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
We all know the role of the
Directors in any Company and Board is collectively involved in the day-to-day
affairs of the Company. Through segregation and delegation depending upon the
size of the Company, the plan, the regulations in the Articles, the directors
in-fact run the Company subject to the provisions of the Companies Act, 1956
and excepting few decisions which should only be taken by the shareholders at
the Annual General Body Meeting (AGM) or Extraordinary General Body Meeting
(EAGM). Subject to the limitations in the provisions of the Companies Act,
1956, the regulations in the Articles of the Company and the SEBI guidelines and
regulations, normally, a Director either holds substantial number of shares in
the Company or he represents a group of shareholders and the practice is also
referred to as “Corporate Democracy”. In view of the role and the powers of the
Directors or the Board collectively, a decision taken for removal of a Director
leads to so much litigation very often. The problems with the removal of
Directors will often come in Private Companies, closely held Public Companies
or the family companies as is referred very often. The litigation surrounding
removal of directors too is very complicated to dealwith if the removal is
strongly opposed by the Director or by the group which he represents. In my
opinion, normally, the issue of removal of Director is agitated either before
the Civil Court or before the Company Law Board under section 397/398 of the
Companies Act, 1956. There can be lot of things prompting the AGM to remove a
director and in most of the cases; it reflects infighting among the
shareholders or the shareholder groups. In my opinion, even if one approaches
the Registrar of Companies (ROC) explaining as to how the removal is
procedurally incorrect, the Registrar concerned may insist the Director who has
been removed to approach the Court or the competent authority and get an order
that the removal is illegal. Thus, an aggrieved Director may be forced to
approach the Civil Court asking for a declaration that a particular resolution
of AGM in which he has been removed is illegal. In view of the fact that there is
no specific bar on the Civil Court in entertaining these kinds of corporate
litigation, the Civil Court is forced to entertain the litigation and should
give finding though it is criticized very often that the Civil Court lacks
expertise in deciding corporate disputes. But, in my opinion, a Civil Court may
not be able to look at the motives, issues of oppression etc. in a Civil Suit
challenging the removal of a Director. A Civil Court may look at the procedural
issues in removing the Director and may lay a special consideration on the
regulations in the Articles of the Company governing removal of Directors and
on the provisions of the Companies Act, 1956 dealing with the appointment and
removal of Directors. Without going into the merits and demerits in the
judgement taken in the AGM, the Civil Court can give a finding that the removal
is illegal if there exists a procedural lapse and may say that the removal is
valid if there is no procedural lapse. But, this is not the case when a
Director removed or the one group of shareholders approaches the Company Law
Board under section 397/398 of the Companies Act, 1956 alleging oppression and
mismanagement and challenging his removal from directorship. 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:
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.
Secondly, there should be
oppression and mismanagement for filing a petition under section 397/398 of the
Companies Act, 1956. There are so many judgements 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 judgements 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 judgements 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, infact, 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.
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. The Company Law Board may not decide to interfere with the removal
of a Director even if it finds some procedural lapse, and at the same, it may
say that the removal is not correct even if it is done in accordance with the
provisions of the Companies Act, 1956. This is a very complicated issue to
understand and to dealwith. Again, if one approaches the Civil Court
challenging the removal of a Director, then, the scope of granting other relief
and giving directions or interim directions to the Company from time to time
may be less, but, it is not the case with the powers of the Company Law Board
under section 397/398 of the Companies Act, 1956. There should not be any major
disputes between or among the shareholders in the Company, but, if there is a
dispute and the shareholders come to the Court or the Company Law Board, then,
there can be so many complications in the course.
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