Hi everybody............
Can a member send special notice to appoint a new auditor in place of retiring auditor before the helding of Board meeting to convene AGM?...
Ca Anand Dubey
(Chartered Accountant)
(1676 Points)
Replied 03 May 2009
Notice of AGM is given by Board and appointment of auditor is approved in AGM, however member holding more than 10% equity can call for EGM .
Gagan Jain
(CA final Student)
(35 Points)
Replied 03 May 2009
sir, i want to know that...
for example:----- Board meeting is to be held on 1st September 2009. in this meeting Board will send notice of AGM. AGM to be held on 29th September 2009..but a member of company sent a special notice under section 225 to appoint a new person in place of retiring auditor on 23rd August 2009.. whether a member can do so?...
Ca Anand Dubey
(Chartered Accountant)
(1676 Points)
Replied 03 May 2009
Dear gagan, the following reference may help you:-
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…..
(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.
Notice moved by a single shareholder, not accepted by the company-
In order to prevent the embarrassment caused by the frivolous notices to remove the director, given by a single shareholder, the companies refuse to circulate the notice to other members (as required by section 284) terming the notice as invalid for non compliance of section 188. Section 188 requires a certain number of shareholders to move a shareholders resolution. The relevant part of the provision is produced hereunder-
188. Circulation of members’ resolutions
(2) The number of members necessary for a requisition under sub-section (1) shall be-
(a) such number of members as represent not less than one-twentieth of the total voting power of all the members having at the date of the requisition a right to vote on the resolution or business to which the requisition relates; or
(b) not less than one hundred members having the right aforesaid and holding shares in the company on which there has been paid-up an aggregate sum of not less than one lakh of rupees in all.
On the other hand the shareholder considered it their right to move a notice under section 284 to remove a director as it nowhere states that it is subject to section 188. This resulted into litigations between the shareholder and the companies’ management. Sometime in mid eighties, one person who held shares in various large companies though in small numbers started giving notices under section 284 to remove the directors. His victims included big names like Shri NA Palkhiwala, Shri Aditya Birla, Shri Y.H.Malegam; this attempt was obviously to gain publicity and to cause undue harassment and embarrassment to the company’s management.1
The case laws and the resulting controversy-
The high courts are divided on the issue that weather section 284 gives the right to a single shareholder to pass a resolution for removal of director or weather compliance to sec 188 is required wherein a minimum number of shareholders are required to give the notice. On one hand there is Calcutta and Karnataka high courts upholding the right of a single shareholder and on the other hand is Delhi high court which rules that section 284 must be read with section 188 because holding the contrary will result in great hardships and also embarrassment to the company’s management. A decision of the Chancelory Division of England which was cited in the Delhi high courts case also held the same.
Detail analysis of the case laws-
Dealing first with the Calcutta and Karnataka high court, in the case of Gopal Vyas vs. Sinclair Hotels and Transportations ltd.2 the matter related to a special notice in respect of appointment of a person other than retiring director under Section 257. This provision is similar to the Section 284 in the sense that it also does not provide clearly weather a single shareholder has the right to give the special notice for the appointment of a person other than the retiring director. The court opined that section 257 is a ‘self contained’ provision and do not require section 188 to be complied with. Both the sections cover different fields and there is no scope for reading any other qualification in it which the legislature in its wisdom does not think is necessary to incorporate.3 In the nutshell the court held that section 257 is a specific provision giving a right to an individual member to give notice there under.
The above mentioned case was cited and followed in the case of Karnataka bank vs. AB Datar 4 in which the Karnataka high court has held that there is nothing in Section 284 which insist on compliance with the provision of Section 188(2) and the right to give the special notice to the company to include in the agenda of the next meeting, the issue of removal of the director in pursuance of a simple resolution, is available to any shareholder. And even if the article of association provides for the compliance of section 188 it can not take away the right from a shareholder in pursuance of Section 9 which gives the companies act an overriding effect on the articles of association.5
The same high court in the case of Prakash Roadlines vs. Vijay Kumar Narang 6 has reiterated its ratio of Karnataka Banks case and held that the right to move a resolution is a inherent right of the shareholder and the right to move a resolution to elect or remove a director is a individual right which is independent of the requirement of Section 188.
Before coming to the cases which held that Section 284 has to be read with Section 188, it is necessary to look at Section 190 which deals with special notice, and is the provision on which the shareholders have based their contentions in the below mentioned two case laws. Section 190 provides that
190. Resolutions requiring special notice
(1) Where, by any provision contained in this Act or in the articles, special notice is required of any resolution…
[(2) The company shall, immediately after the notice of the intention to move any such resolution has been received by it, give its members notice of the resolution in the same manner as it gives notice of the meeting, or if that is not practicable, shall give them notice thereof, either by advertisement in a newspaper having an appropriate circulation or in any other mode allowed by the articles, not less than seven days before the meeting.]
In the case of Pedley vs. Inland Waterways Association ltd.7 the shareholder contended that as the special notice for the specific purpose referred to in Section 284 (for the sake of understanding the reference given here is of the corresponding provision in the Indian act) has been served on the company, it is incumbent upon the company to give its members the notice of the resolution as required by Section 190(2). The court negatived the contention and held that Section 190 is a protective and not an enabling provision; it gives the right to all the members to receive the notice of the resolution of which the special notice has been duly given. But it does not give the right to the single shareholder to have his resolution included in the agenda. Further the court said that Section 190 can not be exercised by a shareholder without complying to Section 188 (dealt with in detail in the next case). Therefore as per this decision a special notice under Section 190 requires that the procedure under Section 188 must be followed, which means a single shareholder (without coming up to the specified figure of the voting power as given in Section 188) can not give a special notice to remove a director under Section 284.
The Pedley’s case was cited in the case of Amar nath Malhotra vs. MCS Ltd.8 the similar contention as taken by the shareholder in the Pedley’s case was taken in the matter of removal of an auditor under Section 225 which also requires a special notice. The Delhi high court said that resolutions which require special notice do not cease to be a resolution as contemplated by Section 188, special notice is required for the resolution which are relatively more important and it will be incongruous to hold that in the matters which are less important Section 188 has to be complied with but in matters of relatively greater importance there is no such requirement. Hence a single shareholder can not move a resolution proposing the removal of an auditor.
Settling the controversy-
There is a sharp cleavage of opinion among the high courts wherein divergent views are taken by the high courts and their ruling results in two different extreme positions. The matter has not yet put to rest as the matter has not reached the Supreme Court hence there is no authoritative pronouncement on the subject. In order to devise a solution to the problem, regard must be had to the “scheme of the act with respect to organization of the meetings.”
The only two shareholder’s meetings in which a general resolution can be passed to remove a director are the annual general meeting (AGM) and extraordinary general meeting (EGM). They require compliance to section 188 and section 169 respectively. Section 169 like section 188 also requires a specific number of shareholders to give a notice for moving a resolution in the upcoming EGM.
169. CALLING OF EXTRAORDINARY GENERAL MEETING ON REQUISITION.
(4) The number of members entitled to requisition a meeting in regard to any matter shall be –
(a) in the case of a company having a share capital, such number of them as hold at the date of the deposit of the requisition, not less than one-tenth of such of the paid-up capital of the company as at that date carries the right of voting in regard to that matter;
(b) in the case of a company not having a share capital, such number of them as have at the date of deposit of the requisition not less than one-tenth of the total voting power of all the members having at the said date a right to vote in regard to that matter.
Section 284 provides for the removal of director in a shareholders meeting by passing a general resolution of which a special notice has been given. Hence, logically the removal can take place only in an EGM or an AGM, and for a requisition the shareholders will have to comply either with section 169 read with section 190 or section 188 read with section 190 as the case may be. The whole scheme of the act can not abridged by section 284 to device a separate path for a single shareholder to give him a right to include the removal of the director in the agenda of the meeting, a right which is well outside the whole scheme of the act providing for the way in which the meetings must be organized.
Which is the more balanced view?-
Hence the view taken by the Delhi high court seems to be the correct view. It seems to be a more balanced view. If it is held that even a single shareholder can move the resolution for removing a director, it could lead to various unpractical and weird results
(i) Frivolous and malafide notices-
Notice may be given by a single shareholder just for the purpose of getting publicity. Or may be just to settle his personal grudge towards a director he may give a notice which will cause embarrassment to the victim director Imagine a situation where a person holding a single share of reliance industries ltd. gives a notice to remove Mr. Mukesh Ambani. Notice will be reduced to a farce where the shareholder resort to it just to gain publicity and his act is not driven by concern regarding the management of the company. For example in the case of HDFC Bank vs. Suresh Chandra Parekh 9. The court absolved the company from circulating the notice to all the members as the shareholder has made it a habit to give such frivolous notices every year to remove the directors.
(ii) Practical hardships-
Thousands of resolutions may be proposed by single shareholders and the company will have no other option but to circulate them to other members to carry out the mandate of section 190. Or on the other hand a single shareholder may give the notice to remove all the directors, as under section 284 a notice can be given to remove all the directors at once as per the judgment of Supreme Court in LIC vs. Escorts ltd. 10 such a notice can even result in a fall of the share prices of the company in the markets, triggered by unclear, unpredictable and confusing state of affairs regarding continuance of the directors in office.
Substantiating the reasoning-
When Pedley’s case was cited in Gopal vyas’s case by the company, the court rejected it saying that it does not have any bearing on the present case as the former was regarding the removal of director while the later was regarding the appointment of the director. On the same logic, Gopal vyas’s case should not have been considered in the karnataka bank’s case as the latter was regarding removal of director. Also, appointment and removal are two different things, it can not be said that just because a director can be appointed in a meeting in pursuance of the special notice given by one shareholder, he can also be removed by the requisition of a single shareholder. Further, the compliance with Section 188 will ensure the prima facie validity of the resolution sought to be moved as coming together of various shareholders will reduce the chances of the notice to be frivolous or one backed by malafide motives.
Conclusion-
In Karnataka Banks case the court did not follow the Pedley’s case because as per the judges subjecting Section 284 to section 188 will cause great hardship to the shareholders. But the fact is that it is very rare that a single shareholder seeks the removal of a director with the belief that he is fighting for a cause or in the interest of the company rather very often it turns up to be a case of attention seeking stunts to gain publicity. Hence the view taken by Delhi high court seems to be the proper view and in light of the judgment an amendment is highly desirable to put the matter beyond doubt
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