Nomination, Appointment And Election Of Directors Under The, Companies Ordinance, 1984

NOMINATION, APPOINTMENT AND ELECTION OF DIRECTORS UNDER THE, COMPANIES ORDINANCE, 1984 NOMINATION, APPOINTMENT AND ELECTION OF DIRECTORS UNDER THE, COMPANIES ORDINANCE, 1984 By Sohaib Khalid Ishaque, Advocate, High Court It would appear that under the Companies Ordinance, 1984, the Directors of a company are either "nominated", "appointed" or "elected". Nomination takes place under section 182 of the Ordinance which allows the creditors of the company, or other special interests, to send their nominees to the board of directors through contractual arrangements. Section 181 of the Ordinance suggests that appointment of directors takes place under section 176 lien the names and number of the first directors of the company are determined v the subscribers to the memorandum of association, and under section 180(2) which allows the directors of a company to fill up a casual vacancy by appointing a person to hold the office of a director for the remainder of the term of the director in whose place he is so appointed. While there is no provision in the Ordinance which specifically says that directors of a company are to be elected, the provisions of sections 177 and 178 of the Ordinance necessarily imply that at least some directors of a company are subject to election. Presumably these are the directors who are not nominated by special interests by virtue of any contractual arrangements. An indication of what these special interests are is, given by section 183, which states that the provisions regarding procedure of election of directors (section 178) does not apply to directors nominated on the board of a company by inter alia, the Pakistan Industrial Credit and Investment Corporation Limited, or the Federal Government or a Provincial Government, or by a corporation or company owned or controlled by such Governments, or by foreign equity holders under a regional cooperation or other cooperation arrangement approved by the Federal Government. It is not clear from any provision whether the directors nominated by creditors (other than those special interests specified in section 183) are subject to election or not. Unlike the directors who are nominated, the directors who are appointed under either section 176 or section 180 appear to be subject to election as contemplated by section 177. By virtue of section 177, the first directors of a company who are subject to election stand retired on the date of the first annual general meeting, and thereafter all such directors stand retired on the expiry of the 3 years period laid down under section 180 of the Ordinance. The procedure for election of directors is prescribed under section 178 of the Ordinance as under: 178. Procedure for election of directors.‑‑(1) The directors of a company shall, subject to section 174, fix the number of elected directors of the company not later than thirty‑five days before the convening of the general meeting at which directors are to be elected, and the number of so fixed shall not be changed except with the prior approval of a general meeting of the company. (2) The notice of the meeting at which directors are proposed to be elected shall among other matters, expressly state‑‑ (a) the number of elected directors fixed under subsection (1); and (b) the names of the retiring directors. (3) Any person who seeks to contest an election to the office of director shall, whether he is a retiring director or otherwise, file with the company, not later than fourteen days before the date of the meeting at which elections are to be held, a notice of his intention to offer himself for election as a director: Provided that any such person may, at any time before the holding of election, withdraw such notice. (4) All notices received by the company in pursuance of subsection (3) shall be transmitted to the members not later than seven days before the date of the meeting in the manner provided for sending of a notice of general meeting, in the normal manner or in the case of a listed company by publication at least in one issue each of a daily newspaper in English language and a daily newspaper in Urdu language having circulation in the Province in which the stock exchange on which its securities are listed is situate. (5) The directors of a company having a share capital shall, unless the number of persons who offer themselves to be elected is not more than the number of directors fixed under subsection (1), be elected by the members of the company in general meeting in the following manner, namely:‑‑ (a) a member shall have such number of votes as is equal to the product of the number of voting shares or securities held by him and the number of directors to be elected; (b) a member may give all his votes to a single candidate or divide them between more than one candidates in such manner as he may choose; and (c) the candidate who gets the highest number of votes shall be declared elected as director and then the candidate who gets the next highest number of votes shall be so declared and so on until the total number of directors to be elected has been so elected. It is submitted that section 178 is perceivably inadequate and inchoate as a statutory provision. While it may be clear in providing that election of directors is to take place at a general meeting of the company, the section fails to cover a number of situations which may be faced by a company while electing its directors. The word "election" connotes the process of choosing or selecting from many, whether by voting or otherwise. There are quite a few occasions when the number of persons, offering themselves to be elected as directors of a company is less than or equal to the number of directors to be elected. It is not very clear from the provisions of section 178 whether in such a situation the persons who file with the company the notices of their intention to offer themselves for election would stand automatically elected (without an actual election in a general meeting) if the number of such notices filed under section 178(3) falls short of the number of directors fixed under section 178(1). If the contemplation of section 178 is that such persons would stand elected as directors on the basis that the number offering themselves for election is less the number fixed, such election would not really be an "election" in the true sense of that term, for no process of choosing or selection would be involved, and no voting of any kind would be necessary at all. An important question that may arise in these circumstances would be whether such persons would stand elected as directors the moment they file their notices under section 178(3), or would they stand elected upon the passing of the deadline date (14 days prior to the meeting at which the elections are to be held) for filing such notices, or would they stand elected on the day of the meeting at which election is to be held. In response to the above question, it may be argued that the persons who file their notices for election would stand elected only on the date of the meeting at which the election is scheduled to be held, and not before. This would follow from (i) section 178(1) which suggests that directors are to be elected at a general meeting of the company‑‑implying, therefore that they can only be elected at such a meeting and not prior thereto, and (ii) the proviso to section 178(3) which states that a person filing a notice of his intention to offer himself for election may, at any time before the holding of the election, withdraw his notice. It may be contended that this proviso gives the person filing a notice under section 178(3) a right to withdraw his notice prior to the holding of the election. If this person were to stand elected on the date he filed his notice or on the deadline date under section 178(3), he would be deprived of exercising his right to withdraw the notice. It could obviously not be the intention of section 178 that a person offering himself for election would be rendered incapable of exercising his right to withdraw, if the number of persons seeking election is less than, or equal to, the number of directors to be elected; but, would be so capable of exercising this right if the number of persons seeking, election is greater than the number to be elected. It may be mentioned that section 178(4) requires that the notices given under section 178(3) by persons offering themselves for election be sent to the shareholders of the company. However, it may be seen' that the utility of sending these notices to the shareholders is undermined by the right available to persons sending the notices to withdraw from the election at any time prior thereto. Shareholders may be in receipt of the notices sent under section 178(4), but they cannot be certain as to who would be contesting the director's election until the day of the election itself, as some of the persons offering themselves for election may have withdrawn themselves from election by that day. It is also noticeable that section 178(5), which provides for the manner in which the election of directors is to be held, exclusively deals with the election of directors of a company having a share capital, and that too with a situation where the number of persons who offer themselves to be elected as directors of such a company is greater than the number of directors fixed under section 178(1). No provision whatsoever has been made for the procedure to be followed in the election of directors of a company without a share capital, apart from subsections (1) to (4) of section 178, which are applicable to all companies. The implication of subsection (5) is that companies without a share capital are free to elect their directors in any manner they see fit so long as the requirements laid down in subsections (1) to (4) are complied with. Leaving aside for a moment the inadequacy of section 178(5) to provide any manner for the election of directors of a company without a share capital, or to provide for a situation where the number of persons offering themselves for election is less than or equal to the number of directors fixed under section 178(1), the peculiar manner of election laid down in clauses (a), (b) and (c) of section 178(5) is also wholly unsatisfactory in dealing with the very particular situation that it purports to provide for. For instance, it is not difficult to imagine a situation where a number of candidates standing for election of directors fail to get any votes, apart from their own, thus leaving a number of positions on the board of directors unfilled. Perhaps an example would make things a little clearer: Suppose the number of directors fixed under section 178(1) is 8, and the number of persons who offer themselves for election is 10. As a member of a company is entitled to give all his votes to a single candidate or divide them between more than one candidate in such manner as he chooses, it is not difficult to visualize a situation where a small number of candidates get the majority of votes (albeit in different numbers) and the remainder get equal number of votes. Assuming that out of the 10 persons standing for election, 6 get equal number of votes, and 4 get different, but higher number of votes that the other 6. In such a situation, the provisions of clause (c) of section 178(5) may prove to be wholly inadequate as its application would result in only 4 candidates getting elected (i.e. the 4 candidates with the higher number of votes), and the remaining 4 positions going unfilled on account of there being a tie among the rest of the 6 candidates. The above example has been given only by way of illustration, and there is no doubt that countless other situations can be thought of where the application of the provisions of section 178(5) would prove to be fairly deficient. It is also difficult to identify the exact reason due to which a particular mode for election of directors of a company with a share capital has been prescribed under section 178(5), with the obvious intention of precluding any other provisions for election that may be made in the articles of association of such a company. One can only speculate that a particular manner for the election of directors in companies limited by shares was specifically laid down under section 178(5) perhaps because of the expectation that the number of such companies incorporated under the Ordinance would be more than the number of other kinds of companies and, hence an express provision which would apply to most companies. However, the reason why the elections should be held in the very manner that has been laid down is rather difficult to perceive. Particularly, it is not very obvious as to why section 178(5)(a) requires that a member shall have such number of votes as is equal to the product of the number of voting shares of securities held by him and the number of directors to be elected. On the one hand, it may be acknowledged that this special formula .for calculating the number of votes available to a member read with section 178(5)(b), which allows a member to give all his votes to a single candidate or to divide his votes among different candidates, permits greater freedom and flexibility to the member in apportioning his votes at the time of directors' election. On the other hand, however, the intent behind laying down this special formula to be applied in the case of election of directors of a company limited by shares, as opposed to the simple "one‑member‑one vote" formula which may be applied in the case of other companies, is not altogether clear. There also does not seem to be any particular reason why three different words, i.e., "election", "nomination" and "appointment" have been sued in relation to gaining of positions on the board of directors of a company. Moreover, it further seems that these words have been somewhat loosely used and are in fact likely to create confusion and absurdity in certain circumstances as explained below. For instance, the provisions of section 187 of the Ordinance lay down a number of eligibility requirements for directors. The section provides as under: 187. Ineligibility of certain persons to become director.‑‑No person shall be appointed as a director of a company if he‑‑ (a) is a minor; (b) is of unsound mind; (c) has applied to be adjudicated as an insolvent and his application is pending; (d) is an undischarged insolvent; (e) has been convicted by a Court of law for an offence involving moral turpitude; (f) has been debarred from holding such office under any provisions of this Ordinance; (g) has betrayed lack of fiduciary behaviour and a declaration to this effect has been made by the Court under section 217 at any time during the preceding five years; (h) is not a member: Provided that clause (h) shall not apply in the case of‑‑ (i) a person representing the Government or an institution or authority which is a member; (ii) a whole time director who is an employee of the company; (iii) a chief executive; (iv) a person representing a creditor. It may be noticed that the above section seems to be placing its requirements on the directors who are to be "appointed", as it begins by providing: "No person shall be appointed as a director of a company if he‑‑". A confusion therefore arises whether the eligibility requirements of section 187 apply to directors who are subject to election. While there is no reason why these requirements should not apply to directors who are to be elected, there is at the same time a strong indication that they are applicable only to those persons who are to be appointed as directors. It may be conceded though that because of the proviso to section 187, the ineligibility grounds (a) to (g) are available with respect to persons who are to be nominated as directors as the said proviso states that clause (h) of section 187 does not apply to a person representing the Government or an institution or authority which is a member of the company in question (such a person is invariably nominated on the board by the Government, institution or authority), the obvious implication is that the other clauses (a) to (g) are applicable to such a person. It, however, cannot at the same time be as easily accepted that the same ineligibility grounds are available against persons to be elected as directors; for there is no mention in section 187 of persons who are to be elected as directors. Indeed it would be absurd to think that there is no bar under the Ordinance for a minor, or a person of unsound mind, or an undischarged insolvent, or a person who has betrayed lack of fiduciary behaviour or who has been convicted of an offence involving moral turpitude, to be eligible for election of director of a company, but at the same time be ineligible for appointment as a director. However, according to one of the cardinal principles of statutory construction, all disabling provisions are to be strictly construed and, as such, it could be argued with equal substance that the ineligibility grounds of section 187 do not apply to person offering themselves for election of directors. The confusion and absurdity is compounded by section 188 of the Ordinance, which inter alia provides that a director shall ipso facto cease to hold office if he becomes ineligible to be appointed as a director on any one or more of the grounds enumerated in clauses (a) to (h) of section 187. The question which arises out of this provision is whether an elected director would cease to hold his office if he is otherwise hit by any of the grounds mentioned in the said clauses (a) to (h). But such a director could validly argue that even if he has become ineligible to be appointed as a director under any one of the grounds mentioned in section 187, yet, such grounds are relevant only in the instance of a director who was appointed, and are not relevant in the case of a director who has been elected. In other words, if such grounds are not relevant for the election of a director, a fortiori, they would not be effective to make an elected director cease to hold his office. If one were to accept that the provisions of section 187 do not apply to a person standing for election of a director, but the disqualification under section 188 would apply to an elected director, another absurdity would result; a person otherwise ineligible to be appointed as a director would be eligible to be elected as one, but would cease to hold office as a director immediately upon entering office after election. An attempt has been made to save the above position from absurdity under Regulation 50 given in Table A of the First Schedule of the Ordinance. The said Regulation provides: 50. No person shall become the director of a company if he suffers from any of the disabilities or disqualifications mentioned in section 187 and, if already a director, shall cease to hold such office from the date he so becomes disqualified or disabled. On the face, of it, this Regulation would seem to cure the deficiency in section 187, as it seems to be applicable to all directors who are either appointed or elected. However, when looked at more closely in conjunction with some of the other relevant provisions of the Ordinance, even this Regulation proves to be quite inadequate in remedying the situation. To begin with, the provisions of Table A are only for the management of a company limited by shares. They do not apply to a company limited by guarantee and not having a share capital, or to a company limited by guarantee and having a share capital, or to an unlimited company. Secondly, by virtue of section 26 of the Ordinance, even a company limited by shares may choose not to adopt any or all of the regulations contained in Table A,' and may even decide to exclude or modify these Regulations. In other words, unlike the provisions of the Companies Ordinance which. are mandatory and binding Regulation 50 is not mandatory in nature as it is capable of being excluded from, or modified in, the articles of association of a company. The efficacy of this Regulation is therefore, manifestly undermined, or is at least capable of being undermined. Last but not least, it could also be argued with a degree of force that the provisions of a regulation contained in Table A are incapable of imposing a disability which has otherwise not been imposed under the Ordinance itself. In view of the foregoing discussion, it is submitted that the above referred provisions of the Companies Ordinance, 1984 need to be immediately reviewed.