Question on Company Law – Sacking a Director

Background: XYZ Private Limited has two directors in the board. Director A and Director B. One CEO C. It has two members (subscribers of shares), they are CEO C and Director A who hold 97% and 3% of shares respectively. As you must have noticed Director B is a non-shareholding director. The question: Now the company (i.e., CEO C – 97% shareholder) wants to sack the director B because of anti-company activities. How do we do it?

Question/s & Constraints:

Scenario1: An EGOM should be called for this purpose. Per Companies Act Sec: 100(2)(a), member should requisition the board for the EGM. Now we shall assume that one of the two directors (B) is an adverse party hence will not respond, hence the Board of Directors will not respond positively or at least one will respond negatively or will simply ignore the requisition.

As per 100(4) if the board does not respond within 21 days the members shall call the EGOM and conduct it and pass the necessary resolutions including the one to sack one director as if it is conducted by directors themselves. But we don’t want to wait for that 21 days. Hence, can we just skip the 100(4) and move straight away to 100(5) that says members can conduct the EGM and attend to the business as if it is a board meeting?

The prescription of the statute is of sequential in nature, i.e., only if 100(4) does not elicit a response from the board, then move to 100(5). In any case, we will not be able to meet the conditions of Sec: 103 on Quorum as at any time we will have only one director even if hypothetically we are assuming that director B is agreeing for the board meeting. Since, board exists at the pleasure of members (majority shareholders) not vice versa can’t we just move to 100(5)?

Scenario 2: If we must follow the procedure of Sec: 169 on removal of directors, can one director send the special notice to the other? I think cannot? Because even for that we must call the board, and we know for sure that one director will not turn up and there will be a problem with quorum all the time. In the above-mentioned situation/s are we forced to wait for that 21 days, (which we don’t intend to) as we must sequentially follow 100(4) and then move to 100(5)? Can’t we just move to 100(5)? Because we already know the result of the action i.e., requisitioning the board for EGOM which is no response from one of the director. If a notice can just be issued under Sec: 169 for removal, which I think we cannot without calling the EGOM which is again not possible as we must wait for 21 days?

What do we do?

I spoke to at least 10 Chartered Accountants and Company Secretaries on this, nobody has given a clear-cut answer except for that ‘no we have to follow the process’.

Here is how I would solve this.

  1. First document the details about the director who has been engaging in anti-company activities along with evidences.
  2. Skip the step of requisitioning the board for an EGM (extraordinary general meeting).
  3. Since, the legal requirement is we should have a minimum of two directors in a private limited company, two resolutions should be passed. One to appoint that CEO as one of the director and the other sacking the director who was engaging in anti-Company activities.
  4. So, the EGM here is conducted by the members directly, not by the board.

Since board serves at the pleasure of shareholders (not vice versa), members are well with in their rights to skip the step that forces them to wait for 21 days, especially if members are looking for some immediate closure. Shareholders cannot be put in a disadvantageous position because of technical step.

Another way to do this is just pass one resolution in EGM electing C as a director and the reconstituted board may send a notice to adverse director under Section 169 Companies act.

What could be the possible consequences?

The Adverse director may go to Company Law Board (CLB), petitioning that the step of calling/requisitioning the board for a Extraordinary meeting was skipped and hence his removal should be declared illegal. This argument apparently will not hold, because our defense will be that the board is in adversity hence there is no justification to follow the rule when we already know the result for sure.

Advertisements
This entry was posted in Law, Uncategorized and tagged . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s