[Ather Saleem]

Companies Act 2017 had introduced a new category of Director i.e. Contractual 

Now the questions arise:

1) Can a non-member be appointed as contractual Director
2) What will be his/her tenure
3) Do we need any amendment in Articles of Association
4) Will it has any impact on number of Directors fixed during election of directors

[Nasir Ansari]

Dear Athar Bhai, thank you for raising a very interesting question.

Deliberation:

Section 153(i)(IV) of the Companies Act, 2017 allows a non-member (non-elected) to become a director if he represents a creditor or special interest through a contractual arrangement.

Section 164(1) of the Act states that a company may have directors nominated by creditors or other special interests by virtue of contractual arrangements.

Both sections recognize that a company may have directors representing:

• creditors, or
• other special interests,
• by virtue of contractual arrangements.

This means the law permits the class of such directors — it removes the restriction that directors must necessarily be elected members.

But neither section states that the contract itself constitutes the appointment. They only state that such persons are eligible or may be nominated.

Hence, an agreement of a contract cannot itself create a statutory office.

Articles govern the manner of appointment.

The provisions of the law DO NOT eliminate the need for Articles to contain the correct mechanism and procedure of such appointment.

Conclusion:

Even in light of Sections 153(i)(iv) and 164(1), a “contractual” or “nominee” director cannot be appointed solely on the strength of an agreement if the Articles of Association do not contain an enabling provision for such appointment.

What Would Likely Be the Term for a Contractual / Nominee Director?

In the absence of a special provision in the Articles, a contractual / nominee director is likely to be subject to the same 3-year term for “ordinary elected directors” as per Section 161 of the Act. However, the Articles should ideally be amended (or already provide) to clearly define:

1. the term (number of years or until a triggering event, e.g., termination of contract or loan), and

2. the mechanism for removal / vacation.

Warm regards!

[Nasir Ansari]

Subsequent appointment of contractual/nominee directors does not affect or disturb the number of elected directors fixed at the time of election.

That number is used solely for election mechanics. Board strength may increase, but the elected seats remain unchanged.