Practicing CA
834 Points
Joined February 2012
DIRECTORS RETIRE BY ROTATION
Applicability: Applicable for Public Companies and subsidiary of Public Companies.
Not Applicable for Private Company which is not a subsidiary of public company andSection 25 Company. However the Articles of Association of Private limited Company may have the provisions relating to rotational directors and retirement of directors.
Purpose of Retirement by Rotation:
Appointment of directors is made by the shareholders in Public Companies. As the directors retiring are eligible for reappointment, the shareholders have a right to appoint him or refuse to appoint the directors for the interest and affairs of the company and public interest.
If the retirement by rotation is not there in public companies the directors holds office for a long time and if there is any fraudulent practice made by the directors it cannot be avoided.
In case of Private Companies these type of fraud is not possible as they are closely held companies, having the promoters and directors as their own family members.
Also in case of Sec 25 Companies, as they are not making profit there wont be any activities againt public interest.
Provisions under Companies Act 1956:
As per sec 255 of Companies Act 1956, in case of a public companies and subsidiaries of public companies unless the articles provide for the retirement by rotation at every annual general meeting, not less than two third of the total number of directors will be the rotational directors. And they are eligible for reappointment in the AGM.
As per Sec 256 of Companies Act 1956, one third of the rotational directors (two third of the total number of directors) will get retired every year at the AGM. In calculation if the answer results in decimal the number will be rounder off to next number.
Example for Retirement by Rotation
|
Situation
|
Total No of Directors
|
Rotational Directors eligible for reappointment (2/3 of total directors)
|
Outcome
1/3 of 2/3
|
Retiring Director (1/3 of rotational directors)
|
|
A
|
9
|
6.00
|
2.00
|
2
|
|
B
|
8
|
5.33
|
1.78
|
2
|
|
C
|
7
|
4.67
|
1.56
|
2
|
|
D
|
6
|
4.00
|
1.33
|
1
|
|
E
|
5
|
3.34
|
1.11
|
1
|
If the one third of the rotational directors comes to two directors, they will be retired based on the date of appointment, who was holding office for a long time will get retired.
If both are appointed on the same day they will be selected by lot.
Directors not included in Rotational Directors:
The following directors are not included in the rotational directors:
· The Managing directors and whole time directors
· The additional directors as they can hold office only till the next annual general meeting.
· The Alternate directors, only the original director instead of whom the alternate director is appointed is included in rotational directors
· The nominee directors and directors appointed by government.
Retirement by Managing Director
A Managing Director is normally a non rotational director and he is appointed for a period of 5 years. Even though the Managing director is not retiring by rotation if required he may retire by rotation at the AGM.
Draft Shareholders Resolution at the Annual General Meeting
“RESOLVED THAT pursuant the provisions of Section 255 and 256 of the Companies Act, 1956 Mr. A , who retires by rotation, and being eligible, offers himself for re-appointment, be and is hereby re-appointed as a director of the Company, liable to retire by rotation.
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