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Are Share Holders Third Party to the Company?

CS Sagar Khandelwal (Practice) (87 Points)

02 May 2011

Hi Experts,

As per the provisions of Section 260 of the companies act directors appointed by third party are not considered as Additional Directors, Pleaseadvice if the Share Holders are Third Party to the Company and is Nominee Directors appointed by Share Holders out of the perview of Section 260 of the Companies Act 1956.

Thanks in Advance

Sagar RK

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4 Replies

ABIR KUMAR DEB (Student-CA FINAL(New)) (153 Points)
Replied 02 May 2011

Shareholders are the owners of the company not 3rd parties. As far as i know,there is no provision in the Act relating to the appointment of nominee directors by shareholders.Generally the 3rd parties are financial institutions/banks which have provided financial assistance to the company.The main objective of appointment of nominee directors is that a borrower company complies with all the legal requirements under the Act. To conclude: 1)Additional directors are different from nominee directors and are appointed by BOD and fall under the purview of Sec 260. 2)Nominee directors are appointed by 3rd parties and do not fall within the purview of Sec 260. 3)Shareholders are not the 3rd parties and cannot appoint nominee directors. Thanks and Regards

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rahul gautam (n.a) (25 Points)
Replied 03 May 2011

I do agree with Abir shareholders are never third parties instead they are the owners. Nominee Directors represent their bank's, financial institution stake in the company thay have invested. Whereas the additional directors are appointed by the board u/s 260 for various reason, appointing them as MD or Wholetime Director being some of them.

CS Sagar Khandelwal (Practice) (87 Points)
Replied 03 May 2011

What happens in a case of a Joint Venture Company where directors are nominee of the Share Holders.... do they need to comply with Section 260???

ABIR KUMAR DEB (Student-CA FINAL(New)) (153 Points)
Replied 04 May 2011

There is no provision in the Companies Act relating to the appointment of nominee directors by shareholders.Also the law does not define nominee directors.A standard defination of nominee director is "Person who acts as a Non Executive Director on the Board of Directors of a firm, on behalf of another person or firm such as bank, investor or lender.” The defination includes investors which includes shareholders as well.Thus shareholders may nominate directors but the Act is silent here.Further authorisation of articles is also needed for appointment of nominee directors by shareholders.Their position will be the same as that of any other director.But Sec 260 does not speak anything about nominee directors.But the nominee directors so appointed would be subject to sec 255,256,257. Note:This opinion is as per my view only. Thanks and Regards.