The Hindu Business Line : Troublesome men for the top slots

STATE with reference to the relevant provisions of the Companies Act, 1956, whether the following persons can be appointed as director of a public company:

Mr A, who has huge personal liabilities far in excess of his assets and properties, has applied to the court for adjudicating him as an insolvent and such application is pending.

Section 274(1) of the Companies Act, 1956 lays down certain disqualifications for directors.

Clause (c) of sub-section (1) of Section 274 disqualifies a person who has applied to be adjudicated as an insolvent and his application is pending. Thus, Mr A cannot be appointed.

Mr B, who was caught red-handed in a shop lifting case two years ago, was convicted by a court and sentenced to imprisonment for a period of eight weeks.

Clause (d) of Section 274 disqualifies a person if he has been convicted by a court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months, and a period of five years has not elapsed from the date of expiry of the sentence.

In the given case, though the offence involves moral turpitude and Mr B has been imprisoned, since the imprisonment was for only eight weeks (that is, less than six months) the disqualification of clause (d) is not attracted.

Thus, `B' can be appointed as a director.

Mr C, a former bank executive, was convicted by a court eight years ago for embezzlement of funds and sentenced to imprisonment for one year.

Again, as per clause (d) of sub-section (1) of Section 274, Mr C is not disqualified since the said disqualification lasts for five years only from the expiry of the sentence.

Mr D is a director of DLT Ltd, which has not filed its annual returns pertaining to the annual general meetings (AGMs) held in the calendar years 2001, 2002 and 2003.

According to clause (g) of sub-section (1) of Section 274, a person who is already a director of a public company which, a) has not filed the annual accounts and annual returns for any continuous three financial years commencing on and after April 1, 1999; or

b) has failed to repay its deposit or interest thereon on due date, or redeem its debentures on due date or pay dividend and such failure continues for one year or more.

However, such person shall not be eligible to be appointed as a director of any other public company for a period of five years from the date on which such public company, in which he is a director, failed to file annual accounts and annual returns under sub-clause (A) or has failed to repay its deposit or interest thereon or redeem its debentures on due date or pay dividend referred to in sub-clause (B).

To be disqualified under sub-clause (A) of clause (g), the failure of the company should have been on both the counts, viz., filing of annual accounts as well as annual returns.

In the given case, failure being only with respect to filing of annual accounts, disqualification is not earned.

`Mr D' is, therefore, not rendered disqualified.

Removal of a director

MR SDR, a shareholder in JKP Ltd, holding 10 equity shares of Rs 10 each fully paid up wants to give a special notice to the company for removal of Mr EDM, a director of JKP without stating any reason in the notice.

State as per the provisions of the Companies Act and/or any decided case law whether Mr SDR is entitled to do so.

A company may, by ordinary resolution passed in general meeting of which special notice has been given, remove a director before the expiry of his term of office.

However, the special notice given by the member(s) must specify the reasons for removal of the director (Queen Kuries & Loans (P) Ltd vs Sheena Jose 1993).

In this case, it was held that the notice must disclose the grounds on which the director is proposed to be removed.

The disclosure of the ground for removal is a matter of substance and not of form because the directors concerned are entitled to make a representation in writing against their removal at the meeting.

The company is bound to send a copy of the representation to every member of the company to whom the notice of the meeting has been sent.

It is only after these steps are taken that the resolution can be passed.

Thus, Mr SDR is bound to state the reasons for removal of Mr EDM in the special notice to be given to the company. Else, the removal cannot be considered valid.

ii) Would your answer be different, if Mr EDM was a director appointed by the Central Government under Section 408 of the Companies Act?

Yes. A director appointed by the Central Government under Section 408 cannot be removed under Section 284.

iii) Explain the provisions of the Companies Act relating to removal of a director in case of receipt of an appropriate special notice by the company for this purpose.

In such a case, the company must forthwith send a copy thereof to the director concerned to enable him make a representation.

If he makes a representation in writing (not exceeding a reasonable length) and requests the company to notify it to the members, the company must, unless it is received by it too late for it to do so:

i) state the fact of the representation having been made in the notice of resolution given to members;

ii) send a copy of the representation to every member of the company to whom notice of the meeting is sent. If the representation is not sent as aforesaid, the company must at the instance of the director read it out at the meeting.

The director is also entitled to be heard on the resolution at the meeting.

The copy of the representation of the director sought to be removed need not be circulated nor the concerned director be allowed the right to have the representation read out in the general meeting (where the same was not circulated earlier because of late receipt), if the company or any other person claiming to be aggrieved, has made an application to the Company Law Board (CLB) to prevent such circulation or reading out on the ground that such circulation or reading out would amount to abuse of the right on the part of the director concerned to secure needless publicity for defamatory matters and the CLB, being satisfied, orders accordingly.

Under Section 284, the company is then required to pass a simple majority resolution for removal of the director.

Seizure of documents

THE Registrar of Companies, West Bengal, has received a complaint from a group of creditors of a company.

The complaint alleges that the directors of the company, to prevent the unearthing of their embezzlement of company's funds, are engaged in falsification and destruction of original accounting books and records.

The complaints urged the Registrar to seize the accounting books and records of the company so that the directors may not be able to tamper the same.

You are required to state the powers, if any, of the Registrar in this respect.

Section 234A provides that where, upon information in his possession or otherwise, the Registrar has reasonable ground to believe that books and papers of, or relating to, any company or other body corporate, or managing director or manager of such company or other body corporate may be destroyed, mutilated, altered, falsified or secreted, the Registrar may make an application to the Magistrate of the First Class or, as the case may be, the Presidency Magistrate having jurisdiction for an order for the seizure of such books and papers.

After considering the application and hearing the Registrar, if necessary, the Magistrate may, by order, authorise the Registrar:

to enter, with such assistance as may be required, the place or places where such books and papers are kept;

to search that place or those places in the manner specified in the order; and

to seize such books and papers as he considers necessary.

The Registrar shall return the books and papers seized under this section as soon as may be, and in any case not later than the thirtieth day, after such seizure, to the company or the other body corporate or, as the case may be, to the managing director or the manager or any other person, from whose custody or power they were seized and inform the Magistrate of such return.

However, the Registrar may, before returning such books and papers as aforesaid, take copies of, or extracts from them or place identification marks on them or any part thereof or deal with the same in such other manner as he considers necessary.

Search or seizure, as aforesaid, shall be carried out in accordance with the provisions of the Code of Criminal Procedure, 1973.

(Suggested answers to the May 2004 CA (Final) paper on corporate laws and secretarial practice.)

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