During the year 2020, due to the outbreak of COVID-19, one of the issues in abiding by the Companies Act, 2013 (Act) has emerged unprecedentedly because the circumstances were so crucial that very few people were able to have noticed the issue. As we all know, the ROCs have allowed a blanket extension of AGMs for the year 2020 to Companies falling within the respective jurisdictions without requiring them to file an application for the purpose in Form GNL-1. The problem emerged is, many Additional Directors appointed on the Boards found their office is defective.
As per the provisions of Section 161(1) of the Act, an Additional Director holds appointed by the Board of Directors, shall hold office upto:
1. the date of the next AGM, OR
2. the last date on which the AGM should have been held,
whichever is EARLIER.
That means, if a person is appointed as Additional Director after the AGM of 2019 and before AGM of 2020, will hold office upto the date of AGM to be held within the time limit under Section 96, or if the Company is unable to hold AGM within the time limit, the office of the Additional Director stand ceased on the date of expiration of the time limit.
For example, the AGM of 2019 was held on 30th September, 2019, as per Section 96, AGM must be held within 15 months from the date of last AGM or 6 months from the closure of financial year i.e due date of AGM will be 30th September, 2020. The Additional Director if appointed shall hold office upto 30th September, 2020 because of the wordings “last date on which the AGM should have been held, whichever is EARLIER”. Even if a company seeks extension of time limit for holding AGM and is allowed by the ROC, the Additional Director’s office stand ceased on the original due date and not on the extended due date, and the company should file Form DIR-12 to give effect of cessation. It’s very clear that legislative intent is to restrict the continuance of office of Additional Directors till the original due date only and not beyond.
Interestingly, in the 1956 Act, the Additional Directors could hold office till the actual date of AGM whenever held, whether within time limit or after the time limit with ROC approval, the actual date when AGM is held, that date shall be the last date. The text of Section 260 of the 1956 Act is produced as follows:
260. Additional Directors
Nothing inSection 255, 258 or 259 shall affect any power conferred on the Board of Directors by the articles to appoint additional directors:
Provided that such additional directors shall hold office only upto the date of the next annual general meeting of the company;
Provided further that the number of the directors and additional directors together shall not exceed the maximum strength fixed for the Board by the articles.
Clearly there is a lot of difference in the time duration for which Additional Directors could hold the office in Section 161(1) of the Companies Act, 2013 & the Section 260 of the Companies Act, 1956.
On & after 12th September, 2013, the notification date of Section 161(1), the appointments of Additional Directors regulated as per the provisions of said Section. Now, during the year 2020, many companies were not able to hold AGMs within the time frame prescribed by Section 96 and they held AGMs after their respective due date. The companies having Additional Directors on their Boards were not able to continue till the actual AGMs held after due dates. This led to a situation that, on the due dates of AGM the offices of Additional Directors were ceased by operation of law in terms of Section 161(1) and companies seeking regularization faced this problem.
Few implications are mentioned below:
1. The Additional Directors stand ceased on the due date of AGM for which Form DIR-12 has to be filed to give effect of cessation in the office of Additional Directors with effect from the due date of AGM.
2. If appointment made in the AGM as regular director in AGM that also need to be filed in Form DIR-12,
3. In case the time gap between the due date of AGM & actual date of AGM is less than 30 days, single Form DIR-12 for reporting the cessation & appointment as mentioned in points 1 & 2 above.
4. If the time gap between the due date of AGM & actual date of AGM is 30 days or more then separate Form DIR-12 is to be used to give effect for cessation & appointment as per the instruction kit of Form DIR-12.
Many companies, who required to have Independent Directors under Section 149(4) read with Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014, and who inducted the Independent Directors through Section 161(1) are quite affected as their composition of Board is disturbed during the time between the due date of AGM & actual date of AGMs.
All the concerned are advised suitably to file the correct particulars in Form DIR-12 to be filed for regularization of Additional Directors in the year 2020.
(The author of this article is CS Tejas Patel, Practicing Company Secretary, and can be contacted at [email protected])