Consequences of accepting appointment of independent or additional director


Last updated: 28 January 2023

Court :
Kolkata High Court

Brief :
This is an eye opener case for those persons, who consents their appointment without knowing further consequences. As pointed out by the Hon’ble Court that the responsibility and duties of a director /additional director are the same. There is only difference on their appointment. The Court also pointed out that a company should file Form DIR-12 for regularisation of appointment of Additional Director in the AGM.

Citation :
SURENDRA KUMAR SINGHI VS REGISTRAR OF COMPANIES, WEST BENGAL & ANR.

KOLKATA HIGH COURT CRR 1751 OF 2020

SURENDRA KUMAR SINGHI VS REGISTRAR OF COMPANIES, WEST BENGAL & ANR.

APPLICABLE PROVISIONS

SECTION 161: APPOINTMENT OF ADDITIONAL DIRECTOR, ALTERNATE DIRECTOR AND NOMINEE DIRECTOR

(1) The articles of a company may confer on its Board of Directors the power to appoint any person, other than a person who fails to get appointed as a director in a general meeting, as an additional director at any time who shall hold office up to the date of the next annual general meeting or the last date on which the annual general meeting should have been held, whichever is earlier.

(2) The Board of Directors of a company may, if so, authorised by its articles or by a resolution passed by the company in general meeting, appoint a person, not being a person holding any alternate directorship for any other director in the company or holding directorship in the same company, to act as an alternate director for a director during his absence for a period of not less than three months from India:

Provided that no person shall be appointed as an alternate director for an independent director unless he is qualified to be appointed as an independent director under the provisions of this Act:

Provided further that an alternate director shall not hold office for a period longer than that permissible to the director in whose place he has been appointed and shall vacate the office if and when the director in whose place he has been appointed returns to India:

Provided also that if the term of office of the original director is determined before he so returns to India, any provision for the automatic re-appointment of retiring directors in default of another appointment shall apply to the original, and not to the alternate director.(Effective from 01-04-2014)

(3) Subject to the articles of a company, the Board may appoint any person as a director nominated by any institution in pursuance of the provisions of any law for the time being in force or of any agreement or by the Central Government or the State Government by virtue of its shareholding in a Government company.

Provided that in case of a Specified IFSC public company, the Board may appoint, any person nominated by any institution or company or body corporate as a director in pursuance of the provisions of any law for the time being in force or of any agreement or by the Central Government or the State Government by virtue of its shareholding in a government company.

Provided that in case of a Specified IFSC private company, the Board may appoint, any person nominated by any institution or company or body corporate as a director in pursuance of the provisions of any law for the time being in force or of any agreement or by the Central Government or the State Government by virtue of its shareholding in a government company.

(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 casual vacancy may, in default of and subject to any regulations in the articles of the company, be filled by the Board of Directors at a meeting of the Board which shall be subsequently approved by members in the immediate next general meeting:

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.

SECTION 152: APPOINTMENT OF DIRECTORS

(1) Where no provision is made in the articles of a company for the appointment of the first director, the subscribers to the memorandum who are individuals shall be deemed to be the first directors of the company until the directors are duly appointed and in case of a One Person Company an individual being member shall be deemed to be its first director until the director or directors are duly appointed by the member in accordance with the provisions of this section.

(2) Save as otherwise expressly provided in this Act, every director shall be appointed by the company in general meeting.

(3) No person shall be appointed as a director of a company unless he has been allotted the Director Identification Number under section 154 or any other number as may be prescribed under section 153.

(4) Every person proposed to be appointed as a director by the company in general meeting or otherwise, shall furnish his Director Identification Number or such other number as may be prescribed under section 153 and a declaration that he is not disqualified to become a director under this Act.

(5) A person appointed as a director shall not act as a director unless he gives his consent to hold the office as director and such consent has been filed with the Registrar within thirty days of his appointment in such manner as may be prescribed:

Provided that in the case of appointment of an independent director in the general meeting, an explanatory statement for such appointment, annexed to the notice for the general meeting, shall include a statement that in the opinion of the Board, he fulfils the conditions specified in this Act for such an appointment.

(6) (a) Unless the articles provide for the retirement of all directors at every annual general meeting, not less than two-thirds of the total number of directors of a public company shall—

(i) be persons whose period of office is liable to determination by retirement of directors by rotation; and

(ii) save as otherwise expressly provided in this Act, be appointed by the company in general meeting.

(b) The remaining directors in the case of any such company shall, in default of, and subject to any regulations in the articles of the company, also be appointed by the company in general meeting.

(c) At the first annual general meeting of a public company held next after the date of the general meeting at which the first directors are appointed in accordance with clauses (a) and (b) and at every subsequent annual general meeting, one-third of such of the directors for the time being as are liable to retire by rotation, or if their number is neither three nor a multiple of three, then, the number nearest to one-third, shall retire from office.

(d) The directors to retire by rotation at every annual general meeting shall be those who have been longest in office since their last appointment, but as between persons who became directors on the same day, those who are to retire shall, in default of and subject to any agreement among themselves, be determined by lot.

(e) At the annual general meeting at which a director retires as aforesaid, the company may fill up the vacancy by appointing the retiring director or some other person thereto.

Explanation. —For the purposes of this sub-section, “total number of directors” shall not include independent directors, whether appointed under this Act or any other law for the time being in force, on the Board of a company.

(7) (a) If the vacancy of the retiring director is not so filled-up and the meeting has not expressly resolved not to fill the vacancy, the meeting shall stand adjourned till the same day in the next week, at the same time and place, or if that day is a national holiday, till the next succeeding day which is not a holiday, at the same time and place.

(b) If at the adjourned meeting also, the vacancy of the retiring director is not filled up and that meeting also has not expressly resolved not to fill the vacancy, the retiring director shall be deemed to have been re-appointed at the adjourned meeting, unless—

(i) at that meeting or at the previous meeting a resolution for the re-appointment of such director has been put to the meeting and lost;

(ii) the retiring director has, by a notice in writing addressed to the company or its Board of directors, expressed his unwillingness to be so re-appointed;

(iii) he is not qualified or is disqualified for appointment;

(iv) a resolution, whether special or ordinary, is required for his appointment or re-appointment by virtue of any provisions of this Act; or

(v) section 162 is applicable to the case.

Explanation. —For the purposes of this section and section 160, the expression “retiring director” means a director retiring by rotation.

SECTION 217(3) IN THE COMPANIES ACT, 1956

The Board shall also be bound to give the fullest information and explanations in its report aforesaid, or in cases falling under the proviso to section 222, in an addendum to that report, on every reservation, qualification or adverse remark contained in the auditors' report.

BRIEF FACTS

  • The petitioner’s case is that the opposite party/complainant has filed a complaint (CS-0108641/2016) before the learned Chief Metropolitan Magistrate, Kolkata against the petitioner stating there in that, M/s Mani Square Limited was incorporated on 30th October, 1959 under the Companies Act, 1956 with paid up share capital of Rs. 66,28,000/- and according to the provisions of Section 217(3) of the Companies Act, 1956, the Board of the company was bound to give fullest information and explanation in its report on every reservation, qualification or adverse remark contained in Auditor’s report.
  • That, upon scrutiny of the Balance-sheet and other documents as on 31st March, 2014 it was found that the Board of Directors did not furnish fullest information and explanation in their Director’s report with respect to the Auditors in their report on Balance Sheet for the year ending on 31st March, 2014.
  • In the Auditor’s Report for the year ending on 31st March, 2014, the auditor has mentioned that there are no dues of Service Tax, VAT, Provident Fund, ESIC which had been deposited on account of any dispute except disputed amount of WBST/VAT of Rs 49.24 Lakhs under the Commercial Tax Party and Revision Board and CST 11.13 Lakhs.
  • This has resulted in violation of provisions of Section 217(3) of the Companies Act, 1956 and the said violation was pointed out to the Directors of the company vide Show Cause dated 30th May, 2016. However, the reply which has been received was not satisfactory and hence, the competent authority has issued instruction to launch prosecution for the aforesaid violation vide their letter dated 28th March, 2016.
  • The petitioner herein has been arraigned along with others as a director of Mani Square Limited. But the opposite party deliberately chose to overlook the fact that the purported violation is in respect of the financial year ending on 31st March, 2014 and not the periods subsequent thereto when the petitioner was appointed as an independent director of M/s Mani Square Limited with effect from 2nd June, 2014 and therefore, the liability which was attempted to be thrust on the petitioner by the opposite party is totally untenable inasmuch as the petitioner did not have any connection with the said Mani Square Limited prior to 2nd June, 2014.
  • Based on the complaint of the opposite parties, the learned Chief Metropolitan Magistrate, Kolkata by his order dated 6th September, 2016 was pleased to take cognizance.
  • On 21st December, 2016, after receiving the file of the case, the learned Metropolitan Magistrate, 10th Court, Kolkata was pleased to issue summons against the petitioner and other accused persons. That the rest of the accused persons on 10th October, 2017 filed an application under Section 205 of the Code of Criminal Procedure through their Learned Advocate and recorded a plea of guilty before the Learned Magistrate and were convicted and sentenced to pay a fine of Rs. 10,000/- only each, in default they were directed to undergo simple imprisonment for fifteen days. The fine amount as directed by the Learned Magistrate was paid by the rest of the accused persons.
  • However, the petitioner being absolutely innocent and having no connection with the alleged circumstances of the instant case, chose not to take the course adopted by the rest of the accused persons and prayed for discharge by filing a petition before the Learned Metropolitan Magistrate, 10th Court at Kolkata but by the impugned order dated 13th March, 2020, the Learned Magistrate was pleased to reject the prayer of the petitioner for discharge, inter alia, on the ground that the proceedings being Summons triable he is not empowered to direct discharge of the accused persons (relying upon the judgment of theSupreme Court in Amit Sibal vs Arvind Kejriwal and Ors. (Reported in (2018) 12 SCC 165).
  • The petitioner has been highly aggrieved by the initiation and continuation of the impugned proceedings and the Learned Magistrate also refused to direct discharge of the petitioner from the case.

THE HON'BLE KOLKATA HIGH COURT DECISION & OBSERVATIONS

Now the main points to be decided in this case are: -

  1. What post was being held by the petitioner on the date of filing the report.
  2. Whether the petitioner is responsible/liable for the offence alleged.

Point No. 1. Form No. DIR – 11 clearly shows that on the date of resignation (30.12.2016) the petitioner was the “Director” of the Company. The said form also shows that the petitioner was with the company as “director” on and from 30.09.2014 to 30.12.2016. As seen from the portal, the petitioner was an “Additional Director” from 02.06.2014 to 30.09.2014. In spite of being shown on the portal as “Additional Director /Director” the petitioner did not lodge any complaint with the Ministry about the alleged wrong information. There is no case that the petitioner had filed any objection to the said wrong information (as alleged) on the portal.

Point No. 2. The board report for the financial year 2013-2014 was filed on 5th September, 2014. From the records it is seen that the petitioner was then an “Additional Director” of the Company. Admittedly the other accused persons have pleaded guilty. The main contention of the petitioner is that he was not attached to the company in the financial year 2013-2014 and as such he is not liable in any manner what so ever. The case of the opposite party is that the board report of the financial year 2013-2014 was filed on 5th September 2014 when the petitioner was an “Additional Director” and as such prima facie becomes liable for the said offences, as filed in this case.

The difference between Directors and Additional directors: -

Basis

Director

Additional Director

Section

A director is appointed as per provisions of Section 152 of the Companies Act, 2013.

Section 161 contains the provisions for appointment of an additional director

Power to Appoint

Members of a company appoint a director.

Additional director is appointed by the Board of the Company

Resolution

Ordinary Resolution

Board Resolution

Term of Office

Generally, 5 years unless the contrary is provided.

Up to the date of the Annual General Meeting or the Last date up to which AGM should have been held.

PLEASE NOTE THAT: an Additional Director is a director having the same powers, responsibilities and duties as other directors. The only difference between them is regards to their appointing authority and their term of office.

POWERS AND OBLIGATIONS

Though appointed on a temporary basis; an additional director is vested with the same powers of a director. Moreover, they are subject to all obligations and limitations of a director. They are also entitled to seek appointment as a permanent director at the Annual General Meeting.

The additional director must utilize his/her powers in the best interest of the company and the shareholders.

ADDITIONAL DIRECTOR-SECTION 161

Section 161(1) provides that the articles of a company may confer on its Board of Directors the power to appoint any person, other than a person who fails to get appointed as a director in a general meeting, as an additional director at any time who shall hold office up to the date of the NEXT ANNUAL GENERAL MEETINGor the last date on which the annual general meeting should have been held, whichever is earlier.

PLEASE NOTE THAT

For Regularization of Additional Director Many people claim that the ROC knows about this director, as the company had already filed DIR 12 at the time of his appointment as additional director. So, following regularization DIR 12 is not required to be filed, which is absolutely a wrong understanding. Since he is now a director, and not an additional director. Therefore, ROC must be informed by filing a new DIR 12 that the additional director has been regularized as a director in the Company.

Moreover, additional directors are on equal footing, in terms of, of power, rights, duties, and responsibilities, as other directors are. Yet, tenure of additional director is up to the date of forthcoming AGM unlike directors which are duly appointed by shareholders in the general meeting. If the company wishes to continue with an additional director beyond the AGM, then it will have to go for his/her regularization.

The Supreme Court in Shiv Kumar Jatia vs. State of NCT of Delhi, Criminal Appeal nos. 1263, 1264 and 1265-1267 of 2019, held: -

“27. The liability of the Directors /the controlling authorities of company, in a corporate criminal liability is elaborately considered by this Court in the case of Sunil Bharti Mittal. In the aforesaid case, while considering the circumstances when Director/person in charge of the affairs of the company can also be prosecuted, when the company is an accused person, this Court has held, a corporate entity is an artificial person which acts through its officers, Directors, Managing Director, Chairman, etc. If such a company commits an offence involving mens rea, it would normally be the intent and action of that individual who would act on behalf of the company. At the same time, it is observed that it is the cardinal principle of criminal jurisprudence that there is no vicarious liability unless the Statute specifically provides for.

It is further held by this Court, an individual who has perpetrated the commission of an offence on behalf of the company can be made an accused, along with the company, if there is sufficient evidence of his active role coupled with criminal intent. Further it is also held that an individual can be implicated in those cases where statutory regime itself attracts the doctrine of vicarious liability, by specifically incorporating such a provision.

29. By applying the ratio laid down by this Court in the case of Sunil Bharti Mittal it is clear that an individual either as a director or a Managing Director or Chairman of the company can be made an accused, along with the company, only if there is sufficient material to prove his active role coupled with the criminal intent. Further the criminal intent alleged must have direct nexus with the accused.

Further in the case of Maksud Saiyed vs. State of Gujarat & Ors. this Court has examined the vicarious liability of Directors for the charges levelled against the Company. In the aforesaid judgment this Court has held that, the Penal Code does not contain any provision for attaching vicarious liability on the part of the Managing Director or the Directors of the Company, when the accused is a Company.

It is held that vicarious liability of the Managing Director and Director would arise provided any provision exists in that behalf in the Statute. It is further held that Statutes indisputably must provide fixing such vicarious liability. It is also held that, even for the said purpose, it is obligatory on the part of the complainant to make requisite allegations which would attract the provisions constituting vicarious liability.

30. In the judgment of this Court in the case of Sharad Kumar Sanghi vs. Sangita Rane while examining the allegations made against the Managing Director of a Company, in which, company was not made a party, this Court has held that when the allegations made against the Managing Director are vague in nature, same can be the ground for quashing the proceedings under Section 482 of Cr.P.C.

In the case on hand principally the allegations are made against the first accused company which runs Hotel Hyatt Regency. At the same time, the Managing Director of such company who is accused no.2 is a party by making vague allegations that he was attending all the meetings of the company and various decisions were being taken under his signatures. Applying the ratio 18 laid down in the aforesaid cases, it is clear that principally the allegations are made only against the company and other staff members who are in charge of day to day affairs of the company. In absence of specific allegations against the Managing Director of the company and having regard to nature of allegations made which are vague in nature, we are of the view that it is a fit case for quashing the proceedings, so far as the Managing Director is concerned.”

  • In the present case the petitioner as seen from the documents was an Additional Director on the date the board report was filed. To counter the same evidence is required to be adduced during trial so also to decide as to whether the petitioner at the relevant time of filing the report was a Director, Additional Director or an Independent Director.
  • The responsibility of an Additional Director being the same as that of a director (but difficult from an independent director) they remain responsible, as the statute provides for the same.
  • Thus to quash the proceedings by exercising this Courts inherent powers would amount to an abuse of the process of Court and would also amount to serious miscarriage of justice.

CONCLUSION

This is an eye opener case for those persons, who consents their appointment without knowing further consequences. As pointed out by the Hon’ble Court that the responsibility and duties of a director /additional director are the same. There is only difference on their appointment. The Court also pointed out that a company should file Form DIR-12 for regularisation of appointment of Additional Director in the AGM.

 



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