COMPANY LAW

INTERNAL-I

REMOVAL OF DIRECTOR

ABSTRACT
A Corporation is an artificial entity whose functions are carried out by people in authoritarian
positions. Such people who run the affairs of the company are the Directors of the company
and the success of the corporation depends on the competency of such Directors. Holding
such an important position necessitates the provisions to hold them accountable for their
actions and also deprive them of their office if they are not being able to provide minimum
eligibility requirements or has been removed from the position due to their conduct.

We shall analyse the removal procedure of a director of a company given under section 169
of the Companies act read with section 115 and shall critically analyse the recent Bharat Pe
controversy in the same light. We shall also look upon section 241 of the act which deals with
the role of the tribunal when such instances happen and also understand the position of the
section by relating and critically analysing the Cyrus Mistry and Tata Sons Case.
 LEGISLATIVE FRAMEWORK
The provisions relating to removal of director was first introduced in the Cohen Committee
which attempted to amend the Companies Act of 1929. The removal of directors was initially
provided in section 184 of the act which states that any agreement which restricts the
company from removing the director from his office is not a valid agreement 1. Till
Companies Act 2006, the same was followed

In the 2013 Act, the grounds for disqualification of director is given in section 164 2. The
removal of director is laid down in the section 169, in the following manner:

1. By an ordinary resolution, after the director is given a chance to be heard

2. For removal, a special notice is required mandatorily and the same has to be followed
for appointment of the replacement of the previous director. If the notice is not served
then it would stand vitiated as the right to reply is repudiated.3
3. After receiving the notice, the same has to be send to the intended director where he
would be given an opportunity to represent his case before the concerned company.
The membership of the director in the company is not mandatory4

Under section 1845, if it is found that if the director has entered into an arrangement or
contract against the provisions of the act, the court can convict him for the same and sentence
a minimum of 6-month imprisonment.6

EXCEPTIONS7
 Section 169 is not applicable to directors appointed by the National Company Law
Tribunal
 If the Company has opted for appointing not less than 2/3rds of the total number of
directors based on the proportional representation
 Directors who represent special interests- creditors, debenture holders
 Life-time directors in the private companies

1
Harben v. Phillips (1883) 23 Ch. D. 14.
2
Companies Act, 2013, § 164, No. 18, Acts of Parliament, 2013 (India).
3
B.V. Thirumalai v Best Ventures Trading P. Ltd., (2004) 63 CLA 118 (CLB )
4
Bhankerpur Simbhaoli Beverages Private Limited & Anr. vs. P.R. Pandya & Ors., (1996) 86 Com Cas 842
(P&H).
5
Companies Act, 2013, § 184, No. 18, Acts of Parliament, 2013 (India).
6
Companies Act, 2013, § 184, No. 18, Acts of Parliament, 2013 (India).
7
Companies Act, 2013, § 163, No. 18, Acts of Parliament, 2013 (India).
KINDS OF DIRECTORS
1. Executive and non-executive directors are removed by through the process stated in
section 169 or based on the authority given to the board in the Articles of Association
2. Additional directors maybe removed by the additional director. The same can be done
until a new AD is appointed based on the powers conferred in the Articles of
Association
3. Managing Directors may be removed by the Board of the company by relying on the
powers conferred by them through the terms of the engagement.
4. Nominee Director is to be removed following section 284 of the 1956 Act, i.e.
through an ordinary resolution passed as the shareholders have the authority to
appoint and remove the director.8

ANALYSIS
BHARATPE CASE
In the present instance, removal proceedings were initiated against the Co-founder and
Managing Director of the Fintech company BharatPe, Mr Ashneer Grover on the grounds that
his family was misappropriating the funds of the company. But before the dismissal by
Board, he resigned9. The validity of the proceedings initiated against him shall be analysed

As mentioned early, before the 2013 act, as per section 284(7), there was scope of devising
alternative schemes for removal of the director as long as it is not conflicting with the section
284. But after the commencement of the 2013 act such a provision is not present as clause 8
of section 169 clearly states “that as derogating from any power for removal under other
provisions of the act “and the even the Articles of Association cannot have provisions going
against the law laid down10.

In this case, the proceedings for removal was initiated by the investors and co-founders of the
company who had nominated him to be the director. But a nominee director can only be
removed according to the procedure laid down in section 169 of the act. This was emphasised
by the court in the case of Delhi and District Cricket Association v. Vinod Tihara 11. Thus a
nominee director can only be removed if
8
Smt. Farrel Futado vs. State of Goa and Others 2008 84 SCL 75 Delhi
9
ETtech, Ashneer Grover seeks removal of CEO Suhail Sameer from BharatPe's board, The Economic Times,
(Mar. 19, 2022,). https://economictimes.indiatimes.com/tech/startups/breaking-ashneer-grover-seeks-removal-
of-ceo-suhail-sameer-from-bharatpes-board/articleshow/89340758.cms
10
Companies Act, 2013, § 6, No. 18, Acts of Parliament, 2013 (India).
11
Delhi and District Cricket Association v. Vinod Tihara 2018 SCC OnLine Del 11491.
 a. If the director voluntarily vacates their office
b. Resign from the post of director
c. If the director is removed by ordinary resolution following procedure in section 169

A managing director is managerial personnel as well as a director and hence the board as the
power to terminate his service and section 169 need not be followed for the same. The court
in the case of S Varadarajan v. Venkateshwara Solvent Extraction (P) Ltd 12 had held them
same stating the section 169 is not referred for removing managing directors, managership is
different from directorship.13

In the present matter, dismissing Mr Ashneer Grover from his managerial position was well
within the powers of the shareholders and the co-founders, but his dismissal from the position
of the nominee director was invalid.

TATA SONS-CYRUS MISTRY CASE

Facts

Cyrus Mistry was removed from the post of Executive Chairman of Tata and Sons 14. He was
later forced to resign by other companies of the Tata Group through extraordinary meetings
held. In 2017, the Tata and Sons and its shareholders had removed him from the position of
director. My Mistry had challenged the removal before the National Company Law Tribunal
(NCLT) which was dismissed. He filled for an appeal before the National Company Law
Appellate Tribunal (NCLAT) which decided in his favour stating that his removal was illegal
as it was oppressive and adverse to the interests of the minority shareholders. But, in the final
appeal before the Supreme Court the decisions of the NCLAT was overturned. In the present
matter the question of the concern is whether corporate governance is overshadowed by
corporate democracy

Analysis

The case filed before the NCLT by Mr Cyrus Mistry was based on the section 241 and
Section 242 of the act, which states that a petition can be filed before the NCLT if the

12
S Varadarajan v. Venkateshwara Solvent Extraction (P) Ltd 1994 80 CompCas 693 Mad, (1992) IIMLJ 130.
13
Major General Shanta Shamsher v. Kamani brothers, AIR 1959 Bom 201.
14
Jagadeeesh M, Tata Vs. Mistry – Case Analysis, R & A ASSOCIATES, (Mar. 12, 2022, 1:00 PM),
https://www.rna-cs.com/tata-vs-mistry-case-law/
activities of the company is being administered in a prejudiced, oppressive or mismanaged
manner, and the NCLT board has the authority to deal with such matter, respectively.

The argument raised by Mistry was that, four months prior to the expulsion, he was praised
by the board and was even offered a pay raise. Based on this he contended that the operations
of the Tata and Sons were in violation of the corporation governance standards the
Companies Act, 2013 addresses15

He was removed by the board of directors as per article 104 B and 121 of the AoA, where
1/3rd of the members were jointly nominated by the two trusts, Sir Dorabjee Tata Trust and Si
Ratan Tata Trust. But since the board was dominated by these two trusts the corporate
democracy was affecting the interests of the minority shareholders. The reason Ratan N Tata
stepped down from chairmanship indicates that he never wanted the Tata group to have
control of the company through majority supremacy and hence wanted the Shapoorji Pallonji
Group’s nominee directors to be given affirmative rights.

This individual membership rights means that the member as the power to assert on his own
behalf without any approval being needed from the majority and having to name the
corporation as a co-plaintiff/defendant in the law suit 16. On the other hand, in a corporate
membership rights, shareholder can only exercise in accordance with a majority votes of the
shareholders

In Mohan Singh v. Shivam Communications Pvt Ltd17, it was held that concerns relating to
one’s rights subject to corporate membership could be brought forward to the Tribunal.
Hence, contractual rights will not be enforceable under section 242.

But, in Surya Estate v. Satish Kumar Bharti 18, the Delhi High Court had held that remedy is
available if the oppression and mismanagement is proved in maters relating to contractual
violation. Even if the oppressive conduct in question does not come from the shareholder’s
corporate membership rights, relief under section 242 is available. In the present case the
appellant was seeking relief relating to right to space in the building. Thus, we can
understand the stand on this matter has been conflicting in some instances.

For the application of the section as laid down in 242(1)(a), the wrongdoing has to not only
be oppressive, mismanaged and cause unfair prejudice, but it also has to be proved that the
15
Tata Consultancy Services Ltd. v. Cyrus Investments (P) Ltd., 2021 SCC OnLine SC 272
16
NVR Nagappa Chettiar v. Madras Race Club, AIR 1951 Mad 831
17
Mohan Singh v. Shivam Communications Pvt Ltd, 2005 124 CompCas 86 CLB.
18
Surya Estate v. Satish Kumar Bharti, [2015] 132 SCL 753 (Delhi).
winding up of the company19 based on the wrongdoing is a just and equitable 20 action. Hence,
the remedies under section 242(2) is limited to the criteria that it should be just and fair.

In the present matter the court rightly pointed out that there was no case of winding up as
removal of directors cannot be grounds for the same. Thus, the burden of proof is on the
minority shareholders to prove the presence of mismanagement and oppression. Here, the
removal did not fall under the scope of Section 241 and 242 as the grounds were not satisfied
by the parties and Mistry group did not have the right to representation because they were
minority shareholders.21

Also, in the present matter, the NLCAT had not only restored Cyrus Mistry in the Board of
Tata Sons but also on the Boards of Tata Group firms who weren’t even parties to the
dispute. But in Usha Ananthasubraniam v. Union Of India22, the Supreme Court had held
that section 241 and 242 can only be applicable for matters in connection to the company’s
affairs who is subjected to the proceedings and business related to another firm cannot be
decided upon by the court. Thus, here the NCLAT had overstepped its authority.

In the present case, we can see that Tata Sons being a private unlisted firm, need not follow
the standards of corporate governance. Corporate governance often focuses on invoking
transparency and profitability but its never conflicting with the corporate democracy. Here,
the corporate governance is the group responsibility which can been is in Boards collective
responsibility mandate.

CONCLUSION
From the legislative framework we can understand that the Companies act has included
various elements in the removal of a director from his position. The Cyrus Mistry case lays
emphasis on the all factors that are required by the law to impose the sections on the
company. It lays a road map for parties who file before tribunal in such cases of oppression or
mismanagement. From the Bharat Pe case we can infer that arrangements contrary to law will
not be entertained From the case of Bharat Pe and Tata sons we can understand that there is a
need for balance of powers between the shareholders and directors when removing the
director from his position
19
Varghese George Thekkel, Tata v. Mistry: A Case for Greater Protection of Minority Shareholders’ Rights,
SCC Online, (Mar. 19, 2022), https://www.scconline.com/blog/post/2021/05/15/tata-v-mistry-a-case-for-
greater-protection-of-minority-shareholders-rights/
20
Baird v. Lees, [1923] SLR 71
21
Agrata Pandey, Tata Sons and the Mystery of Mistry, 45, Vikalpa, 183, 184-185 (2020)
22
Usha Ananthasubramanian v. Union of India, AIR 2020 SC 1061.