Chapter-XII (Section 173–195) of the Companies Act, 2013 (CA 2013) deals with the provisions related to meetings of board of directors of a company and its powers. Section 176 of CA 2013 specifically provides for defects in appointment of directors not to invalidate actions taken. Section 176 come into force 12th September, 2013 vide Notification No. S.O. 2754(E) dated 12.09.2013.
Recently, we have discussed the provisions of section 175 of the Companies Act, 2013 and come to know about the approval of board resolutions passed by circulation. Today, we shall discuss about the provisions of section 176 i.e. defects in appointment of directors not to invalidate actions taken.
Section 176 – Invalidity of Act of Directors for invalid Appointment
According to the provisions of section 176 of the companies act, 2013, no act done by a person as a director shall be deemed to be invalid, notwithstanding that it was subsequently noticed that his appointment was invalid by reason of any defect or disqualification or had terminated by virtue of any provision contained in this Act or in the articles of the company.
In other words, if subsequently it is noticed that the appointment of director was invalid due to defect or disqualification or has been terminated by virtue of any provisions in the Companies Act 2013 or in terms of the articles of association of the company, such past actions of the director will continue to remain valid.
The proviso of section 176 of CA 2013 provides that nothing in this section shall be deemed to give validity to any act done by the director after his appointment has been noticed by the company to be invalid or to have terminated.
Therefore, the provisions of section 176 of the Companies Act, 2013 defends the proper actions taken by a director on behalf of his company. However, if the appointment of director was invalid and noticed by the company then the action taken by such director shall be invalid thereafter.
In the absence of this section this might be possible that all past actions done by director could also become invalid from the date from which the appointment of director become invalid or terminated. That could be very unethical or unacceptable that the act done by a director in good faith on behalf of company would be invalid. Section 176 shall remove this type of confusions of directors and build confidence for action taken by directors of the company.
The provisions of Section 176 shall apply to all companies. Section 176 is applicable from 12-09-2013. The directors of public as well as private companies shall keep note of this section for their reference.
2) Act done BEFORE Noticed by Company:
The act done by directors shall not be invalid even if subsequently noticed that his appointment was invalid. Therefore, the act done by director shall be as valid as if such director had been duly appointed and was qualified to be a director.
Note that the provision clearly says that the act done by director was earlier. That means if the appointment of director was invalid and was not noticed by the company then, the act done by the director shall be valid.
3) Reasons of Invalid Appointment:
By virtue of any provision of the Companies Act, 2013, the appointment of directors shall be invalid by reason of:
- Any defect; or
- Any disqualification; or
Note that the appointment of director shall also be invalid due to any defect or disqualification or termination by virtue of any provision contained in the article of the company. You may refer the provisions of section 164 for disqualifications for appointment of director and section 169 for removal of director of a company.
4) Table-F and Table-H of Schedule-I:
Read the Paragraph 74 of Table-F (Articles of Association of a Company Limited by Shares) and Paragraph 26 of Table-H (Articles of Association of a Company Limited by Guarantee and not having Share Capital) of Schedule-I of the Companies Act, 2013:
All acts done in any meeting of the Board or of a committee thereof or by any person acting as a director, shall, notwithstanding that it may be afterwards discovered that there was some defect in the appointment of any one or more of such directors or of any person acting as aforesaid, or that they or any of them were disqualified, be as valid as if every such director or such person had been duly appointed and was qualified to be a director.
5) Act done AFTER Noticed by Company:
The act of directors shall be invalid if done after noticed by company that his appointment was invalid. The proviso of section 176 provides that the appointment has been noticed by the company to be invalid or to have terminated.
Please don’t think that if the invalidity of appointment of director was not noticed by the company then the action taken by director shall be valid even if the director himself knowing the fact that his appointment was invalid. If a person, functions as a director even when he knows that the office of director held by him has become vacant on account of any of the disqualifications specified in section 167(1), he shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both.
Therefore, if director’s appointment is invalid and the same has been noticed even by the director himself then, he should inform immediately to the company about his invalidity of appointment. Any third party may also inform the company about the defects or disqualifications of director of a company and thereafter, the act done by director shall be invalid.