Position of private companies

In the case of a private company which is not a subsidiary of a public company, the articles may provide for the appointment of all or any of its directors in such manner as may be provided therein. It is not necessary that any of them should be appointed by the company in general meeting. But where the articles do not provide otherwise, the directors are to be appointed in general meeting. In view of section 152(2) of the 2013 Act, it is necessary that the directors be appointed by the company in general meeting.  Note that in the case of a private company, the provisions of sub-section (1) of section 225 of the 1956 Act relating to retirement of directors have no application and none of its directors need retire by rotation in the proportion of one-third or in any other proportion. Such company may make its own provision as regards retirement of its directors. But this exemption does not apply to private banking companies as per section 49 of the Banking regulations Act, 1949. In case of a private company, section 255(1) of the 1956 Act only provides that the directors have to be appointed in a general meeting. The sub-section contains no provision for retirement of any director periodically. Retirement of the director of the company therefore mainly depends wholly on the provisions contained in the Articles of Association of the company and in the absence of any such provision the directors are entitled to continue until removed under section 284 of the 1956 Act.

Appointment versus assignment

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The Supreme Court has made a distinction between “assignment” and “appointment” and held that where in the case of a private company a managing director who was holding his office for life and was empowered by the articles to appoint a successor, appointed by will one G to succeed him as managing director after his death, the “appointment” of the successor did not come within the prohibition of section 312 of the 1956 Act. The Supreme Court carried: “The section [section 312 of the 1956 Act] provides of assignment of his office by a director”. The phrase “his” would mentions that the office contemplated was one held by the director at the time of assignment. An appointment to an office can be completed only if the office has the appropriate vacant. It is legitimate, therefore, to infer that by using the words “his” the Legislature indicated that an appointment by a director to the office which he previously held but did not hold at the date of the appointment was not to be included within the word “assignment”.

Private companies need not have rotational directors: First directors to continue

Although this departmental view was issued under the 1956 Act, the view of the Government holds good under the 2013 Act as the provision under the 2013 Act on this subject is similar to that under the 1956 Act. In the instant case, article 111 of the articles of association of the Hotels Company and Freight company provided for and appointed the appellant as one of its first directors. Under section 256 of the 1956 Act read with section 26 thereof, such an article may be held to prescribe, and constitute a regulation. This article, in our view, constituted an exception to the general rule laid down under section 255 of the 1956 Act. This article also did not provide for retirement or termination of office of such first directors at any point of time. Accordingly, in our view, as long as the said two companies continued to be private companies and after their amalgamation remained a private company, there was no question of retirement of the appellant from his office as a director or such office coming to an end. We are unable to accept the interpretation of sections 255 and 256 of the 1956 Act, as contained in this so called circular is an excerpt from Company news and Notes, presumably a journal. In any event, this document is not a contemporaneous exposition or interpretation of sections 255 and 256 of the 1956 Act. As such, this document cannot be treated I the same manner as a clarification or exposition issued by a competent authority. In any event, the said document cannot be a conclusive exposition.

Total number of directors

This does not mean the maximum number fixed by the articles, but only the total number for the time being appointed as directors. If, for instance, the articles of a company provided that number of directors should not be less than three or more than ten, and if the company actually functions with only six directors, at least two-thirds of these six must, according to the present section, be directors retiring by rotation, and the others may be appointed in any other manner provided by the articles, such as nomination by the managing agent, if any, or otherwise. If the Board of Directors is not constituted so as to conform to the requirements of this section that at least two-thirds of the total number of directors, should be directors , should be directors retiring by rotation and appointed by the company in general meeting , it will not be a legally constituted Board competent to carry on any business, and its proceedings will be vitiated on that ground, and the protection given to acts of individual directors by section 290 of the 1956 Act (now section 176 of the 2013 Act), cannot possibly extend to acts of a Board not validly constituted.

The only qualifications as regards this requirement are that where government directors are appointed or directors are nominated by financial institutions they are not to be taken into account for reckoning the two-third proportion. Under the 2013 Act, where directors are appointed under section 242(2)(k) of the 2013 Act, if the Tribunal so directs or directors are nominated by financial institutions they are not to be taken into account for reckoning the two-third proportion. Under the 2013 Act, the total number of directors for the purpose of determining directors retiring by rotation shall not include Independent directors whether appointed under the 2013 Act or any other law. However directors appointed under section 151 of the 2013 Act would not be excluded while calculating directors retiring by rotation as the definition of independent Director under section 2(47) of the 2013 Act, covers only Independent Directors appointed under section 149 of the 2013 Act.

Disqualification of Company’s directors according to section 274(1) (g) of Companies Act, 1956

Section 152(4) of the 2013 Act can be compared with section 274(1)(g) of the 1956 Act and the rules related to the said section.

Disputes as to directorship, a matter of civil jurisdiction

Whether a person has been properly appointed as a director or whether he should have retired by rotation or whether he should be restrained from acting as a director, all these are the subject-matters of a suit in the ordinary Civil Courts. The matter, however, cannot be raised by a person who has no concern with the company.

Appointment of nominee directors

If any financial institution or other creditor is, by arrangement or agreement with the company, given right to appoint or more directors, such directors will have to be appointed only out of the remaining one-third of the total number of directors. If, for any reason the non-rotational directors have to be increased, the only way to do it without contravening the requirement as regards the two-third proportion of rotational directors is to have the total number of directors so increased as to bring the constitution of the Board to conform to that proportion. If the company’s articles provide for the appointment of directors by recommendation of the shareholders in general meeting, a contract by which the company purports to confer the rights on any other person to make appointments to the Board in any other way is invalid. The company can enter into a valid contract enabling third parties or some shareholders or creditors or debenture holders to appoint directors, provided the memorandum and the articles permit such a contract. The company is compelled to accept the appointment unless the appointee is unfit to act as a director, he has conflicting interests.  Alternatively, the contract may empower the third party to nominate a person as a director and provide that the company shall appoint the nominee to the Board.

Nomination agreement among members embodied in articles

The articles of association of a company given that “so long A and or B (the latter being the plaintiff in this case) and his associates held not less than 10% of the paid-up equity capital, he shall have the right to nominate up to 4 directors”. It was held that this could not be taken to mean that if A and B and the associates of either, all put together would come up to 10%. B could nominate 4 directors without A joining him, but because the shareholding of B and his associates was less than 10% he could not exercise the right of nominating himself and his sins as directors. There was a term in the articles of association that a shareholder holding a specified combination of shares would be entitled to remove directors so appointed. After appointing directors, the shareholder in question ceased to hold the requisite shares. No other shareholder acquired the specified combination of shares. It was held that there was an implied term that such directors would vacate office when there was no longer any shareholder with a shareholding appropriate to authorize their appointment.

Nominate agreement between sellers and purchasers of shares

A clause in an agreement between sellers who are shareholders of a company and the purchasers of the shares of the company from the sellers provided that the sellers shall cause at least 4 directors of the company to resign and to get nominees of the purchasers to be appointed to the Board of the company. It was held that the clause did not affect the provisions of sections 255 and 256 of the 1956 Act governing rotation of directors.

Jurisdiction for dispute relating to appointment of directors

The circumstance of the case had brought about competing jurisdiction. The dispute related to appointment of directors in certain English companies in a group. There was the shareholders agreement whereby the parties submitted to jurisdiction of Geneva courts. The question arose whether that submission had become displaced. The court said that the dispute was about the composition of the Board of the first defendant company. Thus, the subject matter of the dispute was a question concerning the internal management of the company, or more specifically, concerning the composition of one of the organs of the company. That interpretation also accorded with practical convenience, and with the reasonable expectations of those involved, and also issues of internal management which arose who should be admitted to Board meetings, who should approve the accounts and who should be on the register of directors, should be decided by the courts in whose jurisdiction the company had its seat. The mere fact that there appeared to be no live issue of English company law did not change the fact that the subject-matter was the composition of one of the main parts of the company and, therefore, (at least prospectively), the due date of decisions of the company. In order to, the Judge was correct the errors to hold that the English court had jurisdiction.

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