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Amendment relating to appointment of director to fill up a casual vacancy needs a review

Ramaswami Kalidas 
on 19 June 2020

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Amendment to  Section 161(4) of the Companies Act, 2013 relating to the appointment of director in casual vacancy need to be reviewed

Section 161(4) of the Companies Act, 2013(hereinafter referred to as “The Act”)which speaks about the appointment of a director by the Board to fill up  a vacancy caused in the office of a director prior to the expiry of his term has been amended by the companies(Amendment)Act, 2017 with effect from 9.2.2018.

The amended Sub-section is reproduced as under:

Amendment to Section 161(4) of the Companies Act, 2013 need to be reviewed

Section 161(4):

“If the office of any director appointed by the company in general meeting is vacated before his term of office expires in the normal course , the resulting vacancy may, in default of and subject to any regulations in the articles of the company, be filed by the Board of directors at a meeting of the Board which shall be subsequently approved by members in the immediate next general meeting ”.

The changes made by the Amendment Act 2017 were as under:

a)The words ”In the case of a public company” at the beginning of the subsection were deleted in consequence of which the Section has application now to both public and private companies.

b)The  words “which shall be subsequently approved by members in the immediate general meeting” have been added after the words “at a meeting of the Board” implying that the appointment of a person  as director by the Board to fill up a casual vacancy shall be subsequently approved by the members in the immediate next general meeting. The above change in the law runs contrary to the  time tested  legal position that a director appointed in a casual vacancy continues as one until the expiry of the term of the original director in whose vacancy he was appointed .

It is intriguing to note that notwithstanding the above amendments to subsection (4), the proviso under the subsection which was part of the original version of Section 161 since inception, continues to remain unaltered and contradicts the amended subsection. For facility of understanding, the proviso is reproduced as under:

“Provided that any person so appointed shall hold office only up to the date up to which the director in whose place he is appointed would have held office if it had not been vacated.”

Before we proceed to dissect the question   as to whether the person appointed by the Board to fill up a casual vacancy will have to seek appointment at the next general meeting as contemplated by the Sub-section or his regime will continue until the expiry of the term of the person in whose vacancy he has been appointed as propounded by the  proviso , it would be appropriate to deal with the evolution of the sub-section, what constitutes a casual vacancy  and find answers to  other related questions.

 

Section 161(4) corresponds to section 262 in the 1956 Act

It is interesting to note that Subsection (4) of section 161 as it stood originally is substantially a reproduction of section 262(1). The only difference was that whereas Section 262(1) was intended for application only for public companies and for private companies which were subsidiaries of a public company, in the present Act after the amendment made by the Amendment Act 2017 , the sub-section has application for both public and private companies.

The other difference which has been incorporated by the above Amendment Act is that the subsection now calls for the appointment of the director to fill up the casual vacancy to be approved by the members at the immediately following general meeting. This insert was conspicuous by its absence in the original form of the sub-section.

The proviso to the sub-section as appearing  in the present Act is exactly similar to Section 262(2) in the predecessor Act with the only difference is that in the present Act it exists as a proviso whereas under the 1956 Act it was a separate sub-section.

 

What is a casual vacancy

The term “casual vacancy” has not been defined in the present Act as also in the predecessor Act. In Cf.Srinivasan(M.K.) v Subrahmanya Ayyer(W.S.)(1932)2 Com Cases 147), the term was defined to refer to any vacancy which occurs by reason of death, resignation, disqualification, failure of an elected director to accept the office or any other reason than retirement by rotation. Other vacancies do not come within the ambit of the sub-section. They will be filled up in the manner in which the directors are appointed. In Munster v Cammell Co.Ltd (1882)(21Ch.D  183) it was held that where directors have the power to fill up a casual vacancy ,this includes any vacancy other than one caused by efflux of time or a director retiring by rotation.

Board’s powers to fill up a casual vacancy

The ingredients set out in section 161(4) for exercise of the Board’s powers to fill up a casual vacancy can be summarized as follows:

a) the vacancy sought to be filled up by the Board should only be in respect of a director who has been appointed by the company in general meeting. It therefore follows that if an Additional director appointed by the Board resigns his position before the conclusion of the next general meeting at which his appointment is required to be regularized   and the Board fills up the position by appointing someone else  , such appointment shall not be covered by Section 161(4).

b)The exercise of the  power of the board to fill up the casual vacancy is subject to the provisions contained in the company’s Articles.

c) The appointment to fill up the casual vacancy has to be approved by the board at a duly convened meeting. It cannot be approved by circulation. 

Appointment of director by Board shall be in good faith

As the Board has to exercise all its powers bona fide in the interest of the company and in good faith, it follows that the board shall appoint a replacement to fill up a casual vacancy in the interest of the company as held in Ananthalakshmi Ammal (A) v Indian Trades &Investments Ltd.(1952)22 Com Cases 324).

Duration of office of the Appointee on casual vacancy

As stipulated in the proviso under Section 161(4) which corresponds to Section 262(2) where the directors fill up a casual  vacancy , the person appointed will hold office not until the next annual or other general meeting only but for the entire period for which the person in whose place he was appointed would have held office.

The above legal position as regards the tenure of the person appointed to fill up a casual vacancy has been also corroborated by the Department of Company Affairs in its clarification published in Company News &Notes dated July,1, 1963.

In the light of the above background, it would be appropriate to articulate on the controversy created by the amendment made to Section 161(4) referred to above which provides that the appointment shall have validity only till the next general meeting of the members at which members’ approval shall be sought for regularization of the appointee. The above position runs contrary to  the proviso under section 161(4) which postulates the continuity of the appointee as director  till the expiry of the term for which the person in whose casual vacancy the appointment was made was to continue as director.

It is interesting to note that no reasons have been adduced by the MCA while making the following insert to subsection (4) by the Amendment Act 2017 effective from 9.2.2018.

“which shall be subsequently approved by members in the immediate next general meeting ”.

Considering the fact that the above insert has the consequence of making  the Sub-section  run contrary to the proviso thereunder , it would be interesting to look at the observations made by the Judiciary in cases  in which two provisions in the statute run in conflict of each other and are apparently irreconciliable.

When two Provisions of the same Act contradict each other and are not reconcilable

Courts have had occasions to articulate that when two sections of an Act cannot be reconciled, considering that there may be absolute contradictions, the later of the provisions shall prevail.(Wood v Riley (1867)LR3 CP 26),(K.M.Nanavati  v State of Bombay)(AIR 1961 SC 112 at page 137).It is pertinent to note where it comes to Section 161(4), the dichotomy in the law is within the sub-section itself with the Sub-section as amended going contrary to the position propounded by the Proviso which follows the sub-section.

LORD EVERSHED , M.R has observed that “It is no doubt true that if two sections of an Act of Parliament are in truth irreconcilable , then prima facie , the latter will be preferred. But these are arguments of the last resort. The first duty of the Court must be, if the result is fairly possible  , to give effect to the whole expression of the parliamentary intention”.( Eastbourne Corporation v Fortes Ltd (1959)2 All ER 102(CA).

In a case in which two provisos were somewhat repugnant to each other ,LORD MACMILLAN had observed that “If proviso 2 is repugnant in any way to proviso 1 , it must prevail for it stands last in the enactment and so to quote LORD TENTERDEN CJ, ”speaks the last intention of the makers”. ”The last word is with the respondent and must prevail”.(King v Dominion Engineering Co.Ltd (AIR1947 PC 94).

Going by the above observations it would appear that the balance of justice would appear to tilt in favour of drawing the conclusion that the amended subsection (4) to Section 161 shall prevail since that   is the later law as compared to the proviso which was part of the original enactment. In other words,   the view that would  appear to prevail is that the term of the director appointed to fill up the casual vacancy would be co-terminus with the next general meeting of the members at which the members shall resolve to appoint him in case they deem it appropriate to do so.

It is pertinent to note that the passages from the Judiciary which have been cited above are  all on the point as to what the judicial view should be in the face of contradictions between two provisions in the same Act. The situation we are confronted with here is as observed above is   somewhat different in that, sub-section(4) contradicts the proviso lying there under. In other words , the question that needs introspection  is whether the rules of judicial interpretation permit a sub-section to be read in isolation as opposed to the general notion that a proviso, being an inseparable part of a subsection should invariably be read conjointly with the subsection.

Purpose of a “Proviso” in a statute

This brings us to the question as to what is the purpose of a Proviso in a statute. It was observed by the Apex Court in Kedarnath Jute Manufacturing Co.Ltd v Commercial Tax Officer (AIR 1966 SC 12 at page 14) that the normal function of a proviso is to except something out of the enactment or to qualify something enacted therein which but for the proviso would be within the purview of the enactment. As stated by LUSH J.,  ”when one finds a proviso to the Section, the natural presumption is that , but for the proviso, the enacting part of the Section would have included the subject matter of the proviso”.

The general rule has been stated by HIDAYATULLAH,J. as under:

“As a general rule, a Proviso is added to an enactment to qualify or create an exception to what is in the enactment and ordinarily, a Proviso is not interpreted as stating a general rule”(Shah Bhojraj Kuverji Oil Mills and Ginning Factory v Subhash Chandra Yograj Sinha (AIR 1961 SC 1596 at Page 1690(1962).

It is pertinent to note that section 161 in the Act as a whole provides a composite code as regards the procedure to be adopted in the case of appointment of additional director, alternate director   and Nominee director. Section 161(4) is specifically on the point relating to appointment of a director by the Board   when a casual vacancy arises .The proviso thereunder is specific to Section 161(4) and provides an exception thereto. The subsection should not   therefore be read in isolation   and it cannot remain  oblivious to the exception carved out by the proviso which allows the director appointed in a casual vacancy to survive the term of the original director whom he has substituted.

Further if the sub-section were  allowed to prevail over the proviso, as the director appointed in the casual vacancy caused in the board will have to come up for appointment at the general meeting, it  would also mean that under the Law   there is  no difference between a person appointed as an Additional director and a director appointed in a casual vacancy as both the appointments shall need regularization at the next general meeting.

In addition, if the sub-section is allowed to be read in isolation , given the wedge it creates with the proviso, there would be disharmony in the understanding of the Sub-section. The proviso under Section 161(4) cannot be detached from the sub-section as such detachment will lead to a conclusion which would be manifestly  different from what the law intended-that a director appointed in a casual vacancy should have a stint co-terminus with the expiry of the tenure of the director whom he has replaced.

Is the amended portion in section 161(4) to be considered as otiose or redundant –Application of rules of legal interpretation 

It is well settled that Judiciary cannot read anything into a statutory provision which is plain and unambiguous. A statute being an edict of parliament, the language used in the statute is the determinative factor of legislative intent. The above is the rule of literal construction. The words” “which shall be subsequently approved by members in the immediate next general meeting” in subsection (4) of section 161 as inserted with effect from 9.2.2018 are by no means ambiguous or vague. It is only when the subsection is juxtaposed with  the proviso to the sub-section, that it strikes a discordant note as it distorts the postulate put forward by the proviso.

It is a well  recognized principle of interpretation that a statutory provision must be construed rationally. While drawing a conclusion, absurdity and  mischief are to be avoided. It is an established rule of construction that where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been the intention of the legislature, the court may modify the language used by the legislature or even do some violence to it, with a view to achieve the obvious intention of the legislature and produce a rational construction.(Tata Consultancy Services v UOI((2002)(111Comp Cas .292(Kar.)  .

Applying the above rules contextually if credence is given only  to Section 161(4) oblivious to the proviso thereto, the director appointed in a casual vacancy comes up for appointment at the  next general meeting. As the proviso is an inseparable part of the sub-section such isolated reading should  not be permitted. Further such reading would reduce to a nullity the difference between an Additional director and a  director in a casual vacancy. Such a construction would  also cause injury to the proviso whose function it is to provide an exception to the general rule. The rule of rational construction would demand  that the amended portion of  sub-section(4) be ignored, resulting in the restoration of the correct position in the Law that a director appointed in a casual vacancy survives the tenure of the original director.

One of the settled rules of interpretation is also  that Statutory provisions should be construed in a manner which sub-serve the purpose of the enactment and does not defeat it and that no part thereof is considered as surplus or otiose.(Maharashtra State Financial Corporation v Jaycee Drugs and Pharmaceuticals P Ltd.(1991)71 Comp Cas .360(SC).An interpretation which leads to anomalous results or renders the working of the statute or provision unworkable and otiose should always be avoided. An interpretation based on an isolated reading of Section 161(4) would reduce the statute to a nullity due to the pre- existence of the Proviso thereunder. It would therefore be fair to conclude that the amended portion in Section 161(4) needs to be  ignored so as to facilitate a harmonious reading of the law.

Conclusion

In the light of the foregoing analysis of the law , it would be appropriate if the MCA revisits Section 161(4) and reviews the amendment made thereto so that the message becomes loud and clear to the fraternity that a director appointed in a casual vacancy does not have to submit himself to appointment at the next immediate general meeting and that his term becomes co-terminus with the term of the director whom he has replaced.


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