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Removal of Directors under Indian Companies Act 1956 and 2013

Varun Bhargava, Student, Jindal Global Law School



Introduction

According to Section 2(34) of the Indian Companies Act, 2013; a director is referred to a person who is appointed as a director to the Board of a Company. The director is majorly responsible for carrying out day to day affairs of the company which have to be in the interest of the shareholders of the company. Article of Association of the company lays down the powers of the director. A director may or may not be a shareholder or an employee of the company. A company is required to have a maximum of 15 directors, which can be extended by the Board of Directors by passing a special resolution and a minimum requirement of three directors in the case of a Public company, two directors in the case of a Private company and one director in the case of One Person Company has to be followed.

The process of removal of a director is presently dealt in Section 169 of the Indian Companies Act, 2013 and was earlier dealt in Section 284 of the Indian Companies Act, 1956. All directors with the exclusion of the ones appointed by the Central Government are governed by the above-mentioned and all the ones appointed by the Central Government can be removed on the lines of Section 242 of the 2013 Act and were previously dealt with Section 388 of the 1956 Act. With this paper I will explain the situation in which a director can be removed under both 2013 as well as 1956 Acts. Since only the number of the Section for removal of director is different but the process is similar so under the heading of 2013 Act, I will be explaining the process of removal when the director is not appointed by the Central Government and under the heading of 1956 Act, I will explain the process of removal when the director is appointed by the Central Government.

Removal of Director under Indian Companies Act, 2013

A director of a company is to be removed within the guidelines of Section 169, where a special notice of any resolution is required. Whenever the shareholders think that a particular director is acting against their wishes then by passing an ordinary resolution, they can remove such director. After the company has received such notice, it has to send a copy of this to such director and he/she has the right to be heard at the time of resolution during the meeting.

The case of Tarlok Chand Khanna V. Raj Kumar Kapoor is of relevance in deciding whether a director of a company can be removed before the expiry of his term. The court held in this case that a director can be removed under Section 284 (now Section 169) by passing an ordinary resolution but this removal can only be made after his tenure as a director expires. Another case on the similar lines settles the issue as to if the Article of Association confer powers to the Board of Directors to remove any director, will this power be affected by Section 284 (now Section 169)? The case is Ravi Prakash Singh V. Venus Sagar Limited and here the concerned director contended that the removal of a director can only be done in the Shareholders meeting and not in the meeting of Board of Directors. The court in this regard held that where the Article of Association confers powers to the Board of Directors to remove any director, then this power will not be affected by Section 284 (now Section 169) and allowed such powers to the Board of Directors.


Removal of Director under Indian Companies Act, 1956

Removal of a director by the Central Government is dealt under Section 388 of the 1956 Act. If the Central Government is of the opinion that any director of a company is guilty of fraud, persistent negligence or has defaulted in carrying out his duties or that such director has managed the company in a way which has caused damage to the interest of the business of the company or the director has managed the company with an intention to defraud the creditors, then it can state this case against the director and refer this to the Tribunal which would have to decide that whether the director is fit to be a director of the company. Till the time the Tribunal will decide on the future of the person as director, he will have to step down as a director and a suitable person will be chosen to be an interim director till the Tribunal decides on the future of the respondent as a director. The tribunal would have to record its decision mentioning that such person should hold the office of director or not and if the decision is against the person then the Central Government has to remove him from the post of director from the company and this person would not be allowed to hold office of director for any company from the date of such decision to 5 years of the same.

The bench in the case of Union of India V. R C Bhargava, held that there is no such period of limitation to refer a case to the Tribunal where this bench dismissed a reference under Section 388 B of the Central Government to the Tribunal which unsatisfactorily delayed the same. The bench was of the view that if there has been inordinate delay on the part of the Central Government without any justifiable ground, then it needs to be dismissed.In another case on similar section, S P Jain V. Union of India, the court held that the Central Government has to refer to the Tribunal by stating the case against such director and to decide whether the said person is fit to hold the office of director or not, it can enquire in the case.

Comparison with the law in England

The removal of a director in UK is dealt with Section 168 of the Companies Act, 2006. If the reason for removal is not covered in the Article of Association of a company, then any shareholder can propose such removal where a special notice to the company of such proposed resolution has to be mandatorily given. Such director has to be informed of his statutory rights which allows him to give a written statement in his defence and also right to attend and address the said meeting. If the director does not maintain his statutory duties and responsibilities or the director’s conduct is seen as unfit, then an official complaint can be made by any member of the company to the Insolvency Service. The shareholders in both India and UK are not at all required to disclose the reason of such removal even if prima-facie it looks unjust. The Supreme Court of India in the case of Life Insurance Corporation of India V. Escorts Ltd. held that every shareholder of the company has a right to call for an Extraordinary General Meeting which cannot be taken away at any cost and they are not required to disclose reasons for any resolutions that ought to be proposed and such reasons are not under judicial review.

Conclusion

Shareholders are not consulted when a decision as to the working of the company is to be taken place by the Board of Directors so these provisions to remove a director were originally adopted so that the shareholders feel a sense of power. So, only when the shareholders are not satisfied with the working of a particular director, they have an option to get this person removed from the Board of Directors. I am of the opinion that such a strong position of Section 169 of the 2013 Act needs to be relooked at as it is in a way questioning the directorial independence of all the directors of a company. Another point which questions this independence is that the shareholders are not required to mention their intention for removal of director. If these two things are taken away from the shareholders, then they would feel powerless but giving them these powers in a way makes the directors powerless. So, a balance should be worked out where both the shareholders and the Board of Directors do not feel more powerful or powerless in contrast to each other which can be done when the shareholders are required to state a legitimate reason for the removal of any director.

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