APPOINTMENT AND QUALIFICATION OF DIRECTOR

UPDATE: on 30^th 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.