Unveiling the Power of Retirement by Rotation: A Catalyst for Board Continuity and Fresh Perspectives!

Unveiling the Power of Retirement by Rotation: A Catalyst for Board Continuity and Fresh Perspectives!

Introduction:

Retirement by rotation is a mechanism designed to introduce periodic changes to the composition of a company’s board, allowing for the infusion of fresh perspectives, diverse expertise, and new talent. This provision, outlined in Section 152(6) and (7) of the Companies Act, 2013, aims to strike a balance between continuity and innovation in board leadership.

In this article, we will delve into the intricate details of the retirement by rotation provision, focusing on an intriguing aspect: directors who are not liable to retire by rotation. Understanding the exceptions to this requirement is essential for comprehending the intricate dynamics of corporate governance and the varied roles different directors play within an organization. So, let us embark on a journey through the legal nuances and exceptions that define directors who are not subject to retirement by rotation, exploring the relevant provisions.

1. Directors’ Retirement by Rotation: A Necessity for Public Companies

The Companies Act, 2013 emphasizes the retirement by rotation for public companies.

To ensure a balance of experienced and fresh directors, at least two-thirds of the directors of a public company must be subject to retirement by rotation, unless the articles of the company specify the retirement of all directors at every annual general meeting.

2. Appointment of Directors by the Company in General Meeting

The directors retiring by rotation are appointed by the company in a general meeting.

This ensures that the shareholders have a say in the appointment of directors, allowing them to participate actively in shaping the company’s leadership.

3. Retirement of Directors by Rotation at Annual General Meetings

At the first annual general meeting following the appointment of first directors, and in subsequent annual general meetings, one-third of the directors liable to retire by rotation will step down from their positions.

If the number of directors is not a multiple of three, the closest number to one-third will retire.

4. Determining the Directors to Retire by Rotation 

Section 152(6)(d) outlines the method of determining the directors to retire by rotation. The directors who have been longest in office since their last appointment will retire. 

If multiple directors became directors on the same day, the determination will be made by drawing lots, unless they have made an alternative agreement among themselves.

5. Filling the Vacancies: Reappointment or Appointment of Directors 

When a director retires by rotation, the company has the option to fill the vacant position by reappointing the retiring director or appointing someone else. 

This provides flexibility for the company to retain experienced directors or bring in new talent to contribute to the board’s composition and expertise.

6. Vacancies Remaining Unfilled: Adjourned Meetings

Section 152(7)(a) addresses the scenario where the vacancy of a retiring director is not filled at the annual general meeting. The meeting will stand adjourned to the same day in the next week, at the same time and place.

The purpose of the adjournment is to give the company another opportunity to fill the vacant position.

7. Reappointment of Directors at Adjourned Meetings 

If the vacancy remains unfilled after the adjourned meeting, the retiring director is considered re-appointed, unless specific conditions apply. 

8. Exceptional Circumstances for Non-Reappointment (Section 152(7)(b)):

In certain situations, the retiring director may not be automatically re-appointed at the adjourned meeting. 

Exceptions include situations where the resolution for reappointment is put to the meeting and lost, the retiring director expresses unwillingness for reappointment, or the director is not qualified or disqualified for appointment.

9. Directors not liable to retire by rotation 

Certain directors are not subject to retirement by rotation in accordance with the provisions of company law. These directors are exempted from the requirement to retire by rotation, providing flexibility and continuity in their roles within the company.

• Independent Director 

Independent Directors are excluded from the provision of directors liable to retire by rotation. The explanation to Section 152 (6) specifically excludes Independent Directors from being included in Total number of Directors liable to retire by rotation.

Further, pursuant to section 149 (13), which provides that the provisions of sub-sections (6) and (7) of section 152 in respect of retirement of Directors by rotation shall not be applicable to appointment of independent Directors.

• Small Shareholder Director

The appointment of a Small Shareholder Director is specifically exempted from retirement by rotation. Rule 7(5) of the Companies (Appointment and Qualifications of Directors) Rules, 2014, states that such directors shall not be liable to retire by rotation.

• Nominee Director

While the definition of a Nominee Director does not explicitly exempt them from retirement by rotation, certain legislations governing Public Financial Institutions state that the nominee directors appointed by these institutions shall not retire by rotation and he shall hold office at the will and pleasure of the Nominating Institution. It is the behest of the institution that the appointment can either be withdrawn or substituted.

Considering the overriding nature of the legislations concerning the appointment of such directors it can be stated that they cannot be subject to retirement by rotation. However, nominee directors appointed based on agreements with companies or subject to any such provisions in articles may still be subject to retirement by rotation.

• Additional Director

The appointment is typically made to fill a vacancy urgently and is valid until the next annual general meeting when it is regularized. An additional director appointed by the board is therefore not includable in the list of directors liable to retire by rotation.

• Alternate Director:

Alternate directors are not considered for retirement by rotation. Automatic re-appointment applies to the original director, not the alternate director.

• Executive Director (Managing Director and Whole-Time Director) 

MD and WTD are appointed for a particular term. While the Companies Act does not explicitly exempt Managing Directors (MD) and Whole-Time Directors (WTD) from retirement by rotation, it is common practice for large corporates to specifically exclude them through their terms of appointment or articles of association. In the absence of such an exclusion, they may be liable to retire by rotation.

• Director appointed for a casual vacancy until the next AGM

When a director resigns, dies, or becomes incapacitated, the board has the authority to fill the vacancy. The person appointed to fill the vacancy serves until the completion of the term of the director in whose place they were appointed and is not considered in the number of directors liable to retire by rotation.

• First Directors

The first directors hold their offices until the members appoint directors as per the provisions of Section 152. Once regularized/ appointed at the first AGM of the Company, they shall be liable to retire by rotation at subsequent AGMs.

Usha Chopra v. Chopra Hospital (P) Ltd., (2006) 130 Comp Cas 483 (CLB)

In this case, the Court held that incorporation makes subscribers the first directors of the companies. The first directors, howsoever appointed, hold offices only up to the date of the first Annual General Meetings of the companies.

• Any director appointed by any Tribunal 

Any director appointed by any Tribunal shall not be liable to retire by rotation.

10. Illustration: 

In the given situation, let’s determine which three directors are liable to retire at the Annual General Meeting (AGM) based on the provided criteria.

Total Strength | 21

Total Number of Directors (excluding exceptions) | (21-10) = 11

• To calculate 2/3rd of the total number of directors (excluding exceptions) 11 (total directors) * 2/3 = 7.333

Since we need to round off to the next number, we have 8 directors are to be considered for retirement by rotation.

• Next, we determine the number of directors retiring at each AGM, which is 1/3rd of the total number of directors retiring by rotation. 1/3 * 8 = 2.666

Rounding off to the next whole number, we get 3 directors shall retire at every AGM.

To determine the three directors liable to retire at the upcoming AGM, you need to follow these steps:

• Identify the directors with the longest office tenure by comparing their dates of appointment.
• If multiple directors were appointed on the same day, conduct a random selection (draw of lot) to determine the order of their retirement.
• Based on the office tenure and the FIFO (First-In, First-Out) method, select the three directors who will retire at the AGM.

By following these steps, you can determine the specific directors who will be liable to retire at the upcoming AGM based on their tenure and the FIFO method.

Conclusion:

Retirement by rotation of directors under the Companies Act, 2013 plays a vital role in ensuring the dynamic functioning of public companies’ boards. This provision allows for the regular infusion of new ideas and perspectives while maintaining the experience and expertise of existing directors.

By involving shareholders in the appointment and reappointment process, the Act enhances transparency and accountability, promoting good corporate governance in the Indian business landscape. By following a systematic process of retirement, rotation, and reappointment, companies can strike a balance between experience and fresh perspectives, fostering effective governance and decision-making.

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Author is a Qualified Company Secretary, with over four years of comprehensive experience and knowledge in navigating complex Act, Rules and Regulations, including but not limited to The Companies Act, 2013, FEMA, LODR, PIT, SEBI ICDR and more. With a strong passion for law and ongoing pursuit of an LLB degree, possess a comprehensive understanding of legal principles and practices. Author can be connected at [email protected].

Disclaimer: The information provided in this article is for general informational purposes only and does not constitute legal advice. For legal advice, please consult with a Qualified Company Secretary familiar with the relevant laws and regulations. I make no representations or warranties of any kinda, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the article or the information contained in it.