Critique on Removal of Directors under Indian

Company Law.
COMPANY LAW RESEARCH PAPER

Section 284 of the Companies Act deals with the removal of director. The section is general and is applicable to all Directors by whomsoever, under whichever provision and in whatsoever manner appointed, and includes all those not retiring by rotation, except a Director appointed by the Central Government under Section 4081. It also applies to permanent Directors or life-time Directors and Directors appointed for a fixed term even though they might have been appointed by the Articles or otherwise. Permanent Directors appointed for life-time under the Articles of Association can be removed from office2. REMOVAL OF DIRECTOR

1.

Removal by shareholders: Section 284 recognizes the inherent right of shareholders to remove the directors appointed by them. It is not even necessary that there should be proof of mismanagement, breach of trust, misfeasance or other misconduct on the part of the directors. Where the shareholders feel the policies pursued by the directors or any one of them are not to their liking, they have the option to remove the directors by passing an ordinary resolution in the same way as they have the right to appoint directors by passing an ordinary resolution. Section 284 provides that a company may, by ordinary resolution passed in general meeting after due receipt of a special notice remove a director before the expiry of his term of office.3

This section gives right to the shareholders of a company to remove a Director from his office by passing an ordinary resolution, before the expiry of his tenure of office. The right given by this section is a statutory right which cannot be taken away by the Memorandum, Articles or any other document and if it is sought to be so taken away, such provision will be void.4 A rationale behind the provision can be explained thus: the need for removal arises because normally the shareholders have no right to interfere in the decision taken by the board of directors subject to any regulation already made in the articles or subject to any regulation already made by the shareholders. Yet, when the shareholders are not happy with
1

Sec 408- Powers of Government to prevent oppression or mismanagement. Tarlok Chand Khanna v. Raj Kumar Kapoor, (1983) 54 Comp Cas 12 (Del). 3 A.K Majumdar and Dr. G.K.Kapoor, company law and practice; 11th edn, 2005; taxman publications (p) ltd, New Delhi, P.637. 4 M J Sethna; Indian company Law; 11th edn, 2005; vol III; modern law publications; New Delhi, p.2737.

the directors and their functioning they must have the option to remove them from the board.5 Thus they are provided with rights to keep a constant vigil on the affairs of the company and have the right to lodge a complaint for non compliance with the rights they are conferred with or for mismanagement. Further they can get the affairs of the company investigated if they find something fishy going on. As remedial measures they have been conferred with the powers of electing a new management or directors or removing the existing ones. As per the provisions of this section, all Directors appointed by shareholders are liable to be removed by an ordinary resolution of the shareholders. Any person appointed by the Articles of the company shall be deemed to be appointed by the shareholders. However, the shareholders have no authority to remove the Directors appointed by any other authority. Thus, a Director appointed under Sections 402 and 408 of the Act or under any other statute cannot be removed by the shareholders.6 In Tarlok Chand Khanna v. Raj Kumar Kapoor7, it was observed that section 284 is designed to enable the share holders to control the directors by their removal.8

Removal by Central government: Under section 388 B, the central Government has the power to make reference to the Company Law Board against any managerial personnel. Under section 388C, the Company Law Board has the powers to pass an interim order suo moto or on application of the central government, in the interest of members or creditors or in public interest. The interim order may direct the concerned managerial personnel not to discharge any of the function of the office until the further order. The tribunal may further order the appointment of a suitable person to perform the duties of the personnel concerned and specify the terms and conditions thereof. At the conclusion of the hearing of the case, the tribunal shall record its findings, stating therein specifically as to whether or not the director is a fit and proper person to hold the office of director or any other office connected with the conduct and management of any company, section 388D. Further on the basis of the findings the central government may by order remove the delinquent respondent (director) from his

Ravi Mahto; Rights of the Shareholders under Companies Act, 1956. http://www.indlaw.com/publicdata/articles/article202.pdf 6 M J Sethna; Indian company Law; 11th edn, 2005; vol III; modern law publications; New Delhi, p.2737. 7 (1983) 54 Comp Cas 12 (Del). 8 L L V Iyer, Guide to companys Directors. Powers, Rights, Duties and liabilities; 2nd edn, 2003, Wadhwa and Co, Nagpur, P.1149.

office section 388E. After the director has been removed he shall not hold any managerial office in the company for 5 years nor will he be paid any compensation for loss of office as a result of removal. The time limit may, however be relaxed by the central government with the previous concurrence of the Company Law Board i.e. the Tribunal.9 Maruti udhyog Ltd v R C Bhargava10. In this case the principal bench at New Delhi dismissed a petition under section 388 B as a reference was made by the central Government after 5 to 13 years of occurrences of matters alleged on ground of gross and inordinate delay which remained unexplained by the Central Government which was full knowledge of the matters as possessing substantial control over the company. However the bench held that no period of limitation exists for making reference to the tribunal but gross and inordinate delay in the absence of justifiable ground to make the reference renders it liable to be dismissed.

3.

Removal by company Law Board: The proviso to subsection (4) provides that the company or any other persons aggrieved may make an application to the Company Law Board alleging that by such representation the Director is abusing the rights conferred by this section to secure needless publicity for defamatory matters. The Company Law Board, on such application, may order that the representation need not be circulated or read out at the meeting and award costs against the Director though he is not a party to the application. The requirement of intimating the members about the representation having been made in the notice sent to members and the right of the Director of being heard at the meeting can not be dispensed with.11

Where an application has been made to the Company Law Board ( now Tribunal) under Section 397 or 398 against the oppression and mismanagement of a companys affairs, the Company Law Board ( now Tribunal) may order for the termination or setting aside of an agreement which the company might have made with any of its directors.12 Such a director shall not be entitled to serve as a manager, managing director or director of the company
9

A.K. Majumdar and Dr. G.K.Kapoor, company law and practice; 11th edn, 2005; taxman publications (p) ltd, New Delhi, P.642 10 [1998] 17 SCL 269. 11 M J Sethna; Indian company Law; 11th edn, 2005; vol III; modern law publications; New Delhi, p.2746. 12 Hemand D Vakil v RDI Printing and Publishing (pvt) Ltd. (1993) 11 CLA 86 ( CLB).

without leave of the CLB for a period of 5 years from the date of CLBs order terminating or setting aside his contract with the company [section 407(b)]. He shall also not be entitled to claim any compensation from the company for the loss of office. [Section 407(a)].13

By virtue of Section 284 (4) of the Companies Act, the Company Law Board has the powers to direct a company not to circulate the notice for the removal of a Director if it was convinced that the provisions of the section were being abused. Where it was quite obvious from the printed notice with the gaps to be filled in, it was held that the removal of the Director sought in the said notice was not a bona fide exercise of the rights of a shareholder but was for an ulterior motive and such notice was an abuse of the provisions of Section 284 of the Act. The Court considered it a fit case to exercise the statutory powers under Section 284 (4) of the Act and accordingly directed that the company need not place the proposal for removal of the Director as contained in the notice before the General Meeting.14

REASONS FOR REMOVAL OF A DIRECTOR.

As the act is silent on the issue that shareholders must give reasons for removal of director or not. So in such case view taken in England is considered, that no reasons need b given.15 It would appear that to confer a right on a Director to make representation and to be heard in defense of his removal, without requiring shareholders to disclose reasons in support of intended removal looks rather preposterous and unjust as well. However, one must not lose sight of the fact that the statute does not in express terms, qualify this right of shareholders by requiring disclosing reasons. Moreover, it could be argued that to require shareholders to disclose reasons would substantially limit the right and would rather make a mockery of the so called supreme right of shareholders to appoint and remove a Director, and put unjustified restraining on this right. The right would no more be absolute right. There is no reason why the legislature should not, in so many terms, expressly provide for it.16

13

A.K. Majumdar and Dr. G.K.Kapoor, company law and practice; 11th edn, 2005; taxman publications (p) ltd, New Delhi, P.643. 14 Dabur India Ltd v Anil kumar Poddar, (2002) 108 Comp Cas 293. 15 M J Sethna; Indian company Law; 11th edn, 2005; vol III; modern law publications; New Delhi, p.2739. 16 Id.

In Escorts Ltd v Union of India17, the court said that when a meeting is requisioned by some shareholders for the purpose of removing a director, the requisitionists must disclose the grounds on which they want to proceed against the director. This is necessary because the company has to inform the director beforehand of the resolution to remove him so as to enable him to exercise his statutory right of making representation to the shareholders about the matter. The court held that the notice which did not specify the grounds failed its purpose and the company would not be compelled to call the meeting for the consideration of the resolution.18

In India it is now well settled by the decision of the Supreme Court in Life Insurance Corporation of India v. Escorts Ltd19 That with regard to a resolution proposed to be passed at a meeting requisitioned by the shareholders for removal of a Director; no reasons in support thereof need be given. The Supreme Court observed: Thus; we see that every shareholder of a company has the right. Subject to statutorily prescribed procedural and numerical requirements; to call an Extraordinary General Meeting in accordance with the provisions of the Companies Act. He cannot be restrained from calling a meeting and he is bound to disclose the reasons for the resolutions proposed to be moved at the meeting nor are the reasons for the resolutions subject to judicial review.20

As to the requirement of giving reasons for removal of a director the court was of the view that the Act of 1956 recognizes the right in many ways to remove a director from the board and there is no need to give reasons in the resolutions proposed for removal of director. The shareholder or any person has no right to be a director. If the majority of the shareholders elect to entrust the directorship to a person, he may accept and execute that office. But one cannot claim such an office as of right and therefore it is not open to any person to prevent the company holding a meeting and passing a resolution for removal of a director. Comment: In the above matter, the court has given recognition to the corporate management principle of the democratic system and held that it is open to the shareholders to entrust the management
17 18

(1985) 57 Com Cases 241 (bom). L L V Iyer, Guide to companys Directors. Powers, Rights, Duties and liabilities; 2nd edn, 2003, Wadhwa and Co, Nagpur, P.1152 19 (1986) 59 Comp Case, 548: (1986) I Comp LJ 91 (SC) 1370. 20 M J Sethna; Indian company Law; 11th edn, 2005; vol III; modern law publications; New Delhi, p.2740.

of the company to persons in whom they have confidence and it is equally open to them to remove such members of the board in whom they have no confidence.21 Section 16922 of the Companies Act confers on the shareholders another vital right. It enables shareholders to require the Board of Directors of a company to convene, General Meeting and place thereat any resolution including one for removal of Directors. If the Board fails to respond to the requisition put up by the shareholders for convening a meeting, the requisitionists can themselves hold a meeting and pass an resolution. Section 169 requires that the shareholders requisitioning a meeting must set out in the requisition the matters for consideration for which the meeting is to be called. Significantly, like Section 284 Section 169 also does not make it obligatory to disclose reasons in the requisition in support of the resolution proposed to be passed at such meeting.23

REQIUREMENTS

To remove a Director under section 284 certain essential requirements, are to be fulfilled. The Director concerned, must be given a reasonable opportunity to make representations against the proposal for his removal and the shareholders of the company should also have adequate opportunities of being acquainted with such representations before they subscribe to a resolution for removal. The Articles sometimes provide the office of a Director shall be vacated if he is requested in writing by all his co-Directors to resign. In this way a power of removal can be conferred upon the Board of Directors, in addition to the power of the shareholders in general in General Meeting to remove a Director.

SPECIAL NOTICE

Where a Director is to be removed, special notice must be given to that effect, though the resolution is to be only an ordinary resolution. So also where somebody else is to be appointed in place of the removed Director, special notice must be given of such resolution.
I.C.C.L.R. 1994, 5(8), N160-161; www.westlaw.com Sec 169 - Calling of extraordinary general meeting on requisition. 23 M J Sethna; Indian company Law; 11th edn, 2005; vol III; modern law publications; New Delhi, p.2739.
22 21

The company is also required to send a copy of the representations to every member to who notice of the meeting is sent. A significant right is vested with every member and that is that a member who is entitled to attend a general meeting and move a resolution can give special notice of a resolution to remove a Director at a general meeting or to appoint somebody instead of the Director so removed.24 The grounds for removal of the directors are required to be stated in the explanatory statement accompanying the notice of the meeting.

Failure to comply with the requirements of notice would render the removal, as well as the appointment of the Director in the meeting invalid. So where a special notice of the resolution was not given; it amounted to a serious lapse depriving the directors of their statutory right to make representation.25 The special notice of resolution shall be served on the company at least 14 days before the meeting exclusive of the day on which it is served and the day of the meeting.26 Sub-section (3); when a special notice of resolution is properly served on a company, a copy thereof shall forthwith be sent to the Director concerned.27 Manmohan Singh Kohli (Capt.) v. Venture India Properties (P.) Ltd.28 In this case, the respondents had failed to point out any special notice sent by them. As such, in the absence of any notice, the removal of the petitioner and his son from the directorship of the company was bad in law. The respondents had failed to comply with the provisions of Section 284 (2) and (3). Therefore, the resolution passed in the extraordinary General Meeting of the shareholders of the company being illegal, and not in compliance with the provisions of the Act was liable to be set aside. Consequently, both the petitioner and his son were restored to their original position as Directors. All subsequent action taken by the company in this regard would also be null and void.

REMOVAL OF DIRECTORS IN PRIVATE COMPANIES

24

Company law ready reckoner by R. suryanarayanan, 8th edn; 2006; commercial law publishers (India) pvt.ltd, P.124 25 A.K. Majumdar and Dr. G.K.Kapoor, company law and practice; 11th edn, 2005; taxman publications (p) ltd, New Delhi, P.637 26 Company law ready reckoner by R. suryanarayanan, 8th edn; 2006; commercial law publishers (India) pvt.ltd, P.124 27 Id. 28 (2005) 123 Comp Cases 198: (2004) 53 SCL 457 (CLB) (PB).

The section applies to all companies public and private. But, having regard to the fact that Sections 85 to 89 do not apply to a private company, unless it is a subsidiary of a public company, there is no reason why special voting rights by issuing shares having extraordinary rights may not be validly given under the Articles, so as to prevent the removal of a Director by resolution at a General Meeting. The removal of a Director in a private company even if it is lawful, may in circumstances constitute an act of oppression in reference to the aggrieved Director and the Court may give him relief under Section 397 read with Section 402 so as to put an end to the matter complained of. Where a relief against oppression is not sufficient to provide justice to the aggrieved Director, the Court may order the winding-up of the company under the just and equitable clause under Section 433.29

RIGHTS OF A DIRECTOR AFTER TERMINATION OF DIRECTORSHIP.

The directors have a right of compensation or damages which are payable to him in respect of the premature termination of the directorship, or of any appointment terminating with that as Director. Clause (a) of sub-section (7) of section 284 provide that removal of a director would not deprive the person of any compensation or damage for the termination of appointment as a director or for an appointment terminating with that as director. However, section 318 does not provide for payment of compensation for loss of office or any other payment for loss of office or place of profit except the loss of office held by the director in the capacity of managing director, whole time director or manager.30

Sub-section (7) provides for compensation or damages to a Director in the case of wrongful removal. The Articles may confer on the company the power to remove Directors from office, subject to any contract with the company. The Articles may also be substituted by
29

30

M J Sethna; Indian company Law; 11th edn, 2005; vol III; modern law publications; New Delhi, p.2742. A.K. Majumdar and Dr. G.K.Kapoor, company law and practice; 11th edn, 2005; taxman publications (p) ltd, New Delhi, P.640.

new Articles or may be so altered as to cause a breach of an existing contract. In such a case, the Director aggrieved can sue the company for damages for breach of contract, but cannot obtain injunction to prevent the adoption of the new or altered Articles.31 A Director, who is wrongfully removed from the Board of Directors, can sue for relief by injunction or by declaration and injunction. Where, however, the member of the company in General Meeting resolve not to have, a particular Director any longer in their company, the Director concerned would not be granted an injunction in his favour. He can claim damages, if any, to which he is entitled if at all.32 Further in the following cases no compensation is payable:33 Where the director resigns his office in view of the reconstruction or amalgamation of the company and he is appointed in the company resulting from the reconstruction or amalgamation.  Where the director otherwise resigns his office. Where the office of the director is vacated by virtue of Section 203 or under Section 283. Section 203 empowers the court to restrain fraudulent persons from managing companies and Section 283 provides the circumstances in which the office of a director is vacated. Where the company is being wound up and the winding up is due to the negligence or default of the director. Where the director has been guilty of fraud or breach of trust, or gross negligence or mismanagement in the affairs of the company. Where the director has instigated or has taken part in bringing about the termination of his office.

Sub-section (4) of section 318 puts a ceiling on the amount of compensation payable to a director eligible for compensation for loss of office. The sub-section provides that any payment made to a managing or other director in pursuance of sub section (1) shall not exceed the remuneration which he would have earned if he had been in office for the
Sourthern Foundaries ltd v shirlaw, (1940) 2 All ER 445. Read v Astoria Garage ( Streatham) Ltd, (1952) 2 All ER 292. 33 Avtar singh; Company Law; 14thy edn ; reprint 2005; eastern book company, Lucknow, P. 317.
32 31

unexpired residue of his term or for three years, whichever is shorter. The amount payable shall be calculated on the basis of the average remuneration actually earned by him during the period of three years immediately preceding the date on which he ceased to hold the office. But, where he held the office for a lesser period than three years, the amount shall be calculated with reference to the period he actually worked.34

The amount of compensation should not exceed the remuneration which he would have earned for the unexpired residue of his term or for three years, whichever is shorter. The amount should be calculated on the basis of the average remuneration actually earned by him during a period of three years before the termination, or where he held office for a lesser period, during such a period. The case of a Managing director is outside the section. He may be entitled to compensation in the capacity of an employee.35

34

A.K. Majumdar and Dr. G.K.Kapoor, company law and practice; 11th edn, 2005; taxman publications (p) ltd, New Delhi, P.640 35 Golden Handshake and Shareholders protection, (1978) New LJ 205.