Directors Beware
Number of companies in which a person can hold the office of a director
Section 275 (Read along with Section 276, 277, 278 & 279) of the Companies Act, 1956
Vs.
Clause 165 of the Companies Bill 2012
A comparison of old and new provisions
Companies Bill 2012 is all set to replace the 56 year old Companies Act 1956. In this article I am about to discuss the issues related with “Number of companies in which a person can hold the office of a director”. Before going into this interesting discussion let us see the provisions contained in both the Companies Act, 1956 and the Companies Bill, 2012.
Provisions contained in the Companies Act, 1956
Section 275 - No person to be a director of more than fifteen companies:
After the commencement of this Act, no person shall, save as otherwise provided in section 276, hold office at the same time as director in more than fifteen companies. [Earlier this limit was twenty companies - Substituted for "twenty companies" by the Companies (Amendment) Act, 2000, w.e.f. 13-12-2000]
Section 276 - Choice to be made by director of more than fifteen companies at commencement of Act:
(1) Any person holding office as director in more than companies immediately before the commencement of the Companies (Amendment) Act, 2000 shall, within two months from such commencement,—
(a) choose not more than fifteen of those companies, as companies in which he wishes to continue to hold the office of director;
(b) resign his office as director in the other companies; and
(c) intimate the choice made by him under clause (a) to each of the companies in which he was holding the office of director before such commencement, to the Registrar having jurisdiction in respect of each such company, and also to the Central Government.
(2) Any resignation made in pursuance of clause (b) of sub-section (1) shall become effective immediately on the despatch thereof to the company concerned.
(3) No such person shall act as director—
(a) In more than fifteen companies, after the expiry of two months from the commencement of the Companies (Amendment) Act, 2000; or
(b) Of any company after despatching the resignation of his office as director thereof, in pursuance of clause (b) of sub-section (1).
Section 277 - Choice by person becoming director of more than fifteen companies after commencement of Act:
(1) Where a person already holding the office of director in fifteen companies is appointed, after the commencement of the Companies (Amendment) Act, 2000, as a director of any other company, the appointment—
(a) shall not take effect unless such person has, within fifteen days thereof, effectively vacated his office as director in any of the companies in which he was already a director; and
(b) shall become void immediately on the expiry of the fifteen days if he has not, before such expiry, effectively vacated his office as director in any of the other companies aforesaid.
(2) Where a person already holding the office of director in fourteen companies or less is appointed, after the commencement of the Companies (Amendment) Act, 2000], as a director of other companies, making the total number of his directorships more than fifteen, he shall choose the directorships which he wishes to continue to hold or to accept, so however that the total number of the directorships, old and new, held by him shall not exceed fifteen.
None of the new appointments of director shall take effect until such choice is made; and all the new appointments shall become void if the choice is not made within fifteen days of the day on which the last of them was made.
Section 278 - Exclusion of certain directorships for the purposes of sections 275, 276 and 277:
(1) In calculating, for the purposes of sections 275, 276 and 277, the number of companies of which a person may be a director, the following companies shall be excluded, namely:—
(a) a private company which is neither a subsidiary nor a holding company of a public company;
(b) an unlimited company;
(c) an association not carrying on business for profit or which prohibits the payment of a dividend;
(d) a company in which such person is only an alternate director, that is to say, a director who is only qualified to act as such during the absence or incapacity of some other director.
(2) In making the calculation aforesaid, any company referred to in clauses (a), (b) and (c) of sub-section (1) shall be excluded for a period of three months from the date on which the company ceases to fall within the purview of those clauses.
Section 279 – Penalty:
Any person who holds office, or acts, as a director of more than fifteen companies in contravention of the foregoing provisions shall be punishable with fine which may extend to fifty thousand rupees in respect of each of those companies after the first fifteen.
Provisions contained in the Companies Bill, 2012
Clause 165:
(1) No person, after the commencement of this Act, shall hold office as a director, including any alternate directorship, in more than twenty companies at the same time:
Provided that the maximum number of public companies in which a person can be appointed as a director shall not exceed ten.
Explanation.— For reckoning the limit of public companies in which a person can be appointed as director, directorship in private companies that are either holding or subsidiary company of a public company shall be included.
(2) Subject to the provisions of sub-section (1), the members of a company may, by special resolution, specify any lesser number of companies in which a director of the company may act as directors.
(3) Any person holding office as director in companies more than the limits as specified in sub-section (1), immediately before the commencement of this Act shall, within a period of one year from such commencement,—
(a) choose not more than the specified limit of those companies, as companies in which he wishes to continue to hold the office of director;
(b) resign his office as director in the other remaining companies; and
(c) intimate the choice made by him under clause (a), to each of the companies in which he was holding the office of director before such commencement and to the Registrar having jurisdiction in respect of each such company.
(4) Any resignation made in pursuance of clause (b) of sub-section (3) shall become effective immediately on the despatch thereof to the company concerned.
(5) No such person shall act as director in more than the specified number of companies,—
(a) after despatching the resignation of his office as director or non-executive director thereof, in pursuance of clause (b) of sub-section (3); or
(b) after the expiry of one year from the commencement of this Act, whichever is earlier.
(6) If a person accepts an appointment as a director in contravention of sub-section (1), he shall be punishable with fine which shall not be less than five thousand rupees but which may extend to twenty-five thousand rupees for every day after the first during which the contravention continues.
Major Changes in Companies Bill 2012 compared to Companies Act 1956
1) Number of companies in which a person can hold the office of a director increased from 15 to 20.
2) For calculation of 20 companies Alternate Directorship to be included. Earlier in calculation of 15 companies Alternate directorship was not included.
3) Maximum number of public companies in which a person can hold directorship restricted to 10 including private limited companies that are holding or subsidiary of a public companies.
4) Members, by passing special resolution, specify any lesser number of companies in which a director of the company may act as directors.
5) No specific exclusion of Private Limited companies.
Effects as and when these new changes become effective i.e., Companies Bill 2012 takes over the Companies Act 1956
Plenty of resignations on card. Yes, number of public companies in which a person can hold the office of a director has come down from 15 to 10. So persons who are director in more than 10 public companies or deemed public companies should get ready to choose the 10 public companies in which they want to remain as director and resign from remaining companies. For this they have been granted a period of 1 year vide Clause 165(3).
Now coming to persons who are director in huge number of private limited companies. Under Companies Act, 1956, for counting the number of companies in which a person can hold the office of a director some specific exclusions were given vide Section 278. For counting the directorship in 15 companies, directorship in private limited companies was not taken into consideration. Technically a person could be director in any number of private limited companies. As a result of this privilege there are many persons who hold the directorship in more than 100’s of private limited companies. Now under the new provisions in Companies Bill, 2012 the total number of directorship has been restricted to 20.There is no specific exclusion with regard to directorship in private limited company. So all those persons who are directors in large number of private limited companies shall get ready to resign, so as to restrict the total number of directorship to 20. They have been granted a period of 1 year vide Clause 165(3) to resign from directorship so as to restrict the number of directorship to 20.
According to me it is a very good initiative. It will stop formation of fake companies since there is restriction on number of directorship on private companies as well. Wish it results in greater accountability for directors.
(Please discuss the issue and raise your queries, if any.)
Thanks & Regards
Sanjay Gupta.
CAclubindia
