Companies Act Section 243

Companies Act, Section 243: Consequences of Termination or Modification of Certain Agreements by the Tribunal

Section 243 of the Companies Act, 2013 sets out the legal consequences that follow when the National Company Law Tribunal (NCLT) terminates, sets aside, or modifies certain agreements under Section 242(2), particularly in relation to key managerial personnel such as managing directors, directors, or managers of a company. This section ensures that individuals who are found responsible for oppression, mismanagement, or prejudicial conduct do not benefit from continued association with the company or others, and that the company is not liable to pay compensation for their removal.

1. Legal Effect of Termination or Modification of Agreements by Tribunal 

When the Tribunal passes an order under Section 242 terminating, modifying, or setting aside an agreement involving a managing director, other director, or manager, the following consequences automatically arise:

(a) Bar on Claims for Damages or Compensation

The order of the Tribunal shall not entitle the affected person (e.g., a managing director whose contract was terminated) to:
Any damages,
Compensation for loss of office, or
Any form of claim against the company,
Whether such claims are under the terminated agreement or any other source or legal provision.
This clause ensures that no financial liability falls on the company as a result of a Tribunal-mandated termination, even if the agreement previously entitled the person to severance benefits.

(b) Bar on Reappointment Without Leave of Tribunal

Any managing director, director, or manager whose agreement has been terminated or set aside by the Tribunal:
Shall not be reappointed, nor act in such a role for a period of five years from the date of the Tribunal’s order,
Unless prior leave (permission) is obtained from the Tribunal.
Additional procedural safeguard:
Before granting such leave, the Tribunal must ensure that:
Notice of the intention to apply for leave has been served on the Central Government, and
The Central Government has been provided with a reasonable opportunity to be heard in the matter.
This safeguard is aimed at preventing persons found to have mismanaged or abused office from quickly returning to similar positions without proper scrutiny.

1A. Bar on Holding Office for Declared Unfit Persons

In addition to the above, the law also addresses cases where a person has been declared “not a fit and proper person” under Section 242(4A).

Key provisions: Such a person shall not hold the office of director or any other officer related to the management and conduct of the affairs of any company for a period of five years from the date of the Tribunal’s decision.
Exception: The Central Government may, with the leave of the Tribunal, permit such a person to hold office before the expiry of the five-year period.
This ensures that those found unfit to manage a company are prohibited from holding similar roles across all companies for a fixed period, thereby protecting the corporate ecosystem from recurrence of misconduct.

1B. No Compensation for Removed Officers

This clause provides an overriding provision that applies irrespective of other laws, contracts, or company documents (like the memorandum or articles of association):

If a person is removed from the office of director or other managerial position under this section:
They shall not be entitled to any compensation for such removal, including:
Loss of office, or Termination of appointment.
This eliminates any contractual or statutory loopholes that might allow the removed individual to claim exit benefits or golden parachutes, even if provided for in a service agreement or employment contract.

2. Penal Consequences for Contravention

To ensure enforcement of the above restrictions, penalties are prescribed for those who knowingly violate these provisions.

Key offences:

Any person who knowingly:
Acts as a managing director, director, or manager in violation of:
Clause (b) of sub-section (1) (i.e., reappointment bar), or
Sub-section (1A) (i.e., fitness bar),
And every other director of the company who is knowingly a party to such contravention,
Shall be punishable with:

A fine that may extend to ?5,00,000.
This serves as a deterrent against circumventing Tribunal orders by collusion, isrepresentation, or deliberate oversight.