Kanakprabha Jethani | Manager and Ridhima Jain | Executive (finserv@vinodkothari.com)
The Ministry of Consumer Affairs on 28th December, 2021 issued Consumer Protection (Direct Selling) Rules, 2021 (‘Rules’)[1], which provide for several compliance requirements for direct selling agents. With issuance of the said Rules, there have been questions on who will be covered by these Rules. Read more →
Exploring the Judicial Perspectives
– Pieyusha Sharma, Assistant Manager | corplaw@vinodkothari.com
Majority always prevails in corporate democracy. The management of the company is based on the majority rule i.e all matters decided in a general meeting ensue from majority voting which may overlook interests of minority. The need to balance the rights of majority and minority members is well recognized in the Sec 241 of the Companies Act, 2013 (the “Act”) thereby providing protection against oppression and mismanagement for the members of a company. It enunciates the rights of minority to impinge the decisions of majority by applying before Tribunal.
Section 241(1) of the Act states that the complaint can be filed by aforesaid mentioned member(s) before Tribunal when:
(a) the affairs of the company have been or are being conducted in a manner prejudicial to public interest or in a manner prejudicial or oppressive to him or any other member or members or in a manner prejudicial to the interests of the company; or
(b) the material change, not being a change brought about by, or in the interests of, any creditors, including debenture holders or any class of shareholders of the company, has taken place in the management or control of the company, whether by an alteration in the Board of Directors, or manager, or in the ownership of the company’s shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to its interests or its members or any class of members.
However, for seeking relief in case of oppression and mismanagement, eligibility requirements as provided under Section 244(1) of the Act must be satisfied by minority member(s) unless otherwise waived off by the Tribunal on application made by member(s).
This article intends to exhibit the grounds considered by Tribunal while passing the order and in exercise of the authority for grant of waiver in applications.
Section 244(1) of the Act provides the eligibility criteria for filing an application before tribunal to seek relief in case of oppression and mismanagement.
However, as per various judicial precedents merely fulfilling the aforesaid criteria is not the only ground considered by Tribunal to pass an order in favor of the minority. The Tribunal may exercise its power to waive off all or any of the aforesaid mentioned eligibility requirement on justifiable grounds. Such power of exemption is specifically provided in the proviso to section 244 (1), which states,
“Provided that the Tribunal may, on an application made to it in this behalf, waive all or any of the requirements specified in clause (a) or clause (b) so as to enable the members to apply under section 241.”
Notably, the proviso does not hint at the possible ‘reasons’ which can be considered by the Tribunal to grant exemptions. However, section 399 of the predecessor Companies Act, 1956 empowered the Central Government to authorise any member or members of the company to apply to the Company Law Board under section 397 or 398, notwithstanding the minimum requirements. At this point, it would be pertinent to note that the Tribunal too, has to observe principles of natural justice as per Rule 14 of the NCLT, 2016.
Accordingly, few extracts from judicial pronouncements are illustrated herein discussing the grounds considered by Tribunal while passing the order.
Essentially, natural justice requires that a person receives a fair and unbiased hearing before a decision is made that will negatively affect them. Courts have always emphasized on presence of “just and equitable” as the main intent while passing any order which acts as one of the grounds for the grant of waiver. Accordingly, the Tribunal may grant waiver, if in its opinion, it is just and equitable.
Same was established in Sri Krishna Tiles & Potteries v. The Company Law Board And Ors., where petitioner Arunachalam was the lone shareholder out of the members of the company and does not have support of the remaining 49 members. He held only 3015 equity shares which was obviously less than 10 per cent of the paid up share capital of the company. It was contended that no opportunity be granted to the petitioner to show to the Company Law Board that substantiates the waiver of locus standi.
Court held that It is not a protection, granted to the company because the company is after all constituted by its members. It is a bar on the members. In removal of that bar the members have a right of hearing and not the company. Normally, any citizen in a free democratic country has a right to go to court if his interests are adversely affected by the action of anyone. Such right cannot be denied to members of the company qua the working of their company. The statutory bar created can be removed if circumstances exist. This is in consonance with the principle that everyone has a right to approach the court for redress of his grievance. If 11 per cent shareholders can move an application under Section 397 or Section, 398 of the erstwhile Companies Act without the intervention of the Company Law Board or the Central Government then a lesser number should have a right to do so on being authorised without having to fight first a battle with the company before the Company Law Board and then in court.
Similarly, in Photocon Infotech Pvt. Ltd. v. Medici Holdings Ltd. , the Tribunal granted the waiver to the applicant which was subsequently aggrieved by Respondent that the applicant does not fulfil locs standi and filed appeal before NCLAT.
NCLAT upheld the decision of Tribunal and stated that it is open ended wide discretion of NCLT and all judicial powers and discretions are to be so exercised that it should not be arbitrary or whimsical. Interest of justice should always been the guiding factor.
Substantial interest is an exceptional circumstance meriting the grant of waiver. It can be substantial monetary investment or substantial long-standing relationship with the company forming a substantial emotional investment in the company.
The same can be well construed from Thomas George v. Malayalam Industries Ltd., where the locus standi was waived off High Court of Kerala. The applicant and his wife together held 8.84 per cent of the total issued share capital of the respondent company, and thus fell short of the requirement under Sec 244(1). However, the applicants were subscribers to the charter documents of the company and the husband was a managing director and responsible for setting up of the hotel that was being run by the first respondent-company.
The Kerala High Court held that despite not meeting the ten per cent requirement, the applicants’ well established relation with the company as promoter and key managerial personnel reflected their substantial interest in the company’s affairs. Accordingly the waiver was granted.
Similarly, referring to Cyrus Investments Pvt. Ltd. v. Tata Sons Ltd & Ors, the appellants had an interest to the extent of one-sixth of the overall value of the company. Failure to meet the criteria of 1/10th of the share capital was because of the inclusion of preference share capital in the share capital reducing the appellants issued share per centage from eighteen per cent to 2.71 per cent.
The NCLAT held the appellant’s substantial interest in the overall value of the company was exceptional and compelling enough to grant a waiver under Section 244 of the Act.
Also, in this case, there were forty-nine minority shareholders all having shareholding less than 2% individually. This meant that they could not form the required 10% unless they approached the Tribunal in groups of six or more. This showcased the dependence of minority shareholders on one another for their rights.
Tribunal admitted the waiver application observing that the members cannot always be expected to approach the Tribunal in groups where the minority shareholding was disintegrated to an extent that multiple shareholders would have to rely on one-another to fulfil the ten per cent requirement under Section 244(1).
In Manoj Bathla v. Vishwanah Bathla, the shareholding of the respondent was dramatically reduced from twenty-five per cent to 0.33 per cent in the company. This was the subject-matter of the application under Section 241 as well as the plea for warrant of grant of waiver. The NCLT had already granted the waiver, but appealing to the NCLAT, the appellants argued that the respondent does not fulfil the criteria for a section 241 application or the waiver application , as his shareholding was virtually zero per cent, even disentitling him from the status of a member.
The NCLAT upholding the decision of the NCLT, observed that refusing the grant of waiver herein would be depriving the respondent from the relief sought against allegations of oppression manifesting from manipulation of shareholding, because of which the respondent’s interest in the company seemed prejudiced. Noting this, the NCLAT upheld the grant of waiver to enable the respondent to proceed under Sec 241.
Similarly, in Photocon Infotech Pvt. Ltd. v. Medici Holdings Ltd., the reason for application under section 241 was the attempt of the management in demerging key assets of the company in slump sale. However, the Tribunal observed that the shareholding of the aggrieved were also purposely diluted and left with a minute shareholding of 0.038 per cent and 6.62 per cent in order to prevent them from filing a case of oppression and mismanagement. This was done by increasing the number of members of the company by transferring fifteen shares to the employees.
It was held that this dilution of the aggrieved, preventing them from fulfilling the criterion under Section 244 is an exceptional circumstance and in the interest of justice, Hence, waiver was granted.
Similarly, in Farhat Sheikh v. Esemen Metalo Chemicals Pvt. Ltd., where the respondents have increased the issued and subscribed capital in Esemen by issue of further 5,000 equity shares which were allotted to applicant thereby reducing the petitioner’s holding from 16.25 per cent. to approximately 8 per cent. The increase in the capital has been made by the respondents only with the ulterior motive of diluting the shareholding of the petitioner and to take away her qualification under Section 399 of the Companies Act, 1956.
Court granted waiver as issue of shares by respondents was an ulterior motive to dilute the shareholding of petitioner thereby taking away her qualification.
Considering the significance of the minority in aforesaid cases, Tribunal granted waiver of locus standi specified in Section 244.
The object of prescribing a qualifying percentage of shares to file petitions is clearly to ensure that frivolous litigation is not indulged in by persons who have no real stake in the company. Hence, the said requirement is vital and can not be overlooked unless public interest is involved.
● In V.K. Mathur And Others v. K.C. Sharma And Ors, petition was originally filed under section 397 and 398 of the Companies Act, 1956. Later, some of those who moved to Central Government back out from giving a written consent to the original petition when made. Members applied to the Company Law Board for an authorisation in terms of section 399(4) of the Act to enable them to move an application under section 397 and 398 in the High Court. Company Law Board authorised “the applicants” to apply to the court under the above section in relation to the company.
The Delhi High Court held that a petition moved by only some of the persons authorised by the Central Government may not, in fact or in principle, be an application by the authorised persons unless their written consents to the petition are available. section 399(4) is intended to waive the minimum requirements of section 399(1) and, normally, it is the nature of the allegations made rather than the number of members who make an application to it that is considered by the Central Government while granting permission. But, it would perhaps not be correct to say that the numbers is totally irrelevant particularly in cases where no public interest is involved and the disputes are only the result of inter-group rivalries in the organisation.
● In Syed Musharraf Mehdi And Syed v. Frontline Soft Limited And Ors., the petitioners together was holding 6.5% of the paid up share capital of M/s Frontline Soft Limited and constituting less than one-tenth of the total number of its members. They, on being aggrieved by a series of purported acts of oppression and mismanagement in the affairs of the Company, filed application before Company Law Board stating therein that The requirements of section 399 of the Act are directory and not mandatory and that the petitioners will be able to show in due course of the present proceedings that they have support of several other shareholders thereby the petitioners would be able to satisfy in future the requirements of section 399.
Company Law Board dismissed the application stating that petitioners do not possess the requisite locus standi to maintain the petition. It was held that the plea of the petitioners that they will be in a position to muster the requisite percentage shareholding subsequent to filing of the present company petition does not at all merit any consideration. The requirement of requisite percentage is vital and go to the root of the matter, which cannot be broken and overlooked as envisaged therefore, cannot be directory.
Law do intend to strike the right balance between majority rule and minority rights is always an intention. However, minority too, cannot be allowed to disturb the corporate democracy using frivolous tactics.
Hence, decisions taken by majority not divulging any act of oppression and mismanagement are never interrupted. But where any decision is prejudicial to the interest or minority, a right can be exercised by the minority by filing an application before Tribunal pursuant to Section 241(1). Also, Tribunal may even waive off the locus standi considering the significance of interest of minority in the company.
However, as discussed above, it is the sole and wide discretion of the Tribunal to pass order in favor/against the minority based on the facts and circumstances of each case. In any case, in making a decision under section 244, the Tribunal would be driven by the overarching principles of natural justice, as the author discussed above.
– CS Aisha Begum Ansari, Manager | aisha@vinodkothari.com | Last updated as on January 24, 2022
SEBI vide notification dated January 24, 2022 has notified SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2022 (‘Amendment Regulations’) applicable with immediate effect. With this amendment, SEBI has introduced provisions relating to appointment/ re-appointment of a person, including Managing Director (‘MD’) or Whole-Time Director (‘WTD’) or a manager who were earlier rejected by the shareholders at a general meeting.
Last year in January 27, 2021, SEBI issued a Consultation Paper for introducing provisions for appointment or re-appointment of persons who fail to get elected as MD or WTD at the general meeting of a listed entity (‘Consultation Paper’) to curb the practice followed by certain listed entities of passing separate resolutions for regularization of additional directors and for appointment of MD/ WTD. In cases where the latter resolution is not approved by the shareholders, the listed entities used to again appoint the same person as MD/WTD who could hold office until the same was again taken to the shareholders for approval at the next general meeting. The proposed amendments were also approved by SEBI in its Board meeting, however, with certain modifications.
This article discusses the procedure prescribed in the Consultation Paper and ascertains the compliance requirement to be ensured by the listed entity before appointing any director.
In view of instances where the listed entities appointed the persons rejected by shareholders for appointment as MD/WTD by having two separate resolutions for regularization of additional director and for appointment of MD/ WTD, SEBI prescribed following stricter requirements for appointment of such rejected candidates, to ensure that no such appointments are made by the listed entity against the will of the shareholders and against the spirit of corporate governance:
While the Consultation Paper prescribed the requirement only for appointment of MD/ WTD, the Amendment Regulations cover all the directors and managers within its scope. Further, in view of enforcement of Reg. 17 (1C) of the Listing Regulations w.e.f. January 1, 2022, SEBI prescribed seeking prior approval of shareholders, being a stricter timeline than that proposed in the Consultation Paper.
Thus, the sequence will be as follows:
The language of the Consultation Paper and the Amendment Regulations clearly indicates that while considering the re-appointment of a person as a director, including MD/ WTD/ manager, the listed entity will have to see the rejection of such person by its own shareholders and not the shareholders of other listed entities.
The Consultation Paper as well as the Amendment Regulations emphasize on the procedure for re-appointment of a person who has been rejected by the shareholders. However, it does not provide any specific period upto which a company has to travel back to examine the rejection of such person. For instance, if a person’s candidature for appointment as a director was rejected by the shareholders ten years back, should the same be considered if the company intends to appoint him on the board of the company today? Further, should a company carry out due diligence to dig out the history of the appointee or seek declaration from to this effect from the appointee? Since, the Consultation Paper and the Amendment Regulations are silent on the above questions, the listed entity will be required to travel back to examine if the appointment of person was ever rejected by the shareholders in the lifetime of the listed entity.
The intent of the Consultation Paper was to counter the practice of the companies to re-appoint a person as MD/ WTD who was rejected by the shareholders for the same position, by providing stricter procedural requirements. In view of the restriction provided under the Amendment Regulations, it implies that the restriction is not only on appointment of person in the same category for which he was rejected but for appointment in any category of directorships or as manager. For e.g. if the candidature of a person was rejected for appointment as an MD, the requirement of prior approval will apply for appointment as NED as well.
The Board of Directors are primarily responsible for ensuring Corporate Governance and SEBI is determined to revisit and refine the process of appointment of directors by prescribing stricter norms in terms of process adopted for selection of candidates, disclosure requirements, timeline for seeking shareholder’s approval etc. Due to the Amendment Regulations, the listed entity will have one more actionable i.e. to carry out due diligence to ascertain if the candidature of the proposed appointee was ever rejected by the shareholders of the listed entity.
Amendments approved in various SEBI Regulations
– Team Corplaw | corplaw@vinodkothari.com
SEBI Press Release dated December 28, 2021 – click here
Our write-ups:
Anushka Vohra | Manager and Ajay Kumar K V | Manager (corplaw@vinodkothari.com)
Boards are seen as power-centres of a corporate entity. Hence, it is commonly seen that corporate disputes are often invoked out of and revolve around a certain section of shareholders seeking to seize directorship positions favouring the counter-set of shareholders.
Directors may be deprived of their office either due to disqualification, or due to circumstances leading to vacation of office, or resignation, or removal.
While the law, that is, the Companies Act, 2013 (‘CA, 2013’) has provisions around removal of directors, shareholder actions have been challenged in light of different interpretations being accorded to the provisions of Section 169 of CA, 2013 (which is akin to section 284 of the Companies Act, 1956) i.e. removal of a director, subject to certain conditions. However, courts keep facing certain reiterative but rather intriguing questions like – Whether the provisions are ‘exhaustive’ when it comes to removing a director? Whether shareholders constitute an omnipotent authority to dislodge the directors? Whether the board acting in its authority can remove a director without going to shareholders? Whether the removal of directors can happen in adherence to any other power of removal – say directors, nominator, or the like.
As a general rule, it is well accepted that the appointing authority shall have the power to remove a director from such office. However, the right of removal is not limited to the shareholders alone.
In this article, the authors have made an analysis of the ways in which a director can be removed from such office and the process to be followed for such removal.
The CA, 2013 clearly demarcates the rights and obligations of shareholders and directors. The general administration of a company vests with the directors; they are the agents of a company and have a fiduciary duty towards the shareholders and all other stakeholders. The shareholders are referred to as owners of a company as they have their stake involved in the company.
Even though shareholders are the owners of the company, one cannot refute the fact that board of directors have an integral role in the routine affairs of a company and to keep the company as a going concern. Of late, there have been concerns as to whether the shareholders’ power to remove a director is an exceptional power. Essentially, there are following ways a director may be removed: statutory power of removal, a power of removal as per articles, a power of removal arising from terms of appointment, or a power of removal arising from terms of nomination.
The shareholders have been given a power under section 169 of the Act, that they may remove a director by passing an ordinary resolution. This power is usually exercised by the shareholders in situations where a director is acting mala-fide and ultra-vires their authority. In any event, as we discuss below, the right of a shareholder to remove a director does not have to be explained by reasons.
The provisions relating to removal of a director first came into being after the Cohen Committee recommended the same. The Cohen Committee was formed to recommend amendments to the Companies Act, 1929 (regulating the UK Company Law), which eventually formed the basis of the UK Companies Act of 1948. Section 184 of the Companies Act, 1948 provided for removal of directors. The same provided for obtaining shareholders approval by way of ordinary resolution, requirement of special notice. Sub-section(6) of section 184 states that- ‘nothing in this section shall be taken as depriving a person removed thereunder of compensation or damages payable to him in respect of termination of his appointment as director or of any appointment terminating with that as director or as derogating from any power to remove a director which may exist apart from this section.’
The same was retained under the Companies Act, 1985 and subsequently under the Companies Act, 2006.
There are certain jurisdictions which have empowered even the board of directors, by statute, to remove directors. For example, the Companies Act 71 of 2008 introduced into South African law a provision that, for the first time that empowers the board of directors to remove a director from office. The relevant extract of the same is as under:
‘(3) If a company has more than two directors, and a shareholder or director has alleged that a director of the company— (a) has become— (i) ineligible or disqualified in terms of section 69, other than on the grounds contemplated in section 69(8)(a); or (ii) incapacitated to the extent that the director is unable to perform the functions of a director, and is unlikely to regain that capacity within a reasonable time; or (b) has neglected, or been derelict in the performance of, the functions of director, the board, other than the director concerned, must determine the matter by resolution, and may remove a director whom it has determined to be ineligible or disqualified, incapacitated, or negligent or derelict, as the case may be.’
The granting of powers to the board for removal of directors is also a move towards ensuring a balance of powers among the two.
Under the UK Company Law, section 168 contains the provisions relating to removal of directors whereby a company is duly empowered to do so, by ordinary resolution, prior to the expiration of a director’s term of office. S168, inter alia, states that “Nothing in this section shall be taken as … derogating from any power to remove a director which may exist apart from this section,”
The same has been applied in various judicial pronouncements. In the case of Bersel Manufacturing Co Ltd v Berry ([1968] UKHL J0508-2), an express stipulation in the articles that certain directors had the “power to terminate forthwith the directorship … by notice in writing”, was held to have been valid. Also, referring to the case of Nelson v. James Nelson and Sons, Ld.[1], the articles of association of the company in that case contained Article 84 which empowered the Board to exercise all the powers of the company subject to the limitations mentioned in the article, and Article 85 empowered the Board to appoint from time to time any one or more of their number to be managing director and with such powers and authorities, and for such period as they deem fit, and to revoke such appointment.
As discussed above, section 169 of the Act contains provisions for removal of directors. Similar provisions were there under section 284 of the erstwhile Companies Act, 1956 (‘Erstwhile Act’). Such provisions require shareholders’ approval by way of ordinary resolution and the same is coupled with the stringent requirement of special notice. The removal of directors under section 169 can be summed as under:
Section 169 begins with the phrase “A company may, by Ordinary Resolution ………”. The use of the word ‘may’ under section 169 itself implies that the procedure for removal prescribed in Section 169 is not exhausted and there may be various other ways to remove a director.
It is also pertinent to note that section 169(8)(b) inter-alia states that –
(8) Nothing in this section shall be taken—
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(b) as derogating from any power to remove a director under other provisions of this Act.
From above it could be interpreted that the company is not precluded from bringing any alternate method which could be carved out of the existing rigid statutory provision.
The Courts have been liberally interpreting the provision of section 169 to state that where the AoA bestows power on the board to remove directors, compliance with section 169 will not be required. We have referred to some judicial pronouncements hereunder:
In the case of Ravi Prakash Singh v Venus Sugar Limited[2], the Delhi High Court held that –
‘sub-section 7(b) of Section 284 lays down that nothing in the section shall be taken as derogating from any power to remove a director which may exist apart from this section. The section itself therefore contemplates removal of a director in addition to the provisions contained in the Section. Thus where the Articles of Association confer powers on the Board of Directors to remove the Managing Director or other directors, such power is not affected by the provisions of Section 284.’
( “Emphasis supplied”)
The scope of section 284 was also discussed in the case of A.K. Home Chaudhary v. National Textile Corporation[3] wherein the Allahabad High Court held that the powers of Board to remove a director is not barred by section 284-
‘the Petitioner was appointed a whole time director under Article 85(d) and his services have been terminated by the Board of Directors in exercise of their powers under Article 86(c). The Articles of Association do not place any fetter on the power of the Board of Directors to remove a director from service. The powers of the Board of Directors with regard to removal of Director remains unaffected by section 284 of the Companies Act. The impugned order of termination, therefore, is not violative of section 284 of the Companies Act. In the result, for the reasons stated above, we hold that the petitioner is not entitled to any relief.’
Contradicting judgements-
There have been contradicting views by the court in deciding who has the power to remove a director from the office wherein the provisions of section 284 were held to be comprehensive for the course of removal of a director. In the case of Hem Raj Singh v. Naraingarh Distillery Limited[4], the NCLAT held that-
‘It is stated that the removal was in complete contravention of section 284 of the old act as no specific notice was served upon the Appellant as per sub-clause 2 to 4 of section 284 of the old act.’
Akin to section 169, section 284 of the Erstwhile Act provided provisions relating to removal of directors. However, there is a change w.r.t. the alternate remedy which both sections provide. A comparative analysis of the same can be drawn as under:
| Act, 2013 | Erstwhile Act |
| Section 169. Removal of Directors
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(8) Nothing in this section shall be taken-
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(b) as derogating from any power to remove a director under other provisions of this Act. |
Section 284. Removal of Directors
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(7) Nothing in this section shall be taken-
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(b) as derogating from any power to remove a director which may exist apart from this section. |
The words, ‘which may exist apart from this section’ have been replaced by the words, ‘under any provisions of the Act.’ Does this provision have to necessarily be a statutory provision? Does this confer that right to removal under AoA of a company would be violative of section 169?
We are of the view that it is not necessary that there be a statutory provision, any power flowing from the AoA will also suffice. Referring to our detailed deliberations on the background and intent of the provision of removal of directors, it is clear that section 169 cannot be read de-hors of the background of section 284.
Further, we also refer to section 6 and 9 of the CA, 2013 and the Erstwhile Act, respectively, which states that-
Save as otherwise expressly provided in this Act—
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(b) any provision contained in the memorandum, articles, agreement or resolution shall, to the extent to which it is repugnant to the provisions of this Act, become or be void, as the case may be.
While it is a settled proposition that the AoA cannot override the Act, however since there is a carve out under section 169(8), which may not necessarily be a statutory carve out, we understand that AoA of a company can provide for the powers of board to remove directors.
Intriguing questions w.r.t. Removal of directors by the shareholders
The process of removal of directors by the shareholders has various facets, of which the requirement of special notice is crucial. A question that arises is whether the special notice has to be accompanied with reasons for removal. In the case of LIC v. Escorts Limited[5], it was held that-
‘It is not necessary to give reasons in an explanatory statement for removal of a director as desired by section 173(2). Reason behind this judgement given by the court was that the company is acting on the basis of a special notice given by the shareholder u/s 284 and it is not a resolution proposed by the company.’
Under the provisions of Act, 2013 there are different types of directors viz. Executive Director(EDs),Non-Executive Director(NEDs), nominee director, additional director. The Law has made provisions for appointment and removal of all types of directors and differences lie in the method of appointment, authority for removal, etc. Below we analyse briefly the process for removal of different types of directors.
‘It is now a well-settled principle of law laid down by various decisions of the apex court, that the power of appointment includes the power of removal. The power of removal in the present case flows from the right of appointment by the Administrator under article 68(1) of the articles of association. Once this aspect is kept in mind, it is clear that the petitioner has not been removed by the board of directors under section 284 of the Companies Act. It is a re-call of the nomination by the Administrator under article 68(1) read with article 68(4) of the articles of association. As a nominee of the Government, the petitioner represented the largest shareholder in the company and the Government was entitled to revoke the said nomination/appointment as a matte of right which flowed from articles 68(1) and 68(4) with regard to non-rotational director appointed by the Administrator. Section 284 of the Companies Act deal with removal of directors by the company. It requires a company to pass an ordinary resolution to remove a director (not being a director appointed by the Central Government under section 408 of the Companies Act).’
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‘The Government’s right to revoke the appointment under article 68(1) is not the same things as removal of a director by the company under section 284 of the Companies Act. The two operate in different spheres. If this dichotomy is kept in mind, it is clear that power to revoke the appointment made under article 68(1) flows from the power to appoint under article 68(1) and it has nothing to do with the removal of a director under section 284 of the Companies Act.’
3. Additional directors- The board of directors under the powers given by the AoA may appoint an additional director, and until their appointment is regularised by the shareholders at a general meeting, the board of directors can remove an additional director.
4. Managing Director- A managing director is appointed in a dual capacity, i.e. as a managerial personnel and as a director. As a managing director his terms of engagement are usually determined by way of a formal letter. Therefore, termination of the services of a managing director is within the powers of the board and section 169 shall not be referred to in this regard.
In the case of S. Varadarajan v. Venkateshwara Solvent Extraction (P) Ltd: : 1994 80 CompCas 693 Mad, (1992) IIMLJ 130[7], it was held that section 284 does not come in the way of removal of the managing director by the board. Similar decision was taken in the case of Major General Shanta Shamsher v. Kamani brothers: : AIR 1959 Bom 201, (1958) 60 BOMLR 1024, 1959 29 CompCas 501 Bom[8].
Whether special notice under section 115 requires compliance with section 111?
The special notice required under section 169 shall be given as per the provisions of section 115[9] wherein the eligibility criteria and the manner in which such notice of resolution shall be circulated to the members have been prescribed. However, the interesting question here is, whether such circulation to members shall be in compliance with section 111[10]?
The language of section 111 itself gives a direct connection with section 100[11] where it provides the eligibility criteria for giving a notice of resolution for circulation amongst the shareholders. It should also be noted that Sec.100 nowhere uses the term ‘special notice’.
Also, the eligibility criteria prescribed under section 115 is different from what has been provided in section 100 which is tabulated below:
| Eligibility criteria under section 115 | Eligibility criteria under section 100 |
| ● Members holding not less than 1% of the total voting power or
● Members holding shares on which such aggregate sum not less than 5 lakh rupees, as may be prescribed, have been paid up.
|
● In the case of a company having a share capital;
○ Shareholders holding not less than 1/10th of the paid-up share capital of the company ● In the case of a company not having a share capital; ○ Shareholders holding, on the date of receipt of the requisition, not less than 1/10th of the total voting power of all the members. |
From the above, one can see that the threshold limit prescribed under section 115 is lower as compared to section 100. Thus, a lesser minority will be able to give a special notice for the removal of a director as compared to the requirements of section 100. The intent of the law also makes it more evident that these two provisions are separate and distinct from each other.
The subject matter of section 115 and section 111 are different wherein the former contains the provisions where the Act mandates a special notice for a resolution. However, the purpose under section 100 can be anything except what has been provided in section 115.
Further, section 111 requires that the shareholders shall deposit or tender with the requisition, a sum reasonably sufficient to meet the company’s expenses in giving the notice to all the shareholders of the company. However, there is no such requirement provided in section 115 read with Rule 23.
Under section115 and Rule 23, it has been specifically provided that notice of such requisition shall be given by the company to all the members or if it is not practical to give such notice, it shall be published in two newspapers having circulation at the place where the registered office of the company is located either in English language or in any other regional language of such place. But, there is no such provision in section 111 of the Act.
Also, section 140 of the Act also requires that a special notice is required for appointing a person as an auditor other than a retiring auditor, or providing expressly that a retiring auditor shall not be re-appointed. Such a special notice shall be given as per the provisions of section 115.
The views above have been upheld by the Hon’ble High Courts of India in multiple judgements as stated below:
In Gopal Vyas vs Sinclair Hotels And...: AIR 1990 Cal 45, 1990 68 CompCas 516 Cal[12] The Hon’ble High Court of Calcutta took the view that section 284 is a self-contained provision and the procedure is very specific for removal of a director. The court opined took the view that:
“The procedure for removal of a director has been specially provided in our Companies Act. Section 284 makes specific provision for such removal where special notice is required for any resolution of removal of a director or for appointment of somebody instead of that director so removed at the meeting at which he is removed.”
The view taken by Hon’ble Calcutta High Court in Gopal Vyas vs Sinclair Hotels was also upheld in Karnataka Bank Ltd. vs A.B. Datar And Others: 1994 79 CompCas 417 Kar, 1993 (2) KarLJ 230[13] by The Hon’ble Karnataka High Court:
“A comparative view of the two sections shows that section 284 is an independent provision providing for removal of directors and it is available for any shareholder for moving a resolution for removal of a director in meetings called by the company and there is nothing to insist on compliance with the provisions in section 188(2) to call a meeting to move a resolution as urged. Therefore, prima facie the view of the law to be taken having regard to the provisions of the two sections would be to hold that section 284 of the Companies Act is not subject to section 188 of the Companies Act and it is independent of that section..”
The court held that section 284 which provides for the removal of a director contains nothing to indicate that it is subject to section 188 of the Erstwhile Act.
Section 115 of the Act vs. Section 190 of Erstwhile Act
A comparative analysis of the current section and the provision of Esrtwhile Act also make it much clearer that the new section 115 has been refined to make it a complete procedure wherever the Act has prescribed that a special notice of the members shall be required for a resolution to be passed at a general meeting of the company.
| Section 115 of the Act | Section 190 of Erstwhile Act |
| ● Prescribes an eligibility criteria for shareholders to give special notice
● Prescribes a cap of 3 months from the date of meeting for issue of such notice ● Prescribes the languages in which the newspaper advertisement has to be published |
● Does not state any specific eligibility criteria
● No upper limit has been provided. ● Does not specify the manner of newspaper advertisement |
On a perusal of the aforementioned judicial pronouncements, it can be seen that the removal of director from such office has multiple facets and it is not limited to the process as specified in section 169 of the Act alone. Where the articles of a company bestow upon the directors, the power of removal of a director, such right is unaffected by the provisions of section 169. It is also accepted in the courts that the removal of a director need not specify any reason for such removal to be mentioned in the Explanatory statement to a notice to the shareholders. Thus, the provisions of removal of directors can go beyond section 169 of the Act, 2013 and removal can be done by the board of directors in consonance with section 169 read with section 6 of the Act, 2013. Further, the special notice under section 169 shall be given as per section 115 read with Rule 23 and the provisions of section 111 read with section 100 shall not be applicable for such special notice.
[1] https://www.casemine.com/judgement/uk/5a8ff8c860d03e7f57ecd506
[2] https://indiankanoon.org/doc/1738210/
[3] https://www.casemine.com/judgement/in/5ac5e2bb4a932619d9021946
[4] https://indiankanoon.org/doc/149896839/
[5] https://indiankanoon.org/doc/730804/
[6] https://indiankanoon.org/doc/1477791/
[7] https://indiankanoon.org/doc/709945/
[8] https://indiankanoon.org/doc/1339373/
[9] Resolutions Requiring Special Notice
[10] Circulation of Members’ Resolution
[11] Calling of Extraordinary General Meeting
– CS Aisha Begum Ansari | CS Pieyusha Sharma | corplaw@vinodkothari.com
SEBI (LODR) (3rd Amendment) Regulations, 2021 | Corrigendum dated August 6, 2021
NSE Circular dated December 22, 2021 | BSE Circular dated December 22, 2021
Detailed write-ups:
1.Recent amendments relating to independent directors
2.SEBI notifies substantial amendments in Listing Regulations
-Sameer Gahlot | Financial Services Division (finserv@vinodkothari.com)
Since the beginning of the 21st century, technological and digital innovation has improved the efficiency, productivity, and competitiveness in the delivery of financial services[1] and continue to do so. This resulted in benefitting and enhancing the reach and experience for the end customers. These innovations could be possible only due to the dynamic environment whose impetus is on recalibrating the traditional models currently in vogue and to redefine them suiting the current needs. It won’t be surprising, if one could recognize this era with certain buzzing words like digital servitization, circular economy, glocaslisation etc. The disruption caused by the pandemic seems to be the turning point for this century, which outlandish the entire situation and persuaded different players to ponder for out of the box solutions. The innovation has probably reached its zenith during this phase where traditional market players, mainly relying on the physical marketplace, collapsed at a blink of eye whilst many more opportunities emerged. One such innovation is evolution of the concept of neo-banks, which has become the recent buzzword in the financial sector. To put it simply, neo-banks are a digital version of a traditional bank. Several ‘neo-banks’ have been set up in India and abroad during the previous couple of years. Read more →
-Kanakprabha Jethani (kanak@vinodkothari.com)
A crucial feature of the financial sector industry is that the services provided by financial institutions, including the interest rates charged, are not identical and hence, the customer has a choice to approach the lender whose offerings suit the needs of the customer. The choice is influenced by various factors including the ease of onboarding process, information sought, interest and charges levied, customer redressal mechanism etc. In the lending industry, given the options available with the borrower, it has been a common practice to move to new lenders when they provide more favourable terms. Read more →
– HVDLE guided to explain and not comply!
Anushka Vohra | Manager (corplaw@vinodkothari.com)
Recently, SEBI rolled out stricter corporate governance (CG) norms for entities having its non-convertible debt security listed and having an outstanding value of Rs. 500 crore and above as on March 31, 2021 [referred as High Value Debt Listed Entities (HVLDEs)[1]]. One of CG norms applicable is to comply with the requirements that apply with respect to Related Party Transactions (RPTs). The approval requirement, stipulated for material RPTs mandates approval of shareholders and prohibits related parties to vote to approve the transaction. The intent of the law is to ensure approval by shareholders who are not related parties. As HVDLEs include private companies and closely held public companies that must have listed its debentures, this requirement resulted in an impossibility and deadlock. On being approached by one such entity, SEBI suggested a temporary carve out by advising ‘to explain’ and ‘not comply’.
On December 16, 2021, SEBI issued an informal guidance[2] under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations) relating to the applicability of CG requirements on HVLDEs.
Pursuant to the fifth amendment of the Listing Regulations, notified on September 07, 2021[3], the applicability of CG norms were extended to entities with non-convertible debt securities listed and the outstanding amount being Rs. 500 cr or more. While the provisions became applicable from September 07, 2021 the same was implemented on a ‘comply or explain’ basis until March 31, 2023. Accordingly, an HVDLE is expected to endeavour to comply with the provisions and achieve full compliance by March 31, 2023. In case the HVDLE is not able to achieve full compliance with the provisions, till such time, it shall explain the reasons for such non-compliance/ partial compliance and the steps initiated to achieve full compliance in the quarterly compliance report filed under clause (a), sub-regulation (2) of regulation 27 of these regulations.
An HVDLE, that were not equity listed, were only required to comply with Companies Act, 2013 (CA, 2013) requirements for the purpose of transacting with related parties. While CA, 2013 also provides for similar restrictions, it provides a carve out in case of closely held companies. The restriction of related parties not to vote in favor of a resolution, does not apply where ninety per cent. or more members, in number, are relatives of promoters or are related parties. However, there is no such carve out provided in Regulation 23 (4) of the Listing Regulations.
India Infradebt Limited (IIL), a joint venture company and an HVDLE, realised about this deadlock situation as all the shareholders, being venturers, were related parties in terms of Section 2 (76) of CA, 2013. Therefore, it approached SEBI seeking informal guidance for the procedure to be followed for obtaining shareholders’ approval in case of material RPTs.
SEBI provided a stop-gap solution and stated that in view of the ‘inherent difficulty’ by IIL in getting shareholders’ approval for material RPTs, it may choose to explain the reason for not complying.
A pertinent question that arises from the informal guidance and which has not been dealt with, is whether the HVLDEs that are closely held companies, be expected to be on the same pedestal as that of equity listed entities. Even if they are supposed to be, it cannot continue to explain for not complying as from April 1, 2023 these provisions will become mandatory and violation of the same will attract penalties from the stock exchanges.
Further, the RPT provision has been drastically amended and becomes effective from April 1, 2022[4]. The scope of related party and RPT has been widened and the threshold for material RPT has also been amended to impose a numerical threshold of Rs. 1000 crore along with the existing threshold of 10% of annual consolidated turnover. Additionally, the requirement to seek shareholder’s approval will be ‘prior’ to breaching the materiality thresholds.
Therefore, several HVDLEs may be required to seek shareholder’s approval for prospective transactions. SEBI should consider incorporating a carve out similar to that provided under CA, 2013 for closely held HVDLEs in Regulation 23 (4) of the Listing Regulations in order to resolve the issue permanently.
[1] Refer our write up at https://www.moneylife.in/article/bond-issuers-facing-disproportional-compliances-on-corporate-governance-as-sebi-move-nullifies-mca-exemption/65132.html
[2] https://www.sebi.gov.in/sebi_data/commondocs/dec-2021/SEBI%20Informal%20guidance%20letter%20to%20India%20Infradebt%20Limited%20-%20December%2016,%202021.pdf
[3] https://www.sebi.gov.in/legal/regulations/sep-2021/securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-fifth-amendment-regulations-2021_52488.html
[4] Refer our write up here:https://vinodkothari.com/article-corner-on-related-party-transactions/
– Sameer Gahlot | Assistant Manager | finserv@vinodkothari.com
The Insolvency and Bankruptcy Code, 2016 (‘Code’/ ‘IBC’) provides for a collective resolution mechanism – claims of multiple creditors of different nature are collated by the resolution professional or liquidator, as the case may be, which are then repaid from the recoveries made, either pursuant to a resolution plan or by way of realisation under the liquidation process. Thus, in either case, to be able to recover their dues from the corporate debtor, it is pivotal that such party qualifies as a ‘creditor’ with a legitimate ‘claim’ as per the Code.
That being said, while crystallized claims can be easily accounted for, the problem lies where claims are either contingent or unascertainable. Though there have been various judicial developments in this domain, the laws are still not settled and uncertainty looms over the following questions: