SAT ruling to aid appointment of independent directors
June 06, 2023 | 3 comments
The Securities Appellate Tribunal (SAT) has ruled against the Securities and Exchange
Board of India (Sebi) and NSE in a recent matter that pertains to the appointment of an independent director
(ID) by Nectar Life Sciences.
This is an important ruling from the perspective of filling up the casual vacancy by the death of an ID, said
experts.
“Many companies that have not obtained prior shareholders’ approval can take shield of this order and avoid
penalty accordingly,” said Gaurav Pingle, a chartered accountant. “The word ‘unless’ in Regulation 17(1A) does
not mean ‘prior approval’ nor the requirement of passing a special resolution is a qualifying condition for
appointment of a person as a director.”
The matter
SS Chauhan, who died on November 22, 2020, was a non-executive ID at Nectar Life Sciences, resulting in a
casual vacancy in the board of directors.
This vacancy was required to be filled up within three months. On February 13, 2021, the company appointed
Ajit Singh Dhillon, who is over 75 years, as an additional ID.
Under the Companies Act, a casual vacancy can be filled up by the board of directors but the same is required
to be approved by the shareholders within a stipulated time period. Before such a resolution could be passed,
Dhillon resigned from the board, 132 days after he was appointed.
On August 20, 2021, the NSE directed the company to pay Rs 3,11,520 for non-compliance of the LODR Regulations
and Regulation 17(1A) for the quarter ended June 2021.
“SAT has made a clear distinction between the casual vacancy created by the death and casual vacancy created
by the resignation or removal of a director. In the former, SAT has ruled that the casual vacancy has to be
filled up by the board within 3 months and approved by the shareholders’ resolution in the next general
meeting. SAT has rightly ruled that there is no special provision requiring the prior approval of the
shareholders for appointment of a director above the age of 75,” said Yashesh Ashar, partner, Illume Advisory.
SAT’s interpretation
According to the Section 152(2) and Section 161(4) of the Companies Act, a director can only be appointed by
the shareholders of the company in the general meeting. However, in case where the office of a director is
vacated before his term of office expires which results in a casual vacancy then such vacancy can be filled up
by the board of directors within three months and such appointment has to be approved by the members in the
immediate next general meeting.
Regulation 17(1A) of LODR 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.
SAT observed that there is no provision in the LODR 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 Companies 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 Companies Act.
A harmonious reading of section 17(1A) and rule 4 of regulation 17(1C) of the LODR regulations with the
provisions of Sections 152, 161(4) of the Companies Act makes it clear that even if a person above the age of
75 years is appointed by the board of directors to fill up a casual vacancy, such appointment is required to
be approved subsequently within the prescribed period by a special resolution in the next general meeting by
the members of the company.
“The word ‘unless’ depicted in Regulation 17(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,” SAT observed.
Regulation 17 (1A) says: “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 seventy five 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.”
