Foreign director of an Indian company passes away

Question

An Indian company has two foreign directors and both are non resident. What happens when one of the directors passes away.

Answer 1

What happens when one of the directors passes away?

The fact that the directors are foreign and non-resident is basically irrelevant.

Filling the vacancy

The governing documents of the company, probably called "bylaws" or an "operating agreement" will tell you what to do.

The death of a director creates a vacancy in that directorship.

Generally speaking, there will be a portion of the governing documents that applies to vacancies in directorships.

Usually, it will say something like, "in the event of a directorship vacancy, a meeting of the owners of the company shall be held to elect a new director".

Sometimes it will provide that all of the owners get to vote, and sometimes, it will provide that certain owners elect someone to one directorship, and the other owners elect someone to the other directorship.

What if the deceased director is also an owner of the company?

If the deceased director was also one of the owners of the company, the governing documents will make clear whether the surviving owners get to fill the vacancy, or if this is handled by the executor of the estate of the deceased director-owner.

It also isn't uncommon for a small company to have a governing document often called a "buy-sell agreement" or "shareholder agreement". If the company has a buy-sell agreement, this will state that the company, the remaining owners, or both, have a right and/or a duty to buy out the ownership interest of a deceased owner, and will spell out the details of how this right is exercised.

Management of the company until the vacancy is filled

In the meantime, before the vacancy is filled, the governing documents of the company will tell you what management rights the surviving director has in the company.

Usually, the governing documents will state that management of the company, at least with respect to issues that don't require supermajority votes of the owners, can continue to be conducted by the surviving director until the vacancy is filled.

What if there are no governing documents?

If for some reason the company has no governing documents that address these issues, which would be very unusual, the statute under which the company is organized in the first place will provide the default rules that apply if there is no agreement to the contrary.

There is more than one possible statute under which a company can be organized in India. But usually, the default rules of the statute will state that the vacancy in the directorship is filled by a majority vote of the owners. The statute will also usually clarify, in the case of a deceased director-owner, if the executor of the deceased owner's estate is entitled to vote when filling that vacancy.

Obligations With Regard To Third-Parties

Updating public corporate records

Once the vacancy is filled, this information may have to be provided to the government agency in India responsible for handling corporate records for the kind of company in question, either within a statutorily set deadline after the vacancy is filled, or in its next regularly report filed with agency.

Tax filing consequences

The death of a director-owner will probably also require certain things to be done on the company's annual tax returns that would not normally be done in years when a director-owner of the company does not die, and the company may need to coordinate with the estate of the deceased director-owner to provide information necessary for the preparations of the final tax returns of the deceased director-owner.

Default conditions in contracts with third parties.

Finally, it isn't uncommon for loan agreements or important contracts with a company that also have personal guarantees by the directors, to provide that the death of a director constitutes a default under the agreement in question.

The remaining director should review the agreements and contracts of the company to determine if this is the case.

If the death of the director is a condition of default under a loan agreement and/or key contract with the company, the remaining director should pro-actively seek to take whatever action the agreements or contracts state can cure the default, or should pro-actively negotiate with the other parties to the agreements or contracts to have them expressly waive the default arising from the director's death.

This may make it necessary for the company or the remaining director make some sort of concession to the other parties in these contracts or agreements.

For example, the other parties to a loan agreement that was personally guaranteed both both directors may insist that the company provide additional collateral for a loan that now has one guarantor instead of two, in order to convince them to refrain from calling the loan due immediately.