Ozg Sarfaesi / DRT Lawyer
Ahmedabad | Pune |
Kolkata | Bangalore | Delhi | Mumbai
VoIP Text / Phone
# 09811415837-61-72-84-92-94
Website: http://sarfaesi.ozg.in
Email: debt@liaisoning.com
As the shareholders of a Company
can not meet so often to take decisions on day-to-day functions of the Company,
directors are elected by the shareholders in accordance with the provisions of
the Companies Act, 1956. Ultimate control over the directors rests with the
shareholders and shareholders can remove a director in the General Body Meeting
in accordance with the regulations in the Articles and the provisions of the
Act. The role and responsibilities of directors require concentration in
respect of largely held Public Limited Companies in view of the interests of
various shareholders and the public interest. However, when it comes to the
issue of directorship in closely held companies, it normally depends upon the
agreement or understanding between or among the shareholders or groups. Though,
certain companies are run like proprietaryship concerns and partnership firms,
Company is a separate juristic person enjoying privileges as per law. In
reality, directors play a very big role in the functioning and success of any
company and the shareholders may not concentrate much on the business issues
and the day-to-day affairs of the Company. It is true in case of largely held
Public Limited Companies. In view of the powers conferred on directors and
realities of functioning of any Company, shareholding groups or the
shareholders always tries to ensure that their people are elected or appointed
as directors in the Company. When the trust among directors or the shareholding
groups is lost, then, the disputes in the Company will normally get exposed
through appointment or removal of directors. Ignoring the understanding, a Form
may be uploaded with the MCA as if somebody has been appointed as Director
though the procedure for appointment is not followed in reality. Some director
may be removed or a Form can be uploaded with the MCA claiming that a
particular Director has retired voluntary though that was not the factual
position. These disputes over appointment and removal of directors force a substantial
shareholding group to approach the Court of Law or the Company Law Board under
section 397/398 of Companies Act, 1956. In view of the complications, the
Company Law Board endeavour to settle the dispute among the warring groups in
the interests of the Company and only when the reconcilement is impossible, the
Board will pass such orders under section 397/398 and section 402 in order to
put an end to the matters complained of and in order to regulate the affairs of
the Company.
Responsibilities of Directors:
Conceptually, directors play a
very crucial role in any Company and he is burdened with so many
responsibilities. Dealing with the responsibility of Directors, the Hon’ble
Supreme Court of India in M/s. Dale & Carrington Invt. (P) Ltd. &
Another Vs. P.K. Prathapan & Others, 2004 (7) Scale 584, 2005 AIR (SC)
1624, 2004 (122) CC 161, 2004 AIR(SCW) 5143, was pleased to observe as follows:
“16. At this stage it may be
appropriate to consider the legal position of Directors of companies registered
under the Companies Act. A company is a juristic person and it acts through its
Directors who are collectively referred to as the Board of Directors. An
individual Director has no power to act on behalf of a company of which he is a
Director unless by some resolution of the Board of Directors of the Company
specific power is given to him/her. Whatever decisions are taken regarding
running the affairs of the company, they are taken by the Board of Directors.
The Directors of companies have been variously described as agents, trustees or
representatives, but one thing is certain that the Directors act, on behalf of
a company in a fiduciary capacity and their acts and deeds have to be exercised
for the benefit of the company. They are agents of the company to the extent
they have been authorized to perform certain acts on behalf of the company. In
a limited sense they are also trustees for the shareholders of the company. To
the extent the power of the Directors are delineated in the Memorandum and
Articles of Association of the company, the Directors are bound to act
accordingly. As agents of the company they must act within the scope of their
authority and must disclose that they are acting on behalf of the company. The
fiduciary capacity within which the Directors have to act enjoins upon them a
duty to act on behalf of a company with utmost good faith, utmost care and
skill and due diligence and in the interest of the company they represent. They
have a duty to make full and honest disclose to the shareholders regarding all
important matters relating to the company.”
Commercial judgment is not
interfered:
If the commercial wisdom of the
Directors is interfered at each stage, then, the Directors may not be able to
discharge their functions effectively in the interests of the Company. It is
true that the illegal exercise of power by the Directors can be questioned,
but, a care is normally taken when it comes to making a judgment on the
Directors’ judgment in the Company. Emphasizing at the commercial wisdom of directors
and the need of being careful when it comes interfering with the collective and
commercial wisdom of Directors in any Company, the Hon’ble Kerala High Court in
Cochin Malabar Estates And Industries Ltd. And Anr. vs P.V. Abdul Khader And
Anr. 2003 114 CompCas 777 Ker: 2003 45 SCL 170 Ker, was pleased to observe as
follows:
“42. The company judge would
normally start with the presumption that the directors are acting in the best
interest of the company since they have been entrusted with the task of managing
the company by the general body. The judges are ill-equipped to make business
judgments. The court cannot as a rule adjudicate upon the commercial judgment
of the board of directors. If they act prejudicial to the interest of a
minority shareholder there is ample provision in the Companies Act to redress
their grievance. A public limited company will have thousands of shareholders
each will have his own interests. Their views can be voiced at the annual
general meeting or to move the Company Law Board or the Central Government on
Company Affairs if situation warranted. The company judge is not expected to
resolve the dispute raised by the shareholders and substitute his wisdom for
that of the board of directors. In Kanika Mukherjee v. Rameshwar Dayal Dubey
[1966] 1 Comp LJ 65 a Division Bench of the Calcutta High Court held that where
the affairs of a company were manipulated as to deprive a shareholder of his
sizable amount of rights shares, the remedy open to him is before the Company
Law Board and not before the High Court. The company court would not as a
general rule interfere with internal management of a company. It is for the
board of directors to decide the manner in which the affairs of the company are
to be carried on. Courts determine questions of law and not questions of
business management. The company court shall not interfere with the lawful
decision of the board of directors of a company. Even a commercial misjudgment
would not amount to oppression or mismanagement. The board of directors may
err, every error cannot be a ground for action and the company court is not a
correctional court for all errors. A shareholder has to yield to majority rule
and the decision of the board of directors who are also invariably be
shareholders. A shareholder cannot come to the company court with the fanciful
idea that he could move the machinery of the company court to set right what he
thinks correct and what the board of directors does is wrong. The shareholder
if could procure the aid of the court in each and every action taken by the
board of directors it would lead to endless litigation and pin down the company
within the four walls of a company court. The company court should shut its
doors to them and deny entry.”
Even Permanent Director referred
in Articles can be removed:
Many family owned businesses or
the proprietaryship concerns were converted into Companies and when these
conversion takes place, there can be specific regulation in the articles about
the appointment of directors and certain persons are even named in the Articles
as the Permanent Directors at times. In all these cases, unless the Competent
Court feel it appropriate to keep some one in the Board in the interests of the
shareholders or the Company, the shareholders in fact controls the directors
and decide the issues of appointment and removals. There can be exceptions in
law like a director appointed by the Central Government or nominee directors
appointed by Public Financial Institutions. In many cases, where a permanent
director named in the Articles is removed, it will lead to litigation. The
shareholders in the closely held companies or the family companies lay emphasis
on the principles of equity and agreed understandings rather the concept of
company law and the provisions governing the functioning of Companies.
Dealing with the issue of removal
of permanent director, the Hon’ble Delhi High Court, in Tarlok Chand Khanna And
Another vs Raj Kumar Kapoor And Others, 1983 54 CompCas 12 Delhi, ILR 1982
Delhi 156, was pleased to observe as follows:
“23. The question still remains,
if Khanna, a permanent director of the company, could have been removed by the
company in a general meeting in spite of the provision in the articles. If
neither of the two meetings were valid, because Khanna had no notice of these,
even though he was intended to be removed from the board, his removal is bad in
law irrespective of the way one looks at the power of the company in a general
meeting to remove a permanent director, who is appointed as such by name in the
articles. I would, however, consider the question since was raised. No doubt,
Khanna was a permanent director named in art. 10 to hold office for life. In
terms of art. 14, he also had a right during his life time to nominate his
successor on the board in the event of his death. He could, nevertheless, be
removed under s. 284 of the Act. Section 284 is based on s. 184 of the English
Act and applies to all types of companies, public and private, and the only
exceptions are those that are built into the section itself. A person appointed
as a life director by the articles or by any agreement is, nevertheless,
removable by the company in general meeting and has no security of tenure in
office. While the shareholders have no power, apart from that given in the
statute or the articles, to intervene in the management of the company's
affairs, this section was designed to enable them to control the directors by
their removal. The only exceptions are the directors appointed by the Central
Govt. under s. 408, and life directors holding office on April 1, 1952. The
only other exceptions are nominee directors of financial institutions, with
which we are not concerned. No doubt, art. 14 empowers a permanent director to
nominate a director to take his place after his death, but even that does not
save the tenure from the operation of s. 284. True, s. 184 of the English Act
specifically exclude the operation of articles which s. 284 does not, but that
was not necessary in view of the scheme of the Indian Act, because s. 9 of the act
provides that the provisions of the Act would have effect, notwithstanding
anything to the contrary contained in the articles of the company. No further
provisions for exclusion of provisions in the articles to the contrary was
necessary. Khanna could have, therefore, been removed, if the requirements of
s. 284 and of a valid meeting had been satisfied. This was, however, of no
avail; because as observed earlier, the proceedings of the meetings which led
to removal were invalid the absence of notice to Khanna either of the proposed
motion, or of the proposed meeting of the Board and the extraordinary general
meeting of the company. The effect, therefore, is that Khanna continues to be a
permanent director notwithstanding his purported removal from the Board.”
Constant infighting provides
jurisdiction to CLB under section 397/398:
If the directors keep on
fighting, then, the interests of the shareholders or the Company will be at
stake. When the disputes become irreconcilable, the litigation comes to Court
and the aggrieved director or his group can either approach a Civil Court,
Company Court on just and equitable clause or can even approach the Company Law
Board under section 397/398 of the Companies Act, 1956. If the director or his
group is qualified under section 399 of the Act, normally the Company Court may
feel that the issues are to be settled by the Company Law Board under section
397/398 of the Companies Act, 1956. There should be oppression and
mismanagement by a group of shareholders against other for approaching the CLB
under section 397/398 of the Companies Act, 1956. But, the constant infighting
too provides jurisdiction to the CLB to look into the disputes if a petition is
filed. Dealing with the issue of constant infighting, the Delhi High Court in
Chander Krishan Gupta vs Pannalal Girdhari Lal Pvt. Ltd. And Ors, 1984 55 Comp
Cas 702 Delhi, 1982 (3) DRJ 295, was pleased to observe that:
“(10) Section 398 has two facts.
The first is that positive acts are done by the management which results in
prejudice being caused to the company. Secondly section 398 may be attracted
even where no action at all is taken by the management and such non action
results in prejudice being caused to the company The management of the company
has miserably failed in protecting the Company's records and this failure
results in prejudice being caused to the company. Moreover, the constant fight
amongst the directors who were also the shareholders of the company had
certainly adverse effect on the conduct of the company's business with the
result that the company started incurring losses. To my mind, therefore, this
by itself would justify appropriate orders being passed under section 398 of
the Act.”
Directors’ dispute resolution
would be complicated:
When there exist serious disputes
between or among directors or their groups, dispute resolution is not easy and
its complicated exercise. If the issues of directorship are to be decided by
the CLB under section 397/398 of Companies Act, 1956, the CLB may consider plethora
of issues while passing appropriate orders and the CLB is normally driven by
the object that it should put an end to the matters complained of and
regulating the affairs of the Company. CLB may not look into the procedural
irregularities at times in view of other facts and may look into the
technicalities strictly at times. Despite the prevalent majority rule, the CLB
may appoint someone as director even against the wish and will of majority
shareholders in the Company. In view of the fact that actual power is exercised
by the Directors in any Company, a dispute among shareholders will have an
inevitable reference to the action or inaction of the directors of the Company.
Ozg Sarfaesi / DRT Lawyer
Ahmedabad | Pune |
Kolkata | Bangalore | Delhi | Mumbai
VoIP Text / Phone
# 09811415837-61-72-84-92-94
Website: http://sarfaesi.ozg.in
Email: debt@liaisoning.com
