BACKGROUND
There are well established judicial precedents that the directors have fiduciary obligations and duties to act reasonably and in the best interests of the companies where they hold such positions. Their duties emanate due to holding positions which may be synonymous to agents as well as trustees of their companies.
Since the director occupy the position of an agent, the general principles of agency will govern his relationship with the company and also govern the third parties who deal with the company through its directors. In Ferguson v. Wilson (1866) LR 2 Ch LR 77, the court had held that the company has no person, it can act only through directors and the case is, as regards those directors, merely the ordinary case of principal and agent.
In addition to the position of a director as an agent of his company, he is also considered as a trustee although not in the strict sense of the position. In Lands Allotment Co., Re, {1894} 1 Ch 616, 631,the court had held that although the directors are not, properly speaking, trustees, yet they have always been considered and treated as trustees of money which comes to their hands or which are actually under their control and directors are held liable to make good monies which they have misapplied upon the same footing as if they were trustees. The Supreme Court had also recognised the fiduciary position of directors in the case of Chevalier I. I. Iyyappan v. Dharmodayan Co., Trichur , AIR 1966 SC 1017.
From the foregoing, it is amply clear that a director holds a critical position in a company. Hence it is logical that his removal from that position needs to be regulated strictly by law.
Such law was present in section 284 of the erstwhile Companies Act 1956 and with the new Companies Act 2013 coming in the statute book,such provision also finds its place there. The new law is enumerated in section 169 of the new Act.
SECTION 169
REMOVAL OF DIRECTOR WITH MEMBERS’ APPROVAL
Law
169 (1). A company may, by ordinary resolution, remove a director, not being a director appointed by the Tribunal under section 242, before the expiry of the period of his office after giving him a reasonable opportunity of being heard:
Provided that nothing contained in this sub-section shall apply where the company has availed itself of the option given to it under section 163 to appoint not less than two thirds of the total number of directors according to the principle of proportional representation.
Analysis
♦ This sub section {1} empowers a company to remove a director before the expiry of the period of his office but only through the decision of the members passed at any general meeting, by way of an ORDINARY RESOLUTION. {Ref section: 114 of the Companies Act 2013}. Resolution can be passed at any general meeting.It was held in a case of LIC of India v. Escorts Ltd. – AIR 1986 SC 1370 (1986) 59 Comp Cas 548 (SC)that a shareholder cannot be restrained from calling an extra ordinary general meeting for removal of a director.
♦ It is essential that by way of principle of natural justice, the director concerned should be given a reasonable opportunity of being heard to defend his case as to why he should not be removed. Only after hearing his defence that the decision of removal should be taken by the members. {Ref case: Queens Kuries & Loans P Ltd. V Sheena Jose {1993} 76 Comp Cases 821 [Ker]}.
♦ It should be ensured that the director concerned should not have been appointed by the Tribunal under section 242 which relates to powers of the Tribunal for prevention of oppression and mismanagement.
♦ There is another restriction on his removal. If the company has availed itself of the option given to it under section 163 of the new Companies Act to appoint not less than two thirds of the total number of directors per the principle of proportional representation, then action of removal cannot be taken by the company. The reason would be that the section 163 gives minority members special powers to vote and appoint their representative as director at a general meeting and such director should not be subject to removal under this section.
♦ The law regarding removal is encompassing. Interestingly, it was held in the case of Tarlok Chand Khanna v Raj Kumar Kapoor , {1983} 54 Comp Cas 12 Del, that any restriction upon the power of removal would be void. Moreover, even a permanent director in terms of the articles of association, who is not liable to retire by rotation, can be removed. However, in the case of Khetan Industries {P} Ltd v Manju Ravindra Prasad Khetan {1995} 16 CLA 169 { Bom} it was held that civil courts cannot interfere with internal management of companies like appointment and removal of directors since the erstwhile Companies Act 1956 lays down detailed procedure for dealing with such matters. In the case of Karnataka Bank Ltd v A B Datar {1994} 79 Com Cas.417 {Kar} it was held that none has the right to claim office of director.
♦ In the case of Jayanthi R Padukone v ICDS Ltd., {1999} 20 SCL 237 {Kar} it was held that a majority of the directors present can remove a managing director at the Board meeting. In the case of Ravi Prakash Singh v Venus Sugar Ltd {2007} 84 SCL 75 {Delhi} it was laid down that where articles of association confer powers on the Board to remove a director through some specific methodology such power is not affected by provision of section 284 of the erstwhile Companies Act 1956.
SPECIAL NOTICE
Law
169 (2). A special notice shall be required of any resolution, to remove a director under this section, or to appoint somebody in place of a director so removed, at the meeting at which he is removed.
Analysis
♦ This sub section {2} provides for the first step for removal of the director concerned. It also provides for appointment of an individual in place of the removed director for which sub section {5} also must be complied.
♦ As aninitial step a special notice shall be required of any resolution to remove the director. In the case of B V Thirumalai v. Best Vestures Trading P Ltd. (2005) 57 SCL 98 (CLB), it had been held that removal of a director from his office without giving him special notice u/s 284 of the erstwhile Companies Act was contrary to the provisions. In the case of Queens Kuries & Loans {P} Ltd.v Sheena Jose {1993} 76 Com Cas. 821{Ker} it was held that special notice should disclose the grounds for removal of director.
♦ A special notice shall also be required to appoint somebody in place of the director so removed. The appointment must be done at the same meeting at which that the concerned director is removed.
♦ The provision of special notice has been laid down in section 115 of the Companies Act 2013 which mentions that the notice of intention to move a resolution requiring special notice shall be given to the company by such number of members holding not less than one percent {01%} of total voting power or holding shares on which such aggregate sum not exceeding Rs.Five {05} lakhs, as may be prescribed by the Central government has been paid up. The manner of giving notice to the members of the said resolution, by the company, will also be prescribed by the Central Government.
Rule 23 of The Companies {Management and Administration} Rules, 2014 has prescribed the law in this regard.
♦ Significantly the provision of holding by members, minimum voting power or holding shares on which maximum of certain value has been paid up, to enable them to give special notice, was not present in the erstwhile Companies Act, 1956 {Section 284}.There was, however, a confusion in the interpretation of those provisions. It was argued that section 188 of that Act of 1956 requiring specific number of members to make requisition for circulation of members’ resolution, would apply in respect of special notice for removal of director. But it was held in the case of Prakash Road Lines Ltd., v Vijay Kumar Narang {1995} 83 Com Cases 569 {Kar} that section 284 was an independent provision and procedure prescribed by it for removal of a director could not be subordinated to the requirements of section 188. Hence section 188 need not be followed. Interestingly, it was held to the contrary in the case of Amar Nath Malhotra v MCS Ltd (1993) 76 Com Cases 469 (Del) in respect of removal of auditorsbut not directors.Hence section 188 need to be followed.
♦ However, the new law u/s 169 has laid at rest the conflicting interpretations of the earlier provisions.
♦ The impact of the change in this sub section would be that any special notice as per the provisions cannot be given by members holding insignificant shareholdings/ voting powers on frivolous issues or to create unnecessary nuisance in the corporate functioning. Interestingly it was held in the case of Dabur India Ltd., v Anil Kumar Poddar {2001} 4 Comp LJ 351in terms of the earlier law that where it appeared that the notice of removal was not filed in good faith, such notice was an abuse of statutory powers.
DIRECTOR ENTITLED TO BE HEARD
Law
169 (3). On receipt of notice of a resolution to remove a director under this section, the company shall forthwith send a copy thereof to the director concerned, and the director, whether or not he is a member of the company, shall be entitled to be heard on the resolution at the meeting.
Analysis
This sub section {3} lays down further process for the removal of a director. It provides that on receipt of notice of a resolution to remove a director by the company from the required member/s, such company is legally obligated, to forthwithsenda copy thereof to the director concerned and the director shall be entitled to be heard on the resolution at the meeting. It is not defined what the term “forthwith” denotes but an immediate action on the part of the company with no deliberate or intentional delay in compliance will be the touch stone in this matter. Moreover, it is not relevant whether the said director is a member of the company or not as he shall have a right to attend the concerned general meeting and be heard thereat to defend his case. This statutory right of the directorat the general meeting without which the removal resolution will have no effect, has also been recognised in the case of Bhankerpur Simbhaoli Beverages P Ltd v. P R Pandya [1996] 86 Com Cases 842 {P&H}in terms of the erstwhile law.
INFORM MEMBERS ABOUT DIRECTOR’S REPRESENTATION
Law
169(4). Where notice has been given of a resolution to remove a director under this section and the director concerned makes with respect thereto representation in writing to the company and requests its notification to members of the company, the company shall, if the time permits it to do so, —
(a) in any notice of the resolution given to members of the company, state the fact of the representation having been made; and
(b) send a copy of the representation to every member of the company to whom notice of the meeting is sent (whether before or after receipt of the representation by the company), and if a copy of the representation is not sent as aforesaid due to insufficient time or for the company’s default, the director may without prejudice to his right to be heard orally require that the representation shall be read out at the meeting.
Provided that copy of the representation need not be sent out and the representation need not be read out at the meeting if, on the application either of the company or of any other person who claims to be aggrieved, the Tribunal is satisfied that the rights conferred by this sub-section are being abused to secure needless publicity for defamatory matter; and the Tribunal may order the company’s costs on the application to be paid in whole or in part by the director notwithstanding that he is not a party to it.
Analysis
♦This sub section {4} goes on to further lay down that where the director concerned makes a written representation to the company defending his removal and requests the company to notify his representation to members of the company, it is the legal obligation of the company to do so. But the rider is that the company should have the statutory permitted time to comply with this request of the concerned director. If there is permissible time, the company shall in the notice to its members of the resolution state the fact of the representation having been made by the director. The company is also required to send a copy of the representation to every member to whom notice of the meeting is sent. This must be done irrespective of whether notice of general meeting has been sent before or after the receipt of the representation.
♦ Permissible time, in respect of notice calling a general meeting will mean at least clear 21 days’ notice as per section 101 of the Companies Act 2013. As per section 115, it will also mean time as laid down for special notice in terms of Rule 23 of The Companies {Management and Administration} Rules, 2014}. It has to be seen which provision will be invokable.
♦ It is further laid down that where a copy of the representation could not be sent to members due to insufficient time the director may without prejudice to his right to be heard orally require that the representation shall be read out at the meeting. This right of the director also arises where there is default on the part of the company to send the representation as aforesaid.
♦ The proviso, however, permits the company or any person claiming to be aggrieved, to apply to the Tribunal that the copy of the said representation need not be sent out and the representation need not be read out at the meeting. The Tribunal may permit this; but it must be satisfied that the rights conferred by this sub-section are being abused to secure needless publicity for defamatory matter. It is however, made clear that the Tribunal may order the company’s costs on the application to be paid in whole or in part by the director although he is not a party to the process. The rationale could be that where a regular process is curtailed with the permission of the Tribunal which might be on the application of the aggrieved director himself resulting to his benefit, he should bear the cost on the application.
FILLING OF VACANCY- POST REMOVAL
Law
169 (5). A vacancy created by the removal of a director under this section may, if he had been appointed by the company in general meeting or by the Board, be filled by the appointment of another director in his place at the meeting at which he is removed, provided special notice of the intended appointment has been given under sub-section (2).
Analysis
♦ This sub section {5} provides for the legal position after the removal of the director has been effected. Thus, where a vacancy has been created by the removal, such vacancy may be filled by appointment of another director in his place. This applies if the removed director had been appointed in a general meeting or by the Board of Directors.
♦ This filling of vacancy is not obligatory. However, if another individual is to be appointed, for this purpose special notice under sub- section (2) should be given to all the members. Thus, provision of special notice as laid down in section 115 of the Companies Act 2013 must be complied. Moreover, all the provisions for appointment of a director will need to be fulfilled.
TENURE OF NEW DIRECTOR
Law
169 (6). A director so appointed shall hold office till the date up to which his predecessor would have held office if he had not been removed.
Analysis
It is provided in sub section {6} that a director appointed in place of a director removed in terms of these provisions shall be able to hold office till the date up to which his predecessor would have held office if he had not been removed. It is therefore made very clear that through this process and by appointing another director in place of the removed director, the original period of the directorship does not get extended.
WHERE VACANCY NOT FILLED UP
Law
169 (7). If the vacancy is not filled under sub-section (5), it may be filled as a casual vacancy in accordance with the provisions of this Act:
Provided that the director who was removed from office shall not be re-appointed as a director by the Board of Directors.
Analysis
It is provided in sub section {7} that if the vacancy is not filled under sub-section (5) which stipulates filling up vacancy by the members at a general meeting through the process of special notice and passing of resolution, such vacancy may be filled as a casual vacancy. This has to be in accordance with section 161{4} of Companies Act 2013, by the Board of the concerned company. As a precaution and restricting the removed director from coming back as director, it has been provided that such director shall not be re-appointed as a director by the Board. Moreover, the person so appointed in filing a casual vacancy shall hold office only up to the date up to which the director in whose place he is appointed would have held office if it had not been vacated by removal.
RIGHT TO COMPENSATION OR DAMAGES
Law
169 (8). Nothing in this section shall be taken—
(a) as depriving a person removed under this section of any compensation or damages payable to him in respect of the termination of his appointment as director as per the terms of contract or terms of his appointment as director, or of any other appointment terminating with that as director; or
(b) as derogating from any power to remove a director under other provisions of this Act.
Analysis
♦ This provision in sub section {8} states that a person removed under this section as a director shall not be deprived of any compensation or damages payable to him by the company concerned relating to the termination of his appointment as director. The amount payable should be as per the terms of his contract or terms of his appointment as director. Moreover, he should not be deprived likewise in respect of any other appointment terminating with that appointment as director. Thus, he is entitled to claim such compensation or damages. [Ref case: Beach v. Reed Corrugated Cases Ltd {1956} 2 All ER 652 {QBD}].
♦ Moreover, the provision in this section shall not be taken as derogating from any power to remove a director under other provisions of the Companies Act 2013, as for example in section 167 regarding vacation of office of director, and, hence those powers remain unaffected.
CONCLUSION
Without any doubt this provision under section 169 of the Companies Act 2013 for removal of directors is one of critical importance in any corporate administration and functioning. This power needs to be exercised by the Board and the shareholders with utmost restraint and good faith. The principle of natural justice enshrined in the section must be followed in letter and spirit before an extreme step of removal of a director is implemented.
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