This article is written by Uneza Khan. In this article, the author provides a comprehensive analysis of Section 169 of the Companies Act, 2013, along with the reasons and procedure for the removal of the director. Furthermore, it also discusses the exceptions to this provision and, in case of contravention, the penalty that is provided in Rule 30 of the Companies (Management and Administration) Rules, 2014.

Introduction

A company is an artificial person, invisible, intangible, and having existence only in contemplation of law. It neither has its own body nor the ability to think, which makes it crucial that the company’s business be entrusted to some human agents who are usually called the ‘Directors’ of the company.

Viscount Haldane L.C. in Lennard’s Carrying Co. Ltd v. Petroleum Company Ltd (1915), inter alia, commented: ‘A corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directive will must consequently be sought in the person of somebody who, for some purposes, may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation.’ Their position in the company is very versatile, as depending on the circumstances, a director can act as a trustee, an agent, or a managing partner.

Under the Companies Act 2013 (hereinafter referred to as “the Act”), a director is an individual elected by the shareholders of the company to look after the affairs of the company. Their role includes making strategic decisions, monitoring the company’s operations, ensuring compliance with rules and regulations, and acting in the best interests of the corporation and its shareholders. Directors also have fiduciary duties towards the company, which are duties of care, loyalty, and good faith; they are obliged to act honestly and in the best interests of the company, shareholders, and employees. His role is significant for maintaining transparency, ensuring accordance with the provisions of the Act, and also promoting the sustainable growth of the company while protecting the interests of the stakeholders.

Definition of director

Section 2(34) of the Act states that a director is any individual appointed to the board of a company. This definition correlates with Section 2(13) of the Companies Act, 1956, which defines the director as any person who occupies the position of director by whatever name is called. The definition given under Section 2(34) is not exhaustive because this definition may overlook persons who are not appointed formally to the board but still hold significant authority over the company, whereas the definition under the 1956 Act includes any individual by whatever title it is signified. Therefore, Section 2(34) does cover all scenarios where a person acts as a director of the company.

The directors have supreme executive authority over the company’s management. They are assigned to conduct the functions and responsibilities of a company’s director in compliance with the Companies Act of 2013. 

It was held by the Karnataka High Court in the case of S. Gururaja Rao v. State of Karnataka (1979) that the director cannot be called a servant of a company. They cannot be addressed as employees of a company. They are the company’s officers, having direct control over the management and affairs of the company.

In the case of Albert Judah, Judah v. Rampada Gupta and Anr. (1958), it was ruled that any affairs of the company incorporated under the Companies Act shall be managed by the director. They are the individuals whose appointments are done in compliance with the prevailing law. The director’s responsibility may vary from acting as an agent to that of a managing partner, a trustee, etc. However, one must understand that these expressions are not meant to define the authority, responsibility, and duties granted to them exhaustively. It is restrictive for the purpose of suggesting useful perspectives from which they may be examined.

Who can be appointed as a director

Section 149 provides for companies to have a board of directors. It states that only an individual can be appointed as a director, and a body corporate, association, or firm can’t be appointed as a director of the company.

Section 149(1)(a) states that a public company shall have a minimum of three directors, a private company shall have a minimum of two directors, and a one-person company will have one director.

The maximum number of directors in a company will be fifteen, as mentioned in Section 149(1)(b), and they can exceed the limit in a general meeting by special resolution. This sub clause is not applicable to any government company, as mentioned in Section 2(45) of the Act, and states that a company in which not less than 51% of the paid up share capital is held by either the central government, the state government, or two or more state governments; partly by the central government; partly by one or more central governments.

At least one woman director shall be appointed for the prescribed classes or classes of companies.

Section 149(2) states that every company has to comply with the provisions of subsection (1) within one year of the commencement of the Act.

It also states in subsection (4) of Section 149 that every listed company shall have independent directors, which will be one-third of the total number of directors, and the central government may prescribe the minimum number for a class or classes of public companies.

Section 152 deals with the appointment of directors, and as per Section 152(3), no person shall be appointed as a director of the company unless he has not been allotted the Director Identification Number (DIN) under Section 154 of the Act. 

Rule 9 of the Companies (Appointment and Qualification of Directors) Rules, 2014 mentions that the DIN is allotted by the Central Government as a unique director identification number to any person intending to be a director or serving as a director of a company upon making an application in Form DIR-3 pursuant to Sections 153 and 154 of the Act. It is valid for a lifetime and has 8 digits. Directors ‘ information is maintained in a database through the Director Identification Number. If the director changes the company, he can use the same DIN because it is specific to a person.

Qualifications and disqualification of a director

There are no academic or professional qualifications prescribed for directors under the Companies Act. The directors are not subject to sharing qualifications. So, unless the company’s articles mention a provision to that effect, a director is not required to be a shareholder unless he wishes to be one voluntarily. However, the articles generally specify a minimum share qualification.

Disqualifications of a director

Section 164(1) of the Act provides that a person shall not be eligible for appointment as a director of a company if:

• he is of unsound mind and has been declared so by a competent court; 
• he is an undischarged insolvent;
• he has applied to be adjudicated as an insolvent, and his application is pending; 
• he was convicted of any offence related to moral turpitude or otherwise and is sentenced to imprisonment for not less than 6 months, and a period of 5 years has not elapsed from the end of the sentence;
• if he is disqualified by any order of the tribunal; 
• if any calls were not paid related to any shares of the company, either held jointly or individually, and six months have elapsed since the last day fixed for the payment of the call; 
• if he is convicted under Section 188 of the Act concerning related party transactions in the last five years; 
• if he has not complied with Section 152(3), i.e., he has not been allotted the Director Identification Number.
• If they have not been present in the board meetings for over 12 months under the Companies Act, 2013.
• If they enter into contracts or arrangements in violation of the provisions of Section 184 of the Act. Subsection (2) of Section 184 provides that every director of a company having any interest in or being concerned directly or indirectly in a contract, arrangement, or proposed contract or arrangement that is entered into or to be entered into: 

1. with a body corporate in which the director,acting alone or in association with any other director, holds more than 2% shares of that body corporate, or is a promoter, manager, or chief executive officer of that body corporate; 
2. with a company or other organisation in which the director is a partner, owner, or member, shall disclose the nature of his stake or concern at the board meeting in which the contract or arrangement is discussed and shall attend this meeting. If the director is not concerned or interested at the time of entering into such a contract or arrangement and later becomes concerned after entering into it, they shall promptly disclose it at the very first board meeting held after becoming concerned or interested.

Removal of directors 

The removal of directors can be understood through the following two categories:

1. Removal by shareholders 
2. Removal by the tribunal, as mentioned in Section 242 of the Act.

Removal by shareholders 

Section 169 of the Act gives the shareholders the inherent right to remove the directors appointed by them. The shareholders have the power to appoint a director by passing an ordinary resolution in the same way the shareholders can remove the director by passing an ordinary resolution at their discretion when it deems fit that the policies pursued by the director are not to their liking or that there is mismanagement, breach of trust, or misconduct on the part of the director of the company.

Procedure for the removal of directors 

Section 169 of the Act mentions the procedure for the removal of the director, allowing for their removal before the expiry of their tenure by passing an ordinary resolution.

Removal by ordinary resolution 

The board of directors needs to have a board meeting to fix the date, time, and location of Extraordinary Meeting or Annual General Meeting and to consider the resolution made for the removal of directors under Section 169. 

A resolution will be passed by the directors of the company for the removal of the director, which will be subject to the approval of the shareholders of the company at the general meeting, and a notice will be issued to call a general meeting of the members, which will mention a fixed date, time, and venue set forth in the resolution for the removal to be passed by the shareholders at the meeting.

The section provides that once the notice of general meeting has been finalised, it shall be accompanied with an explanatory statement to the notice of general meeting, which shall mention the comprehensive grounds for the removal, a copy of the special notice received from a shareholder, and the written presentation given by the director to be removed.

The ordinary resolution will be passed in the general meeting (or ordinary resolution simply means passing of the resolution with simple majority votes in compliance with the articles of the company) as a special business on the agenda for the extra-ordinary general meeting or annual general meeting, except in the case of an independent director, which is mentioned in Section 149(6). For the removal of the director of the company, a special resolution will be passed.

Under Section 149(10), the reappointment of an independent director for a second term in the office will be subject to removal only after passing a special resolution in the general meeting and giving the director a reasonable opportunity of being heard.  

The company has to comply with the requirements set forth by the registrar of the company, which include filing various returns and documents, such as the annual return, within 60 days from the date of the Annual General Meeting. The company has to file the necessary returns within thirty days from the date of the ordinary resolution passed in the general meeting. Non-compliance with this may lead to a penalty against the company under Section 117 of the Act.

Within 30 days of passing such a resolution, Form MGT 14 and Form DIR 12 are essential to be filed with the Registrar of Companies (ROC).

Form DIR 12 is an approval form, and the ROC, during the review process, may request additional documents. The additional documents may include a copy of:

1. Representation letter by the concerned director,
2. Special Notice for the director’s removal,
3. Affidavit from the Director, who has signed the form, stating that they have complied with all the legal requirements for removal,
4. Indemnity provided by the director who signed the form,
5. A certificate from the practising company secretary who has signed the form,
6. Evidence of documents dispatched to the director being removed and 
7. Minutes of the board meeting, the extraordinary general meeting, and the attendance register. 

The ROC, at their discretion, may add or remove any of the above documents based on the situation, as this list is not exhaustive.

Following the resubmission of Form DIR 12, on the satisfaction of ROC, the Form DIR 12 will get approval. The approval time will be between 3 to 6 months from the date of filling of Form DIR 12.

Section 117 of the Act states that a resolution passed by the company in any meeting must be filed with the Registrar of Companies within 30 days in Form MGT-14. Form MGT-14 is basically used to file resolutions. It will be filed by the company with the Registrar of Companies (ROC) in compliance with Section 117 (the Act) and the rules made thereunder. 

There is no need to file MGT-14 by the company for matters mentioned in Section 179(3)(f) of the Act read with Rule 8 of the Companies (Meetings of Board and its Powers) Rules 2014.

Section 179(3)(f), which deals with the granting of loans, giving guarantees, or providing securities in respect of loans, and Rule 8 of the Companies (Meetings of Board and its Powers) Rules 2014 state that the following powers shall also be exercised by the Board of Directors only by the resolutions passed at board meetings: 

• to make political contributions;
• to appoint or remove key managerial personnel (KMP) or 
• to appoint internal auditors and secretarial auditors.

Thus, there is no need to file e-form MGT-14 by the companies with the Registrar of Companies regarding a resolution passed to provide security, grant loans, or give guarantees in the ordinary course of their business by:

• A banking company,
• Any class of non-banking financial company registered under the Reserve Bank of India,
• Any class of housing finance company registered under the National Housing Bank Act, 1987.

Consequences of Failure to File MGT-14

The company may only file for MGT-14 after receiving an order of condonation if it fails to file it within 30 days of passing such a resolution. The Ministry of Corporate Affairs has the power of condonation.  

Condonation of delay the company has to follow :

• In case of a delay in filing Form MGT-14  the company will have to file Form CG-1 with MCA for condonation. 
• The company shall be liable for the payment of the penalty levied by MCA in the condonation order. 
• The company shall file a copy of the order and penalty receipt in form INC-28 with ROC after the receipt of the order and payment of the penalty. 
• The company shall then submit e-form MGT-14 by mentioning the SRN of INC-28.

Special notice

Section 115 of the Act read with Rule 23 of the Companies (Management and Administration) Rules, 2014 provides that a special notice by the members representing not less than 1% of the total voting power or holding shares on which such aggregate sum of not less than five lakh has been paid up on the date of the notice mentioning the intention to move a resolution for the removal of the director on various grounds such as misconduct or negligence or any other matters related to disqualification should be given to the company not less than 14 days before the meeting.

This privilege of special notice proposed by the members for the removal or appointment of the director cannot be subjected to the requirement of Section 111 of the Act regarding the circulation of a member’s resolution. 

When the company receives the special notice of intention to move a resolution for the removal of the director, the company shall furnish a copy of the notice and address the director, who will have the right to be heard and make representations against the resolution under Section 169 of the Act.

In the case of Queen Kuries & Loans (P.) Ltd. v. Sheena Jose (1993), it was held that the notice must disclose the reason for which the director’s removal is proposed.

Reasonable opportunity of hearing

If the director provides a written representation and appeals to the company for circulation among the members, the company will notify the members to whom the notice of meeting has been sent. In cases where there is insufficient time to complete this formal process, the representation should be read out to the members of the company at the meeting. The director is entitled to be heard in the meeting.

If, on the application of the company or any other person claiming to be aggrieved, the tribunal is satisfied that the rights conferred by subsection (4) of Section 169 are being violated to secure publicity for defamatory matter, then there is no need to send a copy of the representation, and even if the director is not a party to it, the tribunal may order the costs of the company on the application to be paid by the director in whole or in part. 

Provisions for vacancy created by removal of director

Under Section 169(5), if the director of the company was appointed at the general meeting or by board, and on his removal, any vacancy created may be filled by the appointment of a new director at the same general meeting for which a special notice of the appointment has been mentioned in subsection (2) of Section 169.

Section 169(6) states that the new director appointed shall hold the office till the tenure of the remaining predecessor, if he has not been removed.

Prohibition of re-appointment and unfilled vacancies

Section 169(7) states that the vacancy can be filled as a casual vacancy in compliance with the provisions of this Act if, under subsection (5), the vacancy is not filled. The director removed from the office shall not be re-appointed by the board of directors as a director.

Protection of rights of the director

Section 169(8)(a) of the Act mentions that compensation or damages for loss of office may be claimed by a director as per the terms of contract or terms of his appointment as director, who has been removed as a director consequent to termination of his appointment. However, if the removal is in compliance with the articles of association or terms of service, no compensation may be payable.

Section 169(8)(b) of the Act mentions that nothing in this section shall be taken as limiting the ability to remove a director in accordance with other provisions of this Act.

Section 169 is permissive in nature because it gives shareholders the authority to remove directors through an ordinary resolution; thus, they can make decisions at their discretion regarding the composition of the company’s board. This means that shareholders have the alternative of exercising their right to remove a director if they believe it is in the interest of the company, without being bound by stringent requirements or restrictions. 

The section describes the conditions and procedure for the removal of a director, but it does not require the removal of a director in specific circumstances, giving shareholders the right to decide based on their judgement and assessment of the director’s execution or conduct. Therefore, the permissive nature of this section assures shareholders flexibility and liberty in handling the company’s affairs.

Removal by tribunal

The director can be removed by the National Company Law Tribunal under Section 242 of the Act. If the members or shareholders file a petition under Section 241 before the tribunal for the prevention of mismanagement and oppression in the company, and if the tribunal deems fit, it may terminate or set aside any contract or agreement made by the director, managing director, or managerial personnel, or order his removal.

The director whose appointment is terminated is not eligible for appointment as managing director, director, or manager in any company until five years without the consent given by the tribunal under Section 243(1)(b), nor can he claim damages for loss of office that is directorship from the company under Section 243(1)(a).

Subsection (2) of Section 243 states that any person who knowingly acts as a managing director or director or manager of a company contravening clause (b) of subsection (1) and any other director who is party to such contravention shall be punishable with a fine which may extend to five lakh rupees.

When a director can’t be removed under Section 169 of Companies Act

As discussed above, Section 169 of the Act provides that a company may, after giving him a reasonable opportunity to be heard, by ordinary or special resolution, remove a director prior to the expiration of his term of office. Any contract made between a director and the company that the director renders irremovable by an ordinary resolution will be void, being contrary to the Act.

The following are the exceptions to Section 169 of the Act: 

• A director appointed by National Company Law Tribunal under Section 242. 
• A company operating under Section 163, that has adopted a system where two-thirds of its directors are elected through proportional representation. It means that the shareholders of the company vote for candidates in proportion to the number of shares they hold. This ensures adequate representation for minority shareholders within the company.

Penalties for contravention of Section 169 of Companies Act

Any company in default of compliance with the provisions of Section 169 and every officer of the company in default shall be liable for penalties, including a fine of Rs fifty thousand, and if the failure continues, Rs five hundred will be added per day till contravention continues. The maximum fine that can be imposed in the case of a company will be Rs. 3 lakh, and in the case of an officer in default, it will be Rs. 1 lakh.

Rule 30 of the Companies (Management and Administration) Rules, 2014 mentions the penalty for contravention of the rule. In case of any default in compliance with the provisions of this rule, a fine will be imposed on the company and every officer or other person, which may extend to five thousand rupees, and if the contravention continues, it will further extend to five hundred rupees for each day for which the contravention continues. 

However, it must be noted that the offences committed under Section 169 of the Act read with Rule 23 of the Companies (Management and Administration) Rules, 2014 are compoundable under Section 441 of the Act.

Landmark judgments on removal of directors

Bushell v. Faith (1970)

Facts of the case 

The facts of the case were that the articles of association of the company named Bush Court (Southgate) Ltd. mentioned that, at the time of any resolution being proposed at any general meeting for the removal from office of any director, any shares held by that director shall, on a poll in respect of such resolution, carry the right to three votes per share. 

The company had £300 of total issued capital, and fully paid-up shares were equally held by three persons, each holding 100 shares of £1 each. Mr. Faith had 100 shares, and his two sisters, Mrs. Bushell and Dr. Bayne held the other 200 shares. The two sisters tried to remove the third director, i.e. Mr. Faith. He defeated the motion and recorded 300 votes, and his two sisters recorded 200 votes together.

Issues in the case

Whether or not Article 9 of the company’s articles of association violates Section 184 of the Companies Act 1948?

Judgement of the case 

The trial court held that the weighted votes clause was unconstitutional and made a mockery of Section 184 of the English Companies Act, 1948. This decision was reversed by the House of Lords,arguing that the British Parliament was well aware of the fact that the company’s articles executed weighted votes, yet no provisions were against it. This made it clear that the legislation didn’t oppose such a practice. 

Tarlok Chand Khanna v. Raj Kumar Kapoor & Ors. (1983)

Facts of the case

As per the facts of this case, Tarlok Chand was removed by a resolution in a general meeting from the board of directors. The petitioner promoted a company that consisted of family members as members and shareholders. In 1965, when the petitioner, who held the majority shareholding, fell ill, the respondent, who belonged to the other group, took over the company’s management. Subsequently, some more shares were transferred to the majority shareholders, and the petitioner was removed from the Board of Directors of the company. Thereupon, the petitioner filed the petition on the grounds of oppression and mismanagement of the company and for other allied reliefs. He challenged this by arguing that the proper notice was not circulated to the shareholders regarding his removal. Other company petitions were also filed for various reliefs by members of each of the groups.

Issues in the case

Whether or not prior notice is to be given to the director before his removal, and whether or not Article 8 of the article of association of the company was invoked?

Judgement of the case

The court held that the removal of a director of the company must comply with the provisions of the Companies Act, 2013, and his removal was not valid due to the irregularities in the procedure. The purpose of Section 169 is to eliminate arrangements or contracts under which the directors were removed by extraordinary resolutions or were irremovable. The sector over which Section 169 operates is thus extensive. In this case, it was said that any restrictions on the power of removal would be void.

Bhankerpur Simbhaoli Beverages (P) Ltd. v. Sarabjit Singh & Ors (1995)

Facts of the case

The facts of the case were such that the appellant challenged his removal, stating that the proper procedure was not followed. The court found that the resolution passed was not in compliance with the company’s article of association, and proper notice to the shareholders was not sent.

Issues in the case

Whether or not compliance with the articles of association regarding the removal is necessary?

Judgement of the case

The court held in favour of the appellant and observed that his removal was invalid. It also emphasised adhering to procedures mentioned in the Companies Act, 2013 and highlighted the requirements for fairness and transparency in corporate affairs.

Any resolution without the opportunity to make a representation would be null and void. It is a denial of opportunity to the director if he has not received the letter prior to his removal. Section 169(4) provides that there is no need to read aloud at the meeting or circulate the representation where, on application to the tribunal, it is satisfied that the rights under this section are abused for arising publicity to a defamatory matter. 

Nazir Hossein and Anr. v. Darayus Bhattena & others (2000)

Facts of the case

In this case, the chairman of the board of directors of Indian Automotive Racing Club, in the company’s board meeting, appointed an additional director by resolution passed in compliance with Section 285 of the Companies Act, 1956, i.e., Section 169 of the 2013 Act. This was challenged in a civil suit. The court passed a consent order instructing the company to hold its meeting under the direction of a third person to reconsider the initial agenda of the earlier meeting in question.

Issues in the case

The issue revolves around additional directors acting as directors of the Suit Club and restraining directors, as well as additional directors and life members enrolled after 7-11-95 from casting their votes at the AGM.

Judgement of the case

The Apex Court ruled that the proceeding of the earlier meeting in which the Chairman presided, in which life members were inducted as additional directors, would not sustain and, therefore, the appointment of such additional directors as made in the earlier meeting stands void. 

Conclusion 

Section 169 gives the shareholders the power to remove the directors as well as the right to represent themselves. The removal of directors requires a high degree of attention and diligence. It is a very sensitive matter which requires an understanding of the legal framework and procedures. It should be regarded as a last resort, with careful evaluation given to the procedural intricacies involved.

Shareholders possess an inherent right to remove a director and must perform due diligence and prudence when considering the removal of a director, as it can significantly impact the company’s governance and operations.

The removal of directors cannot be limited to the methods as specified in Section 169. This provision balances the shareholders interests as well as provides a just and fair process for the directors.

Frequently Asked Questions (FAQs)

Is Section 169 an exhaustive method of removal?

No, Section 169 is not exhaustive, as it begins with the phrase that ‘A company may, by Ordinary Resolution……’ Here “May” denotes that the removal of the director’s procedure is not exhaustive and there can be other methods for removal as well. Section 169(8)(b) also states that the company is not deprived of any alternate methods for the removal of the director. 

What are the rights given to the director who is being removed by giving special notice?

The following are the rights for the welfare of the director:

• The director subject to the removal can send a letter of representation to the company in return for the special notice received by the company for his removal. The company will send the special notice as well as the letter of representation to all the shareholders at least 7 days before the general meeting.
• In case, due to any circumstances, the letter was not received by the shareholders, the director has the right to read it out loud in the general meeting. 
• The concerned director may appeal to the tribunal if they disagree with the legal process.

Can a director challenge their removal under company law?

Yes, a director’s removal can be challenged by them under the Companies Act if they believe the removal was unjust, unlawful, or not conducted in compliance with the company’s articles of association or provisions of the Act. According to the jurisdiction and particulars relating to their removal, directors may take legal action to challenge their removal, including suit or arbitration. They may take action if they believe that the proper procedures were not followed, that the grounds for removal were invalid, or that their removal was on a discriminatory basis or in violation of their rights as directors.

What role do shareholders play in the removal of directors?

Shareholders play a vital role in the removal of the directors, as they have voting rights in the meeting. They have the right to be informed and can object to any proposed removal. They can also initiate a director’s removal by putting forward proposals.

Section 169(1) gives the company the power to remove a director unless he is appointed by the tribunal. The shareholders pass an ordinary resolution after giving him a reasonable opportunity to be heard.

What is the difference between a voluntary resignation and the removal of a director?

Resignation by a director of a company is voluntary, whereas removal is involuntary. The director is removed due to his disqualification or other reasons, whereas there is no requirement of any such reasons in resignation. 

References 

• Dr. N.V. Paranjee, Company Law-7th Edition (2016)
• Avtar Singh, Company Law- 16th Edition (2015)
• https://www.icsi.edu/media/portals/0/APPOINTMENT%20AND%20QUALIFICATIONS.pdf
• https://www.mca.gov.in/MinistryV2/dinprocess.html 

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