The Tata-Mistry tussle is seeing Tata Sons moving resolutions to remove directors including independent directors i.e Nusli Wadia and others from from boards of Tata group listed companies that form a part of the salt-to-steel conglomerate.
What holds out for Tatas going forward ?
This actions prompts an exploration of the removal of directors under the Companies Act.
As the precedent for this under the new Act is very limited, an exposition on the old Act would be a more fruitful exercise.
Section 284 of the Companies Act, 1956 follows Section 184 of the English Companies Act, 1948 and now corresponds to Sections 303 and 304 of the English Companies Act, 1985 and is adopted on the following recommendation of the Company Law Committee:
“In future, a director of the company, whether under an agreement or not and notwithstanding anything to the contrary in its articles would be removable by an ordinary resolution of which special notice has been given. The right proposed to be given to a director, who is likely to be affected by any such resolution, to make a representation to the company at the company’s expense will ensure the consideration of the pros and cons of any such resolution by the general body of shareholders, before a decision is taken by them to remove him. In our opinion, the general body of shareholders should have greater powers to remove a director with whom they are dissatisfied whether such director is under a contract of service or not."
Section 284 can be said to be the statutory recognition of shareholder’s democracy. The principle that in the management of the company shareholders should have the ultimate say is reflected by the provisions of this section.
While the shareholders have no power, apart from that given to them by the statute or Articles- which, in practice, does not amount to much – to intervene in the management of the company’s affairs, this section was designed to enable them to control the directors by removing them.
In Indian Company Law the balance of power is normally with the directors who by the articles and by virtue of Section 291 are authorised to exercise the general powers of the company and interference of the shareholders with the managerial activities of the directors is not encouraged by the articles or by statute. However Section 284 enables the shareholders to assert themselves against the directors, if need be, and makes it clear that ultimate control is in the hands of the members of the company.
It was held in Tarlok Chand Khanna vs Raj Kumar Kapoor that Section 284 is designed to enable the shareholders to control the directors by their removal. The provisions of Section 284 are in addition to any other power that may exist for removal of a director. Moreover, any provision in the company’s articles or any agreement between a director and the company by which the director is rendered irremovable by an ordinary resolution would be void as such provisions would be contrary to the Companies Act. Thus the Section intends to do away with arrangements by virtue of which directors are irremovable or removable only by extraordinary or special resolutions. Section 284 operates over an extensive field and applies to all directors subject to the following exceptions:
• It does not apply to a director appointed by the Central Government in pursuance of Section 408.
• It does not, in the case of a private company, authorise the removal of a director holding office for life on 1 April, 1952.
• It does apply to companies which have adopted the system of electing two-thirds of their directors by the principle of proportional representation.
It was held in Major General Shanta Shamsher vs Kamani Brothers that Section 284 does not affect the power of the Board of Directors to revoke the appointment of a managing or other director made by the Board. Later it was held in S. Varadrajan vs V. Venkateswara Solvent Extraction Private Limited that Section 284 would not be attracted when the Board of Directors seeks to remove a director from his managerial position.
Thus the judiciary has clearly laid down that Section 284 has nothing to do with the removal of a Director by the Board of Directors. However, under Section 283 a company can by its Articles vest the power of removal of a director in the Board of Directors and Section 284 would not adversely affect any such provision in the Articles.
Grounds for removal of director
The meaning and significance of the right of making representation against removal by the director concerned was explained in detail by the Bombay High Court in Escorts Ltd vs Union of India. The Court said that when a meeting is requisitioned by some shareholders for the purpose of removing a director, those particular shareholders 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 a representation to the shareholders about the matter. The right of representation will be an empty formality if the proposed action does not inform the director concerned of the grounds on which he is sought to be removed since he will not know what representation he should make.
The court held that a 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. Further, the notice of the meeting must be accompanied by a copy of the resolution and an explanatory statement. This is essential because without it the rest of the shareholders would be groping in the dark since they would not know why a director unanimously elected by them only some time ago and against whom there is no adverse report, is sought to be removed.
When a combination of shareholders is going to change the very composition of the company’s Board of Directors and thereby the future destiny of the company, the power of removal must be exercised in good faith in the interests of the company and not on account of other motivations. The court can if it finds the existence of improper motives refuse to compel the company to hold the requisitioned meeting.
However, this decision of the Bombay High Court was reversed by the Supreme Court of India in Life Insurance Corporation of India vs Escorts Ltd. The Court relied on various authorities for holding that a statement of reasons is not necessary to support a resolution for removal. A notice read as follows: ‘To remove (if deemed necessary) any of the present directors and to elect directors to fill any vacancy in the Board’ The Court held that notice to remove any of the present directors would justify the removal of all as ‘any’ would include ‘all’ directors.
The court also refused to look into the conduct of the Life Insurance Corporation in requisitioning a meeting in order to remove directors. The institution being a major shareholder has every right to look to the safety of its investments and for that purpose to consider whether the management is in proper hands. For this purpose, the Life Insurance Corporation cannot be equated with the state under Article 12 of the Constitution, but has to be considered on par with individual shareholders. When a notice proposing the resolution for removing a director under Section 284 is not filled in good faith, it being printed and carried gaps which needed filling, it was held that such notice was an abuse of statutory power. The company was not bound to place the notice before the general meeting.
Wadia, for instance, has been an independent director with the group since 1981. Tata will be hard-pressed to prove his incompetence before a court of law. Do we see better strategic handling or mere legalities as the Tata-Mistry tussle plays out going forward.
(The writer is a founder of Hammurabi & Solomon and is a visiting fellow with the Observer Research Foundation)
Updated Date: Nov 16, 2016 09:53 AM