Friday, August 8, 2014

Guest Post: Removal of Directors – The Necessary Numbers

[The author is an Advocate at the Bombay High Court, and can be contacted at c.gajaria@outlook.com]

Under the Companies Act, 1956 (“1956 Act”), it was settled law that a resolution proposing the removal of a director before expiry of his period of office under s. 284 of the 1956 Act would have to satisfy the numerical requirements prescribed by s. 188 of the 1956 Act (see for example, http://taxguru.in/company-law/member-shareholding-stipulated-sec188-seek-resolutions-included-circulation.html). 

The numerical requirements laid down in s. 188 of the 1956 Act were:-

1.            such number of members as represent at least 5% of the total voting power; or

2.            at least 100 members holding shares on which at least Rs. 1,00,000/- has been paid up. (“Numerical Requirement A”)

However, the Companies Act, 2013 (“2013 Act”) prescribes two different numerical requirements to propose a resolution for the removal of a director before the expiry of his period of office – one more diluted and the other more stringent than the one in the 1956 Act.

S. 169 of the 2013 Act (which has replaced s.284 of the 1956 Act) states that a special notice would be required to remove directors. The requirement for such special notice was also found in s. 284(2) of the 1956 Act – but there is one important difference. 

A combined reading of s. 115 of the 2013 Act and Rule 23 of The Companies (Management and Administration) Rules, 2014 indicates that a special notice may be given by members holding:-

1.            at least 1% of the total voting power; or

2.            shares on which at least Rs. 5,00,000/- has been paid. (“Numerical Requirement B”)

It is thus seen that the numerical requirements to give special notice for removal of directors under the 2013 Act have been diluted as opposed to the 1956 Act. The possible reason for this is that there was no numerical requirement defined for a special notice under the 1956 Act and which now finds place in the 2013 Act.

The counter argument to this would be that s. 188 of the 1956 Act has been replaced by s.111 of the 2013 Act. S. 111 of the 2013 Act provides for circulation of members’ resolution and requires the following numerical requirements (under s.100 of the 2013 Act):-

1.            in case the company has a share capital, members holding at least 10% of the paid up share capital carrying voting rights; or

2.            in case the company has no share capital, members holding at least 10% of the voting powers. (“Numerical Requirement C”)

It is thus seen that Numerical Requirement C (under the 2013 Act) is more stringent than Numerical Requirement A (under the 1956 Act) for circulation of members’ resolutions.

Ultimately, it will have to be seen whether the regulators or the courts adopt Numerical Requirement B (i.e. the more diluted one) or Numerical Requirement C (i.e. the more stringent one) to evaluate eligibility of member resolutions purporting to remove directors. 

- Chinmaya H. Gajaria

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