The directors of a Company are responsible for managing and looking after the day-to-day affairs of the Company. The Companies Act, 2013 (“Act”) has clearly bifurcated the rights and responsibilities of the directors and shareholders. Even though shareholders are the owners of the company, one cannot refute the fact that board of directors have an integral role in the routine affairs of a company. Boards are seen as power-centers of a corporate entity. Having said, a company may, for a variety of reasons, choose to remove a director from office. Directors may be deprived of their office either due to disqualification, or due to circumstances leading to vacation of office, or resignation or removal.
Section 169 of the Act provides the procedure for removing a director from his office. The section corresponds to section 284 of the Companies Act, 1956 (“1956 Act”) and retains substantially the provisions contained therein. However, the question which arises is that whether the provisions provided in the Act are ‘exhaustive’ when it comes to removing a director. In this article, the primary focus is to analyze the ways in which a director can be removed from such office.
Sections like 169 of the Act and 284 of the 1956 Act, gives shareholders of every company the right to remove, by passing an ordinary resolution, any director from his office, other than a director appointed under Section 242 of the Act. The rights given under the aforesaid sections is the statutory right which cannot be taken away by the memorandum or by any contract or any other document and if it sought to be taken away, such provision will be void.
In LIC of India v. Escorts Limited, the Hon’ble Supreme Court has categorically held that every shareholder of a company has a right, subject to statutorily prescribed procedural and numerical requirements, to call an extraordinary general meeting in accordance with the provisions of the Act.
Also, it must be borne in mind that a shareholder being a contributor to the capital of a company, he gets bestowed by the fact of his shareholding with certain rights which can never be usurped from him. He does not participate directly in the company management and relies on the board of directors to steer the fortunes of a company. That being so, the right to both appoint or remove a director is an inherent right of the shareholder.
Having said, Section 169 of the Act begins with the phrase “a company may, by ordinary resolution, remove a director, not being a director appointed by the Tribunal under Section 242 of the Act”. The usage of word may itself clearly implies that the procedure for removal prescribed under Section 169 is not exhaustive and there may be various ways to remove a director. Further, 169(8) of the Act, provides that nothing in the aforesaid section shall be taken as derogating from any power to remove a director which exists apart from Section 169 of the Act. Section 169(8) preserves the power of a company to remove a director from his office in exercise of the power that exists apart from Section 169.
In one of the cases, the articles of a company authorized the board of directors to appoint whole-time directors, and another article to remove the whole-time director appointed by the board. The petitioner in the case who was removed from the position of whole-time director contended that the procedure to remove a director is laid down under Section 284 of the 1956 Act and the board of directors had no authority to remove the petitioner. The court, however, held that Section 284 of the 1956 Act merely provided for removal of a director by the shareholders and prescribes the procedure for the same. It does not prohibit removal of a director otherwise than in accordance with Section 284.
Thus, where the articles of a company confer power on the board to remove the managing or other directors, such power is not affected by the provisions of Section 284.
Also, recently in the case of Delhi and District Cricket v. Vinod Tihara and Ors, it was urged by the learned counsel for the petitioner that the petitioner being a director of the Government company could be removed only in accordance with the procedure laid down by Section 284 of the 1956 Act. Further, it was contended that the board of directors had no authority to remove the petitioner who was a director of the company. In the present case, the Hon’ble court was of the view that where the articles of association confer powers on the board of directors to remove a managing director or other directors, such power is not affected by the provisions of Section 284.
Further, in the case of Ravi Prakash Singh v Venus Sugar Ltd, it was stated that the power conferred on the board of directors in terms of the company’s articles of association to remove a director shall not be in any way be impacted by the provisions of Section 169 of the Act corresponding to section 284 in the 1956 Act.
It is, therefore, possible to provide in the contract or articles that the office of a director who is a managing or whole-time director would expire ipso facto if the concerned person is removed by the board as a managing director or other director.
However, in an interestingly contrary judgment, a person appointed as a life director or permanent director by the articles or by an agreement is nevertheless removable by the company in general meeting and has no security of tenure in office. While the shareholders have no power, apart from that given in the statute or the articles, to intervene in the management of the company’s affairs, Section 284 is designed to enable them to control the directors by their removal.
Despite the abovementioned decisions, it is possible to challenge a view in relation to removal of a director by way of articles or by an agreement. Therefore, it is advisable to follow the process of removing a director only in a general meeting and as per the process laid down under Section 169 of the Act.
Follow LexTalk World for more news and updates from International Legal Industry.