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Number of directorships - A direction in good governance

Amitav Ganguly 
on 14 October 2015

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{Section 165 of the Companies Act 2013}

BACKGROUND

The basic legal premise of limiting the number of companies which an individual can hold directorships is that it is essential for his efficient functioning and effectual carrying out his fiduciary duties. He cannot be expected to give adequate time and exercise proper judgement if he has directorships of too many and thus unwieldy number of companies. It is well known that no man can have the detailed knowledge of facts of many enterprises, more so, since facts are the basis on which a director can properly exercise his judgement in the affairs of a company.     

The section 165 of the Companies Act 2013 has consolidated and amended the earlier provisions in sections 275 to 279 of the erstwhile Companies Act 1956.

MAXIMUM NUMBER OF DIRECTORSHIPS

The first sub section of section 165 of the new Companies Act lays down the maximum number of directorships which can be held by any individual including any alternate directorship, as twenty companies. This restriction relates to the holding of directorships at the same point of time.

The erstwhile Companies Act had laid down the maximum number of companies, as fifteen which interestingly was reduced from twenty.

A further restriction in this sub section is that there is a sub limit of maximum number of public companies in which a person can be appointed as a director which shall not exceed ten. Hence this sub limit is with regard to public companies only and not private companies.

However, the coverage of public companies for this sub limit has been made more stringent. It is provided that for reckoning the limit of public companies, directorship in private companies that are either:-

  • holding company, or
  • subsidiary company,

of a public company shall be taken into account.

Thus these will be included in the sub limit of ten.

Significantly as per erstwhile Companies Act, directorships in pure private companies, unlimited companies, associations {not carrying business for profit or which prohibits the payment of a dividend}, and alternate directorships had been excluded from the overall limit of fifteen companies. But all these directorships are included in the limit of the new Companies Act.     

LOWERING THE LIMIT

The next sub section {2} lays down a new concept that the members of a company may, by special resolution passed at a general meeting, specify any lesser number of companies in which a director of the company may act as directors. However, the provisions of the sub section {1} have to be kept in view.  Hence the members can fix the maximum number to less than twenty companies or maximum number of public companies to less than ten companies.

Interestingly a query can be raise as to whether members of a company can fix lesser number of directorships for any specific director or the same has to be done across the board for all directors of that company. 

TRANSITION PROVISIONS

The sub section {3} provides for a transition phase where a person has held directorships exceeding the limits before the commencement of the new Companies Act he has to, within a period of one year from such commencement, comply with these provisions. Since the limit under the Companies Act 2013 is twenty companies and the limit under the  erstwhile Companies Act was fifteen companies which is less, the relevancy of the new provision has to be complied in the context of the following :-

  • Inclusion of directorships of pure private companies, unlimited companies, associations {not carrying business for profit or which prohibits the payment of a dividend}, alternate directorships or any other directorships in the overall limit of twenty companies.  
  • A sub limit of ten public companies within said twenty companies has to be ensured.

A typical example will illustrate this. Suppose an individual is already a director in thirty pure private companies and a director in fourteen public companies, he was complying with the provisions of the erstwhile Companies Act. But on coming into force of the new Companies Act, he has to restrict his directorships to maximum ten pure private companies and ten public companies.

In such cases he has to choose, within one year of commencement of new Companies Act, not more than the specified limit of those companies, as companies in which he wishes to continue to hold the office of director. He has also to resign his office as director, in writing, in the other remaining companies and intimate the choice made by him to each of the companies in which he was holding the office of director before such commencement. He has also to intimate the Registrar of Companies having jurisdiction in respect of each such company.

The section 165 of the new Companies Act has come into force w.e.f.1st April 2014 and it is expected that by this time due compliances have been done by all concerned.    

EFFECTIVE DATE OF RESIGNATION

The sub section {4} lays down the  provisions as to when the written resignation shall be effective which has been made in pursuance of  sub-section (3), to reduce the excess number of directorships held by a director in other remaining companies. It stipulates that such effectiveness shall be immediately on the despatch of the resignation letter by the director to the company concerned.  Interestingly section 168 of the new Companies Act  states that the resignation of a director shall take effect from the date on which the notice is received by the company or the date, if any, specified by the director in the notice, whichever is later. Obviously this section 165 provides differently since it is a transition provision.  

As the section 165 has already come into force, hopefully this provision of resignation has been duly complied with by all concerned.     

NOT TO ACT AS DIRECTOR- EXCEEDING THE LIMITS

The sub section {5} provides that a person shall not act as director in more than the specified number of companies subsequent to:-

  • despatching the written letter of resignation of his office as director, or non-executive director as per sub section {3} , or 
  • the expiry of one year from the commencement of the new Companies Act,

        whichever is earlier.

This has been provided to ensure that the concerned director cannot escape from compliance and cannot continue as director in excess of the stipulated number of companies.

Moreover, in terms of proviso to section 168 {2} of the new Companies Act he shall be held liable even after his resignation for the offences which occurred during his tenure.

With the coming in force of the section 165, it is expected that this provision too has been properly observed by all concerned.    

If not the penal provisions will apply.

PENAL PROVISIONS

The last sub section {6} lays down the penal provisions to the effect that the person accepting an appointment as a director in contravention of sub-section (1), shall be punishable with fine which shall be minimum five thousand rupees but which may be maximum twenty-five thousand rupees for every day after the first during which the contravention continues. 

CONTINUING OFFENCE

The last sub section indicates commission of continuing offence and can only cease when such commission comes to an end. It was held by Supreme Court in the case of State of Bihar v Deokaran Nenshi , AIR, 1973 SC 908 that  a continuing offence is one which is susceptible of continuance and is distinguishable from the one which is committed once and for all. It is one of those offences which arise out of failure to obey or comply with a rule or its requirement which involves penalty the liability for which continues until the rule or its requirement is obeyed or complied with.

CONCLUSION

The new section 165 of the Companies Act 2013 is definitely an improvement over the law in this regards in the erstwhile Companies Act 1956.  It is more stringent but that is required to make functioning of director more effective by keeping his/her other directorships to a manageable limit, thus getting better attention and commitment. This is expected to give a direction in good corporate governance.

AMITAV GANGULY


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