Provision for the Removal of Company Directors – (Companies Act, 1956)

(iii) The Company Law Board under section 402.

(i) Removal by the Shareholders:

According to section 284, “A company may, by ordinary resolution, remove a director before the expiry of his period of office.” Special notice of at least 14 days is required to be given for moving a resolution to remove a director.

On receipt of notice of a resolution to remove a director, the company shall forthwith send a copy thereof to the director concerned. The director shall be entitled to be heard on the resolution for his removal at the meeting.

On request of the director, the company shall send a copy of any representation made by the director in writing thereon to each of its members. In case the copies of the representation could not be sent to the members because it was received too late, the director concerned may require it to be read out at the meeting.

However, Central Government may not allow the representation to be sent out or read to the members if on an application of the company or any member, the Government is satisfied that the rights conferred by law shall be abused by the director concerned in securing needless publicity for the defamatory matter.

The vacancy caused by the removal of a director may be filled at the same meeting in which the removal takes place provided an earlier special notice to this effect has been given to the members together with the removal notice.

The person so appointed will hold office up to the date to which his predecessor would have held it, had he not been removed. If the vacancy is not filled at the meeting, it may be filled by the Board as a casual vacancy.

However, the shareholders cannot remove the following directors:

(i) A director appointed by the Central Government under section 408 for the prevention of oppression and mismanagement.

(ii) A director holding office for life on the 1st day of April 1952, in the case of private company.

(iii) A director appointed under the system of proportional representation adopted by the company under section 265.

(iv) A director appointed by the Financial Institution.

(ii) Removal by the Central Government:

Central Government has the power (under Sec. 388B, 388C, 388D, and 388E) to remove directors of a company from office on the recommendations of the Company Law Board (Tribunal w.e.f. its constitution).

The case of any director or other managerial personnel may be referred by the Central Government to the Company Law Board (Tribunal) for enquiry, where the Central Government is convinced of the existence of any of the following circumstances:

(a) Such person is or has been guilty of fraud, misfeasance, persistent negligence or default in carrying out his obligation and functions under the law, or breach of trust; or

(b) The business of the company is not or has not been conducted and managed by such person in accordance with sound business principles or prudent commercial practices; or

(c) The company is or has been conducted and managed by such person in a manner which is likely to cause, or has caused serious injury or damage to the interest of the trade, industry or business to which such company pertains; or

(d) The business of the company is or has been conducted and managed by such person with intent to defraud its creditors, members or any other persons or otherwise for a fraudulent or unlawful purpose or in a manner prejudicial to public interest.

After the hearing of the case, the Company Law Board (Tribunal) shall record its findings and forward it to the Central Government. If the Company Law Board has declared a person unfit to occupy any office connected with the conduct and management of the company, the Central Government shall remove such person from office.

Such person shall not be entitled to hold office of a director or any other office connected with the management of the affairs of any company during a period of 5 years from the date of the order of removal.

(iii) Removal by Company Law Board:

Where an application is made to the Company Law Board (Tribunal after it is formed) under section 397 and 398 against oppression and mismanagement of a company’s affairs, the Company Law Board may, if satisfied, order for the termination or setting aside of an agreement which the company might have made with its directors (Sec. 402).

The effect of such order will be removal of such director or directors from his or their office. Such a director (including managing director) shall not be entitled to serve as a manager, managing director or director of any company without the sanction of the Company Law Board for a period of 5 years from the date of the Company Law Board’s order terminating or setting aside his contract with the company. He shall also not be entitled to claim any sort of compensation from the company for the loss of office (Sec. 407).