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Removal of Auditor and Director- Sec 140 and 169 of Companies Act 2013

Ramaswami Kalidas 
on 15 May 2020

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Removal of an Auditor and director under the Companies Act, 2013-Procedure and some unintended impediments on the way.

Introduction

The provisions relating to the above are contained respectively under Sections 140 and 169 of the companies Act, 2013 (hereinafter referred to as 'The Act'). While Section 140 corresponds to Section 225 of the previous Act ,Section 169 replicates substantially the provisions of Section 284 of the 1956 Act.Although a common thread runs through the procedure to be adopted for this purpose under both the enactments-namely the requirement of a special notice from the members, there are certain subtle differences between the two Acts as outlined hereunder.

Removal of Auditor and Director- Sec 140 and 169 of Companies Act

Differences between the present Act and the 1956 Act

The differences in the two statutes are being encapsulated as under:

1) Section 225 in the former Act only contemplated the provision of a special notice for removal of an auditor during the pendency of his tenure culminating in the approval of the shareholders by ordinary resolution. The present Act calls for approval by special resolution as also the previous approval of the Central Govt. This power has been delegated by the Central Govt.to the Regional directors in terms of notification dated 19.12.2016 and the application for this purpose has to be preferred in e-form RD-1.The procedure for removal of the auditor under the new Act is much more rigid.

2) Under Section 225 ,upon receipt of the notice , a copy thereof has to be forwarded to the Auditors so that he can prepare grounds for his representation in writing which can in turn be circulated to the members of the company. If the same has been received too late for circulation to members , the Auditor could, without prejudice to his right of being heard orally at the meeting, seek that the representation be read out at the meeting .Section 140 in the Act also provides substantially the same requirements .

3) Section 140 provides that the auditor sought to be removed shall be given a 'reasonable opportunity of being heard'. This expression was conspicuous by its absence in the previous Act which endowed the auditor only with the right of representation. We shall elaborate on the import of the above expression during the course of our discussion.

4) Section 190 of the previous Act stipulated, inter alia, that special notice should be given of the intention to move the resolution to the company not less than fourteen days before the meeting at which it is proposed to be moved, excluding the date of the notice and the date of the meeting. There was no provision in the law that the special notice should carry the support of a minimum majority of members. The Delhi HC in Amar NathMalhotra v MCS Limited (76 Comp.Cas 469)based on an application of the decision in the celebrated English case of Pedley v Inland Waterways Association Limited (1977)(1 All ER 209)held that the special notice served by the shareholder under section 190 for removal of the auditors should carry the support of the shareholders under Section 188.However, notwithstanding, Courts across the Country were of the unanimous view that even a single shareholder irrespective of his holding in the company could move for the removal of an auditor/Director .The principle enunciated was that the right of the shareholders to remove a director being inherent in the statute, it could not be scuttled by a requirement that it should have the backing of a minimum majority. In fact Section 190 never contemplated that it should be read in conjunction with section 188.

The decisions given below ran contrary to the decision of the Delhi HC referred to above:

  • Gopal Vyas v Sinclairs Hotels Transportation Ltd(68 Comp Cas 516)
  • Prakash Roadlines Ltd v Vijay Kumar Narang (83 Comp Cas 569)
  • Karnataka Bank Limited v A.B.Datar (79 Comp Cas 417).

The present Act provides under Section 115 that the special notice from the shareholders for the above purposes shall require the support of not less than one percent of the total voting power in the company or holding shares on which the aggregate sum not exceeding five lakhs of rupees has been paid up.The manner in which the company shall deal with the special notice is laid down under rule 23 of the Companies (Management and Administration)Rules, 2014.The present Act therefore denies to the single shareholder the right to move the special notice unless he holds by himself the requisite voting power as laid down in Section 115 above.

Auditor/Director shall have a reasonable opportunity of being heard

As mentioned above, section 140(1) and Section 169 of the Act respectively provide the Auditor and the director sought to be removed with a reasonable opportunity of being heard. By a proviso introduced with effect from 21.2.2018 under Section 169(1), an Independent director re-appointed for a second term shall be removed only by a special resolution and after giving him a reasonable opportunity of being heard .

The expression 'reasonable opportunity of being heard' contrasts with the entitlement of the director'to be heard on the resolution'' at the meeting as endowed under Section 284 (3) of the previous Act. The difference in terminology between the two Acts is subtle and the Supreme Court has in FazalBhaiDhala v Custodian General ,Executive Property (AIR 1961 SC197)explained the significance of the term as under:

'The person concerned should be given a reasonable opportunity to be heard before any order prejudicial to him is made in revision. If this reasonable opportunity of being heard cannot be given without the service of the notice , the omission to serve the notice would be fatal. Where however, proper hearing can be given without service of notice , it does not matter at all and all that has to be seen is whether even though a notice was given , a reasonable opportunity of being heard was given.'

Another perspective to the concept of 'reasonable opportunity of being heard' was provided by the Supreme Court in Feda (P)Ltd v S.N.Bilgrami(AIR 1960 SC 415)where the Court observed as follows:

'The requirement that a reasonable opportunity of being heard must be given has two elements ;the first is that an opportunity must be given .the second is that this opportunity has to be reasonable.Both these matters are justiciable and it is for the court to decidewhether an opportunity has been given and whether that opportunity was reasonable.'

The present Act contemplates that before a decision is taken by the shareholders as to his removal, the director concerned shall be provided an opportunity to defend himself. It is up to the director to decide whether he shall exercise his right to defend himself and no decision on his removal shall suomoto be taken unless he is allowed to exercise his rights of being heard. The principles of natural justice shall be followed in the procedure adopted for removal. The right conferred under the present Act on the auditor/director proposed to be removed is much more valuable as opposed to the right conferred under the old Act.

Right of shareholders to remove directors

Under the Act, the right of shareholders to remove a director/Auditor is an unfettered right which should not be impeded through the imposition of restrictions not contemplated under the Statute. The articles should not impose conditions on the exercise of such rights, subject to compliance with the procedure laid down in the law. That the right to appoint and remove the directors is a creation of the statute and it is appropriately bestowed on the shareholders has been observed in Prakash Roadlines Limited v Vijay Kumar Narang (83 Comp Cas 569).The court also observed that the enforcement of the right of removal cannot be restricted by a court of law.

It was noted in Karnataka Bank Ltd v Datar(AB)(79 Comp Cas 417) that it is not open to any person to prevent a company from holding a meeting for the removal of a director.

Auditors'/Directors' right of representation

The concerned Auditor/director can upon receipt of the proposal for his removal, can provide a written representation setting out his defence , to the company which should ideally be attached with the notice for convening the meeting .This of course assumes that the notice for the removal has been received well ahead of the time for dispatching notices for the general meeting to the members.

In the event that the director/Auditor does not wish to provide a written representation, he reserves the right to make an oral submission to the members on the floor of the general meeting. The fact that the director has not provided a written representation does not in any way, prejudice his right of making an oral representation as is evident from a reading of Sections 140(4) and 169(3) respectively where it concerns the concerned auditor and director. The choice is therefore entirely with the concerned director.

Having said this, given the modalities that apply in particular to listed companies in transacting business in general meetings through the provision of a remote e-voting pattern, the existing procedure available in the law has to be necessarily tweaked for seeking approval of members for removal of the director/auditor.

 

Procedure for seeking shareholders' approval- Postal ballot is not allowed

Once the validity of the special notice under Section 115 for the removal of Auditor/director has been established, to bring the issue to a logical conclusion, it would be incumbent on the company to take necessary steps for taking the approval of the shareholders. Section 110(1)(b) of the Act provides that in respect of any item of business, other than ordinary business, and any business in respect of which directors or auditors have a right to be heard of at any general meeting, these shall not be transacted by postal ballot.

The proviso under Section 110 which was inserted with effect from 9.2.2018 by the Companies(Amendment)Act, 2017 clarifies that any item of business that needs to be transacted by a postal ballot may be concluded in a general meeting by a company which is required to offer an e-voting platform to its members.

Rule 22 of the Companies (Management and Administration )Rules 2014 sets out the procedure to be adopted for conducting business through a postal ballot process. From a reading of the Proviso under Rule 22 (16)(j) of the above Rules , an inference can be drawn that postal ballot process shall apply in respect of companies other than one person companies and other companies where the number of members is restricted to two hundred .As Rule 20 of the above rules provides for the requirement of remote e-voting for companies whose equity shares are listed on stock exchanges and for other companies which have a shareholder base of one thousand or more, it follows that companies which are not listed and which do not have more than one thousand shareholders have to compulsorily resort to postal ballot for transacting items specified in Rule 22(16) of the above rules.

Considering the embargo laid down in Section 110 on transacting the item relating to removal of auditors and directors, it follows that companies which come under the ambit of the postal ballot requirements have to consider the resolutions for such removal on the floor of the house .They can either send the written representations received in time from the director/auditor along with the notice for the general meeting or alternatively include the item in the notice and allow the concerned person to make a representation orally on the floor of the meeting, apart from considering any written representation that may have been received after the dispatch of the notice which could be again circulated to the shareholders or put up in newspapers for their information.

 

Where requirement of remote e-voting applies- the hurdles that lie ahead

Section 108 of the Act read with Rule 20 of the Companies (Management and Administration)Rules, 2014 lays down that every company which has listed its equity shares on a recognized stock exchange and every other public company which has not less than one thousand members ,shall provide a e-voting platform to enable their shareholders to vote on resolutions proposed to be considered at general meetings. This does not however suggest that the facility of voting on the floor of the meeting shall not be available to those members who have not availed of the remote e-voting platform. Such members can indeed cast their voting through ballots at the premises of the general meeting provided that they have not voted already in the e-voting platform.

Rule 20(4)(vi) of the above rules provide that the e-voting process shall be kept open for a minimum of three days and will close at 5 P.M on the date preceding the date of the general meeting.

As every item to be transacted in the case of companies belonging to the above genre have to be subjected to voting through the e-voting platform, as also considering that the substantial majority of shareholders will have exercised their votes electronically, there is practically no scope for a director/auditor to make a oral representation at the meeting. Even if they do so, it could have an impact limited to only those present at the meeting who have not yet cast their votes. Due to the procedure involved in the e-voting process, listed companies will have to therefore insist that the director/Auditor provides a written representation in time before the dispatch of the notice for the general meeting so that the representation can be attached to the notice for the general meeting and also made a part of the evoting process.This however assumes that the special notice under section 115 is received well ahead of time to ensure inclusion in the notice.This assumption goes against the grain of the statute.

Yet another difficulty that will be encountered shall arise from the fact that Rule 23(2) allows a company to act on the basis of a special notice which is valid if it is submitted fourteen days before the date of the meeting at which the resolution is proposed to be moved. By that time, the dispatch of the notice for the general meeting would have concluded and the e-voting documents would have been received by the shareholders. The moot question in such circumstances is how will the company respond. Legally it has no right to reject a valid special notice nor is it possible to transact the business of removal on the floor of the meeting. The law unfortunately does not provide for any exception/ safety note so as to enable the company to put through the item for the consideration of the meeting. It would also be a travesty of justice if the director /auditor sought to be removed were not allowed to represent himself. There would be denial of the principles of natural justice where the aggrieved director/auditor is concerned.

Thus the intent in the statute through the provision of a democratic process for dealing with a special notice would , we dare say, be scuttled unwittingly for a particular genre of companies. Ideally provisions of law should operate harmoniously paving the way for the objective set out to be achieved seamlessly. Unfortunately the regime of e-voting , a novelty under the new Act cannot work against the backdrop of Sections 140 and 169 and exceptions needs to be carved out in the law.

Conclusion

In the light of the foregoing discussion , we are therefore confronted with a catch 22 situation arising out of the incompatibility of Section 108 and the relevant rules thereunder to the provisions of Sections 140 and 169 .To meet the ends of justice, it is imperative that an exception is chiseled out of the existing e-voting Rules so that the issue of removal of directors/auditors can be handled in an adept manner in full compliance of the extant provisions in the law.Until that happens, listed companies will continue to be in tenterhooks confronted as they would be with the conundrum that the law on the subject is.

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