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In this article, Samadrita C Bhattacharjee currently pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses the standard operating procedure for appointment of directors when all existing directors have vacated office.

Introduction

The Companies Act, 2013 (hereby referred to as the “Act”) is an Indian Parliamentary Act on Indian Company Law that regulates incorporation, responsibilities and dissolution of a company along with laying clear rules about the roles and responsibilities of the directors, board members, stakeholders and other employees of the company. The Companies Act, 1956 was amended partially after receiving the approval of the President of India on August 29th, 2013. The Act raised the maximum number of members in private companies from 50 to 200. A concept for the structure of a “One Person Company” was also included in the Act.

Who is the director of a company?

A company is a legal entity which has no physical existence. It can only function through its directors who are the officers of the business structure. The directors are appointed by a group of people whose job is to supervise a particular project or program of a company. They are usually members of the governing council or the Board of Management who are expected to act in good faith to achieve the objectives of the company with skill and diligence and exercise their independent judgements.

Section 166 of the Act clearly states the following as the “Duties of Directors”:

(1) A director has to act in accordance with the rules set out by the articles of the company.

(2) A director is expected to act in good faith to promote elements of the company for the benefit of its members and to act in the best interest of the company.

(3) A director is expected to exercise his duties with skill, care and diligence and exercise independent judgement in situations that call for it.

(4) A director is expected not to get involved in any situation in which he may have a direct or indirect conflict of interest.

(5) A director is prohibited from attempting to achieve any undue gain or take advantage of his position to benefit himself or his relatives, partners or associates. If found guilty of any such offence, he will be liable to pay an equal amount to the company.

(6) A director is prohibited from assigning his office or any of his assignments to someone else. If any such offence takes place, the assignments shall be considered void.

(7) A director of a company is prohibited from contravening the provisions of this section of the Act. If found guilty of such an offence, he shall not be fined any less than one lakh rupees. However, the fine shall not extend to more than five lakh rupees.

 

What does the Companies Act say about the directors?

In Chapter XI of Section 149 (1) of the Companies Act, 2013, it is clearly mentioned that every single company shall have a board of directors consisting of individual directors. In case of a public company a minimum of 3 directors are needed and in case of a private company, a minimum of 2 directors are needed to ensure smooth functioning of the company. In the case of an OPC (One Person Company) having one director is mandatory, while the minimum number of directors in a producer company have to be five. The maximum number of directors in a company can be 15. A special resolution needs to be passed if a company wants to hire more than fifteen directors.

This chapter of the Act also mentions such class or classes of companies where there has to be one female director. It states every company existing on or before the date of commencement of this Act shall comply with the requirements of the provisions of the subsections as mentioned in the Act within a year of such commencement.

The Act states that it is mandatory to have at least one director who has resided in India for more than one hundred and eighty-two days in the previous calendar year.

Can all directors of a company resign at the same time?

In Chapter 4 of the Ministry of Corporate Affairs (MCA), it states that the resignation of a director should be treated as a choice exercised by the director of a company. Although it is an extremely rare case where all directors of a company resign at the same time, such a situation is possible in the following scenarios:

  • Full board disqualification

A full board disqualification is never imposed by the government but always achieved by the directors of a company themselves.

Irrespective of the list prepared by the Government of India, if any director who has been disqualified under Sections 164 and 167 of The Companies Act, 2013 continues to work, it is considered to be unlawful and calls for immediate expulsion. In a situation such as this, a company shows the door to disqualified directors to save the company from further embarrassment.

  • Full board resignation

All the members of the board may resign for a number of reasons though it may seem like a distant imagination in a country like ours which has a majority of family-run firms. If such a situation ever occurs, it is honourable for the directors to vacate their offices respectfully.

This situation of full board disqualification has been foreseen in Section 167(3).

In both the private and public structures of a company, if a situation arises when all the directors of a company have resigned from their offices or vacated their offices under section 167, the promoters or, in their absence, the Central Government shall be vested with the power to appoint the required number of directors who shall hold offices until the new directors are appointed by the company after conducting a general meeting.

What happens when all directors of a company resign at the same time?

Even when all directors of a company resign at the same time the company does not stop functioning. The concept of perpetual succession comes into play and a new set of directors are appointed who are expected to carry forward the legacy and goodwill of the company.

Section 168(3) of The Companies Act, 2013 states that when all directors of a particular company resign from the Board, the promoter or the Central Government, in absence of a promoter, shall appoint the required number of directors who are going to hold the office until new directors can be appointed in a general meeting.

This section states that a director may resign from his office by giving a notice in writing to the company; the Board on receipt of such a notice shall make note of the same and inform the Registrar in such manner, within the stipulated time frame and in such form as may be prescribed in the Act. It also states that the Board shall put the fact of such resignation in the report of directors laid in the meeting by the company that immediately follows such an act, provided that a director shall forward a copy of his resignation along with detailed reasons for his resignation to the Registrar within thirty days of the resignation, in such manner as may be mentioned in the Act.

Who is responsible when all the directors of a company resign?

If a company is left with no appointed director, the shareholders of the company may have the authority to appoint new directors. According to The Companies Act, 2013 there is no vested power for the shareholders to appoint directors and this power has been delegated to the Board of members of the company. However, case laws suggest that the shareholders can act instead of the Board through conducting a general meeting. The Act mentions that the members of a company should have the power to call for a general meeting. If the articles mention of no such power, an application may be needed to be made to the court, which can intervene in the matter and call for a general meeting, which is otherwise impractical to be called under the articles of The Companies Act.

How do you assign new directors?

Usually, companies where all directors have resigned face a lot of difficulties while filing the forms for the appointment of new directors as the adopted bureaucracy of our country plays a big role in such proceedings. In such companies where no authorized signatory director is available due to deactivation of DSC of resigning director on the filing of DR11. Therefore, the appointment of directors through e form cannot be filed. The MCA issued a clarification vide General Circular No. 3/2015, dated March 3rd, 2015 that states that the RoC may allow any one of the resigned directors, who was an authorised signatory of the company, to file the e-form as applicable and subject to compliance of other provisions of the Act of 2013.

The process to be followed in the appointment of new directors

As per the internal circular of the MCA dated 6th October 2017, the following should be followed as the Standard Operating Procedure(SOP) for the appointment of new directors for the vacant board of non-compliant companies in accordance with the terms of Section 164(2):

  • Power given under Section 167(3)

The power to appoint directors in case of a vacant board falls under this Section of the Act where the promoters of a company, or their absence, the Central Government shall hold the power to appoint the required number of directors to hold office until the directors are appointed by the company in a general meeting.

Although the standard operating procedure does not mention anything about where the Central Government shall call for such a general meeting to get the required number of directors appointed, it states that either the promoter or shareholders can appoint the minimum number of directors.

  • Calling for a General Meeting

Public Company

In case of a public company that has a company secretary, a notice may be issued by the Company Secretary to call for a general meeting in which new directors can be appointed. In cases where there is no company secretary, the promoter or a member of the Board may take the needful action by calling a general meeting.

As per the procedure laid down in the internal department letter, to standardise the Restoring Process of Appointment of Directors in cases of Vacant Board, the quorum requirements as mentioned under Section 103 of the Act may or may not be fulfilled. The resolution, however, needs to be passed by a minimum number of members as required to constitute a public company.

Private Company

In the case of a private company, a promoter or any member of the Board can issue a notice to call for a general meeting in which new directors can be appointed. The resolution needs to be passed by a minimum number of members as required in order to constitute a private company.

  • Notice and Explanatory statement

The Notice issued shall include a resolution to appoint the minimum number of directors required and also include a general authority to such appointees for any compliance and representation that they make on the company’s behalf. The explanatory statement shall cover the detailed explanation for such new appointments and provide details for the purpose of such new appointees.

  • Documents required to be prepared and submitted to the MCA

  1. Form DIR-2 (ie, consent to act as a director in the format enclosed in Enclosure-1) along with an address and identity proof.
  2. Form MBP-1 shall be in the format enclosed (Enclosure-1) and it shall set out the interest of the appointees in other companies.
  3. Form DIR-8 (Enclosure-3) providing the intimation of directors as per section 164(2) Rule 4 of Companies Rules 2014 (Appointment and Qualification of Directors).
  4. Proof of shareholding of the promoters or shareholders, who are eligible to appoint new directors, in the form of the Register of members, share certificates, certification by professional with the membership number, etc, the authenticity if which has been certified by a practising professional such a PCS, PCA or Practising Cost Accountant. The field of professional has not been clearly stated in the Act.
  5. A copy of the resolution for the appointment of the new directors along with a copy of the notice and explanatory statement.
  6. An affidavit signed by the new director duly notarized in the format enclosed (Enclosure-4) shall need to be submitted by the promoter or the shareholders with the request letter clearly state the following:
    • The company does not have any qualified directors at the time of the appointment of the new director.
    • The fact of his appointment as discussed in the general meeting held prior to his appointment. The attendance sheet of the general meeting shall be enclosed with the affidavit.
    • Undertaking to pay the required amount for insertion of the name of the newly appointed director from the back end.
    • The newly appointed director has been given all the necessary powers for making compliances, representing the company and undertaking any other action necessary in the interest of the company.

In addition to the submission of hard copies of the aforesaid documents, it has also been suggested that all such documents may be submitted as soft copies in a portable format.

Conclusion: What do the newly appointed directors have to keep in mind?

The newly appointed directors shall have the foremost task of making the default as mentioned under Section 164(2)(a) of the Act so that all the other compliances may smoothly be processed by the company. The Companies (Amendment) Bill of 2017 allows a cooling period of six months to file all such procedures. It does not provide any such compliance making period. Once the SOP has been executed, the status of the newly appointed directors will be decided upon. Whether the appointees shall be treated as disqualified till the time they make the filing with the Registrar of Companies (RoC) or, if the RoC will allow them with reasonable time for making the compliances without treating them as disqualified is the question to be decided upon.

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