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Appointment of Director by Central Government

The Companies Act, 1956 through its Section 408 empowers the Central Govt. to appoint director(s) in a Company, subject to the order of CLB under certain circumstances as mentioned below:
(1) to safeguard the interests of the company, or its shareholders or
(2) in the public interests.

When can such Directors be appointed?
(1) On a reference made to it by the Central Government or
(2) On an application of not less than one hundred members of the company or of the members of the company holding not less than one-tenth of the total voting power therein;

After such inquiry as the CLB deems fit to make, that it is necessary to make the appointment or appointments in order to prevent the affairs of the company being conducted either in a manner which is oppressive to any members of the company or in a manner which is prejudicial to the interests of the company or to public interest :

Provided that in lieu of passing an order as aforesaid, the CLB may, if the company has not availed itself of the option given to it under section 265, direct the company to amend its articles in the manner provided in that section and make fresh appointments of directors in pursuance of the articles as so amended, within such time as may be specified in that behalf by the CLB.

In case the CLB passes an order under the proviso to sub-section (1), it may, if it thinks fit, direct that until new directors are appointed in pursuance of the orders aforesaid, such number of persons as the CLB may, by order, specify as being necessary to effectively safeguard the interests of the company, or its shareholders or the public interest, shall hold office as additional directors of the company and on such directions, the Central Government shall appoint such additional directors.

Office Tenure of such Director(s)
Such directors, as may be appointed by the CG, hold office for such period, not exceeding three years on any one occasion.

No requirement of holding qualification of shares:
The Director appointed by the CG, shall not be required to hold any qualification shares, even though the articles of the company requires it.

Not liable to retire by rotation:
The office of Director appointed by the CG, shall not be liable to determination by retirement of directors by rotation.

For the purpose of reckoning two-thirds or any other proportion of the total number of directors of the company, any director(s) appointed by the CG shall not be taken into account.

Confirmation of the CLB on changes in composition of Board of Directors:
Every change in the composition of Board of directors, made during the tenure of the director appointed by CG, shall have effect unless confirmed by the CLB.

Directions of the Central Govt.:
The Central Government may issue such directions to the company as it may consider necessary or appropriate in regard to its affairs and such directions may include directions to remove an auditor already appointed and to appoint another auditor in his place or to alter the articles of the company, and upon such directions being given, the appointment, removal or alteration, as the case may be, shall be deemed to have come into effect as if the provisions of this Act in this behalf have been complied with without requiring any further act or thing to be done.

Periodic Reporting to the Central Govt.
The Director appointed, as stated above, has to report to the Central Government from time to time with regard to the affairs of the company.

Removal of the Director appointed by CG:
The Central Govt. may remove such director(s) appointed by it and may appoint another person in his place, at its sole discretion.

Not liable to Prosecution for Companies act provision violation
Directors nominated by the Government u/s 408 of the Companies Act, 1956 shall not be held liable for any act of omission or commission by the company or by any officers of the company which constitute a breach or violation of any provision of the Companies Act, 1956, and which occurred without his knowledge attributable through Board process and without his consent or connivance or where he has acted diligently in the Board process. The Board process includes meeting of any committee of the Board and any information which the Director was authorised to receive as Director of the Board as per the decision of the Board. (General Circular No. 08/2011, No.2/13/2003/CL- V, Government of India, Ministry of Corporate Affairs, dt 25th march 2011)

Note : With effect from the Companies (Second Amendment) Act, 2002, the powers of the CLB under Section 408 has been transferred to the Tribunal. (effective date yet to be notified)

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