Alternate Director
Before proceeding to the section, its best to understand the concept and the logic.
Concept : who is an alternate director
An Alternate Director is exactly what he is called i.e. an ‘Alternate’ or a ‘next best alternative’ for the person discharging the functions of the Original Director.
Logic behind appointing an alternate director
1) The first one is pretty simple – there may be only two Directors in a company, one of which may be absent from the state (or country) and to meet the quorum requirements for meetings, presence of two directors is necessary. However, the Board may not be willing to appoint someone as an Additional Director, whose term of office will be independent of anybody else’s term of office, and hence, an alternate will be used.
2) Typically, the Alternate Director may be the next person in charge of the department which the original director is heading. In this case, the alternate will more or less be ‘acting for and on behalf of the original director’.
3) Useful for cases where the original director is the first choice of the rest of the Board to act as a Director, and the Board clearly wishes that once the original director returns, the alternate should give up his office.
4) Alternate Directors may even be used in cases where all the original directors are foreign nationals (permissible currently) and there are difficulties in holding Board Meetings since all are at different places in the world. This, however, would apply only in cases where the Board (comprising of the original foreign nationals) has complete confidence in the Indian nationals who are appointed as the alternates.
Section 313
(1) The Board of directors of a company may, if so authorised by its articles or by a resolution passed by the company in general meeting, appoint an alternate director to act for a director (hereinafter in this section called "the original director") during his absence for a period of not less than three months from the State in which meetings of the Board are ordinarily held.
(2) An alternate director appointed under sub-section (1) shall not hold office as such for a period longer than that permissible to the original director in whose place he has been appointed and shall vacate office if and when the original director returns to the State in which meetings of the Board are ordinarily held.
(3) If the term of office of the original director is determined before he so returns to the State aforesaid, any provision for the automatic re-appointment of retiring directors in default of another appointment shall apply to the original, and not to the alternate, director.
Dissection of the Section :
Sub-section (1)
• The Board of Directors of the Company may: Its not mandatory to appoint an Alternate Director, the Board can still do with providing a leave of absence to the absentee director if it so wishes, and if not, it will amount to a ground for vacation of office of the Director u/s 283 (1)(g) – the period prescribed under both the sections is same i.e. three months.
• If so authorised by the Articles or by a resolution passed by the company in general meeting: The Board cannot act arbitrarily if there is no backing authority as prescribed, i.e. this does not fall within the general powers of the Board u/s 291.
• Appoint an alternate director to act for a director (hereinafter in this section called "the original director") : The intention of the legislature is that the Alternate is clearly appointed “in lieu of” the original and not in an independent capacity.
• during his absence for a period of not less than three months : If the estimated period of absence is less than three months, the alternate cannot be appointed.
• From the state in which meetings of the Board are ordinarily held : Usually the state of the registered office or corporate office of the company or in some cases the state in which maximum business transactions take place, if different, or state where the most important project is located
Sub-section (2)
• An alternate director appointed under sub-section (1) shall not hold office as such for a period longer than that permissible to the original director in whose place he has been appointed : If the Original Director is an Additional Director, the Alternate’s office ends at the next AGM, if the Original Director is rotational director, the Alternate’s office ends when he is up for rotation, if the Original Director is non rotational, the Alternate continues until he returns. This again, is an indicator of the legislative intent that the Alternate is an “in lieu of” person.
• and shall vacate office if and when the original director returns to the State in which meetings of the Board are ordinarily held : The vacation of office is by law, the intention of the Alternate to resign or not is inconsequential.
Sub-section (3)
If the term of office of the original director is determined before he so returns to the State aforesaid, any provision for the automatic re-appointment of retiring directors in default of another appointment shall apply to the original, and not to the alternate, director : Whenever the Original Director’s office is liable to retirement by rotation, the Alternate’s office will come to an end, since any automatic re-appointment will apply only to the Original Director and not the Alternate.
Companies Bill 2009
Section 142 (2)
The Board of Directors may, if so authorised by its articles or by a resolution passed by the Company in general meeting, appoint a person not being a person holding any alternate directorship for any other director in the company, to act as an alternate director for a director during his absence for a period of not less than three months from India :
Provided that a person who is proposed to be appointed as an alternate director for an independent director should be qualified to be appointed as an Independent Director under the provisions of this Act :
Provided further that an alternate director shall not hold office for a period longer than that permissible to the director in whose place he has been appointed and shall vacate the office if and when the director in whose place he has been appointed returns to India.
Provided also that if the term of office of the original director is determined before he so returns to India, any provision for the automatic re-appointment of the retiring directors in default of another appointment shall apply to the original, and not to the alternate director.
Changes with the Companies Bill 2009
Although the new bill still mandates minimum number of meetings in a year, this will reduce cases of appointments of alternates only for the purpose of solving difficulties in holding Board Meetings, since the new bill considers meetings held through video conferencing or other electronic means capable of preserving recordings to be valid meetings.
The new bill mandates one ordinarily resident Director, and this requirement may or may not be met by using an Alternate Director – each has its pros and cons. A plus is that if not trustworthy, the office of the Alternate can be brought to an end simply by entering the country, while the cons is that if the office of the Alternate Director comes to an end, it violates the requirement of an ordinarily resident director.
Points which come to one’s mind :
1) If the Original Director does not secure a leave of absence from the Board, is his office (and in turn the Alternate’s office also) up for vacation after three months despite the Alternate being appointed?
Legislative intent is clearly no, and the Boards act of appointing an alternate for him clearly shows that they are informed and approve of his absence for not less than three months. However what if there is no clear request and granting of leave of absence?
2) This is oft asked and discussed – what if the Original Director simply enters or transits through the state in which the Board meetings are ordinarily held.
Legislative intent is that once the Director can return to attend the Board Meetings, the Alternate should be done away with. However, the wordings used (which are again repeated in the Companies Bill 2009) have created a lot of confusion. Technically, the Alternate Director should vacate the office if the Original Director returns to the State, but this should clearly be in the knowledge of the Board and / or the Company. If the Original Director does not provide any information as to whether or not he has entered the state, and the Alternate continues to act for him, all acts done by the Alternate as a Director should be considered valid.
3) An interesting point to note is that both the Original Director and the Alternate Director can be simultaneously acting on behalf of the company. The Original can be out of the country signing agreements somewhere, and the Alternate can very well, at the same time, be at the Board table, approvi
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