DIRECTOR: DUTIES, VACATION, RESIGNATION, REMOVAL

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

In my last post, I stopped myself from further reading midway due to length of the post “Appointment and Qualification of Director”. Now, this is time to resume reading.  Let us start with Additional Director, Alternate Director and Nominee Directors.

ADDITIONAL DIRECTOR (SECTION 161, SUB – SECTIONS 1):

Firstly Articles of a company must confer its Board of Director power to appoint Additional Director. A person failed to be appointed through general meeting must not be appointed as Additional Director. An Additional Director must hold office only up to the date of next Annual General Meeting or the last day, on which the Annual General Meeting should have been held, whichever is earlier.

My suggestion is that on MCA21 portal, there should be facility that such appointment should be shown as “Additional Director till …..” showing the date on which Annual General Meeting should have been held and their name should be removed without any further filing of form/document in absence of form/document for reappointment.

ALTERNATE DIRECTOR (SECTION 161, SUB – SECTIONS 2):

Firstly Articles of a company must confer its Board of Director power to appoint Alternate Director but in absence of such power, a resolution passed by the company in general meeting should confer this power to its Board of Directors. I prefer this power in Articles of Association of the company if such appointment may be visualised. Such Alternate Director will act for a director during his absence for not less than three months from India. No person shall be appointed as an alternate director for an independent director unless he is qualified to be appointed as an independent director under the provisions of this Act. An alternate director shall not hold office for longer than that permissible to the director in whose place he has been appointed and shall vacate the office when the director in whose place he has been appointed returns to India . If the term of office of the original director is determined before he so returns to India, any provision for the automatic re-appointment of retiring directors in default of another appointment shall apply to the original, and not to the alternate director.

NOMINEE DIRECTOR (SECTION 161, SUB – SECTION 3)

Articles of a company must give its Board of Directors permission to appointment a Nominee Director. Such person may be nominated by any institution in pursuance of any law or of any agreement. The Central Government or State Government may nominate only by virtue of its shareholdings in a Government Company.

DIRECTOR IN CASUAL VACANCY (SECTION 161, SUB – SECTION 4):

This provision is applicable for public company. If, the office of any director appointed by the company in general meeting is vacated before his term of office expires in the normal course, the resulting casual vacancy may be filled by the Board of Directors at a meeting of the Board. any person so appointed shall hold office only up to the date up to which the director in whose place he is appointed would have held office if it had not been vacated.

I read it again, if a director was appointed as “director not liable to be retired by rotation” and agreement is silent on superannuation or otherwise, the director in casual vacancy will be in office up to which date? Further a director appointment by company in annual general meeting liable to be retired by rotation and casual vacancy arise after one and half month, then what? Hope, we may have answer elsewhere in this bill or in subordinate regulation. Readers may please enlighten me, by writing in comment section of this post.

DUTIES OF DIRECTORS (SECTION 166):

1. A director of a company shall act in accordance with the articles of the company.
2. A director of a company shall act in good faith to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.
3. A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.
4. A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
5. A director of a company shall not make or attempt to make any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.
6. A director of a company shall not assign his office and any assignment so made shall be void.

If a director of the company contravenes the provisions of this section such director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

VACATION OF OFFICE OF DIRECTOR (SECTION 167):

The office of a director shall become vacant in case—

(a)  he incurs any of the disqualifications specified in section 164;

(b) he absents himself from all the meetings of the Board of Directors held during a period of twelve months with or without seeking leave of absence of the Board;

(c)  he acts in contravention of the provisions of section 184 on entering into contracts or arrangements in which he is directly or indirectly interested;

(d)  he fails to disclose his interest in any contract or arrangement in which he is directly or indirectly interested, in contravention of the provisions of section 184;

(e)  he becomes disqualified by an order of a court or the Tribunal;

(f)   he is 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. The office shall be vacated by the director even if he has filed an appeal against the order of such court;

(g)  he is removed in pursuance of the provisions of this Act;

(h)  he, having been appointed a director by virtue of his holding any office or other employment in the holding, subsidiary or associate company, ceases to hold such office or other employment in that company.

Readers may note that earlier, a director may be removed when he absent from three consecutive meetings without leave of absence. The leave of absence is a matter of routine, whether asked or not. Now, routine leave of absence is no relation with continuation of directorship. Every meeting attained by director starts a new period of twelve month under this provision.

If a person, functions as a director even when he knows that the office of director held by him has become vacant on account of any of the disqualifications specified in subsection (1), he shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both.

I presume that where a director “do not know his vacation”, he may function as a director without attracting any punishment until it “come to know” to him.

Where all the directors of a company vacate their offices under any of the disqualifications specified in sub-section (1), the promoter or, in his absence, the Central Government shall appoint the required number of directors who shall hold office till the directors are appointed by the company in the general meeting.

Here, promoters have power to appoint a director in certain circumstances. However, this is unusual for Indian companies where promoter is not director.

A private company may, by its articles, give any other ground for the vacation of the office of a director in addition to those specified in sub-section (1).

RESIGNATION OF DIRECTOR (SECTION 168):

A director may resign from his office by giving a notice in writing to the company and the Board shall on receipt of such notice take note of the same and the company shall intimate the Registrar in such manner, within such time and in such form as may be prescribed and shall also place the fact of such resignation in the report of directors laid in the immediately following general meeting by the company. A director shall also send a copy of his resignation along with detailed reasons for the resignation to the Registrar within thirty days of resignation in such manner as may be prescribed.

There is no need for the acceptance by the board but it will take note of resignation.

The resignation of a director shall take effect from the date on which the notice is received by the company or the date, if any, specified by the director in the notice, whichever is later the director who has resigned shall be liable even after his resignation for the offences which occurred during his tenure.

Where all the directors of a company resign from their offices, or vacate their offices under section 167, the promoter or, in his absence, the Central Government shall appoint the required number of directors who shall hold office till the directors are appointed by the company in general meeting.

REMOVAL OF DIRECTOR (SECTION 169):

A company may, by ordinary resolution, remove a director, not being a director appointed by the Tribunal under section 242, before the expiry of the period of his office after giving him a reasonable opportunity of being heard. The provision relating to removal shall not apply where the company has availed itself of the option to appoint not less than two – thirds of the total number of directors according to the principle of proportional representation.

A special notice shall be required of any resolution, to remove a director, or to appoint somebody in place of a director so removed. On receipt of notice of a resolution to remove a director, the company shall immediately send a copy thereof to the director concerned, and the director, whether or not he is a member of the company, shall be entitled to be heard on the resolution at the meeting.

The director concerned may make representation in writing to the company and requests its notification to members of the company. The company shall, if the time permits it to do so,— (a) in any notice of the resolution given to members of the company, state the fact of the representation having been made; and (b) send a copy of the representation to every member of the company to whom notice of the meeting is sent. If, a copy of the representation is not sent as aforesaid due to insufficient time or for the company’s default, the director may without prejudice to his right to be heard orally require that the representation shall be read out at the meeting.

The copy of the representation need not be sent out and the representation need not be read out at the meeting if, on the application either of the company or of any other person who claims to be aggrieved, the Tribunal is satisfied that the rights conferred by this sub-section are being abused to secure needless publicity for defamatory matter; and the Tribunal may order the company’s costs on the application to be paid in whole or in part by the director inspite of that he is not a party to it.

A vacancy created by the removal of a director under this section may, if he had been appointed by the company in general meeting or by the Board, be filled by the appointment of another director in his place at the meeting at which he is removed, provided special notice of the intended appointment has been given. A director so appointed shall hold office till the date up to which his predecessor would have held office if he had not been removed. If the vacancy is not filled, it may be filled as a casual vacancy. The director who was removed from office shall not be re-appointed as a director by the Board of Directors.

Good directors are keys for success of any business (doing business responsibly – CSR) and good governance. Governance issue is in focus, we will touch all provisions governing corporate governors, called directors in near future posts.

Please note: this 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 author.