Automatic cessation of Terms of Additional Director at AGM

Case Study on Automatic cessation of Terms of Additional Director on AGM under Section 161 of Companies Act, 2013

Summary: The Ram Kishan v. Kamal Narain Sharma (1995) case, upheld under Section 161(1) of the Companies Act 2013, establishes that an Additional Director’s tenure automatically ceases at the Annual General Meeting (AGM) unless shareholders reappoint them. The Delhi High Court ruled that no formal removal resolution is needed; the director’s term ends by default. This clarifies that Additional Directors are temporary appointees with no vested right to continue beyond the AGM, reinforcing the board’s authority to replace them beforehand. This principle ensures statutory compliance and clear understanding of Additional Directorships within corporate governance. This article delves into the factual matrix of the case, its legal implications, and the applicability of its principles under the Companies Act, 2013.

❖ Factual Matrix of the Case

i. The dispute revolved around the cessation of an Additional Director from the company’s board.

ii. Ram Kishan, the petitioner, was appointed as an Additional Director under Section 260 of the Companies Act, 1956.

iii. The respondents, including Kamal Narain Sharma, contended that Ram Kishan’s directorship automatically terminated at the ensuing AGM in the absence of a formal resolution for his reappointment.

iv. Ram Kishan challenged this stance, asserting that a formal removal resolution was imperative for his cessation from office.

❖ Legal Issue

The pivotal legal question before the Delhi High Court was:

Whether an Additional Director requires a formal removal resolution, or does their tenure end automatically at the next AGM unless reappointed?

❖ Delhi High Court’s Decision

The Delhi High Court adjudicated in favor of Kamal Narain Sharma, rendering the following key observations:

i. Automatic Termination of Office:

• • As per Section 260 of the Companies Act, 1956, an Additional Director’s tenure is inherently limited, and they automatically vacate office upon the conclusion of the AGM unless expressly reappointed.
  • There is no statutory compulsion for the company to pass a formal removal resolution.

ii. No Vested Right to Continue Beyond AGM:

• • The court reaffirmed that an Additional Director does not possess an inherent right to remain in office unless explicitly ratified at the AGM.
  • The Board is empowered to replace or remove an Additional Director prior to the AGM at its discretion.

iii. Reinforcing the Temporary Nature of Additional Directorship:

• • The judgment clarified that Additional Directors are temporary appointees and their tenure is strictly governed by the company’s Articles of Association and the statutory provisions.

❖ Provisions Under the Companies Act, 2013

The Companies Act, 2013 replaced the Companies Act, 1956, and the relevant provision governing Additional Directorship is now encapsulated in Section 161(1).

Section 161(1) of the Companies Act, 2013: Appointment of Additional Directors

Key Provisions:

• The Board of Directors may appoint an Additional Director, subject to authorization by the Articles of Association.
• The Additional Director serves only until the next AGM.
• If the shareholders do not pass a resolution for reappointment, the Additional Director ceases holding office by operation of law.
• The Board retains authority to remove or replace an Additional Director prior to the AGM without necessitating shareholder intervention.

Conclusion

The Delhi High Court’s ruling in Ram Kishan v. Kamal Narain Sharma (1995) elucidated that an Additional Director’s tenure concludes at the AGM unless expressly reappointed, and no separate removal resolution is statutorily required. The Companies Act, 2013, under Section 161(1), perpetuates this principle, thereby maintaining legal continuity in corporate governance.

This judicial pronouncement serves as a cornerstone for corporate entities, legal practitioners, and regulatory bodies, ensuring a coherent understanding of Additional Directorship and adherence to statutory compliance under the Companies Act, 2013.

****

Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com).

Related Posts:

Defectiveness In The Office of Additional Directors

Consequences on Non-Regularization of Additional Director

Analysing Law of Additional Director

Resignation of Director: Companies Act 2013 Procedure & Guidelines