Appointment of Nominee Directors by Debenture Trustees: Addressing Impediments under Section 164(2) of Companies Act, 2013

Aniket Patra 16 Aug 2025 1,476 Views 0 comment Print Company Law | Articles

Appointment of Nominee Directors by Debenture Trustees: Addressing Impediments under Section 164(2) of Companies Act, 2013

The primary role of a Debenture Trustee (DT) is to safeguard the interests of the debenture holders, a responsibility that becomes even more critical when the issuer company defaults in its payment obligations. The Companies Act, 2013, along with SEBI regulations and related circulars, empowers Debenture Trustees with several tools to discharge this responsibility. One such power is the right to appoint a nominee director to the board of the issuer company in the event of certain defaults.

Section 71(6) of the Companies Act, 2013, read with Rule 18(3)(e) of the Companies (Share Capital and Debentures) Rules, 2014, mandates that the Debenture Trustee shall appoint a nominee director in the event of certain defaults by the issuer company. This requirement is further echoed in Regulation 15(1)(e) of the SEBI (Debenture Trustees) Regulations, 1993.

In accordance with Regulation 15(1)(e) of the SEBI DT Regulations, a Debenture Trustee is required to appoint nominee director on the board of the issuer company under the following circumstances:

Two consecutive defaults in the payment of interest to the debenture holders;
Default in the creation of security for the debentures; or
Default in the redemption of debentures.

However, Debenture Trustees have encountered significant difficulties in the appointment of nominee directors on the boards of defaulting issuer companies.

A major obstacle arises from the reluctance of eligible candidates to accept such appointments, primarily due to the implications of Section 164(2)(b) of the Companies Act, 2013. This provision does not distinguish between executive directors and nominee directors for the purpose of disqualification.

Section 164(2)(b) of the Companies Act, 2013, states as follows:

“No person who is or has been a director of a company which has failed to repay the deposits accepted by it, or pay interest thereon, or to redeem any debenture on the due date, or pay interest due thereon, or pay any dividend declared, and such failure to pay or redeem continues for one year or more, shall be eligible to be re-appointed as a director of that company or appointed in any other company for a period of five years from the date on which the said company fails to do so.”

This provision results in a disqualification that extends to all directors of the defaulting company, including those who are appointed as nominee directors by Debenture Trustees. As a result, there is a strong disincentive for professionals to accept such directorships, even when acting solely in a fiduciary capacity.

To address this anomaly, SEBI had raised the issue with the Ministry of Corporate Affairs (MCA) following the recommendations of its Working Group. The matter was also included in the agenda of the SEBI Board Meeting held on December 20, 2022.

The Company Law Committee, in its report of March 2022, acknowledged the issue and favorably considered SEBI’s proposal. Paragraph 16.17 of the report recommended the insertion of a new proviso to Section 164(2), clarifying that the disqualification under clause (b) shall not apply to nominee directors appointed pursuant to nomination by Debenture Trustees registered with SEBI.

Despite the Committee’s favorable recommendation, the required amendment has not yet been incorporated into the Companies Act, 2013.

In view of the continuing challenges faced by Debenture Trustees in the appointment of nominee directors, it is essential that the proposed amendment to Section 164(2) of the Companies Act, 2013 be adopted without delay. The amendment is necessary to remove the existing unintended disincentive and to ensure effective representation of debenture holders’ interests in defaulting companies.

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