Under the Companies Act, 2013, a vital aspect of corporate governance is the appointment of directors in a company. One of the significant provisions is the appointment of directors to replace those who retire in Section 152(6)(e). The relevance of Section 160, which covers the right of individuals not retiring as directors to represent the directors, is frequently questioned along with this. These provisions are described in this blog, and their interactions, as well as the practical implications for companies and other stakeholders.
Understanding Directors’ Retiring by Rotation
Not all directors are appointed in a public company. The Act provides for the rotation of directors as a way of making them accountable and sharing in the participation of shareholders. In Section 152(6), there are two-thirds of the aggregate directors of a public company who must be liable to retire by rotation.
This implies that one-third of such directors have to step down with each Annual General Meeting (AGM). But these directors may be re-appointed unless the company otherwise determines.
The principle of rotation guarantees that shareholders get new chances to judge the work of the board and re-elect or elect new directors.
Section 152(6) and (e) – Appointment in lieu of retiring director
The Companies Act, 2013, section 152(6)(e) is as follows:
- The company may fill the vacancy by appointing the retiring director or some other person thereto, at the annual general meeting at which the director retires as aforesaid.
This implies that in the event that a director retires on rotation, the company can choose between two options:
- Re-appoint the director retiring – This is widely used when the shareholders are content with the performance of the director.
- Replace him/her with someone else– Shareholders can bring in new skills or alter the board membership.
In case a vacancy is not filled and the AGM does not specifically leave the vacancy unfilled, the meeting will be adjourned. In the meeting that has adjourned, when the vacancy remains unfilled, then the retiring director is considered re-appointed unless there are special exceptions (such as the re-appointment resolution was previously voted down).
Therefore, Section 152(6)(e) provides continuity and flexibility to companies by providing them with the option of retaining experienced directors or hiring new leaders.
Section 160 -Right of any Person to represent on behalf of Directorships
Whilst under Section 152 the directors who retire by rotation are incorporated, Section 160 gives a chance to anyone (not the director who is retiring) to challenge the position of a director.
It states:
A director who has not retired may be elected a director during the AGM, provided he/she send a written notice of candidature at least 14 days before the AGM.
The notice should be accompanied by a deposit of ₹1,00,000 or any other amount as required. This money is returned in case the individual is elected as a director or obtains over 25 per cent of the valid votes.
Section 160 is intended to make the board appointment processes more democratic and to ensure that boards are not run as closed clubs with only incumbent members determining who remains. It gives the shareholders and other qualified people the authority to submit new candidates.
Section 152 (6) (e) plays off with Section 160
A practical question will be: Can Section 160 be applied when the retiring director is not re-appointed and another person is to be appointed instead?
The position is as follows:
- In the case of the retiring director being re-appointed, Section 160 is not applicable as it is automatic in the case of re-appointment as long as it has been endorsed by the shareholders.
- Otherwise, in case the retiring director is replaced by the appointing person, Section 160 would apply. By Section 160, the new candidate has to adhere to the new Section by filing a notice of candidature and deposits.
Exceptions under Section 160 – According to the Companies (Amendment) Act, 2017, the following are the exceptions of Section 160:
- Directorship in a private company.
- Independent directors.
- Directors appointed upon the recommendation of the Nomination and Remuneration Committee (NRC).
- Directors who have been appointed by the Board of Directors of the company.
Accordingly, in the vast majority of public companies, where a new individual is offered to replace a retiring director, Section 160 must be adhered to, unless it is exempted by the foregoing requirements.
Practical Example
Suppose that a publicly-traded company, XYZ Ltd., has Mr. By rotation a retiring AGM. The shareholders can make three options:
- Re-appoint Mr A – In the event of satisfaction of the shareholders, they pass an ordinary resolution that he is re-appointed.
- Appoint Mr B in place of Mr A -Mr B should not contravene Section 160 by failing to submit a notice of candidature and a deposit except where his name is proposed by the Board or NRC.
- Vacuity left unfulfilled -In case of no resolution passed, then the meeting is adjourned. Unless filled in by the meeting at which it is adjourned, Mr Unless there are exceptions, A is considered re-appointed.
This case demonstrates the practical interrelatedness between Section 152(6)(e) and 160.
Compliance Requirements
In the case of companies, one must make sure:
- Directors are rotated properly at each AGM.
- Introduction of Form DIR-12 to the Registrar of Companies (ROC) in order to be appointed or re-appointed.
- Keeping records of the directors and making updated disclosures under Section 184 and other provisions.
- Where new appointments are to be made as in Section 160, due notice, deposit and shareholder resolution should be undertaken.
Conclusion
Section 152(6) (e), which provides that directors retire and are then replaced by others pursuant to a provision in the Companies Act, 2013, along with the fact that Section 160 applies, constitutes a critical structure of the Companies Act, 2013. Section 152 provides continuity of the process by the rotation system, whereas Section 160 democratises it, allowing a new candidate to challenge to be a director.
In the case of public companies, adherence to these provisions is not only a legal obligation of the company but also a measure of enhancing corporate governance and shareholder democracy.
