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Expiry date for directors

Sundharesan Jayamoorthi 
on 10 March 2015

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March 31 is round the corner and every director has to be doubly vigilant about his existence as some of the mundane provisions listed out in the Companies Act, 2013 (“Act”) prescribe for a expiry date for a director in case of certain non-compliances. There was a time when a director would join the company and theexpiry of his tenure will be decided only on his expiry, but contrary to this, a draconian Act has re-written this theory. The entry of a director in a company can be by choice of a person, but exit seems to be by force or automatic and by operation of law. One wonders if the term or tenure of a director has been equated with a FMCG product that has a shelf life, a director has to be extremely careful with his tenure, which may also have a limited shelf life or an expiry date that is decided by the legislation. The expiry date can be on account of:

1. Death of a director

2. Resignation of a Director

3. Removal of Director

4. Disqualification of a director

5. Vacation of office of a director

6. Retirement of a director either in employment or as a director

7. Operation of law

The regulators have fixed the expiry date under various provisions; This article lists out some instances where the onus is on the director to keep track of these dates, failing which without his knowledge he would have initiated his last date in the Company.

Validity period of 12 months

Section 167(1) of the Act has stipulated a rack life of only 12 months for a director; which means a director has to keep track of the last board meeting that he has attended in the last one year. If he fails to attend one board meeting in a period of 12 months, then he vacates his office, which is an automatic cessation of his position. Thus every director has to ensure that he does not absent himself from all the meetings of the Board of Directors held during a period of twelve months with or without seeking leave of absence of the Board.

The period of twelve months can be a period of twelve months starting from the day on which the director has attended the last Board Meeting. As section 167 was notified on April 1, 2014, the above provision shall also be effective from the commencement of the section. Hence with effect from April 1, 2014, for the first financial year a director has to ensure that he attends atleast one board meeting from April 1, 2014 to March 31, 2015, the last date being March 31, 2015. From there on he shall ensure to attend a board meeting which is held not later than twelve months from the date of last board meeting in which he was present.

Another instance is of Mr. X, a Director of ABC Limited who has attended the board meeting of the Company on April 15, 2014, he has complied with the above provisions and he does not vacate office as on March 31, 2015. Whereas Mr. X has to ensure that he attends a board meeting of the Company on or before April 14, 2015, to ensure that he does not vacate office pursuant to section 167. This tracking of compulsory attendance in the last 12 months is a continuous process.

Validity may expire every financial year

The Act requires every director to provide annual disclosure pursuant to section 184(1) of the Act on or before the close of the financial year, which is March 31, in form MBP 1. In case the director fails to give this declaration then he vacates his office as a director pursuant to section 167(3) of the Act. In the interest of retaining the position the onus is on every director to submit this form to the Company, even f it has no details to be filled in.

Validity period of two terms

Section 149 of the Act prescribes for the term of office of Independent director to be a maximum of 10 years, which is two terms of 5 years.

Validity period only till Performance

An independent director will continue to hold office only till such time when his performance is evaluated and he is found fit and proper to continue to be a director. This exercise has to be undertaken by the company for every financial year, which is evident based on the interpretation of the provisions of section 134 of the Act, that requires every company to report in the Directors’ Report on the status of the annual performance evaluation. It means other directors of the company will evaluate independent director’s annual performance and based on the report the term of his office will be determined.

Clause VIII of Schedule IV of the Act outlines the evaluation mechanism and clause V of this schedule provides that every re-appointment shall be based on this evaluation report. Clause VIII states that:

(1) The performance evaluation of independent directors shall be done by the entire Board of Directors, excluding the director being evaluated.

(2) On the basis of the report of performance evaluation, it shall be determined whether to extend or continue the term of appointment of the independent director.

Validity period till the next Re-appointment:

As per clause V to schedule IV of the Act the independent director shall be re- appointed on the basis of report of performance evaluation, which means if the evaluation is not favourable the director shall not be re-appointed. Section 134(3)(p) of the Act provides for matters to be included in Boards’ report: (p) in case of a listed company and every other public company having a paid up share capital of twenty five crore rupees or more calculated at the end of the preceding financial year, a statement indicating the manner in which formalannual evaluation has been made by the Board of its own performance and that of its committees and individual directors.

This provision requires a performance evaluation to be done every year for all the directors and the report on the same to be given in Director’s Report.

Thus every director has to ensure that the expiry date of his tenure does not become automatic other than the instance of death, which is inevitable. Trust the system but verify the facts, the onus of vacating the office is now on the director.


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