Meaning of Retiring Directors

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Expressions “retiring directors”, “rotational directors” and “rotating directors” are frequently used synchronously to convey the same meaning. In Section 256 and section 257 “retiring director” means a director retiring by rotation. This refers to a director appointed by the company in general meeting and retiring by rotation at such meeting provided by section 256. Persons appointed as additional directors under section 260, persons appointed to fill casual vacancies under section 262, persons appointed as alternate directors under section 313 and directors appointed by the Central Government under section 408 are not “retiring directors” within the meaning of section 256. They must therefore comply with the provisions of sections 256 as well as section 257 where applicable. As provided by section 257 a person, who is not  a retiring director, shall be eligible for appointment to the office of director at any general meeting, if he or some members intending to propose him has, not less than fourteen days before the meeting left at the office of the company a notice in writing under his hand signifying his candidatures for the office of the director or the intention of such member to propose him as a candidate for that office along with a deposit of Rs.500, which shall be refunded to such person or to such member if the person succeeds in getting elected as a director.

Retirements of Directors on due date whether AGM held or not

As observed above directors required to retire by rotation at an annual general meeting, would cause to be directors on or before the date on which annual general meeting is held or required to be held, this view has been endorsed by the Department of Company Affairs in its Circular Letter No.9/1/58 P.R., dated 30-9-1958, wherein it laid emphasis that this was “the main sanction of ensuing regularity of annual general meetings” of the Companies. According to the Department where the retiring director actually continues in office beyond the date on which the meeting is due to be held, the invalidity of such continuance should be questioned in view of the decision of Madras High Court, referred to above.

Failure of Directors to retire by rotation and right to Remuneration

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Where directors required to retire by rotation at an annual general meeting fail to retire in view of the misreading or misinterpretation of section 256 or the articles or otherwise they vacate their office at the conclusion of that meeting and are not entitled to any remuneration after the last day on which the meeting ought to have been held. Similarly, where a director vacates office on failure to be re-elected and continues to act as such thereafter, remuneration payable to him ceases as from the date when he ought to have vacated office under the provisions of the act or the Company’s articles.

Re-Appointment of Retiring Director

Articles usually provide that a retiring director is eligible for re-appointment and he may offer himself for re-appointed. Where at the annual general meeting a director retires by rotation the company may fill up the vacancy by appointing the retiring director or some other person thereto [Section 256(3)]. There is nothing in the Act to provide that an ordinary resolution suffices to elect a director, but that is the normal practice. If a retiring director offers himself for re-election and members neither appoint someone in his place, nor resolve that the vacancy shall not be filed, nor reject the resolution for his re-appointment he shall be deemed to have been re-appointed as provided in section 256(4). There is no restriction on the number of times a retiring director may be re-appointed unless the articles expressly impose a restriction which they do not normally do.

Non-Rotating Directors not to exceed one-third

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The number of directors not liable to retire by rotation, i.e., non-rotating directors, cannot exceed one-third of the total number of directors of a public company [Section 255(1)]. Directors nominated by financial institutions giving loans to the companies and managing directors are usually and whole-time directors are at times appointed as non-relating directors consistently with the provisions of the Act applicable in the matter. Government has laid down guidelines for the appointment and the role of nominee directors of financial institutions on the Board of assisted companies.[The director nominated by public financial institutions constituted by the central act will not be taken into account for the purpose of determining the number of non-retiring directors]. Special directors appointed by the Board for industrial and financial reconstruction under section 16 of the sick industrial companies (Special provisions), Act 1985 and the directors appointed by the Central Government under section 408 are non-rotating directors. Where the number of non-rotating directors exceeds one-third of the total number of directors for the time being in office the proper course is to increase the total number of directors so as to bring the constitution of the Board to conform to two-third proportion of rotating directors as required by section 255(1)(a) .If the number increased goes beyond the permissible maximum under the articles of the company articles will have to be amended with the approval of the Central Government as required under section 259. An amendment of any provision relating to non-rotating directors contained in the articles, etc., will also require Government’s approval under section 268. The alternative is to make some of the non-rotating directors as rotating directors to conform with the provisions of section 255 by mutual understanding with the company, so that they get re-elected on their retirement by rotation.

Ascertainment of Directors retiring by rotation

Section 256(1) provides that at every annual general meeting subsequent to the first annual general meeting one third of the directors liable to retire by rotation, or if their number is not three or a multiple of three then, the number nearest to one-third, shall retire from office. Directors liable to retire by rotation shall be those who have been longest in office since their last appointment. As between the persons who became directors on the same day, those who are liable to retire shall be determined by lot. This is however, subject to any agreement among themselves or in default of any such agreement.[Section 256(2)]. At the first annual general meeting of a public company all the first directors (including subscribers to the memorandum of association) other than those who under specific provisions in the articles , consistent with the provisions of section 255(2) need to retire at the first annual general meeting shall retire at that meeting. It is open to a company to provide in its articles that all the directors are liable to retire by rotation or that all the directors shall retire at every annual general meeting.

Directors term of office

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When section 255(1) provides that one-third of the directors who are liable to retire by rotation at the annual general meeting of the company shall retire from office it implies that a director cannot normally hold office for more than three years. The duration of his office may, however, be extended on his reappointment as director as provided in section 256(3).  A director require to retire by rotation ceases to be the director after the date on or before which the annual general meeting is required to be held, whether or not such meeting is actually held.

One-third of Directors liable to retire by rotation

When section 256(1) provides for retirement of one-third of the directors at every annual general meeting (subsequent to the first-one) it does not apply in the case of an extraordinary general meeting. To determine one-third of the directors liable to retire by rotation the section expressly provides that if their number is not three  or a multiple of three, then the number nearest to one-third shall retire from office. Where the articles of the company contained such a provision and there were only two directors on the Board (other than managing directors being non-rotating directors) it was held that the article was inapplicable and neither of them was bound to retire. Where the articles provided that out of the total number of directors two directors would retire every year, it was similarly held that where in a particular year, it was similarly held that where in a particular year there were only two directors in office the above provision was not workable and hence none of them was liable to retire. Where the articles provided that a certain proportion of the whole number of directors should retire annually it was held that additional directors appointed under section 262 to hold office upon the date of the next annual meeting will not be included in ” the whole number of directors” . It was also held in an English case that a provision for determining the director to retire “by ballot” meant “by lot”.

When for determining one-third of the directors liable to retire by rotation section 256(1) provides for “the number nearest to one-third” it implies that any fraction less than one-half should be rounded off as one. On the language used in that section it is not permissible that the fraction contained in the one-third should be rounded off as one. To take an illustration, if seven directors of a company are directors liable to retire by rotation one-third of that number is two and not there. On the proper construction of the said section who directors must therefore, retire by rotation at the annual general meeting and such directors are to be determined in the manner provided in section 256(2).

When section 256(1) provides that one-third of the directors who are liable to retire by rotation shall retire from office, it imposes an obligation on those directors who are due to retire at the annual general meeting to retire at that meeting. The retiring director cease to be directors at the conclusion of the annual general meeting .

Automatic Retirement of Directors

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It is now well settled that where in any calendar year the annual general meeting of the company is not held as provided by section 166(1) directors who are liable to retire by rotation at the meeting as provided by section 256(1) and additional directors appointed under section 260 to hold the office upto the date of that annual general meeting shall vacate office on the last day on which the meeting ought to have been held as provided by section 166(1).In this connection attention may also be invited to the explanation to section 159(1), which provides that any reference in section to the day on which the annual general meeting is held or to the date of the annual general meeting shall, where the annual general meeting for any year has not been held, be constructed as a reference to the latest day on pr before which that meeting should have been held in accordance with the provisions of the  Act. If a company fails to hold an annual meeting as provided by section 166(1) the company as well as its officers cannot take advantages of its default , since that would amount to placing premium to mismanagement. The tenure of office of directors liable to retire by rotation cannot be extended by not holding the annual general meeting at which they are liable to retire by rotation and thereby cease to hold their office. They shall be treated as having vacated their office on the last day in which the meeting should have been held as required by section 166(1).

Failure to hold an annual general meeting may result in retiring directors vacating office automatically , having no one being appointed in their place. When a situation arises where no director remains in office and there is no effective Board to exercise powers of the directors, powers of management would be revert to the company in general meeting.

Section 255 and 256

Nothing contained in Sections 77,255,256 and 273 shall effect any provision in the Articles of the company for the election by ballot of all its directors at each annual general meeting if such company does not carry on the business except for profit or prohibits the payment of dividend to its members [Section 263 A]. This section applies to companies licensed under section 25. It gives statutory recognition to the practice of electing office bearing by ballot followed by clubs, chamber of commerce or other association registered by license under the Act as a limited company without the addition to its name of the word “Limited” or the words “Private limited”. In the case of companies limited by guarantee (e.g., clubs, chambers of commerce or other associations) rules of the company usually prescribe  a mode of  election of committee members by ballot  or any other manner. Such rules cannot, however, override the provisions of the Act or the company’s articles. In such cases the proper procedure would be to submit the results of such election for approval by the company at the annual general meeting . Without such approval the persons so elected cannot be said to be validly appointed.

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