Recommendations of Companies Law Committee for Directors

As we are aware that on 1^stFebruary 2016, Ministry of Corporate Affairs uploaded the report of Companies Law Committee on its website. In this post, we will discuss recommendations of the committee for the Directors and their meetings.

Provision relating to Resident Director:

The Committee felt that it would be more appropriate that in relation to the director’s stay in India during the financial year and not the calendar yearwith the requirement effective after a period of six months from incorporation.

Note:

1. as per this recommendation Newly incorporate Company can have resident director within 6 month of incorporation of Company.
2. Status of resident on the basis of Director’s stay in India during the financial year instead of calendar year.

Appointment of director by recommendation of NRC:

The Committee, recommends that in case of appointment of Independent Directors and Directors recommended by the Nomination and Remuneration Committee, the requirements of Section 160 ought to be dispensed with.

Note:

If Director is recommended by NRC then no need to follow the provisions of Section 160 like Notice of candidature, deposit of Rs. 1 Lac etc.

Alternate Director:

The Committee recommended that there should be a prohibition in the Act for appointing a director of a company as an alternate director in the same company.

Note: A director of company will not allow to appoint as alternate director in the same Company in the absence of other director.

Fill a vacancy caused by vacation of the office of any director:

Section 161(4) authorizes the Board of a public company to fill a vacancy caused by vacation of the office of any director before the expiry of his term, however subject to the AOA of the company. The Committee was of the view that this right should be available to the Boards of private companies as well.

Maximum No. of Directorship:

The Committee, therefore, recommended for excluding directorship in a dormant company for the purposes of the limit under Section 165.

Disqualifications from appointment as, and vacation of office of director:

The Committee recommended that the vacancy of an office should be triggered only where a disqualification is incurred in a personal capacity and therefore, the scope of Section 167(1)(a) should be limited to only disqualifications under Section 164(1).

Note:the office of all the directors in a Board would become vacant where they are disqualified under Section 164(2), and a new person could not be appointed as a director as they would also attract such a disqualification. There for restrict the scope of vacation of office u/s 167(1) upto disqualifications under Section 164(1).

Disqualification of 164(2) on newly appointed Director:

1. The Committee also recommended that a disqualification under Section 164(2) be only applicable to a person who was a director at the time of the non-compliance, and

1. in case of a continuing non-compliance, there should be a period of six months’ time allowed for a new Director to make the company compliant.
   

Note: If a company is defaulter u/s 164(2) and appoint new director then disqualification will be on only person who was a director at the time of the non-compliance. But newly appointed director have to make good all the non-compliance with in 6 month of appointment, if he fails to do so he will also count under disqualified u/s 164(2)

Filing of DIR-11:

The Committee felt that it would be appropriate if an Option of Intimating such resignation to the Registrar was given to the Director instead of making it mandatory. The requirement of mandatory filing by the company in the prescribed Form should continue. This would also facilitate foreign Directors.

Note: once this recommendation will approve filing of DIR-11 will be optional instead of mandatory.

Recommendation to do away with Requirement of DIN:

The Committee considered and recommended that necessary flexibility may be provided in the Act to do away with the requirement of DIN or provide an option to shift to AADHAAR or any other universally accepted identification number at a future date.

Independent Director:

Pecuniary relationship

The Committee recommended that, in view of the difficulties being faced to decide pecuniary relationship, the test of materiality for the purpose of determining whether pecuniary relationships could impact the independence of an individual to be an independent director may be introduced.

Pecuniary relationship of Relatives:

The Committee felt that the scope of the restriction on “pecuniary relationship or transaction” entered into by a relative be made more specific by clearly categorizing the types of transactions as provided under Section 141(3)(d).

Exemption from Appointment of Independent Director:

The Committee recommended in case of joint venture companies, wholly-owned subsidiaries, and dormant companies that fall within the purview of Section 455 of the Companies Act, 2013. to exclude such companies from the requirement of appointing an independent director. As there were not justifiable grounds to prescribe for appointment of independent directors in such companies to protect the interests of dispersed minority shareholders.

Note: Not mandatory to appoint ID by joint venture companies, wholly-owned subsidiaries, and dormant companies.

Time period for filing of casual vacancy:

The Committee recommended, time for filling up of the casual vacancy for appointment of Independent Director within three months.

Separate Meeting of ID:

The independent directors of the company shall hold at least one meeting in a year, without the attendance of non- independent directors and members of management

The Committee recommends describing Year as “Financial Year”.

(Author – CS Divesh Goyal, ACS is a Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com)