Section 243: consequence of termination or modification of certain agreements

Introduction

Section 243 commenced on 1 June 2016 under S.O. 1934(E). The Companies (Amendment) Act, 2019, s. 35 inserted sub-sections (1A) and (1B) and extended sub-section (2) to them, in force from 15 August 2019 (S.O. 2947(E)). The Companies (Amendment) Act, 2020, s. 44 removed imprisonment from sub-section (2), in force from 21 December 2020 (S.O. 4646(E)).

Sub-sections (1A) and (1B) here follow the wording inserted by the 2019 Act ("office"), because the India Code consolidation prints "officer" and repeats some words.

Key takeaways

Effect on the agreement

Under sub-section (1), where an order under section 242 terminates, sets aside or modifies an agreement referred to in section 242(2): (a) the order does not give rise to any claim against the company by any person for damages or compensation for loss of office or in any other respect; and (b) no managing director, other director or manager whose agreement is terminated or set aside may, for five years from the date of the order and without the Tribunal’s leave, be appointed or act as managing director, other director or manager of the company.

The proviso requires notice of the intention to apply for leave to be served on the Central Government, with a reasonable opportunity of being heard.

• India Code — consolidated Companies Act, 2013, section 243
• eGazette — Companies (Amendment) Act, 2019 (No. 22 of 2019)
• eGazette — MCA notification S.O. 2947(E), 14 August 2019 (2019 Amendment Act provisions in force 15 August 2019)
• eGazette — Companies (Amendment) Act, 2020 (No. 29 of 2020)
• eGazette — MCA notification S.O. 4646(E) (2020 Amendment Act provisions in force 21 December 2020)
• eGazette — MCA notification S.O. 1934(E), 1 June 2016 (commencement)

Persons found not fit and proper

Under sub-section (1A), a person who is not a fit and proper person pursuant to section 242(4A) shall not hold the office of a director or any other office connected with the conduct and management of the affairs of any company for five years from the date of the decision. The Central Government may, with the leave of the Tribunal, permit the person to hold such office earlier.

Under sub-section (1B), notwithstanding any other provision of the Act, any other law, or any contract, memorandum or articles, a person removed from the office of a director or other such office is not entitled to, and must not be paid, any compensation for loss or termination of office.

Penalty

Under sub-section (2), any person who knowingly acts as a managing director, other director or manager in contravention of sub-section (1)(b) or sub-section (1A), and every other director knowingly a party to the contravention, is punishable with fine which may extend to five lakh rupees. Imprisonment was removed by the 2020 amendment.

Practical preparation

On receiving a section 242 order, update the register of directors and KMP and file the required forms; stop all payments of compensation to the removed person; block re-appointment for the barred period unless the Tribunal grants leave; and screen new appointments for any person found not fit and proper under section 242(4A).

Procedure, forms, fees and timelines for applications under this provision are set out in rules made under the Act and in the Tribunal’s procedure; check the current text of those rules, and any exemption notification for your class of company, before relying on this guide.

Practical checklist

Glossary

Section 242 order

An order of the Tribunal on an application for relief against oppression or mismanagement under section 241.

Fit and proper person

A finding the Tribunal may record under section 242(4A) in relation to a person involved in the affairs of the company.

Frequently asked questions