Section 284 - Removal of directors

Section Applicability

This section applies to all companies whether public or private.

Parameter

Removal of directors: This section lays down the procedure for removal of a director of a company by passing an ordinary resolution at a meeting of the shareholders of the company. If a director holds an office of managing director or whole-time director by virtue of his being the director and if he is removed as a director, the office of the managing director or the whole-time director would automatically come to an end.

Special Notice: A special notice of at least 14 clear days before the general meeting is required from a member proposing an ordinary resolution for removing the director. Such special notice must comply with the provisions of section 190. A copy of the special notice shall be sent forthwith to the director concerned.

Validity of removal of director when no special notice was sent to them: Where no special notice of the resolution is shown to have been sent under section 284(2) to the directors concerned, who are entitled to be heard on the resolution for their removal from directorship at the meeting, their removal will be bad in law and the resolution passed at the extraordinary general meeting of shareholders will be liable to be set aside. The concerned directors will get restored to their original position as directors from the date of their removal _ Capt Manmohan Singh Kohli v. Venture India Properties (P) Ltd. (2004) 61 CLA 358( CLB). Also refer S Varadarajan v. Udhayem Leasings and Investments (P) Ltd. (2005) 65 CLA 21 (CLB).

Can a single shareholder give notice for the removal of director: A director of a company can be removed only by a resolution duly passed at a general meeting and not otherwise. Hence only a shareholder alone can give notice for the removal of a director. It should be noted that no single shareholder can give notice for the removal of a director unless he holds the number of shares prescribed under section 188 of the Companies Act, 1956. A group of shareholders who hold the number of shares prescribed under section 188 can also give notice for the removal of a director. Removal of a director is not an individual right but is a collective right.

Litigation:

As above mentioned, an ordinary resolution is sufficient for the removal of directors of any company. The aggrieved person i.e. the director challenges an ordinary resolution in the Court of law mainly on two grounds:

1. Principal of Natural Justice has been violated.2. Meeting of the members which caused his expulsion is illegal. [procedural irregularities]

Also, there are two important issues when a Director or the concerned group approaches the Company Law Board challenging his removal as a Director as follows:

1. The Director or the group questioning the issue of removal should be qualified under section 399 of the Companies Act, 1956 if they want to move a petition before the Company Law Board under section 397/398 of the Companies Act, 1956.

2. Secondly, there should be oppression and mismanagement for filing a petition under section 397/398 of the Companies Act, 1956.

The above two issues are important when it comes to approaching the Company Law Board under section 397/398 of the Companies Act, 1956. Unlike the Civil Court which can only look into the procedural irregularity in removing a Director, the Company Law Board can look into various issues and its decision or direction need not be based on the procedural irregularities only and its order is normally directed to put an end to the matters complained of or in order to regulate the future affairs of the Company.

Escorts Ltd. v. Union of India and others1 [ Bombay High Court ]

Facts: In this Case, Writ Petition has been filed by the Petitioner i.e. Escorts Ltd. which raised lot of questions on the procedural matters of company law, includes Removal of Directors, which were very unique and important. The outcome of the Judgment affected not alone the petitioner Company but all the others as well.

Held: “It is true that if a director is removed, the shareholders as such are not directly affected; but it cannot be said that they have no interest whatsoever in the matter. A shareholder is certained interested in seeing that the company is managed by duly elected directors and they are not removed on extraneous grounds. In any case, they are certainly entitled to see that directors who have been unanimously elected and against whom no allegation is made, are not removed arbitrarily; much less removed so as to pass on the effective management of the company to certain persons who are elected merely by the majority without due regard to the larger interests of the company. When the EGM is held, at that meeting they are certainly entitled to call upon the requisitionist to state the reasons. The director concerned is entitled to represent why he should not be removed. He may also orally state at the EGM as to why a certain section of shareholders is bent upon removing him.” It is so because, unless the reason for removal of an

1 [1985] 57 Comp Cas 241 (Bom).

elected director is stated, the director concerned would not be in a position to make an effective representation. Breaching the above condition may lead to a positive way to open doors for the litigation to challenge the validity of the removal of director.

M.S. Madhusoodhanan v. Kerala Kaumudi Pvt. Ltd. and Ors.2

Facts: One of the issues which has been considered, along with other, is the removal of petitioner as a Managing Director. Ordinary resolution has been passed to the effect to remove the petitioner as a managing director. The petitioner has challenged the same as arbitrary, illegal as the said resolution erred and not in consonance with the Articles of association.

Held: It was held that that as per Article 41 of the Articles of Association of kerala kaumudi the petitioner has been designated as a Managing director and editor of the company for a life long period. However, the Respondents claimed that they have altered the articles of association and deleted the said entry i.e. Article 71. The Petitioner countered that the essential requirements to alter the articles of association has not been fulfilled. The alteration erred in all the procedural requirements. Thus, the contentions of the Petitioner were upheld by the Court and directed the respondent to reinstate the Petitioner as Managing director.

Conclusion:

Also, many more cases on the issue of the removal of directors, as mentioned above, reflects on section 397 and 398 of the Companies Act, 1956. i.e. Oppression and mismanagement of the Company. There are so many judgments explaining as to how to construe the words “oppression” and “mismanagement” used under section 397/398 of the Companies Act, 1956. In the beginning, the words are construed so strictly and it is considered as an extraordinary remedy. If we go by the judgments on section 397/398 of the Companies Act, 1956 in the past, then, the oppression as alleged should be ‘harsh’ and ‘burdensome’. Again, there should be series of acts constituting oppression and mismanagement. That was legal position in the past. However, in the recent judgments it is held that the Company Law Board can pass any order under section 397/398 or section 402 of the Companies Act, 1956 even if the oppression and mismanagement is not established or proved. That means, the Company Law Board can very well say that, infect, there is no oppression and mismanagement, still, an order or direction can be passed and it is justified. Now, scope of section 397/398 of the Companies Act, 1956 is literally changed and technicalities are ignored.

2 (2004) 9 SCC 204.