Summary: This article examines the legal framework governing director removal under Section 169 of the Companies Act, analysing the balance between shareholder democracy and directorial protection through recent judicial pronouncements. It explores the procedural safeguards, compliance requirements, and practical challenges companies face when removing directors, especially if they are also shareholders.
The removal of directors under the Companies Act, 2013 (“Companies Act”), provides for a balance between shareholder democracy and directorial protection. The statutory framework clearly establishes members authority to remove directors and limits judicial intervention to instances where such removal is oppressive or prejudicial. These rights have been periodically tested in courts, most recently in the Zee Case[1] before the High Court of Bombay (“Bombay HC”), following the earlier Tata-Mistry Case[2] before the Supreme Court of India (“SC”). Against this backdrop, this blog explores the legal framework governing removal of directors.
Process
Section 169 covers all types of directors, i.e., executive, non-executive, nominee, and independent directors. However, two categories of directors cannot be removed: (i) those appointed by the National Company Law Tribunal (“NCLT”) under Section 242 of the Companies Act; and (ii) directors in companies that have adopted proportional representation for appointing at least two-thirds of their directors under Section 163 of the Companies Act.
Section 169(1) of the Companies Act empowers the shareholders of a company to remove directors before the expiry of their term, subject to prescribed procedures. The process broadly involves issuance of a special notice by members holding at least 1% of the total voting power or shares with a paid-up share capital value of at least INR 5 lakhs, to the collective board of directors to requisition the removal of a director. The removal must be approved by a majority vote of the shareholders (i.e., through an ordinary resolution) at a meeting, which must be held at least 14 days after the initial notice by the shareholders.
The outgoing director is entitled to receive a copy of the notice and make representations (written or oral) either before or at the members’ meeting. Although the Companies Act does not prescribe any guidance or threshold/ reasons for removal, it is crucial to establish clear rationale to prevent disputes and maintain a professional, transparent process. This is especially relevant for listed companies, which must disclose their reasons for removal to the stock exchanges. Some of the common grounds for removal include breach of fiduciary duties where the director has failed to act in good faith or in the company’s best interests, misconduct and misfeasance, violation of company policy, poor performance, and fraud.
Following the receipt of a special notice, the Board must convene a meeting with at least seven days’ notice (or at shorter notice, subject to requisite approval), to acknowledge the special notice and call a general meeting for the director’s removal. This general meeting must take place within the prescribed timeline of 21 days or at shorter notice (where permissible), post the completion of 14 days from the issuance of the notice.
The removal will have to be approved by simple majority, meaning votes in favour must exceed those against. However, if the director is an independent director re-appointed for a second term, the resolution needs to be passed with not less thanthree-fourth of the total number of votes cast. Once passed, the director is removed with immediate effect.
The complexity is further heightened by the need to distinguish between director’s removal from their executive position and their continued right as a shareholder, as removal from directorship does not affect their shareholding or voting rights. In such situations, companies often face practical challenges including increased compliance burden, potential conflict of interest and hostility from the director-shareholder who may request confidential documents for their defence, and the risk of information leakage that could cause reputational damage. Further, this may also impact the minimum number of votes required to remove the director. The board and remaining shareholders must therefore carefully balance the need for effective governance with procedural safeguards afforded to the director, whilst considering alternative mechanisms such as contractual provisions in employment agreements or specific clauses in the articles of association that may provide additional pathways for resolution.
A director facing removal under Section 169 of the Companies Act is entitled to several fundamental procedural safeguards rooted in the principles of natural justice. The director has the statutory right to be heard, which can be exercised through written representation to the company or by addressing the shareholders at the general meeting directly. Under Section 169(4), the director concerned can make a representation in writing to the company and request its dissemination to the members, with the company being obligated to send a copy of the representation to every member to whom the notice of the meeting is sent, provided time permits. Prior to the voting procedure, the director facing removal must be given an opportunity to be heard at the meeting, in addition to any written representation that has been circulated. This right to be heard is a statutory right that cannot be taken away by the articles of association or any other document.[3] Additionally, where an aggrieved director is also a member holding requisite shareholding, they may file an application before the NCLT under Section 241 of the Companies Act for oppression and mismanagement in relation to the operations of the company, including reinstatement of the director.
In the Tata-Mistry case, the powers of Tribunal under Section 242 of the Companies Act were tested. In this case, Mr. Cyrus Mistry was removed as Executive Chairman of Tata Sons and from directorships across Tata Group companies through Board and shareholder resolutions. Cyrus Investments and Sterling Investments, Tata Sons’ minority shareholders, challenged the removal before the NCLT, alleging oppression and mismanagement. Although the NCLT dismissed the petition filed by the minority shareholders on the ground that no cause of action had been established, the NCLAT took a contrary view and held that Mr Mistry’s removal constituted oppression, thereby directing his reinstatement. However, on appeal, the Supreme Court set aside the NCLAT’s order and clarified that the Tribunal’s jurisdiction under Section 242 does not extend to interfering with a company’s decision to remove a director, unless such removal is demonstrably oppressive or prejudicial to the interests of the company or its members, or amounts to mismanagement.
Conclusion
The Companies Act, through time-intensive compliance requirements, including special notice requirements and representation rights of the outgoing director, aim to protect the interests of directors, while upholding corporate democracy (as the process is devoid of court intervention in the first instance).
Successful director removal process requires ensuring all statutory requirements are meticulously satisfied, in letter and in spirit, and companies should avoid reacting in haste. Legitimate rights of the outgoing director are to be protected in the process. Companies that fail to appreciate this balance, risk not only invalidation of the removal process but also potential legal challenges that could be more disruptive than the original concerns that prompted the removal.
For further information, please contact:
Sindhushri Badarinath, Partner, Cyril Amarchand Mangaldas
sindhushri.badarinath@cyrilshroff.com
[1] Invesco Developing Markets Fund and another v. Zee Entertainment Enterprises Ltd. and another (2022) 232 Comp Cas 20 (“Zee Case”). In this case, the appellants issued a requisition to Zee for the removal of, inter alia, Mr. Puneet Goenka from the board of Zee. However, the board of Zee did not convene the general meeting, prompting the appellants to approach the NCLT, which directed Zee to consider the requisition. Zee rejected the requisition, citing multiple legal infirmities, and approached the single judge bench of the Bombay HC. The bench granted an injunction restraining Zee from taking any steps on the said requisition by the appellants. The appellants then approached the division bench of the Bombay HC, which set aside the order of the single judge bench, thereby upholding the unfettered power of shareholders under Section 169 of the Companies Act.
[2] Tata Consultancy Services Limited v. Cyrus Investments Private Limited and Others (2021) 9 SCC 449 (“Tata-Mistry Case”).
[3] Ms. Varshaben S. Trivedi v. Shree Sadguru Switch Gears (P) Limited, (2013) 116 CLA 153 (CLB)
