SWAYAM COURSE ON LAW RELATING TO COMPANIES, SECURITIES,

INSOLVENCY AND BANKRUPTCY IN INDIA

SUBJECT EXPERT & AUTHOR : Prof. (Dr.) K. V. S. Sarma

Vice-Chancellor,
Maharashtra National Law University, Aurangabad
COURSE CO-ORDINATOR, : Prof. (Dr.) G. B. REDDY
Professor of Law, University College of Law,
Osmania University, Hyderabad.
TEACHING ASSISTANT : Dr. S.B. Md. IRFAN ALI ABBAS
Visiting Faculty, University College of Law
Osmania University, Hyderabad.
_________________________________________________________________________________________________________________________

LESSON-13: DIRECTORS – REMOVAL, POWERS & DUTIES

Removal of Director
A director may be removed from office by the following:
1) By the company in general meeting.
2) By the Tribunal.

1) By the Company in General Meeting

Section 169 of the Act provides that a company may by a special notice by ordinary
resolution; remove a director before the expiration of his period of office. The section
equally applies to all companies whether public or private. However, there are
exceptions to this section.
a) It does not apply in case of a director appointed by the Central Government.
b) It does not apply to the case of a company which has adopted the system of
electing two-thirds of its directors by the principle of proportional
representation under proviso to section 163.
c) A director appointed by the NCLT.
d) Nominee directors.

A special notice of a resolution to remove a director is required, that is, notice of

the intention to move the resolution should be given to the company not less than 14 days
before the meeting. Once the company receives the notice, it must furnish a copy of it to

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Lesson-12: Directors - Appointment

the director concerned who will have the right to make a representation against the
resolution and to be heard at the general meeting. If the director submits a
representation and requests the company to circulate it among the members, the
company should, if there is time enough to do so, send a copy of the representation to
every member of the company to whom notice of the meeting is sent. If this is not
possible, the representation may be read out to the members at the meeting. The director
is entitled to be heard on the resolution in the meeting which should be a valid meeting
in all its aspects.

In LIC of India v. Escorts Ltd., (1986) 59 Comp. Cas 548 (SC) it was held that it is
not necessary for the members requisitioning removal of a director to state the reasons
or grounds on which they wish to remove the director. The vacancy caused by the
removal of a director may be filled at the same meeting provided special notice of the
proposed appointment was also given. The person so appointed will hold office for the
residue of the period of the removed director. If the vacancy is not filled at the meeting
it may be filled by the Board treating it as a casual vacancy but the Board cannot re-
appoint the removed director. A removed director may claim compensation for loss of
office as a director consequent to termination of his appointment.

2) Removal of Director by the NCLT

According to section 242(2) (h) of the Act when, on an application to the NCLT for
prevention of oppression or mismanagement, it finds that a relief ought to be granted, it
may terminate or set aside any agreement of the company with a director or managing
director or other managerial personnel. When the appointment of a director is so
terminated he cannot, except with the leave of the NCLT, serve any company in a
managerial capacity for a period of five years. It is necessary that the Central Government
should be notified of the intention to apply for such leave. He also cannot claim
compensation for loss of office.

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Resignation by a Director

According to section 168 of the Act, a director may resign his office in a manner
provided in the Articles of the company. If the Articles are silent, he may resign his office
any time after giving reasonable notice to the company and the Board. The company shall
take notice of the same and intimate the ROC within such time and in such form as
prescribed and shall place the fact of such resignation in the report of directors laid down
in the general meeting. The resigning director shall also forward a copy of his resignation
along with detailed reasons for resignation to the ROC within 30 days of such resignation.
The resignation shall take effect from the date on which the notice is received by the
company or the date, if any, specified by the director in the notice, whichever is later.

Where all the directors of a company resign from their offices, the promoter, or in
his absence, the Central Government shall appoint the required number of directors who
shall hold office till the directors are appointed by the company in general meeting. A
managing director or a whole-time director cannot, however, resign merely by giving a
notice. A formal acceptance of resignation by the company is essential in their case.
Independent Director:

According to section 149(4) of the Act, every listed public company is to have at
least one-third of the total number of directors as independent directors. The Central
Government may prescribe the minimum number of independent directors in a class or
classes of public companies. According to section 149(6) of the Act, an independent
director in relation to a company means a director who is not a managing director or a
whole-time director or a nominee director. An independent director is one a) who in the
opinion of the Board is a person of integrity and possesses relevant expertise and
experience; b) who is or was not a promoter of the company or of its holding, subsidiary
or associate company; c) who has or had no pecuniary relationship with the company, its
holding, subsidiary or associate company or their promoters or directors during the
immediately preceding two financial years or during the current financial year; d) none
of whose relatives has or had pecuniary relationship or transactions with the company,
its holding, subsidiary or associate company, or their promoters, or directors amounting

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to two per cent or more of its gross turnover or total income or Rs. 50,00,000/- or such
higher amounts as may be prescribed, whichever is lower, during the two immediately
preceding financial years or during the current financial year; e) who, neither himself
nor any of his relatives i) holds or has held the position of key managerial personnel or is
or has been employee of the company or its holding, subsidiary or associate company in
any of the three financial years immediately preceding the financial year in which he is
proposed to be appointed. iii) holds together with his relatives two per cent, or more of
the total voting power of the company; or iv) is a chief executive or director, by whatever
name called, of any non-profit organization that receives 25 per cent or more of its
receipts from the company or that holds two per cent or more of the total voting power
of the company; or f) who possesses such other qualifications as may be prescribed. The
independent director has to make the declaration of his independence at the first meeting
of the board which he attends and subsequently every year at the first meeting of the
Board in the financial year. The company and independent directors have to abide by the
provisions of Schedule IV of the Act.

Manner of election of independent directors and maintenance of Data Bank

According to section 150 of the Act, the independent directors have to be selected
from a data bank which should contain names, addresses and qualifications of persons
who are eligible and willing to act as such. This has to be maintained by any institute as
may be notified by the Central Government. The appointment has to be approved by the
company in general meeting. The Central Government may prescribe the manner and
procedure of selection of independent directors who fulfill the qualification and
requirements stated in section 149.

Appointment of Key Managerial Personnel

According to section 203 of the Act, it is compulsory for every public company and
every private company which is a subsidiary of public company having paid up capital of
prescribed sum, to appoint a Managing Director or Whole time Director or Manager. It
also made it compulsory such companies to appoint a whole-time company secretary.

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The section also made compulsory for every company belonging to such class or
classes of companies to appoint the following whole-time key managerial personnel-
a) Managing Director or Chief Executive Officer or Manager and in their
absence, a whole-time Director;
b) Company Secretary; and
c) Chief Financial Officer.
The above appointments should be authorized by the Company’s Articles of Association.
A Key Managerial Personnel shall not hold office in more than one company except in its
subsidiary company at the same time. Any vacancy of the KMC shall be filled up by the
Board at a meeting within six months from the date of such vacancy. Any contravention
of the provisions relating to the appointment of managerial personnel shall be punishable
under section 203(6). The Act did not provide for qualification necessary for
appointment as a director of a company.

Restriction on Number of Directorships

According to section 165 of the Act, no person shall hold office at one and the same
time as director of more than twenty public companies at a time. Where a director
already holding office in twenty companies is appointed, the appointment shall not take
effect and shall become void unless within one year of the commencement of this Act he
vacates his office in some companies so as to bring down the number to twenty.

That the maximum number of directorships that an individual can hold including
alternate directorship is twenty, of which not more than ten, can be public companies. In
counting the limit of public companies, directorship of private companies which are
either holding or subsidiary company of a public company shall be included. The section
further provides that a company by a special resolution in its general meeting can specify
lesser number of directorships than twenty, in which a director of the company can act
as director.

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Powers of the Directors

General Powers Vested in the Board

According to section 179 of the Act “Subject to the provisions of the Act, the board
of directors of a company shall be entitled to exercise all such powers and to do all such
acts and things as the company is authorized to exercise and do.” Once elected and in
control, the directors have almost total power over the operations of the company, until
they are removed.

Shareholders’ intervention in exceptional cases:

In the following exceptional situations, the general meeting is competent to act

even in a matter delegated to the Board:
a) Mala fide: The majority of the shareholders had the right to control the action
of the directors in the matter when they are acting against the interest of the company.
b) Board incompetent: The majority of the shareholders may exercise a power
vested in the Board when the directors have, for some valid reason, become
incompetent to act.
c) Deadlock: The shareholders can intervene when the directors are unwilling to
act, or, on account of a deadlock, unable to act.
d) Residuary powers: The residuary powers of a company reside in the general
meeting of shareholders.

Powers exercisable by resolution at Board Meetings

Section 179 provides that following powers of the company can be exercised only
by means of resolutions passed at meetings of the Board: The power a) to make calls; b)
to authorize buy-back referred to in the first proviso to clause (b) of section 68(2); c) to
issue securities including debentures; d) to borrow money; e) to invest the funds of the
company; f) to grant loans or give guarantees or provide security in respect of loans; g)
to approve financial statements and the Board’s report; h) to diversify the business of the
company; i) to approve amalgamation, merger or reconstruction; j) to take over a

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company or to acquire a controlling or substantial interest in another company; k) any

other matter which may be prescribed.

Powers exercisable with general meeting approval:

Section 180 of the Act lays down that the following powers can be exercised by the
Board only with the consent of the company in general meeting:
a) Sale, lease or otherwise disposal of the whole or substantially the whole of the
undertaking of the company; b) To invest otherwise in trust securities the amount
of compensation received by the company as a result of any merger or amalgamation;
c) To borrow money, in cases where the money to be borrowed by the company,
together with the money already borrowed, will exceed the aggregate of the paid-up
share capital and free reserves, apart from temporary loans obtained from the
company’s bankers in the ordinary course of business; d) To remit or give time for
repayment of any debt from a director.

b) Contribution to bona fide charitable and other funds:

Section 181 of the Act authorizes the Board of Directors of a company may contribute to
bona fide charitable and other funds; Prior permission of the company in general meeting
shall be required for such contribution in case any amount the aggregate of which, in any
financial year, exceeds five per cent of its average net profits for the three immediately
preceding financial years.

c) Power to make political contributions:

Section 182 of the Act permitted the companies to contribute money to any political party
or to any person for political purposes. The amount should not exceed seven and half per
cent of the company’s net profits during the three immediately preceding financial years.
Contribution should be sanctioned by a resolution of the company’s Board of Directors
and that will be sufficient authorization for all round validity. Only exception to this rule
is Government Companies and Companies which have been in existence for less than
three years.

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d) Power to make contributions to National Defence Fund:

Section 183 of the Act authorizes the companies to make contributions to the
National Defence Fund. This power can be exercised by Board. Contribution can be of
such amount as may be thought fit.

Duties of Directors

Section 166 of the Act made a statutory formulation of director’s duties. Such
duties have been spelled out in terms of the following six points:
1) Subject to the provisions of this Act, a director of a company shall act in accordance
with the articles of the company;
2) A director of a company shall act in good faith in order to promote the objects of the
company for the benefit of its members as a whole, and in the best interests of the
company, its employees, the shareholders, the community and for the protection of
environment
3) A director of a company shall exercise his duties with due and reasonable care, skill
and diligence and shall exercise independent judgment.
4) A director of a company shall not involve in a situation in which he may have a direct
or indirect interest that conflict, or possible may conflict, with the interest of the
company.
5) A director of a company shall not achieve or attempt to achieve any undue gain or
advantage either to himself or to his relatives, partners, or associates and if such
director is found guilty of making any undue gain, he shall be liable to pay an amount
equal to that gain to the company.
6) A director of a company shall not assign his office and any assignment so make shall
be void.
7) If a director of a company contravenes the provisions of this section such director
shall be punishable with fine which shall not be less than one lakh rupees but which
may extend to five lakh rupees.

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Duty to attend Board Meetings:

According to section 167(1)(b), the office of a director will be vacated if he absents

himself from all meetings of the board for a consecutive period of 12 months, with or
without obtaining leave of absence from Board.

Duty to disclose personal interest:

According to section 184 of the Act where a director is interested in a particular

transaction of the company, he must disclose it to the Board at the very first meeting after
he had become so interested. The interested director shall not participate in the
discussion on the matter in which he is interested, in the Board. In case he votes, it would
be null and void and the defaulting director shall be punishable under section 184(4) of
the Act.

Number of Board’s Meeting:

According to section 173 of the Act, every company shall hold the first meeting of
the Board of Directors within thirty days of its incorporation and thereafter hold a
minimum number of four meetings of its Board of Directors every year in such a manner
that not more than one hundred and twenty days shall intervene between the two
consecutive meetings of the Board. The participation of the directors in the meeting of
the Board may be either in person or through video-conferencing or other audio-visual
means. The Central Government may, however, by notification in official gazette exempt
any class or classes of companies such as non-profit associations registered under the
Act, from holding all these Board meetings. Section 174 of the Act provides that the
quorum for the meeting of the Board of Directors of a company shall be one-third of its
total strength or two directors, whichever is higher. Section 185 of the Act prohibits the
companies to lend money to its directors.

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Conclusion

After reading this lesson the reader can understand that the shareholders have
power to remove the directors before their tenure. He will also understand the procedure
that directors should follow to exercise their powers. He will also understand the various
duties of the directors and the consequences in case they fail to discharge their duties.

*******

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