In this article, Rishika Raghuwanshi, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses on how to appoint a new director in the case of death of an existing director.
A corporation is a separate legal entity having its own rights and privileges. It is an artificial being existing only in contemplation of law. It cannot function on its own like a human being, as it does not have a mind or body. Hence, it functions through people or individuals like directors.
This is the reason why directors of a company are entitled to exercise all such powers and do all such acts and things as the company is authorised to do. Even though they can exercise all the powers that a company can, except those specifically done in the general meeting, no regulation of a general meeting can invalidate a prior act done by a director. Moreover, shareholders cannot intervene in the usage of powers vested in the directors. The most they can do is amend the articles to restrict their power but that will not have any retrospective effect. Therefore, one can safely assume the directors of a company have enormous powers when it comes to the functioning of a company.
They play a fiduciary role with these powers cast upon them and hence their appointments are done under the strict guidance of the Act, to secure the interest of the company.
Meaning of Directors
The Companies Act 2013 defines director in Section 2(34) as ‘a director appointed to the board of a company’. The legal position of the directors of the company is related to different attributes. They act as trustees for assets and properties of the company, as agents on behalf of the companies and as managing officer who enjoys the vast power of management by various provisions in memorandum and articles. No matter what legal attribute they are referred to, they really are
“….. commercial men managing a trading concern for the benefit of themselves and of all the shareholders in it. They stand in a fiduciary position towards the company in respect of their power and capital under their control.”
This highlights that a corporation’s success heavily depends on the directors they hire. Therefore, these directors are required to be of high calibre and integrity. Their fiduciary positions require them to act with utmost good faith, care, skill and due diligence. This is the reason why their appointment on to the board is an important consideration.
Appointment of Directors
There are detailed regulations under the Act pertaining to the appointment of directors. Chapter XI of the Companies Act, 2013 provides for the appointment and qualification of directors. There are different procedures for appointing directors, such as
- Appointment at general meetings: Section 152(2) withholds that every director should be appointed in the general meeting unless the companies act 2013 specifically provides otherwise. These directors retire by rotation in the subsequent general meeting. It is to be noted that a director cannot prolong his tenure by not holding the annual general meeting.
- Appointment of first directors: The first directors are usually mentioned in the articles of association. If it is not mentioned in the articles then the subscribers of the memorandum are deemed to be the directors until a director is appointed. But for any reason such as death the person does not assume office, it will be necessary for the subscriber of the memorandum to convene a meeting for the appointment of directors.
- Appointment of resident directors: The companies act 2013 for the first time has introduced the term resident director. According to Section 149(3), every company shall have a director who lived in India for at least one hundred and eighty-two days in the previous calendar year.
- Appointment of independent directors: Section 149(4) requires every company to have at least one – third of the total number of directors as independent director Appointment by the board of directors. An independent director is a director other than a managing director or a whole-time director or a nominee director. He acts as a watchdog to protect the interest of the shareholders.
- Appointment by the board of directors: The matter at hand will deal extensively with the appointment by the board of directors. The board of directors can exercise power to appoint in following cases:
- Additional directors: an Additional director is a person who is suitable for serving the board and his presence is desirable for the interest of the company. The board of directors can appoint any person as an additional director anytime but he who is to be appointed must not fail to get appointed in the general meeting.
- Filling up casual vacancy: The board of directors is empowered to fill the casual vacancy of public companies or private companies who are a subsidiary of public companies.
- Alternate director: The board of directors either by its articles or by resolution passed in the general meeting can appoint an alternate director to act in the absence of a director for a period not more than three months.
Appointment of Directors through Casual Vacancy
To understand appointment when an existing director dies, we need to understand casual vacancy. Casual Vacancy is when a director’s office is vacated before the expiry of his tenure. These vacancies normally occur when
- A director dies
- A director resigns
- A director is disqualified
- A director becomes insolvent
Moreover, in the case named M.K. Srinivasan v. W.S. Subrahmanya Ayyar, an interest observation was made. This case dealt with the question whether a casual vacancy arises if a director appointed to fill this vacancy, does not assume office. The court was of the opinion that no casual vacancy is created if the director does not assume office merely for the reason of efflux of time. This is because the situation of vacating the office is not created if the director has never assumed the office.
In the event of a casual vacancy, it should be filled by the provisions of the Companies Act, 2013 and subject to the Articles of Association of the Company.
Appointment of a Director when an Existing Director dies
Section 161(4) gives power to the board of directors to appoint during a case of casual vacancy of a public company. Thus, subject to regulations present in the articles of the company, any director appointed in general meeting, vacates his office can be filled by the board of directors at the board meetings.
The tenure for the person appointed to fill this casual vacancy will hold the office for the entire period for which the person in whose place he was appointed would have held the office. Hence if “R” was appointed to fill the casual vacancy created by “E”. R would continue till the whole period for which E was appointed for and not till the next annual general meeting. Further, on expiry of E’s term R will not be eligible for reappointment as a director retiring by rotation.
Moreover, the above-mentioned provisions will apply to private companies who are subsidiary of a public company but not to a purely private company. Also, there is no vacancy created by a non-rotational director who is appointed otherwise than through general meeting. Section 161 does not apply to him and thus the vacancy cannot be filled by the board of directors.
Section 161 does not apply to a private company who is not a subsidiary of a public company. They fill the casual vacancy through their Articles of association or Section 152 which is general meetings.
The procedure of appointing directors to fill the casual vacancy
- Check for any provisions in Articles of the Company relating to appointment of Director to fill the casual vacancy read with Section 161(4) of the Companies Act, 2013. If there are in existence such provisions then follow them to fill the casual vacancy.
- Hold a board meeting for such appointments, if such provisions don’t exist in the Articles.
- Collect DIN number of the proposed director under section 153 read with from DIR-3 and DIR-4.
- Collect the mentioned Declaration/Consent/Documents from the proposed director:
- Passing a resolution in the Board meeting for appointing the new director.
- File form DIR.12 with Register of companies within thirty days of passing board resolution for the appointment.
(a) Obtain consent in writing in form DIR-2 pursuant to Rule-8 of Companies (Appointment & Qualification of Directors) Rules, 2014.
(b) A declaration that the appointed director is not disqualified u/s 164(2) of Companies Act, 2013.
(c) File form MBP.1 to disclose interest.
- Check management hierarchy so that if the Director is under the category of “one level below KMP” then the form MGP.14 should be filled.
- Make necessary entries with the registrar of directors, key managerial persons and their shareholdings.
- Notification to the stock exchange as per the listing agreement must be sent.
A corporation functions through its directors. As pointed out directors have a very important role to play in the company. With such enormous powers, a fiduciary duty is cast upon them. This is why strict procedures are laid down for the appointment of every kind of directors.
Casual vacancy, which is the result of a death of an existing director can be filled by the board of directors but the same is not applicable in purely private companies. Private companies can do so by their provisions in the article of association or through a general meeting. A casual Director is not a Director by rotation and his tenure gets over when the tenure of the person who originally held that office gets over.
Therefore, casual directors are there to fill the vacancy and take up duties of the director who died so as to not cause any certain disturbance in the management’s function which might result after the death of a director.