The Hindu Business Line : In the company of ambiguity

AN ADDITIONAL director appointed by the board in terms of Section 260 of the Companies Act, 1956 (the Act) holds office "up to the date of the next annual general meeting of the company." The use of the words `up to' has created avoidable confusion. The Department's views, vide its letter dated February 5, 1963, is as follows:

"The Department is advised that under Section 260 an additional director appointed by the board of directors of a company ceases to hold office as additional director immediately before the commencement of the next annual general meeting of the company as contemplated by Section 260 and in any event he cannot continue in office after the expiry of the statutory period laid down in Section 166 for holding an annual general meeting of the company."

While coming to this view, the Department has also set store by the contrasting language of Section 224 in the context of tenure of auditor. According to Section 224, an auditor appointed at an AGM holds office "from the conclusion of that meeting until the conclusion of the next annual general meeting."

The learned author Ramiah, in his celebrated work Guide to the Companies Act, has questioned this view of the Department. According to him, if the directors retiring by rotation can continue till the AGM is over, why can't the additional directors.

But then Section 256, dealing, inter alia, with this issue in the context of the retiring directors, is not happily worded either.

It is as ambiguous as Section 260 in this regard. It says, "at every ... annual general meeting one-third of the directors for the time being as are liable to retire by rotation ... shall retire from office."

This again begs the question: At which precise point of time?

The problem is not merely relating to semantics. The clarity with which Section 224 in the context of auditors deals with the issue is to be devoutly wished in the context of directors as well. For, there can be a void otherwise. For example, the strength of the board may be just three — the statutory minimum for a public company — including an additional director. If he has to step down before the meeting, as opined by the Department, there would be a vacuum in the board should the meeting be adjourned.

There is another issue. There is a string of judgments holding the view that a director retiring by rotation as well as an additional director cannot prolong his term in office by postponing the annual general meeting beyond the last date by which it should have been held (B. R. Kundra vs Motion Pictures Association — 1976 46 Com Cases 339).

According to Section 166, two successive annual general meetings cannot be separated in time by more than 15 months. But the Registrar may, for any special reason, extend this time limit by a period not exceeding three months.

The moot question is: Can the retiring director and additional director continue in office till the date extended by the Registrar or have they to hang their boots immediately on the expiry of 15 months from the last AGM?

This issue is not merely pedantic. Because the acts of the directors done during the interregnum between the 15-month deadline and the extended period can be assailed if it is proved that but for the presence and support of the retiring and additional directors, the resolutions passed by the board during this period would not have been through? Section 290 only saves acts of directors from being assailed on grounds of, among other things, invalid appointment, if such invalidity, for example, is discovered afterwards.

It does not save acts done by a director whose term of office has expired but continues to act (Karnal Distillery Co vs Ladli Prashad — AIR 1960 Punj 655).

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