CA Final Corporate & Allied Laws, Paper 4, Chapter 3, Part 1 of 3

CA. Siddharth Agarwal

To learn about the several pre-requisites before appointment of a director.

To learn about the different bodies that play a pivotal role in the appointment of directors.

To learn what are the different modes of appointment of a director.

To be able to apply the knowledge acquired in solving practical cases in exam.

Director Director includes any person occupying the position of

director, by whatever name called. The definition of a director is basically based on his functions.

Deemed Director A person in accordance with whose directions or

instructions the Board of directors of a company is accustomed to act.

However, a person shall not be treated as a Deemed Director by reason only that the Board acts on advice given by him in a professional capacity.

Phase 1

Prologue to Appointment

Appointment of Directors

Phase 2

Board Meeting

Powers

Related party Transactions

Phase 3

Removal

Vacation

Office of Profit

Inter corporate loans,

investments

Phase 4

Appointment of MD, WTD

Remuneration of Directors

The entire Phase 2 has been discussed separately in chapter 4 of ICAI material.

So in this chapter 3, we are going to focus on Phase 1, 3 & 4.

Prologue to Appointment and Appointment of Directors

• Separate resolution for each Appointment of directors Section 263

• Qualification Shares Section 270

• Disqualifications of directors Section 274

• Increase in number of directors to require Government sanction Section 259

• Restrictions on number of directorships Section 275

• Consent of candidate for directorship to be filed with the Company and Registrar Section 264

All the above provisions in Prologue relate to PUBLIC Companies.

Only Section 274(1)(a) to (f) regarding Disqualification of Directors applies on both Public and Private companies.

Before moving into the “prologue” topics, an understanding of the concept of ROTATIONAL DIRECTORS shall prove immensely useful.

Sec 255 : Rotational directors (Applicable only to a Public Company)

AT LEAST 2/3rd of the total number of directors of a Public Company, shall be directors liable to retire by rotation (rotational directors).

Company can even make all its directors Rotational through its Articles of Association.

While determining 2/3rd any fraction shall be rounded upwards to 1.

1/3rd of the rotational directors determined U/s 255 shall retire by rotation at the ensuing AGM.

The directors to retire by rotation at every AGM shall be those who have been longest in office since their last appointment.

If two persons became directors on the same day, then subject to any agreement among themselves, the retiring director shall be otherwise determined by lot.

While determining 1/3rd, the rounding off shall be done as usual.

Lets X Ltd has 15 directors – A, B, C, D, E, F, G, H, I, J, K, L, M, N & O. Let’s say the above directors were appointed chronologically i.e. A has been longest in office and then B and then C and so on.

As per Sec 255, At least 2/3rd of the total number of directors of a Public Company, shall be directors liable to retire by rotation.

• Number of rotational directors = 2/3rd of 15 = 10 • So the Company has decided accordingly that first 10 directors from A

to J shall be rotational directors. • The other 5 directors [K, L, M, N & O] shall not retire by rotation.

Now as per Sec 256, 1/3rd of the rotational directors determined U/s 255 shall retire by rotation at the ensuing AGM, who have been longest in office.

• Number of retiring directors = 1/3rd of 10 = 3.33 ~ 3 (round off). • So A, B & C shall retire first in the coming AGM on 10-August-

2013. They may seek re-appointment in that same AGM.

Now let’s take hypothetically that all A, B & C, D & E were appointed by the shareholders on the same day. Then the 3 retiring directors out of A, B & C, D & E shall be determined by lot.

In an AGM, the Ordinary Business contains an item “Appointment of Directors” – actually it is “Reappointment of Retiring Rotational Directors”.

All other cases of “Appointment of Directors” are considered as Special Business.

Now we are going to learn the 6 topics in Prologue to Appointment.

Again I will reiterate that all the Prologue topic apply to PUBLIC Companies except Sec 274 (1) (a) to (f).

At general meeting of a Public Company, 2 or more persons cannot be appointed or reappointed as directors of the Company by a single resolution,

Unless a resolution that appointment shall be so made has first been agreed to by the meeting without any vote being given against it.

• A resolution moved in contravention of above shall be void, whether or not objection was taken at the time to its being so moved

Consequence of contravention:

• Section 263 shall not apply to Private Company and ‘not for profit’ Company. Exemptions:

Separate resolution for each Appointment of directors

In ABC Ltd 3 directors were to be appointed. The item was included in the agenda for AGM scheduled on 30th September 2010, under the category of ‘Ordinary Business’.

All the 3 persons as proposed by the Board of Directors were elected as Directors by passing a ‘single resolution’ avoiding the repetition (multiplicity) of resolution.

After the 3 Directors joined the Board, certain members objected to their appointment and resolution. Examine the provisions of the Companies Act 1956 and decide:

Whether the contention of the members shall be tenable and whether both the appointment of Directors and the ‘single resolution’ passed at the Company’s AGM shall be void?

What would be your answer in case the Company in question is an “Association not for profit” incorporated U/s 25 of the Act. (8 Marks)

Quote Section 263 – Such a single resolution is void and hence Appointment is not valid whether or not it is objected to by the shareholders.

If XYZ Company was a “Association not for profit” Company, then Sec 263 does not apply and the appointment shall be considered valid.

Qualification Shares – Number of Equity shares that shall be held by a person to make him eligible for becoming a DIRECTOR.

Companies Act does not require any director to hold qualification shares. It has been left to the Company to decide regarding this matter.

If the Articles of the Company require a director to hold Qualification Shares, then only he/she has to hold it.

However certain restrictions have been put on the Articles by the Act.

2 restrictions placed on Articles by the Act are:-

Limit on number of shares.

Time limit within which the shares have to be acquired.

Restriction 1 : • Limit on number of shares - The nominal value of the

qualification shares shall not exceed Rs. 5,000 or where the nominal value of one share exceeds Rs. 5,000, then only one share constitutes qualification.

• The director shall obtain his qualification shares within 2 months after his appointment.

Restriction 2 : Time limit within

which the shares have to be acquired.

• Any provision in the articles of the Company shall be void in so far as it requires a person to hold the qualification shares before his appointment as a director or to obtain them within a shorter time than two months after his appointment or requires him/her to hold qualification shares exceeding N.V. of Rs 5,000

If the Article violates the 2 Restrictions:

The Director shall vacate his office (Sec 283 – one of the grounds for vacation of office).

If he continues to act as a director after the said period of 2 months, he shall be punishable with fine which may extend to Rs 500 for every day between such expiry and the last day on which he acted as a director.

Also as per Sec 283, if he doesn’t vacate his office, fine of Rs 5000 per day shall be levied.

So a cumulative penalty of Rs 5500 shall be levied.

The limit of holding qualification shares within 2 months is an absolute time limit, no more no less.

Extrapolations:

• Holding of shares means that share must be allotted within 2 months. • Bearer of a share warrant is not deemed to be a holder of qualification

shares

EXEMPTIONS

• Many special categories of Directors are exempted form holding qualification shares even if the Article requires so.

The Articles of Association of MKP Limited incorporated with an Authorised Share Capital of Rs.50 crores divided into 5 crores Equity Shares of Rs.10 each contained the following clause:

“The qualification of a director shall be the holding of at least 1,000 Equity shares in the Company and such a director if not already so qualified shall have to obtain his qualification within a period of 30 days from the date of his appointment as director.”

Examine the validity of the above clause in the light of the provisions of the Companies Act, 1956. (5 Marks)

This provision on the Articles is void. To make it valid, it should be replaced with the following clause:

“The qualification of a director shall be the holding of at least 500 Equity shares in the Company and such a director if not already so qualified shall have to obtain his qualification within a period of 2 months from the date of his appointment as director.”

Mr. Busybody has been appointed as a Director of ACE Automobiles Limited on 2nd April, 2002.

The articles of association of the Company provides that the qualification of a director shall be holding of at least 10 shares in the Company.

Mr. Busybody applied for 10 equity shares of the Company on 31st May, 2002. But the shares were allotted only at the Board meeting held on 19th August, 2002.

Examine with reference to the relevant provisions of the Companies Act, 1956 whether Mr. Busybody has complied with the requirements relating to qualification shares.

If not, what are the consequences?

Quote the Consequences of failure to hold qualification shares within 2 months of his appointment.

Disqualifications pronounced by this Section are at 2 levels:

Sec 274(1)(a) to (f) are for any Company, PUBLIC AS WELL AS PRIVATE because these are directly attributable to the Director himself and are stereotypes.

Sec 274(1)(g) applies only for a director in any PUBLIC COMPANY. This disqualification is attributable to the offence committed by the Company and not the Director.

a) He has been found to be of unsound mind by a Court of competent jurisdiction;

b) He is an undischarged 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 involving moral turpitude and sentenced in respect thereof to imprisonment for ≥ 6 months, and a period of 5 years has not elapsed from the date of expiry of the sentence;

e) He has not paid any call in respect of shares of the Company held by him, and 6 months have elapsed from the last day fixed for the payment of the call; or

f) An order disqualifying him for appointment as director has been passed by a Court in pursuance of section 203 and is in force, unless the leave of the Court has been obtained for his appointment in pursuance of that section;

Section 274(1) (a) to (f) A person shall not be capable of being appointed director of a Company, if

State with reference to the relevant provisions of the Companies Act, 1956 whether the following persons can be appointed as a Director of a Public Company:

Mr. A, who has huge personal liabilities far in excess of his Assets and Properties, has applied to the court for adjudicating him as an insolvent and such application is pending.

Mr. B, who was caught red-handed in a shop lifting case two years ago, was convicted by a court and sentenced to imprisonment for a period of eight weeks.

Mr. C, a Former Bank Executive, was convicted by a court eight years ago for embezzlement of funds and sentenced to imprisonment for a period of one year.

All the cases stated in the question are based on the provisions of Section 274(1) of the Companies Act, 1956 dealing with disqualifications of directors. Based on the provisions of the said section, each case can be discussed as follows:

In the present case, Mr. A has applied to be adjudicated as an insolvent and his application is pending with the Court. Hence, he cannot be appointed as a Director of a Company – whether Public or private.

In the present case, although the sentence was only two years ago, but the period of sentence was only eight weeks, i.e., less than six months. Hence, Mr. B does not come under the prescribed disqualification and can be appointed as a director of a Company.

In this case the imprisonment was for a period of one year, i.e., for more than six months, but since more than five years have elapsed from the expiry of the sentence, Mr. C has come out of the prescribed disqualification and can be appointed as a director of a Company.

A director of a Public Company shall be disqualified from being appointed or reappointed as a

director in any other Public Company for a period of 5 years, if the Public Company of which he

is already a director -

Has not filed the annual accounts and annual returns for any

continuous 3 financial years

Has failed to repay its deposit or interest thereon on due date or redeem its debentures on due

date or pay dividend and such failure continues for one year or

more.

The disqualification U/s 274 (1) (g) shall apply only if:

• The Public Company in which he is a director has committed any one of the 2 defaults mentioned above and

• The Company in which he is seeking appointment or reappointment is a Public Company

Disqualification U/s 274 (1) (g) shall not result in vacation of the office of Director as it is not a ground for vacation of office U/s 283.

Even if the default made by the Public Company is subsequently cured, the director shall continue to remain disqualified.

Responsibilities of Director, Auditor, Company and Central Govt:

The proposed director shall file a declaration with the Company stating that he is not disqualified U/s 274(1)(g)

Auditor shall state in his audit report whether any of the directors are disqualified U/s 274(1)(g) [Sec 227(3)]

Whenever a Public Company makes a default U/s Sec 274(1)(g), it shall immediately file a return with the ROC stating the default and the names and

addresses of all its directors and the ROC shall forward a copy to the CG.

CG shall update the names of such directors and the companies in which they are directors on the website of the Department of Company Affairs

Mr. Ram is a Director of ABC Limited, XYZ Limited and PQR Limited. ABC Limited was regular in filing annual returns, but did not file annual accounts for the year ended 31st March, 2002. Further ABC Limited failed to pay interest on loans taken from a Public financial institution from 1st January, 2002 onwards and also failed to repay the matured deposits on due date from 1st April, 2002 onwards.

Mr. Ram is proposed to be appointed as director of MN Limited on 1st June, 2003. MN Limited has sought a declaration from Mr. Ram to the effect that the disqualification specification Section 274(1)(g) of the Companies Act, 1956 is not applicable in his case. Mr. Ram seeks your advice on the following:

Whether it is in order for him to give the declaration sought by MN Limited in view of the defaults committed by ABC Limited.

Whether he can continue as a Director in XYZ Limited and PQR Limited and also seek reappointment when he retires by rotation at the annual general meetings of respective companies to be held in September, 2003.

Would your answer be different, if Mr. Ram resigned his office of director in ABC Limited on 31st December, 2002?

As ABC Ltd has failed to repay its deposits on due date and the failure continues for more than one year, Mr. Ram is disqualified under section 274(1)(g)(B) and he cannot give the declaration sought by MN Ltd. In view of his disqualification U/s 274(I)(g)(B),

Mr. Ram is not eligible to be appointed as additional director in MN Ltd. from 1st June 2003 onwards.

The disqualification would come into operation only at the time of appointment or reappointment of Mr. Ram as director on any Public Company after the default has become effective.

Till such time, Mr. Ram can continue to hold the office of director in all Public companies in which he is a director.

He need not vacate the office of director in XYZ Ltd and PQR Ltd. as there is no such requirement either in section 274(1)(g) or section 283(Section 283 stipulates the circumstances under which the office of a director shall become vacant).

But Mr. Ram cannot seek reappointment on XYZ Ltd and PQR Ltd when he returns by rotation at the AGMs to be held in September, 2003.

If Mr. Ram resigned his office of director in ABC Ltd. on 31st December 2002, he is not a director when the default U/s 274(i)(g)(B) becomes effective i.e. 31st March, 2003. Hence he can give the declaration sought by MN Ltd. He can also seek re-appointment as a director in XYZ Ltd. and PQR Ltd. when he retires by rotation.

Private Public

Members Directors Members Directors

Minimum 2 2 7 3

Maximum 50 As fixed by Articles

Unlimited As fixed by Articles

Under Companies Act,1956 Under Companies Bill

Max. Directors Section 252 No upper limit

Clause 149 15 directors

Number of Directorship

Section 275 Maximum upto 15 (directorships in private companies is not counted)

Clause 165 Maximum upto 20 and not more than 10 in public companies Overall capping of 20 now

In the case of a Public Company, any increase in the number of its directors, except an increase which is within the permissible maximum under its ARTICLES AS FIRST REGISTERED, shall not have any effect unless approved by the CENTRAL GOVERNMENT;

and shall become void if, and in so far as, it is disapproved by that Government:

Provided that where such permissible maximum is 12 or less than 12, no approval of the Central Government shall be required if the increase in the number of its directors does not make the total number of its directors more than 12.

CG approval is needed only when the increased number of directors exceeds the maximum permissible directors in the Articles as first registered.

“As first registered” implies that a Company cannot avoid the approval from CG by amending its Articles through a Special resolution.

Articles of Reliance Industries Limited as first registered prescribe a maximum of 12 Directors. Presently it has 12 directors. It wants to appoint Mr Deepak Parekh and Mr K V Kamath as non executive directors. Can it do so without approval from CG?

Answer: NO. It has to do the following:

Pass Special Resolution and amend Articles.

Take prior approval of CG.

But the Act gives a liberty that up to 12 Directors, Company does not need any approval from CG, even if the Articles have fixed a lower number as maximum permissible limit.

Extrapolation: Section 259 does not apply to:

a. Private Company

b. Govt Company

c.“Not for profit” companies such as Section 25 Company.

The maximum number of Directors of each of the following Companies as per their Articles of Association is 11.

(i)ABS Company Ltd.

(ii)DSP Trading Private Ltd.

(iii)Traders Association (a Company registered under Section 25 of the Companies Act, 1956)

(iv)Hindustan Paper Ltd. (a Government Company under Section 617 of the Companies Act, 1956)

The Board of Directors of the Company wants to increase the number of Directors to 15.

State with reference to the provisions of the Companies Act, 1956 whether the Directors can do so.

Answer: Only ABS Company Ltd. has to do the following:

• Pass Special Resolution and amend Articles. • Take prior approval of CG.

All the other companies have to just Pass Special Resolution and amend Articles.

Section 275. No person to be a director of more than fifteen companies

No person shall hold office as a Director in more than 15 companies at the same time.

Section 277. Choice by person becoming director of more than 15 companies

• (1) Where a person already holding the office of director in 15 companies is appointed as a director of any other Company, the appointment shall not take effect and become void unless such person has, within 15 days thereof, effectively vacated his office as director in any of the companies in which he was already a director.

(2) Where a person already holding the office of director in 14 companies or less is appointed as a director of other companies, making the total number of his directorships more than 15, he shall choose the directorships which he wishes to continue to hold or to accept, so however that the total number of the directorships, old and new, held by him shall not exceed 15.

None of the new appointments of director shall take effect until such choice is made within 15 days of the day on which the last of them was made.

In calculating, for the purposes of sections 275 and 277, the number of companies of which a person may be a director, the following companies shall be excluded, namely • a Private Company; • an unlimited Company; • an association not for profit; • a Company in which such person is only

an alternate director.

If any of the companies referred in (1), (2) or (3) convert into a Public Company, it shall be excluded for

a period of 3 months from the date of Special Resolution for

conversion into a Public Company.

Mr. PMC is Director in 14 Public Limited Companies as on 30th July, 2003. He continues to be so till 4th September, 2003. The following companies appoint Mr. PMC as a Director at their respective Annual General Meetings held on dates mentioned against their names.

PQR Ltd. (AGM held on 29th September, 2003).

BCD Private Ltd. (AGM held on 25th September, 2003).

City Traders Association (A Company registered under Section 25 of the Companies Act, 1956- AGM held on 26th September, 2003).

TSP Ltd. (AGM held on 25th September, 2003).

You are required to state with reference to the relevant provisions of the Companies Act, 1956 the options available to Mr. PMC in respect of accepting or not accepting the appointment of Director of the above companies.

(2) and (3) are excluded from the ceiling limit and only (1) & (4) are included making the total number of companies 16. So Mr. PMC shall have to resign from one of the companies within 15 days from 29th September, 2003 i.e., by 14th October, 2003.

Jolly was a director in 15 companies excluding those exempted under the Companies Act 1956. Subsequently –

He became elected as president of a Chamber of Commerce.

A Private Company in which he was a Director became a Public Company.

(1) is excluded from the ceiling limit.

For (2), he shall have to resign within 3 months from the date of Special Resolution for conversion into a Public Company.

Consent by a Director

Consent with the Company

Consent with the ROC in

Form 29

Exceptions are: Exceptions are:

1. Retiring director by rotation and seeking reappointment

1. Retiring director by rotation and seeking reappointment

2. A Fresh Candidate applying for Directorship U/s 257.

2. Additional Director, Alternate Director, Director filling Casual Vacancy when seeking appointment as a regular director U/s 257.

3. A person named as a director under its articles as first registered.

J, an existing rotational director of MRN Company Ltd, whose term expired on the Company’s AGM held on 30th September 2011, was reappointed at the same meeting. He did not file the consent with ROC accepting the position of a director. Few members of the Company objected to his continuation as a Director as he has not filed the consent with ROC. Decide:

Whether the members’ contention is correct?

Would your answer be different in case J was named as a director in the Articles as first registered?

No, he need not file his consent.

NO, again he is not required to file his consent.

Appointment of Directors

First Directors By Shareholders

Rotational Directors

Fresh Candidature

By Proportional Representation

Small Shareholders Director

By Board of Directors

Additional Directors

Alternate Directors

Filling of Casual Vacancy

By Central Government Nominee Directors

Section 254. Subscribers of memorandum deemed to be directors

Subject to any regulations in the Articles of a Company, subscribers of the memorandum shall be deemed to be the directors of the Company, until the directors are duly appointed in a General Meeting U/s 255.

Explanation:

Usually the Articles prescribe one of the following:-

Mention the names of the first directors or

It says that the names of the first directors shall be determined in writing by the subscribers of the memorandum or a majority of them.

Table A of the Companies Act: The number of the directors and the names of the first directors shall be determined in writing by the subscribers of the memorandum or a majority of them.

Unless a Public Company specifically excludes the application of Table A in its Articles, Table A shall apply to the Company.

Or if the Public Company does not have its own Articles, Table A shall apply to it.

In the event Table A applies, then the first directors shall be determined in writing by the subscribers of the memorandum or a majority of them.

• Re-appointment of Retiring Rotational Directors by Shareholders

Section 255, 256

• Fresh Candidature Section 257

• Appointment of Directors by Small Shareholders Section 252

• Appointment of Directors by proportional Representation Section 265

Sec 255 : Rotational directors (Applicable only to a Public Company)

AT LEAST 2/3rd of the total number of directors of a Public Company, shall be directors liable to retire by rotation (rotational directors).

Company can even make all its directors Rotational through its Articles of Association.

While determining 2/3rd any fraction shall be rounded upwards to 1.

1/3rd of the rotational directors determined U/s 255 shall retire by rotation at the ensuing AGM.

The directors to retire by rotation at every AGM shall be those who have been longest in office since their last appointment.

If two persons became directors on the same day, then subject to any agreement among themselves, the retiring director shall be otherwise determined by lot.

While determining 1/3rd, the rounding off shall be done as usual.

Sec 255 & 256 do not apply to a Private Company and “Not for profit” Company.

Teaser 1: In case the meeting could not decide how the vacancies caused by retirement to be dealt with, what shall be the consequences?

Answer: If - the place of the retiring director is not so filled up and

the meeting has not expressly resolved not to fill the vacancy, Then the meeting shall stand adjourned till the same day in the next week, at the same time and place, or if that day is a Public holiday, till the next succeeding day which is not a Public holiday, at the same time and place.

Teaser 2: What will be your answer, assuming that the matter could not be decided even at the adjourned meeting?

Answer:If at the adjourned meeting also, the place of the retiring director is not filled up and that meeting also has not expressly resolved not to fill the vacancy, the retiring director shall be deemed to have been re-appointed at the adjourned meeting, unless—

At that meeting or at the previous meeting a resolution for the reappointment of such director has been put to the meeting and lost;

The retiring director has expressed his unwillingness to be so reappointed;

He is not qualified or is disqualified for appointment;

A resolution, whether special or ordinary, is required for his appointment or re-appointment in virtue of any provisions of this Act; or

A resolution in contravention of Sec 263 has been passed i.e. appointing 2 or more directors by a single resolution.

A resolution in contravention of Sec 263 has been passed i.e. appointing 2 or more directors by a single resolution.

For example, Mr. X, Y and Z were appointed as directors via a single resolution subject to an earlier unanimous resolution agreeing to appoint the directors through a single resolution.

Subsequently, say after 2 years, all the 3 directors retire by rotation at the AGM and offer themselves for reappointment.

Due to adverse circumstances the vacancy in their office could not be filled and at the adjourned AGM also, the place of the retiring directors is not filled up and the meeting also has not expressly resolved not to fill the vacancy, then in such a scenario the 3 directors X,Y and Z cannot be deemed to be reappointed.

AGM of Hero Ltd has been scheduled in compliance with the requirements of the Companies Act 1956. In this connection, it has some Directors who are rotational and out of which some have been appointed long back, some have been appointed on the same day.

Decide in this connection:

a. Which of the Directors shall be retiring by rotation and be eligible for re-election?

b. In case 2 directors were appointed on the same day, how would you decide their retirement by rotation?

c. In case the meeting could not decide how the vacancies caused by retirement to be dealt with, what shall be the consequences?

d. What will be your answer, assuming that the matter could not be decided even at the adjourned meeting? (8 Marks)

Company

All members

Any Member or Director

AGM

A B

A. A person who is not a retiring director shall be eligible for appointment to the office of director at any general meeting, if he or some member intending to propose him has, at least 14 days before the meeting, left at the office of the Company a notice in writing under his hand signifying his candidature for the office of director along with a refundable deposit of Rs.500. B. The Company shall inform its members of the candidature of a person for the office of director by serving individual notices on the members at least 7 days before the meeting.

Alternatively, the Company can advertise such candidature at least 7 days before the meeting in at least two newspapers.

Sec 257 shall not apply to a Private Company, unless it is a subsidiary of a Public Company i.e. It is a deemed Public Company.

Note: Usually Additional Directors, Alternate Directors or Nominee Directors offer themselves for reappointment as a regular director using this provision. Also, this mechanism allows a new candidate to be appointed as a director in the Company.

The management of ATP Ltd., a Company listed with The Stock Exchange, Mumbai wants to appoint Mr. BDF as a Director of a Company at the Annual General Meeting of the Company to be held on 24th May, 2007. It may be noted that Mr. BDF is not a retiring Director.

The Management seeks you guidance regarding the procedure to be adopted for the purpose. You are required to state the procedure to be followed for giving effect to such proposal and formalities to be observed after appointment of Mr. BDF as Director, by the management of ATP Ltd., as per the provisions of the companies Act, 1956. . (5 Marks) May 2007

Mr. Suresh, an additional director appointed by the board of directors of a Public Company, is proposed to be appointed as a regular director in the Annual General Meeting. Explain the requirements under the Companies Act, 1956 to give effect to the proposed appointment. Nov. 2008. (5 Marks)

Small Shareholders Director (SSD)

Sec 252 – Eligibility The Companies (Appointment

of the Small Shareholders’ Director) Rules, 2001

Who is a Small shareholder?

It means a shareholder holding shares of nominal value of Rs. 20,000 or less in a Public Company.

Section 252: (a) A Public Company having -

(b) Paid-up capital of Rs. 5 crores or more;

(c) 1,000 or more small shareholders,

May have a director elected by such small shareholders.

Manner of election of small shareholders’ director (SSD):-

A Company may act suo-moto to elect a small shareholders’ director from amongst small shareholders

or upon the notice of at least 1/10th of total small shareholders

who have proposed name of a person (who shall also be a small shareholder of the Company) shall

appoint a small shareholders’ director.

Small shareholders intending to propose a person shall leave a notice of their intention with the

Company at least 14 days before the meeting under the signature of

at least 100 small shareholders specifying name, address, shares

held and other required details.

• Tenure of such small shareholders’ director shall be for a maximum period of 3 years subject to meeting the requirement of provisions of Companies Act except that he need not have to retire by rotation.

• On expiry of his tenure, the same person if so desired by small shareholders may be elected for another period of 3 years.

Tenure of such small

shareholders’ director (SSD)

• Such director shall be treated as director for all other purposes except for appointment as whole time director or managing director.

• No person shall hold office at the same time as small shareholders’ director in more than 2 companies.

Restriction on small

shareholders’ director (SSD)

• He need not hold qualification shares. • He is a non-rotational director. 2 Liberties

• Disqualifications of an SSD are same as that of any other director U/s 274 except that Sec 274(1)(g) shall not apply to him.

• He shall vacate his office as and when he ceases to be an SSD i.e., he holds shares of Nominal value exceeding Rs.20,000.

Disqualifications and vacation of

office

• He can be removed from his office just like any other director by following the procedure prescribed U/s 284. Removal

The Board of Directors of M/s ABC Limited, an unlisted Company having a paid-up capital of Rs.6 crores consisting of equity share capital of Rs.5 crores and preference share capital of Rs.1 crore and also 1,100 ‘Small Shareholders’ holding equity shares seeks your advice on the following:

• Is it necessary for the Company to appoint a Director to represent the ‘Small Shareholders’?

• In case the Company decides to appoint such a Director. The procedure to be followed by the Company for such appointment and the period for which such appointment can be made.

• Can such a director be removed by the Company before the expiry of his period of appointment without the consent of the ‘Small Shareholders’?

Advise explaining the relevant provisions of the Companies Act and the Rules. (8 marks)

The objective is to empower the minority in appointment of directors and bring an end to the oppression & mismanagement.

This provision is completely Articles Driven.

Since this is an overriding provision, Sec 255 and 256 shall not apply in this case.

Voting system adopted shall be single transferable vote or cumulative voting or any other manner.

At least 2/3rd of the total number of the directors of a Public Company shall be appointed by proportional representation if

required by its Articles.

The appointment by proportional representation shall be made once in every three years.

Cumulative voting is a type of voting process that helps strengthen the ability of minority shareholders to elect a director.

This method allows shareholders to cast all of their votes for a single nominee for the board of directors when the Company has multiple openings on its board.

In contrast, in "regular" or "statutory" voting, shareholders may not give more than one vote per share to any single nominee.

For example, if the election is for four directors and you hold 500 shares (with one vote per share), under the regular method you could vote a maximum of 500 votes for any one candidate (giving you 2,000 votes total - 500 votes per each of the four candidates).

But with cumulative voting, you could choose to vote all 2,000 votes for one candidate, 1,000 each to two candidates, or otherwise divide your votes whichever way you wanted.

Let us understand this through an example: No. of seats = 2 No. of candidates = 4 (A, B, C & D) No. of voters = 30 Voting Shall Take Place Only A Single Time. These voters have to draw their preference list. Lets take –

5 voters

• 1 – A • 2 – B • 3 – C • 4 - D

17 voters

• 1 – A • 2 – C • 3 – B • 4 - D

8 voters

• 1 – D • 2 – B • 3 – C • 4 - A

Winning Quota (Droop’s Quota) = No. of Voters +1 = 30 +1 = 11. No. of Seats +1 2+1

In the first round, • A – 22 votes. • D – 8 votes.

Excess Votes of A = 11 shall be transferred to the 2nd best choice of 1st and 2nd Group in the ratio of 5:17 which comes to 2.5 & 8.5 rounded off to 3 & 8 respectively.

So now the pattern looks like – • A – 11 votes. • B – 3 votes. • C – 8 votes. • D – 8 votes.

5 voters

• 1 – A • 2 – B • 3 – C • 4 - D

17 voters

• 1 – A • 2 – C • 3 – B • 4 - D

8 voters

• 1 – D • 2 – B • 3 – C • 4 - A

As none of the candidates have reached their threshold, ‘B’, the candidate with the fewest votes, is eliminated.

All his votes belonged to the 1st group whose 3rd best choice was ‘C’ and hence his 3 votes are reallocated to ‘C’. So now the voting looks like –

• A – 11 votes. • B – 0 votes. • C – 11 votes. • D – 8 votes.

This gives ‘C’ 11 votes and he is elected.

5 voters

• 1 – A • 2 – B • 3 – C • 4 - D

17 voters

• 1 – A • 2 – C • 3 – B • 4 - D

8 voters

• 1 – D • 2 – B • 3 – C • 4 - A

• Additional Directors Section 260

• Alternate Directors Section 313

• Filling of Casual Vacancy by the Board Section 262

1. • BOD has the power to appoint additional directors in case of emergencies and exigencies.

2. • Such additional directors shall hold office only up to the date of the next annual general

meeting of the Company. They are not retiring rotational directors.

3. • An additional director retires compulsorily on the ensuing AGM, but he can offer himself for

appointment as a regular director in that same AGM as a fresh candidate U/s 257.

4. • Provided further that the number of the directors and additional directors together shall not

exceed the maximum strength fixed for the Board by the articles.

5. • What if Ensuing AGM is not held: The additional director shall vacate his office on the last

day the AGM should have been held.

Original Director goes out of the State for ≥ 3

months in which Board meetings are ordinarily

held.

• The BOD may appoint an ALTERNATE DIRECTOR who shall hold office till the time ORIGINAL DIRECTOR returns to the State.

Mr. Q, a Director of PQR Limited proceeding on a long foreign tour, appointed Mr. Y as an alternate director to act for him during his absence.

The articles of the Company provide for appointment of alternate directors.

Mr. Q claims that he has a right to appoint alternate director.

Examine the validity of contention.

Section 313 of the Companies Act, 1956 provides that the Board of Directors of a Company may, if authorised by its articles or by resolution passed by the Company in general meeting, appoint an alternate director to act for a director during his absence for a period of not less than 3 months from the State in which the meetings of the Board are ordinarily held.

The alternate director can be appointed only by the Board of Directors and only in cases where the Board is authorised by Articles or by the Company in general meeting. Hence Mr. Q, the director in question, is not competent to appoint alternate director and the appointment of Mr. Y as alternate director is not valid

Casual Vacancy arises in the office

of a director appointed in the GM i.e., death, disqualification, resignation, etc.

If ARTICLES prescribe the

manner in which such position can

be filled then follow it.

Else BOD shall fill the vacancy in a Board Meeting. He shall hold

office till the time VACATING

DIRECTOR would have held his

office.

If the director appointed by the BOD vacates, then the same cannot be filled by the BOD.

It is not mandatory to fill the casual vacancy and the BOD may resolve not to fill it.

He is not a director retiring by rotation within the meaning of Sec.255 & Sec 256 and hence if he wants to get appointed as a regular director after his retirement, he has to follow Sec 257 procedure i.e., fresh candidature.

The Board of Directors of XYZ Limited appointed Mr. A as a Director in the casual vacancy caused by resignation of Mr. X.

Mr. A is proposed to be re-appointed as a Director at the Annual General Meeting, when he vacates his office.

Examine with reference to the relevant provisions of the Companies Act, 1956 whether Mr. A can be considered as a 'Retiring Director' and state the legal requirements to be fulfilled to give effect to the proposed appointment of Mr. A as a Director at the Annual General Meeting.

The Central Government may appoint such number of persons as Directors as the Tribunal (CLB) may specify to prevent oppression and mismanagement for such period, not exceeding 3 years, as it may think fit.

More about Sec 408 shall be covered later in chapter 7 on “Prevention of Oppression & Mismanagement”.

Who is a Nominee Director? • A Nominee Director is a person who has been nominated by an authority

and not elected as such. Examples are:

1. Director nominated by the Holding Company on Subsidiary company pursuant to clause 49 of the Listing Agreement. 2. Director nominated by the Lending Banks under the Loan Agreement. 3.Director nominated by a private equity investor in the company.

A Company may appoint a nominee director if the following 2 conditions are satisfied:- • Appointment of such Nominee director is authorized by its Articles of

Association. • A nominee director shall be appointed only out of 1/3rd of total number of

directors – i.e., non-rotational directors.

However these provisions do not apply to a nominee director appointed under a special statute.

• He need not retire by rotation U/s 255 & 256.

• He need not hold qualification shares U/s 270.

• He can be appointed even if there is no such provision in the Articles of the Company.

• He cannot be removed by the shareholders by following Sec 284.

In case of some financial institutions (e.g., UTI, LIC, IDBI), the relevant Acts by

which they came into existence allow them to

appoint Nominee Directors with overriding

provisions in the Board of Assisted Companies. He is exempted from several provisions of Companies

Act like:

So we have covered the following topics so far: Prologue to Appointment of Directors i.e., the

different aspects to be checked before appointment of directors.

a. Separate resolution for each Appointment of directors

b. Qualification Shares c. Disqualifications of directors d. Increase in number of directors to require

Government sanction. e. Restrictions on number of directorships f. Consent of candidate for directorship to be filed

with the Company and Registrar

Appointment of Directors

First Directorsy By Shareholders

Rotational Directors

Fresh Candidature

By Proportional Representation

Small Shareholders Director

By Board of Directors

Additional Directors

Alternate Directors

Filling of Casual Vacancy

By Central Government Nominee Directors