FILLING THE CASUAL VACANCY OF INDEPENDENT DIRECTOR CAUSED BY REIGNATION OF INDEPENDENT DIRECTOR OF OVER 75 YEARS OF AGE

[Mr. M. GOVINDARAJAN]

Appointment of Board of Directors

Section 149 of the Companies Act, 2013 (‘Act’ for short) provides that every company shall have a Board of Directors consisting of individuals as Directors.   Section 152(2) of the Act provides that Directors can only be appointed by the Company in a general meeting.

Casual vacancy

Section 161(4) provides for filling up of a casual vacancy by the Board of Director. The said section provides that if the office of any director appointed by the company in general meeting is vacated before his term of office expires in the normal course, the resulting casual vacancy may, in default of and subject to any regulations in the articles of the company, be filled by the Board of Directors at a meeting of the Board which shall be subsequently approved by members in the immediate next general meeting.   Any person so appointed shall hold office only up to the date up to which the director in whose place he is appointed would have held office if it had not been vacated.

Independent director

Rule 4(1) of the Companies (Appointment and Qualifications of Directors) Rules, 2014 (‘Rules’ for short) provide for the appointment of independent directors by the eligible company.  That company shall have at least 2 independent directors.  Any intermittent vacancy of an independent director shall be filled-up by the Board at the earliest but not later than immediate next Board meeting or three months from the date of such vacancy, whichever is later.

Regulation 25(6) of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Regulations’ for short) provides that an independent director who resigns or is removed from the board of directors of the listed entity shall be replaced by a new independent director by listed entity at the earliest but not later than the immediate next meeting of the board of directors or three months from the date of such vacancy, whichever is late. Where the listed entity fulfils the requirement of independent directors in its board of directors without filling the vacancy created by such resignation or removal, the requirement of replacement by a new independent director shall not apply.

In ‘NECTAR LIFE SCIENCES LTD. VERSUS SECURITIES AND EXCHANGE BOARD OF INDIA, NATIONAL STOCK EXCHANGE OF INDIA LTD. - 2023 (5) TMI 447 - SECURITIES APPELLATE TRIBUNAL, MUMBAI, one Dr. (Maj. Gen) S.S.Chauhan (retired) was a non executive independent director in the appellant company.  He died on 22.11.2020.  Therefore a casual vacancy arose.  The Board of Directors of the appellant on the recommendations of Nomination and Remuneration Committee resolved to appoint Dr. Maj.Gen. (retired) Ajit Singh Dhillon in the meeting held on 13.02.2021 as an Additional Independent Director who was 75 years and 9 months at the time of his appointment.

Before getting the approval of the shareholders for the appointment of the Additional Independent Director, he resigned his office with effect from 24.06.2021 after rendering service as Additional Independent Director for a period of 132 days.

Regulation 17(1A) of provides that no listed entity shall appoint a person or continue the directorship of any person as a non-executive director who has attained the age of 75 years unless a special resolution is passed to that effect, in which case the explanatory statement annexed to the notice for such motion shall indicate the justification for appointing such a person.  Regulation 17(1C) indicates that the listed entity shall ensure that the appointment of a person on the Board of Directors is approved by the shareholders at the next general meeting or within a period of three months from the date of appointment whichever is earlier.

National Stock Exchange (‘NSE’ for short) issued a notice, dated 20.08.2021 to the appellant for non compliance of Regulations.  NSE directed the appellants to pay a fine of Rs.3,11,520/- for non compliance of Regulation 17(1A) for the quarter ended 30^th June, 2021.  The appellant, thereafter, made an application before NSE for the waiver of fine vide his application dated 25.08.2021.  The said application was rejected by NSE vide their order dated 12.07.2022 on the ground that the provisions of Regulation 17(1A) is mandatory and that no person can be appointed as a Non-Executive Independent Director who is more than 75 years of age unless a special resolution is passed by the shareholders of the Company.  The Committee further observed that the requirement of passing a special resolution is a qualificatory condition for appointment of a person as a Director under Regulation 17(1A).

The appellant challenged the said order before this Tribunal.  The Tribunal framed the issue for its decision in this appeal is  whether prior approval is required to be taken from the shareholders of the Company through a special resolution before a person who has attained the age of 75 years can be appointed to fill up a casual vacancy.

For this purposes the Tribunal analyzed the relevant provisions of the Act and Regulations.  The Tribunal found that Regulation 25(6) relates to a vacancy being created on account of removal or resignation of a Director under Section 168 and 169 of the Act. It does not relate to filling up a casual vacancy under Section 161(4) on account of death of a Director. Regulation 17(1A) provides that no person shall be appointed or continue the directorship as a Non-Executive Director who has attained the age of 75 years unless a special resolution is passed to that effect by the members in the general meeting.   Regulation 17(1C) indicates that the listed entity shall ensure that the appointment of a person on the Board of Directors is approved by the shareholders at the next general meeting or within a period of three months from the date of appointment whichever is earlier.

The Tribunal observed that upon the death of Dr. Chauhan on 22nd November, 2020, a casual vacancy in the office of Independent Director came into existence which could be filled up by the Board of Directors under Section 161(4) of the Act read with Regulation 17(1C) and proviso to Rule 4 of the Rules. Such appointment was required to be subsequently approved by the shareholders of the Committee in the next general meeting.  The Tribunal, in view of the above facts, made it clear of the following-

• There is no provision in the Regulations for filling up a casual vacancy of a Director in a Company.  Casual vacancy can only be filled up under Section 161(4) of the Act read with the proviso to Rule 4 of the Rules.
• Regulation 17(1A) is not applicable for purpose of filling up a casual vacancy under Section 161(4) of the Act.
• Regulation 17(1A) cannot be read in isolation. It has to be read along with Section 152(5) of the Act.
• Under the proviso to Section 152(5) the Board of Directors has to justify that the person who is going to be appointed as an Independent Director fulfills the conditions for appointment of such a Director as specified in the Act whereas under Regulation 17(1A) a special resolution is required to be passed indicating the justification for appointment of such person.

The Tribunal was of the opinion that when an appointment of an Independent Director above the age of 75 years is made by the Board of Directors under Section 161(4) such appointment is required to be approved by the shareholders of the Company in the next general meeting to be passed by a special resolution. The Board of Director would be required to indicate in the explanatory statement that the person fulfills the qualifications specified in the Act and also quote reasons for appointing such person who has crossed the age of 75 years.

The Tribunal further observed that the word ‘unless’ depicted in Regulation 7(1A) does not mean ‘prior approval’ nor the requirement of passing a special resolution is a qualificatory condition for appointment of a person as a Director.   The Tribunal held that the finding of the respondent that no persons can be appointed or continued to be appointed as a Non-Executive Director unless prior approval of the shareholders is made is erroneous. The impugned order cannot be sustained.  The Tribunal held that no penalty could have been imposed for violation of Regulation 17(1A) of the Regulations.  Nothing has been brought on record to indicate violation of any provision of the Act or Regulation 17(1C) of the Regulations.   The Tribunal allowed the appeal and quashed the impugned order.