The Companies Act 2013, which received presidential approval on August 29, 2013, represents a significant legislative achievement by the Indian Parliament. This Act serves as a comprehensive and revised framework, encompassing both consolidation and modification of laws governing companies in India. It officially entered into force with its publication in the Official Gazette on August 30, 2013.
It’s worth noting that while certain provisions of the Act were put into effect through a notification issued on September 12, 2013, the Companies Act of 1956 remains in effect alongside the new legislation.
The Companies Act 2013 serves as the primary regulatory framework governing the establishment and operations of companies in India. Prior to this, the country’s first Companies Act following independence was enacted in 1956, with its provisions shaping the landscape for businesses. The formulation of the 1956 Act drew heavily from the recommendations of the Bhabha Committee. Over time, this legislation underwent several amendments, and in 2013, substantial revisions were introduced.
One noteworthy innovation brought about by the 2013 Act, specifically in Section 135, was the pioneering move to mandate corporate social responsibility (CSR) spending by law. This made India the first nation globally to require such mandatory CSR commitments from corporations.
Companies (Amendment) Act, 2019
The Companies (Amendment) Act of 2019, which was enacted by the Parliament in July 2019, introduced several notable changes to the Companies Act. The key revisions include:
Mandatory CSR Allocation:
Companies are now required to set aside unutilized CSR funds in a dedicated account. If these funds remain unspent after a three-year period, they will be transferred to a fund specified in Schedule VII of the Act, which may include entities like the Prime Minister’s Relief Fund.
Registrar of Companies’ Authority
The Act grants the Registrar of Companies the authority to initiate proceedings for the removal of a company’s name from the Register of Companies if it fails to conduct business or operate in accordance with Company Law.
Decriminalization of Minor Offences
The amendment decriminalizes 16 minor offences mentioned in the Act, transforming them into civil defaults.
These changes represent a significant shift in the regulatory landscape for companies, with an emphasis on corporate social responsibility, effective business operations, and a more balanced approach to handling regulatory violations.
An In-Depth Analysis- Section 169 of the Companies Act, 2013
The foundation of a company’s governance rests in the hands of its Board of Directors, entrusted with the responsibility of steering the organization towards prosperity and safeguarding the interests of its shareholders. Acting as the company’s agents, these directors are designated by shareholders to oversee day-to-day operations. In alignment with this principle, the Companies Act of 2013 bestows upon them certain essential rights, enabling them to shield themselves from external and internal threats.
One of the pivotal privileges granted by the Companies Act is the authority to dismiss directors if they deviate from the company’s constitution and employ their powers solely for personal gain rather than the company’s welfare.
According to Section 169 of the Companies Act, 2013, a company has the authority to remove a director, excluding those appointed by the Tribunal under Section 242, before the conclusion of their term through the passage of an ordinary resolution. This removal process must entail affording the director in question a fair and reasonable opportunity to present their case.
However, it’s important to note that for an independent director appointed for a second term under Section 149 of the Companies Act 2013, removal can only occur through the passage of a special resolution and, once again, after providing the director with a reasonable chance to present their case.
There are exceptions to the provisions of Section 169 regarding director removal. Notably, the company cannot remove individuals falling into the following categories:
- Directors appointed by the Tribunal.
- Directors in situations where the company has opted to appoint no less than two-thirds of the total director count through the principle of proportional representation.
Director Removal Process According to Section 169 of the Companies Act, 2013
Special Notice Requirement: Shareholders, as per Section 115 of the Companies Act, 2013, must provide a special notice of their intention to move a resolution for director removal to the company at least 14 days before the meeting. This notice period excludes the day of service and the meeting day itself (Section 169 of the Companies Act).
- Eligibility to Send Special Notice:
Only shareholders holding at least 1% of the total voting power or possessing shares with a cumulative value of not less than INR 5, 00,000 as of the notice date have the authority to send a special notice for director removal. This notice must be signed by the concerned shareholders.
- Intimation to the Director:
The company must promptly inform the director in question about the intended resolution by providing a copy of the special notice. The director is entitled to present their case at the meeting.
- Director’s Representation:
If the director wishes to challenge their removal, they can submit a written representation to the company. The company is then obligated to mention the receipt of this representation in the notice for the general meeting and send a copy to every member.
- General Meeting and Resolution:
A general meeting must be convened, where an ordinary resolution for the director’s removal is passed.
- Filing with Registrar of Companies:
Following the resolution’s passage, the company must file e-form no. DIR-12 with the Registrar of Companies within 30 days.
- Vacancy and Appointment:
If a vacancy arises due to the director’s removal, the same meeting can appoint another director temporarily. A special notice for this intended appointment is required.
- Tenure of Newly Appointed Director:
The newly appointed director serves until the formal appointment process is completed.
- Automatic Vacation of Office:
Upon removal, the director’s office is automatically vacated under Section 167.
- Liability of Removed Director:
The removed director remains liable for any damages or compensation owed to them as per the terms and conditions of their appointment.
Form DIR 12 Approval Process and Documentation
When submitting Form DIR 12, it’s important to note that it is an approval form. The Registrar of Companies (ROC) may request additional documents during the review process. These supplementary documents can include:
- Copy of Representation Letter:
The letter from the concerned director presenting their representation.
- Copy of Special Notice:
The special notice served for director removal.
- Copy of Director’s Affidavit:
An affidavit from the director who signed the Form confirming compliance with all legal requirements for the removal.
- Copy of Director’s Indemnity:
An indemnity is provided by the director who signed the Form.
- Certificate from Practising Company Secretary:
A certificate from a Practising Company Secretary who signed the Form.
- Proof of Dispatch:
Evidence of documents sent to the director being removed.
- Minutes and Attendance Register:
Copies of the board, extraordinary general meeting minutes, and the attendance register.
This list is not exhaustive, and the ROC may request other documents as needed based on the specific situation. After resubmitting Form DIR 12 and upon the ROC’s satisfaction, the Form will be approved. The approval timeline from the filing date of Form DIR 12 typically falls within the range of approximately 3 to 6 months.
Penalties for Non-compliance with the Companies Act, 2013
Section 169 of the Companies Act Violation:
In the event of a company failing to adhere to the provisions of Section 169, both the company and any responsible officer within the company will be subject to penalties. The penalties include a fine of INR 50,000 initially, and in cases of persistent non-compliance, an additional penalty of INR 500 for each day the failure continues, capped at INR 3 00,000 for the company and INR 1 00,000 for the defaulting officer.
Contravention of Rule 23 of the Companies (Management and Administration) Rules, 2014:
According to Rule 30 of the Companies (Management and Administration) Rules, 2014, violations of rules established under Section 169 can lead to penalties. Both the company and the responsible officer can face fines of up to INR 5,000. If the violation persists, a daily fine of INR 500 may be imposed for each day of contravention.
It’s important to note that offences falling under Section 169 of the Companies Act, 2013, in conjunction with Rule 23 of the Companies (Management and Administration) Rules, 2014, are compoundable under Section 441 of the Companies Act, 2013.
Balancing Shareholders’ and Directors’ Powers under the Companies Act, 2013
The Companies Act of 2013 meticulously outlines the roles, responsibilities, and boundaries of shareholders and directors within a company. Directors are entrusted with the general management of the company; they act as its agents and owe a fiduciary duty to shareholders and all stakeholders involved. Shareholders, on the other hand, are often regarded as the company’s owners due to their financial stakes in the enterprise.
While shareholders indeed hold the ownership stake, it’s crucial to acknowledge that directors play an indispensable role in the day-to-day operations of a company, ensuring its continued viability. Lately, there has been a debate surrounding whether the power of shareholders to remove a director should be considered an exceptional prerogative.
In essence, directors can be removed through various avenues: statutory authority, provisions in the company’s articles, terms of appointment, or terms of nomination. Section 169 of the Companies Act grants shareholders the authority to remove a director through the passage of an ordinary resolution. Typically, this power is exercised when a director’s actions are deemed mala-fide or exceed their authorized authority. Importantly, as we will explore further, shareholders are not obligated to provide specific reasons for removing a director.
Section 169(8) – Exclusive Method of Director Removal?
Section 169 of the Companies Act, 2013 commences with the phrase, ‘A company may, by Ordinary Resolution…,’ and the use of the word ‘may’ within this section inherently suggests that the removal process outlined in Section 169 is not the sole and exhaustive method. There may exist various other avenues for director removal.
Furthermore, it’s noteworthy that Section 169(8)(b) specifies, among other things, that ‘Nothing in this section shall be taken— XXX (b) as derogating from any power to remove a director under other provisions of this Act.’ This provision underscores that a company is not confined to the confines of the specific procedure detailed in Section 169. Instead, it retains the flexibility to explore alternative methods within the broader statutory framework. In essence, this provision allows for the possibility of devising alternative approaches to director removal that align with the overall provisions and intent of the Companies Act.
The removal of a director represents an intrinsic prerogative vested in shareholders, embodying the principle that a director may be ousted from their position if deemed inept or unsuitable for their role within the company. However, it is prudent to explore all available legal avenues and exhaust other options before embarking on the process of director removal.
Director removal is a sensitive and infrequent undertaking requiring a high degree of caution and diligence. Initiating such proceedings demands a thorough understanding of the legal framework and meticulous adherence to the stipulated procedures. Shareholders must exercise prudence and meticulousness when contemplating the removal of a director, as the consequences can significantly impact the company’s governance and operations.
In summary, while the power to remove a director is an inherent right of shareholders, it should be regarded as a last resort, with careful consideration given to the legal and procedural intricacies involved. This approach ensures that the removal process is carried out fairly, just, and legally compliant, safeguarding the interests of all stakeholders within the company.
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