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Total Number of Subscribers: 467 |
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Date:10th January 2009 |
Compiled by Mr. M. Sathya Kumar |
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"Can the
holder of a single share requisition the removal of the director of a
company?" The Directors of a company are responsible
for its corporate governance; they according to the organic theory are the
limbs and brain of the company which though being a separate legal entity, is
an unnatural person. Out of the eight different ways in which the directors
of a company can be removed, the most important and widely used is by way of
section 284 which require passing of an ordinary resolution in the shareholders
meeting of which a special notice has been given. This article deals with the
question that whether the holder of a single share can move a resolution for
the removal of director, in the absence of compliance to sec. 188 which
requires a particular number of shareholders for moving a resolution? In the
later part of the article the difference of opinion among the High courts is
discussed with the help of case laws. As the matter has not reached to the
Supreme Court there is no authoritative pronouncement on the subject, so the
attempt is made to find the solution keeping in mind the whole ‘scheme of the act’, ‘practical considerations’ and the ‘resulting hardships’ that will be caused by construing in
either of the two ways. A Bare reading of
section 284- On reading section 284 it is found that it
requires a special notice and a ordinary resolution to remove a director, but
the special notice shall be served by how many shareholders, section 284 is
silent on that, infact the word shareholder nowhere appears in section 284,
it only says that “Special notice shall be required
of any resolution to remove a director under this section”. The relevant part of section 284 is produced hereunder- 284. Removal of
directors (1) A company may, by ordinary resolution,
remove a director (not being a director appointed by the Central Government
in pursuance of section 408) before the expiry of his period of office….. (2) Special notice shall be required of any
resolution to remove a director under this section, or to appoint somebody
instead of a director so removed at the meeting at which he is removed. (3) On receipt of notice of a resolution to
remove a director under this section, the company shall forthwith send a copy
thereof to the director concerned, and the director (whether or not he is a
member of the company) shall be entitled to be heard on the resolution at the
meeting. Notice moved by a
single shareholder, not accepted by the company- In order to prevent the embarrassment caused
by the frivolous notices to remove the director, given by a single
shareholder, the companies refuse to circulate the notice to other members
(as required by section 284) terming the notice as invalid for non compliance
of section 188. Section 188 requires a certain number of shareholders to move
a shareholders resolution. The relevant part of the provision is produced
hereunder- 188. Circulation of
members’ resolutions (2) The number of members necessary for a
requisition under sub-section (1) shall be- (b) not less than one hundred members having
the right aforesaid and holding shares in the company on which there has been
paid-up an aggregate sum of not less than one lakh of rupees in all. On the other hand the shareholder considered
it their right to move a notice under section 284 to remove a director as it
nowhere states that it is subject to section 188. This resulted into
litigations between the shareholder and the companies’ management. Sometime in mid eighties, one person who held
shares in various large companies though in small numbers started giving
notices under section 284 to remove the directors. His victims included big
names like Shri NA Palkhiwala, Shri Aditya Birla, Shri Y.H.Malegam; this
attempt was obviously to gain publicity and to cause undue harassment and embarrassment
to the company’s management.1 The case laws and
the resulting controversy- The high courts are divided on the issue
that weather section 284 gives the right to a single shareholder to pass a
resolution for removal of director or weather compliance to sec 188 is
required wherein a minimum number of shareholders are required to give the
notice. On one hand there is Calcutta and Karnataka high courts upholding the
right of a single shareholder and on the other hand is Delhi high court which
rules that section 284 must be read with section 188 because holding the
contrary will result in great hardships and also embarrassment to the company’s management. A decision of the Chancelory Division of England
which was cited in the Delhi high courts case also held the same. Detail analysis of
the case laws- Dealing first with the Calcutta and
Karnataka high court, in the case of Gopal Vyas vs. Sinclair Hotels and
Transportations ltd. the matter related to a special notice in respect of
appointment of a person other than retiring director under Section 257. This
provision is similar to the Section 284 in the sense that it also does not
provide clearly weather a single shareholder has the right to give the
special notice for the appointment of a person other than the retiring
director. The court opined that section 257 is a ‘self contained’ provision and do not require section 188 to be complied
with. Both the sections cover different fields and there is no scope for
reading any other qualification in it which the legislature in its wisdom
does not think is necessary to incorporate.3 In the nutshell the court held
that section 257 is a specific provision giving a right to an individual
member to give notice there under. The above mentioned case was cited and followed
in the case of Karnataka bank vs. AB Datar in which the Karnataka high court has held
that there is nothing in Section 284 which insist on compliance with the
provision of Section 188(2) and the right to give the special notice to the
company to include in the agenda of the next meeting, the issue of removal of
the director in pursuance of a simple resolution, is available to any
shareholder. And even if the article of association provides for the
compliance of section 188 it can not take away the right from a shareholder
in pursuance of Section 9 which gives the companies act an overriding effect
on the articles of association.5 The same high court in the case of Prakash Roadlines
vs. Vijay Kumar Narang 6 has reiterated its ratio of Karnataka Banks case and held
that the right to move a resolution is a inherent right of the shareholder
and the right to move a resolution to elect or remove a director is a
individual right which is independent of the requirement of Section 188. Before coming to the cases which held that
Section 284 has to be read with Section 188, it is necessary to look at
Section 190 which deals with special notice, and is the provision on which
the shareholders have based their contentions in the below mentioned two case
laws. Section 190 provides that 190. Resolutions
requiring special notice (1) Where, by any provision contained in
this Act or in the articles, special notice is required of any resolution… In the case of Pedley vs. Inland
Waterways Association ltd.7 the shareholder contended that as the special notice
for the specific purpose referred to in Section 284 (for the sake of
understanding the reference given here is of the corresponding provision in
the Indian act) has been served on the company, it is incumbent upon the
company to give its members the notice of the resolution as required by
Section 190(2). The court negatived the contention and held that Section 190
is a protective and not an enabling provision; it gives the right to all the
members to receive the notice of the resolution of which the special notice
has been duly given. But it does not give the right to the single shareholder
to have his resolution included in the agenda. Further the court said that
Section 190 can not be exercised by a shareholder without complying to
Section 188 (dealt with in detail in the next case). Therefore as per this
decision a special notice under Section 190 requires that the procedure under
Section 188 must be followed, which means a single shareholder (without
coming up to the specified figure of the voting power as given in Section
188) can not give a special notice to remove a director under Section 284. The Pedley’s case
was cited in the case of Amar nath Malhotra vs. MCS Ltd.8 the similar
contention as taken by the shareholder in the Pedley’s case was taken in the matter of removal of an auditor under Section
225 which also requires a special notice. The Delhi high court said that
resolutions which require special notice do not cease to be a resolution as
contemplated by Section 188, special notice is required for the resolution
which are relatively more important and it will be incongruous to hold that
in the matters which are less important Section 188 has to be complied with
but in matters of relatively greater importance there is no such requirement.
Hence a single shareholder can not move a resolution proposing the removal of
an auditor. Settling the
controversy- There is a sharp cleavage of opinion among
the high courts wherein divergent views are taken by the high courts and
their ruling results in two different extreme positions. The matter has not
yet put to rest as the matter has not reached the Supreme Court hence there
is no authoritative pronouncement on the subject. In order to devise a
solution to the problem, regard must be had to the “scheme of the act with respect to organization of the meetings.” The only two shareholder’s meetings in which a general resolution can be passed to
remove a director are the annual general meeting (AGM) and extraordinary
general meeting (EGM). They require compliance to section 188 and section 169
respectively. Section 169 like section 188 also requires a specific number of
shareholders to give a notice for moving a resolution in the upcoming EGM. 169. CALLING OF
EXTRAORDINARY GENERAL MEETING ON REQUISITION. (4) The number of members entitled to
requisition a meeting in regard to any matter shall be – Section 284 provides for the removal of
director in a shareholders meeting by passing a general resolution of which a
special notice has been given. Hence, logically the removal can take place
only in an EGM or an AGM, and for a requisition the shareholders will have to
comply either with section 169 read with section 190 or section 188 read with
section 190 as the case may be. The whole scheme of the act can not abridged
by section 284 to device a separate path for a single shareholder to give him
a right to include the removal of the director in the agenda of the meeting,
a right which is well outside the whole scheme of the act providing for the way
in which the meetings must be organized. Which is the more
balanced view?- Hence the view taken by the Delhi high court
seems to be the correct view. It seems to be a more balanced view. If it is
held that even a single shareholder can move the resolution for removing a
director, it could lead to various unpractical and weird results (i) Frivolous and
malafide notices- Notice may be given by a single shareholder
just for the purpose of getting publicity. Or may be just to settle his
personal grudge towards a director he may give a notice which will cause
embarrassment to the victim director Imagine a situation where a person
holding a single share of reliance industries ltd. gives a notice to remove
Mr. Mukesh Ambani. Notice will be reduced to a farce where the shareholder
resort to it just to gain publicity and his act is not driven by concern
regarding the management of the company. For example in the case of HDFC Bank vs.
Suresh Chandra Parekh 9. The court absolved the company from circulating the notice
to all the members as the shareholder has made it a habit to give such
frivolous notices every year to remove the directors. (ii) Practical
hardships- Thousands of resolutions may be proposed by
single shareholders and the company will have no other option but to
circulate them to other members to carry out the mandate of section 190. Or
on the other hand a single shareholder may give the notice to remove all the
directors, as under section 284 a notice can be given to remove all the
directors at once as per the judgment of Supreme Court in LIC vs. Escorts
ltd. 10
such a notice can even result in a fall of the share prices of the company in
the markets, triggered by unclear, unpredictable and confusing state of
affairs regarding continuance of the directors in office. Substantiating the
reasoning- When Pedley’s case was cited in Gopal vyas’s case by the company, the court rejected it saying that it does not
have any bearing on the present case as the former was regarding the removal
of director while the later was regarding the appointment of the director. On
the same logic, Gopal vyas’s case should not have
been considered in the karnataka bank’s case as the latter was
regarding removal of director. Also, appointment and removal are two
different things, it can not be said that just because a director can be
appointed in a meeting in pursuance of the special notice given by one
shareholder, he can also be removed by the requisition of a single
shareholder. Further, the compliance with Section 188 will ensure the prima
facie validity of the resolution sought to be moved as coming together of
various shareholders will reduce the chances of the notice to be frivolous or
one backed by malafide motives. Conclusion- In Karnataka Banks case the court did not follow
the Pedley’s case because as per the judges subjecting Section 284 to section 188
will cause great hardship to the shareholders. But the fact is that it is
very rare that a single shareholder seeks the removal of a director with the
belief that he is fighting for a cause or in the interest of the company
rather very often it turns up to be a case of attention seeking stunts to
gain publicity. Hence the view taken by Delhi high court seems to be the
proper view and in light of the judgment an amendment is highly desirable to
put the matter beyond doubt. 1. Article by M L Bhakta, (2001) 44 CLA (
mag.) 76 Article by Apurv Kothari Faculty of Law,
Delhi University |
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