The BharatPe Saga: Power and procedure for removal of a nominee director

Recently, fintech company BharatPe was in the news for a variety of reasons. One such ongoing conversation is in relation to the claim made by one of the founders for removal of the CEO, Ashneer Grover, who is a joint nominee of both the founders, from the Board of BharatPe.

To clarify at the outset, this article will strictly deal with the legal issue concerning the power of the shareholder(s) to remove its nominee directors from the board and the procedure involved therein.

It is a standard market practice to grant rights of nominating a director to the board and to the founders/investors. These rights and powers come along with a certain shareholding in the company, and are mostly enforced by incorporating such right in the Articles of Association. However, the question now arises – does the nominating shareholder also have the consequent right to withdraw its nomination, resulting in the removal of the director from the board?

One might argue that it is only logical that the person who has the right to nominate a director would also carry the right to withdraw such nomination and remove the director. However, such an answer might have a claim to logic, but not to legality. To arrive at the correct legal answer and to shed some light on this issue, we must turn back to the Companies Act, 2013.

In the 2013 Act, there has been a major alteration in the statutory scheme (as compared to Companies Act, 1956) for removal of directors from the board of a company. Section 169 of the 2013 Act deals with the procedure for removal of a director. While Section 169 is essentially similar to Section 284 of the 1956 Act, the following change has been made by Parliament in the 2013 Act.

Clause 7(b) of Section 284 of the Companies Act, 1956 read as under:

“284. Removal of directors.

-----------

(7) Nothing in this section shall be taken-

(a) ------------

(b) as derogating from any power to remove a director which may exist apart from this section.” [Emphasis supplied]

Whereas, sub-section 8(b) of Section 169 of the 2013 Act reads as under:

“169. Removal of directors.

-----------------

(8) Nothing in this section shall be taken-

(a)------------; or

(b) as derogating from any power to remove a director under other provisions of this Act.” [Emphasis supplied]

Evidently, the 1956 Act provided ample scope for devising an alternative scheme for removal of a director (which could have existed “apart” from the Section, such as in the Articles of Association), as long as such schemes were not substantially contrary to Section 284 of the 1956 Act. Hence, the nominating shareholder could have relied upon the Articles of Association to contend that such Articles provided the powers to remove its nominee director.

However, under the 2013 Act, the option of drawing out an alternative scheme/procedure for removal of directors, which is not prescribed under the Act itself, has been taken away by the Legislature. Therefore, the removal of a director from the board of a company can solely be done following the procedure prescribed under Section 169 of the 2013 Act (i.e., by way of an ordinary resolution passed by the shareholders of the company). Notably, Section 6 of the 2013 Act mandates that the Articles of Association cannot derogate from the Act. Therefore, even if the Articles (or any other contract) provides for powers of removal of a director which are beyond the Act, such provisions cannot be enforced; as such, enforcement would go against the express stipulation of the law.

The correct law applicable in the context of Section 169 of the 2013 Act was authoritatively laid down in a judgment delivered by the Delhi High Court in Delhi and District Cricket Association v. Vinod Tihara, which had held-

“22. Under section 169 of the 2013 Act, the power for alternate scheme of removal of directors has been made subject to other provisions of the entire Act i.e., the alternate scheme would have to ensure that it does not derogate from any power to remove a director as specified under any other provision of the Act. That being the clear language of the statute, the only method in which a director could be removed is the one prescribed under section 169 of the 2013 Act, which stipulates that a director may be removed by ordinary resolution by a company. Section 6 (a) confers a paramount status to the provisions of the Act, overriding all other memorandum or articles, agreements or resolutions passed by the company. Section 169 (8) (b) ensures that the power to remove a director under other provisions of the Act are not affected by what is stipulated under the said section itself.”

Therefore, in my view, the right of a shareholder to nominate ceases once the name of the nominee is referred to the company. Thereafter, the nominated person has to seek election to the board in accordance with the provisions of the Companies Act. Consequently, its removal/vacation from office is also governed under the provisions of the Companies Act (Section 169). Therefore, it is amply clear that the removal of a nominee director can only happen in 3 circumstances –

(1) If they voluntarily vacate their office; or

(2) Duly resign from the post of a director; or

(3) Such director is removed by an ordinary resolution subject to compliance with Section 169.

There is no right in law or otherwise for the shareholder to claim removal of its nominee shareholder, except for in the above three circumstances.

Anubhav Khamroi is a corporate lawyer. The views expressed are solely his own and do not reflect the views/position of his firm.