You are on page 1of 11

Removal by Tribunal on application under Section 397 or 398 (concerning oppression and mismanagement)1 (1) When an application is made to the

Tribunal under Section 397 or 398 for the prevention of oppression or mismanagement, the 'Tribunal' may provide for the termination, setting aside or modification of any agreement, howsoever arrived at, between the company on the one hand and any of the persons on the other, namely :² (i) (ii) (iii) the managing director, any other director, and manager,

upon such terms and conditions as may, in the opinion of the Tribunal, be just and equitable in all the circumstances of the case.2 (2) (a) The persons removed from the office under See. 402 shall not have right to make any claims whatever against the company for any damages or compensation for the loss of office or in any other respect, either in pursuance of the agreement or otherwise; (b) No managing or other director or manager whose agreement is so terminated shall for a period of 5 years from the date of the order terminating or setting aside the agreement, without leave of the Tribunal be appointed or act as the managing or other director, or manager of the company.37 Removal of managerial personnel by the Central Government on recommendation of the Tribunal38 (Sees. 388-B to 388-E) On the recommendation of the Tribunal, the Central Government may remove managerial personnel from office, where there are circumstances suggesting :² that any person concerned in the conduct and management of the affairs of a company is guilty of fraud, misfeasance, persistent negligence or default in carrying out his obligations and functions, or breach of trust; or that the business of a company is not or has not been conducted and managed by such person in accordance with sound business piinciples or prudent commercial practices; or that a 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

1 Substituted for "Company Law Board" by the Companies (Second Amendment) Act. 2002. 2 Sec. 402(d).

where the office of the director is vacated under Section 203 (restraining fraudulent persons from managing companies). no compensation shall be made in the following cases :² where a director resigns his office on reconstruction of a company. 388B(3).that the business of a company is or has been conducted and managed by such person with intent to defraud its creditors. or a director holding the office of manager or the whole time employment of the company. appoint another person to that office in accordance with the provisions of this Act. (e) the is company due to is the being wound negligence or up. ' Substituted for "Company Law Board" by the Companies (Second Amendment) Act. However. The Centra] Government may state a case against the person aforesaid and refer the same to the Tribunal for inquiring into the case and deciding as to whether or not such person is a fit person to hold his office.). the company may. 407 (1). Compensation for loss of office (Sec. 318) Compensation for loss of office. where the director resigns his office even if there is no reconstruction or amalgamation of the company. Sec. The person against whom a case is referred to the Tribunal shall be joined as a respondent to the application. (d) where winding up director.39 If the decision is against such person. etc. or as consideration for retirement from office may be made by a company to a managing director. members or any other persons or otherwise for a fraudulent or unlawful purpose or in a manner prejudicial to public interest. he shall Sec. In the vacancy caused by such removal. with the prior approval of the Central Government. default and of the the where the director has been guilty of fraud or breach . be removed from the office. No such payment can be made by the company to any other director. Such a person shall not hold the office of a director or any other office connected with the conduct and management of the affairs of any company during a period of 5 years from the date of the order of removal. or Section 283 (on account of disqualifications like insolvency or unsoundness of mind. or its amalgamation with any other company and is re-appointed in the new company. 2002.

etc. or a private company in which he is a director or member.of trust. 314(1).) prior consent of a company by a special resolution and the approval of the Central Government is required. unless there is consent of the company by a special resolution. or has taken part in bringing about the termination of his office.² prohibited from managing 3 Sec. or manager. if the monthly remuneration exceeds such sum as may be prescribed (prior to the amendment in 1988 the sum mentioned was Rs. no payment of compensation is to be made if the assets of the company on winding up. (c) private company of which such a director or manager. if they are to hold any office or place of profit.5 (2) If any person. whichever is shorter. (b) firm in which such director or manager. or a firm in which he is a partner. For this purpose. is a partner. 314) A director or any of his partners or relatives. . 202) (1) An undischarged insolvent is a company. 202(2). and a body corporate incorporated outside India. or relative of either.000/p. 3. gross negligence. (f) where the director has instigated. or any subsidiary or holding company thereof. a company includes :² an unregistered company. is a director or member. Director. 4 Sec. If the winding up of a company commences either before or within 12 months of a person ceasing to hold office. are not sufficient to repay to the shareholders the share capital contributed by them. which has an established place of business within India.3 In the case of : (a) a partner or relative of a director or manager. 5 Sec.4 Prevention of management by undesirable persons (Sees. The payment of compensation shall not be in excess of the amount which such managing or other director would have earned if he had been in office for the remaining term of his office or for three years. or gross mismanagement in the conduct of the affairs of the company. or relative of either. cannot hold any office or place of profit carrying such monthly remuneration as may be prescribed.m. not to hold office or place of profit (Sec. 202 & 203) Undischarged insolvent not to manage companies (Sec. being an undischarged insolvent. after deducting the expenses thereof. 314 (1-B).

12. Where² (i) a person is the promotion. or acts as. 203) Section 203 contains power to restrain fraudulent persons from managing companies.000 to Rs. or directly or indirectly takes part or is concerned in the promotion. An application for making of an order may be made by the Official Liquidator. If any person acts in contravention of an order made under Sec. which may extend to two years. 5.000 by the Companies (Amendment) Act. 2000. or take part in the promotion.000.discharges the functions of a director. 301)²Every company shall keep one or more registers in which shall be entered separately particulars of all contracts or arrangements. formation. 13. company. or with fine which may extend to Rs. or with both. w. or convicted of formation any or offence in connection management of with a (ii) in the course of winding up that a person has been guilty to fraudulent conduct of the misfeasance in relation to the breach of his duty to the company. or company or of any the Court or the Tribunal. [The amount of fine has been increased from Rs.e. and also the companies and the firms in which the directors are interested. Or by the liquidator of the company. or with fine which may extend to Rs. of of a company. as the case may be. Register of directors. 50. In the order the period of restraint. 2000]. (Sec. or by a person who is or has been a member or creditor of the company. in that respect of each offence. and other registers Register of contracts. which cannot exceed five years.000 by the Companies (Amendment) Act. he shall be punishable with imprisonment for a term which may extend to two years. etc. or management of any company.2000. without the leave of the Court or the Tribunal. it appears any offence amounting company's business. . 203. formation or management of a company. 50. may make an order that that person shall not. 202(1). he shall. The amount of fine has been increased from Rs.6 Power to restrain fraudulent persons from managing companies (Sec. of any company. as the case may be. 5000 to Rs. be a director of the company. or with both. 6 Sec.f. or discharges any of the functions of the manager. may be specified.000/-. in which directors are interested. 50. 50. etc. be punishable with imprisonment for a term.

the resolution passed at the meeting would be invalid but the same can be validated by ratification at a validly conducted meeting.51 Notice of every meeting of the Board of directors shall be given in writing to every director for the time being in India. The amount of fine has been increased from Rs. 285. A.e. Union of India. 13. unless the Articles otherwise provide. 1. 1000. Sec.f. the company shall within 21 days from the date of entering into the contract or of varying of the contract. Every officer of the company whose duty it is to give notice as aforesaid and who fails to do so shall be punishable with fine which may extend to Rs. MEETINGS OF BOARD (Sees.12. 302) Where a company² enters into a contract for the appointment of manager of the company in which contract any director of the company is concerned or interested. a meeting of the Board of Directors shall be held at least once in every three months and at least 4 such meetings shall be held every year.8 Quorum for meeting (Sees. then the number of the directors who are not interested (at least two) shall be the quorum. 8 Parmeshwari Prasad Gupta v. If that day in the next week is a public holiday. 285-286) In the case of every company.Disclosure to members of director's interest.000 by the Companies (Amendment) Act. 1973 S. 2389.C.58 7 Sec. etc. 2000 w.2000. at the same time and place.R. and at his usual address in India to every other director. 285-290) Meeting every 3 months with notice (Sees. whichever is higher. (Sec. the meeting shall automatically stand adjourned till the same day in the next week. together with memorandum clearly specifying the nature of the concern or interest of such director in such contract or variation.9 54.I. . 286. at the same time and place. 285. 100 to Rs. or varies any such contract already in existence in which a director is concerned or interested. In case there are more than 2/3rd interested directors and the quorum cannot be attained. send to every member of the company an abstract of the terms of the contract or variation. as the case may be. If a meeting of the Board could not be held for want of quorum then.7 If the meeting is held without giving notice to a director. 9 Sec. then the adjournment of the meeting will be till the next succeeding day which is not a public holiday. 287-288) The quorum for a meeting of the Board shall be l/3rd of its total strength (any fraction is to be rounded off as one) or two.

if the resolution has been circulated in draft. 193 (IB). The pages of the minute book should be consecutively numbered. 193 (3). Sec. Sec.63 The minutes of each meeting shall contain a fair and correct summary of the proceedings thereof. to all the directors or to all the members of the committee.Passing of resolutions by circulation (Sec.59 Minutes of Board's meetings (Sec. 193(1). 193 (2). Sec. 288. 290. if any. 193(1A). of officers made at any of the meetings aforesaid shall be included in the minutes of the meeting. The entries must be made in the minute book within 30 days of the conclusion of a meeting. Sec. Such resolution may be passed either at the meeting of the Board or through circulation. 289) The business of the Board is to be transacted by resolutions.64 Sec. Sec. and has been approved by a majority of them who are entitled to vote on the resolution.62 In no case the minutes of the proceedings of a meeting shall be attached to any such book aforesaid by pasting or otherwise. the minutes shall also contain:² 10 Sec. 289. in the minute book.61 Each page of every such book shall be initiated or signed and the last page of the record of proceedings or each meeting in such books shall be dated and signed.10 In the case of a meeting of the Board of Directors or of a committee of the Board. 193) Every company shall record minutes of all proceedings of every general meeting and of its Board of Directors or of every committee thereof. together with necessary papers. . A resolution shall be deemed to have been duly passed by the Board or by a committee thereof by circulation. Sec.

or the provisions contained in the Memorandum or Articles of the company. The amount of fine has been increased from Rs. 2000. the resolution.11 If default is made in complying with the foregoing provision. . 500/-. dissenting from. 291) The Board of Directors shall be entitled to exercise all such powers. or not concurring in.2000. w.15 Certain powers to be exercised by Board only at the meeting (Sec. 292) (1) The Board of Directors of a company can exercise the following powers on behalf of the company. Such powers can be exercised subject to the provisions of the Companies Act or any other Act.12. and such powers can be exercised only by means of resolutions passed at the meetings of the Board :² y y y The power to make calls on shareholders in respect of money unpaid on their shares.e.f. and in particular. 194.12 Minutes to be evidence (Sec. The power to borrow money otherwise than on debentures. if any. the names of the directors. the meeting shall be deemed to have been duly called and held and all proceedings there at to have duly taken place. 194) Minutes of meetings kept in accordance with the provision of Section 193 shall be evidence of the proceedings recorded therein. 50 to Rs.the names of the directors present at the meeting. 195) Where proceedings of any general meeting of the company or of any meeting of its Board of Directors or of committee of the Board have been duly kept. 14 Sec. The power to issue debentures. 11 Sec. 193(6). or the regulations made by the company in general meeting. as the company is authorised to exercise and do. 195. 500 by the Companies (Amendment) Act. and to do all such acts and things. and in case of each resolution passed at the meeting. then until the contrary is proved. all appointments of the directors or liquidators made in the meeting shall be deemed to be valid. 12 Sec.13 Presumptions to be drawn where minutes duly drawn and signed (Sec. 13. 15 Sec.14 Board's Powers and restrictions there on General powers of the Board (Sec. the company and every officer of the company who is in default shall be punishable with fine which may extend to Rs. 13 Sec. 193 (4). 291(1).

17 (3) Every resolution delegating the power to invest funds of the company referred to in clause (d) of sub-clause (1) shall specify the total amount upto which funds may be invested and the nature of the investments which may be made by the delegate. the purpose for which the loans may be made by the delegate. 292(3). 292(5). 5 crores shall constitute a committee of the Board of Directors. Sec.y y The power to invest the funds of the company. i. and The power to make loans. Two-third of the total number of members of the audit committee shall be directors. The main provisions of Section 292 A are as under:² Every public company having a paid-up capital of not less than Rs. 2000. The audit comrnittee shall consist of not less than 3 directors and such number of other directors as the Board may determine. and the maximum amount of loans which may be made for each such purpose in individual cases. (d) and (e) as stated above to any committee of directors or other principal officers of the company. and prescribe the conditions subject to which the powers are to be exercised by the delegate. 292(2).20 Audit Committee (Sec. 292A) A new Section 292A. 292(4).19 It may be noted that the right of the company in general meeting to impose restrictions or conditions on the exercise by the Board of any of the powers specified in sub-section (1) can always be exercised by the company. has been introduced by the Companies (Amendment) Act. The audit committee shall act in accordance with the terms of reference specified in writing by the Board. other than the managing and whole time director. 292(1). whereby a committee of the Board of Directors. Sec.18 (4) Every resolution delegating the power to make loans referred to in clause (e) to subclause (1) shall specify the total amount up to which loans may be made by the delegate.e. The Board may delegate powers (c). 16 17 18 19 20 Sec. known as 'Audit Committee'. . Sec. the 'Audit Committee' has to be constituted by certain companies. Sec.16 (2) Every resolution delegating the power to borrow money in clause (c) of sub-section (1) shall specify the total amount up to which the funds outstanding at any one time up to which money may be borrowed by the delegate..

The audit committee shall have authority to investigate into any matter in relation to the items specified in this Section (292A) or referred to it by the Board. 50. shall be binding on the Board.000.The members of the audit committee shall elect a chairman from amongst themselves. the scope of audit including the observations of the auditors and review the half yearly and annual financial statements before submission to the Board and also ensure compliance of internal control system. 293) The Board of Directors of a public company or its subsidiary can exercise the following powers only with the consent of the company in the general meeting :² (i) (ii) (iii) sale. Restrictions on powers of Board (Sec. it shall record the reasons there for and communicate such reasons to the shareholders. The recommendations of the Audit Committee on any matter relating to financial management including the audit report. remission or extension of time for repayment. It shall have full access to information contained in records of the company and external professional advice. Penalty for non-compliance. The audit committee shall have discussions with the auditors periodically about internal control system. if any. (iv) . if any. If the Board does not accept the recommendations of the Audit Committee. or with fine which may extend to Rs. which is more than the aggregate of the paid-up capital and its free reserves. The Chairman of the Audit Committee shall attend the annual general meetings of the company to provide any clarification on matters relating to audit. and the director in charge of the finance shall attend and participate at meetings of the Audit Committee but shall not have the right to vote. borrowing money. lease or any other disposal of the undertaking of the company. the internal auditor. investment of the amount of compensation received by the company on account of compulsory acquisition of the company's assets in securities other than trust securities.²If a default is made in complying with the provisions of this Section. or with both. The auditors. the company and every officer who is in default shall be punishable with imprisonment for a term which may extend to one year. of any debt due by a director. The annual report of the company shall disclose the composition of the audit committee.

(iv) above. 293.000/. the same shall not be valid or effectual unless the lender proves that he advanced the loan in good faith and without knowledge that the limit imposed by that clause had been exceeded. Pursuant to deeds and documents defendant No. or for any political purpose to any person. 5 and 6 were placed in character of secured creditor by company. defendant Nos. 1 for purchase of equipments. companies other than Government companies and those companies which have been in existence for less than three years. The acceptance of deposits by a banking company in the ordinary course of business shall not come within the restriction on borrowing stated at No. The amount of such contribution in any financial year should not exceed 5% of its average net profits during the three immediately preceding financial years. or if the ordinary business of the company is to sell or lease property. The above stated restrictions are subject to the following further provisions : The restriction at No. 22 State Bank of India v. No such contribution can be made by a company unless a resolution authorizing the making of such contribution is passed at a meeting of the Board of Directors. (i) above regarding sale or lease of undertaking shall not affect the title of a buyer or a lessee if he acted in good faith and exercised due care and caution. 1 to 3.in a financial year.21 Restrictions on powers of Board²Impleadment of parties for recovery of amount On distribution of assets. 1 to 3. can make contributions to any political party. 1. whichever is greater. 6 was lawfully entitled to recover amount from defendant No. Such resolution shall be deemed to be justification in law for the making and the acceptance of the contribution 21 Sec. 4 as also secured creditor in relation to defendant Nos.(v) contributions to charitable and other funds not directly relating to the business of the company or the welfare of its employees exceeding Rs. 64 lacs in favour of defendant No. machinery. Business Forms Limited. the companies were not permitted to make contribution for any political purposes. Defendant No. applicant Bank admitted it had second charge over fixed assets over Calcutta unit. (iv) above. 293-A) Prior to the amendment of the Companies Act in 1985. If the company incurs more debt than prescribed in the limit at No. . 50. IV (2004) BC 158 (DRT³Kolkata).22 Political Contributions (Sec. Defendant No. Bank was able to prove its case against defendant Nos. Now.out of loan granted by defendant. Applicant Bank had no claim against either of defendants 4 to 8 and defendants 4 to 8 had no claim against applicant Bank. 6 had disbursed sum of Rs. or 5% of its average net profits during the preceding three years. Defendants 1 to 3 were jointly or severally liable to pay sum along with interest at the rate 6% per annum.

If a company makes any contribution in contravention of the above mentioned provisions. .authorised by it. Every company must disclose in its profit and loss account any amount or amounts contributed by it to any political party or for any political purpose during the particular financial year. tract. brochure. or the company in general meeting may contribute such amount. or for political purpose. pamphlet of the like by or on behalf of a political party or for its advantage shall also be deemed to be contribution of the amount to such political party. The amount of expenditure incurred by a company on advertisement in any publication like souvenir. as it thinks fit. 293-B) The Board of Directors of any company or any person so authorised by the Board. The total amount so contributed by a company shall also be shown in the Profit and Loss Account of the company for that particular financial year. to the National Defence Fund or any other Fund approved by the Central Government for the purpose of national defence. Contributions to the National Defence Fund (Sec. the company shall be punishable with fine which may extend to three times the amount so contributed and the defaulting officer shall be punishable with imprisonment up to three years and shall be liable to fine.