The Companies Act, 2013 (Act) emphasis on flexibility and rigidity among the Composition of the Board of Directors (Board). The Flexibility hereby denotes the mandatory inclusion of Rotational Directors among the Board and the Rigidity provides for the inclusion of Non-Rotational Directors among the Board. The said combination has been mandated under Section 152 sub-section 6 and 7 of the Act leading to appropriate structure of governing body of companies.
This provision ensures that the Members of Company having power to remove the majority of the directors and appoint any other director for such position. This provision had been discussed and adopted from the report of the Company Law Committee 1952 “Bhabha Committee Report”.
The question emerges that, How the Companies Act, 2013 maintain balance between the “Flexibility” and “Rigidity” among the Board?
The provisions with respect to aforesaid concept has been envisaged under Section 152(6) and (7) of the Act.
Applicability: Only Public Companies (not applicable to Government companies and its subsidiaries)
Section 152
Sub-section 6: Provides as follows;
The Company shall have not less than two-third (2/3rd) of the Total Number of Directors, as directors whose period of office is liable to retire by rotation and their appointment shall be made only in the general meeting. However, the remaining Directors (1/3rd) 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.
That among, above said 2/3rd directors liable to retire by rotation, one-third of such Directors (if their number is neither three nor a multiple of three, then, the number nearest to one-third) shall retire from office at every subsequent Annual General Meeting (AGM) held after the first AGM of the Company.
Provided that the Articles of Association (“AOA”) may provide for the retirement of all Directors at every AGM, which implies that the articles of Companies may either provide for the retirement of all Directors at every AGM or the retirement of not less than/at least 2/3rd of Total Number of Directors only.
The Directors liable to retire by rotation at every AGM shall be those who have been longest in office since their last appointment, but as between persons who became Directors on the same day, those who are to retire shall, in default of and subject to any agreement among themselves, be determined by lot.
The explanation appended to Section 152 (7) specifically provides the definition of Retiring Director.
The said explanation has been reproduced herein below for ready reference.
“Explanation.—For the purposes of this section and section 160, the expression “retiring director” means a director retiring by rotation.”
The Directors who retire at the AGM, the vacancy may be filled by the members in General Meeting by appointing the retiring director or some other person thereto, which implies that the directors retire only at the AGM but their appointment can be made at General Meeting, which expression includes Annual General Meeting and Extra-Ordinary General Meeting.
Categories of Directors not liable to retire by rotation:
1. Independent Directors:
The Independent Directors have been kept out of the provision of directors liable to retire by rotation. The explanation appended to Section 152 (6) specifically excludes Independent Directors from being included in Total number of Directors.
The said explanation has been reproduced herein below for ready reference.
“Explanation.—For the purposes of this sub-section, “total number of Directors” shall not include independent Directors, whether appointed under this Act or any other law for the time being in force, on the Board of a company.”
Further, pursuant to section 149 (13), which provides that the provisions of sub-sections (6) and (7) of section 152 in respect of retirement of Directors by rotation shall not be applicable to appointment of independent Directors.
2. Small Shareholders’ Director:
Pursuant to section 151 read with rule 7 of Companies (Appointment and Qualifications of Directors) Rules, 2014, sub rule 5 specifically prohibits that the appointment of such director shall not be liable to retire by rotation.
Rule 7:
“(5) 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;”
3. Nominee Directors:
Under the explanation to section 149(7), a Nominee director has been considered as a non-executive, non-independent director. There is nothing in the definition which suggest that they shall not be liable to retire by rotation. Having said this, it is pertinent to consider that when a person is nominated as a director on the board of a company by a Public Financial Institution, under the enactments under which these institutions have been created, it has been stated expressly that the nominee director shall not retire by rotation and he shall hold office at the will and pleasure of the Nominating Institution. It is the behest of the institution that the appointment can either be withdrawn or substituted.
Considering the above, the question that assumes significance is whether a Nominee Director appointed under specific enactments shall be liable to retire by rotation. Considering the overriding nature of the legislations concerning the appointment of such directors it can be stated that they cannot be subject to retirement by rotation. However, persons appointed as Nominee directors in terms of agreements entered into with the companies may be liable to retirement by rotation.1
4. Additional Director:
The board may have the need to appoint a director urgently to bolster its strength and may not be in a position to wait until the annual general meeting to consider the appointment of a fresh director. In such a situation, as permitted under section 161 subject to existence of enabling provisions in the articles, the board can appoint an additional director whose tenure shall be up to the date of next annual general meeting at which his appoint is normally regularised through the process set out in section 160. An additional director appointed by the board is therefore not includable in the list of director liable to retire by rotation.
In the same vein, when a vacancy is caused in the board due to the resignation, death or incapacity of a director the board is authorized to fill up such a vacancy at duly convened meeting. The person appointed to fill the vacancy continues as director till the completion of the term of the director in whose vacancy he has been appointed. He too will not be considered in the number of director liable to retire by rotation.2
5. Alternate Director:
Pursuant to section 161(2), the Board of Directors of a company may appoint an alternate director in place of director who remains absent for a period of not less than three months from India, if so authorised by its articles or by a resolution passed by the company in general meeting not being a person holding any alternate Directorship for any other director in the company or holding Directorship in the same company. And
Third proviso to section 161(2) reads as follows:
“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.”
Hence, according to third proviso to section 161(2), since, the automatic re-appointment of retiring Directors in default of another appointment applies to original director, the alternate director shall not be considered for retirement of director by rotation.
An illustration explaining the calculation for directors liable to retire by rotation:
Total Strength = 17 Directors
Independent Director = 3 Directors
Nominee Directors = 1 Director
Additional Directors = 1 Director
Small Shareholders Directors = 1 Director
Alternate Directors = 1 Director
Total Number of Directors = 17-3-1-1-1-1= 10 Directors
| Directors liable to retire by rotation/Rotational Directors | = 10*2/3=6.66 (not less than two-third or upper round off) = 7 Directors |
| Remaining Directors/Non-Rotational Directors | = 10-7= 3 Directors |
| Number of Directors who shall retire at AGM | = 7*1/3= 2.33 (if their number is neither three nor a multiple of three, then, the number nearest to one-third) = 3 Directors |
Hence, as per the above said provision, out of total number of 10 directors, 7 directors shall be liable to retire by rotation and 3 directors shall retire at AGM.
Note: The provisions of Section 160-Right of Persons Other than retiring Directors to Stand for Directorship shall not apply to the appointment of retiring directors pursuant to Section 152(6).
Sub-section 7: Provides as follows;
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, or if that day is a national holiday, till the next succeeding day which is not a holiday, at the same time and place.
Deemed Re-appointment of Retiring Director
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, Unless—
- 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; meaning thereby that the resolution for the re-appointment of such director is not approved by the members.
- 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; meaning thereby that the retiring director expressed his unwillingness to be so re-appointed.
- he is not qualified or is disqualified for appointment; meaning thereby that he is disqualified under Section 164 or any other provisions of the Companies Act, 2013.
- a resolution, whether special or ordinary, is required for his appointment or re-appointment by virtue of any provisions of this Act; meaning thereby that one more resolution whether special or ordinary is required to be passed by virtue of any provisions of this Act for his appointment or re-appointment.
- Section 162 is applicable to the case; meaning thereby that his re-appointment is not violative of Section 162 of Companies Act, 2013.
Conclusion: The above provisions ensure the Shareholders’ Democracy, strengthening the governance mechanism of companies by providing the appropriate mix of “Flexibility” and “Rigidity” among the Board, in a way that the Shareholders having majority power to re-appoint or remove the existing directors and appoint any other directors on the Board.
1A. Ramaiya, Guide to the Companies Act (19th edn., Vol II, Lexis Nexis, 2020) p 2810
2A. Ramaiya, Guide to the Companies Act (19th edn., Vol II, Lexis Nexis, 2020) p 2811
Author Bio
In the given example, the Number of Directors who shall retire at AGM = 7*1/3= 2.33 (if their number is neither three nor a multiple of three, then, the number nearest to one-third) = 2 Directors and not 3 Directors.
if nothing is specified in question, whether nominee director is appointed due to requirement of some act or by company, then what to assume for calculation of total directors purpose?
Well Explained.
Very informative article….hope to read more from you