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Is Nominee Director liable to retire by rotation? - MMJC
Introduction.
Companies Act 2013 (‘the Act’) provides for management of companies by the board of directors on behalf of shareholders. The Act also provides for appointment and retirement/resignation of directors. Generally speaking, all the directors are appointed by shareholders or even if appointed by board, then approved by the shareholders at general meetings. The only exception to this rule is, appointment of nominee director.
As per explanation to sub-section (7) of section 149 of the Act, Nominee director is a director who is appointed by the board on the recommendation of a financial institution, government or any other person to represent his interest[i]. Further as per sub-section (3) to section 161 board of directors have the power to appoint nominee director[ii]. Therefore, the Act does not mandate requirement of obtaining shareholder approval for appointment of nominee director. Hence there arises a question that whether nominee directors are liable to retire by rotation like all other directors as provided under sub-section (6) of section 152 of the Act. In this article we shall try to find out an answer to this question.
Retirement by rotation – the Act[iii]
Sub-section (6) of Section 152 of the Act says that unless articles of association provide for retirement of all directors, minimum 2/3rd of the total directors excluding independent directors shall be liable to retire by rotation every year. An express exclusion from this section is provided only to the independent directors and to no one else. Therefore, literally speaking, all directors including nominee directors and excluding independent directors shall be considered for calculating number of directors liable to retire by rotation.
Retirement by rotation – Articles of association.
As stated above appointment of nominee director is subject to provisions of Articles of Association [‘AOA’]. The AOA should have a provision relating to appointment and retirement of nominee director and whether or not he shall be liable to retire by rotation shall depend in this provision. If the AOA states that nominee director appointed under sub-section (3) of section 161 of the Act shall not be liable to retire by rotation, then the nominee director cannot be counted while calculating total number of directors for calculating 2/3rd directors as it will be in violation of provisions of AOA. But if AOA is silent, then he will have to be consider in this calculation as the Act does not provide any express exemption to nominee director.
Liable to retire by rotation – managing director/whole time director vis a vis nominee director.
Reliance on provisions of AOA in this regard gives rise to one more question. At times, AOA of the companies provide exemption to managing director or whole-time director from being liable to retire by rotation. In such a case, if nominee director is not provided with such exemption as per AOA but MD/WTD is entitled to exemption, then nominee director shall be liable to retire by rotation whereas, MD/WTD shall not be liable. But what if the articles provide this exemption to both, nominee director as well as MD/WTD and the remaining directors are less than 2/3rd in number? In such a situation, if all directors excluding nominee director and MD/WTD are only made liable to retire by rotation then compliance with AOA will result in non-compliance of the Act which is not acceptable.
In such a case, the company will have to make MD/WTD liable to retire by rotation as he is appointed by shareholders and the nominee director is appointed on the recommendation of an outsider pursuant to an agreement.
Conclusion.
From all the above discussion, we can say that the Act does not provide any express exemption to nominee director from being liable to retire by rotation, but such exemption can be available to him by virtue of provisions in AOA of the company. If AOA contains such provision giving exemption to nominee director, then he is safe. Otherwise, if AOA is silent then he is also liable to retire by rotation like all other directors.
This article is published in Taxmann. The link to the same is as follows:
This article is written by Rutuja Umaidkar – Associate – rutujaumadikar@mmjc.in
[i] Explanation. —For the purposes of this section, “nominee director” means a director nominated by any financial institution in pursuance of the provisions of any law for the time being in force, or of any agreement, or appointed by any Government, or any other person to represent its interests.
[ii] Subject to the articles of a company the board may appoint any person as a director nominated by any institution in pursuance of the provisions of any law for the time being in force or of any agreement or by central government or the state government by virtue of its shareholding in a government company.
[iii] (6) (a) Unless the articles provide for the retirement of all directors at every annual general meeting, not less than two-thirds of the total number of directors of a public company shall–
(I) be persons whose period of office is liable to determination by retirement of directors by rotation; and
(ii) save as otherwise expressly provided in this Act, be appointed by the company in general meeting.
(b) The remaining directors in the case of any such company shall, in default of, and subject to any regulations in the articles of the company, also be appointed by the company in general meeting.
(c) At the first annual general meeting of a public company held next after the date of the general meeting at which the first directors are appointed in accordance with clauses (a) and (b) and at every subsequent annual general meeting, one-third of such of the directors for the time being as are liable to retire by rotation, or if their number is neither three nor a multiple of three, then, the number nearest to one-third, shall retire from office.
(d) The directors to retire by rotation at every annual general meeting shall be those who have been longest in office since their last appointment, but as between persons who became directors on the same day, those who are to retire shall, in default of and subject to any agreement among themselves, be determined by lot.
(e) At the annual general meeting at which a director retires as aforesaid, the company may fill up the vacancy by appointing the retiring director or some other person thereto.
Explanation. — For the purposes of this sub-section, “total number of directors” shall not include independent directors, whether appointed under this Act or any other law for the time being in force, on the Board of a company.