The appointment and regularization of the directors determine the fate of a company in the complex world of the corporate governance and management. Among such roles, “Additional Director” is prominent, often appointed after the initial board formation of a company.
This Article elaborates upon the complexities and procedures pertaining to the appointment and regularization of Additional directors with specific regard to Section 161(1) of the Companies Act, 2013.
Introduction
Usually, a director is appointed in the General Meeting of the Company. But at times, there may arise a situation wherein a director needs to be appointed urgently and then in such situations, the Board cannot afford to pass it through the general meeting first for its appointment because it would take a lot of formalities, thus leading to delays in its decisions.
Section 161(1) of the Companies Act of 2013 provides that by the company’s Articles, the Board of Directors can appoint any person other than those who have failed to get appointed in a general meeting as an additional director.
Know about Additional Director and its Role
An Additional director is a person who gets appointed by the board of directors of a company after its formation. He can be appointed by a special board meeting or at the time of annual general meeting.
An additional director on a company board is not part of the board, but an appointment made by either a member of the public or by shareholders. Such an individual need not be a company employee but rather a member of society who possesses some experience in his or her area of responsibility. The corporate executives and the field’s experts often form additional directors.
An additional director enjoys the same capacity as other directors of a company and engages in the management and decision-making of a company.
Mandatory Requirements
- No appointment as an additional director can be made of any person who does not secure his resolution to appoint him as a director getting passed in the previous general meeting of the shareholders.
- The AOA of the company shall authorize the Board of Directors to appoint an Additional Director.
- The total number of Directors in the Company shall not exceed the limit after the appointment of an Additional Director.
- The Additional Director, who will be appointed, shall have an Active DIN.
Qualification and Number of Additional Directors
- It can therefore be seen that under the provisions of the Act no educational qualification is required to meet in order to become an additional director. Nevertheless, the proposed director should not be regarded as disqualified from being a director as provided by section 164 Companies Act.
- Also, they did not fail to get appointed as a director in the same company by the shareholders in a general meeting.
- The total number of directors and additional directors together should not exceed the number stated in the Articles of Association.
Powers and Obligations
Although the appointment is temporary, an additional director has the same rights as a director. Further, he is under the same liabilities and disabilities as that of a director. He also has a right to become a permanent director at the Annual General Meeting.
The powers should be exercised by the additional director in the best interest of the company and its shareholders. The job is to advice and counsel management so that they can make choices that benefit shareholders. Conflicts of interest that can influence a company’s operations or decision-making process can also be avoided with its assistance.
Term/duration of an Additional Director
The term of an additional director is till the next annual general meeting or last date when the annual general meeting ought to have been held, whichever is earlier.
Failure on the part of a company to conduct its annual general meeting in time cannot form any excuse for extending endlessly the tenor of an Additional director. If for any reason, the AGM is not conducted, he has to vacate office on the last date on which the AGM ought to be held as required by the Act.
Appointment of Additional Director
The appointment of the additional director is guided by Section 161(1) of the Companies Act 2013, which states the following:
The Articles of Association of the Company give the Board of Directors the authority to designate any individual as an Additional Director at any time.
If a person was not appointed as a director in that company in any of the prior resolutions, then Section 161(1) restrains that person from being appointed as an Additional Director of that company in future. This restraint is supposed to prevent a person from entering the Board room via the “back door” by the civility of the Board, where he has failed to obtain the mandate of the shareholders.
It, however, does not restrain the individual from becoming an Additional Director in another company where no such resolution was brought into place. The law does not act as a bar in the Board of directors’ power to nominate an Additional director in the role of an independent director.
The right of the shareholders to appoint a director is a very precious right. This right needs to be exercised cautiously and regularly in the interest of the company. The appointment of an additional director has to be approved by shareholders and cannot be delegated.
Procedure for Appointing an Additional Director
The process of making an appointment of an additional director is governed by provisions under the Companies Act 2013 and requires close attention to legal and procedural steps. Below is a detailed procedure to ensure smooth compliance with the appointment:
Identify the Need
The first action will be identifying the required expertise or support at the level of the board. Whatever the technical or strategic form that it is required will definitely be established.
Verify the Articles of Association
Before doing that check the company’s Articles of Association to ascertain if they entitle the board of directors to appoint extra directors, if they do not a special resolution at a general meeting will have to resolve to alter the AoA.
Identify the Candidate
Choose a suitable person for the role of an additional director. The candidate should comply with the requirements under the Companies Act 2013, not be disqualified under Section 164, and hence, should not be suffering from undischarged insolvency, any conviction, etc.
Obtain Consent
The proposed candidate should give his written consent to become a director as provided for in Section 152(5) of the Companies Act. Before finalizing the appointment, the identified candidate for the additional director position must provide explicit consent. This will prevent later misunderstandings.
Board Meeting
Call a board meeting through a notice as stipulated in Section 173 of the Companies Act and the company’s internal policies. The agenda should have the appointment of an additional director.
Board Resolution
Pass a resolution to appoint the additional director at the board meeting. The resolution shall include details of the appointment and terms of engagement as additional director.
Filing of Form DIR-12 to the Registrar of Companies
The corporation must submit Form DIR-12 to the Registrar of Companies within 30 days of being appointed. The following are to be attached to the DIR form-
- Copy of the resolution approving the appointment.
- Consent letter from the nominated director.
- Declaration of qualifications, if any.
Communication to Stakeholders
Report the appointment in the company’s next annual report or in a general meeting, if required. List companies report to the Stock Exchange(s) concerned subject to listing regulations.
Regularisation of Additional Director
An additional director’s term in a company is up to the next Annual General Meeting but can be regularized after shareholder approval. The Board can recommend the director for a regular director without complying with section 160 of the Companies Act, 2013.
To regularize the appointment of the additional director as a full Director of the company, the specific Ordinary resolution must be passed at the Annual General Meeting.
However, if the director intends to appoint themselves or a member proposes him, they can give notice to the company under section 160 of the Companies Act, 2013. Appointment will follow the prescribed procedure.
Conclusion
The role of the additional director is of great importance to corporate affairs strategy. A more versatile approach to operational needs can be also backed by law and procedures, as seen in Section 161(1) of Companies Act of 2013. Appointed directors are a great asset to the company as they help implement effective governance, enhance the quality of decisions made and guarantee management during tough times.
Nonetheless, there are rules which have to be followed and where necessary the Memorandum and Articles of Association should be amended within legal constraints. In today’s fast, competitive business world, proper appointment at the right time empowers companies to overcome obstacles and lay the strong groundwork for sustaining growth and prosperity.
References
The Companies Act, 2013 (Act No. 18 of 2013)
The Companies (Appointment and Qualification of Directors) Rules, 2014
