Appointment and Removal of Directors

Meaning of Directors and Board of Directors and their appointments 

On incorporation, a company becomes a legal artificial person but it cannot act by itself and consequently it has to depend upon some human agency to act in its name. The members have no inherent right to participate in the management of the company. A large sized company may have its members running into lakhs, who are dispersed all over the country and they even lack the expertise to manage the affairs of the company, which makes it impossible to give the management of the company in their hands. Therefore a specialized body of persons called as directors are appointed by the members to manage the affairs of the company. The directors must act as a body without improper exclusion of any of the directors. The directors collectively referred to as BOARD. The board is the managerial body constituted by the members to whom is entrusted the whole management of the company.

According to Section 2 (34) of the Companies Act, 2013, “Directors means a director appointed to the board of a company.”

According to Sec.2 (10) of the Indian Companies Act, 2013, “Board of Directors” or “Board”, in relation to a company, means the collective body of the directors of the company;

Appointment of Directors

Section 149 of the Companies Act, 2013, makes it obligatory on every public company to have at least three directors and on every other company to have at least two directors. The directors may be appointed in the following ways:

1. Appointment of First Directors (Sec. 152): First directors mean the director of the company who assumes office from the date of incorporation of the company. The first directors of a company may be named in its articles of association and if it is not mentioned, then the subscribers of the memorandum of association who are individual, shall be deemed to be the first directors of the company, until the directors are not appointed in accordance with Section 152.

In case of public company, if the article provides any share qualification, only such subscribers as possess the necessary share qualification shall be deemed to be directors. The articles at the time of registration may contain the names of the first directors until directors are appointed in the first general meeting.

2. Appointment of Directors by Members in the General Meeting (Sec. 152(2): Except for the first director, the subsequent directors are appointed by the company in the general meeting. Sec. 152(2) provides that not less than 2/3 of the total number of directors of a public company, or of a private company which is subsidiary of a public company must be appointed by the company in general meeting. These directors must be subject to retirement by rotation. The remaining directors of such a company and a purely private company are appointed by the company in general meeting

3. Appointment by Board of Directors: The directors are appointed in the general meeting by the members. But, the Board of Directors may also appoint the directors, in the following way:

a. Additional Directors: Section 161, of the Act, lays down that the Board may appoint additional directors if the article of association of a company empower the Board of Directors to do so. Such additional directors shall hold office only up to the date of the next annual general meeting. If the annual general meeting is not held, then such additional director vacates his office on the last day on which the annual general meeting should have been held in terms of Section 166. The additional directors are exempted from the requirement of filing consent to act as directors.

b. Casual Vacancies: Section 161 empowers the Board of Directors to appoint the directors in the casual vacancy which may occur due to any reasons like, death, resignation, insanity, insolvency etc of the directors. Such casual vacancy may be filled according to the regulations and procedure prescribed by the articles of association. A person appointed to fill a casual vacancy will hold office only till the date up to which the directors in whose place, he is appointed would have held office. 

c. Alternate Directors: The Board Meeting may be held at a time when a director is, absent for a period of more than three months from the state and in such a situation, an ‘alternate director’ is appointed. The Board of Directors can appoint the additional director in the absence of a director if so authorized by articles or by a resolution passed by the company in general meeting. The alternate director shall work until the original director return or up to the period permitted to the original director. The provision of the Act not applicable to the alternate director is as:

A. The appointment of an alternate director is not considered as an increase in the strength of the Board of Directors.

B. Alternate Directorship held by a person cannot be counted for the maximum number of directorship, which a person can hold.

C. An alternate director is not required to hold any qualification shares.

4. Appointment of Directors by Central Government: At least 100 members of the company or the members of the company who hold at least one-tenth of the total voting power, approach the Central Government for appointing a director to safeguard the interest of the company or its members or the public or to curb the oppressive and mismanagement of company’s affairs.

The term of appointment of the directors by the Central Government should not exceed 3 years and he may be removed by the Central Government for appointing another person to hold the office.

5. Appointment of Directors by Third-Parties if the Article provides (Sec. 152): A company may have ‘nominee directors’ which is permissible in a company if the articles of association gives power to such third parties to appoint their nominee on company’s board. Here the third party may be debenture holders, financial corporation, banking companies who have advanced loan to the company to safeguard their interests that the money is only used for the purpose for which it was borrowed.

6. Appointment of Directors By small shareholders if the article provides: The Small Shareholders, in case of a public company having:

i. A paid-up capital of five cores rupees or more, and

ii. one thousand or more small shareholders.

may have a director elected by such small shareholders in the manner as may be prescribed.

The directors are appointed by ordinary resolution i.e. through the majority of the shareholders. The minority of the shareholders does not get the opportunity to send representative in the Board of Directors. But, through proportional representative voting, the shareholders can get that opportunity.

7. Appointment of directors by professional representation (Sec. 163): The Directors of a company are generally appointed by simple majority. As a result majority shareholders controlling 51% or more votes may elect all directors and a substantial minority of 49% may not find any representation on the board. This section give power to the minority shareholders to elect directors through single transferable vote and cumulative voting. 

Removal of Directors

A director of a company can be removed by

(a) Shareholders (Sec. 169)

(b) The Tribunal (Sec. 242)

(a) Removal by shareholder: Section 169 empowers the company to remove a director by ordinary resolution before the expiry of his period of office except in the following cases:

(1) A director appointed by the tribunal under sec. 242;

(2) A nominee director of a public financial institution which is by its charter empowered to nominate a person as a director or to remove him notwithstanding any power contained in any other act;

(3) Director appointed in accordance with the principal of proportional representation, under section 163. This is to ensure that the directors appointed by the minority are not removed by a bare majority.

Special notice is required of any resolution to remove a director or to appoint somebody in his place at the meeting at which he is removed. On receipt of such notice, the company will immediately send a copy thereof to the director concerned. He may make any representation in writing and the copy of such representation may be sent by the company to every member. Where the copy of the representation is not sent to the members, in that case the director concerned may require the representation to be read at the meeting.

A vacancy created by the removal of a director as aforesaid can be filled up at the meeting at which he is removed provided special notice of the proposed appointment was also given. The director so appointed shall hold office till the date the director removed would otherwise have hold office. If the vacancy is not filled, it shall be filled up as casual vacancy except that the director removed shall not be re-appointed. The director so removed is entitled to claim compensation or damages for branch of contract.

(b) Removal by the Tribunal: On an application to the Tribunal for prevention of oppression and mismanagement, the tribunal may terminate or set aside or modify any agreement between the company and the managing director, or any other director or manager. On such termination, the director cannot serve the company in a managerial capacity for a period of five years from the date of the order of termination, without the permission of the tribunal. The director on removal cannot sue the company for damages or compensation for loss of office (Sec. 243).

Removal of a non-rotational director of a government company

Directors appointed by the state government as a nominee director can be removed by such government. The government is entitled to revoke the nomination as a matter of right, which flows from the articles of association. Revoking of the appointment by the government under the articles is not the same thing as removal of a director by the company under sec. 169. Hence, if the government revokes the nomination, there is no contravention of section 169.