NATIONAL LAW INSTITUTE, UNIVERSITY,

BHOPAL.

A project of

LAW RELATING TO BUSINESS ASSOCIATION- II

ON

Removal of a Director

SUBMITTED TO : SUBMITTED BY:

Dr. Kondaiah Jonnalagadda Aditya Mohanty

Assistant Professor 2008 B.A.L.L.B. 82
3RD YEAR
VIII Trimester
 Removal of a Director

Contents

1. Declaration…………………………………………………..3

2. Statement of purpose…………………………………………4

3. Methodology……………………………………………..….4

4. Object……………………………………………………....4

5. Introduction………………………………………………..6

6. Removal Of a Director…………………………………….....6

a. Removal by shareholders………………………………6

b. Removal by Central government……………………….7

c. Removal by company Law Board……………………..8

7. Reasons For Removal of a Director …………………………9

8. Requirements……………………………………………...11

9. Special Notice…………………………………………….11

10.Removal of Directors in Private Companies…………………12

11.Rights of a Director after Termination of

Directorship……….13

12.Bibliography……………………………………………..15

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 Removal of a Director

Declaration

The ideas expressed in the report are mine and not

of the University. The work reported in this report

is original and not reproduced any where without

adequate acknowledgement.

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 Removal of a Director

Statement of Purpose
To study the procedure and circumstances under
which a director may be removed

Methodology
The project has been made by using various means
for research, mainly scholarly articles and books.
References have been made to sources using the
Internet and electronic databases.

Objectives
 To understand who can remove a director
 To analyze the requirements to dismiss a
director
 To study the procedure for dismissing a
director

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 Removal of a Director

Hypothesis
Based on the premise that a director of a company
is difficult to remove and can be done only
according to strict legal provisions.

Coverage and Scope

This project deals with the procedure to remove a
director along with his right and who can remove
him and under what circumstances

Conceptual Framework
Section 284 of the Companies Act deals with the removal of directors. 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 408. 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

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 Removal of a Director

otherwise. Permanent Directors appointed for life-time under the Articles of

Association can be removed from office.

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 Removal of a Director

INTRODUCTION
Section 284 of the Companies Act deals with the removal of directors. 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 408. 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 office.
 

REMOVAL OF A 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.
 
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. A rationale behind the provision can
be explained thus: “the need for removal arises because normally the
shareholder’s 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

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 Removal of a Director

happy with the directors and their functioning they must have the option to
remove them from the board”. 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. In Tarlok Chand Khanna v. Raj
Kumar Kapoor, it was observed that section 284 is designed to enable the share
holders to control the directors by their removal.
 
2. 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
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,

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however be relaxed by the central government with the previous concurrence of

the Company Law Board i.e. the Tribunal.
 
Maruti udhyog Ltd v R C Bhargava. 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.
 
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
company’s 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. Such a director shall not be entitled to serve as a
manager, managing director or director of the company without leave of the CLB
for a period of 5 years from the date of CLB’s 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)].
 

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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.
 

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. 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.
 
In Escorts Ltd v Union of India, 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

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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.
 
In India it is now well settled by the decision of the Supreme Court in Life
Insurance Corporation of India v. Escorts Ltd 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.”
 
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 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.
 
Section 169 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

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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.
 

REQUIREMENTS
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. 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. 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. The special notice of

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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. 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.
 
Manmohan Singh Kohli (Capt.) v. Venture India Properties (P.) Ltd. 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

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.

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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.

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 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. 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.
 
FURTHER IN THE FOLLOWING CASES NO COMPENSATION IS PAYABLE :
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.

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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 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.
 
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.

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BIBLIOGRAPHY

Books and Articles

 R. Suryanarayanan,Company Law Ready Reckoner, 8th edn; 2006; commercial

law publishers (India) pvt. Ltd.
 A.K. Majumdar and Dr. G.K.Kapoor, Company law and practice; 11th edn,
2005; taxman publications Pvt. Ltd., New Delhi
 M J Sethna; Indian company Law; 11th edn, 2005; vol III; Modern Law
Publications; New Delhi
 Avtar singh; Company Law; 14thy edn ; reprint 2005; eastern book company,
Lucknow
 L.L.V Iyer, Guide to company’s Directors. Powers, Rights, Duties and
liabilities, 2nd edn, 2003, Wadhwa and Co, Nagpur

Online Resources

 www.jurisonline.com
 www.paclii.org

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