Can Articles of Association terminate directorship automatically when their employee status ceases, in a private company?
It is common for board seats to be tied to an executive role, particularly for managing directors, whole time directors, or “executive directors” whose presence on the Board is intended to mirror their day to day responsibility. This raises a practical question, can a private company’s Articles of Association (“AoA”) provide that a director appointed by virtue of employment will automatically cease to be a director when that employment ends, without using the removal route as mentioned in Section 169 of the Companies Act, 2013?
The short answer is yes, a private company can frame such an AoA clause, and the cessation will be treated as a “vacation of office” or a “co-terminus” tenure, rather than a removal under Section 169. However, this requires the clause to be drafted carefully and with precision and there are certain nuances that should be kept in mind.
Why this Issue exists: Directorship vs Employment are Distinct “Hats”
The Company Law recognises that a person can occupy two legally distinct capacities: –
- As a director (one has a fiduciary duty under company law); and
- As an employee/executive (one has a contractual relationship which is governed by the service terms).
This controversy is not about whether these two capacities are different, as they are. The real issue is that whether the position on the Board is independent, or conditional upon the employment relationship. If the appointment to the Board is conditional, then that condition ending, due to termination or resignation can legitimately bring the Board’s tenure to an end, provided it is given in the AoA.
The Idea behind “Co-terminus”- Companies Act, 1956 and Companies Act, 2013
First, let’s analyse the legal provisions of Companies Act 2013 in comparison with Companies Act 1956, so as to understand how the legislature perceives the relationship between (i) the office of a director and (ii) any contractual employment that a director may separately hold.
Under the Companies Act 1956, Section 283(1)(i) stated that,
The Office of a director shall become vacant if-
having been appointed a director by virtue of his holding any office or other employment in the company, he ceases to hold such office or other employment in the company. This provision makes it clear that if an individual is appointed as a director by virtue of holding any other office or employment, the director shall become vacant right after he ceases to hold such office.
In the case of Sunil K. Alagh v. Britannia Industries Limited [1993] 1 CLA 68, the court adopted a substance over form approach. It said that Alagh’s appointment as a director was linked to his executive role, and did not enter the Board independently (e.g., as a promoter nominee or shareholder director). It relied on the report by the Sastri Committee Report, and emphasised that in this case Alagh was an executive directors first, and then a director. Their position in the board is co-terminus with their employment. The court held that this was not a removal under Section 284, which requires a shareholder approval. This means Alagh lawfully ceased to be a director the moment his employment ended.
Coming down to the Companies Act 2013, Section 167 states-
A private company may, by its articles, provide any other ground for the vacation of the office of a director in addition to those specified in sub-section (1).
This confirms that a private company can include additional grounds for vacating of office in its AoA.
In the case of Ravi Prakash Singh v. Venus Sugar Ltd., (2007) 140 Comp Cas 823, the issue was whether AoA could validly provide a mechanism for removal/withdrawal of a director independent of the statutory removal process under Section 284 of the Companies Act, 1956 (now Section 169 of the Companies Act, 2013). The AoA provided that co-promoters had the right to nominate and withdraw their nominee directors. The plaintiff was a nominee director of one promoter group. That promoter group withdrew his nomination, and the plaintiff challenged this, arguing that removal must follow Section 284. The court held that Section 284/Section 169 is not the sole or excusive mode of removal of a director. If the Articles validly provide for appointment and removal/withdrawal of a nominee director, that mechanism continues to operate. The statutory provision does not override contractual or article-based rights, unless the Act expressly prohibits such arrangements. Although, this case was decided under Section 284 of the Companies Act 1956, the decision remains directly relevant since the case establishes that a private company, by way of its articles allow cessation of employment and directorship, simultaneously.
In simpler terms, a company can validly include in its AoA special grounds or mechanisms for cessation of directorship, provided they do not contravene the Companies Act. Section 169 is not the exclusive mechanism for cessation of directorship where the AoA validly provide otherwise.
Additionally, Gautam Bharadwaj v. Invest India Micro Pension Services Pvt. Ltd., 2015 SCC OnLine CLB 123, the court clarified that when a director voluntarily enters into the employment agreement and accepts the termination clause (he can get terminated by the company on notice with 90 days’ time), he cannot resile from it later. The court established the doctrine of estoppel stating that you cannot approbate at first, enjoy the benefits and then reprobate when the contract operates against you.
While this case arose in the context of a managing director, the principle applied was contractual estoppel, not statutory removal. Basically, law cannot be invoked to escape the consequences of a voluntarily accepted employment agreement.
In a private company, where (i)AoA expressly provides that a director appointed/continuing by virtue of employment (or as an employer/promoter nominee) shall vacate office upon cessation/termination of that employment (or upon withdrawal by the nominator), and (ii) the individual has accepted those terms through the AoA/appointment/employment contract, the company may treat the person as having ceased to hold directorship in accordance with the Articles/contract, without necessarily invoking the Section 169 removal procedure, because AoA-based cessation/withdrawal mechanisms can operate independently of Section 169, and a person who has contractually agreed to termination-linked consequences is bound and estopped from resisting them.
Moreover, in Tata Consultancy Services Ltd. v. Cyrus Investments (P) Ltd., (2021) 9 SCC 449, the Supreme Court upheld the affirmative voting rights (Veto rights) of the Tata Trusts’ nominee directors under Article 121, declaring them legally valid and not “oppressive” to minority shareholders. It held that courts should not rewrite or dilute such provisions merely on grounds of fairness, unless they contravene the Companies Act or are proved oppressive. Courts treat the AoA as a binding “governance contract” and allow it to create strong control rights (like veto/affirmative vote). So an AoA clause making a director’s tenure co-terminus with employment is generally valid unless it violates the Act.
Conclusion
Section 169 is a safeguard against arbitrary ouster of a director whose tenure otherwise continues, it is not a way to convert a conditional, role-linked seat in the board into a permanent entitlement. Where the AoA makes directorship co-terminus with employment, the director’s continuation is not an independent right bur rather it is a consequence of continuing in service. Once service ceases, the director’s seat ends on its own terms. Terming this as a removal would be a gross mischaracterisation, the company is not exercising a power to remove, but merely giving effect to a consequence embedded in the appointment itself, by mentioning it in the contract or employment agreement.
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