Wednesday, October 23, 2013

Appointment of Additional Director without DIN by the Sole Director

ABC Pvt. Ltd. Co. is a company which consisted of two members on the Board.  One of the directors died before signing the financials of the company.  The sole director intends to appoint one of the senior officers of the company, who is experienced, efficient and well versed with the financials, as an additional director.   But the said officer does not have Director Identification Number.   Since the financials are urgently required to be signed, the sole director intends to go ahead with the appointment of the additional director.

In the context of the above, the following issues arise for consideration.

1.        Whether a director who is a sole member on the Board of Directors can legally appoint an additional director?

2.        Whether the appointment of an individual who does not have a Director Identification Number is valid in law?

3.        If the answer to the Query No. 2 is in the affirmative, whether signing of the financials of the company by such additional director, pending his allotment of the Director Identification Number, valid in law?

Section 28 of the Companies Act, 1956 provides for Adoption and application of Table A in the case of companies limited by shares, and reads as follows:

“(1) The articles of association of a company limited by shares may adopt all or any of the regulations contained in Table A in Schedule I.

(2) In the case of any such company which is registered after the commencement of this Act, if articles are not registered, or if articles are registered, in so far as the articles do not exclude or modify the regulations contained in Table A aforesaid, those regulations shall, so far as applicable, be the regulations of the company in the same manner and to the same extent as if they were contained in duly registered articles.”

The Supreme Court of India, In Seth Mohan Lal v. Grain Chambers Ltd., (1968) 1 Comp LJ 275 (SC), has held as follows:

“The provisions of Table A will apply to a Company except to the extent that they are not modified or excluded by its articles.”

Regulation 75 of the Table ‘A’ Regulations as contained in Schedule I to the Companies Act, 1956 provides as follows:

"The continuing directors may act notwithstanding any vacancy in the Board; but, if and so long as their number is reduced below the quorum fixed by the Act for a meeting of the Board, the continuing directors or director may act for the purpose of increasing the number of directors to that fixed for the quorum, or of summoning a general meeting of the company, but for no other purpose."

It is pertinent to note the words, "the continuing directors or director may act", occurring in the above Regulation. The said words clearly take within the sweep of the Regulation 75 to deal with a situation wherein, there remains only one director on the Board, and such sole director is required to appoint an additional director or such number of additional directors for the purpose of increasing the number of directors to that fixed for the quorum by the Companies Act, 1956.

The directors cannot act unless the munimum number is first made up. See: Sly, Spink & Co., [Re, (1911) 2 Ch. 430] ; Owen & Ashworth Chaim, [(1901) 1 Ch. 115]. Also that, the Department of Company Affairs has issued a clarification in this regard. The DCA had advised to increase the board strength either by way of co-option or appointment of additional directors, if so authorised by the articles, and to transact the business and if this way out is not possible to call a general meeting. See: Taxmann's Circulars & Clarifications, 1992 Edition at p. 294.

 In view of such position in law, in the instant case, the appointment of additional director by the sole director, if the company concerned has adopted Regulation 75 of Table A as part of its articles, is valid in law.

Accordingly, Query No. 1 is answered.

Proviso to Section 253 of the Companies Act, 1956 reads as follows:

"Provided that no company shall appoint or re-appoint any individual as director of the company unless he has been allotted a Director Identification Number under section 266B."

Clause (a) of Section 266A of the Companies Act, 1956 provides as follows:

"Every individual, intending to be appointed as director of a company, shall make an application for allotment of Director Identification Number to the Central Government in such form, and manner (including electronic form) along with such fee, as may be prescribed:"

Section 266B of the Companies Act, 1956 reads as follows:

"The Central Government shall, within one month from the receipt of the application under section 266A, allot a Director Identification Number to an applicant, in such manner as may be prescribed."

Second Proviso to Section 266A of the Companies Act, 1956 reads as follows:

"Provided further that every applicant, who has made an application under this section for allotment of Director Identification Number, may be appointed as a director in a company, or, hold office as director in a company till such time such applicant has been allotted Director Identification Number."

In view of the above statutory provisions, and in the context of the above, I am of the opinion that an individual can be appointed as an additional director even if such individual is not allotted a DIN, provided that such individual has duly made an application for allotment of DIN before he is appointed as an additional director. In that event, his appointment as an additional director in the company is legally valid till such time such additional director has been allotted DIN.

It is to be noted that, such additional director, as per Section 266D of the Companies Act, 1956, is required to intimate his DIN to the company concerned within one month of its receipt from the Central Government; whereupon, the company concerned is required, as per Section 266E of the Companies Act, 1956, to furnish the DIN of such additional director to the Registrar or relevant authority, if any, within one week of the receipt of intimation under Section 266D by it.

In any case, once the additional director is duly appointed by the sole director, the two directors, having duly constituted on the Board of the company concerned, may immediately sign its financials, which shall be valid in law.

Accordingly, Query Nos. 2 and 3 are answered.

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  4. Hi Balram. Thanks for the great article. I had a question for you. In case someone has been a director in a company for over the last 10 years but got the DIN registered only 6 years ago, is that a punishable offence? If yes, which sections of the law would that fall under? Thanks in advance.


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