“Director” as it verbally refers, is an individual who runs a company. Naturally, that director has to be a person with flesh and bone, legally defined as a natural person. So the office of a director may become vacant voluntarily, by removal or by death. The sanctity of directors' office is protected to the extent that even majority shareholders of a company cannot interfere with the activities of a director in his course of work intended towards the benefit of the company. However, in terms of functioning, directors are not immune from the repercussions of their unwarranted activities.
A director, although entitled to non-interference, is not immune from removal, or his post being dissolved by law. The vacancy of a director's position stems from the grounds laid down in section 108 of the Companies Act (Act) and its regulation 78 under Schedule I. Removal of the director before the completion of their tenure is allowed under section 106 of the Act, which must be done through an extraordinary resolution. This kind of removal requires special procedures and is shrouded with legal dilemmas which can bring about uncertainties for a company.
Generally it is accepted that section 106(1) deals with only elected directors and their removal, not the contractual appointees. If read with section 91(2), shareholders of a public company have the power to remove up to one third of the total number of the directors. Articles of Association (AoA) of a company can contain the grounds of such removal and new grounds can be introduced. In Shuttleworth v Cox Brothers and Co. Ltd (1927), English court observed that if a new ground for removal by altering the AoA is introduced, a director may be removed on that new ground. The irony lies in the redress availed by such directors against the company.
This process gets diluted in cases of contracted directors. British Murac case (1915) dictates that a company has no power to alter its AoA with the aim of committing a breach of a contract. Alternatively, Justice Sargent argues that the conundrum lies in company's inherent power of altering its AoA. High Court Division (HCD) of Supreme Court of Bangladesh (SC) observed in Syed Ameenul Huq and Ors v M. H. Arif and ors (1988) that the office of director is not statutory and hence guided by the terms of the contract. Hence, removal through alteration of AoA is a putative practice in companies.
In Bangladesh, there is no provision of compensation when a director is removed under statutory powers, unlike India's company act. So the removal of a director is likely to become one sided when other members are pitted towards the removal while altering the AoA to create new grounds of removal. In this case shareholders retain ultimate control over the director. The right of removal is quite absolute and the court is reluctant with the shareholders' decisions of removal observed in Re Gresham Life (1872).
The process of removal can also stem from Bangladesh Bank for banking companies through the Banking Companies Act 1991. Bangladesh Bank may remove a director of a bank, if appointed in contravention of section 23 of the said act, by first issuing a show cause notice. Section 11 also provides for further grounds of removal, such as conviction, the person's association jeopardizing the banking company's interest etc. There is a scope for hearing in this section, but Bangladesh Bank has the discretion to not hold any hearing if it will cause delay and will be injurious to the interest of the depositors and the banking company.
Bangladesh Bank also has the authority to remove the chairman, chief executive or director of a financial institution through the Financial Institution Act 1993. Section 26(1) of the said act stipulates that to stop damaging activities against the financial institution or its depositors or to ensure proper management, a director may be removed by Bangladesh Bank after recording the cause. Section 26(2) requires an issuance of show cause notice before taking actions.
Apart from removal, section 108 read with regulation 78 of the Companies Act 1994 laid down several grounds for the vacation of the office of a director of a company. This obviously occurs through the operation of the law. However, the common test of “damage to the company/institution and/or its stakeholders” is not judicially tried. This blurs the fine line between actions beneficial to the company and actions taken otherwise, creating room for misappropriation of the power to remove directors, who reside at the core of a company's management.
The author Maruf Hasan Tamal is an intern researcher at A.S & Associates.
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