Consequence of Termination of Agreements: S. 243

The consequence of termination of agreements ordered in an oppression case is set out in section 243 of the Companies Act, 2013, and it runs in one direction only. Where the Tribunal terminates, sets aside or modifies an agreement under section 242, the company owes nothing for it, and a managing director, other director or manager whose agreement was terminated or set aside is kept out of that company's boardroom for five years without the leave of the Tribunal.

What is the consequence of termination of agreements under section 243?

Sub-section (1) attaches to an order that terminates, sets aside or modifies an agreement such as is referred to in sub-section (2) of that section, meaning the agreements in the list of orders the Tribunal may make under section 242. Two consequences follow, and they are drafted as separate clauses.

Clause (a) closes off the money claim. The order shall not give rise to any claims whatever against the company by any person for damages or for compensation for loss of office or in any other respect either in pursuance of the agreement or otherwise, the Act closing the clause with a semicolon. The words by any person are wider than the counterparty, and or otherwise closes the route of framing the claim as something other than a contractual one.

Clause (b) is the disqualification. no managing director or other director or manager whose agreement is so terminated or set aside shall, for a period of five years from the date of the order terminating or setting aside the agreement, without the leave of the Tribunal, be appointed, or act, as the managing director or other director or manager of the company, the clause running on into its proviso. Note what clause (b) covers and what it does not: it names an agreement terminated or set aside, where clause (a) also covers one that is modified.

Who has to be heard before the Tribunal lifts the bar?

The Central Government. The proviso to clause (b) provides that the Tribunal shall not grant leave under this clause unless notice of the intention to apply for leave has been served on the Central Government and that Government has been given a reasonable opportunity of being heard in the matter.

That is a real gate rather than a formality on the drafting. Leave is not available on an application between the company and the person concerned alone, because the Government's opportunity to be heard is a precondition to granting it.

How does the fit and proper bar in section 243(1A) differ?

It comes from a different finding and it reaches further. Sub-sections (1A) and (1B) were inserted by Act 22 of 2019 with effect from 15 August 2019, and they attach to the fit and proper decision the Tribunal records under section 242(4A), not to the termination of an agreement.

⚠️ The (1A) reach in that table is a summary of a clause the India Code consolidation prints with its middle limb repeated. It reads shall not hold the officer of a director or any other officer connected with the conduct and management of the affairs of any other officer connected with the conduct and management of the affairs of any company, with officer standing where the sense is office. The table states the limb once because that is its evident meaning, and this note records what the source actually prints, on the same footing as the slip below.

Sub-section (1B) adds that on removal, that person shall not be entitled to, or be paid, any compensation for the loss or termination of officer, printed with that typographical slip in the India Code consolidation where the sense is office. The fit and proper machinery that produces this outcome sits in section 241(3) and section 242(4A), and is described in oppression and mismanagement.

What is the punishment for acting in breach?

Sub-section (2) reaches two groups. Any person who knowingly acts as a managing director or other director or manager of a company in contravention of clause (b) of sub-section (1) or sub-section (1A), and every other director of the company who is knowingly a party to such contravention, is punishable with fine which may extend to five lakh rupees. Act 29 of 2020 substituted five lakh rupees for the earlier five lakh rupees, or with both, and by the same section omitted the words with imprisonment for a term which may extend to six months or, both with effect from 21 December 2020. This is a fine only offence today.

The sitting board is therefore exposed alongside the barred person. A director who knows about the bar and lets the appointment through is within the sub-section on its own words. The general rules on removing a director are covered in removal of a director section 169, and the ordinary managerial contract that section 243 unwinds is described in a contract with a managing director.

For an investor, the visible trace of a consequence of termination of agreements is usually a change in key managerial personnel rather than a filing that names section 243. The separate class remedy that runs beside the oppression route is set out in a class action suit under the Companies Act.

Flock reports the filings themselves, each stamped with its date and linked back to the exchange or regulator that published it. What any of it means for you is your call to make.