Amitav Ganguly

Amitav GangulyAnalysis Of  Law  Of  Alternate Directorship {with amendment proposed}

BACKGROUND

Before one analyases the provisions in the Companies Act 2013 relating to alternate director, { Sub section {2} of section 161 of the Companies Act 2013}, it is to be understood that appointment of alternate director in place of  absentee original director is a business decision of the Board of Directors of a company. It is not madatory that alternate ditector has to be appointed. There can be many cases where in spite of one or more directors being absent for long periods, no alternate  director/s is/are appointed.

It is however important to note that such absentee  directors who will not be able to attend the board meetings during their absence;  they should ensure that their offices  donot become vacant in terms of section 167 of  Companies Act  2013.

Practically speaking alternate directors, on many occasions,  are appointed where foreign directors in Indian companies are absent. It is well known that such directors who may be foreign nationals, may not be residing in India and not find it convenient to attend board meetings or other business matters in India, on a regular basis. This will necessitate having their alternates , who may be Indian nationals residing in India and able to take care of the interests which the foreign directors are required to do.

However, the alternate director is not a proxy or an agent of the original director.

Pertinently, the position of alternate director is the same as that of the original director with regard to the compliance  and applicability of the provisions of the Companies Act 2013 { New Act}.

The earlier law for appointment and term of office of alternate directors was given in section 313 of the Erstwhile Companies Act 1956. { Old Act}

The new law under section 161 {2} of the Companies Act 2013 reads as follows:-

“(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, to act as an alternate director for a director during his absence for a period of not less than three months from India:

Provided that 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:

Provided further that an alternate director shall not hold office for a period longer than that permissible to the director in whose place he has been appointed and shall vacate the office if and when the director in whose place he has been appointed returns to India:

Provided also that 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.

ANALYSIS

It is provided that :-

  • The Board of Directors of a company may, { It could be any type of company and the power of the Board is dicretionary},
  • if authorised by articles of association of the company, or alternatively,
  • by a resolution passed by the company in general meeting, { It is not provided whether it will be Annual General Meeting or Extrarordinary General meeting and whether ordinary or special resolution will be required},
  • appoint a person, { Should be an individual only in terms of section 149{1} of the new Act},
  • not being a person holding any alternate directorship for any other director in the company, { This is a new restriction not provided in the Erstwhile Companies Act 1956}. {Presently getting amended as discussed hereinafter},
  • to act as an alternate director for the original director during his absence for a “period” of not less than three months from India. { It should be “continuous period” as clarified by the Central Government with respect to the Old Act- dated 28th September 1966}.
  • No person can be appointed as an alternate director for the original independent director unless he is also qualified to be appointed as an independent director under the provisions of the new Act. {This is laid down in, inter alia, section 149}. {This is a new restriction not provided in the Old Act}.
  • The alternate director shall hold office maximum for a period permissible to the original director and shall vacate the office if and when the director in whose place he has been appointed returns to India. {The provision in the Old Act has been slightly amended here}.
  • Where 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 provision in the Old Act has been slightly amended here}.

COMMENTS

This sub section {2} of section 161 of the Companies Act 2013 {New Act} is by and large in line with the section 313 of the Erstwhile Companies Act 1956. {Old Act}.

As per the provisions, the action for appointment of alternate director has to be taken only by the Board of Directors {Board} with the requisite authority of the articles or shareholders’ resolution.  It is to be clearly understood that the power is with the Board and not the original director. Significantly the Board can appoint an alternate director not to the liking or without the consent of the original director. Although there would be no illegality involved, it is advisable and practical to make the appointment which is acceptable to all relevant parties.

As explained, the appointment is a discretion of the Board; nevertheless in case of  business requirements and in the interest of the company, the Board should definitely exercise this power.

It was held in the case of D Ross Porter v Pioneer Steel Co Ltd. {1989} 2 Comp Cas LJ  89  Delhi that  where there is compelling reason to appoint an alternate director the Board can be compelled to make an appointment.

As already mentioned, this sub section provides that the alternate director may be appointed in place of the original director during his absence for a period of not less than three months from India. This is in contrast to the section 313 of the Old Act which stipulates the absence of the original director for a period of not less than three months from the State in which the Board meetings are ordinarily held. Hence only when the original director has gone out of India and not from the State that this new  law gets invoked. Absence from India should be for a continuous period.

As also stated, another provision is that a person who is to be appointed as alternate director, should not hold any alternate directorship for any other director in the same company. This prohibits a scenario where a Board has only one Alternate Director for two or more absentee original directors. But it also implies that the same person may be an alternate director of a director in any other company.

The Companies { Amendment} Bill 2016, which is before the Parliament has gone another step and proposes to amend the legal position by also prohibiting an   existing director from holding alternate directorship in the same company.

As also mentioned, the first proviso lays down that where the original director is an independent director; the alternate director should also be qualified to be appointed as an independent director as per the law enumerated in the new Act.

Aptly, in case of a public company whose securities are listed on the stock exchanges,  SEBI { Listing Obligations and Disclosure Requirements } Regulations 2015 apply wherein the qualifications of “Independent Director” have also been defined, in line with the new Act. Such company has to keep in view the SEBI regulations , too.

The second proviso is in line with the section 313 of the Old Act and lays down that the alternate director shall not hold his office for a period longer than what the original director is permitted to hold, and that, if and when the original director returns to India, the alternate director shall vacate his office. Therefore it appears that the alternate director shall take action to vacate the office. His action should be immediate otherwise there may be violation of the provisions. The onus is also on the original director to intimate, forthwith, to the company and to the alternate director the fact and the date of his return to India. It  appears  that even if the original director returns for one day this provision will be invoked. Moreover, although it is not clearly laid down, the original director re-occupies his office. The matter needs to go to the earliest Board meeting.

But  there could be scope for ambiguity here and it shall be better if the Central Government clarifies the law and the process.

The third proviso, likewise, reflects the earlier section 313 and provides that before the original director returns to India if his term of office is determined and comes to an end, any provision for automatic reappointment of retiring director in default of another appointment, {as per section, 152 of the new Act}  shall apply to the original director only. Thus the alternate director shall not be reckoned in this regard.

CONCLUSION

Although the provisions of appointment and term of office of alternate director under the Indian company law is not new,  there has been definitive improvement in the law as existed in the Erstwhile Companies Act 1956 and the new Companies Act 2013, {which is also proposed, now, to be amended}. However, some clarifications  from the Central Government would be welcome to better comply with this important law.

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