Appointment & Rotation of Directors & Concept of First Directors

DIRECTOR: As per section 2(34) ‘director’ means a director appointed to the Board of a company.

There are various category of directors given under the Companies Act, 2013 for example: Managing Director, Whole Time Director, Part time Director etc.

Types of Directors on the basis of time of Appointment:

Page Contents

• Types of Directors on the basis of time of Appointment:

  • First director :  {Section 152(1)}

  • Subsequent directors {Section 152(2)}

• Basic legal requirements for appointment of directors

• Concept of rotation of directors

• Tenure of first director for public companies:

• Tenure of Deemed to be First Directors

1) First Director

2) Subsequent Directors.

Taking the discussion forward about the above types of directors:

First director :  {Section 152(1)}

Three Alternative methods for appointment of First Director:

• Method #1: Appointment of first directors by naming in the AOA at the time of drafting AOA during Incorporation.

• Method #2: AOA can give the authority to the subscribers of the MOA to appoint first director and such subscribers of MOA appoint first directors after Incorporation of Company.

• Method #3: If AOA of a Company do not provide any of the above method of appointment then subscribers to MOA shall be deemed to be the Directors of the Company, until the Directors are duly appointed in the General meeting.

Subsequent directors {Section 152(2)}

Section 152(2) states that every director shall be appointed by the Company in the General meeting via Ordinary Resolution but provides for the scope of exception also as section 152(2) starts with “save as otherwise expressly provided in this act”, so the exceptions are provided in section 161 i.e appointment by the Board of Directors, section 242 i.e appointment by NCLT etc.

Basic legal requirements for appointment of directors

1. Director must have the Digital Identification Number (DIN)

2. Director shall furnish the Declaration that he is not disqualified.

3. Director shall give his consent to act as director in form DIR-2 and the same shall be filed to ROC in e-Form DIR-12 within 30 days of the appointment.

Concept of rotation of directors

The concept of the rotation of Directors is only applicable to the Public Companies.

According to section 152(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.

OBSERVATION: So, this means that either the articles provide for the retirement of all directors at every Annual General Meeting or otherwise 2/3rd of the total strength of directors shall be rotational directors and those 2/3rd Directors shall be appointed in the General meeting i.e they cannot be first directors of the Company (because they are appointed by AOA) or directors appointed by Board of Directors u/s 161 or Directors appointed by the NCLT u/s 242. And the balance 1/3 can either be appointed by AOA (i.e First Directors) or if the AOA does not provide then they shall also be appointed in the General Meeting.

Now, the question arises when shall the Rotation of Director begins and how does it work

According to Section 152(6)(c) the Retirement shall begin at the first Annual General Meeting held after the general meeting at which the Directors are first appointed to meet the Compliance of 152(6)(a) i.e 2/3^rd directors to be rotational and appointed in general meeting and subsequently at every Annual General Meeting thereafter.

Also, the Composition of 2/3^rd and 1/3^rd shall be made at the first General meeting (either Annual General Meeting or extra ordinary General Meeting) of the Company where the directors are first appointed.

Note: Independent Directors are not Counted for the Concept of Rotation of Directors.

Quantum of Directors liable for Rotation: exact 1/3^rd of the Rotational Directors shall retire from the office and in case the number of Rotational Directors is neither three nor a multiple of three, then, the number nearest to one-third, shall retire from office.

Method of Retirement: The Directors shall retire on first in first out (FIFO) basis i.e who have been longest in office since their last appointment and between those appointed on same day shall either retire as per the agreement entered by them or be determined by lot.

Re-appointment of Retiring Director or appointing the new Director: 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.

Tenure of first director for public companies:

Now very Important Question is that what will be the Tenure of first Director.

Tenure of First Director who are appointed by Naming in AOA or are appointed by subscribers who are authorised by AOA.

As discussed above that for every public Company at-least 2/3^rd of the total number of director should be Rotational director and shall be appointed in the General Meeting and hence the first directors who are appointed by AOA need to retire so that the directors can be appointed in the General Meeting for the purpose of Rotation of Directors form the subsequent General Meeting.

As per Company News and notes dated July 1, 1963 All the first directors who are appointed by naming in AOA shall vacate at 1st Annual general Meeting, but the AOA of Company can protect few amongst them to Continue thereafter, but the Company have to appoint the requisite no of directors to make the Composition of 2/3rd and 1/3rd and then from the second Annual general meeting, 1/3rd of the rotational Directors will retire.

Tenure of Deemed to be First Directors

As per Company News and notes dated July 1, 1963, the tenure of deemed to be first director is till the first Annual General Meeting only and the articles cannot provide for Continuation thereafter in case of the deemed to be first director.

Let’s understand the same by way of Examples

CASE #1: If an Extra-ordinary General meeting is convened before 1st Annual General Meeting and if the directors are appointed thereat as per the section 152(6), then all the deemed directors shall vacate at such Extra-ordinary General meeting and the Company shall appoint the suitable Number of Directors at such Extra-Ordinary General Meeting to make the Composition of 2/3rd and 1/3rd and then the Concept of Rotation shall begin from 1st Annual General Meeting.

CASE #2: If no Extra-ordinary general meeting is convened before 1st Annual General Meeting then all the first Directors shall vacate at the 1st Annual General Meeting and the Company shall appoint the suitable Number of Directors at such Annual General Meeting to make the Composition of 2/3rd and 1/3rd and then the Concept of Rotation shall begin from 2nd Annual General Meeting.