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Removal Of Directors : A Critical Analysis

Submitted to:
Mr. Shyamtanu Paul
Faculty, Corporate Law

Submitted by:
RAJAT AGRAWAL
Roll No 106
Semester VI, B. A., LL. B (Hons.)

Submitted on:
05
th
April, 2014


Hidayatullah National Law University Raipur, Chhattisgarh


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TABLE OF CONTENTS

ACKNOWLEDGEMENTS3
RESEARCH METHODOLOGY....4
INTRODUCTION...5
APPOINTMENT OF DIRECTOR.7
First director
Appointment by company
Appointment by third party
Appointment by central government
Restriction on appointing director
REMOVAL OF DIRECTOR..10
Removal by Shareholders
Removal by Central Government
Removal by the Court.
CONCLUSION............15
BIBLIOGRAPHY....16










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ACKNOWLEDGEMENTS

I feel highly elated to work on the topic.
The practical realization of this project has obligated the assistance of many persons. I express
my deepest regard and gratitude for our Faculty of Corporate Law. Their consistent supervision,
constant inspiration and invaluable guidance have been of immense help in understanding and
carrying out the nuances of the project report. I take this opportunity to also thank the University
for providing extensive database resources in the Library and through Internet.





Rajat Agrawal
Semester-VI














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OBJECTIVES:

To study the concept of appointing director
To study the procedure for removal of director in brief.




RESEARCH METHODOLOGY:

Secondary data has been used. The study is descriptive and analytical in nature.

Books and other reference as guided by Faculty of Corporate Reconstruction have been primarily
helpful in giving this project a firm structure. Websites, dictionaries and articles have also been
referred.








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INTRODUCTION
Section 2(13) of the Companies Act, 1956 defined a term director and states that 'director'
includes any person occupying the position of director, by whatever name called.
In the ordinary sense a director is someone who administers, controls or directs something,
especially a member of a commercial company; one who supervises, controls or manages; a
person elected by the shareholders of a company to direct company's policies; person appointed
or elected according to law, authorized to manage and direct the affairs of a company.
A corporation is an artificial being, invisible, intangible and existing only in contemplation of
law
1
.It has neither a mind nor a body of its own
2
. A living person has a mind which can have
knowledge or intention and he has hands to carry out his intention. A corporation has none of
these, it must act through living persons. This makes it necessary that the companys business
should be entrusted to some human agents. Hence the necessity of directors is required in a
corporation. Section 252 of the act therefore, requires that every public company shall have at
least three directors and every private company shall have at least two directors.
A director is a professional men hired by the company to direct its affairs. They are not the
servants of the company. They are rather the officers of the company. A director is not a servant
of any master. He cannot be described as a servant of the company or of anyone
3
. A directors is
in fact a director or controller of the companys affairs.
According to JESSEL MR:
4

Directors have sometimes been called trustees, or commercial trustees and sometimes as
managing partners, it does not matter what you call them so long as you understand what their
true position is, which is that they are really commercial men managing a trading concern for the
benefit of themselves and of all other shareholders in it.

1
MARSHALL J IN TRUSTEES OF Dartmouth College V. Woodward (1819)17 US 518, 636, cited in laski, The
Personality Of Associations, 29 Harv LR 404
2
Haldane LC in Lennards Carrying Co.V Asiatic Petroleum Co, 1915 AC 705 at p 713:[1914-1915]
3
Moriarty V Regents Garrage and Engg Co, [1921] 1 KB 423. LUSH J at p 431.
4
Forrest of Dean Coal Mining Co, Re, (1878) 10 Ch D 450 at pp 451-452
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Section 303 (1) of the companies act ( though for the limited purpose of maintenance of Register
of Diirectors, etc) provides that any person with whose directions or instructions the board of
directors is accustomed to act is also deemed to be a director.
According to Section 2(30) of the act, the definition of an officer includes a director as well as
any person under whose direction or instructions the board or any one or more of the directors
are accustomed to act.
In the opinion of A.M.Chakraborti, the expression person in this respect seems to have been
used in the sense in which it is defined in the General Clause Act. The person in accordance with
whose directions or instructions, the board of director is accustomed to act need not necessarily
to be an individual. The person even be a body corporate. In the case of Andhra Pradesh High
Court in Deen Dayalu V. Sri B.P.Reddy
5
, court held that A manager or any other managerial
personnel is however, not a director.
The director of a company represented to the shareholders that their consent was necessary in
order to effect an amalgamation and induced the shareholders to give them optio to purchase
their shares. They exercised the option, carried out the amalgamation and made a profit
6
.









5
[1984] 2 Comp. LJ 396.
6
Allen V. Hyatt.
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APPOINTMENT OF DIRECTOR

Section 252 provides that every public company (other than a public company which has become
such by virtue of Section 43-A) must have at least 3 directors and every private company must
have at least 2 directors. Subject to the minimum number of directors a company should have,
the articles of a company may prescribe the maximum and the minimum number of directors for
its board of directors. A company in a general meeting may by ordinary resolution increase or
reduce the number of its directors within the limits fixed in that behalf by its article. A public
company or a private company which is a subsidiary of a public company cannot increase the
number of directors beyond the permissible maximum under its articles without the approval of
the central government. However, no approval of the central government is required if such
permissible maximum is twelve or less than twelve, and the increase in the number of its
directors does not exceed twelve.
Director may be appointed in the following ways:
1. By the articles as regards first directors.
2. By the company in general meeting.
3. By the directors,
4. By third parties
5. By the principle of proportional representation
6. By the central government
1. First directors :
The first directors are usually named in the articles. The articles may also provide that both the
number and the names of the first directors shall be determined in writing by the subscribers to
the memorandum or a majority of them. Where the articles are silent regarding the appointment
of directors, the subscribers of the memorandum who are individuals shall be deemed to be the
first directors of the company. They shall hold office until the directors are appointed at the first
annual general meeting.
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2. Appointment by company :
Appointment of subsequent directors is made at every annual general meeting of the company.
Section 255 provides that not less than two-thirds of the total number of directors of a public
company must be appointed by the company in general meeting. These directors must be subject
to retirement by rotation. The remaining directors of such a company and the directors generally
of a purely private company must also be appointed by the company in general meeting. In other
words, not more than one-third of the total number of directors can act as non-retiring directors
i.e not subject to retirement by rotation.

At every subsequent annual general meeting one-third of the directors of a public company are
liable to retire by rotation. If the number is not three or a multiple of three, then the number
nearest to one-third must retire from office. The directors to retire by rotation at every annual
general meeting must be those who have been longest in office since their last appointment. As
between person who become directors on the same day, those who are to retire will, subject to
any agreement among themselves, be determined by lot.

A person who is being proposed as a candidate for the office of a director must sign and file with
the company his consent in writing to act as a director if appointed. This requirement does not
apply to a director retiring by rotating. Appointment of directors of a public company must be
voted individually by separate ordinary resolutions.
3. Appointment by third parties :
The articles may gives right to debenture-holders, financial corporations or banking companies
who have advanced loans to the company to nominate director on the board of the company. The
number of directors so nominated should not exceed one-third of the total strength of the board.
They are not liable to retire by rotation.
4. Appointment by the central government :
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According to section 408 of the companies act, the central government has the power to appoint
directors for the purpose of prevention of oppression and mismanagement. It provides that the
central government may appoint such number of directors on the board of the company as it may
think fit to effectively safeguard the interest of the company, its shareholders, or public interest.
Such an appointment shall be for a period not exceeding three years, and shall be made on the
application of not less than 100 member or members holding not less than 1/10th of the voting
power of the company. Such directors will not be required to hold any qualification shares, not
they shall be liable to retire by rotation.
Restriction on appointment of directors:
A person shall not be capable of being appointed a director by the articles or named as a
director or proposed director of the company or intended company in a prospectus or
statement in lieu of prospectus unless he or his agent in writing has signed and filed with
the registrar consent in writing to act as such director and has:
Signed the memorandum for his qualification shares; or
Taken his qualification shares from the company and paid or agreed to pay for them; or
Signed and filed with the registrar an undertaking in writing to take from the company his
qualification shares and pay for them; or
Field with the registrar an affidavit that his qualification share, if any, are registered in
his name.







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REMOVAL OF DIRECTORS

The removal of directors is often controversial. It underlines a legal cum technical process in
which the shareholders determine their candidate of choice to helm the management of the
company. It is in reality a power play between controlling shareholders and minority
shareholders. Under extreme circumstances and in highly unusual situations it may become
necessary to remove a member from the board of directors, an office or other position.

The recent Court of Appeal decision in Indian Corridor Sdn Bhd & Anor v Golden Plus
Holdings Bhd
7
considered and clarified a few pertinent issues in respect of the removal of
directors in a public company. These include the shareholders right to convene a general
meeting under section 145 (S 145) of the Companies Act 1965 (Act) and the requirements to
remove directors under section 128 of the Act.

A director of a company can be removed by
Shareholders
Central government,
or the court

Removal by shareholder :

Section 284 empowers the company to remove a director by ordinary resolution before the
expiry of his period of office except in the following cases:

A. A director appointed by the central government under section 408.
B. A director in case of a private company, holding office for life on the 1st day of April
1952. (A director for life subsequent to that day may be removed).
C. Director appointed in accordance with the principal of proportional representation, under
section 265. This is to ensure that the directors appointed by the minority are not removed
by a bare majority.

7
[2008] 3 MLJ 653
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D. Special notice is required of any resolution to remove a director or to appoint somebody
in his place at the meeting at which he is removed. On receipt of such notice, the
company will immediately send a copy thereof to the director concerned. He may make
any representation in writing and the copy of such representation may be sent by the
company to every member. Where the copy of the representation is not sent to the
members, in that case the director concerned may require the representation to be read at
the meeting.

E. A vacancy created by the removal of a director as aforesaid can be filled up at the
meeting at which he is removed provided special notice of the proposed appointment was
also given. The director so appointed shall hold office till the date the director removed
would otherwise have hold office. If the vacancy is not filled, it shall be filled up as
casual vacancy except that the director removed shall not be re-appointed.

The director so removed is entitled to claim compensation or damages for branch of contract.

Removal by the Central Government :

A director can also be removed at the initiative of the central government. The companies act
enables the central government to remove managerial personnel (including a director) from
office on the recommendation of the high court. The central government may refer to the high
court cases against managerial person on any of the ground mentioned in section 388-B. Every
such reference will be made in the form of an application which must contain a statement of
material facts. The person against whom such reference is made must be joined as a respondent
to the application.

The High court in the interests of creditors, members or the publish suo motu or on the
application of the central government, may his duties until further orders direct the respondent
not to discharge any of his duties until further orders. The court may also appoint a suitable
person in place of the respondent. Every person so appointed is deemed to be a public servant.
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At the conclusion of hearing of the case, the high court shall record its decision stating
specifically whether or not the respondent is a fit and proper person to hold the office of director.
If the finding of the high court is against the respondent the central government shall by order
remove such a person from office.

The person who is so removed cannot hold office of a director for a term of five years unless the
period is remitted. The person removed cannot claim any compensation for loss or termination of
office.

Removal by the Court:

On an application to the court for prevention of oppression and mismanagement the court may
terminate or set aside or modify any agreement between the company and the managing director,
or any other director or manager. On such termination, the director cannot serve the company in
a managerial capacity for a period of five years from the date of the order of termination, without
the permission of the court. The director on removal cannot sue the company for damages or
compensation for loss of office.

Right to remove Director is a legal right of Members As per section 284 of the Companies Act,
1956, right of a shareholder to remove director in the general meeting through Ordinary
Resolution is a Legal right. This Legal right cannot be damaged or taken away by MOA, AOA or
any other document or agreement.

KHETAN INDUSTRIES PRIVATE LIMITED VS. MANJU RAVINDRA PRASAD
KHETAN
In this case it was held by the court that the shareholders have a right to remove the directors
under section 284 by passing ordinary resolution and section 284 provides an inbuilt mechanism
for the enforcement of the right and civil court has no jurisdiction to entertain the suit for
removal of director.

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IMPORTANT JUDGEMENTS WITH RESPECT TO SECTION 284


1. LIC of India v Escorts Ltd
8
.

As per a milestone judgment given in LIC of India v Escorts Ltd. (1986) it was held that it is not
necessary to give reasons in explanatory statement for removal of a director as desired by section
173(2). Reason behind this judgment given by the court was that the company is acting on the
basis of a special notice given by the shareholder u/s 284 and it is not a resolution proposed by
the company. Only one member is enough to give special notice for removal

2. Karnataka Bank Ltd. v A.B. Datar
9


It was held by the High Court in Karnataka Bank Ltd. v A.B. Datar (1994) 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.

Practical procedure for Removal of Director
1) After receiving Special Notice (not less than 14 days in advance of the desired meeting)
from the member to remove director u/s 225, It is duty of the company to give immediate
notice of the resolution to its members.
2) It is not possible for the company to give notice to all the members, company should
publish the same notice advertisement in the newspaper having an appropriate circulation
not less than 7 days before the meeting.
3) Due intimation must be given to the director regarding the removal notice. Right of such
director to be heard on the resolution should be taken care of.
4) As per section 225(4), director also possess the right to make a representation in writing
against his removal and request the company to notify it to the company's members
[section 225(4)].

8
(1986) 1 SCC 264: (1986) 50 Comp Cas 548
9
(1993) 2 Kant LJ 230: (1994) 79 Comp Cas 110 Kant.
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5) The representation could not be sent to the members because it was received too late or
because of companys default in sending it, the company must read out the representation
at the general meeting.
6) Now it is duty of the company to hold a General Meeting to discuss the matters and pass
a ordinary resolution to remove the director.
7) File form-32with the ROC within 30 days of passing the resolution.
There are few decisions of Indian courts regarding compliance of section 188 as procedural
section with section 284. But based on contrary decisions here I would like to say that Section
284 is an independent provision providing for removal of directors and it is available to any
shareholder to remove a director in meetings called by the company and there is nothing to insist
on compliance with the provisions in section 188(2) to call a meeting to move a resolution.
Thus, where on receiving notice for general meeting two shareholders gave separate notice to
company intending to move resolution under section 284 for removal of some of the directors,
and the company gave notice to shareholders of the notice through advertisement in newspaper,
it was held that compliance of section 188 was not necessary. [Karnataka Bank Ltd. v A.B.
Datar
10
.













10
(1994) 79 Comp Cas 417 (Kar
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CONCLUSION

The prime responsibility of the board of directors is to determine the broad strategy of the
company and to ensure its implementation. To do this successfully requires high quality
leadership. It also requires that the directors have sufficient freedom of action to exercise their
leadership. The board can only fulfill its responsibilities if it meets regularly and reasonably
often. Under extreme circumstances and in highly unusual situations it may become necessary to
remove a member from the board of directors, an office or other position.
Reasons for removing a board member may relate to any of the following:
Breach of confidentiality, for all matters dealt with in camera or issues not discussed at
the public meeting;
Failure to meet obligatory procedures in the disclosure of conflict of interest;
Failure to fulfill the fiduciary duties of a director for the corporation;
Failure to comply with the attendance policy for directors meetings; and
Inappropriate or consistent lack of participation and contribution to effective discussion
and board decision-making.
Where Article Of Association of a company confer power on board of directors to remove a
director whether such power shall be affected by the provisions of section 284
11
. It may be
interesting to debate as to whether a director can be removed by the Board of Directors if such a
power is conferred upon it by the article of association. However, there is no bar to a private
company which is not a subsidiary of a public company for including such a provisions in its
articles.







11
Ravi Prakash Singh V. Venus Sugar Ltd. [2008] 84 SCL 75 (Delhi),
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BIBLIOGRAPHY:

Books referred:

Seth Dua & Associates, Joint Ventures and Mergers and Amalagamtion, Lexis Nexis,
Edn 1, 2013
K.R. Sampath, Law and Procedure for Mergers, Joint Ventures, Amalgamations,
Takeovers and Corporate Restructure, Snow White Publication, Edn 4
th
, 2008
A. Ramaiya, Ramaiyas Companies Act, Edn 15
th
, 2001
Dr.Avtar Singh, Company Law;
A.K.Majumdar, Dr. G.K. Kapoor, Company Law, Taxmanns Publication, Edn 15
th