Directors' Appointment Terms Upheld under Companies Act

The court allowed the petition, confirming that directors appointed under Section 408(1) of the Companies Act, 1956, continue to hold office until completion of their term. It held that any change in the board of directors must be confirmed under Section 408(5). The court refused the stay application due to serious irregularities by the company and significant public interest.

---

---

Issues Involved:
1. Continuation of directors appointed under Section 408(1) of the Companies Act, 1956.
2. Requirement of confirmation of newly elected directors under Section 408(5) of the Companies Act, 1956.

Detailed Analysis:

Issue 1: Continuation of Directors Appointed under Section 408(1)

The petitioners sought directions that the directors appointed by them under Section 408(1) of the Companies Act, 1956, by order dated November 17, 1973, continue to be the directors of the respondent company until they have completed their full term of three years. The background includes an order dated November 17, 1973, by the Government of India, appointing two directors for three years, which was challenged in a writ petition. The court had restrained these directors from taking further steps due to an undertaking by the petitioners not to call any board meeting without court orders.

The court noted that the order dated November 17, 1973, could not be implemented due to the injunction and undertakings given by the company. The court emphasized that the purpose of appointing directors under Section 408(1) is to prevent the company's affairs from being conducted in a manner oppressive to members or prejudicial to the company or public interest. The court held that the order did not have the chance to become effective and operative but remained dormant. Therefore, the order dated November 17, 1973, did not exhaust itself and was still alive, meaning the Government Directors continue to hold office.

Issue 2: Requirement of Confirmation of Newly Elected Directors under Section 408(5)

The petitioners also contended that the board of directors elected by the company requires confirmation of their appointment under Section 408(5) of the Companies Act, 1956. The principal contention was that the order dated November 17, 1973, is in force until the directors appointed under that order have held office for a full term of three years, and the respondent company is bound to apply for confirmation by the Central Government-Company Law Board of the newly elected directors.

The court observed that Sub-section (5) of Section 408 provides that no change in the board of directors made after a person is appointed under Section 408 shall have effect unless confirmed by the Central Government. The court was not impressed by the submission that the impugned order came to an end after three years. The injunction granted by the court was still in force, and the parties had proceeded on the footing that the appointment of the directors under Section 408 continues. The court concluded that with the appointment of Government directors subsisting, any change in the board of directors cannot have effect unless confirmed under Section 408(5).

Conclusion:

The court allowed the petition in terms of prayers (a) and (b) with costs, confirming that the directors appointed under Section 408(1) continue to hold office and any change in the board of directors requires confirmation under Section 408(5). The court refused the stay application, considering the serious irregularities committed by the company and the significant public interest involved.

---