Analysis of Section 165 of The Companies Act, 2013

SECTION 165 OF THE COMPANIES ACT, 2013

NUMBER OF DIRECTORSHIPS

(1) No person, after the commencement of this Act, shall hold office as a director, including any alternate directorship, in more than twenty companies at the same time:

Provided that the maximum number of public companies in which a person can be appointed as a director shall not exceed ten.

Explanation I — For reckoning the limit of public companies in which a person can be appointed as director, directorship in private companies that are either holding or subsidiary company of a public company shall be included.

Explanation II.— For reckoning the limit of directorships of twenty companies, the directorship in a dormant company shall not be included.

(2) Subject to the provisions of sub-section (1), 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.

(3) Any person holding office as director in companies more than the limits as specified in sub-section (1), immediately before the commencement of this Act shall, within a period of one year from such commencement,—

(a) choose not more than the specified limit of those companies, as companies in which he wishes to continue to hold the office of director;

(b) resign his office as director in the other remaining companies; and

(c) intimate the choice made by him under clause (a), to each of the companies in which he was holding the office of director before such commencement and to the Registrar having jurisdiction in respect of each such company.

(4) Any resignation made in pursuance of clause (b) of sub-section (3) shall become effective immediately on the dispatch thereof to the company concerned.

(5) No such person shall act as director in more than the specified number of companies,—

(a) after despatching the resignation of his office as director or non-executive director thereof, in pursuance of clause (b) of sub-section (3); or

(b) after the expiry of one year from the commencement of this Act, whichever is earlier.

(6) If a person accepts an appointment as a director in contravention of sub-section (1), he shall be liable to a penalty of five thousand rupees for each day after the first during which such contravention continues.

ANALYSIS OF SECTION 165

Section 165 of the Companies Act, 2013 corresponds to sections 275, 276, 278 and 279 of the Companies Act, 1956. Now there is only one section i.e 165 of the Companies Act, 2013 divided into 6 sub-sections.

Purpose of section 165 of the Companies Act, 2013 is to prohibit a person (individual) from becoming director in more than 20 companies (including maximum 10 public companies) so that such person can give proper, sufficient and quality time to the companies in which such person is a director thereby discharging function of a director in a effective manner.

Section 165(1) corresponds to section 275 of the Companies Act, 1956. For the first time Companies Act, 1956 brought out the provision for fixing maximum number of companies in which a person can hold directorship. Initially when Companies Act, 1956 came into force there was a limit of 20 companies (excluding private companies, unlimited companies, section 25 company (Now section 8 company) and alternate directorship) but later on Companies (Amendment) Act, 2000 reduced it to fifteen. Now section 165(1) has restored 20 companies limit including maximum 10 public companies (listed or not) and this section has not made any distinction between listed public companies and unlisted public companies.

Section 165(1) shall not apply to section 8 company.

Explanation one has made it clear that private company which is either holding or subsidiary of a public company shall be included for calculating limit of ten public companies.

Originally explanation two was not there under section 165(1) but it has been inserted by Companies (Amendment) Act, 2017 w.e.f. 9^th February 2018, which says that dormant company shall not included for reckoning limit of 20 companies. This explanation is based on logic that dormant company is a company which is inactive having insignificant transaction therefore negligible time and attention will be required from a director and such director can devote good time in companies other than dormant company.

Section 165(2) has given power to members of company to limit the number of directorship for a director of company even below 20 by passing special resolution.

Section 165(3) was a transitional provision, inserted with a view to provide time limit within which an existing director had to make choice of his twenty companies because earlier under the Companies Act, 1956 private companies and unlimited companies were excluded from the statutory limit but under the Companies Act, 2013 they will counted for twenty companies limit and moreover limit on public companies has also been brought in.

Section 165(4) and 165(5) is a consequential provision because of section 165(3)

Section 165(6) has made it clear that if a person accepts appointment as a director beyond specified number of companies then such person shall be liable for penalty of five thousand rupees for each day after the first during which such contravention continues.

(Section 165(6) has been amended by companies (Amendment) Ordinance, 2019 )

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