Mr. Ravi Prakash Singh vs Venus Sugar Limited And Ors.
2007 Latest Caselaw 1264 Del

JUDGMENT

Sanjay Kishan Kaul, J.

1. The plaintiff, erstwhile director of defendant No. 1, has filed the present suit for declaration and permanent injunction seeking a decree whereby the removal of the plaintiff as director of defendant No. 1/company be restrained and it be declared that the plaintiff is a director of defendant No. 1 Company.

2. The plaintiff claims to be a businessman and an industrialist and states that he was a co-promoter and an original investor in the shares of defendant No. 1/company.

3. Defendant No. 1 is a public limited company within the meaning of Companies Act, 1956 ('the said Act' for short) incorporated on 16.01.1991 with the primary object of setting up of project for the manufacture of white crystal sugar. The certificate of commencement of business was obtained by the defendant No. 1/company on 13.05.1991. Defendant No. 2 is the Managing Director of the company and the other defendants except defendant No. 12 are the Directors of the defendant No. 1/company.

4. Defendant No. 1/company made an offer of public issue of equity shares vide prospectus dated 01.05.1992 in which the plaintiff is stated to be a part of the company's management. A part of the finances were obtained from UPSIDC, Kanpur. The plaint sets out the investments made by the various shareholders but it is not necessary to go into the details of the same as the scope of the suit in view of the relief claimed is limited. Suffice to say that apparently disputes arose between the plaintiff on the one hand and the management on the other. This resulted in a letter dated 11.06.1993 being issued to the plaintiff informing him that his nomination as Director by the co-promoter was being withdrawn and the plaintiff would cease to be a director with effect from 29.06.1993, the date on which Board Meeting of the Directors had to be held. It is the case of the plaintiff that such withdrawal of nomination is ultra vires and contrary to the provisions of Section 284 of the said Act read along with provisions of Sections 189 and 190. A resolution was passed thereafter on 29.06.1993 whereby the plaintiff was removed from the Board of Directors. Hence, the suit.

5. The suit has been resisted by the defendants, and inter alia, it is stated that the plaintiff was only a nominee of the co-promoters (defendant Nos. 2, 3 & 4) and the defendant No. 12/company. It is the stand of the defendants that they were within their rights to withdraw the nomination of the plaintiff as a nominee director of the co-promoters and the same is in accordance with the agreements entered into with UPSIDC and as incorporated in the Articles of Association of the Company. It is thus the case of the defendants that Section 284 of the said Act would not apply to the facts of the present case.

6. On the pleadings of the parties, issues were framed on 24.01.2000, which are as under:

1. Whether the removal of the plaintiff from the directorship of defendant No. 1 company is illegal, as alleged in the plaint? If so, to what effect?

2. If Issue No. 1 is proved in the affirmative, to what relief, if any, is the plaintiff entitled?

7. On the same date itself the parties agreed that no oral evidence would be required for deciding the issues and documents have already been admitted/denied. However, the matter was not heard as adjournments were requested from time to time. It was also found that original documents had not been filed and repeatedly time was given to file the original documents. Only one document was exhibited as Ex P-1 which is the attendance sheet of the Board Members present in the meeting held on 29.06.1993. At the stage when the matter was to be taken up for final hearing, the defendants suddenly realized that there are certain originals which would have to be proved and thus moved IA No. 4493/2006 to lead evidence of one witness Mr. M.P. Singh. This application was allowed by the Order dated 15.05.2006 and the affidavit filed along with the application of Mr. M.P. Singh was taken on record. The order itself records that the testimony of Sh. M.P. Singh is required to prove documents including the undertaking dated 16.09.1992 executed by the plaintiff (ExDW1/2), minutes of the meeting of the Board of Directors of defendant No. 1 held on 17.08.1991 (ExDW1/1) whereby the plaintiff was appointed as the nominee of co-promoters i.e. defendant Nos. 1,2 & 3, minutes of the meeting of board of directors held on 29.06.1993 (Ex DW1/3) and memorandum and articles of association of the defendant No. 1 (ExDW1/4). These documents were accordingly proved by affidavit of Mr. M.P. Singh who was cross examined by learned Counsel for plaintiff.

8. At the stage when the matter again came up for final hearing, it is the plaintiff who decided to file applications seeking to lead oral evidence. The applications were allowed by the order dated 28.09.2006 subject to costs. The costs were not deposited by the plaintiff and thus on 30.10.2006 it was noticed that suit would have to heard as it is without evidence of plaintiff. It is in these circumstances that the matter has now come up for final hearing. The suit has been on board for some time and was listed at serial No. 6 today (effective item No. 3). The matter was taken up on board in the pre lunch and also in the post lunch sessions, but none has cared to appear for the defendants. Learned Counsel for the plaintiff has thus alone rendered assistance to this Court. On hearing learned Counsel for the plaintiff, perusal of pleadings and documents and the law cited at Bar, the following findings on the issues are arrived at.

1. Whether the removal of the plaintiff from the directorship of defendant No. 1 company is illegal, as alleged in the plaint? If so, to what effect?

9. There is really issue No. 1 which has to be decided in the present suit. Issue No. 2 is a sequitur which would arise if the plaintiff succeeds in the first issue. The plea of learned Counsel for the plaintiff is that a perusal of the Minutes of the Meeting held on 17.08.1991 (Ex DW1/1) shows that the manner in which the plaintiff was appointed as the director. The relevant portion is extracted below:

Appointment of Directors on behalf of co-promoters

The Board considered the nominations of Sh. Ravi Prakash Singh, Shri Mangal Singh and Dr. Ishwar Singh as Directors on behalf of co-promoters. Welcoming its nominations, the following resolutions were unanimously passed:

Resolved that Sh. R.P. Singh, nominee of co promoters be and is hereby appointed as Director of the company liable to retire by rotation.

Resolved that Sh. Mangal Singh, nominee of co-promoters be and is hereby appointed as Director of the company liable to retire by rotation.

Resolved that Dr. Ishwar Singh, nominee of co-promoters be and is hereby appointed as Director of the company liable to retire by rotation.

The Board desired that necessary intimations be given to the Registrar of Companies in time.

10. It is the submission of the learned Counsel for the plaintiff that aforesaid shows that though the plaintiff was a nominee of the co-promoters, the actual appointment of the plaintiff was as a director of defendant No. 1/company and was liable to retire by rotation. Learned Counsel thus submits that the removal of the plaintiff could only be in accordance with provisions of Section 284 of the said Act. The relevant provisions of the said Act are reproduced as under:

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:

Provided that this sub-section shall not, in the case of a private company, authorise the removal of a director holding office for life on the 1st day of; April, 1952, whether or not he is subject to retirement under an age limit by virtue of the articles or otherwise:

Provided further that nothing contained in this sub-section shall apply where the company has availed itself of the option given to it under Section 265 to appoint not less than two-thirds of the total number of directors according to the principle of proportional representation.

(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.

11. Learned Counsel submits by reference to the aforesaid provisions that such removal, though possible by an ordinary resolution, could only arise in pursuance to a special notice required to be given fourteen days in advance and the removal can only be in a shareholders' meeting. The submission thus is that the Board of Directors meeting could not have removed the plaintiff.

12. Learned Counsel has also drawn the attention of this Court to provisions of Sections 189 and 190 of the said Act. Section 189 provides for what an ordinary and special resolution respectively are, which are to be passed in a prescribed manner in a General Meeting of the shareholders. Section 190 provides that where, by any provision contained in the said Act or in the articles, special notice is required of any resolution, 14 days advance notice of the Meeting is required to be given. Learned Counsel also submits that the plaintiff could have retired only by rotation in accordance with the provisions of the said Act which provide for retirement of Directors through rotation. Learned Counsel submits that there is a misconception in the mind of the Board of Directors that while passing the resolution for removal of the plaintiff, no shareholders meeting is liable to be held. This misconception is alleged to be based on the reading of the words 'nominee director. It is submitted that the said expression used in Section 284 of the said Act makes it abundantly clear that the same is in the context of the nominee director of the central government under Section 408 of the said Act.

13. Learned Counsel for the plaintiff has relied upon the judgment of learned Single Judge in Mr. Tarlok Chand Khanna and Anr. v. Mr. Raj Kumar Kapoor and Ors. 2nd (1982) I Delhi 156 where it has been observed in para 21 that even a person appointed as a life director or a permanent director by the Articles or by any agreement is, nevertheless, removeable by the company in a General Meeting and has no security of tenure of office. The only exceptions are the directors appointed by the Central Government under Section 408 of the said Act and life directors holding office on April 1, 1952. The only other exception are nominee directors of financial institutions with which the case was not concerned. It was held that since there was absence of notice, the Director could not have been removed. This case however would have no application to the given facts of the present case where the controversy is whether the Board of Directors could have removed the plaintiff as a Director based on the provisions of the Articles of Association.

14. The stand of the defendants as contained in the written statement shows that the reliance has been placed on the undertaking given by the plaintiff dated 16.09.1992 (ExDW1/2) relevant portion of the undertaking is as under:

That in terms of Clause 6.3 of the said promoters/financial collaboration agreement

5. That in terms of Clause 6.3 of the said Promotors/Financial Collaboration agreement and supplementary Promotors/ Financial Collaboration agreement, before the allotment of the shares is made, the co-promotors shall obtain suitable letter of agreement/undertaking from such persons agreeing to be bound by the terms and conditions of the said agreement. Hence this undertaking is being executed.

6. That Sh. Ravi Prakash Singh, party of the second part of this undertaking has gone through the terms and conditions of the aforesaid agreements and has agreed to ratify and be bound by terms and conditions of the promotors/ financial collaboration agreement and supplementary promotors/financial collaboration agreement.

7. That Sh. Ravi Prakash Singh, nominee of the co-promotors hereby undertakes to always exercise his voting rights in favor of the co promotors and will do all such acts and deeds as are required to be done by the co-promotors in terms of the aforesaid agreements and nominee of the co promotors will never exercise their voting rights against the co promotors.

15. It is thus the plea of the defendants that the plaintiff was only a nominee of the co-promoters and thus could be withdrawn at any time without the requirement of going through a shareholders meeting. These aspects in fact find discussion even in the minutes of the meeting dated 29.06.1993, Ex DW1/3 where the plaintiff was removed. The plaintiff was permitted to be accompanied by a person familiar with legal procedure who made submissions on behalf of the plaintiff. All the pleas of the plaintiff in this behalf were in fact noted and a decision was thereafter taken that in terms of the Articles, there is no requirement of a Meeting of the shareholders. The Minutes itself record the pleas as advanced on behalf of the plaintiff.

16. In my considered view, there can be no doubt that the provisions of Section 284 of the said Act have to be adhered to for purposes of removal of a Director in terms thereof. This is a mandate of the Act. This mandate would require an advance notice to be given and a shareholders meeting held where an ordinary resolution should be passed. In the present case the notice dated 11.06.1993 was for the Board Meeting to held on 29.06.1993 and thus there was an advance notice of fourteen days. However the notice was for a meeting of the Board of Directors and not for a shareholders meeting. The question thus arises as to whether a shareholders meeting was necessary to remove the plaintiff or could the Board of Directors have removed the plaintiff. The scope and effect of Section 284 of the said Act form part of the discussion in a Division Bench Judgment of the Allahabad High Court in A.K. Home Chaudhary v. National Textile Corporation U.P. Ltd 1948 (48) Indian Factories and Labour Reports The relevant portion at page 101 is extracted as under:

Learned Counsel for the petitioner then urged that the petitioner being a Director of the Government company could be removed only in accordance with the procedure laid down by Section 284 of the Companies Act, 1956. The Board of Directors had no authority to remove the petitioner who was a Director of the company. Section 284 lays down that a company may, by ordinary resolution to remove a director. On receipt of the notice of resolution to remove a director, the company shall forthwith send a copy thereof to the director concerned, and if he makes representation to the company, the same may be placed before the committee of the company for consideration. It was urged that the procedure prescribed by Section 284, no doubt, provides procedure for removal of a director of a company by ordinary resolution at a meeting of the shareholders of the company. But the selection is not exhaustive. A director may cease to hold office by retirement, dismissal, removal, or by vacating his office voluntarily. He may be removed, by the Board of Directors or share holders at a meeting of the company. Section 284 merely provides for removal of a director by share holders and prescribed procedure for the same, it does not prohibit removal of a director otherwise than in accordance with Section 284. Sub-section 7(b) of Section 284 lays down that nothing in the section shall be taken as derogating from any power to remove a director which may exist apart from this section. The section itself therefore contemplates removal of a director in addition to the provisions contained in the Section. Thus where the Articles of Association confer powers on the Board of Directors to remove the Managing Director or other directors, such power is not affected by the provisions of Section 284.

Article 84 of the Memorandum and Articles of Association of National Textile Corporation (Uttar Pradesh) Limited provides for constitution of Directors. Article 85 makes provision for appointment of Chairman cum Managing Director and other directors. Article 85(d) provides that Chairman cum Managing Director and the Directors shall be entitled to be appointed whole time Directors. Article 86(c) provides that the Chairman cum Managing Director and the Directors shall have the power to remove any whole time Director appointed in accordance with Article 85(d) at any time, in their absolute discretion. Thus, a Director appointed under the Articles of Association by the Board of Directors is liable to be removed at any time. The petitioner was appointed a whole time Director under Article 85(d) and his services have been terminated by the Board of Directors in exercise of their powers under Article 86(c). The Articles of Association do not place any fetter on the power of the Board of Directors to remove a Director from service. The powers of the Board of Directors with regard to removal of Director remains unaffected by Article 284 of the Companies Act. The impugned order of termination, therefore, is not violative of Section 284 of the Companies Act.

17. In view of the aforesaid, it is not in doubt that though there is a mandate contained under Section 284 of the said Act that is not the only methodology for removing a Director. It is noted in the judgment that there may be eventualities like retirement, dismissal, removal or vacation of office voluntarily. The present case is one of removal of the plaintiff. The judgment makes it clear that where Articles of Association confer power on the Board of Directors to remove a director, such power is not affected by the provisions of Section 284 of the said Act. I am in full agreement with this view. The Articles of Association are in the nature of an agreement between the shareholders who are the joint owners of the company. If some specific methodology is devised by consent, nothing precludes the members/shareholders from doing so. The question to be considered is whether the present Articles of Association do provide for such a procedure.

18. The Memorandum and Articles of Association have been exhibited as DW1/4. The issue of Directors is discussed from Article 110 onwards. The relevant Articles are the following:

112(a) Until otherwise determined by the UPSIDC and co promotors, the Board of Directors of the Company shall consist of nine directors in addition to the directors who may be appointed pursuant to or under any agreement with debenture holders or other financial institutions giving them right to appoint director (s) on the Board. Out of nine directors, the UPSIDC shall be represented by three directors including the Chairman and the Co promotors shall be represented by six directors including the Managing Director, out of these six directors to be nominated by the co promotors, the number of non rotational directors shall not exceed three. The representation of the UPSIDC and the co promotors on the Board of the Company shall be such as to ensure the proportion stipulated in this clause.

h) UPSIDC and the Co promotor shall have right to remove/withdraw their respective nominees on the Board of Directors. Similarly, they will have a right to provide substitutes thereof.

19. Article 112(a) of the Articles of Association provides for strength of the Board of Directors and who has to make the appointment of the Directors. It provides for six directors to be nominated by co promoters out of which the number of non rotational directors shall not exceed three. It is not in dispute that the plaintiff is a rotational director. Article 112(h) provides that both UPSIDC and co-promoters shall have the right to remove or withdraw their nominees from the Board of Directors and further have a right to provide substitutes thereof. It is in furtherance of this power that the co-promoters have exercised their rights in the present case and sought to withdraw the plaintiff as a director nominated by them. I am thus of the considered view that the co promotors were well within their rights to have issued the letter dated 11.06.1993 whereby they sought to withdraw the nomination of the plaintiff as director of the co promoters. Such nomination is not in the realm of nomination by the Central Government under Section 408 of the said Act but the exception to Section 284 of the said Act would also arise where articles provide to the contrary. The present case is one where there is such provision in the Articles. I am thus of the considered view that the discussion resulting in the decision taken on 29.06.1993 whereby the plaintiff was removed from Board of Directors cannot be faulted. The issue is answered against the plaintiff.

2. If Issue No. 1 is proved in the affirmative, to what relief, if any, is the plaintiff entitled?

20. Since issue No. 1 is answered against the plaintiff, there is no question of any relief or consequential benefit to the plaintiff. It may be further noticed that since the institution of the suit almost fourteen years have passed and in any case the plaintiff would retired by rotation in August, 1994.

The issue is answered accordingly.

Relief

21. In view of the findings arrived on the aforesaid issues, the suit of the plaintiff is dismissed.

22. I am not inclined to grant costs to the defendants for the reason that they have provided no assistance to the Court for the final adjudication of this matter.