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)]

(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 respect.

(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.

(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.

(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 or such an appointment [refer Proviso to Section 152 (5)].

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 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"June, 2015 as amended by Notification No. 584 (E), dated 13 June, 2017].

(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 unfavorable 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 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.

Further, 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.

(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 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° 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 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 1/3“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: lf 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 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.

SECTION 152: APPOINTMENT OF DIRECTORS