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All You Need to Know about Appointing Directors for Your Company in India

A director of a company is pretty much the brain of the business. The company operates under his management; therefore it is imperative that you appoint the right person for the job.

Appointing directors for your company shouldnt be done without spending enough thought. Directors are very crucial for the Success of a Company. This is the version of Indian Companies, especially Indian Companies Act, 2013

Now, there is no two ways about this.

Section 149 provides that every company must have a board of directors and that the directors must be real individuals and not persons created under legal fiction for example trusts or other companies.

A private company must have a minimum of two directors and a public company needs to have a minimum of three directors. That aside, an OPC can operate with just one director.

However, one of these directors need to have stayed in India for a minimum of 182 days in the previous year of his appointment.

Section 149(4) provides that every company must have a minimum of one-third of its directors who are independent directors.

There is a lot of pre-qualifications regarding independent directors, which you need to be aware of before you move ahead with their appointment.

But first, let's see how directors are to be appointed-

Appointment of First Directors

They are the ones who will run your company, first after its incorporation. Section 152 provides that the subscribers of the memorandum are the ones who will appoint the first directors.
  • Related Read: All You Need to Know about the Memorandum of a Company
If you are the subscriber to the memorandum of a company, you need to appoint them by making provisions of the same in the Articles of Association of your company.

If you fail to appoint any directors or do not appoint them, then you, along with the other subscribers of the memorandum shall be made the first directors of the company.

Note that once you become a director, you will be entrusted with a lot of responsibilities, as well.

However, the first directors will be in office as the directors only till the first Annual General Meeting of the company.

How to Appoint Directors

Now, Section 152 of the Companies Act, 2013 provides all about how directors should be appointed. And, it provides that directors must be appointed via General Meetings of shareholders.

Shareholders need to elect their preferred directors. However, only one director can be elected via one resolution as shareholders need to vote on each candidate individually.

In fact, in the case of Raghunath Swarup Mathur v. Raghuraj Bahadur Mathur, cited in (1966) 2 Comp LJ 100, it was held that when two or more directors are appointed via a single resolution, then the appointment shall be void and non-existent.

However there is a way to go around this.

Before electing directors, the shareholders in the meeting needs to unanimously resolve that they are going to elect more than one person via a single resolution.

Also, there needs to be a proper contract that provides for appointing the director.

Reappointment or Fresh Appointment after Directors Retire

Reappointment of Fresh Appointment of Directors in an Indian Company bound under Indian Corporate Law or Indian Companies Act, 2013 can be done by the Board of Directors or the Shareholders in a Shareholder Meeting

It has been provided under the Companies Act, 2013 that directors are bound to retire by rotation and a maximum of one-third of the total directors of the Company can be made permanent directors.

Now, when this happens, the shareholders via their general meeting needs to fill up the gap created. However if they want, they may choose not to fill up the gap in the board of directors.

If the shareholders choose to fill the gap, they can reappoint the outgoing directors or they can appoint fresh candidates to be directors.

If the shareholders do not do either, the meeting shall be deemed to have been adjourned. And, if they again do nothing in the next meeting, the outgoing directors will be deemed to have been reappointed.

Appointment by Minorities via Proportional Representation

This provision, which lies in Section 163 of the Companies Act, 2013 has been enacted to protect minority shareholders. Since theoretically, the majority can elect directors for all the board positions, this section serves to stop just that and provide the minority with proportional representation in the board of directors.

The company can prescribe via its articles of associations the manner in which the minorities of the company can vote for directors of their choosing. 

One of the procedures for the minorities to choose their directors is by cumulative voting.

For example, if the minority shareholders hold 10% of the share capital of the company, they have a right to choose 10% of the board of directors.

Another way of voting via proportional representation is by single transferable vote.

But what happens when a director suddenly retires?

Well, that issue has been the cause of a ton of controversies since decades. However, thankfully the issue has been pretty much resolved in the recent times. And, we'll talk about that in the next section-

Appointment when Seats of Directors Fall Vacant

Section 161 of the Companies Act, 2013 provides for the situation when a seat in the board of directors becomes vacant. This can occur for any reason whatsoever - the director may suddenly retire, or he may fall sick or he may become disqualified from continuing in the position of a director for any reason.

When such a vacancy occurs, the Company's articles will dictate how the vacancy will be filled. But when there is nothing in the articles which provides how the vacancy will be filled, the decision shall rest upon the board of directors. However, the Board of Directors need to make the decision at a Board meeting.

The newly appointed director will hold his office till the end of the tenure of the director, whom he is replacing.

In the case of Shailesh Harilal Shah vs Matushree Textiles Ltd, AIR 1994 Bom 20, it was held by the Bombay High Court that the Board of Directors could appoint a person as an additional director when the number of directors fell below the minimum permissible limit as per the Act.

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What if You Suddenly Need More Directors for Your Company

Well, these sudden requirements can be filled by the Board of Directors themselves. However, there needs to be a provision in the Articles of Association which enables them to make the call.

Now it is a known fact that the general power of appointing directors belongs to the shareholders. But, when the Articles also give power to the directors to appoint other directors due to exigencies, there arises a problem as it can lead to a tussle of power between the shareholders and the board of directors.

Now it has been settled that where it is expressly provided in the Act, for example the filling of casual vacancies, the directors have the prerogative to fill the gap; however when it comes to getting additional directors on board, the Articles will dictate as to who has the power to get other directors on board.

Therefore, if you want the shareholder general meeting to retain the power to select additional directors over and above the Board of Directors, you need to mention that in the Articles.

The Most Important Number When it Comes to Directors

Before you appoint a director, check if he/she has a Director Identification Number, or DIN, for short. It is basically a number that serves to identify directors and helps determine whether they are qualified to serve as directors or not.

A company needs to inform the Registrar of Companies or such other authority as prescribed by the Central Government, the DINs of all their directors within 15 days of getting that information.

If your company fails to provide the information even after the late filing period as given under Section 403, you will be liable to fines.

Therefore, you need to ask all appointed directors for their DINs as soon as they join.

And, don't worry, it is perfectly natural for new directors to not have DINs. Then, they need to apply to the Central Government to provide them with the number in the prescribed format. Once the application is made, the Central Government will provide the number to the director(s) within a month.

However, the Directors after making their application, can continue acting in their position. When the director receives his Director Identification Number from the Central Government, he needs to notify it to the company where he acts as a director.

Related Reads:

Disqualifications of Being a Director

Being a director requires a very high standard of responsibility. As such, Section 164 of the Companies Act, 2013 provides that a person can not be a director, if he has got certain features.

Here's what Section 164 provides -
1.     A person shall not be eligible for appointment as a director of a company, if —
a.     he is of unsound mind and stands so declared by a competent court;
b.    he is an undischarged insolvent;
c.     he has applied to be adjudicated as an insolvent and his application is pending;
d.    he has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the date of expiry of the sentence:
Provided that if a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of seven years or more, he shall not be eligible to be appointed as a director in any company;
e.     an order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force;
f.     he has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call;
g.    he has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years; or
h.     he has not complied with sub-section (3) of section 152.
2.     No person who is or has been a director of a company which—
a.     has not filed financial statements or annual returns for any continuous period of three financial years; or
b.    has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures 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 other company for a period of five years from the date on which the said company fails to do so.
3.     A private company may by its articles provide for any disqualifications for appointment as a director in addition to those specified in sub-sections (1) and (2):
Provided that the disqualifications referred to in clauses (d), (e) and (g) of sub-section (1) shall not take effect—
              i.        for thirty days from the date of conviction or order of disqualification;
             ii.        where an appeal or petition is preferred within thirty days as aforesaid against the conviction resulting in sentence or order, until expiry of seven days from the date on which such appeal or petition is disposed off; or
            iii.        where any further appeal or petition is preferred against order or sentence within seven days, until such further appeal or petition is disposed off.
If you have any questions, leave them down below, and we'll get back to you. And, if you liked this article, do give it a share.


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