The role of proxy directors

The extant regime on appointment of alternate directors has been coming for sharp criticism. The Companies Bill, 2011 (the Bill) seeks to remove some of the rough edges and bring clarity to areas that were mired in doubt. The extant regime allows appointment of alternate directors by the board of directors of a company if the original director is likely to be away for not less than three months from the state in India in which the board meetings are ordinarily held with the alternate director automatically vacating the position as soon as the original director returns to such state.

This threw up many awkward questions for which there were no answers. What if board meetings are held at different places in India and what happens in that event to the status of the alternate director. The Bill ends these awkward uncertainties and questions by allowing alternate directors to be appointed only when the original director is likely to be away from India for not less than three months with the alternate director automatically vacating the office on the original director's return to India.

This is a welcome change inasmuch as video conferencing, which is a permitted form of meeting, renders the institution of alternate directors largely redundant. It has perhaps been retained for foreign directors in the dawning realisation that the time zones are different and it might not be proper to expect the original director abroad to wake up for a board meeting held according to IST and go back to sleep once the meeting is over. It must, however, be pointed out that the new regime while catering more to foreigners is not out of bounds for Indians. Therefore Indian directors going abroad for more than three months can also have an alternate director appointed.

There are other improvements as well. At present, one can be a proxy director for more than one director so much so that it is not uncommon to find an Indian resident standing in for as many as four or more directors in a huge display of farce. The proposed new regime brings sanity to the institution by mandating that one can at best be an alternate director standing in for only one original director.

Improvements

The present regime assumes that in any case all foreign directors for whom the dispensation is largely useful think alike and one proxy would do their collective but similar biddings. And this was largely responsible for the invidious veto power given to such a proxy stemming out of the fear that if a person is standing in for four or five, their will may not be sufficiently asserted in a one director one vote dispensation.

It happens at present and is going to be countenanced by the new regime as well. A director wearing two hats would be at his wits' end if his heart does not agree with what his principal says. To spare him of such embarrassment, he should not be put in such a dual role where he is constrained to bite the bullet, kill his conscience and do the foreigner's bidding.

The law is silent on the liability of the proxy director. Is he liable for his actions or would he be able to pass the buck onto the original director for whom he is standing in?

LIABILITY

This grey area has not been cleared in the Bill. Similarly, can the proxy director break free of the original director and assert his will? In other words, can he go against the dictates of the original director? Is he an agent simpliciter? What happens if the original director returns before three months? This festering issue has not been answered even in the proposed new regime. Will the appointment of the proxy be assailed on this ground alone? The Bill would have done well to be more explicit on all these and other issues.

Boards meetings are a structured affair with proper agenda. Would it not be conducive to greater participation and certainty had the foreign directors been allowed to email their views on a given issue instead of being permitted to nominate a person and recommend him to the Board? A go-between tends to sour the relationship. In any case, the Bill must be hailed for narrowing the scope for appointment of proxy directors.

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