Damodaram Sanjivayya National Law University

VISAKHAPATNAM Corporate law : Project on

Removal of Directors

PRESENTED BY Mithun shashank ROLL NO: 2009-25 7th Semester

Pg.no.1

List of cases

Alok Prakash Jain v. Union of India, (1973)43 Com Cas 68 (Cal). Bhankerpur Simbhaoli Beverages Private Limited v. P.R Pandya, (1996)86 Com Cas 842 (P&H). Bushell v. Faith, [1970]1 All ER 53. Dabur India Limited v. Anil Kumar Poddar, (2001)4 Comp LJ 351. Escorts Ltd. v. Union of India, (1984) Comp LJ 387. Life Insurance Corporation of India v. Escorts Limited, (1986)1 SCC 264. Major General Shanta Shamsher v. Kamani Brothers, AIR 1959 Bom 201. Re El Sombrero Ltd., [1958]3 All ER 1. S.P Jain v. Union of India, (1966)1 Comp LJ 42 Bom. S.Varadrajan v. V. Venkateswara Solvent Extraction Private Limited, (1994)80 Com Cas 693 (Mad). Tarlok Chand Khanna v. Raj Kumar Kapoor, (1983)45 Com Cas 12 (Del). Union of India v. R.C Bhargava, (1998)4 Comp LJ 374.

Pg.no.2

CONTENTS

INTRODUCTION Removal by shareholders Applicability of Section 284 Removal by the central government. Removal by the National Company Law Tribunal Conclusion

pg.no.2 pg.no.3 pg.no.4 Pg.no.6 pg.no.8 pg.no.10

Pg.no.3

REMOVAL OF DIRECTORS

INTRODUCTION Director as the term signifies is a person who directs. The Concise Oxford Dictionary explains Director as a member of the managing board of a commercial company. Section 2(13) of the Companies Act, 1956 defines that director includes any person occupying the position of a director by whatever name called. Section 253 lays down that only an individual shall be appointed as a director. Thus, director is an individual lawfully appointed to the Board of Directors of a Company that is duly constituted to direct, control and supervise the activities and affairs of the company.1 Removal of directors. Removal of a director is an extremely important and significant step which must be undertaken only after careful thought and deliberation. Removal of a director means changing the core or the heart of the company.Such a change may affect the fortunes of the company or even change the destiny of the company forever. Thus Removal of Directors is an extremely important part of corporate law which cannot be overlooked. In order to wholly understand the concept of Removal of Directors it is necessary to look at the rationale behind the removal of directors ie. why should there exist a provision for Removal of Directors and on whom should the power of removal be conferred and why. The Companies Act provides for Removal of Directors in the following ways: Removal by Shareholders.2 Removal by the Central Government.3 Removal by the National Company Law Tribunal.4
1 2 3 4

. The companies act.1956. Section 284 of the Companies Act, 1956. Sections 388B-388E of the Companies Act, 1956. Section 402 of the Companies Act, 1956.

Pg.no.4

Removal by shareholders Section 284 of the Companies Act, 1956 follows Section 184 of the English Companies Act, 1948 and now corresponds to Sections 303 and 304 of the English Companies Act, 1985 and is adopted on the following recommendation of the Company Law Committee.5 In future, a director of the company, whether under an agreement or not and notwithstanding anything to the contrary in its articles would be removable by an ordinary resolution of which special notice has been given. The right proposed to be given to a director, who is likely to be affected by any such resolution, to make a representation to the company at the companys expense will ensure the consideration of the pros and cons of any such resolution by the general body of shareholders, before a decision is taken by them to remove him. In our opinion, the general body of shareholders should have greater powers to remove a director with whom they are dissatisfied whether such director is under a contract of service or not Section 284 can be said to be the statutory recognition of shareholders democracy. The principle that in the management of the company shareholders should have the ultimate say is reflected by the provisions of this section.6 The interference of the shareholders in the management of company is really not encouraged but section 289 of the companies act was designed to enable them to control the directors by removing them. It was held in Tarlok Chand Khanna v. Raj Kumar Kapoor.7 that Section 284 is designed to enable the shareholders to control the directors by their removal.8

5 6 7 8

A.Ramaiya, Guide To The Companies Act (Nagpur: Wadhwa and Company, 1992)at 1304. A.M Chakrabarti, Company Law Volume I (New Delhi: Taxmann, 1994)at 874. (1983)45 Com Cas 12 (Del). It was also held in this case that a permanent director entitled under the Articles of

Association of a company to hold office for life can be removed from office under Section 284.

Pg.no.5

The provisions of Section 284 are in addition to any other power that may exist for removal of a director. Moreover any provision in the companys articles or any agreement between a director and the company by which the director is rendered irremovable by an ordinary resolution would be void as such provisions would be contrary to the Companies Act. Thus the Section intends to do away with arrangements by virtue of which directors are irremovable or removable only by extraordinary or special resolutions. Section 284 operates over an extensive field and applies to all directors subject to the following exceptions: It does not apply to a director appointed by the Central Government in pursuance of Section 408. It does not, in the case of a private company, authorize the removal of a director holding office for life on April 1, 1952. It does apply to companies which have adopted the system of electing twothirds of their directors by the principle of proportional representation. After the 284 power to the shareholders a question comes weather the board of director can remove the director under section 284 ? It was held in Major General Shanta Shamsher v. Kamani Brothers.9 that Section 284 does not affect the power of the Board of Directors to revoke the appointment of a managing or other director made by the Board. But later the supreme court said in S.Varadrajan v. V. Venkateswara Solvent Extraction Private Limited10 that Section 284 would not be attracted when the Board of Directors seeks to remove a director from his managerial position. Thus the judiciary has clearly laid down that Section 284 has nothing to do with the removal of a Director by the Board of Directors. Applicability of Section 284 Section 284 applies to all companies, private and public. The words ordinary resolution in Section 284 merely connote a resolution depending for its passing

AIR 1959 Bom 201, (1958) 60 BOMLR 1024. (1994)80 Com Cas 693 (Mad).

10

Pg.no.6

upon a simple majority of votes cast in conformity with the articles of the company. The articles of a public company or a private company which is a subsidiary of a public company cannot provide for disproportionate voting rights, as this would be inconsistent with the provisions of Sections 88 and 89. But as these sections do not apply to a private company which is not a subsidiary of a public company, the articles of such a company may give special voting rights to a director on a poll on a resolution to remove him from office, so as to prevent the removal of a director under Section 284. In Bushell v. Faith.11 Is a noted case he companys articles provided that: In the event of a resolution being proposed at any General Meeting of the Company for the removal from office of any director, any shares held by that director shall on a poll in respect of such Resolution carry the right to three votes per share The company Bush Court (Southgate) Ltd. had a capital of 300 in 1 shares, held as to 100 each by Faith and his sisters, Ms. Bushell and Dr Bayne. However owing to the abovementioned provision in the articles Faith was able to record 300 votes and outvote his sisters, who recorded 200 votes between them, by demanding a poll on a motion to remove him from office of director. The House of Lords held that the articles effectively gave a director on a poll on a resolution for his removal from office weighted votes for the shares he held notwithstanding the provisions of Section 184 of the English Companies Act, 1948 (now section 303 of the English Companies Act, 1985)12 The judgement was highly criticized, but the positive accept cannot be overlooked This decision will help to protect the partnership principle in private companies and safeguard partners from being removed from their directorships.

11 12

[1970]1 All ER 53. Section 303 of the English Companies Act, 1985 is analogous to Section 284 of the Indian

Companies Act, 1956 and thus the principle laid down in Bushell v. Faith would hold good in India. Thus there is nothing in the Companies Act in India to prevent a private company which is not a subsidiary of a public company from giving, by its articles, special or weighted voting rights to the shares held by the directors.

Pg.no.7

It is to be noted that the right of removal of a director under Section 284 is a statutory right, which cannot be frustrated by quorum requirements.13 For the removal of the directors or director from the company the director should be given the notice of his removal in hand in Bombay High Court in Escorts Ltd. v. Union of India.14in the case the court said when a meeting is held for the removal of the director, the meeting must disclose the reasons for the removing 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 a representation to the shareholders about the matter. The right of representation will be an empty formality if the proposed action does not inform the director concerned of the grounds on which he is sought to be removed since he will not know what representation he should make. The court held that a 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. However this decision of the Bombay High Court was reversed by the Supreme Court of India in Life Insurance Corporation of India v. Escorts Ltd.15The Court relied on various authorities for holding that a statement of reasons is not necessary to support a resolution for removal. A notice read as follows:To remove (if deemed necessary) any of the present directors and to elect directors to fill any vacancy in the Board The Court held that notice to remove any of the present directors would justify the removal of all as any would include all directors. When a notice proposing the resolution for removing a director under Section 284 is not filled in good faith, it being printed and carried gaps which needed filling, it was held that such notice was an abuse of statutory power. The company was not bound to place the notice before the general meeting.16 Removal Of Directors By The Central Government.

13 14 15 16

Re,El Sombrero Ltd., [1985]3 All ER 1.

(1984) Comp LJ 387. (1986)1 SCC 264.

Dabur India Limited v. Anil Kumar Poddar, (2001)4 Comp LJ 351.

Pg.no.8

The central government has the power to remove the directors through referring to the Tribunal against any managerial personnel. The Central Government may state a case against a Director and refer the same to the Tribunal for enquiry, if in the opinion of the Central Government there are circumstances suggesting.17 That the director is guilty of fraud, misfeasance, persistent negligence or default in carrying out his obligations and functions, or breach of trust, in the conduct and management of the affairs of the company; or That the business of the company is not or has not been conducted and managed by such person in accordance with sound business principles or prudent commercial practices; or That the companys affairs have been conducted and managed in a manner which has caused or is likely to cause serious injury or damage to the interest of the trade, industry or business to which the company pertains; or That the business of the company has been conducted and managed by such a person with the intention to defraud its creditors, members or any other persons or for an unlawful or fraudulent purpose or in a manner prejudicial to public interest. The Court in S.P Jain v. Union of India18 affirmed that a reference by the Central Government to the Tribunal under Section 388B must be made by stating a case against the person and a request that the Tribunal may inquire into the case and record its decision whether he is a fit or proper person to hold the office of a director or other managerial office.19 Every application should also be signed and verified in the manner laid down in the Code of Civil Procedure, 1908 for the signature and verification of a plaint in a suit by the Central Government.20 Thus once all the procedural formalities under Section 388B have been complied with the Tribunal will hear the case after giving due opportunity to the persons involved and record their findings. After hearing the case the Tribunal will record its decision under Section 388D and if the Tribunal finds that the respondent is not fit and proper to hold his office the Central Government will
17 18 19 20

As per Section 388B (1) (a-d) of the Companies Act, 1956. (1966)1 Comp LJ 42 Bom. (1966)1 Comp LJ 42 Bom. Section 388B(4) of the Companies Act, 1956.

Pg.no.9

issue to the respondent a show cause notice asking him to show cause why he should not be removed from his position of authority. Under Section 388E the Central Government may pass orders removing the director from office and a director who is removed in such fashion is barred by law from holding the office of director or any other office connected with the conduct and management of the affairs of the company for a period of five years from the date of order of removal unless the period is remitted. No compensation is payable to a director removed under Section 388E. The company may with the previous approval of the Central Government appoint another person to the office where removal has taken place. It must be noted that Sections 388B-388E do apply to both public and private companies but they do not apply to such bodies corporate as foreign companies which are incorporated outside India, as they are not companies within the meaning of Section 3 of the Companies Act, 1956. It was held in Union of India v. R.C Bhargava.21that delay and acquiescence vitiate a reference made by the Central Government to the Company Law Board under Section 388B. This decision should be appreciated as a delay in making a reference points towards mala fide on the part of the Central Government and protects the innocent director from abuse of power by the Central Government. Removal Of Directors By The National Company Law Tribunal. Section 402 of the Indian Companies Act, 1956 gives inter alia, the power of removal of directors to the National Company Law Tribunal. When on an application to the Tribunal for prevention of oppression or mismanagement, the Tribunal finds that relief ought to be granted, it may terminate or set aside any agreement of the company with a director or managing director or other managerial personnel. When the appointment of a director is so terminated he cannot, except with the leave of the Tribunal, serve any company in a managerial capacity for a period of five years. Neither can he sue the company for damages or compensation for loss of office.22 Thus Section 402 vests the Company Law Tribunal with very wide powers and the Tribunal can exercise its discretion and remove a director of a company if it feels that that such a removal is equitable and in the interests of justice.
21 22

(1998)4 Comp LJ 374. By virtue of Section 407 of the Companies Act, 1956.

Pg.no.10

However this power vested in the Tribunal by virtue of Section 402 is to be exercised keeping in mind the provisions of Sections 397-407. Sections 397-398 give a right to members of a company to apply for relief in cases of mismanagement and oppression. Section 399 specifies which members of the company have a right to apply under sections 397 and 398. Section 400 provides that notice must be given to the Central Government of applications made under Sections 397 and 398. Section 401 gives the Central Government the right to make an application to the Tribunal under Sections 397 and 398. Section 403 gives the Tribunal the power to make interim orders in the interests of justice during the pendency of proceedings before it in respect of an application made under section 397 and 398. Section 403 gives the Tribunal the power to make interim orders in the interests of justice during the pendency of proceedings before it in respect of an application made under section 397 and 398. Section 404 allows and states the effect of an alteration to the memorandum or articles of the company and Section 407 lays down the consequences of orders passed by the Tribunal which result in termination or modification of certain agreements including agreements between directors and the company. Thus Sections 397-407 along with an order under Section 402 are a complete code by themselves which gives great power to the National Company Law Tribunal to prevent oppression and mismanagement. By virtue of this power to remove a director the Tribunal prevents and provides relief in cases of oppression and mismanagement under sections 397 and 398. The power of the tribunal is vast and it is hoped that the power will not be abused and be exercised justly and equitably.

Pg.no.11

CONCLUSION

The importance of the power of removal of directors vested by the Companies Act in the shareholders, the Central Government and the Tribunal is extremely great and this power if wrongly exercised can shake the foundations of the company and change its fortunes dramatically. Section 402 and Sections 388B-388E give wide and extensive powers to the Tribunal and the Central Government respectively with respect to removal of directors. This power must be exercised with utmost caution and after exercising due care and discretion. It is hoped that the Central Government and the Tribunal will not abuse their powers and exercise their power in the interests of justice and to protect public interest.

Pg.no.12

Bibliography.

Articles
Dr. K.R Chandratre, Can a Board of Directors expel a director? [2000]37 Corporate Law Adviser (Magazine) 71.

BOOKS A. Ramaiya, Guide To The Companies Act (Nagpur: Wadhwa and Company, 1992). A.J Boyle and Birds, Company Law (New Delhi: Universal Law Publishing Company Private Limited, 1994). A.M Chakrabarti, Company Law (New Delhi: Taxmann, 1994). B.K Sen Gupta, Company Law (Calcutta: Eastern Law House, 1990).

Pg.no.13