Analysing Law of Additional Director

Amitav Ganguly

BACKGROUND

The provision for appointment of additional directors is a special emergency power available to companies. The appointment lapses when the shareholders would normally assume control over the appointment of the directors at the general meeting. { Ref case: Topandas Mohanlal Advani v. Yeotmal Electric Supply Company {1940} 10 Com Cases 133 , 139: AIR 1940 Sind 87}  

The provision for additional directors was present in section 260 of the erstwhile Companies Act 1956 which has since been replaced by sub section {1} of section 161 of the Companies Act 2013 { new Act} and the latest law reads as follows:

SECTION 161

161. (1) The articles of a company may confer on its Board of Directors the power to appoint any person, other than a person who fails to get appointed as a director in a general meeting, as an additional director at any time who shall hold office up to the date of the next annual general meeting or the last date on which the annual general meeting should have been held, whichever is earlier.

ANALYSIS

The articles of association of a company may confer on its Board of Directors:-

1. the power to appoint any person, {other than a person who fails to get appointed as a director in a general meeting}, as an additional director, at any time,

2. who shall hold office up to the date of the next annual general meeting, or

3. the last date on which the annual general meeting should have been held,

4. whichever is earlier { e. earlier of the dates referred in point nos. 3 and 4}.

5. From the above following can be analyzed:-

{a} The articles of association should provide for the appointment of additional director. It was held in the case of Needle Industries {India} Ltd v Needle Industries Newey { India} Holdings Ltd AIR., 1981, SC 1298 that the relevant power to Board in the articles is imperative.

{b} Due to the use of the term “may” in the opening line of the sub section, it is discretionary on the part of a company to have this provision in its articles. However where the company has adopted the Model articles in terms of section 5, Schedule I of the new Act, in totality, the requisite provision is present. Even if the company has adopted some of the regulations of the Model articles including this provision, the sub section would be invoked.

{c} Any person, that is an individual, can be be appointed, however he should not be a person who has failed to get appointed as director in a general meeting.

Thus the candidate should not be person who did not get appointed as a director in a general meeting, earlier, meaning thereby that where a person did not get the approval of the shareholders for his appointment, he cannot become a director through back door – i.e. another route of appointment via board process. A possible loophole in the earlier section 260 of the erstwhile Act has therefore been plugged in this sub section.

{d} It is permissible for the appointment to be made at any time depending upon the business requirements and exigencies. It was held in the case of Maharashtra Power Development Corporation Ltd v. Dabhol Power Co. {2004} 52 SCL 224 { Bom} that in order to complete the quorum, the Board of Directors can appoint an additional director in a Board meeting in accordance with the articles of association of the company.

Pertinently there is no restriction on the exercise of this power, which can be done by the Board more than once every year, however, the total number of directors including the additional directors shall not at any time exceed the maximum strength fixed by the Board by the articles. Interestingly the restriction of maximum strength was present in the earlier section 260 itself, but this is now present in the Model articles of the new Act and not in its new section 161{1}.

In case a company adopts a part of the Model articles but has its own clause for appointment of additional director not providing for the restriction of maximum strength, an ambiguous position may arise. In fact the Government should clarify if such a scenario arises.

{e} It is clear that the appointee cannot hold office indefinitely. Thus he shall hold office up to the date of the next annual general meeting {AGM} and if for any reason AGM is not held then he holds office up to the last date on which the AGM should have been held, whichever is earlier.

The provision that the additional director shall hold office up to the date of next AGM is in line with the earlier section 260, but further provision in the event where AGM is not held, is a new law. It was held in many cases, one of these cases was that of Surjit Malhan and B K Malhan v John Tinson and Co., ILR {1985} HP 135 {HP} where it was held that the additional director vacates his office on the last day on which the AGM should have been called and held as per provisions and he cannot continue thereafter on the ground that AGM could not be called and held within the stipulated time. Thus law laid down in these cases has been given statutory force herein, thus streamlining the provisions.

Interestingly, this sub section may take away the impact of extension of time of holding of AGM through approval of the Registrar as permitted under section 96 of the new Act of 2013, on the tenure of the additional director. That means, in case as per provisions, the last date on which AGM should have been held is, say, 30^th September and the company concerned has got extension of time to hold AGM till say, 30^th October, and, actually holds the AGM on 30^th October, the tenure of additional director would be only up to 30^th September. This seems to be unintentional lapse on the part of the legislature while it had streamlined these provisions. And it should be rectified by way of clarification by the Central Government

{f} It is made clear in terms of the Table F of the Model articles, as per section 5, Schedule I of the new Act that the individual concerned who held office as additional director up to the AGM shall be eligible for appointment by the company as director, subject to the provisions of the new Act, at the said AGM. He could be appointed as a regular director by the shareholders whose period of office is liable to determination by retirement by rotation.

{g} There may be a situation where the number of directors is reduced to one. In such case it has been held that such one continuing director can appoint additional director. { Ref case: Macson Development Co. Ltd., Gordon { 1959} 19 DLR {2d} 465 {Canada}. The new Act also 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 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 the appointment of additional director in this respect.

{h} Interestingly it may be stated that power of the general meeting to appoint additional director is not taken away where it has conferred on the Board this power. Hence the general meeting will continue to have power to appoint additional directors where the directors have not filled the vacancies or they are not able to do so. ( Ref case : Foster v Foster {1916}   1 Ch 532).

In contrast where articles have been so framed as to delegate power to appoint new directors to the Board to the exclusion {emphasis supplied} of the general meeting in such case appointment by general meeting would be inoperative. {Ref case : Ram Kissendas v. Satya Charan Law. AIR 1950 PC 81}  

Conclusion

Undoubtedly the new provision regarding additional directors in terms of section 161{1} of the Companies Act 2013 is an improvement as compared to earlier section 260 of the erstwhile Companies Act 1956, however certain clarifications from the Central Government would be welcome. This would be one of the most invoked law by the corporate world.