Procedure of Appointment of Company Directors in India (Companies Act 1956)

The first directors can hold office only till the first annual general meeting of the company when they will be replaced by directors appointed by the company at this meeting.

2. Appointment of Directors by Members:

The subsequent directors, in the case of a public company, are appointed by the members of the company in the general meeting. Section 255 provides that at least 2/3 of the total number of directors shall be appointed by the members of the company in general meeting. They shall be rotational directors i.e. subject to retirement by rotations.

The remaining directors in the case of any such company and the directors of a private company may be appointed in accordance with the provisions of the company’s articles. In the absence of any such provision in the articles or in case of default in so appointing directors, these directors shall also be appointed by the company in general meeting (Sec. 255).

Retirement of directors by rotation:

In case of a public company, out of the two third directors liable to retire by rotation, one-third (or the nearest number to one-third) shall retire at every subsequent annual general meeting of the company.

The turn for retirement shall be determined by the length of office of each director. Those who have been longest in office shall retire first. As between persons who become directors on the same day, retirement may be decided by lot, or mutual agreement.

Re-appointment of directors:

The vacancies caused by the retirement of directors should be filled up at the same meeting. Retiring directors are eligible for re-election and may be re-appointed again.

A person, other than the retiring director can also contest election for directorship only if he or any other member who intends to propose him has given at least 14 days’ nomination notice before the date of the meeting, in writing, to the company along with a deposit of Rs. 500. The deposit amount will be refunded on election of such person as director [Sec. 257 (1)].

On receipt of such a notice the company is required to inform all the members at least 7 days before the meeting about the candidature. However, individual notices to members will not be necessary if the company advertises such candidature or intention not less than 7 days before the meeting in at least two newspapers circulating in the place where registered office of the company is located, of which one is published in English language and the other in regional language of that place [Sec. 257 (1-A)].

If the vacancy caused by the retirement of a director by rotation is not filled up at the same general meeting, the meeting shall be deemed to have been adjourned to the next week. If at the adjourned meeting also the vacancies are not filled up, the retiring director shall be deemed to have been re-appointed automatically except in the following cases:

(a) A resolution for his re-appointment was put before the meeting, but was lost; or

(b) When such person has declined re-appointment in writing; or

(c) When he has been disqualified; or

(d) A resolution, whether special or ordinary, is required for his appointment or re­appointment by virtue of any provisions of this Act; or

(e) When it is resolved not to fill up the vacancy (Sec. 256).

It is to be noted that failure on the part of the company to call the annual general meeting on the due date, does not entitle a director to continue in office. He will be treated as having vacated his office on the last day on which the annual general meeting could and should have been held as per section 166 (including the period of extension).

3. Appointment of Directors by the Board:

The Board of Directors may make the following appointments:

(i) Additional or co-opted directors:

It authorised by the Articles, Board of Directors may appoint additional directors within the maximum strength of the board fixed by the Articles of Association. Such additional directors shall hold office only up to the commencement of the next annual general meeting (Sec. 260).

(ii) Casual vacancy:

A casual vacancy occurring amongst the directors ( on account of death, resignation or otherwise) may be filled up by the Board of Directors unless the Articles provide a different procedure. The person so appointed shall hold office only up to the time his predecessor would have continued (Sec. 262).

(iii) Alternate directors:

The Board of Directors may, if so authorised by the Articles of Association or by a resolution passed by the company in the general meeting, appoint an alternate director, to act for a director during his absence for a period of not less than 3 months from the State in which meetings of the Board are ordinarily held. Such a director will vacate office immediately on the return of the original director to the State. Such an alternate director will automatically vacate office on the expiry of the term of the original director even if the latter has not returned (Sec. 313).

4. Appointment of Directors by Third Parties:

A company may give, by its articles, power to debenture-holders, a banking company or a financial institution who has advanced loans to the company to appoint their nominees on the Board. The number of such directors should not exceed one-third of the total strength of the Board. These directors are not required to retire by rotation.

5. Appointment of Directors by the Central Government (Sec. 408):

Central Government may appoint such number of directors as the Company Law Board (Tribunal w.e.f. the date to be notified) may, by order in writing specify to prevent oppression and mismanagement in a company. Such appointment shall be made for a period of not more than 3 years on any one occasion.

The Company Law Board (the Tribunal) may issue such an order on a petition made to it by the Central Government or on the application of at least 100 members of the company or the member(s) holding at least 10% of the voting rights in the company.

The ground of such petition is conduct of the affairs of the company in a manner oppressive to any member of the company or in a manner prejudicial to the interests of the company or public interest.

A person appointed as a director by the Central Government in pursuance of the above provisions shall not be:

(i) Required to hold qualification shares;

(ii) Required to retire by rotation;

(iii) Considered for the purpose of reckoning two-thirds or any other proportion of the total number of directors of the company.

The Central Government has the right to remove any such director from his office at any time and appoint another person to hold office in his place.

These provisions are applicable to both public and private companies.

6. Appointment of Directors by Proportional Representation:

Directors in a company may be appointed either by

(a) A system of straight majority of votes or

(b) A system of proportional representation.

In a system of straight majority of votes, those who get the largest number of votes are declared elected. Further, voting for each director is done individually through single resolution for each of the director to be elected (Sec. 263).

Under this system, a shareholder or group of shareholders holding 51% or more shareholding is able to monopolise all the directorships with the result that even a sizeable minority of the shareholders is powerless to get even one of their representatives into the directorate.

The alternative system is the system of proportional representation by a single transferable vote or cumulative voting. In this system the minority shareholders may also be in a position to get representation on the board of directors.

Section 265 of the Indian Companies Act gives option to the companies to adopt system of proportional representation for the appointment of directors. Appointment of directors in such a case is to be made once in 3 years. If the terms of the directors are staggered so that one or a few are elected each year, a minority may not be able to elect any director on the board.

The system of proportional representation works either by cumulative voting or single transferable voting. In cumulative voting system, every shareholder has votes equal to the number of directors to be elected multiplied by the number of shares held. The directors to be elected are voted for at the same time.

Thus, a minority is allowed to secure representation on the Board of Directors. In single transferable voting system each voter has only one vote. The names of all the candidates for election are entered in the ballot paper. The voter is required to indicate his first, second, third preferences and so on against each candidate.

These preferences are equal to the number of candidates to be elected. In the first instance, only the first preference is counted and any candidate who receives the number of votes called quota is declared elected.

The surplus first preference votes of the candidate elected are transferred to other candidates in the order of preference. This process is continued till the requisite candidates are elected.