Amitav Ganguly

Amitav GangulyBackground

Simply stated, a casual vacancy is said to have occurred in the Board of Directors{ Board} when the office of a director appointed by the shareholders is vacated before the expiry of his term. Although the Companies Act 2013 { new Companies Act } doesnot define what constitutes this vacancy, it would mean vacancy arising due to death of the director, his resignation, or insolvency and not by efflux of time or retirement by rotation. { Ref case: Srinivasan { M.K} v. Subrahmanya Aiyer {W.S.} (1932) 2 Comp Cases 147}. Failure of an elected director to accept the office may also constitute a casual vacancy. Such vacancy will need to be filled up in terms of the articles of association {articles} of the company. If there is no provision in the articles, the Board still has the power to fill up the vacancy.   A person appointed to fill the vacancy will hold office until the expiry of the period for which the outgoing director would have held office.

Section 262 of the erstwhile Companies Act 1956 {erstwhile Companies Act} had provided for this law which by and large has been kept in sub section {4} of section 161 of the new Companies Act and reads as follows:-

Section 161{4}

(4) In the case of a public company, 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:

Provided that 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.”

ANALYSIS

On analyzing the provisions, the following pertinent factors emerge :-

  1. This law applies to a public company only;
  2. Relates to the office of a director in that public company;
  3. Such director has been appointed by that company in general meeting;
  4. His office is vacated before his term of office expires in the normal course;
  5. In such an event, a casual vacancy arises;
  6. That vacancy is to be filled by the Board of Directors of that public company at a meeting of the Board;
  7. That vacancy is to be filled, in default of and subject to any regulations in the articles of that company;
  8. The person so appointed to fill the vacancy 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.

Comments

{A} As mentioned, this sub section {4} of section 161 is in line with section 262 of the erstwhile Companies Act which, however, exclusively related to filling up of casual vacancies among directors. The most important aspect to note here is that the original director, whose office has vacated – resulting in casual vacancy, was a director appointed by the company in a general meeting. Moreover, the vacancy has happened before the term of office of the original director expires in the normal course. What is “normal course” has not been laid down but will mean the period of appointment as stipulated for the original director which will come to an end at the end of that period.

{B} It may be worthwhile to note that where a casual vacancy is filled up by the Board, and, thereafter the director appointed to such casual vacancy also vacates his office, then section 161{4} cannot be invoked as the sub-section applies only to a casual vacancy in the office of director who was appointed by the members in a general meeting. The way out can be that the Board may appoint additional director in such an event.

{C} This sub section only applies to public company. But the said section 262 of the erstwhile Companies Act applied to public company as well as any private company which is a subsidiary of public company. The query which may arise here is whether pure private companies are permitted to fill casual vacancies as per their articles, unfettered by this provision? Or are they totally prohibited? The Government should come out with a clarification in this respect.

{D} As stated, filling up of casual vacancy of a director would need to be done as per the articles of association by the Board at its duly held and conducted meeting and not through circulation in terms of section 175 of the new Companies Act. Pertinently, the Board is not bound to fill a casual vacancy. It may also be possible for the articles to provide that the appointment can be made :-

  • by the members in a general meeting, or
  • either by the Board or by the members in a general meeting.

If articles are silent, the Board can exercise the power and it appears that the members can also do so in a general meeting.

{E} As mentioned, the period of the office of the new director appointed to fill up the casual vacancy has been limited. He can 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. From this it can be interpreted that the period of holding office of the new director is not until next annual general meeting or general meeting of the company, but, as specified clearly herein as per the proviso of this sub section.

{F} There may be a situation where the number of directors on the Board is reduced to one, due to casual vacancy. The new Companies Act provides thus:-

Section 174 provides:

(2) The continuing directors may act notwithstanding any vacancy in the Board; but, if and so long as their number is reduced below the quorum fixed by the Act for a meeting of the Board, the continuing directors or director may act for the purpose of increasing the number of directors to that fixed for the quorum, or of summoning a general meeting of the company and for no other purpose.”

The Table F of the Model articles, in terms of section 5, Schedule I of the new Companies Act also provides likewise.

Since there is no restriction as to how the continuing director may act to increase the number of directors to the level of quorum or for calling a general meeting, it is legally possible for the appointment of director to fill casual vacancy in this respect.

Interestingly it was held in the case of Anantalakshmi Ammal {A} v Indian Trades & Investments Ltd [1952] 22 Comp Cases 324 that casual vacancy can be filled up by the Board even where the membership of the Board has fallen below the statutory minimum, although the power should be exercised by the Board in good faith and in the interest of the company.

CONCLUSION

The law of filling up of casual vacancy in the Board has not undergone very significant change through the new Companies Act 2013 and as such the the precedent laws of the courts in terms of the erstwhile Companies Act 1956 will still have relevance.

Posted Under

Category : Company Law (2996)
Type : Articles (10792)