Section 169: Removal of Directors

Introduction to Section 169

Section 169 of Companies Act, 2013, part of chapter XI that deals with appointment and qualification of directors. This section lays down the provision for removal of a director from the company. Directors as defined by companies act as a person elected or appointed to the board of directors of the company, who with other directors have the responsibility of determining and implementing the company’s policy [1]. Director is a person of utmost importance to the company as they make day to day decisions and they steer the companies towards the right direction and sometimes when a director is not performing his/her function to best of its abilities, then it becomes essential to remove them so that company and its shareholders does not face any losses and this is where this section comes into place. This analysis will provide a better understanding of the procedure as laid down under this section.

Purpose of Section 169

This is a very important section of the act, 2013 laying down the provision for removal of directors. It lays down briefly the following:

This section provides for removal of directors. Similar to the provisions of section 284 of the 1956 Act, a company can by passing an ordinary resolution, before the expiry of period of directors’ office, can remove a director. However, the present section further provides that before his removal, a reasonable opportunity of being heard is required to be given. This section will not be applicable 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.
A special notice of at least fourteen clear days before the meeting is to be held by requisite members with respect to any resolution, for removing a director or to appoint somebody in place of a director so removed. The director being removed in such a meeting will be entitled to be heard on the resolution at the meeting. It may be noted that under the 2013 act, there is a change in the provisions relating to ‘special notice’.
Under section 190 of the 1956 act, there was no specific minimum shareholding requirement to issue special notice for removing the director of the company. However, under section 115 of the 2013 act, a minimum shareholding has been prescribed for giving special notice.
Where notice has been given of a resolution to remove a director and the director concerned has made representation against such removal in writing to the company and further requested that its notification be send to the members of the company, the company has to adhere to this request and sent the directors representation to members and if a copy of representation is not send to the members, then the same has be read out at the meeting.
However, a copy of 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 aggrieved person, tribunal is satisfied that the rights are being abused to secure needless publicity for defamatory matter.
The company or any other person who claims to be aggrieved may make an application to the tribunal in form NCLT-1 and shall be accompanied with such documents as are mentioned in Annexure B [2].
If a director holds an office of a managing director or whole-time director by virtue of his being a director and if he is removed as a director, the office of the managing director or whole-time director would vacate automatically.
A vacancy created by the removal of a director may 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 to all parties that are involved. A director so appointed will hold office till the date up to which his predecessor would have held office if he had not been removed. In case a vacancy is not filled, it may be filled as a casual vacancy, provided that the director who was removed shall not be re-appointed.
Nothing in this section as stated will be considered and taken to imply (a) as depriving a person removed under this section of any compensation or damages which are payable to him in respect of such termination (b) as derogating to any other power to remove a director under other provisions of this act.

Also Read Corporate Governance Committee In India

Situation Before Enactment of Section 169

This section corresponds to section 284 (Removal of directors) of the 1956 Act. Except for the penalty or eligibility criteria, all other provisions are similar. Additionally, punishment for contravention has now been increased. In case of default under this section the company and every director or employee who is responsible for such default of this section will be punishable with fine, not less than rupees fifty thousand but extended to rupees five lakh. Earlier, members having only one share could give special notice for the removal of director but now in accordance with section 115 of the new act, 2013 specific limit has been imposed for the members to send special notice to pluck the misuse. The effect of proviso to section 284(1) of the old act, 1956 has been removed in the new act, 2013.

Application of Section 169

Section 169 comes into application, when a director is to be removed by the company. This section lays down the procedure for removal of a director, which has to be followed for a valid removal. This section also comes into play when the vacancy created by the removal has to be filled.

Amendment to Section 169

This section has not been amended after its incorporation under this act. But vide notifications (MCA S.O. 768(E) dated 21st February 2018), certain new provisos have been added in sub section (1) of this section. The first proviso states that independent directors who are re-appointment for a second term under section 149(10) can only be removed by passing a special resolution and after giving him an opportunity of being heard [3]. The second proviso states that this section will not be applicable 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 [4].

Cases at a Glance

Tarlok Chand Khanna v. Raj Kumar Kapoor [5]: In this case Delhi High court held that the company in general meeting has the power under section 284 of the 1956 act to remove a permanent director even if articles of association put restrictions on its removal. A person appointed as a director pursuant to any provision in the articles or by the articles themselves is deemed to be appointed by the shareholders. Hence even permanent directors can be removed pursuant to this section.
LIC v. Escorts Ltd. [6]: The Supreme Court in this case held that shareholders have an inherent right to remove directors of the company. However, shareholders cannot have the authority to remove the directors who have been appointed by an authority other than the body of shareholders. These include a director appointed by the Tribunal for prevention of oppression and mismanagement under section 242 of the act and a director appointed under the principle of proportional representation under section 163 of the act. It was also held that it is not necessary to give reasons in an explanatory statement for removal of a director as desired by section 173(2) of the 1956 act, simply because the company is acting on the basis of special notice and not on a resolution proposed by the company. When the shareholders require a meeting for the very purpose of removing a director, then it is not necessary for the requisitions to state the reasons on which they wish to proceed against the director.
Bhankerpur Simbhaoli Beverages (P) Ltd. v. Sarabhjit Singh [7]: In this case the court held that where “no special notice of resolution to remove the directors was given, the resolution passed in the extra ordinary general meeting for removing the directors will be held to be invalid”.
Khetan Industries Pvt. Ltd. v. Manjuravindra Prasad [8]: In this case the court held that the court does not have the power to prevent shareholders from exercising their power under this section. The court can merely examine whether the procedure prescribed by the act has been followed or not, when exercising the power under this case.
S Varadrajan v. Venkateswara[9]: Here the court held that the powers of the management are generally vested in the directors and the shareholder do not ordinarily have right to interfere in the matter but if they are not agreeable with the policy of a particular director, they can use their power to remove a director as provided under companies act and thus in totality have a greater voice in the administration of the company. Where the directors do not call a meeting on requisition, the requisitions shareholders can themselves call it. In their notice of meeting the requirement of explanatory notice is not applicable. The court did not restrain such a meeting and also held that section 284 (now section 169 of act, 2013) is not applicable for removal of managing directors from his managerial ship as distinguished from his directorship.
Rohit Churamani v. Disha Research and Marketing Services Pvt. Ltd. [10]: In this case there was a two-member director company and there was an attempt by majority shareholders to remove the minority shareholder from his office as director, but this was not being done as he would not attend the meeting. The court in this case here ordered a meeting, which had to be called and then considered the motion and held that the meeting would be valid even if only one member attended. The quorum provision cannot be used to veto the power. This decision highlights the importance of the majority’s statutory right to remove a director.
Shoe Specialities Ltd. v. Standard Distilleries & Breweries Pvt. Ltd. [11]: In this case the court held that the procedure prescribed by this section is not applicable where a relief sought under section 242 contemplates en bloc removal of all the directors.

Concluding Summary

This section is very important as it lays down the procedure to remove a director. Directors are very important people in a company, they give direction to companies work and when shareholders feel like they are not fulfilling their duties, this section comes into play as to protect their and companies interest. This section makes sure that directors are given an opportunity to make their case and thus it also protects the right of the director to not be wrongfully terminated. As a whole it is a section of utmost importance for smooth functioning of the company.

Also Read Directors under Company Law in India

References:

[1] Companies Act, 2013, No. 18, Acts of Parliament, § 2(34) (2013).

[2] National Company Law Tribunal Rules 2016, r. 79 (MCA).

[3] MCA S.O. 768(E) dated 21st February 2018.

[4] Id

[5] Tarlok Chand Khanna v. Raj Kumar Kapoor (1983) 54 CompCas 12.

[6] LIC v. Escorts Ltd. (1986) 59 CompCas 548.

[7] Bhankerpur Simbhaoli Beverages (P) Ltd. v. Sarabhjit Singh (1996) 86 CompCas 842 (P & H).

[8] Khetan Industries Pvt. Ltd. v. Manjuravindra Prasad (1995) 16 CLA 169.

[9] S varadrajan v. Venkateswara Solvent Extraction Pvt. Ltd. (1994) 2 WLR 272 (HL).

[10] Rohit Churamani v. Disha Research and Marketing Services Pvt. Ltd. (2005) 123 CompCas 417.

[11] Shoe Specialities Ltd. v. Standard Distilleries & Breweries Pvt. Ltd. (1997) 90 CompCas 1 (Mad.).