This article has been written by Mudit Gupta. The article deals with all the necessary details pertaining to Section 161 of the Companies Act, 2013, dealing with the appointment of additional directors, alternate directors, and nominee directors, their responsibilities and procedure of appointment. The article also deals with the appointment of director in case of casual vacancy.

This article has been published by Shashwat Kaushik.

Introduction 

Fundamentally, companies are given a separate entity status in India but their operation and growth are completely dependent on how various stakeholders work in the organisation. All the key decisions of a company are taken by the board of directors, who are appointed in the general meeting. These directors are the key decision-makers in the company. Apart from the normal board of directors, the Companies Act, 2013 provides for the appointment of additional directors, alternate directors or nominee directors. The provision for appointment of these directors is provided in Section 161 of the Companies Act, 2013. In this article, this provision will be discussed in detail along with the role and responsibilities of such directors. The article further discusses the procedure for appointment of these directors. All these details will provide a great understanding about the appointment and importance of these directors.

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Directors appointed under Section 161 of Companies Act, 2013 

Directors are one of the most important parts of a company. They are responsible for the decision making of a company, as they are its key signatories. They are also responsible for efficient corporate governance within the company. This part of the article will provide a clear understanding of the types of directors appointed under Section 161 and their role in corporate governance in India. 

When we talk about corporate governance in India, the appointment of additional directors, alternate directors, and nominee directors plays a very important role in ensuring operational continuity and strategic management within companies without any sort of hindrance. The appointment of an additional director is done to gain specialised expertise or fill interim vacancies, thereby enhancing the board’s diversity and skill set. Appointment of alternate directors is done with the specific aim of ensuring uninterrupted decision-making processes by getting directors who act as substitutes for primary directors during their absence for some reason. Nominee directors are appointed to provide a clear representation of the interests of specific stakeholders, such as shareholders or financial institutions, thus, safeguarding their investments and ensuring their viewpoints are considered in board deliberations. The appointment of these directors as per Section 161 of the Companies Act, 2013 plays a critical role in increasing the board’s competence by enhancing transparency and accountability in corporate decision-making within the company.

Additional director

Contrary to the appointment of normal directors, additional directors are appointed by the board of directors and their appointment is governed by the AOA and Section 161(1) of the Companies Act, 2013. This provision gives the Board of Directors the power to appoint additional directors between Annual General Meetings (AGMs), with the condition that the same is provided in the Articles of Association (AOA) and the total number of directors appointed shall not exceed the maximum number fixed by the AOA. The appointed additional directors shall hold office until the next AGM, where their appointment is regularised by shareholders. This flexibility gives companies an option to swiftly address the skill gaps in the organisation or emergent needs in board expertise and hence ensures accurate and timely decision-making and operational efficiency while adhering to statutory requirements. In a scenario where a general meeting is not held, the office shall be vacated by the Additional Director on the last day on which the AGM was to be held. The appointment of an additional director can be made by both private and public companies. A person cannot be appointed as an additional director if he/she fails to get appointed as a director in a general meeting. Such appointments shall be made in accordance with the AOA of the company as it is provided in the Companies Act, 2013.

Consequences of irregular appointment of an additional director

The appointment of an additional director is made with a motive to get a specialised person on the board of directors of the company. In a scenario where the additional director is appointed as the managing director, he/she will also cease to hold the managing director’s office if his/her appointment is not ratified at the next general meeting. In case his/her appointment is ratified, he/she will be appointed as the managing director as per Section 196 of the Companies Act, 2013.

In cases where the company or any person of the company is in violation of the provisions of Chapter XI dealing with the appointment and qualification of directors under the Companies Act, 2013, for which no penalty has been provided, there is a penalty of Rs. 50,000 for each of the officers of the company and the company itself. In case of continuous failure, a penalty of Rs. 500 per day is to be levied for a maximum limit of Rs. 3,00,000 for the company and Rs. 1,00,000 for the officers. Section 205 of the Companies Act, 2013 provides that the responsibility of the company secretary is to make sure that the company complies with all the statutory and regulatory requirements. Hence, the company secretary shall advise the board of directors to comply with all the statutes. The same was also pronounced in an adjudication order passed by the Registrar of Companies, Karnataka, Bengaluru for violation of provisions of Section 161 of the Companies Act 2013 by M/s. Chaitanya India Fin Credit Private Limited.

Alternate director 

As per Section 161(2) of the Companies Act, 2013, the Board of Directors have the power to appoint an alternate director to act in the absence for not less than three months of the original director, if same is authorised by its articles or by a resolution passed by the company in a general meeting. An alternate director can be appointed by both the public and private companies. As per the Companies Act, 2013, authorisation by the articles or a resolution passed by the company in a general meeting is necessary for the appointment of an alternate director by the Board of Directors of a company. A person holding an alternate directorship for any other director in the company or holding a directorship in the same company shall not be appointed as the alternate director. The criteria of independence must be satisfied by the alternate director if it is proposed that the alternate director should be appointed as an independent director. The right to appoint an alternate director vests in the hands of the board of directors. The original director has no right to appoint an alternate director. 

The alternate director shall not hold the office for a period of time longer than that permissible for the director in whose place he has been appointed. The alternate director shall immediately cease to hold his office if the original director ceases to be a director because of death or vacation of office under Section 167. The office shall be vacated by the alternate director when the original director, in whose place he has been appointed, returns. Section 152(7)(b) that deals with the automatic reappointment of a director shall apply only to the original director, and not to the alternate director if the term of the original director expires before he/she rejoins the company. 

Nominee director

An individual nominated by an institution, including banks and financial institutions, for appointment as the director on the board of companies where such institutions have some ‘interest’ is known as a nominee director. The ‘interest’ can either be in the form of financial assistance such as loans or an investment in shares. Strategic investments like these may have a direct effect on the profitability of the nominator and therefore, to facilitate monitoring of the operations and business of the investee company, the appointment of a nominee director becomes essential. The appointment of a nominee director is made as per Section 161(3) of the Companies Act, 2013. A nominee director is “nominated” by a nominator. All the rights concerning appointment, removal, and the terms and conditions of appointment form part of the agreement entered into with the company by such investor, creditor, or other stakeholders and are in the hands of the nominator. This type of director acts as a ‘watchdog’ and participates in decision-making. The director has the responsibility of maintaining confidentiality about the affairs of the company. This type of director can also be appointed by the state or central government. Also, the director should have a Director Identification Number (DIN).

Need for Section 161 of Companies Act, 2013 

After getting an understanding of all types of directors appointed under Section 161 of the Companies Act, 2013 and their role in corporate governance, it is imperative to understand the need for such a provision. The Companies Act, 1956 provided for the appointment of alternate directors but there was no provision for the appointment of additional directors or nominee directors. With the passage of time, a need for both types of directors was felt by legislators and policymakers and hence, provisions for the appointment of both types of directors were introduced in the Companies Act, 2013. Now, let’s understand the purpose of all 3 types of directors appointed as per Section 161.

A situation may arise where the board of directors of the company intends to appoint a person to the board; however, it might not be possible to convene a general meeting to seek the approval of the members. Then, in that case, they can appoint a person as an additional director of the company until the next annual general meeting. This gives the company a quick solution for getting a person with expertise in the area on board.

The main purpose of the appointment of an alternate director is to get a person on board in place of an existing director when he/she is not available for a minimum period of 3 months. This helps the board make quick decisions with clear representation, and hence, enhances the transparency of the corporate governance system of the company.

The main purpose of the appointment of the nominee director is to safeguard the interests of the nominator without conflicting with his/ her fiduciary duty as a director. This gives the nominator, who is either a creditor, investor, or any other stakeholder, a clear representation on the board of the company, ensures that their rights are taken care of by the company, and creates transparency and trustworthiness in corporate governance.

Procedure for appointment of a director under Section 161 of Companies Act, 2013 

Now that we have a clear understanding of the types of directors appointed under Section 161 and the need for such a provision, understanding the procedure for their appointment is very much necessary. This part of the article deals with the procedure for the appointment of all 3 types of directors appointed under this provision.

Appointment of additional director

The procedure for the appointment of the additional director is as follows:

  1. Board resolution: At a duly convened board meeting, the board of directors must approve the appointment of an additional director. The board resolution for the appointment must contain the reason for the appointment, the nature of the appointed person’s expertise and qualifications that justify his/her appointment.
  2. Adherence with the AOA: The AOA should provide for such an appointment to be made by the board and the limit on maximum number of directors fixed by the AOA shall not be breached after the appointment of the director.
  3. Intimation to the Registrar: Within 30 days of the appointment, the company must ratify the same to the Registrar of Companies (RoC) by filing Form DIR-12 along with necessary fees and relevant documents, which include details of the director appointed and the board resolution passed.
  4. Ratification by the shareholders: The appointment of the additional director is provisional until it is ratified at the AGM by the shareholders. If the appointment is ratified, then the director holds the directorship; otherwise, if it is not ratified, then the appointed director has to leave the position.
  5. Tenure: An additional director holds office until the next AGM of the company or till the date on which a regular director is appointed, whichever is earlier. If the appointment is not regularised by the shareholders at the AGM, the director needs to vacate the office.
  6. Disclosure: The appointment of the additional director shall be disclosed to the shareholders in the board’s report at the AGM. This ensures transparency in corporate governance. 

Appointment of alternate director 

The procedure for the appointment of the alternate director is as follows:

  1. Board Resolution: At a duly convened board meeting, the board of directors must approve the appointment of an alternate director. The board resolution passed must also specify the duration for which the director is appointed and in whose place he/she is appointed.
  2. Consent of the alternate director: The person appointed should give his/her consent to act as an alternate director and should also provide a declaration that he/she is not disqualified to act as a director.
  3. Intimation to the registrar: The company must file Form DIR-12 with the Registrar of Companies (RoC) along with necessary fees and relevant documents, including the consent of the alternate director and board resolution passed for the appointment within 30 days of the appointment.
  4. Vacation of office: Unless otherwise resolved by the board, the office shall be vacated by the alternate director if and when the original director returns to India or is able to resume his or her duties as a director of the company.
  5. Tenure: The tenure of the alternate director is dependent on the director whose office has been assumed and as soon as he/she is able to assume the office, the tenure of the alternate director is over.
  6. Disclosure: The appointment of the alternate director shall be disclosed to the shareholders in the board’s report at the AGM. This ensures transparency in corporate governance.

Appointment of nominee director

The procedure for the appointment of the nominee director is as follows:

  1. Nomination by the stakeholder: A nominee director is typically nominated by a specific stakeholder, such as a shareholder, financial institution, or any other entity as permitted under the company’s AOA or a shareholder agreement. He/she is appointed with the aim of providing clear representation of the stakeholders on the board of the company.
  2. Board resolution: At a duly convened board meeting, the board of directors must approve the appointment of a nominee director. The board resolution passed specifies the name of the nominee director, the entity nominating them and the reason for their appointment.
  3. Intimation to the registrar: The company must file Form DIR-12 with the Registrar of Companies (RoC) along with necessary fees and relevant documents, including the details of the nominee director and the board resolution passed for the appointment.
  4. Disclosure: The appointment of the alternate director shall be disclosed to the shareholders in the board’s report at the AGM. This ensures transparency in corporate governance.
  5. Tenure: The tenure of the nominee director is dependent on the agreement between the stakeholder and the company.

Responsibilities of directors appointed under Section 161 of Companies Act, 2013 

Now that we have a clear understanding of the appointment procedure for directors appointed, let’s discuss the responsibilities of the directors appointed under Section 161.

Responsibilities of additional director

An additional director appointed as per the Companies Act, 2013 has similar responsibilities as an independent director. These directors are onboarded on the board because of their specialised knowledge; hence, their main role is to provide suggestions to the board based on their knowledge for the benefit of the company. While their appointment is provisional until ratified by shareholders at the next AGM, they are obligated to act in the best interests of the company, uphold fiduciary duties, and comply with statutory obligations. For example, if a company decides to put its foot in a new technical industry that requires a high level of knowledge and precision, the appointment of an additional director who is an expert in the industry to help the company navigate through the unknown territory helps the company grow effectively and efficiently.

These are some of the key responsibilities that are to be performed by the additional directors.

Responsibilities of alternate director

The alternate director is appointed primarily with a motive to fill the shoes of a regular independent director during their in their absence, and hence, during their role as a replacement of the original director, their key responsibilities are similar to those of the independent directors, which include attending board meetings, participating in the decision-making and ensuring continuity in governance. An alternate director must act in accordance with the company’s best interests, exercise fiduciary duties, and adhere to legal and regulatory requirements. The role of an alternate director is very crucial, as it helps in maintaining continuity in corporate governance and ensures that the decision-making is not hindered due to the absence of key directors. As per Section 184(2) of the Companies Act, 2013, an alternate director is duty bound to disclose his interest, if any, in a particular transaction to prevent a situation of conflict of interest. Also, it must also be noticed that alternate directors can only take inputs from the independent director in situations where he/she joins to fill a vacancy for a particular time period he/she is under a duty to act as an independent director. Appointment of alternate director as independent director is not violative of any provision of the Companies Act, 2013 but such an appointment is made only in cases of non-availability of the then director.

In the case of Oriental Metal Pressing (P) Ltd. vs. Bhaskar Kashinath Thakoor (1960), it was held that the alternate director is not expected to act according to the instructions of the original independent director. The appointment of an alternate director is not an assignment of office.

Responsibilities of nominee director

Nominee directors are the directors who are appointed to represent the stakeholders on the board of the company. Such a director has several roles and responsibilities, including adequate disclosure of interest, reporting to the nominator and protection of the interests of the company in its entirety. While their primary responsibility is to advocate for the interests of the nominating entity, they should also act in an impartial, transparent and legal-bound manner so that they ensure that the decisions benefit the company and uphold corporate governance as well. One of the key responsibilities performed by them is maintaining clear communication with both, the nominating entity and the company. As per Section 149(6) of the Companies Act, 2013, a nominee director is not considered an independent director. Hence, they do not have responsibilities similar to those of an independent director. Their most important responsibility is to act as a bridge between the nominator and the company and protect the best interests of both. In the case of Harkness vs. Commonwealth Bank of Australia Ltd. (1993), it was held that the duty of confidentiality is of greater importance than the duty towards the nominator.

These are some of the key responsibilities that are to be performed by the nominee directors.

Appointment of directors in case of casual vacancies 

If any vacancy for the office of a director is caused by the death or resignation of a director appointed by the shareholders in a general meeting, before the expiry of his term, the board of directors has the power to appoint a person as director to fill the vacancy. The vacancy of a director caused by death or resignation before the term of his/her office shall be filled by the Board at a meeting and shall be approved subsequently in the next general meeting, subject to the articles of the company. The provisions relating to the appointment of a director to fill casual vacancies are provided under Section 161(4) of the Companies Act 2013. By default, the casual vacancy in the office of a director has to be filled by the Board at a meeting. Prior explicit authorisation is not required for the appointment of a director in a scenario like this. If the AOA are silent regarding this issue, the Board has the inherent power to appoint a person to fill up the vacancy. In the case of a public company, such an appointment cannot be made by a resolution of circulation and can only be made by a meeting of the Board of Directors. The interpretation of the language of Section 161(4) suggests that only the offices of the directors appointed at a general meeting can be filled by the provisions mentioned under Section 161(4) and the provision is not applicable to any other type of director. For example, if any vacancy arises for the office of an additional or alternate director, the provision provided under Section 161(4) cannot apply and hence such a vacancy cannot be filled by applying the provisions of Section 161(4) of the Companies Act, 2013. 

Procedure for appointment of directors in case of casual vacancy

The procedure for the appointment of directors in cases of casual vacancies is as follows:

  1. Obtaining consent and declaration: Obtaining the consent under Form DIR-2, declaration in Form DIR-8 and a disclosure of interest in Form MBP-1.
  2. Nomination and remuneration committee: The constitution of a Nomination and Remuneration Committee (NRC) and a Stakeholders Relationship Committee (SRC) is provided under Section 178 of the Companies Act, 2013. In the case of a listed company, the NRC shall be constituted of three more non-executive directors, out of whom half should be independent directors and should be appointed by the board of directors.
  3. Board meeting: At a duly convened board meeting, the board of directors must approve the appointment of a director in case of a casual vacancy as per Sections 161(4) and 173 along with Secretarial Standards-I.
  4. Time bound disclosures: As per Regulations 30 and 46(3), a company must submit the disclosures to the stock exchange on which it is listed. As per Regulation 7(1) of SEBI (PIT) Regulations, 2015, in the case of listed companies, within 7 days of the appointment of the director, disclosures must be obtained in Form-B.
  5. Intimation to the registrar: The company must file Form DIR-12 with the RoC along with necessary fees and relevant documents.
  6. Update statutory register: Necessary updates in Form MBP-4 are to be made in the directors and KMP registers and register of contracts or arrangements in which directors are interested.
  7. Disclosure: The appointment of the director in the event of a casual vacancy shall be disclosed to the shareholders in the board’s report at the AGM. This ensures transparency in corporate governance.
  8. Duration: The appointed director shall hold office only up to the term of the director in whose place he is appointed.

Key considerations

The main points that are to be considered for the applicability of Section 161(4) are as follows:

  1. The provisions of this section do not apply to private companies.
  2. Directors nominated in the general meeting are the only ones who can replace the director in case of a casual vacancy.
  3. The retirement of a director through rotation shall not be considered a casual vacancy.
  4. A director for a casual vacancy cannot be appointed by circulation. They have to be appointed by board resolution.

Conclusion 

The appointment of an additional director, alternate director and nominee director is a very crucial part of the corporate governance structure of India, as it acts as a pillar by providing flexibility in the directorial appointments. These appointments reduce the dependency on AGM for such appointments, which saves time and resources for the company and also enhances swiftness and trustworthiness in the system. While reducing the dependency on the AGM, the transparency of the system is not compromised, as the appointments are done as per the AOA of the company. A clear understanding of the appointment, role, and responsibilities of these directors is necessary to understand the corporate governance landscape in India. 

The Companies Act, 1956, had provisions about the appointment of alternate directors but didn’t have any provision regarding the appointment of an additional director or a nominee director. The Companies Act, 2013 realised the need for such provisions and filled the void by introducing them.

The article attempted to cover all the necessary details and provisions related to Section 161 of the Companies Act, 2013. This provision helps in better strategic management and decision-making for the company in the dynamic business and economic conditions of today’s time. 

Frequently Asked Questions (FAQ) 

What is the interconnection of Section 161 and Section 152(2) of the Companies Act?

Section 161 of the Companies Act, 2013 allows for the appointment of additional directors by the board between annual general meetings. However, Section 152(2) stipulates that all directors, including additional directors, must ultimately be appointed or reappointed by shareholders at AGMs. Thus, Section 161 provides a mechanism for interim appointments, while Section 152(2) ensures final approval and ratification by shareholders for all appointments and reappointments of the directors of the company.

Can a person be an alternate director of two companies?

Yes. There is no bar on the number of companies in which a person can be an alternate director.

Can the appointment of an additional director be made by the board through a circulation resolution?

Yes, except in the case of a director who is proposed to be appointed to fill up a casual vacancy for which the decision can be taken by the Board only at its meeting, there is nothing in the Act that restrains this appointment. Secretarial Standard 1 (SS1) also, does not consider this appointment to be irregular.

Can an independent director be appointed by the board in the category of an additional director?

Yes. There is no law contrary to the appointment of an independent director in the category of an additional director.

References 

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