THE VALIDITY OF A PERMANENT CHAIRMAN: A LOOK AT THE RULES OF CORPORATE GOVERNANCE


In small private companies, it is not unusual to see that the articles of association provide that one person, usually the promoter, is to have permanent management or administrative position. This leaves the shareholders and the board of directors without many options when they are aggrieved by the actions of such a person.
It is a settled principle of law, that a company is free to be constituted the way its promoters want it to be. The Companies Act, 2013 also recognizes this fact and uses the terms ‘unless the articles of a company otherwise provide’ to allow the promoters to have considerable flexibility in making of the Articles in a way that is best suited for that company. However, the conflict between flexibility and regulation by the companies act leads to a legally ambiguous terrain. One such area is the validity of clauses within the articles of association (“AoA”) designating a person as the chairman for a set time or even for their whole lifetime.

What is the chairman?
Though ‘chairman’ has not been defined in the Companies Act, it has been used extensively and multiple powers and duties have been imposed on the chairman. The Supreme Court weighed in on the meaning of the ‘chairman’ as used in the Companies Act in the case of T.N. Seshan v. Union of India, [1] and stated that the chairman of a company is the head of its board of directors. Chairman means a person chosen to preside over meetings e.g. one who presides over the meetings of the board of directors. The function of chairman would, therefore, be to preside over meetings, preserve order, the conduct of the business of the day, ensure that precise decisions are taken and correctly recorder and do all that is necessary for smooth transaction of business.
Therefore the chairman is essentially a facilitator of the board of directors and nothing more. His role is further illustrated by provisions for his appointment and removal which may happen by a simple resolution in the board of directors. Since the chairman has to act for the board, it is a sine qua non that he be a director. 
A director can be removed from his post by calling an Extraordinary General Meeting (EGM) by any shareholder under Section 169 [2] of the act. It was held in the case of LIC of India v. Escorts Ltd. [3] that the right to remove a director by calling an EGM is an inherent right an cannot be restrained.

Legislative Intent on Lifetime Appointments
Removal of a director under the Companies Act, 1956 could be done under Section 248 [4]. However, the provision created an exception for lifetime directors of private companies. Thus the removal of directors, and consequently a chairman under Section 248 could not be done as per the procedure sanctioned by the law. However, this has changed now since a parallel proviso is absent in Section 169. The omission of the proviso shows that the legislature has made changes to its view of granting significant flexibly to private companies in their regulation. Furthermore, the omission of the proviso makes the legislative intent clear to the effect that now directors can be removed by the shareholders.

Permanent post of chairman & validity of such AoA 
It has been held in Shiv Omkar Maheshwari v. Bansidhar Jagannath, [5] that Articles of association can be equated to a contract between all the members and directors of a company and that every member is bound to strictly adhere to the AoA. [6] Therefore, if the AoA provides for a person to be a permanent chairman, the members would be strictly bound by those terms if those terms are valid in law. However, it has to be pointed out that the legal validity of those clauses is doubtful, to say the least since Section 6 of the Act specifically provides that any AoA repugnant to the act would be void to that extent. Since the act clearly provides for the removal of a director, thus a clause to effectuate a permanent chairman of the board of directors would clearly deviate from the policy of the act. Coupling the deviation from the legislative policy with the legislative intent which can be derived from the omission of the first proviso to Section 248 in the new act, it can be reasonably said, that AoA having clauses to effectuate a permanent chairman would be likely held to be void.
This policy can also be extracted from cases such as the case of Tarlok Chand Khanna v. Raj Kumar Kapoor [7], where it was held that any restriction on removal of a director would be void and unenforceable. The court went even further and held that even a permanent director, who is not liable to retire by rotation, can be removed, even if there is a restriction on such removal. Through various judgments, it can be inferred that Section 169 is a statutory right, which cannot be taken by the AoA or any contract. If the right is sought to be taken away, the agreement would be void. 

Powers of the board and future developments
Since the chairman of the board of directors is still a director, he would be obliged with fiduciary duties just as the other directors. This fiduciary duty extends not just to act in the best interest of the company, but also to its shareholders. Thus holding the office of the chairman would mean that such office would also have to be discharged as per the fiduciary duties of a director. In the case of Cyrus Investments Pvt. Ltd. v. TATA Sons Ltd. & Ors., [8] “likewise an executive chairman will continue as long as he enjoys the pleasure of the board. The NCLT held that the concept of ‘freehand rule’ is an antithesis to collective responsibly and collective decision making”. Thus the case implicitly recognized that the board has the power to remove a chairman, but the applicability of it on private limited companies and on companies whose articles are to the contrary remains unclear. Still, this judgment has to be considered important in that it recognizes and envision the role of a board as a check on the powers of the chairman, and thus it is possible that courts recognize the power to remove a chairman including a lifetime chairman to give teeth to the board’s responsibilities with respect to accountability of the chairman.

Conclusion
Even though, complete clarity on the law related to persons holding posts of a chairman is not present in the current context, as the differences between the 1956 act and the 2013 act, along with the viewing the board of directors as an accountability mechanism to the chairman, can lead to a clearer interpretation of the law by the courts. However, until these legal developments arrive, the present law does not suggest that a lifetime post for chairman of the board of directors is valid.

References
[1] T.N. Seshan v. Union of India, (1995) 4 SCC 611
[2] Companies Act, 2013, § 169, No. 18, Acts of Parliament, 2013 (India)
[3] L.I.C. of India v. Escorts Ltd., AIR 1986 SC1370
[4] Companies Act, 1956, § 248, No. 1, Acts of Parliament, 1956 (India)
[5] AIR 1956 Bom 459
[6] Boardland’s Trustees v. Steel Brothers & Co. Ltd., (1901) 1 Ch 279 
[7] (1983) 54 Comp Cas 12 (Del)
[8] C.P. No. 82 (MB) of 2016

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