has been introduced in India. Hopefully, present Companies Bill will change status of Corporate Governance in India. The qualified Directors and transparency in appointment of directors is single most important key for success of public corporate and corporate governance. As I discussed, appointment of “Key Managerial Personnel” is discussed in Section 203 but specific provisions of Chapter XI should be taken care of in case of appointment of Directors as they are specific provisions for them. Chapter XI consists of 23 Section from Section 149 to Section 172.

THE BOARD (SECTION 149):

The Board shall consist of individuals not of other persons like firms, LLP, companies, gods or other legal persons.

A public company shall have minimum three directors and private company two. While newly introduced one man company shall have minimum one director.

All companies may have maximum fifteen directors. However, a company may appoint more than fifteen directors after passing a special resolution.

Some prescribed class of companies shall have at least one woman director. (What about gender neutral humans?)

Every company shall have at least one director who has stayed in India for a total period of not less than one hundred and eighty – two days in previous calendar year. This means all Indian and foreign nationals may be a director in Indian company if any one of the director among them in that particular company stayed in previous calendar year in India for more than one hundred and eighty – two days.

Every listed company shall have at least one-third of total number of directors as Independent directors. The central government may prescribe minimum number of independent directors in other class or classes of public companies.

We will discuss provision particular to Independent separately in a future post.

APPOINTMENT OF DIRECTORS (SECTION 152):

If different person are not named as first director in articles of the company, individual subscribers shall be deemed to be first directors.

Every director shall be appointed in general meeting as a general rule.

Director identification number (DIN) shall be a precondition for appointment as director.

Every person proposed to be appointed shall furnish a declaration that he is not disqualified to become a director under this Act. However, consent to act as director may be given after appointment but before any act as director.

A person appointed as director shall not act as director unless he gives his consent to hold office of director and such consent has been filed with the registrar within thirty days of his appointment. This means appointment as director and his taking charge of office of director shall now be a different thing. Director shall take charge into office only after giving his consent and filing his consent with registrar. It means an appointed director will take charge after filing his consent with registrar. This will effectively also bar a director from receiving salary from date of appointment. His salary should logically be effective from the date of his taking charge into office of director.

Separate motion should move for the appointment of each director as per section 162. A motion for approving a person for appointment or for nomination a person for appointment shall also be treated as motion for appointment.

Retirement by rotation (Sub 6 of section 152):

Articles of a company may provide that all directors of the company shall be retiring by rotation.

Even where articles of a company do not provide this, not less than two – thirds of total number of directors of a public company shall be liable to be retired by rotation and be appointed by company in general meeting.

This sub – section put a condition in an earlier statement of this section made in sub – section (2) where a general rule was enacted that every director shall be appointed in general meeting. Here, this sub – section effectively clarify that in public company some directors, whose number shall not be more than one – thirds of total number of directors may be appointed otherwise that appointment in general meeting. However, clause (b) of this sub – section further clarifies that number and manner of appointment of these directors shall be prescribed in Articles of the company. This number of two – thirds shall be a number nearest to two – thirds, where it is a fraction of a number.

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.

For the purpose of this sub – section, total number of directors shall not include independent directors.

RIGHT OF PERSONS TO STAND FOR DIRECTORSHIP (SECTION 160):

A person other than retiring director is eligible for appointment to the office of a director at any general meeting, if he himself or some member intending to propose him as a director has not less than fourteen days before the annual general meeting left a notice in writing under his signature proposing his candidature as director with a deposit of Rs one lakh. This deposit shall be refunded to him or the member if he gets elected as director or gets more than twenty five percent of total valid votes cast either on show of hand or on poll on such resolution. The company shall inform its members of such candidature in prescribed manner.

OPTION TO ADOPT PRINCIPLE OF PROPORTIONATE REPRESENTATION (SECTION 163):

The articles of a company may provide for the appointment of not less than two-thirds of the total number of the directors of a company in accordance with the principle of proportional representation, whether by the single transferable vote or by a system of cumulative voting or otherwise and such appointments may be made once in every three years and casual vacancies of such directors shall be filled as provided in sub-section (4) of section 161.

DISQUALIFICATION OF DIRECTORS (SECTION 164):

This section bracketed disqualification in three different classes; primary disqualifications, disqualification due to corporate in actions, and additional disqualifications.

Primary disqualifications (Sub – section 2 of section 164):

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 un-discharged 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 and a period of five years has not elapsed from the date of expiry of the sentence. 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; or

(h) he has not been allotted a director identification number.

The disqualifications referred to in clauses (d), (e) and (g) of sub-section (1) shall not take effect—

(i) for thirty days from the date of conviction or order of disqualification;

(ii) where an appeal or petition is preferred within thirty days as aforesaid against the conviction resulting in sentence or order, until expiry of seven days from the date on which such appeal or petition is disposed off; or

(iii) where any further appeal or petition is preferred against order or sentence within seven days, until such further appeal or petition is disposed off.

Disqualification due to corporate inaction (Sub – section 2 of section 164):

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.

A private company has power to provide any additional disqualification.

NUMBER OF DIRECTORSHIPS (SECTION 165):

No person shall hold office as a director, including any alternate directorship, in more than twenty companies at the same time. This section further limit, maximum number of public companies in which a person can be appointed as a director to ten.

If a person accepts an appointment as a director in contravention, he shall be punishable with fine which shall not be less than five thousand rupees but which may extend to twenty-five thousand rupees for every day after the first during which the contravention continues.

We will discuss duties, vacation of office, Resignation of director, removal of director and other issues related with office of director in our next blog – post. We will discuss independent director in a future blog – post.

Please note blog post is not a professional advice but general information about the subject covered here. In case, you have specific query, please seek professional advice or contact this author.

 

Advertisements

41 responses to “APPOINTMENT AND QUALIFICATION OF DIRECTOR

  1. Pingback: Index of Companies Law Posts | AishMGhrana

  2. Pingback: Directorship within limit | AishMGhrana

  3. Pingback: AishMGhrana: 2015 in review | AishMGhrana

  4. Pingback: FOOTSTEPS OF CORPORATE GOVERNANCE IN COMPANIES ACT 2013 | AishMGhrana

  5. 1. I could not find the section which disqualifies government employees from holding the post of a director in a private firm.

    2. Is it legal therefore for the spouse of a central government employee to hold the position of a director in a private firm?

    Like

  6. Pingback: EXEMPTION TO PRIVATE COMPANIES | AishMGhrana

  7. Pingback: EXEMPTION TO GOVERNMENT COMPANIES | AishMGhrana

  8. Pingback: EXEMPTION TO NON PROFIT COMPANIES | AishMGhrana

  9. Pingback: EXEMPTION TO NIDHI COMPANIES | AishMGhrana

  10. Pingback: AishMGhrana: 2014 in review | AishMGhrana

  11. under Section 164[2], the disqualification under sub-clause [a] shall take place if financial statement or annual return for any one financial year reamin pending for filing for continuous three financal years. this is my interpretation.

    yr comment please.

    tushar vora

    Like

  12. Is it necessary to Give DIN along with the proposal for appointment of Director or it has to be given before AGM for appointment.

    Like

  13. what is the procedure for changing all (3) director of private company and appointing new directors on the same day,,,,and what are documents and filiing requirement
    plzzz rply as soon as possible
    thanking u vry much….

    Like

  14. Pingback: WOMAN DIRECTOR | AishMGhrana

  15. Pingback: DISQUALIFICATION OF DIRECTORS | AishMGhrana

  16. vishal pansuriya

    Really very informative sir..n trying to follow ur instuction..

    vishal pansuriya(cma final student)

    Like

  17. Hello Sir ,

    For the very first time , today , I read ur Blog. Great Sir , very Informative. I will try to follow u regularly. Sir I hv a query , if u please reply – In a Pvt. Ltd. Co. , Out of two Directors , one is Executive Director and second one is Independent / Non executive director.Can they sign the balance sheet and adopt it also ?. If Statutory required , in any other case , Can both of them jointly Sign ? Can Independent director be held accountable merely by signing the Balance Sheet (he does not participate in day to day affairs of the Co.) ?

    Like

  18. “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.”.. so far as rotation is concerned co, may rotate both of aforesaid directors .. so why it will be determined by lot??

    Like

    • If company has three directors retire by rotation at the time of incorporation, who shall be retire by rotation in first, second or third Annual General Meetings?
      Director A suggests age-wise!
      Director B suggests in Alphabetic order!
      Director C say why me!

      Like

  19. greetings for clarifying section 152(6) in user friendly way

    Like

  20. Pingback: AishMGhrana: Annual Report 2013 | AishMGhrana

  21. Shall Sub – section 2 of section 164 applies to private companies?

    Like

  22. Dear Aish,

    Greetings for presenting such an informative article,

    Howeve, para 4 of heading APPOINTMENT OF DIRECTORS (SECTION 152) speakes:
    ” Every director after appointment shall furnish a declaration that he is not disqualified to become a director under this Act.”

    I believe this declaration should be before the appointment.

    Ambrish Dwivedi

    Like

    • Stand Corrected:
      “Every person proposed to be appointed shall furnish a declaration that he is not disqualified to become a director under this Act. However, consent to act as director may be given after appointment but before any act as director.”
      Thanks for support.

      Like

  23. Can an employee in a Bank (Private sector or Nationalised bank) be a director in a newly constituted or proposed Chitty company (PVT LTD or Public Ltd). Whether employment is a bar to his entry as director or promoter.?

    Like

    • The Companies Act or any corporate law do not bar an employee to be a promoter or director but Service/employment Contract or rules is. An employee may be a non – executive director in any company with prior permission of his employer.
      I do not see any circumstance, where a bank employee may be whole time director or executive director of any company unless bank itself appoint the employee as a nominee director on executive position in the company.
      There is no problem to be a promoter as such.

      Like

  24. Pingback: POWER OF BOARD UNDER COMPANIES BILL 2012 | AishMGhrana

  25. Pingback: INDEPENDENT DIRECTORS IN COMPANIES BILL 2012 | AishMGhrana

  26. Vinod kumar jain

    sir,in case of a pvt. Ltd. compay,appointment of first director as MD/ED needs filling of Form 32 or not.kindly clarify

    Like

    • Dear Vinod,
      You are asking about requirement under present companies bill,1956. Appointment of first director (or any director) as MD/ED amount to change in directors and MDs. under Section 303 (2) of CA, 1956.Provisions of Section 268 and 269 are additional to section 303 and additionally applicable to public companies. Please file Form 32 in your case.
      This will be same position in present Company Bill, 2012 Section 170 (2) which use terms, “from the appointment of every director and key managerial personnel, as the case may be, and within thirty days of any change taking place.”

      Like

  27. Pingback: DIRECTOR: DUTIES, VACATION, RESIGNATION, REMOVAL | AishMGhrana

  28. Very informative information

    Like

  29. Hi Aishwarya,

    This is really a very good summary… thank you so much for sharing this.

    Like

No professional query in comments (but in mail). Only academic discussion here. Comments moderated. Sometime, reply to your mail ID. To subscribe blog, check homepage.

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s