Removal of Director: A Legal Right of Members

REMOVAL OF DIRECTOR: A LEGAL RIGHT OF MEMBERS

By Mojahid Karim Khan

INTRODUCTION

The directors of a company are its eyes, ears, brains, hands, nerves and other essential limbs upon whose efficient functioning depend the rules of the company. The directors formulate policies and establish organisational setup for implementing those policies and to achieve the objectives as contained in the memorandum. If Directors are found in any misleading or misbehavior then three authorities namely the shareholders, Central government, and company law board have the power to terminate him or to remove him from his post but the main question regarding this subject matter is related to removal of directors without his misconduct or rather on the will of the three authorities mentioned above.

LEGAL POSITION OF DIRECTOR

It is very difficult to define the position of directors. Section 2(B) of the companies act 1956 defines a director as ‘Director includes any person occupying the position of director, by whatever name called’. Section 252 of the act makes it obligatory on every public company to have at least three directors and on every other company to have at least two directors.

The true position of a company director is that of agent and apart from the provisions of the various corporate laws, which bind them, confess certain rights upon, impose certain obligations on them and make them liable for defaults for violations thereof. Their real relationship with the company is governed by the arrangements of the agency as governed by the contract act.

 

QUALIFICATION OF DIRECTORS

The companies act 1956 does not lay down any qualification for a person to be appointed as a director of a company. However it mentions disqualification of directors, which are contained in section 274 of the act. Section 274 of the act states that a person shall not be capable of being appointed as director of a company- if

(a)   He has been found to be of unsound mind by a court of competent jurisdiction and the finding is in force.

(b)   He is an un discharged insolvent

(c)    He has applied to be adjudicated and his application is pending

(d)   He has been convicted by a court for any offence including moral turpitude and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not been elapsed from the date of expiry of the sentence.

(e)    He has not paid any calls in respect of the shares of the company held by him, whether alone or jointly with others and six months have elapsed from the last day fixed for the payment of the calls.

(f)    An order disqualifying him for appointment as director has been passed by court in pursuance of section 203 and is in force unless the leave of the court has been obtained for his appointment in pursuance of that section.

(g)   Such person is already director of other public company.

A private company which is not a subsidiary of a public company may by its articles, provide that a person shall be disqualified for appointment as a director on any grounds in addition to those specified in subsection (1)

 

DIFFERENT MODES UNDER WHICH DIRECTORS CAN BE REMOVED

A director may be removed from office before the expiry of his term by:-

(a)    Shareholders of the company

(b)   Central government

(c)    Company law board

 

ü  REMOVAL OF DIRECTOR BY SHAREHOLDERS OF THE COMPANY

According to section 284 (1) of the act, the shareholders of a company may, by passing an ordinary resolution at a general meeting remove director before the expiry of the period of his office. However there is also some exceptions related to it the exceptions are as follows:-

(a)    A director appointed by the central government under section 408

(b)   A director of a private company holding for life on the first day of April, 1952 whether or not he is subject to retirement under age limit by virtue of the articles or otherwise.

(c)    Where the company has availed itself of the option to appoint not less than two-thirds of the total numbers of directors according to the principles of proportional representation under section 265.

(d)   A director appointed by a financial institution/bank under the terms of a loan agreement.

As we will look into the provision of this section and exceptions there to then we can easily see that there are instances where shareholders are refrained from removing director, it was held through a judgment that the rights given under Section 284 is a ‘STATUTORY RIGHTS’ which cannot be taken away by the memorandum, articles or by any contract or any other document and if it is sought to be taken away, such a provision will be void. Under these circumstances there was a decision in the case of Life Insurance Corporation of India V. Escort ltd, in this case judges held that the shareholders in any case should not be  restrained from calling a general meeting to remove existing directors and appoint new director.[1] Similarly there was another decision in the case Ravi Prakash Singh V. Venus Sugar ltd,[2] the judgment in this case made it clear that where articles of association confer power on the board of directors to remove a director, such power is not affected by the provisions of section 284. On the other hand there are many cases where Hon’ble court has decided that a Director can be removed for obvious reasons but on the other hand contrary to this at many circumstances an issue relating to removal of directors have emerged where director is removed only on the will of shareholders, Central government, Company law board. There was a case Vinod Kumar Mital V. Kaveri lime industries ltd.[3] It has been held to be a good ground for removing a director where it was found as a fact that the director had made misleading complaints to various government authorities which resulted in raids on the companies premises and the concerned authorities found nothing wrong and gave a clean chit to the company. But here we are concerned to find out the provisions when there is no evidence or reasons reason to remove directors but the shareholders or authorities wants to do so then what step or measure should they take to remove those directions.

ü  REMOVAL OF DIRECTOR BY CENTRAL GOVERNMENT

Chapter IV A of the act comprising section 388B to 388E contains provisions regarding power of central government to remove managerial personnel of a company from office on the recommendation of the company law board. The central government may state a case against the person and refer the same to the Company Law Board with the request that company law board may inquire into the case and record the decision as to whether or not such person is fit  and proper person to hold the office as director or not.

Formation of the opinion by the central government is subjective process and cannot be questioned ordinarily,[4]  however, if the bona fides of the government are challenged and if the government is called upon to explain, such material must be disclosed to the company law board.

ü  REMOVAL OF DIRECTOR BY COMPANY LAW BOARD

When on application to the company law board for prevention of oppression under section 397 and mismanagement under section 398 of the act, it may by order, termiate or set aside any agreement of the company with a director or managing director or other personnel on such terms and conditions as it may think just and equitable. The court may constitute an advisor board for proper management of the company. It can appoint a special officer or administrator.[5]

It was held by the court while dealing with an application under section 397 or 398 has the power to reconstitute the board of the company concerned. In such an event the directors of the company would cease to be directors.[6]

CONCLUSION

In one of the case the Hon’ble High Court in Karnataka Bank Ltd. v A.B. Datar (1994)  even went to the extent of saying that at some instances only one member is enough to remove the director that under section 284 is an independent provision and special notice u/s 284 can be given by a single member irrespective of the number of shares and voting rights he holds. Irrespective of the exceptions mentioned above there have been many instances where Courts have decided that under every circumstances rights is vested upon the shareholders, central government, Company Law Board and they can remove the directors at any instance.

[1] Life Insurance Corporation of India V. Escort ltd. (1986) 59 comp. cas. 548 (SC)

[2] Ravi Prakash Singh V. Venus Sugar ltd, (2008) 84 SCC 75 (Del)

[3] Vinod Kumar Mital V. Kaveri lime industries ltd (2000) 100 com. Cases 66

[4] Alok Prakash jain V. Union of India (1973) 43 Comp Case 68

[5] Richardson and Cruddas Ltd. V.Haridas Mundra AIR 1959 Cal 695.

[6] Bennett Coleman & Co. Ltd. V. Union of India (1977) 47 Comp Cas 92 (Bom)