Appointment and Qualifications of Directors PDF

a CHAPTER 1 v v a v v 1 APPOINTMENT AND QUALIFICATIONS OF DIRECTORS...

a CHAPTER 1 v v a v v 1 APPOINTMENT AND QUALIFICATIONS OF DIRECTORS LEARNING OUTCOMES By the end of this chapter, students will be able to:  Comprehend the provisions relating to the appointment of directors, number of directors, resident director, appointment of woman director and others.  Explain the Director Identification Number (DIN), its allotment and other matters relating to DIN.  Eloborate as to who are Independent Directors, their appointment, qualifications, tenure etc.  Specify and recognise the provisions relating to the first director, additional director, alternate director, nominee director and casual vacancy of the director.  Explain the provisions relating to small shareholders’ director, retirement by rotation, principle of proportional representation for appointment, maximum directorships etc.  Describe the disqualifications pertaining to the appointment as director, duties of directors, vacation of office of director, resignation of director, removal of director, etc. © The Institute of Chartered Accountants of India a 1.2 CORPORATE AND ECONOMIC LAWS 1. INTRODUCTION According to Section 2(10) of the Companies Act, 2013 (in short ‘the Act’), "Board of Directors" or "Board", in relation to a company, means the collective body of the directors of the company. According to section 2(34) "director" means a director appointed to the Board of a company. The directors are the individuals who are appointed to manage the business affairs of a company. A company is an artificial person created by law having separate legal existence but without any physical body or mind of its own. It needs to be managed through the human beings. Though the shareholders being owners are physically available to manage their company but as their number grows, all of them together may not be able to manage the affairs; and if they do so it shall be mismanagement and nothing else. That’s why the concept of directors has emerged. The directors (within the permissible limit) may be elected from among the shareholders or outsiders. Legal position of Directors As regards legal position of directors in relation to a company, they can be considered both agents and trustees. As agents, they bind the company as their principal as soon as they enter into various transactions on its behalf. The law of agency comes into play and it governs the relationship between the company and its directors. At times, the company itself is principal as well as agent in respect of certain acts which cannot be delegated. The Companies Act, 2013 lays down provisions requiring as to when the company needs to act both as principal as well as agent and when the directors need to act as agent of the company. It may be noted that where directors are empowered to take certain decisions, the company cannot negate them or issue directions to the directors directing them to go for a particular decision except that it may replace the directors with the ones of its choice. As trustees, the directors are required to take care of properties, moneys, trade secrets, etc. belonging to the company. In fact, as trustees the directors are in a fiduciary relationship with the company (and not with any individual shareholder) and if such relationship is broken and the company suffers losses because of the illegal acts of the directors, the erring directors will be required to compensate the losses suffered by the company. The office of directorship is an office of trust. The definition of ‘officer’ given in Section 2 (59) of the Act, inter-alia, includes ‘director’ which means a director, at certain times, is also the officer of the company. Since an officer is an employee of the company, the director as officer is also an employee so far as certain provisions of the Companies Act, 2013 are concerned. Collective body of the directors The collective body of the directors is called the ‘Board of Directors’ or simply the ‘Board’. It is the Board which takes decisions at its meetings and not any individual director. This is the reason why a quorum (i.e. presence of minimum directors at the Board meetings) is prescribed so that collective decisions are taken. At times, if permitted, the decisions can be taken by the Board without calling a meeting but in that case too they are collective decisions. © The Institute of Chartered Accountants of India  APPOINTMENT AND QUALIFICATIONS OF DIRECTORS 1.3 2. COMPANY TO HAVE BOARD OF DIRECTORS[SECTION 149] Section 149 of the Act contains provisions which require that every company shall have to constitute Board of Directors. The provisions of constitution of Board of Directors are stated as under: Number of Directors:According to section 149(1) of the Companies Act, 2013, every company shall have a Board of Directors consisting of individuals as directors. Thus, any person other than individuals like a body corporate, firm or association of persons cannot be appointed as a director. Every company shall have- (a) minimum number of directors: (A) in case of a Public Company-3 Directors, (B) in case of a Private Company-2 Directors, and (C) in case of a One Person Company (OPC)-1 Director (b) maximum number of directors:15 Directors Note:If the company wants to appoint more than 15 directors, it can do so after passing a special resolution. Number of directors in company Minimum Maximum Public company Private company OPC 15 (more directors can be appointed by passing a 3 Directors 2 Directors 1 Director special resolution) Exemptions (A) A Government company is exempted: (i) from the application of Section 149 (1) (b) which requires a company to have a maximum of fifteen directors only; and (ii) from the application of First Proviso to Section 149 (1) which enables a company to appoint more than fifteen directors after passing a special resolution. However, above exemption is applicable only if such Government company has not committed a default in filing its financial statements under Section 137 or Annual return under © The Institute of Chartered Accountants of India a 1.4 CORPORATE AND ECONOMIC LAWS Section 92 with the registrar. [Notification No.G.S.R. 463(E), dated 5 thJune, 2015 as amended by Notification No. GSR 582 (E), dated 13-06-2017]. (B) Similar exemption, as above, is also applicable to company incorporated under Section 8 of the Companies Act, 2013 subject to the condition that such a company has not committed a default in filing its financial statements under Section 137 or Annual return under Section 92 with the registrar. [Notification No. 466 (E), dated 5 th June, 2015 (as amended by Notification No. 584 (E), dated 13 th June, 2017)]. (c) Woman director: At least one woman director shall be on the Board of such class or classes of companies as has been prescribed in Rule 3 of the Companies (Appointment and Qualifications of Directors) Rules, 2014 [Second proviso to section 149(1)] Rule 3 provides that the following classes of companies shall appoint at least one woman director- every listed company every other public company having paid up share capital of 100 crore or more, or turnover of 300 crore or more Explanation-For the purposes of having a woman director on the board, it is clarified that the paid up share capital or turnover, as the case may be, as on the last date of latest audited financial statements shall be taken into account. Compliance by a newly incorporated company:A company, which has been incorporated under the Act and is covered by the provisions requiring appointment of a woman director, shall comply with such provisions within a period of six months from the date of its incorporation. Filling of Intermittent Vacancy of Woman Director:Any intermittent vacancy of a woman director shall be filled-up by the Board at the earliest but not later than immediate next Board Meeting or 3 months from the date of such vacancy whichever is later. Example 1: Sheetal was occupying the office of woman director in a company but due to her sudden death on 17th March, 2019, the intermittent vacancy so occurred was required to be filled-up at the earliest because she was the only woman director on the board. The immediate Board meeting was held on 25th June, 2019. The vacancy of the women director must be © The Institute of Chartered Accountants of India  APPOINTMENT AND QUALIFICATIONS OF DIRECTORS 1.5 filled-up latest by 25th June, 2019 or within three months from the date of such vacancy i.e. 16th June, 2019 whichever is later i.e., by 25 th June 2019. (d) Resident Director:Every company shall have at least one director who stays in India for a total period of not less than one hundred and eighty-two days during the financial year. However, in case of a newly incorporated company the above requirement shall apply proportionately at the end of the financial year in which it is incorporated.[Section 149(3)] (e) Independent Director:Specified public companies are required to appoint independent directors on their Board with a view to boost the level of corporate governance. Such Specified companies are the backbone of any economy and therefore, they must be managed in the best possible manner including adhereing to the specified legal provisions. An independent director needs to have an independent mindset which should not be unduly influenced by the other members of the Board; and if such members take any decision which is illegal or not in the best interest of the company or economy, it must be hindered by the independent directors at the outset. The provisions relating to independent directors are discussed later in the Chapter. (f) Interested Director: An interested director is one among the other directors who constitute Board of Directors. In fact, when an existing director becomes interested in a transaction of the company, he is called interested director; and he needs to disclose his interest at the appropriate forum and at appropriate time. The provisions regarding interested director are discussed in another Chapter. (g) Executive and Non-Executive Directors: The Board of Directors may comprise both executive and non-executive directors. The executive directors are responsible for managing different business operations undertaken by the company. It is their responsibility that the departments which they head operate smoothly. A whole time director and managing director are covered in this category of directors. In contrast, the non- executive directors participate through Board meetings in discussions relating to framing of policies for the efficient management of the company. Professional directors and nominee directors are covered in this category of directors. Independent directors are a type of non-executive directors.They are not as active as executive directors on the board of the company. They are held to be liable only if they knowingly consented to the wrongful acts. © The Institute of Chartered Accountants of India  a 1.6 CORPORATE AND ECONOMIC LAWS 3. APPOINTMENT OF DIRECTORS [SECTION 152] Section 152 of the Act deals with the matters relating to appointment of directors. (i) Appointment of First Directors Where no provision is made in the articles of a company for the appointment of the first directors, the subscribers to the memorandum who are individuals shall be deemed to be the first directors of the company until the directors are duly appointed. [Section 152(1)] In case of a One Person Company (OPC), an individual being member shall be deemed to be its first director until the director or directors are duly appointed by the member in accordance with the provisions of this section.[Section 152(1)] In simple words, usually, articles of the company contain the names of the first directors. In case it is not so, then the individual subscribers to the memorandum are deemed to be the first directors. The corporate bodies, if they are also subscribers, shall not be capable of becoming directors. The first directors shall hold the office until the directors are duly appointed. In fact, the term of first directors is limited to the holding of first Annual General Meeting (AGM).So far as OPC is concerned, the individual member of the OPC is deemed as first director. Thereafter, such member may appoint director or directors as per his requirements. (ii) Appointment of subsequent Directors Save as otherwise expressly provided in this Act, every director shall be appointed by the company in general meeting. [refer Section 152(2)] At a general meeting,the shareholders of the company (i.e. the owners) gather and take decisions. Generally, every director shall be appointed by the company in general meeting except where the Companies Act expressly provides some other procedure for appointment of directors. For example, it is expressly provided in the Act that additional directors or alternate directors can be appointed by the Board of Directors if the articles of the company empower Board in this respect1. (iii) Other Requirements of Appointment (a) Allotment of Director Identification Number (DIN):A person shall be appointed as a director of a company only when he has been allotted DIN under section 154 or any other number as may be prescribed under section 153. [referSection 152(3)] 1 As per Section 161, explained later on. © The Institute of Chartered Accountants of India  APPOINTMENT AND QUALIFICATIONS OF DIRECTORS 1.7 (b) Providing of DIN and furnishing of Declaration by the proposed Director:Every person proposed to be appointed as a director by the company in general meeting or otherwise, shall furnish his Director Identification Number (DIN) or such other number as may be prescribed under Section 153. Further, he shall also furnish a declaration that he is not disqualified to become a director under this Act. [refer Section 152(4)] (c) Written Consent to act as Director:A person appointed as a director shall not act as a director unless he gives his written consent to hold the office as a director. The consent shall be furnished to the company on or before his appointment as a director in Form DIR-2. The company shall file the consent of the director with the Registrar within 30 days of such appointment in Form DIR-12 along with the prescribed fee as prescribed [refer Section 152 (5) and Rule 8 of the Companies (Appointment and Qualifications of Directors) Rules, 2014]. Provided further that in case the person seeking appointment is a national of a country which shares land border with India, necessary security clearance from the Ministry of Home Affairs, Government of India shall also be attached alongwith the consent. Example 2: Mr. Naresh wants to appoint himself as director in Global Services Private Limited. Mr. Naresh is required to apply for DIN (if he does not have the DIN) thereafter, he can be appointed as a director in Global Services Private Limited by giving written consent in Form DIR-2 to the company. Global Services Private Limited shall have to file the consent of Mr. Naresh with the Registrar within 30 days of such appointment in Form DIR-12. (d) Explanatory Statement in case of appointment of Independent Director:In case an independent director is appointed in the general meeting, an explanatory statement for such appointment annexed to the notice for the general meeting, shall include a statement that in the opinion of the Board, he fulfills the conditions specified in this Act for such an appointment [refer Proviso to Section 152 (5)]. Exemptions Non-applicability of Section 152 (5): (1) Section 152 (5) regarding ‘furnishing of consent to act as a director’ shall not apply in case of Government company where appointment of the director is done by the Central Government or State Government.[Notification No. G.S.R. 463(E), dated 5 th June, 2015 as amended by Notification No. GSR 582 (E), dated 13-06-2017]. (2) Similar exemption from Section 152(5) is also applicable to a section 8 company. [Notification No. 466 (E), dated 5 thJune, 2015 as amended by Notification No. 584 (E), dated 13 th June, 2017]. © The Institute of Chartered Accountants of India  a 1.8 CORPORATE AND ECONOMIC LAWS Note:In both the above cases, the exemption is applicable only if the company has not committed a default in filing its financial statements under Section 137 or Annual Return under Section 92 with the Registrar. (iv) Retirement of Directors by Rotation [Section 152(6)] Section 152 (6) deals with retirement of directors by rotation. The reason behind incorporation of such a provision in the Statute is that at no stage a self-perpetuating management should take control of the company. Under the model of self-perpetuating management, the Board of Directors is allowed to control its own composition i.e. such board can dictate the terms like how long a director can serve, and even it can elect and re-elect directors itself. This type of model may not be conducive to the healthy growth of the company. In effect, shareholders are the owners of the company but they cannot usurp the powers of the directors and interfere in the matters of managing the company. The concept of rotational directors enables them not to re-elect a retiring director for whom they have an unfavourable opinion. The provisions of Section 152 (6) are stated as under: (a) Appointment of Rotational director & no. of directors liable to retire by rotation: Unless the articles provide for the retirement of all directors at every annual general meeting, not less than two-thirds of the total number of directors of public company shall— (A) be persons whose period of office is liable to determination by retirement of directors by rotation; and (B) save as otherwise expressly provided in this Act, be appointed by the company in general meeting. (b) Appointment of non-rotational directors:The remaining directors in the case of any such company shall, in default of, and subject to any regulations in the articles of the company, also be appointed by the company in general meeting. (c) Retirement from office of rotational director: At the first annual general meeting of a public company held next after the date of the general meeting at which the first directors are appointed and at every subsequent annual general meeting, one-third of such of the directors for the time being as are liable to retire by rotation, or if their number is neither three nor a multiple of three, then, the number nearest to one-third, shall retire from office. It is to be noted that the provision regarding ‘retirement by rotation’ is applicable to a public company or a private company which is subsidiary of a public company. In other words, a private limited company which is not a subsidiary of a public company,is exempted and therefore, if the articles permit it can appoint all its directors as non- rotational directors or permanent directors. © The Institute of Chartered Accountants of India  APPOINTMENT AND QUALIFICATIONS OF DIRECTORS 1.9 The articles of a public company may provide for the retirement of all the directors at every annual general meeting. If such is not the case, then not less than two-thirds of the total number of directors of that public company shall be the persons who are liable to retire by rotation. In other words, the articles must provide that minimum two-thirds of the total number of directors shall be liable to retirement by rotation. Such directors are called rotational directors. The term“total number of directors” shall not include independent directors, whether appointed under the Companies Act, 2013 or any other law for the time being in force, on the Board of a company. Thus, independent directors are not liable to retire by rotation and therefore, they are non-rotational directors. 2Further, any person appointed as a nominee director being nominated by any institution in pursuance of the provisions of any law or any agreement (like when a financial institution that has been created by an Act of Parliament nominates a person as its nominee director on the Board of a company which has availed financial assistance from such institution) cannot be considered as a director liable to retire by rotation.Nominee director may also be appointed by the Central Government or the State Government by virtue of its shareholding in a Government company. One-third of directors to retire at AGM: Once the number of directors who are liable to retire by rotation is determined, only one-third out of that number shall retire. If such number is neither three nor a multiple of three, then, the number nearest to one-third, shall be considered and such of the directors shall retire from office. Example 3: Khatkhata Advisory Limited constituted its board with 12 directors in which 2 directors are independent directors and 1 director is a nominee director. As per the provision of section 152 of the Companies Act, 2013, the concept of retirement by rotation of rotational directors shall be applicable to public company. Therefore, Khatkhata Advisory Limited shall be required to calculate the number of rotational directors which is liable to retire by rotation. Total number of directors who are holding their office is 12 directors. It should be noted that at least 2/3 rd of total number of directors shall be liable to retire by rotation. However, independent director and nominee director shall not be counted in “total number of the directors”. Thus, 12 Directors less 3 Directors i.e. 9 directors shall be counted for “total number of the directors”. Here, 6 directors (9 * 2/3 rd =6) shall be liable to retire by rotation. Now, 1/3 rd of directors liable to retire by rotation (i.e. 6 * 1/3 rd = 2 directors), shall actually retire by rotation at AGM. 2 Refer Section 161 (3). © The Institute of Chartered Accountants of India  a 1.10 CORPORATE AND ECONOMIC LAWS Example 4: A company is having 6 directors. Directors liable to retire by rotation: 6 * 2/3 i.e. 4 No. of directors to retire at AGM: 4* 1/3, i.e. 1.33 or nearest to 1/3 rd is 1. Example 5:A company is having 7 directors. Directors liable to retire by rotation 7*2/3 i.e. 4.7 or 5 (not less than two-third) No. of directors to retire at AGM: 5* 1/3 i.e. 1.67 or nearest to 1/3 rd is 2. Example 6:A company is having 9 directors out of which 3 are independent directors. The ‘total number of directors’ for the purpose of calculation of number of rotational directors shall be 6 only because 3 independent directors are to be excluded. Rest of the calculations shall be as per Example given above. (d) Directors liable to retire by rotation: The directors who actually retire by rotation at every annual general meeting shall be those who have been longest in office since their last appointment.If two or more directors were appointed on the same day, retirement by rotation will be decided between them by mutual agreement among themselves or by lot as the case may be. The above provision (d) clarifies the basic question that after the determination of number of directors liable to retire by rotation, who should actually retire at the AGM? For this purpose it is provided that the directors who have been longest in the office since their last appointment are the directors who need to beretired first. However, it may happen that some of those were appointed as directors on the same day. In that case, if there exists any mutual understanding relating to retirement among such directors, that should be followed; otherwise the determination shall be done by draw of lots. (e) Filling of vacancy of rotational director: At the annual general meeting at which a director retires as aforesaid, the company may fill up the vacancy by appointing the retiring director or some other person thereto. Re-appointment:When a director is retired a vacancy is created. To fill that vacancy, the company may re-appoint the retiring director itself at the AGM. If the retiring director is not re-appointed, the company may appoint some other person at his place but in that case provisions of Section 160 3 are to be complied with. The clause regarding appointment of directors for filling the vacancies created by retiring directors is quite important. However, the number of directors should not fall short of minimum directors required in a company at any stage. However, so long as 3 Section 160 is discussed later in the Chapter. © The Institute of Chartered Accountants of India  APPOINTMENT AND QUALIFICATIONS OF DIRECTORS 1.11 the clause regarding minimum required directors is fulfilled the company may also resolve not to appoint anyone in place of retiring director. In case Annual General Meeting is not held on due date, then the retirement of rotational directors cannot be postponed to that particular date when the AGM shall be held in future. The directors who are liable to retire must vacate the office of director immediately when the AGM is ought to have been held. Non-rotational Directors: Remaining 1/3rd or less number of total directors (after determining the number of rotational directors) are not liable to retire by rotation. These are called non-rotational directors. They may also be appointed at the general meeting or as per the provisions contained in the articles of the company. (v) Deemed re-appointment of retiring Directors under certain circumstances [Section 152(7)] Section 152 (7) provides the way for deemed appointment of a retiring director as under: (a) Adjournment of general meeting:If the vacancy of the retiring director is not so filled- up and the meeting has not expressly resolved not to fill the vacancy, the meeting shall stand adjourned till the same day in the next week, at the same time and place. In case that day is a national holiday, the meeting shall be adjourned till the next succeeding day which is not a holiday, at the same time and place. (b) Deemed re-appointment:If at the adjourned meeting also, the vacancy 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 with immediate effect. Exceptions to deemed re-appoinment: In the following circumstances, a retiring director shall not be deemed as re-appointed: (A) if at that meeting or at the previous meeting, a resolution for the re-appointment of such director has been put to the meeting and lost i.e. his re-appointment has not been considered favourably because of non-passing of resolution; (B) if the retiring director has, by a notice in writing addressed to the company or its Board of directors, expressed his unwillingness to be so re-appointed; (C) if he is disqualified for appointment as per the provisions of the Act; (D) if a resolution, whether special or ordinary, is required for his appointment or re-appointment by virtue of any provisions of this Act; or (E) if Section 162 is applicable to the case i.e. where a single resolution was used to appoint two or more persons as directors without first moving a proposal which was required to be agreed to at the meeting and no vote was being cast © The Institute of Chartered Accountants of India a 1.12 CORPORATE AND ECONOMIC LAWS against it. In such a case, Section 162 is contravened and two or more appointments made by a single resolution are void. Consequently, retiring director is not deemed to be re-appointed. Note: For the purposes of Section 152, the “retiring director” means a director retiring by rotation4. Exemptions Non-applicability of Sections 152(6) and 152(7):Section 152(6) and 152 (7) of the Act of 2013, shall not apply to: (a) a Government company, which is not a listed company, in which not less than fifty-one per cent of paid up share capital is held by the Central Government, or by any State Government or Governments or by the Central Government and one or more State Governments; (b) a subsidiary of a Government company, referred to in (a) above. subject to the condition that such a company has not committed a default in filing its financial statements under Section 137 or Annual Return under Section 92 with the Registrar. [Notification No.G.S.R. 463(E), dated 5 th June, 2015 as amended by Notification No. GSR 582 (E), dated 13-06-2017]. 4. DIRECTOR IDENTIFICATION NUMBER (DIN) [SECTION 152 (3) AND SECTIONS 153 TO 159] “Director Identification Number” (DIN)5:DIN means an identification number allotted by the Central Government to any individual, intending to be appointed as director or to any existing director of a company, for the purpose of his identification as a director of a company. It is provided that the Director Identification Number (DIN) obtained by the individuals prior to the notification of the ‘Specification of Definitions Details Rules’ shall be the DIN for the purpose of the Companies Act, 2013. Further, it is to be noted that "Director Identification Number" (DIN) shall include the Designated Partnership Identification Number (DPIN) issued under section 7 of the Limited Liability Partnership Act, 2008 and the rules made thereunder. Example 7: Mr. Rajesh having DIN 00452568 and already appointed in Raj Industries Private Limited. Now, he wants to appoint himself in M/s. Karnawat Industries LLP as a designated partner. 4Explanation to Section 152 (7). 5As per Rule 2 (1) (e) of the Companies (Specification of Definitions Details) Rules, 2014 © The Institute of Chartered Accountants of India  APPOINTMENT AND QUALIFICATIONS OF DIRECTORS 1.13 Here, he does not require to apply for DPIN. As per section 7 of the Limited Liability Partnership Act, 2008, DIN can be used as DPIN for Designated Partner. Requirement of DIN: According to Section 152 (3), no person shall be appointed as a director of a company unless he has been allotted the Director Identification Number (DIN) under section 154 or any other number as may be prescribed under section 153. Filing of Application for allotment of DIN:Section 153 deals with the filing of application for allotment of DIN. Accordingly,every individual intending to be appointed as director of a company shall make an application for allotment of DIN to the Central Government in the prescribed form and manner and along with prescribed fees. It is provided that the Central Government may prescribe any identification number which shall be treated as Director Identification Number and in case any individual holds or acquires such identification number, the requirement of Section 153 shall not apply or apply in such manner as may be prescribed. Further, Rule 9 of the Companies (Appointment and Qualifications of Directors) Rules, 2014 states the following procedure for making an application for allotment of DIN before appointment in an existing company: (1) Filing of application : Every applicant, who intends to be appointed as director of an existing company shall make an application electronically in Form DIR-3, to the Central Government6 for allotment of a Director Identification Number (DIN) along with the prescribed fees. It is provided that in case of proposed directors not having DIN, the particulars of maximum three directors shall be mentioned in Form No.INC-32 (SPICe) and DIN may be allotted to maximum three proposed directors through Form INC-32 (SPICe). Example 8- Mr. Varun, Mr. Ankit and Mr. Parag are planning to incorporate a private limited company. They do not have DIN because they are becoming directors in any company for the first time. Here, they can apply for allotment of DIN along with the form of incorporation of the Company i.e Form INC-32 (SPICe). (2) Providing of electronic system to facilitate submission of application: The Central Government shall provide an electronic system to facilitate submission of application for the allotment of DIN through the portal on the website of the Ministry of Corporate Affairs. (3) (a) Filling of required information in Form attached with relevant documents: The applicant shall download Form DIR-3 from the portal, fill in the required particulars 6Vide Notification No. S.O. 1354(E) dated 21st May, 2014, issued by MCA, the powers and functions of the Central Government in respect of allotment of Director Identification Number under Sections 153 and 154 stand delegated to the Regional Director, Joint Director, Deputy Director or Assistant Director posted in the office of Regional Director at Noida. © The Institute of Chartered Accountants of India  a 1.14 CORPORATE AND ECONOMIC LAWS sought therein, verify and sign the form and after attaching copies of the following documents, scan and file the entire set of documents electronically- (i) photograph; (ii) proof of identity; (iii) proof of residence; (iiia) board resolution proposing his appointment as director in an existing company (iv) specimen signature duly verified. (b) Submission of digitally signed Form: Form DIR-3 shall be signed and submitted electronically by the applicant using his or her own Digital Signature Certificate and shall be verified digitally by a company secretary in full time employment of the company or by the managing director or director or CEO or CFO of the company in which the applicant is intended to be appointed as director in an existing company. (4) In case the name of a person does not have a last name, then his or her father's or grandfather's surname shall be mentioned in the last name along with the declaration in Form No.DIR-3A. Allotment of DIN: According to section 154, the Central Government shall allot a Director Identification Number (DIN) to the applicant in the prescribed manner within one month from the receipt of application. Rule 10 of the Companies (Appointment and Qualifications of Directors) Rules, 2014 provides the following procedure for rejection or allotment of DIN: (i) Generation of application number-On the submission of the Form DIR-3 on the portal and on payment of the requisite fees, an application number shall be generated by the system automatically. Provided that no application number shall be generated in case of the person applying for Director Identification Number is a national of a country which shares land border with India, unless necessary security clearance from the Ministry of Home Affairs, Government of India has been attached alongwith application for Director Identification Number. (ii) Communication of issue of DIN-After generation of application number, the Central Government shall process the applications received for allotment of DIN and decide on the approval or rejection thereof and communicate the same to the applicant along with the DIN allotted in case of approval by way of a letter by post or electronically or in any other mode, within a period of one month from the receipt of such application. (iii) In case of defective/incompelete application-If the Central Government, on examination, finds such application to be defective or incomplete in any respect, it shall give intimation of such defect or incompleteness, by placing it on the website and by email to the applicant who © The Institute of Chartered Accountants of India  APPOINTMENT AND QUALIFICATIONS OF DIRECTORS 1.15 has filed such application. The applicant shall be directed to rectify the defects or incompleteness by resubmitting the application within a period of 15 days of such placing on the website and email. It is provided that the Central Government shall – (a) reject the application and direct the applicant to file fresh application with complete and correct information, where the defect has been rectified partially or the information given is still found to be defective; (b) treat and label such application as invalid in the electronic record in case the defects are not removed within the given time; and (c) inform the applicant either by way of letter by post or electronically or in any other mode. (iv) In case of rejection or invalidation of application, the fee so paid with the application shall neither be refunded nor adjusted with any other application. Note 1: All DINs allotted to individual(s) by the Central Government before the commencement of these rules shall be deemed to have been allotted to them under these rules. Note 2: The DIN so allotted under these rules is valid for the life-time of the applicant and shall not be allotted to any other person. Procedure for allotment of DIN On submission of Form and fees, application no. is generanted on the system CG shall process such application approval or rejection is communicated to the applicant within 1 month from receipt of such application in case of approval, DIN alloted will be sent through by post/electronically/in any other manner In case of defective/incomplete application, CG shall place it on website and intimate by email to the applicant direct to rectify the defects/incompletness by resubmitting the application within 15 days of placing on website and email. CG shall reject and direct to file fresh application, where defect rectified partially /information given is defective In case of non -removal of defect- treat and label as invalid in electronic records. inform applicant of rejection /invalidation and no-refund or adjustment of paid fees Prohibition on obtaining more than one DIN: According to Section 155, no individual, who has already been allotted a DIN under section 154, shall apply for, obtain or possess another DIN. © The Institute of Chartered Accountants of India a 1.16 CORPORATE AND ECONOMIC LAWS Example 9: Mr. Tahir was appointed as a director in Bombay Textiles Private Limited with DIN 00658400. Now, He wants to be appointed as a director in another company. Here, Mr. Tahir shall have to use existing DIN for appointment as a director in new company. He can not apply for another DIN. Director to intimate DIN: According to Section 156, every existing director shall, within one month of the receipt of DIN from the Central Government, intimate his DIN to the company or all the companies wherein he is a director. Company to inform DIN to Registrar: According to section 157 (1), every company shall, within 15 days of the receipt of intimation under section 156, furnish the DIN of all its directors to the Registrar or any other officer or authority as may be specified by the Central Government with such fees or additional fees as may be prescribed. Every such intimation shall be furnished in the prescribed form and manner. According to Rule 10A of the Companies (Appointment and Qualifications of Directors) Rules, 2014: (1) Every director, functioning as a director in one or more companies on or before the 30th June, 2007 and who has not yet intimated his DIN to such company or companies shall, within one month of the receipt of Director Identification Number from the Central Government, intimate his Director Identification Number to the company or all companies wherein he is a director as per Form DIR-3B. (2) The intimation by the company of Director Identification Number of its directors under section 157 shall be furnished in Form DIR-3C within 15 days of receipt of intimation under section 156. Punishment for failure to furnish the DIN to Registrar: According to Section 157(2) if any company fails to furnish the DIN to Registrar, it shall be liable to a penalty as under:  25,000 and in case of continuing failure, with a further penalty of 100 for each day after the first during which such failure continues, subject to a maximum of 1,00,000.  Further, every defaulting officer of the company shall be liable to a penalty as under: Minimum penalty of 25,000 and in case of continuing failure, with a further penalty of 100 for each day after the first during which such failure continues, subject to a maximum of 1,00,000. Obligation to indicate DIN: According to Section 158,every person or company, while furnishing any return, information or particulars as are required to be furnished under the Companies Act, 2013, shall mention the Director Identification Number in such return, information or particulars in case such return, information or particulars relate to the director or contain any reference of any director. Punishment for contravention of Sections 152, 155 and 156:Section 159 provides that if any individual or director of a company makes any default in complying with any of the provisions of section 152, section 155 and section 156, such individual or director of the company shall be liable to a penalty as under: © The Institute of Chartered Accountants of India  APPOINTMENT AND QUALIFICATIONS OF DIRECTORS 1.17  Penalty upto 50,000 and where the default is a continuing one, with a further penalty up to 500 for each day after the first during which such default continues. Cancellation or Surrender or De-activation and Re-activation of DIN: Rule 11 of the Companies (Appointment and Qualifications of Directors) Rules, 2014 lays down the procedure for cancellation or surrender or deactivation and re-activation of DIN as under: (1) The Central Government or Regional Director (Northern Region), Noida or any officer authorised by the Regional Director may, upon being satisfied on verification of particulars or documentary proof attached with the application received along with prescribed fee from any person, cancel or deactivate the DIN in case - (a) the DIN is found to be duplicated in respect of the same person provided the data related to both the DINs shall be merged with the validly retained number; (b) the DIN was obtained in a wrongful manner or by fraudulent means; However, before cancellation or deactivation of DIN pursuant to the clause (b) above, an opportunity of being heard shall be given to the concerned individual. For this purpose (i) the term “wrongful manner” means if the DIN is obtained on the strength of documents which are not legally valid or incomplete documents are furnished or on suppression of material information or on the basis of wrong certification or by making misleading or false information or by misrepresentation. (ii) the term “fraudulent” means if the DIN is obtained with an intent to deceive any other person or any authority including the Central Government. (c) of the death of the concerned individual; (d) the concerned individual has been declared as a person of unsound mind by a competent Court; (e) if the concerned individual has been adjudicated an insolvent. (f) on an application made in Form DIR-5 by the DIN holder to surrender his or her DIN along with declaration that he has never been appointed as director in any company and the said DIN has never been used for filing of any document with any authority, the Central Government may deactivate such DIN. However, before deactivation of any DIN in the above case (f), the Central Government shall verify e-records. (2) The Central Government or Regional Director (Northern Region), or any officer authorised by the Central Government or Regional Director (Northern Region) shall, deactivate the Director Identification Number (DIN), of an individual who does not intimate his particulars in e-form DIR-3-KYC within the stipulated time in accordance with Rule 12A. © The Institute of Chartered Accountants of India a 1.18 CORPORATE AND ECONOMIC LAWS (3) The de-activated DIN shall be re-activated only after e-form DIR-3 is filed along with the fee as prescribed under the Companies (Registration Offices and Fees) Rules, 2014. Intimation of Changes in Particulars specified in DIN Application: Rule 12 of the Companies (Appointment and Qualifications of Directors) Rules, 2014, provides for the following procedure for intimation of changes in particulars specified in the DIN application: (1) Intimation of change to Central Government: Every individual who has been allotted a DIN under these rules shall, in the event of any change in his particulars as stated in Form DIR-3, intimate such change(s) to the Central Government within a period of thirty days of such change(s) in Form DIR-6 in the following manner, namely: (i) The applicant shall download Form DIR-6 from the portal, fill in the relevant changes, verify the form and attach duly scanned copy of the proof of the changed particulars and submit electronically; (ii) the form shall be digitally signed by a chartered accountant in practice or a company secretary in practice or a cost accountant in practice; (iii) the applicant shall submit the Form DIR-6; (2) Applicant to be informed of change in the electronic database:The Central Government, upon being satisfied, after verification of such changed particulars from the enclosed proofs, shall incorporate the said changes and inform the applicant by way of a letter by post or electronically or in any other mode confirming the effect of such change in the electronic database maintained by the Ministry. (3) Intimation to concerned Registrar:The DIN cell of the Ministry shall also intimate the change(s) in the particulars of the director submitted to it in Form DIR-6 to the concerned Registrar(s) under whose jurisdiction the registered office of the company(s) in which such individual is a director is situated. (4) Indiviual to inform change in particulars to the company/ies:The concerned individual shall also intimate the change(s) in his particulars to the company or companies in which he is a director within 15 days of such change. In the decided case of Imraj Ali Molla v. Union of India, W.P. Nos. 268 and 273 of 2019 March 18, 2020, it was held that since DIN is allocated under section 154 and there is no provision in Act for deactivation of DIN of a director only on ground of disqualification under section 164(2)(a) or section 167(1)(a), action of RoC in deactivating DIN of petitioners on ground of such violation of section 164(2)(a) of a particular company could not confer a right on RoC to deactivate such DIN. It was laid in Gaurang Balvantlal Shah v. Union of India, R/Special Civil Application Nos. 22435 of 2017 and Others, December 18, 2018, that DIN of a director cannot be cancelled or deactivated except under circumstances mentioned in rule 11 of Companies (Appointment of Directors) Rules, 2014. © The Institute of Chartered Accountants of India  APPOINTMENT AND QUALIFICATIONS OF DIRECTORS 1.19 5. RIGHT OF PERSONS OTHER THAN RETIRING DIRECTORS TO STAND FOR DIRECTORSHIP [SECTION 160] A person who is not a retiring director is also eligible to stand for directorship. Section 160 of the Act and Rule 13 of the Companies (Appointment and Qualifications of Directors) Rules, 2014 contain provisions in this respect. These are discussed as under: (i) Requirement of Written Notice: (a) Person who applies his candidature as a director: A person other than retiring director shall be eligible for appointment as a director in a company at any general meeting (Whether in AGM or EOGM), if he has given a notice in writing under his hand signifying his candidature as a director at least 14 days before the meeting at the registered office of the company. (b) Member who intends to propose other person for directorship:Instead of above person, some other member of the company who intends to propose such other person as a director can also give a written notice at the registered office of the company signifying his intention to propose the other person as a candidate for directorship at least 14 days before the meeting. (ii) Requirement of Deposit: The written notice needs to be accompanied with the deposit of 1,00,000 or such higher amount as may be prescribed. Exceptions-The Independent Director requirement of deposit director recommended by the Nomination and Remuneration shall not apply in Committee, if any under section 178(1) following cases of appointment of director recommended by the Board of Directors, where there is no directors Nomination and Remuneration Committee. (iii) Action by the company:The company shall inform its members regarding the candidature of a person for the office of director in accordance with the manner prescribed in Rule 13 of the Companies (Appointment and Qualifications of Directors) Rules, 2014. The same is stated below: At least 7 days before the general meeting, the company shall inform its members of such candidature- (1) by serving individual notices through electronic mode to such members who have provided their e-mail addresses for communication purposes and in writing to all other members; and (2) by placing notice of such candidature on its website, if any. © The Institute of Chartered Accountants of India  a 1.20 CORPORATE AND ECONOMIC LAWS When there is no need to serve notices individually: It shall not be necessary for the company to serve individual notices if it advertises such candidature, not less than 7 days before the meeting: (a) at least once in a vernacular newspaper in the principal vernacular language of the district in which the registered office of the company is situated, and (b) at least once in English language in an English newspaper circulating in that district. (iv) Refund of Deposit: The amount of deposit shall be refunded to such person or, as the case may be, to the member, if the person proposed gets selected as a director or gets more than 25% of the total valid votes cast either on show of hands or on poll. Explanation – No deposit fees shall be refunded to those candidates who are not appointed as directors or do not get more than 25% of total valid votes in favour of their appointment. Note 1: For the purposes of Section 160, the expression ‘retiring director’ means a director retiring by rotation 7. Note 2: Not all the directors are retiring directors. Therefore, if an additional director or an alternate director or a nominee director or a director appointed to fill a casual vacancy, is to be appointed as a regular director at the general meeting, the procedure prescribed by Section 160 is required to be followed. Similarly, where a director retires by rotation but instead of re-appointing him, a new person in his place is proposed to be appointed, provisions of Section 160 are attracted. Clarifications (1) As per Notification No. G.S.R. 465(E), dated 5th June, 2015, in case of Nidhis,the amount of deposit for the purpose of Section 160(1) shall be “ten thousand rupees”. In other words, a person (not a retiring director) proposing his candidature as director in Nidhis or some other member proposing such person’s candidature shall be required to deposit 10,000 along with the written notice. (2) The MCA vide General Circular No. 38/2014, dated 14th October, 2014, has clarified that in case of Section 8 companies, their Board of Directors shall decide as to whether the deposit of 1,00,000 is to be forfeited or refunded if the person proposed as director fails to secure more than 25% of the valid votes. 7Explanation to Section 152 (7). © The Institute of Chartered Accountants of India  APPOINTMENT AND QUALIFICATIONS OF DIRECTORS 1.21 Exemptions (1) In terms of Notifications No. 463 (E), dated 5 th June, 2015, as amended by Notifications No. 582 (E), dated 13 th June, 2017, Section 160 shall not apply to: (a) A Government company in which the entire paid up share capital is held by the Central Government, or by any State Government or Governments or by the Central Government and one or more State Governments; (b) A subsidiary of a Government company, referred to in (a) above, in which the entire paid up share capital is held by the Governmment company. (2) In terms of Notifications No. 464 (E), dated 5 thJune, 2015 as amended by Notifications No. 583 (E), dated 13 th June, 2017, similar exemption from Section 160 is applicable to a private company. (3) In terms of Notifications No. 466 (E), dated 5th June, 2015 as amended by Notifications No. 584 (E), dated 13th June, 2017, similar exemption from Section 160 is also applicable to Section 8 companies whose articles provide for election of directors by ballot. Note: In all the three cases mentioned above exemption from the application of Section 160 is available only if the concerned company has not committed a default in filing its financial statements under Section 137 or Annual return under Section 92 with the Registrar. 6. APPOINTMENT OF DIRECTOR ELECTED BY SMALL SHAREHOLDERS [SECTION 151] According to Section 151 of the Act, a listed company may have one director elected by the small shareholders. This provision enables the small shareholders to place their representative on the Board of Directors of a listed company so that their voice is also listened effectively. The term “small shareholders” means a shareholder holding shares of nominal value of not more than 20,000 or such other sum as may be prescribed. Manner of appointment of small shareholders’ director and terms and conditions of such appointment are prescribed by Rule 7 of the Companies (Appointment and Qualifications of Directors) Rules, 2014. These provisions are discussed below: (i) Strength of Small Shareholders required for appointment of their Director:A listed company may, upon notice of not less than: (a) one thousand small shareholders; or whichever is lower (b) 1/10 th of the total number of such shareholders, have a small shareholders’ director elected by the small shareholders. © The Institute of Chartered Accountants of India  a 1.22 CORPORATE AND ECONOMIC LAWS However, a listed company may opt to have a director on suo moto representing small shareholders and in such a case the provisions given below in Point (ii), shall not apply for appointment of such director. (ii) Serving of notice by small shareholders:The small shareholders intending to propose a person as a candidate for the post of small shareholders’ director shall give a notice of their intention with the company at least fourteen days before the meeting under their signature specifying the name, address, shares held and folio number of the person whose name is being proposed for the post of director and of the small shareholders who are proposing such person for the office of director. However, if the person being proposed does not hold any shares in the company, the details of shares held and folio number need not be specified in the notice. (iii) Statement to be annexed with notice:The notice shall be accompanied by a statement signed by the person whose name is being proposed for the post of small shareholders’ director stating- (a) his Director Identification Number (DIN); (b) that he is not disqualified to become a director under the Act; and (c) his consent to act as a director of the company. (iv) Small shareholders’ director as independent director:Such director shall be considered as an independent director. Therefore, he should meet the eligibility criteria pertaining to independent director as given under section 149(6) and should give a declaration of his independence in accordance with section 149(7) of the Act. (v) Applicability of section 152: The appointment of small shareholders’ director shall be subject to the provisions of section 152 except that- (a) such director shall not be liable to retire by rotation; (b) such director’s tenure as small shareholders’ director shall not exceed a period of three consecutive years; and (c) on the expiry of the tenure, such director shall not be eligible for re-appointment. (vi) Applicability of Section 164:A person shall not be appointed as small shareholders’ director of a company, if he is not eligible for appointment in terms of section 164 which specifies the disqualifications for appointment as a director. (vii) Vacation of office:A person appointed as small shareholders’ director shall vacate the office if - (a) the director incurs any of the disqualifications specified in Section 164; © The Institute of Chartered Accountants of India  APPOINTMENT AND QUALIFICATIONS OF DIRECTORS 1.23 (b) the office of the director becomes vacant in pursuance of Section 167 8; (c) the director ceases to meet the criteria of independence as provided in Section 149 (6). (viii) Maximum number of directorships:No person shall hold the position of small shareholders’ director in more than two companies at the same time. However, the second company in which he has been so appointed shall not be in a business which is competing or is in conflict with the business of the first company. (ix) Cooling period: A small shareholders’ director shall not be appointed in or be associated with such company in any other capacity, either directly or indirectly for a period of three years from the date on which he ceases to hold office as a small shareholders’ director in a company. 7. APPOINTMENT OF ADDITIONAL DIRECTOR, ALTERNATE DIRECTOR, A DIRECTOR TO FILL CASUAL VACANCY AND NOMINEE DIRECTOR [SECTION 161] (A) Additional Director [Section 161(1)]: According to the section: (i) The articles of a company may confer on its Board of Directors the power to appoint any person as an additional director at any time. (ii) A person, who fails to get appointed as a director in a general meeting, cannot be appointed as an additional director. (iii) Additional director shall hold office up to the date of the next annual general meeting or the last date on which the annual general meeting should have been held, whichever is earlier. With a view to meet urgent requirements of management, the Board of Directors is empowered to appoint any person as an additional director at any time if such power is granted by the articles. The notable point is that it is not Section 161 (1) but the articles which confer such power. The person to be appointed as additional director should possess DIN and must not be the person who failed to get appointed in a general meeting. This brings to the force the power of shareholders i.e. any person discarded as director at a general meeting by the shareholders cannot get appointed by the Board of Directors through back-door entry. 8 Section 167 of the Act specifies various grounds, which if attracted, shall make a director liable to vacate his office. © The Institute of Chartered Accountants of India a 1.24 CORPORATE AND ECONOMIC LAWS Further, an additional director is not a retiring director. Therefore, his appointment as regular director requires that the provisions of Section 160 are followed. Term of office of additional director: The term of additional director is limited to the holding of ensuing Annual General Meeting (AGM). Even if the AGM is not held on the last due date, the term ends there itself and it cannot be extended to a date when the AGM, in actuality, shall be held in future after its due date. (B) Alternate Director [Section 161(2)]: According to this section: (i) The Board of Directors of a company may, if so authorised by its articles or by a resolution passed by the company in general meeting, appoint a person, not being a person holding any alternate directorship for any other director in the company or holding directorship in the same company, to act as an alternate director for a director during his absence for a period of not less than three months from India. (ii) No person shall be appointed as an alternate director for an independent director unless he is qualified to be appointed as an independent director under the provisions of this Act. (iii) An alternate director shall not hold office for a period longer than that permissible to the original director in whose place he has been appointed and shall vacate the office if and when the original director returns to India. (iv) If the term of office of the original director is determined before he so returns to India, any provision for the automatic re-appointment of retiring directors in default of another appointment shall apply to the original, and not to the alternate director. The power to appoint an alternate director rests with the Board of Directors. However, such power must be conferred by the articles or by a resolution passed at the general meeting. An alternate director is appointed in place of a regular director who has gone out of India. The period of absence of such original director from India must be minimum three months or more. A short absence of less than three months does not entitle the Board to appoint an alternate director. Such proposed alternate director should possess DIN. A person selected for appointment as alternate director must not be the one who is holding any alternate directorship for any other director in the company. In other words, a person who is already an alternate director in the company cannot hold another alternate directorship in that company. Further, the selected person must also not be a director in the same company. Thus, a person already a director cannot at the same time be an alternate director in the same company but a person holding directorship in any other company can be considered for the appointment as alternate director. However, for considering maximum number of directorships of a person under Section 165, the alternate directorship shall also be counted. Thus, a fresh alternate directorship should be taken up by the person concerned only if his © The Institute of Chartered Accountants of India  APPOINTMENT AND QUALIFICATIONS OF DIRECTORS 1.25 holding of regular as well as alternate directorships does not exceed the maximum limit. Further, he should not be disqualified to hold the office of a director. Example 10: Mr. Devendra Kumar has been appointed as an alternate director in place of Mr. Gaurav Jain (i.e. Original Director) in Urban Development Private Limited. Now, company wants to appoint Mr. Devendra Kumar as an alternate director in place of Ms. Shaily Jaiswal (i.e. another original director of the same company). Here, Mr. Devendra cannot be appointed as an alternate director of another original director of the company. In case, the original director is an independent director and he leaves for a place outside India for three months or more, the person who is to be appointed in his place as alternate director must be qualified to be appointed as an independent director. In other words, the status of independence as well as other requisites of an independent director must form part of such alternate director who is selected for appointment in the absence of an independent director. A ‘would be alternate director’ is not exempted from furnishing his consent to act as director. Therefore, he must furnish his consent in DIR-2 to the company on or before his appointment and in turn the company shall file his consent with the Registrar in DIR-12. Term of office of alternate director: The term of office of an alternate director coincides with the permissible term applicable to the original director in whose place he has been appointed. Thus, the term shall not be longer than the term which is permissible to the original director; and as soon as the original director ceases to be a director (death included) the alternate director follows his steps and is required to vacate the office. Further,the alternate director shall vacate the office immediately on the return of original director to India. It may happen that the term of orginal director expires while he is still outside India. In such a case, the provisions relating to automatic deemed re-appointment as envisaged in Section 152 (7) (b) shall apply to the original director and not to the alternate director appointed in his place. Thus, the original director (and not alternate director) shall be deemed as re-appointed at the adjourned AGM if the company does not appoint another person on the expiry of the term of original director. Appointment of alternate director by original director: The original director who is leaving to a place outside India cannot appoint an alternate director in his place. It is the Board which shall make the appointment because the authority for such appointment vests in the Board. Following example will make the situation clear: Example 11: Mr. Q, a Director of PQR Limited proceeding on a long foreign tour (period of duration ouside India exceeded three months), 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. © The Institute of Chartered Accountants of India a 1.26 CORPORATE AND ECONOMIC LAWS As per section 161(2), the Board of Directors of a company may, if so authorised by its articles or by a resolution passed by the company in general meeting, appoint a person, not being a person holding any alternate directorship for any other director in the company or holding directorship in the same company, to act as an alternate director for a director during his absence for a period of not less than three months from India.From the above provision it is clear that the authority to appoint alternate director has been vested in the Board of Directors only and that too subject to empowerment by the articles or by a resolution passed by the company in general meeting. Therefore, Q, in this case is not authorized to appoint an alternate director and the appointment of Mr. Y is not valid. (C) Nominee Director [Section 161(3)]: According to this section: ‘Subject to the articles of a company, the Board may appoint any person as a director nominated by any institution in pursuance of the provisions of any law for the time being in force or of any agreement or by the Central Government or the State Government by virtue of its shareholding in a Government company.’ Simply stated, a nominee director is not like any other director. He represents the body which makes his nomination for appointment as director in the company. Whenever a company obtains financial assistance from some financial institution or bank, such instituation invariably nominates its representative for safeguarding its interests till the loaned amount is completely repaid. The nominee director is expected to ensure that the terms of loan ageements are religiously complied with all the time by the company concerned which has been granted financial assistance. The Board of Directors (subject to the articles) is empowered to appoint a nominee director and the shareholders cannot interefere with such appointment. Further, by virtue of its shareholding in a Government company, the Central Government or the State Government may also nominate a person for appointment as nominee director and the Board shall have to follow the suit without any hinderance on its part. (D) Casual Vacancy [Section 161(4)]: According to this section: (i) if the office of any director appointed by the company in general meeting is vacated before his term of office expires in the normal course, the resulting casual vacancy may, in default of and subject to any regulations in the articles of the company,be filled by the Board of Directors at a meeting of the Board which shall be subsequently approved by members in the immediate next general meeting. (ii) Any person so appointed shall hold office only up to the date up to which the director in whose place he is appointed would have held office if it had not been vacated. © The Institute of Chartered Accountants of India  APPOINTMENT AND QUALIFICATIONS OF DIRECTORS 1.27 The above provisions are discussed as under: The term ‘casual’ means a sudden happening i.e. something which happened by chance or unexpectedly or unforeseen but not by efflux of time. A casual vacancy results when the office of any director appointed in the general meeting is vacated before the expiry of his term in the normal course. This is not the vacancy created due to the retirement of a director. It is created because of certain other factors that are not linked with retirement like occurrence of death or attraction of disqualification or tendering of resignation or removal, etc. Further, in this case, the term of the office of director because of which the casual vacancy is created does not get expired in the normal course. A vacancy which was created due to the fact that the elected director declined to assume the office after his appointment at general meeting cannot be said to result in a casual vacancy. In such a case, when there was no assume of office by the director, how can he vacate it. Thus, there arises no casual vacancy. Section 161 (4) does not require that articles should expressly empower the Board of Directors for filling a casual vacancy. When a casual vacancy occurs it shall be filled by the Board at its meeting by passing a resolution and not otherwise. The vacancy so filled by the Board shall be approved subsequently by members in the immediate next general meeting. It is to be noted that where articles contain any regulations as regards filling of casual vacancy they need to be followed by the Board; but the subsequent approval of such filling of vacancy by members in the immediate next general meeting is a must. As we have noticed, the casual vacancy arises when any director appointed in the general meeting vacates his office before the expiry of his term. Thus, such appointment of the director who vacates his office must have been made in the general meeting and when the casual vacancy is filled by the Board and subsequently approved by the members in the immediate next general meeting, the matter ends there. Subsequently, if the casual vacancy so filled is again vacated due to some casual occurence, then it cannot be said to be a casual vacancy because it arose against an appointment which was not made in the general meeting. Such type of vacancy needs to be filled by the Board by appointing an additional director. A director appointed to fill a casual vacancy is not a ‘casual director’. He enjoys all the powers as well as is required to bear the responsibilities of the director in whose place he is appointed except that where the earlier director was an ‘interested director’, his ‘interest’ cannot be attached to the new director filling the casual vacancy. In case a company has appointed a woman director because of statutory requirement and an intermittent vacancy is created in the office of such woman director, the Board shall fill such casual vacancy at the earliest but not later than immediate next Board meeting or three © The Institute of Chartered Accountants of India  a 1.28 CORPORATE AND ECONOMIC LAWS months from the date of creation of such vacancy, whichever is later.9Similar is the case with an independent director whose intermittent vacancy must be filled at the earliest but not later than immediate next Board meeting or three months from the date of occurrence of such vacancy, whichever is later.10However, there is no such urgency so far as filling of any other casual vacancy is concerned (i.e. not of a woman director or of an independent director) because if the Board of Directors feels that the affairs of the company can be managed without appointing anybody, then the Board can postpone such appointment. Term of office of a director appointed to fill a casual vacancy:The term of office of a director appointed to fill a casual vacancy continues till such time up to which the term of the director because of whom the casual vacancy was created would have continued. Thus, the person filling the casual vacancy shall hold office up to the date up to which the director in whose place he is appointed would have continued in the office which in other words means ‘up to the unexpired term of such director’. The ‘continuation clause’ is applicable because of the Proviso mentioned under Section 161 (4); but for the application of this ‘continuation clause’ the appointment made by the Board needs to be approved by the members in the immediate next general meeting. 8. APPOINTMENT OF DIRECTORS TO BE VOTED INDIVIDUALLY [SECTION 162] Section 162 of the Companies Act prohibits appointment of directors by passing a single resolution. Electing more than one person as directors through a single resolution deprives the shareholders from exercising their choice to reject a specific individual. In such a situation, either they will have to vote against or in favour of all the prospective directors i.e. it shall be difficult for them to reject a particular person as director unless they reject such resolution in toto, thus not appointing all the persons specified in that resolution. That is why, Section 162 requires every individual person to be voted individually for appointment as director. As stated in the box below, if certain conditions are satisfied this provision shall not apply to a Government company and its wholly-owned subsidiary. Further, a private company is also exempted from this provision. In nutshell, provisions of Section 162 are as under: (i) Two or more directors of a company cannot be elected as directors by a single resolution.It implies that each person shall be appointed as director by a separate resolution. 9As per Second Proviso to Rule 3 of the Companies (Appointment and Qualifications of Directors) Rules, 2014. 10 As per Second Proviso to Rule 4 (1) of the Companies (Appointment and Qualifications of Directors) Rules, 2014. © The Institute of Chartered Accountants of India  APPOINTMENT AND QUALIFICATIONS OF DIRECTORS 1.29 (ii) As an exception, two or more persons can be appointed as directors by a single resolution if a proposal to move such a resolution (i.e. appointing two or more persons as directors by a single resolution) has first been agreed to at the general meeting without any vote being cast against it. Example12: A company held its general meeting at its registered office with twenty members present. At the meeting a proposal was moved to appoint three persons as directors by a single resolution. This proposal was agreed to by the seventeen shareholders who voted in its favour but the remaining three members did not vote at all. Thus, no vote was cast against the proposal. In such a situation, the company can appoint three persons as directors by a single resolution. Such single resolution shall be passed by simple majority i.e. as an ordinary resolution. (iii) A resolution moved in contravention of the provision stated in point (ii) above shall be void, whether or not objection thereto was raised at the time when it was so moved. (iv) A motion for approving a person for appointment, or for nominating a person for appointment as a director, shall be treated as a motion for his appointment. Exemptions Non-applicability of Section 162 of the Act of 2013: (1) Notifications No. GSR 463(E), dated 5th June,2015 as amended by Notification No. GSR 582 (E), dated 13-06-2017 states that Section 162 requiring appointment of each person as director by a separate resolution, shall not apply to: (a) A Government company in which the entire paid up share capital is held by the Central Government, or by any State Government or Governments or by the Central Government and one or more State Governments; (b) A subsidiary of a Government company, referred to in (a) above, in which the entire paid up share capital is held by that Governmment company. However, above exemption is applicable only if such Government company has not committed a default in filing its financial statements under Section 137 or Annual Return under Section 92 with the Registrar. (2) Similarly, Notifications No.and 464(E), dated 5th June, 2015 as amended by Notification No. GSR 583 (E), dated 13-06-2017 exempts a private company from the application of Section 162.However, this exemption is applicable only if such private company has not committed a default in filing its financial statements under Section 137 or Annual Return under Section 92 with the Registrar. © The Institute of Chartered Accountants of India  a 1.30 CORPORATE AND ECONOMIC LAWS 9. OPTION TO ADOPT PRINCIPLE OF PROPORTIONAL REPRESENTATION FOR APPOINTMENT OF DIRECTORS [SECTION 163] As a general rule, the directors in a company are appointed by simple majority. It implies that the shareholders having voting rights just equal to 51 percent can easily negate the choice of other minority shareholders who have substantial voting rights as high as up to 49 percent in the matter of appointment of directors. Thus, minority shareholders though having sizeable voting rights may not find it possible to appoint even a single director of their own on the Board of Directors. To counter this kind of unpleasant situation which may create confrontation in a company and adversely affect the managerial efficiency. Section 163 chalks out a system by which directors may be appointed by way of proportional representation. The provisions of Section 163 are stated as under: (i) Section 163 starts with the phrase ‘Notwithstanding anything contained in this Act’ which implies that this section has overriding effect i.e. it overrides all other provisions of the Companies Act, 2013. (ii) The articles of a company need to contain provisions for the appointment of directors by proportional representation. The procedure as contained in the articles must be capable enough to enable the minority shareholders to have a proportionate representation on the Board of Directors. (iii) The articles need to provide for the appointment of not less than two-third (i.e. minimum 2/3 rd or more) of the total number of the directors in accordance with the principle of proportional representation. (iv) Such appointments to be made in accordance with the principle of proportional representation, may use following methods of voting: (a) Voting according to the single transferable vote. It means, a candidate gets elected if he secures the requisite votes fixed as quota; or (b) Voting according to a system of ‘cumulative voting’; or (c) Otherwise i.e.adoption of any other transparent and effective method of voting if it ensures that the Board shall have fair representation of the minority interest, in case methods stated at (a) or (b) are not adopted. (v) Such appointments may be made once in every 3 years. (vi) Casual vacancies of such directors shall be filled as provided in Section 161 (4) i.e. such casual vacancy shall be filled as per the provisions of the articles; and if there is no such provision, then the Board of Directors may fill the vacancy through a board resolution. Later on, such appointment may be regularized by the shareholders at the immediately held general meeting. © The Institute of Chartered Accountants of India  APPOINTMENT AND QUALIFICATIONS OF DIRECTORS 1.31 Exemptions Non applicability of Section 163: Section 163 of the Act, shall not apply to: (1) A Government company in which the entire paid up share capital is held by the Central Government, or by any State Government or Governments or by the Central Government and one or more State Governments; (2) A subsidiary of a Government company, referred to in (1) above, in which the entire paid up share capital is held by that Governmment company. subject to the condition that such Government company has not committed a default in filing its financial statements under Section 137 or Annual Return under Section 92 with the Registrar. [Notifications No.GSR 463(E), dated 5th June, 2015 as amended by Notification No. GSR 582 (E), dated 13-06-2017] 10. DISQUALIFICATIONS FOR APPOINTMENT OF DIRECTOR [SECTION 164] Section 164 of the Companies Act, 2013 contains disqualifications of a director. A person shall not be eligible for appointment as a director of a company if he suffers from any of the specified disqualifications. As such, the law does not specify any professional or educational qualifications of a director or requires him to hold requisite number of qualification shares except that as a general rule, any person desiring to become a director should be competent to contract and should have been allotted a Director Identfication Number (DIN). Various disqualifications are mentioned as under: (i) Section 164(1)states that a person shall not be appointed as a director if: (a) he is of unsound mind and stands so declared by a competent court; (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, whether involving moral turpitude or otherwise, and sentenced to imprisonment for not less than 6 months and a period of 5 years has not elapsed from the date of expiry of the sentence. However, in case a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of 7 years or more, he shall not be eligible to be appointed as a director in any company (e) an order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force; © The Institute of Chartered Accountants of India  a 1.32 CORPORATE AND ECONOMIC LAWS (f) he has not paid any calls in respect of any shares of the company held by him and 6 months have elapsed from the last day fixed for the payment of the call. It is immaterial whether such shares are held individually by him or jointly with others; (g) he has been convicted of the offence of dealing with related party transactions under section 188 at any time during the last preceding 5years; or (h) he has not complied with section 152 (3) which requires a director to have a Director Identification Number (DIN). (i) he has not complied with the provisions of Section 165 (1) relating to holding of specified number of directorships. (ii) Sub-section (2) of Section 164 prescribes disqualifications which get attached to a person if he is or has been a director of a company which has committed default as under— (a) his company has not filed financial statements or annual returns for any continuous period of 3 financial years; or (b) his company has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for 1year or more. In both the above cases of default, the director concerned shall not be eligible to be re- appointed as a director of such defaulting company or appointed in some other company for period of 5 years from the date on which the said company has committed default. Where a person is appointed as a director in a defaulted company: However, in case a person is appointed as a director of a company which has committed default as per clause (a) or clause (b) above, he shall not incur the disqualification for a period of six months from the date of his appointment. Exemptions As per Notification No. GSR 463 (E), dated 5 th June, 2015 as amended by Notification No. GSR 582 (E), dated 13 th June, 2017, Section 164(2) is not applicable to a Government company provided it has not committed a default in filing its financial statements under Section 137 or Annual Return under Section 92 with the Registrar. (iii) Additional qualifications by private company: According to Section 164 (3), a private company (not being a subsidiary of a public company) is permitted to provide for additional disqualifications through its articles for appointment of a person as a director besides those specified in sub-sections (1) and (2) of section 164. [referpoints (i) and (ii) above]. Thus, it may specify certain qualifications like a graduate shall only be the director or the prospective director should hold certain number of qualification shares, etc. © The Institute of Chartered Accountants of India  APPOINTMENT AND QUALIFICATIONS OF DIRECTORS 1.33 Note: In terms of Proviso to Section 164 (3), the disqualifications referred to in clauses (d), (e) and (g) of sub-section (1) shall continue to apply even if the appeal or petition has been filed against the order of conviction or disqualification. (iv) Disqualification as prescribed by Section 217 (6)(ii): Section 217 relates to a company which is under investigation. In case any director of such a company has been convicted of an offence under Section 217, the director shall be deemed to have vacated his office on and from the date on which he is so convicted. On such vacation of office, he shall be disqualified from holding an office in any company. In Manju Chamundeeswari v.Union of India,W.MP. NOS. 28025 & 28027 of 2021, it was laid that in terms of rule 11 of Companies (Appointment and Qualifications of Directors) Rules, 2014 neither cancellation nor deactivation of DIN is provided for upon disqualification under section 164(2) and such deactivation would be contrary to section 164(2), read with section 167(1) inasmuch as person concerned would continue to be a director of defaulting company. The High Court of Kerala held in Zacharia Maramkandathil Mohan v.Union of India W.P (C) No. 21628 of 2020,June 16, 2021 the following principles : (i) Section 164(2) disqualifying directors of companies for a period of 5 years on failure to submit annual returns/financial statements for 3 consecutive years is not ultra vires Article 14 or Article 19(1)(g) of Constitution. (ii) Section 164(2) which had come into force from 1-1-2014 would have prospective and not retrospective effect and defaults contemplated under section 164(2)(a) with regard to non-filing of financial statements or annual returns for any continuous period of three financial years to be counted from financial year 2014-15 only. (iii) Disqualification under section 164(2) is of temporary nature, thus, rule 11 of Companies (Appointment and Qualifications of Directors) Rules, 2014 does not empower any authority to cancel or deactivate DIN upon disqualification under section 164(2). 11. MAXIMUM NUMBER OF DIRECTORSHIPS[SECTION 165] Section 165 of the Act provides for the maximum permissible directorships that a person can hold. The provisions are as under: (i) Maximum number of directorships:According to Section 165(1), a person, after the commencement of the Companies Act, 2013, shall not hold office as director,including any alternate directorship, in more than 20 companies at the same time. Further, out of the above limit of 20 companies, the maximum number of public companies in which a person can be appointed as a director shall not exceed 10. It may be noted that the limit of public companies (i.e. 10) shall include directorship in private companies that are either holding or subsidiary company of a public company. © The Institute of Chartered Accountants of India  a 1.34 CORPORATE AND ECONOMIC LAWS However, the limit of directorships of 20 companies shall not include the directorship in a dormant company; as also in a Section 8 company (refer Exemption mentioned in the box below). Exemptions Section 165(1) [refer point no.(i) above] shall not apply to a Section 8 company subject to the condition that such a company has not committed a default in filing its financial statements under Section 137 or Annual return under Section 92 with the Registrar. In other words, a directorship in a Section 8 company shall not be counted for determining the maximum permissible limit. [Notification No. 466 (E), dated 5 th June, 2015 as amended by Notification No. 584 (E), dated 13 th June, 2017]. (ii) Lesser number of directorships than maximum:The members of a company may, by special resolution, specify any lesser number of companies in which a director of the company may act as directors. [Section 165(2)] (iii) Prescription of Transition Period of One Year:Immediately before the commencement of the Companies Act, 2013 (i.e. before 01-04-2014), if a person was holding office as director in more companies than the specified limits, he was required, within one year (i.e. by 31-03-2015) to: (a) choose not more than the specified limit of companies, in which he wished to conti