Retirement of Company’s Director by rotation

This following article will provide you a clear summary of appointment of first directors, Retirement of Directors by rotation and filing of consent and requirement of Director Identification Number with respect to sections 254, 255, 256 and 264 of the Companies Act, 1956. The first directors of the company are generally named in the Articles of the company.

Section 254 of Companies Act, 1956

retirement

Section 254 of the 1956 Act provided that if there was no provision in the articles for appointment of first directors then individual subscribers to the memorandum would become the first directors of the company. As per section 253 of the 1956 Act only an individual could act as a director. It was obligatory on the company to ensure that only an individual who was allotted DIN was appointed as a director.

Section 255 of the Companies Act 1956

Section 255 of the 1956 Act dealt with the appointment of directors and their retirement by rotation. The amendments in section 255(1) of the 1956 Act vide Companies (Amendment) Act, 1960 (relating to retirement by rotation) was based on the recommendations of the Companies Act Amendment committee, which stated that: “A suggestion was made that guarantee companies should be exempted from the operation of section 255. In Chambers of Commerce, trade associations, clubs and companies licensed under section 25, all directors generally retire simultaneously every year. A general provision may, therefore, be made by adding the following words at the beginning of section 255(1), unless the articles provide for the retirement of all directors at every annual general meeting. Prior to this amendment not less than two thirds the total number of directors of a public company or private company which was a subsidiary of a public company were required to retire by rotation. At every Annual General Meeting at least one third of the number of directors retired from amongst the directors liable to retirement by rotation. The directors to retire by rotation were directors who were longest in office and amongst those appointed on the same day, unless there was any agreement between them, were to be determined by lot. A director retiring by rotation was eligible to be reappointed and if the vacancy of the retiring director was not filled up by appointing any other person then the director retiring by rotation was deemed to have been reappointed unless certain specific circumstances as referred to in section 256(4) of the 1956 act were attracted.

Section 256 of Companies Act, 1956

Section 256 of the 1956 Act which dealt with directors retiring by rotation was amended by the Companies (Amendment) Act, 1965 which omitted words: or sub-section (3) of section 280” in sub-section (4)(b)(v) and sub-section (5) of section 256 of the 1956 Act. Later, the Companies (Amendment) Act, 1960, inserted explanation to section 256 of the 1956 Act.

Section 264 of Companies Act, 1956

Section 264 of the 1956 Act provided for filing of consent by the candidate to directorship. A person could act as a director only after filing with the Registrar his consent to act as a director (Section 264(2) of the Companies Act, 1956). The Companies (Amendment) Act, 1960 did away with the requirement of filing of consent by a candidate for directorship and required filing of such consent within thirty days of appointment. However filing of consent was not attracted in case of a director re-appointed after retirement by rotation, an additional, alternate director or director appointed in casual vacancy who was appointed as a director or as an additional or alternate immediately on expiry of his term of office or a person named as a director in the articles. A person was required to give his consent to the company before his appointment as a director and consent to act as a director was required to be filed with the Registrar within thirty days of appointment. Furnishing a declaration of not being disqualified from appointment was not statutorily mandated although the companies obtained such declaration as a good practice. The Companies (Amendment) Act, 1956 substituted the words ‘other than a person’ with ‘other than a director retiring by rotation or otherwise or a person’ in section 264(1) of the 1956 Act and also substituted sub-section(2) of section 264 of the Companies Act, 1956.

Every person proposed to be appointed as a director shall before such appointment furnish to the company his or her; (a) DIN, (b) a declaration that he is not disqualified from being appointed as a director and (c) his or her consent as per Rule 8 of the Companies (Appointment and Qualification of Directors) Rules, 2014 (Form DIR 2) to act as a director. Such consent may be furnished on appointment too. After he is appointed to the office of the director, he shall not as a director until the consent furnished to the company, is filed by the company with the registrar within 30 days of his appointment in Form DIR 12. Explanatory statement for appointment of an Independent Director should include a statement that in the opinion of the Board the person proposed to be appointed as an Independent Director satisfies the requirement of the Act. An Independent Director shall not be liable to retirement by rotation as per section 149 (13) of the 2013 Act. Further for the purpose of determining the number of directors shall not include Independent Directors. Filing of consent was necessary only in case of public companies and not applicable to private companies also.

First Directors of a company

Section 152(1) of the 2013 Act relates to first directors of the company and is a modified version of section 254 of the 1956 Act. Section 254 of the 1956 Act referred to “in default of and subject to any regulation in the articles” while section 152 of the 2013 Act refers to the Articles simplifier. This makes the drafting more concise and the option now available to companies is to name the first directors in the articles of association. If they do not do so, as per the deeming provision of section 152 of the 2013 Act, the subscribers who are individual shall become the first directors and the compliances i.e. filing of consent, DIN requirements etc. relating to directors will need to be ensured for such persons. This is a natural corollary will mean that in case the first directors are not named in the articles of association then the subscribers who are individuals need to necessarily have DIN. Unless the articles of association names a director, the first director in One Person Company shall be the member (in case of an OPC as per the rules only a natural person can be a member) until director or directors are duly appointed by such a member. In case of a One Person Company provisions of annual general meeting are not applicable (section 122 of the 2013 Act). A resolution is deemed to have been passed once:

  • It is communicated to the company
  • Entered in the minutes book and
  • Signed and dated by the member

The date shall be the date of the meeting for the purpose of the 2013 Act. So in a One Person Company a director would be deemed to be appointed once the minutes duly entered in the minute book are signed or dated by the sole member. Therefore until directors are appointed by the member in a One Person Company, such member shall continue to act as its directors.

Appointment of Directors in General meeting

Section 152(2) of the 2013 Act is a new provision. All directors except the first director, additional director, nominee director, alternate director and director appointed in casual vacancy shall be appointed by the company in a general meeting. Where the date of appointment of an additional director or director appointed in casual vacancy should be the date of appointment by the shareholders in the general meeting or the date of appointment by the Board will need to be clarified by the Central Government. It is also not clear as to whether the casual vacancy caused in the office of an Independent Director will be filled in by the Board under section 161(4) or will be required to be filled by the shareholders under section 152(2) read with section 150(2) and schedule 4 clause 4(2) of the 2013 Act. While cause 6(2) of schedule 4 of the 2013 Act refers to a period of one hundred eighty days within the vacancy must be filled up, the second provision to Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 empowers the Board to fill up any intermittent vacancy in the office of an independent director shall hold office up to the date up to which the director in whose place he is appointed would have held office if it had not been so vacated.

Director identification number

Section 152(3) of the 2013 Act corresponds to provision to section 253 and to section 266 B of the 1956 Act which provides that a person shall not be appointed unless he is allotted a DIN. The 2013 Act provides that a person cannot hold office as a director and cannot be appointed till such time allotment of Din is made by the Central Government. However, in the context of the 1956 Act, section 266(a) provided that a person could be appointed as a director if he had made an application for allotment of DIN and was awaiting the DIN to be allotted. Section 152(4) of the 2013 Act is a new provision and is consequential to section 152(3) of the 2013 Act. Since, a person shall not be appointed as a director unless he or she holds a DIN, the obligation to intimate the LLP company of DIN is on the person intending to be appointed as a director.

Consent to act as Director

A person appointed as a director shall not act as a director unless the following two conditions are satisfied.

  • He gives his consent to hold office as director
  • Such consent is filed with the Registrar within 30 days of appointment.

The 2013 Act consent may be given by the person appointed as director on or before such appointment. The filing of such consent with the Registrar is to be effected by the company within 30 days of such appointment in Form DIR 12 along with Form DIR 2, as provided under the Companies (Appointment and Qualification of Directors) Rules, 2014. In case of appointment of Independent director, there are some additional compliance requirements. Section 102 of the 2013 Act, requires explanatory statement for appointment of an Independent Director to include a statement that in the opinion of the Board the person proposed to be appointed as an independent director fulfills the conditions specified in the 2013 Act for such appointment . The explanatory statement shall also contain jurisdiction for choosing the person for appointment as an Independent director.

Retirement by rotation

Section 152(6)(a) and (b) of the 2013 Act is reproduction of section 255 of the 1956 Act with a minor change which makes it clear that retirement by rotation is not applicable to private companies unless the articles of association of the company specifies otherwise. As per section 2(71) of the 2013 Act, which defines a public company, a private company which is a subsidiary of a public company will be deemed to be a public company and hence will be required to comply with the requirement of directors retiring by rotation although the company may otherwise continue to be a private company in its Articles. Section 2(87)of the 2013 Act defines the term subsidiary and as per explanation (c) to the and section, the expression company includes a body corporate. However, Section 2 (71) of the 2013 act which defines the term subsidiary of a company and as Term Company refers only to companies incorporated under the provisions of the 2013 Act or under any previous company law the term subsidiaries will not include any body corporate incorporated outside India. Hence private companies incorporated in India which is subsidiaries or public companies incorporated in India which subsidiaries of public companies incorporated outside India will not be deemed to be public companies.  While the explanation to sub-section (6) of section 152 of the 2013 Act clarifies that the total number of directors for the purpose of determining directors retiring by rotation will not include Independent directors, by virtue of section 2(47) of the 2013 Act a director appointed under section 151 of the 2013 Act will not be deemed to be an independent directors. Rule 7(4) of the Companies (Appointment and qualification of Directors) Rules, 2014 states that a small shareholder director shall be considered as an Independent Director if he gives a declaration under section 149(7) and is eligible under section 149(6).

Reappointment of retiring directors

Section 152(7)(a) and (b) of the 2013 Act relates to automatic reappointment of the retiring director. Section 152(7) (a) of the 2013 Act provides that the general meeting shall stand adjourned to the same day in the next week if the vacancy of the retiring director is not expressly resolved not to fill up the vacancy. At the adjourned meeting the retiring directors shall be deemed to be reappointed except in the following cases:

  • Where the meeting has expressly decided not to fill up the vacancy.
  • Where the resolution for reappointment of retiring director has been put to vote and has been defeated
  • Where the retiring director has by notice in writing addressed to the company expressed his unwillingness to be reappointed
  • Where a resolution is required for such appointment
  • Where a resolution is required for such reappointment
  • Where a proposal for appointment of two or more directors by one single resolution as per section 162 is proposed for consideration at the meeting.

 A retiring director means a director retirement by rotation and hence an Independent director cannot be deemed to be reappointment after completion of his tenure.

Relevant Rules issued under Companies Act, 2013

Section 152 of the 2013 Act is to be read with Rule 8 of the Companies (Appointment and qualification of Directors) Rules, 2014. Rule 8 deals with the form in which the consent as required under section 152(5) of the 2013 Act is to be filed with the company and with the Registrar.

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