Removal of Directors

Directors play a crucial role in the functioning of any company, but there may come a time when removing a director becomes necessary. Whether it’s due to the director’s misconduct or resignation, the process of removing a director needs to be carried out legally and carefully. In India, there are different procedures for removing a director, depending on the reason. This blog post will outline the legal steps involved in the removal of directors from a company in India.

I. Introduction

A. Importance of directors in a company

Directors are an essential component of a company’s success. Their expertise and guidance can provide direction and facilitate growth. As per the 2013 Companies Act, a minimum number of directors must be present in a company at all times. These directors engage in decision-making that shapes the company’s strategy and ensures that it functions efficiently. The primary objective of the directors is to enhance the organization’s wealth and generate profits for shareholders.

“Good governance relies on effective boards providing strategic leadership and oversight. An effective board helps to build confidence in a company’s decision-making processes and can contribute to its long-term success,” says Ministry of Corporate Affairs.

However, the removal of directors is essential if they fail to uphold their responsibilities. This removal can take place if they commit prohibited acts, miss consecutive board meetings, breach Section 184 agreements or contracts, or face disqualification due to court orders. The company can also ask a director to resign voluntarily. Adequate notice and a fair hearing are the steps taken before disqualifying directors.

In conclusion, directors play a pivotal role in shaping the future of an organization. Their removal is necessary if they fail to comply with their responsibilities. Companies must ensure that the minimum director requirements are met at all times to achieve their objectives. 

B. Reasons for removal of directors

There are several reasons why a director may be removed from a company. One common reason is frequent absenteeism from board or committee meetings. This may indicate a lack of commitment or engagement from the director, and can hinder the decision-making process. Another reason for removal is when a director violates the organization’s policies or code of ethics, or engages in illegal activities such as insider trading or revealing confidential information. These behaviors can harm the company’s reputation and lead to legal repercussions. In some cases, a director may become a hindrance to the smooth functioning of the board by micromanaging or behaving inappropriately, resulting in an unhealthy and dysfunctional boardroom environment. It’s important to note that the decision to remove a director should be well thought out and discussed, and should only be done when absolutely necessary. As Meerad Consultants notes, “The removal of directors is a delicate process that must be documented properly in the company’s laws.” 

II. Ways to Remove a Director from a Company

A. Resignation of Director

Directors of a company are appointed to manage the affairs of the company and it is not uncommon for them to resign for several reasons. A director may resign voluntarily, or the board of directors may want to remove the director for non-performance or any other grounds. In case of resignation, the director needs to submit a notice in writing to the board of directors, and the board is required to intimate the ROC of the notice within 30 days in the form of DIR-12.

“If any Director Resigns from their post, they are required to follow a set of steps. After providing notice in writing to the Company, a Director may resign from a company. The Board must communicate this notice to the Registrar of Companies within 30 days in the form of DIR-12,” explains the online portal IndiaFilings.

If the director wants to file a copy of the resignation letter along with the reasons for resignation, Form DIR-11 can be used. The resignation is effective from the date the company receives the notice of the resignation or the specified date mentioned by the director.

“The effective date of resignation shall be the same as the date of cessation that is entered in the form DIR12,” explains IndiaFilings. Direct resignation of the Director will only be valid if the Director has caused the notice and all the necessary documents to be delivered to the Company. Failure to file Form DIR-12 within the deadline may lead to penalties being levied on the director and the company. 

1. Steps to be followed in case of resignation

When a director decides to resign from their position, there are some steps they need to follow to ensure a smooth exit. The first step involves giving notice in writing to the company, detailing the resignation letter and the effective date of the resignation. It’s important to inform the Board of Directors of this decision and request for an acknowledgement of the resignation. The resignation letter with reasons (if the director chooses) should also be forwarded to the Registrar of Companies (ROC) within 30 days from the date of resignation.

To complete the resignation process, the Director should fill out Form DIR-11; attach a copy of the resignation letter, proof of dispatch, and any other relevant information to the ROC. The Board of Directors will then consider the notice, pass a resolution accepting the resignation and notify the ROC using Form DIR-12, which must be submitted within 30 days.

It’s crucial to note that failure to file the DIR-12 form and to comply with procedures within the Companies Act can attract penalties and legal issues for the Director and the company. Therefore, following the steps mentioned here is essential to ensure a seamless resignation process. Remember, “A director can resign, but a company’s governance must never take a back seat while doing so.” 

2. Consequence of not filing Form DIR-12

It is crucial for companies to file Form DIR-12 within 30 days of a director’s removal. Not filing this form can lead to serious consequences such as penalties and prosecution. The penal provisions of the Companies Act now levy a penalty on officers in default along with the defaulting company. Certain penalties even specify imprisonment for officers in default along with monetary penalties. Such non-compliance can result in considerable financial and legal repercussions. Registrar of Company maintains updated records of every director of the company, i.e., their appointment, removal, resignation, and personal details (KYC), etc. Failing to file Form DIR-12 can result in the company’s non-compliance with regulatory requirements, causing negative implications for its reputation. Hence, it is crucial to file this form within the stipulated time to avoid incurring infractions and disruptions to the organization.

According to Legalraasta, “If a notice is not duly served or filed with Registrar by the company under Section 169(2), the Tribunal may, on the application of any aggrieved person, direct the company to serve the notice on such person in such manner and within such time as may be specified by the Tribunal.” 

B. Director Absent from Board Meetings for 12 months

According to the Companies Act 2013, if a director fails to attend board meetings for a continuous period of one year without prior permission from the board, it should be made a ground for vacation of office by the concerned director. This provision has been introduced to ensure that directors carry out their responsibilities diligently and don’t hamper the decision-making process of the company by being absent for long periods. In such cases, regardless of whether the leave of absence was given by the board for the meetings held during the year, the concerned director’s office will be vacated. This transformational change in the law conveys the message that a director, irrespective of whether they are appointed or nominated, should take their responsibilities seriously and play a vital role in the smooth running of the company.

According to muds.co.in, the consequences of such disqualification are severe and can lead to the permanent loss of the director’s career. Therefore, it is crucial for directors to understand their responsibilities and perform them judiciously. As per the Ministry of Corporate Affairs, the board of directors has to exercise strategic oversight over business operations while ensuring compliance with legal frameworks and integrity of financial accounting and reporting systems. Proper and timely disclosures are also essential for gaining credibility among stakeholders. The obligation to appoint and remove directors should rest with the company, and the government should not intervene in non-government companies’ appointment and removal process. It is also necessary for every company to have at least one director resident in India to ensure accountability. 

C. Removal of Director by Shareholders

One of the ways to remove a director in India is through a resolution passed by shareholders. Shareholders have been given the power to do so under Section 169 of the Companies Act 2013. The power is exercised by the shareholders when they believe that the director is acting beyond their authority. However, the right of a shareholder to remove a director does not require explanation by reason. It can be done simply by passing an ordinary resolution. The notice of the resolution must be sent to all shareholders and the resolution must be passed in a general meeting. Failure to file Form DIR-12 after removal can result in severe consequences.

“The provisions around removal of directors shall be in adherence to any other power of removal, say, directors nominator or the like,” says Meerad Consultants, a legal consulting firm in India. This is because the right of removal is not limited to shareholders alone, but extends to the appointing authority. The legality of shareholder actions to remove directors have been challenged due to varying interpretations being accorded to Section 169, which is akin to Section 284 of the Companies Act 1956. Nonetheless, it is important to ensure the proper ways are being followed for the removal of directors in India. 

1. The notice sent to all shareholders

When shareholders decide to remove a director from a company, they need to ensure that the proper procedures are followed to avoid any legal repercussions. One of the most critical and mandatory steps that they need to take is to issue a special notice to all shareholders, informing them of the intention to remove the director. As per Section 115 of the Companies Act, the notice must be given by members holding not less than 1% of the total voting power or holding shares on which an aggregate sum of not less than Rs. 5 Lakh have been paid up on the date of such notice. This notice must be sent at least 14 days before the date of the general meeting where the resolution for removal of the director will be discussed.

Additionally, the company must also send a copy of the special notice to the concerned director. This notice will allow the director to prepare for the meeting and exercise their right to be heard under Section 169 of the Companies Act. As per the process mentioned in Rule 23 of the Companies (Management and Administration) Rules 2014, once the special notice is received, the board must convene a meeting to take note of it. Subsequently, an extra-ordinary general meeting must be called, and the notice of such a meeting must be dispatched to all members of the company at least 21 days prior to the EGM.

Overall, the notice sent to all shareholders plays a crucial role in the removal of a director from a company. It ensures that all stakeholders are aware of the intended action and are provided with an opportunity to participate in the decision-making process. This way, the entire process remains transparent and fair to all concerned parties. 

2. The resolution passed in the general meeting

After the notice is sent to all shareholders, a resolution must be passed in the general meeting to remove a director. As per Section 169 of the Companies Act 2013, an ordinary resolution can be passed to remove a director by giving them a reasonable opportunity to be heard. In case of an independent director, a special resolution is required. The director who has been removed from office cannot be re-appointed. However, there are certain exceptions to this rule. A director appointed by the Tribunal or the one appointed under the principle of proportional representation cannot be removed.

It is mandatory to issue a special notice to the concerned director at least 14 days before passing the resolution. The special notice must include the specific agenda for which it is being sent. Moreover, it is important to provide an opportunity to the concerned director to present their side in writing. According to Rule 23 of the Companies (Management and Administration) Rules 2014, a special notice can be given by members holding not less than 1% of the total voting power or holding shares on which an aggregate sum of not less than Rs. 5 Lakh has been paid up on the date of such notice. The company must send a copy of the special notice to the concerned director simultaneously.

Overall, the removal of a director through a resolution passed in the general meeting is a complex process that requires careful attention to legal requirements and documentation. It is important for shareholders to conduct thorough research before arriving at any decision and to ensure they follow all the proper procedures so as not to cause a major crisis in the company. 

III. Consequences of not filing Form DIR-12

Not filing Form DIR-12 after the removal or resignation of a director can result in significant consequences for the company. According to Section 168 of the Companies Act, 2013, if the company fails to file Form DIR-12 notifying the ROC of the change in directors, it may face heavy penalties. One of the major penalties for non-submission of Form DIR-12 is a monetary fine of up to INR 1 lakh (approximately USD 1,358) under Section 642 via Section 441. The company may also lose its legal privilege, making it difficult to operate and function efficiently in the market. Additionally, it may also result in the directors facing disqualification from holding directorship in any other company, as the ROC may initiate action against them.

Moreover, Roshan Simon, senior Associate at Phoenix Legal, adds, “The failure to file DIR-12 may lead to the company being declared a ‘defaulting company’, which could hamper its ability to enter into contracts with third parties. This could heavily impact the company’s reputation and prospects of entering into investment transactions.” Therefore, it is crucial for companies to follow the proper procedure and file Form DIR-12 to avoid such unfavorable consequences. 

IV. Conclusion

A. Importance of the removal of directors

The removal of directors is an essential aspect of a company’s management. Having the right board of directors can provide guidance and support to achieve company goals and generate profits for the shareholders. It is crucial to remove a director if they are not contributing positively or they are engaging in activities that go against the company’s regulations. As per the Companies Act 2013, shareholders or the central government have the right to appoint or remove any director at any time. Every company must have a set minimum number of directors, with a public company requiring a minimum of three, a private limited company requiring two, and a sole proprietorship requiring just one.

It is necessary to follow proper procedures for the removal of directors, including giving proper notice to the director and allowing them to be heard. Failure to follow the correct procedure can lead to legal consequences, including the company being responsible for notifying the Registrar of the dismissal and assigning authority over it.

As Meerad Consultants states, “Balance of powers between shareholders and directors” is essential. The director-appointed or director-nominated board of directors also has the power to remove a director in addition to the shareholders’ authority. The board can remove a director if there are valid grounds present for the removal. The power of the shareholders to remove a director is crucial, but it must be exercised with careful consideration, keeping in mind the potential consequences of the removal.

In conclusion, the removal of directors is a significant step that should always be taken in accordance with proper procedures and after careful consideration of all factors. It is essential to have a competent board of directors to guide the company towards its goals and ensure its smooth functioning. 

B. Proper ways to follow for the removal of directors in India

Proper ways to follow for the removal of directors in India require a systematic approach as per the Companies Act 2013. The law provides for different scenarios that may lead to the removal of directors, including resignation, absence from board meetings, and removal by shareholders. In all cases, the process involves a set of steps and procedures to be followed by the company and the board of directors. In case the director gives his resignation, the company holds a board meeting to accept his resignation and then files the necessary forms with the Registrar of Companies. The company can also remove the director suomoto by an ordinary resolution passed in a board meeting and then get it approved by the shareholders in a general meeting. This requires giving proper notice to the directors and shareholders, and providing an opportunity to the director for being heard. Additionally, if a director is absent from board meetings for 12 consecutive months, he will be deemed to have vacated his office, and the company will have to file a form DIR-12 for his removal. Following due process is essential to ensure that the removal of directors is legal and proper. As Meerad Consultants says, “The right of removal is not limited to the shareholders alone.”