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a.Q.1 What is the text of the Section 160 of Companies Act 2013 and rule framed thereunder?

Ans.: Section 160 of Companies Act 2013 which has come into force from 1.4.2014 reads as under:

“Right of persons other than retiring directors to stand for directorship.

160. (1) A person who is not a retiring director in terms of section 152 shall, subject to the provisions of this Act, be eligible for appointment to the office of a director at any general meeting, if he, or some member intending to propose him as a director, has, not less than fourteen days before the meeting, left at the registered office of the company, a notice in writing under his hand signifying his candidature as a director or, as the case may be, the intention of such member to propose him as a candidate for that office, along with the deposit of one lakh rupees or such higher amount as may be prescribed which shall be refunded to such person or, as the case may be, to the member, if the person proposed gets elected as a director or gets more than twenty-five per cent of total valid votes cast either on show of hands or on poll on such resolution.

(2) The company shall inform its members of the candidature of a person for the office of director under sub-section (1) in such manner as may be prescribed.”

Rule 13 of Companies (Appointment & Qualification of Directors) Rules 2014 reads as under:

“Notice of candidature of a person for directorship

13. The company shall, at least seven days before the general meeting, inform its members of the candidature of a person for the office of a director or the intention of a member to propose such person as a candidate for that office-

(1) by serving individual notices, on the members through electronic mode to such members who have provided their e-mail addresses to the company for communication purposes, and in writing to all other members; and

(2) by placing notice of such candidature or intention on the website of the company, if any:

Provided that it shall not be necessary for the company to serve individual notices upon the members as aforesaid, if the company advertises such candidature or intention, not less than seven days before the meeting at least once in a vernacular newspaper in the principal vernacular language of the district in which the registered office of the company is situated, and circulating in that district, and at least once in English language in an English newspaper circulating in that district.”

Q.2  What was corresponding Section of  Companies Act 1956?

Ans.:  Section 257 of Companies Act 1956 which corresponds to Section 160 of Companies Act 2013 read as under:

“Right of persons other than retiring directors to stand for directorship.

257. (1) A person who is not a retiring director shall, subject to the provisions of this Act, be eligible for appointment to the office of director at any general meeting, if he or some member intending to propose him has, not less than fourteen days before the meeting, left at the office of the company a notice in writing under his hand signifying his candidature for the office of director or the intention of such member to propose him as a candidate for that office, as the case may be along with a deposit of five hundred rupees which shall be refunded to such person or, as the case may be, to such member, if the person succeeds in getting elected as a director.

(1A) The company shall inform its members of the candidature of a person for the office of director or the intention of a member to propose such person as a candidate for that office, by serving individual notices on the members not less than seven days before the meeting :

Provided that it shall not be necessary for the company to serve individual notices upon the members as aforesaid if the company advertises such candidature or intention not less than seven days before the meeting in at least two newspapers circulating in the place where the registered office of the company is located, of which one is published in the English language and the other in the regional language of that place.

(2) Sub-section (1) shall not apply to a private company, unless it is a subsidiary of a public company.”

Q.3:  What is the intention behind such provision in the Act?

Ans.:  As a general rule, directors are appointed by members at a general meeting.  As an exception, Board can also appoint directors in some specified cases.   Section 160 provides for right of any person to stand for the position of a director in a company in a general meeting in a democratic way.  However, provision for deposit has also been made to avoid abuse of this right by some persons with bad motive.  The amount of deposit which was merely Rs.500/- under 1956 Act has been drastically increased to Rs.1 lac under 2013 Act. 

Q.4:  Whether there is any exemption from application of this Section to some class of companies?

Ans.: Private companies: Section 257 of 1956 Act was not applicable to a private company, unless it was a subsidiary of a public company.  On the other hand, Section 160 of 2013 Act is applicable to a private company also.  MCA intends to exempt private companies from this Section by a notification under Section 462 of the Act.  Draft of notification has already been laid before the Parliament.  Final notification in this regard is expected to be issued in this month (August 2014).  However, till such time private companies will have to comply with this provision.

Government companies:  Under 1956 Act wholly owned Government companies were exempted from Section 257 vide Notification No.GSR 906 dated 30.7.1981.  However, exemption notification under 2013 Act is still awaited.

Section 8 companies:  Under 1956 Act Section 25 companies whose articles provided for election  of directors by ballot were exempted from Section 257 vide S.O. No.1578 dated 1.7.1961.  However, exemption notification under 2013 Act is still awaited.

Q.5:  In which cases Section 160 will apply?

Ans.:  As per wordings used in Section 160, it will be applicable in cases of appointment of directors other than retiring directors.  Retiring director means a director retiring by rotation at the meeting.  Thus it seems to be applicable in following cases:

a. Appointment of additional director as director at AGM

b. Appointment of a director to fill casual vacancy

c. Any other person seeking appointment as director at general meeting (including alternate director, nominee director etc.)

The erstwhile DCA (now MCA) had clarified as under:

“In the view of the Department, additional director appointed under Section 260 and directors appointed to fill casual vacancies under section 262 are not retiring directors within the meaning of the Explanation below sub-section (5) of section 256.  Accordingly, in their case, the provisions of section 257(1) will be attracted and will have to be complied with.  In view of the clarification given above, the aforesaid directors should comply with the provisions of section 26491) and (2) also.”  (Company News & Notes dated July 1, 1963).

Keeping in view above, MCA could take a view that this Section will apply even to appointment of independent directors under Companies Act 2013. Hence, in practice companies are still following Section 160 in such cases to avoid risk  of penal provisions, even though not necessary looking to the intention behind the law.

However, as mentioned above, intention behind this provision is to permit a common person to stand for directorship of a company and at the same time deter frivolous proposals and misuse the provision.  Hence, this provision should not applicable to a person who is proposed to be appointed as a director by the Board of Directors of the company directly.  Thus additional directors being appointed as director at AGM and independent directors to be proposed by the Board should be out of purview of Section 160.  MCA should reconsider this and issue a fresh clarification in this regard or amend the Act if required.         
 

Q.6:  Give a draft of notice to be given under Section 160.

Ans.:  Draft of notice under Section 160 is given below:

“The Board of Directors,

XYZ Ltd

Dear Sirs,

Re:  Notice under Section 160 of Companies Act 2013

                                            

I, Mr ____, member of the company, hereby propose the candidature of Mr ___ S/o Shri ____  residing at _______________for appointment as a director of the company at the forthcoming Annual General Meeting  of the company.

Please find enclosed herewith cheque No._______ dated ______ drawn on ________ for Rs.1,00,000/- being the deposit for proposing the candidature of Mr _____ as a director of the company.

Thanking you,

Yours  faithfully,

(__________)”

Q.7:  Who can give the notice with deposit?

Ans.:  The notice alongwith deposit can be given by the candidate himself or any member of the company.  There is no requirement that such member should be an individual only.  Hence even a corporate member can also give such notice with deposit.  Further, there is no requirement  of minimum shareholding  for this purpose.  Hence even a member holding one equity share can give  such notice.  Section 160 provides for giving notice by a ‘member’ which term includes preference shareholders also.  However, since preference shareholders cannot vote on the resolution, they cannot give notice under the Section.

Q.8:  What should be the mode of payment of deposit amount?

Ans.: The Act has not provided for any specific mode of payment of the deposit amount.  However, with a view to ensure transparency and bring the facts on record it would be advisable to make payment through banking channel only, i.e. cheque/DD/RTGS etc. and not in cash.

Q.9:  When the notice and deposit is to be given?

Ans.:  As per Section 160 notice is required to be given at least 14 days before the general meeting.  However, in practice such  notice is given before issue of notice of general meeting (which is required to be issued at least 21 days before the meeting) so that it could be incorporated in the same  notice of general meeting and additional formality is avoided.  The notice of general meeting can state the fact that the company has received notice under Section 160 of the Act or candidature of someone as a director.  Hence it will be advisable to give notice under Section 160 alongwith deposit of Rs.1 lac on or before the date of the Board meeting when draft of notice of general meeting is approved.

Q.10:  How the intimation about the notice  is to be given to the members?

Ans.: Rule 13 of Companies (Appointment & Qualification of Directors) Rules 2014 prescribes method of intimating the members about the notice received under Section 160.  As per the Rule at least 7 days before the meeting individual notice has to be served to the members and such notice has also to be placed on company’s website, if any.  It implies that if the company does not have any website, the requirement of placing the notice on website will not be applicable. It may be noted that requirement of placing such notice on company’s website was  not there in 1956 Act.  Such notice may be removed from the website after the general meeting since it will loose its relevance.  Individual notice to members can be dispensed with if notice is issued in newspaper as per the Rule.

Q.11: Whether the company can refuse to give  intimation of the notice to the members?

Ans.: No, the company cannot refuse to give intimation  of the notice to the members.  The word ‘shall’ used in sub-section (2) indicates that it is mandatory.  [Gopal Vyas v. Sinclair  Hotels & Transportation Ltd., AIR 1990 Cal 45, 49 : (1990) 68 Com Cases 516 (Cal—DB).

Q.12: When the deposit is to be refunded?

Ans.:  In case the candidate is appointed as director at the general meeting, or he gets more than 25% of valid votes cast, the deposit amount has to be refunded by the company to the concerned person.  Otherwise, the deposit is to be forfeited by the company.  [Circular No.5 dated 15.9.1989].

Q.13: What will be accounting treatment of the deposit?

Ans.: The company should keep the deposit under any appropriate head under Current Liabiities.  In case the deposit is forfeited, it should be transferred to Other Income.

Q.14. What is the penalty prescribed in case of contravention of provisions of the Section?

Ans.:  Section 172 of the Act provides that if a company contravenes any of the provisions of this Chapter and  for which no specific punishment is provided therein, the company and every officer of the company who  is in default shall be punishable with fine which shall not be less than Rs.50,000/- but  which may extend to Rs.5 lacs.

Q.15. Whether offence under the Section can be compounded?

Ans.: Section 441 of the Act provides for compounding of offences punishable with:

- Fine only

- Fine or imprisonment

- Fine or imprisonment or both.

Offences punishable with imprisonment only or imprisonment and fine both are not compoundable.

However, Section 441 has not yet come into force and hence presently offences under the Act are not compoundable.           

By: P C Agrawal                    

B.Com., LL.B., CAIIB, FCS

E-mail: cs.pcagrawal@gmail.com  

Aurangabad (Maharashtra)

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