Section 284 of the Companies Act deals with the removal of director. 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 4081. 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 office2.

REMOVAL OF 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.3

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.4 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 happy with

1 Sec 408- Powers of Government to prevent oppression or mismanagement.2 Tarlok Chand Khanna v. Raj Kumar Kapoor, (1983) 54 Comp Cas 12 (Del).3 A.K Majumdar and Dr. G.K.Kapoor, “ company law and practice;” 11 th edn, 2005; taxman publications (p) ltd, New Delhi, P.637.4 M J Sethna; “ Indian company Law”; 11th edn, 2005; vol III; modern law publications; New Delhi, p.2737.

the directors and their functioning they must have the option to remove them from the

board”.5 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.6 In Tarlok Chand Khanna v. Raj

Kumar Kapoor7, it was observed that section 284 is designed to enable the share holders to

control the directors by their removal.8

 

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

5 Ravi Mahto; “Rights of the Shareholders under Companies Act, 1956”.http://www.indlaw.com/publicdata/articles/article202.pdf6 M J Sethna; “ Indian company Law”; 11th edn, 2005; vol III; modern law publications; New Delhi, p.2737.7 (1983) 54 Comp Cas 12 (Del).8 L L V Iyer, “Guide to company’s Directors. Powers, Rights, Duties and liabilities;” 2 nd edn, 2003, Wadhwa and Co, Nagpur, P.1149.

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, however be relaxed by the central government with

the previous concurrence of the Company Law Board i.e. the Tribunal.9

 

Maruti udhyog Ltd v R C Bhargava10. 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.11

 

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.12 Such a director

shall not be entitled to serve as a manager, managing director or director of the company

9 A.K. Majumdar and Dr. G.K.Kapoor, “ company law and practice;” 11 th edn, 2005; taxman publications (p) ltd, New Delhi, P.64210 [1998] 17 SCL 269.11 M J Sethna; “ Indian company Law”; 11th edn, 2005; vol III; modern law publications; New Delhi, p.2746.12 Hemand D Vakil v RDI Printing and Publishing (pvt) Ltd. (1993) 11 CLA 86 ( CLB).

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)].13

 

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.14

 

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.15 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.16

 

13 A.K. Majumdar and Dr. G.K.Kapoor, “ company law and practice;” 11 th edn, 2005; taxman publications (p) ltd, New Delhi, P.643.14 Dabur India Ltd v Anil kumar Poddar, (2002) 108 Comp Cas 293.15 M J Sethna; “ Indian company Law”; 11th edn, 2005; vol III; modern law publications; New Delhi, p.2739.16 Id.

In Escorts Ltd v Union of India17, 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 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.18

 

In India it is now well settled by the decision of the Supreme Court in Life Insurance

Corporation of India v. Escorts Ltd19 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.”20

 

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

17 (1985) 57 Com Cases 241 (bom).18 L L V Iyer, “Guide to company’s Directors. Powers, Rights, Duties and liabilities;” 2 nd edn, 2003, Wadhwa and Co, Nagpur, P.115219 (1986) 59 Comp Case, 548: (1986) I Comp LJ 91 (SC) 1370.20 M J Sethna; “ Indian company Law”; 11th edn, 2005; vol III; modern law publications; New Delhi, p.2740.

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.21

 

Section 16922 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 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.23

 

REQIUREMENTS

 

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.

21 I.C.C.L.R. 1994, 5(8), N160-161; www.westlaw.com22 Sec 169 - Calling of extraordinary general meeting on requisition.23 M J Sethna; “ Indian company Law”; 11th edn, 2005; vol III; modern law publications; New Delhi, p.2739.

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.24 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.25 The special notice of 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.26 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.27

 

Manmohan Singh Kohli (Capt.) v. Venture India Properties (P.) Ltd.28 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

24 Company law ready reckoner by R. suryanarayanan, 8th edn; 2006; commercial law publishers (India) pvt.ltd, P.12425 A.K. Majumdar and Dr. G.K.Kapoor, “ company law and practice;” 11 th edn, 2005; taxman publications (p) ltd, New Delhi, P.63726 Company law ready reckoner by R. suryanarayanan, 8th edn; 2006; commercial law publishers (India) pvt.ltd, P.12427 Id.28 (2005) 123 Comp Cases 198: (2004) 53 SCL 457 (CLB) (PB).

 

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 433.29

 

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.30

 

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

29 M J Sethna; “ Indian company Law”; 11th edn, 2005; vol III; modern law publications; New Delhi, p.2742.30 A.K. Majumdar and Dr. G.K.Kapoor, “ company law and practice;” 11 th edn, 2005; taxman publications (p) ltd, New Delhi, P.640.

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.31 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.32

 

Further in the following cases no compensation is payable:33

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.

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

31 Sourthern Foundaries ltd v shirlaw, (1940) 2 All ER 445.32 Read v Astoria Garage ( Streatham) Ltd, (1952) 2 All ER 292.33 Avtar singh; “Company Law”; 14thy edn ; reprint 2005; eastern book company, Lucknow, P. 317.

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.34

 

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.35

34 A.K. Majumdar and Dr. G.K.Kapoor, “ company law and practice;” 11 th edn, 2005; taxman publications (p) ltd, New Delhi, P.64035 Golden Handshake and Shareholders protection, (1978) New LJ 205.