Companies Amendment Act-2017 - Analysis of provisions relating to Directors

The Companies Amendment Act,2017 (herein after referred to as the 'Amendment Act') has finally seen the light of the day after a period of prolonged hibernation lasting almost two years. The amended provisions are being notified for application in a phased manner. The Amendment Act comes off as a breath of fresh air in that it eases the rigors of procedure on any matters, sets right the drafting anomalies that had crept in unwittingly in the original version of the Companies Act, 2013 (hereinafter 'the Act') and all told, facilitates the creation of a more friendly Eco-system.

Given the bandwidth of the changes brought about by the Amendment Act, it is well-nigh impossible to capture the nuances of all the changes in the limited confines of a discussion paper. Hence in this exposition, we propose to adopt a sectorial approach and look at the changes which have been made to the realms of directors and Board Management.

Changes to Section 149

Sub-section (3) in the Act has been amended to provide that every company shall have at least one director who stays in India for a total period of not less than 182 days in a financial year. The earlier requirement was that the period of stay shall be determined with reference to a calendar year. The change is appropriate since this will align the sub-section with the provisions of Section 6 of the Income Tax Act,1961 relating to determination of residential status.

A proviso has been inserted under Section 149(3) to stipulate that in case of a newly incorporated company, the requirement of a resident director as above will be relaxed and the period of stay in India shall apply proportionately at the end of the financial year in which the company is incorporated.

Relaxation of the requirements relating to Qualifications as Independent Directors

Clauses (c) and (d) in Section 149(6)in the existing Act which set out ,inter alia, the attributes of an Independent director have been modified.

An Independent director logically is not supposed to have any pecuniary relationship with the company with which he is associated as a Director as this will vitiate his independence.

As per Clause (c) in Section 149(6) as it stood before the Amendment Act, a director was precluded from having a pecuniary relationship with the company, its holding ,subsidiary or associate company or their promoters or directors during the two immediately preceding years or during the current financial year.

Clause (d) to Section 149(6) stipulated that pecuniary relationship shall exist where the director himself or his relatives have transactions the value of which entered into by them with the Company, its holding, Subsidiary or Associate Company or their promoters amount to two percent or more of the Company's gross turnover or total income or fifty lacs or such higher amount as may be prescribed whichever is lower during the two immediately preceding financial years or during the current financial year. Thus the litmus test for constituting pecuniary relationship was the two percent benchmark as above.

The Amendment Act has retained substantially the contents of the original clause ( c) except that the threshold for constituting 'pecuniary relationship' where the Independent Director is concerned ,has been raised to an amount not exceeding ten percent or such amount as may be prescribed of the total income of the independent director from the Company .For computing the above limit income of the Independent director received from the company by way of sitting fees and commission based on net profits of the company which form a part of his 'remuneration' shall be excluded. The increase in the above threshold eases considerably the rigors caused by the earlier thresholds.

In addition, pursuant to amended clause (d) under Section 149(6), the status of an Independent Director will stand vitiated in the following circumstances:

a) where the relatives of the Director have either during the current financial year or during the two immediately preceding financial years –

i) hold any security or interest in the company, its holding ,subsidiary or associate company for a face value not exceeding Rupees fifty lacs or two percent of the paid up share capital of the company or such higher amount as may be prescribed

ii) are indebted to the company or its holding/subsidiary/associate company or to the company's promoters or directors in excess of an amount to be prescribed.

iii) has provided a guarantee or any security in connection with the indebtedness of any third person in the company, its holding/subsidiary/associate company or the Company's promoters or directors of such holding company for such amount as may be prescribed.

iv) has any other pecuniary transaction or relationship with the company , its holding/subsidiary/Associate company for a value amounting to two percent or more of its gross turnover or total income either singly or in combination with the transactions referred to in clauses(i),(ii) or (iii) above.

A proviso is also being inserted after sub- clause(i) under clause(e)of Section 149(6)to the effect that where the director himself or any of his relatives hold or have held the position of a key managerial personnel(KMP) or is or has been an employee of the company or its holding/subsidiary/Associate company in any of the three financial years preceding his appointment as Independent director ,in case the relative of the concerned director is in the employment of the company , the director's independence shall not be influenced or affected by the relative's employment with the company during the preceding three financial years.

The thresholds contemplated under the amended Section 149(6) have to be prescribed through delegated authority in the form of Rules and it is therefore no surprise that this Section has not yet been notified for application.

Be that as it may, suffice to say that the qualifications for being an Independent director will ease considerably upon enforcement of the amended provisions.

Having said that, the language used in the amended provisions stated above is so convoluted that it would be beyond comprehension for a lay reader to discern the true import of the changes. Simplicity of language is cardinal in drafting any legislation but this requirement has been obviously given a go-by above.

Amendment to Section 152(3)

As per the existing law, no person can be appointed as a director of a company unless he has been allotted a Director Identity Number (DIN) under Section 154.The sub-section thus has the effect of debarring a person from being appointed as a Director unless he has been allotted a DIN in the first place.

Given that there are certain issues associated with obtaining the DIN in particular for non-resident directors, the Govt. is contemplating to introduce any identification number other than DIN which would be considered as equivalent to DIN .If the concerned person has obtained such identification number, he will not be called upon to apply for DIN as is evident from the amendment proposed under Section 153.

Although both Section 152 and 153 have been notified for application from February,9, 2018 , the modalities associated with the making of an application for an Identification number which will be similar to DIN have not yet been finalized. Therefore in spite of the notification of the above provisions , as of now, the requirement of a person having a DIN as a pre-requisite for his appointment as Director still continues.

Amendment to Section 160 (1)

Section 160(1) as it stood prior to its amendment provided for the requirement of a deposit of a fee of Rupees one lac or such higher amount to be prescribed for proposing the appointment of a Director at any general meeting apart from the requirement of either the candidate for the appointment or a member proposing the candidature serving upon the company a notice for the appointment within fourteen days from the date of the meeting. In the event of election of the Director or upon the candidate obtaining twenty five percent of the votes cast, the deposit referred to above shall be refunded by the company.

The amendment to Section 160(1) which has been notified effective from February,9, 2018 takes away the requirement of the candidate or the member proposing the candidature making the above deposit in the case of appointment of an Independent Director or where the appointment of a director has been recommended by the Nomination and Remuneration Committee of the Board where the company has constituted such a Committee. Where the company does not have the above Committee, if the appointment bears the recommendation of the Board, the requirement of the deposit shall not arise .

The immediate fall-out of the amendment is that it will encourage the tendency, which was conspicuous during the regime of the 1956 Act , of unscrupulous persons or those with an axe to grind in proposing their candidatures for appointment as directors in reputed companies merely with the intention to embarrass the existing Board as there would now be on down- side to such a endeavor in the form of the requirement of a security deposit and the risk of loss of 75% thereof if the candidate does not garner adequate support thereby imperiling forfeiture of the deposit.

The other related issue which will soon get rekindled is on the point whether the Company will be called upon to take cognizance of a notice received from a single member holding minuscule number of shares proposing a candidature or whether the company can thwart out such provocation by insisting that the notice bears the support of at least members holding 10% or more of the capital of the Company.

Fellow professionals will recall that under the 1956 Act also there was cleavage of views on whether the provisions of Section 190 which called for a special notice from the members for moving resolutions should be read in tandem with Section 188.On the same subject there were conflicting decisions of the Courts with the Calcutta HC ruling in Gopal Vyas v Sinclair Hotels and Transportation Ltd(AIR 1990 Cal 43) that the issue of a notice by a single member who does not carry the support of the requisite strength contemplated under Section 188 would be adequate for the company to act upon by circulating the same to the members for consideration. The contrary view was taken on the issue by the Delhi HC in Amarnath Malhotra v MCS Ltd (1993)(76 Com Cases 469) which followed the decision in Pedley v Inland Waterways Association Ltd(1977)1 All EC209)

Amendment to Section 161(2)-Alternate Directors

The sub-section in its original form provided that any person who is not holding the position of Alternate director in the company could act as an Alternate for any director during the period of his absence from India, subject to the provisions of the Company's Articles. The scope of the subsection is being widened to provide that any person who is already holding directorship in the company shall not be considered for appointment as an Alternate for another.

Amendment to Section 161(4)-Rectification of drafting anomaly

There existed in the original version of the above sub-section an anomaly due to the usage of the words 'In the case of a public company' as a result of which if the office of any director appointed in general meeting stood vacated before the expiry of his term in a private company , the resulting casual vacancy had to be filled up only by a general meeting approval. Therefore whereas a public company could fill up the casual vacancy at the behest of the Board, a private company had to seek the approval of the shareholders for filling up the same vacancy. This was paradoxical.

The anomalous position has now been set right by the Amendment Act through the omission of the words 'In the case of a public company'. Thus a private company can now fill up a casual vacancy on its Board through a Board process.

Having said that , the subsequent portion of the amendment made to Section 161(4) makes intriguing reading. The settled position in the law as propounded by Section 262 in the 1956 Act is that whomsoever is appointed as a director to fill up a casual vacancy in the office of the Director survives the term of the original director whom he has replaced. He comes up for re-appointment only upon the expiry of the tenure of the director whom he has replaced.

The amendment made to sub-section(4) postulates that the appointment of director appointed in a casual vacancy shall be subsequently approved by members in the immediate next general meeting. This construction is contrary to the accepted position in the Statute and makes the status of a person appointed as director to fill a casual vacancy analogous to that of a person appointed as Additional Director who stays in office only till the date of the next Annual General Meeting.

It follows from the above amendment that the status of a director appointed in a casual vacancy in terms of tenure of his office shall be similar to that of an Additional Director.

Relaxation in disqualification provisions-Section 164(2) and (3)

Section 164 of the Act sets out the circumstances that lead to the disqualification of directors. Certain changes are proposed by the Amendment Act which are yet to be notified for enforcement.

A proviso has been added under Section 164(2) which has the effect of insulating a director from disqualification, albeit, for a temporary period.

Under the above provision any person who is or has been a director of a company which has not filed its financial statements or annual returns for any continuous period of three years or has failed to repay deposits accepted by a company or to pay interest thereon or to redeem any debentures or pay interest thereon or to pay any dividend which has been declared and such failure continues for one year or more is ineligible from being re-appointed as director in the company or from being appointed in any other company for a period of five years from the date of occurrence of the default.

The newly added proviso under Section 164(2) states that where a person is being appointed as director in a company which has committed any default contemplated under clause (a) or (b)of Section 164(2), he shall not incur disqualification for a period of six months from the date of his appointment.

The existing proviso under Section 164(3) is being substituted by a new proviso which stipulates as under:

Where a director incurs disqualification for any one of the following reasons as envisaged in clauses ( c ), (d)and (e ) of Section 164(1) :

Conviction by a court of any offence whether involving moral turpitude or otherwise and he has been sentenced to imprisonment for a term which is not less than six months and a period of five years have not elapsed from the date of expiry of the sentence.

- any order passed by a court or Tribunal by which the person has been disqualified from appointment and the order is still in force.

- conviction for an offence dealing with related party transactions under Section 188 during the last preceding five years

- such disqualification shall apply even where the director concerned has filed an appeal or petition against the conviction or disqualification.

Relaxation in the number of directorships-Section 165

The above Section speaks about the number of companies with which a person can be associated as a director.

Explanation II to the Section has been added by the Amendment Act to provide that while calculating the maximum number of directorships a person can hold directorships held in dormant companies shall not be taken into consideration.

Vacation of office of Director-Changes made to Section 167

A proviso has been added under clause (a) in Section 167(1) to stipulate that if any director incurs disqualification under Section 164(2) he shall vacate office in all the companies in which he is a director except in the company in which the default under the said subsection has arisen. This change is in congruence with the proviso inserted under Section 164(2) which echoes the same sentiment.

In addition, the existing proviso under clause (f)of Section 167(1) has been substituted in the Amendment Act.

The result of the above amendment is that where a director has to vacate office in terms of clauses ( e) and ( f)of Section 167(1) respectively for incurring disqualification from appointment in terms of an order of a court or Tribunal or for conviction for an offence whether or not for moral turpitude involving sentencing for a period of less than six months , vacation of office by director shall be held in abeyance for thirty days from the date of conviction or disqualification and where an appeal or petition has been preferred within thirty days against the conviction until the expiry of seven days from the date on which the appeal or petition is disposed off. In cases where a further appeal or petition has been filed against the sentence within seven days, the vacation of offence shall be kept in abeyance until the further appeal is disposed off.

The above changes make the provisions of Section 167 less rigorous and also result in an alignment ,to an extent, of the provisions of Section 164 with Section 167.

Need for Director to inform Registrar about resignation-Section 168

In its original form , the proviso under Section 168(1) stipulated that a Director shall also forward a copy of his resignation along with the reasons therefore to the Registrar within thirty days of his resignation. The use of the words 'director shall also forward' in the proviso led to a view that the filing of the resignation by the director in Form DIR-11 was mandatory and that the resignation would not take effect unless this was done. The replacement of the above words in the Section by the words 'director may also forward' is clearly indicative of the fact that the filing of the subject form would be optional for the director and that his resignation would be complete where he is concerned upon the company taking note of the same.

Resignation by a Director is as much his prerogative as his consent to an appointment and therefore the change in the law making it optional for the director to file his resignation with the Registrar is appropriate and will ease the rigmarole that the director has to undergo by making the filing of his resignation on his part in DIR-11 mandatory.

Conclusion

From the above discussion one can conclude that the amendments brought about are salutary and welcome. The biggest takeaway from the Amendment Act as stated in the introductory remarks is that it softens in many areas the load of procedure, removes the ambiguity that existed in many provisions and also irons out the drafting anomalies that were profligate in the original version of the 2013 enactment. This augurs well for the future and one wishes that after the large scale changes brought about by the Amendment Act , the law will stabilize and not subjected to the proliferation of knee-jerk changes brought about through the maze of Rules and notifications in the last three years or so. What is also irksome is the fact there is considerable delay in enforcing the changes made by the Amendment Act. As of February,9, 2018 only 44 Sections have been notified. Some of the notified provisions need sub-ordinate legislation in the form of Rules which are yet to be announced.