Removal of Director under Section 169 of Companies Act, 2013

The board of directors is often regarded as the central decision-making body of a company. It exercises control over the day-to-day affairs and ensures that the company operates efficiently as a going concern. At the same time, shareholders, being the owners of the company, retain certain fundamental powers, including the authority to alter the composition of the board.

Removal of directors is one such important mechanism that reflects the balance of power between shareholders and directors. Corporate disputes frequently revolve around attempts by one group of shareholders to change board composition in order to gain control over the company. The law, therefore, provides a structured framework to regulate such removal, while also ensuring fairness and adherence to principles of natural justice.

Section 169 of the Companies Act, 2013 deals with the removal of directors by shareholders. However, the legal position is not confined to this provision alone. Judicial interpretations and statutory provisions indicate that removal of directors can occur through multiple routes depending on the circumstances.

Modes of Cessation of Directorship

A director may cease to hold office through various modes. These include:

• Disqualification, where the director becomes ineligible under statutory provisions. This results in automatic cessation of office and does not require any formal resolution for removal.
• Vacation of office, which may occur due to reasons such as absence from board meetings or other statutory grounds. This is again automatic in nature and arises by operation of law.
• Resignation, where the director voluntarily steps down from the position. This is governed by the terms of resignation and the applicable provisions of the Act.
• Removal, which is an active process initiated by the company or other competent authority to terminate the director’s tenure before expiry of the term.

Among these, removal under Section 169 represents a significant shareholder-driven mechanism and is the focus of this discussion.

Statutory Framework under Section 169

Section 169 of the Companies Act, 2013 provides that a company may remove a director by passing an ordinary resolution, before the expiry of the director’s term of office. This provision is applicable to all directors except those appointed by the Tribunal under Section 242.

The key elements of Section 169 are as follows:

• The removal must be carried out through an ordinary resolution of shareholders.
• The resolution must be passed before the expiry of the director’s term.
• A special notice of the resolution is mandatory.
• The concerned director must be given a reasonable opportunity of being heard, in accordance with principles of natural justice.
• The company may appoint another person in place of the removed director at the same meeting, subject to special notice.

The requirement of special notice is a crucial procedural safeguard. Such notice must be given by members holding not less than 1% of the total voting power or holding shares on which an aggregate sum of not less than ₹5 lakh has been paid up on the date of notice.

Legislative Background and Evolution

The concept of removal of directors by shareholders has its roots in English company law. The Cohen Committee recommended the introduction of provisions allowing shareholders to remove directors through ordinary resolution. This led to the incorporation of such provisions in the UK Companies Act, 1948, particularly under Section 184.

The UK law recognised two important principles:

1. Shareholders have the power to remove directors through ordinary resolution.
2. This statutory provision does not override other existing powers of removal.

The same principle continued under the UK Companies Act, 1985 and later under the Companies Act, 2006, where Section 168 provides for removal of directors while preserving other removal powers.

Indian law adopted similar provisions under Section 284 of the Companies Act, 1956, which has now been replaced by Section 169 of the Companies Act, 2013.

Whether Section 169 is an Exhaustive Provision

A recurring legal question is whether Section 169 provides the only method for removal of directors or whether it is merely one of several available mechanisms.

The wording of Section 169 begins with the expression “A company may…”. The use of the term “may” suggests that the provision is enabling rather than exhaustive. This interpretation is further strengthened by Section 169(8)(b), which states that nothing in this section shall be taken as derogating from any power to remove a director under other provisions of the Act.

This indicates that the statutory method is not intended to exclude other valid methods of removal.

Under the earlier law, Section 284 of the Companies Act, 1956 used the phrase “which may exist apart from this section.” The 2013 Act replaces this with the phrase “under other provisions of this Act.” While this change has led to interpretational debates, it does not conclusively eliminate other sources of removal powers, particularly those arising from the Articles of Association.

Role of Articles of Association

The Articles of Association (AoA) of a company may contain provisions regarding appointment and removal of directors. Courts have recognised that where the AoA confers power on the board or any authority to remove a director, such power may operate independently of Section 169.

In Ravi Prakash Singh v Venus Sugar Limited, the Delhi High Court held that Section 284 of the earlier Act does not restrict the operation of powers conferred under the Articles. The court observed that removal of a director may take place in addition to the statutory provisions where the Articles so provide.

Similarly, in A.K. Home Chaudhary v National Textile Corporation, the Allahabad High Court upheld the power of the board to remove a director under the Articles. It was held that the statutory provision does not impose any restriction on such powers.

These decisions highlight that the AoA can play a significant role in determining removal mechanisms, provided there is no inconsistency with the Act.

Contrasting Judicial Views

While several decisions support a flexible interpretation, there are also contrary views. In Hem Raj Singh v Naraingarh Distillery Limited, the NCLAT emphasised strict compliance with the statutory procedure for removal of directors and treated the provisions as mandatory.

This divergence indicates that the interpretation of removal provisions may depend on the facts of each case and the specific powers exercised.

Right of Shareholders and Requirement of Reasons

The power of shareholders to remove a director is a fundamental right under company law. This power is often exercised in situations where a director is acting against the interests of the company or beyond the scope of authority.

An important question arises as to whether reasons must be stated in the explanatory statement accompanying the resolution.

In LIC v Escorts Limited, it was held that it is not necessary to provide reasons for removal of a director. The rationale is that the resolution originates from a special notice given by shareholders and not from the company itself. Therefore, the explanatory statement need not contain detailed reasons.

This position reinforces the autonomy of shareholders in exercising their removal powers.

Removal of Different Types of Directors

The process of removal may vary depending on the nature of the director and the mode of appointment.

Executive and Non-Executive Directors

Executive Directors (EDs) and Non-Executive Directors (NEDs) may generally be removed either:

• By shareholders under Section 169, or
• By the board, where such power is conferred under the Articles.

In the case of Executive Directors, contractual terms of appointment may also be relevant.

Nominee Directors

Nominee directors are appointed by financial institutions or investors. The general principle is that the power of appointment includes the power of removal.

In Farrel Futado v State of Goa and Others, it was held that removal of a nominee director by the appointing authority is distinct from removal under statutory provisions. The power flows from the right of nomination and operates independently.

Additional Directors

Additional directors are appointed by the board under the authority of the Articles. Their tenure continues until the next general meeting. The board has the power to remove such directors before their appointment is regularised.

Managing Directors

A Managing Director occupies a dual position as both a director and managerial personnel. The termination of a managing director’s appointment may be governed by contractual terms and board powers.

In S. Varadarajan v Venkateshwara Solvent Extraction (P) Ltd and Major General Shanta Shamsher v Kamani Brothers, it was held that removal of a managing director by the board does not necessarily attract the provisions of Section 284 of the earlier Act.

Special Notice and Procedural Requirements

The requirement of special notice is central to the removal process under Section 169. Such notice must be given in accordance with Section 115 read with the relevant rules.

Section 115 prescribes the eligibility criteria for members to give special notice and also provides the manner of circulation of such notice.

An important distinction arises between Section 115 and Section 100 of the Act:

• Section 115 requires members holding 1% of voting power or shares worth ₹5 lakh.
• Section 100 requires members holding one-tenth of the paid-up share capital or voting power.

The lower threshold under Section 115 indicates that the legislature intended to make it easier for minority shareholders to initiate removal proceedings.

It has also been clarified that the procedure under Section 169 read with Section 115 is independent and does not require compliance with Section 111 or Section 100.

Judicial Recognition of Independent Procedure

Courts have recognised that the removal of directors is governed by a distinct statutory mechanism.

In Gopal Vyas v Sinclair Hotels, the Calcutta High Court observed that the procedure for removal of a director is specifically provided under the Act and requires special notice.

Similarly, in Karnataka Bank Ltd. v A.B. Datar and Others, the Karnataka High Court held that the provision for removal of directors is independent and not subject to other procedural provisions relating to requisition of meetings.

These decisions reinforce the view that Section 169 operates as a self-contained provision for shareholder-driven removal.

Comparative Analysis: Section 169 and Section 284

A comparison between Section 169 of the 2013 Act and Section 284 of the 1956 Act reveals certain differences.

Under Section 284, the saving clause referred to powers existing apart from the section. Under Section 169, the reference is to powers under other provisions of the Act.

Despite this change, the broader principle remains that statutory removal does not necessarily exclude other valid mechanisms, particularly those recognised by the Articles or contractual arrangements.

Principles of Natural Justice

Before removing a director, the law mandates that the concerned individual must be given a reasonable opportunity of being heard. This ensures fairness and prevents arbitrary action.

The director may make written representations and may also be heard at the general meeting where the resolution is considered. This procedural safeguard is essential to maintain transparency and accountability.

Conclusion

Removal of directors under Section 169 of the Companies Act, 2013 represents an important mechanism through which shareholders exercise control over corporate governance. The provision ensures that directors remain accountable to the owners of the company.

At the same time, the legal framework recognises that removal is not confined to a single statutory route. Powers arising from the Articles of Association, nomination rights, and contractual arrangements may also operate in appropriate cases. Judicial decisions have acknowledged this multiplicity of mechanisms, although differing interpretations continue to exist.