Removal of Directors : Meaning, Reasons, Ways and Documents

Who is Director under Companies Act, 2013?

According to Section 2(34) of the Companies Act, 2013, “Director means a Director appointed to the Board of a company.” In other words, any person occupying the position of a director, by whatever name called.

This definition is fairly inclusive and includes all people who work as directors for a firm, regardless of the exact title they may have, such as independent, non-executive, managing, or executive director. Furthermore, the definition is all-inclusive and includes directors of businesses incorporated under the act or any prior company law, as well as directors of all kinds of enterprises, whether private or public.

Geeky Takeaways:

• The process of removing a director from their position for misconduct or incompetence that affects corporate governance is known as Removal of Director.
• Conflicts of interest, incompetence, and misconduct are frequently cited as grounds for director removal.
• Directors may be removed by the shareholders by special resolution, automatically removed for an extended period, or by voluntary resignation.
• Failure to file Form DIR-12 for Director resignation or removal may result in legal non-compliance, fines, and loss of good standing.
• A Director may be removed by submitting a resignation letter, a board resolution, a shareholder resolution, Form DIR-12, updated statutory registers, and any other pertinent evidence.

Removal of Director under Companies Act, 2013

1. Legal Framework: In addition to the company’s Articles of Association (AoA) and any applicable shareholder agreements, the removal of a director is principally governed by the provisions of the Companies Act, 2013 (or applicable company law in the jurisdiction).

2. Grounds for Removal: Misconduct, carelessness, incapacity, conflict of interest, loss of confidence, or non-compliance with statutory obligations are usually grounds for director removal. The company’s Articles of Association (AoA) may additionally include particular grounds for dismissal.

3. Board Decision or Shareholder Resolution: The removal procedure may be carried out through a resolution approved by the shareholders or by the Board of Directors (BOD), depending on the applicable laws and the company’s rules. Certain directors might only be removed by shareholders in specific circumstances.

4. Special Notice: In a lot of places, the shareholders are required to provide the firm with a special notice before they can propose the removal of a director. The director has a chance to react and challenge the removal during this notice period.

5. Board or Shareholder Meeting: To discuss the director’s removal, either the board meeting or the shareholders meeting. Usually, a majority vote of the board members or shareholders present at the meeting decides whether to dismiss a director.

6. Filing Requirements: To update the company’s records and reflect the change in directorship, the appropriate filings must be made with the appropriate government agencies, such as the Registrar of Companies, if the removal is granted.

Reasons behind Removal of Director

A Director of a company can be removed for any of the following reasons:

1. Misconduct: Directors may be removed for misconduct, which includes engaging in criminal acts that violate their fiduciary duty to the firm, such as fraud, embezzlement, corruption, or other forms of misconduct.

2. Negligence: Directors may be removed if they persistently neglect to carry out their responsibilities, use due caution, or make a meaningful contribution to the board’s decision-making process.

3. Conflict of Interest: Directors are required to behave in the company’s best interests and abstain from circumstances in which their interests collide with those of the business. Removal may result from failing to declare conflicts of interest or remove oneself from pertinent decisions.

4. Breach of Duties: Directors are obligated to operate in the company’s best interests, honestly, and with good faith. Removal is a possibility for actions that go beyond their authority, misuse business resources, or engage in self-dealing.

5. Loss of Confidence: The board or shareholders may decide to remove a director from office if they no longer have faith in their capacity to carry out their duties.

6. Disqualification: A director may lose their right to serve on the board for a variety of reasons, including insolvency, a criminal record, or a court-ordered mental illness.

Ways to Remove a Director of a Company

1. When the Directors Tender their Resignation

A formal resignation letter is usually sent to the Board of Directors (BOD) or other appropriate authorities within the organization when a director chooses to leave their position willingly. The effective date of the resignation should be included in the resignation letter. It can be set for an agreed-upon future date or it might be immediate. The resignation will be reviewed and accepted by the Board of Directors or other appropriate authorities by the protocols specified in the company’s bylaws or other governing documents. Upon approval, the resignation becomes effective, and the board may start the process of appointing a replacement director.

The following steps need to be followed:

• Hold a board meeting by giving 7 days of clear notice.
• Board members will take note of resignation in the meeting.
• A resolution then needs to be passed in a particular format.
• Further, Form DIR-11 needs to be filed by the resigning director in his capacity.
• The company has to file Form DIR-12 with the ROC along with the registration letter and the board resolution.
• Once all the formalities are done, the name of the director will be removed from the master data of the company on the Ministry of Corporate Affairs (MCA) website.

2. Director Remains Absent from the Board Meetings for 12 Months

A director may be considered to have resigned from their post if they routinely miss board meetings without providing a good cause and getting approval from the board. The company’s rules or other governing papers usually specify the precise period of absence that initiates this action. This period is frequently set at 12 months or another pre-defined duration. The board may declare a director’s position vacant after the allotted term of absence has passed and fill the position by the processes specified in the company’s governing documents.

The following steps need to be followed:

• If a director remains absent from all the meetings held over twelve months, with or without seeking leave of absence from the board, they are considered to have vacated their office as per Section 167.
• Form DIR-12 must be filed.
• Once all formalities are done, the concerned director’s name will be removed from the database of the Ministry of Corporate Affairs (MCA).

3. Removal of Director by Shareholders

A general meeting is where shareholders cast their vote to remove a director from their post. The company’s bylaws, controlling papers, and applicable laws and regulations control the removal procedure. The processes specified in these agreements must be followed by shareholders, which may include giving prior notice of their intention to vote on the removal of the director and meeting certain voting requirements. The decision to remove the director is effective immediately upon the shareholder’s vote, and the board may then proceed to replace the vacancy in the director post by the established processes.

The following steps need to be followed:

• A notice for a board meeting is sent to all the shareholders within 7 days from the date of issue.
• A resolution is passed for a general meeting and then for the removal of the director, subject to the approval of shareholders on the day of the meeting.
• After a 21-day notice period is provided, the second meeting of shareholders is held to vote on the resolution passed earlier. The one who is being removed as the director by shareholders will be allowed to speak on their removal.
• Form DIR-12 must be filed by shareholders along with the attachments of the board resolution, and an ordinary resolution.
• Once all formalities are done, the concerned director’s name will be removed from the database of the Ministry of Corporate Affairs (MCA).

Consequences of Not Filing Form DIR-12

1. Penalties: The regulatory authorities may impose fines for failure to comply with the filing requirements. Penalties for failing to comply with filing obligations can be severe in India and can get worse over time if the failure to comply continues.

2. Legal Liability: If directors and officials fail to carry out their legal responsibilities, they may be held legally liable for non-compliance. They could be held personally accountable for any losses the business or its stakeholders suffer as a result of their non-compliance.

3. Non-Recognition of Changes: The Registrar of Companies will not acknowledge any changes to the details of Directors if Form DIR-12 is not filed. This could lead to misunderstandings about the present makeup of the Board of Directors and have an impact on the legitimacy of the choices the board makes.

4. Difficulty in Transactions: Failure to comply with reporting requirements may provide challenges for several business transactions, including acquisitions, mergers, and fundraising initiatives. As part of their due diligence procedure, regulatory bodies, and other parties can need precise information about the directors.

5. Loss of Good position: The company’s position and reputation among creditors, investors, regulators, and other stakeholders may be damaged by persistently failing to provide required documents. This could hinder the business’s capacity to draw in capital or forge commercial partnerships.

Hence, if a company fails to file Form DIR-12 within 30 days from the date of resignation, the following penalties will apply:

• After 30 days and within 60 days: Twice the government fees.
• After 60 days and within 90 days: Four times the government fees.
• If it exceeds 90 days: 10 times the government fees.
• If it exceeds 180 days: 12 times the government fees and will be fined for the compounding offence as well.

Documents Required for a Director Removal in a Company

1. Board Resolution or Special Resolution: Depending on the organizational structure and the governing documents, a resolution passed by the shareholders or the Board of Directors is required to start the removal process. The purpose of this resolution should be to explain the rationale behind the suggested removal and to approve the necessary procedures.

2. Notice of Meeting: A notice of the board meeting or shareholder meeting where the removal will be considered and voted upon may be necessary, depending on the organization’s rules or applicable legislation. The notice must make clear which item on the agenda relates to the director’s dismissal.

3. Resignation Letter (Optional): A resignation letter from the director may be received and retained on file if they want to leave their post voluntarily rather than be fired. This record might serve as proof of the director’s departure as well as an acknowledgment of the choice.

4. Written Notice to the Director: If the dismissal isn’t freely done, the director should be notified in writing of the decision to remove them from their post. The rationale behind the removal as well as any pertinent clauses from the organization’s bylaws or other governing documents should be included in this letter.

5. Formal Notice to Regulatory Authorities: In certain jurisdictions, it may be necessary to comply with legal requirements and provide formal notice of the director’s dismissal to the Registrar of Companies or regulatory authorities. This guarantees that the director’s information is taken down from official registers and updated in the company’s records.

Conclusion

The Companies Act, 2013’s provisions regarding director removal functions as an essential tool for upholding corporate governance and guaranteeing accountability inside businesses. In the event of wrongdoing, incapacity, or other good cause, shareholders may remove directors from their posts by following the procedures and protections outlined in these rules. To support strong governance practices, preserve organizational stability, and preserve their reputation, businesses have to understand and abide by these laws.

Frequently Asked Questions (FAQs)

1. Is it possible to re-appoint a removed director?

Answer:

Yes, a removed director may be re-appointed in accordance with the Companies Act’s requirements by following the legal procedures specified in both the act and the Articles of Association of the company.

2. Is a director able to contest their dismissal?

Answer:

If directors feel their dismissal was unfair or carried out outside of the law, they do have the ability to contest it. They are free to pursue legal action via the proper channels.

3. Is there a minimal amount of time that must pass before calling a board meeting or shareholders’ meeting to remove a director?

Answer:

In accordance with the Companies Act 2013, there is a minimum notice time of 7-21 days before a board meeting or shareholders meeting is called, depending on the nature of the meeting and its agenda.

4. Is it possible for shareholders to dismiss a director?

Answer:

Yes, a special resolution adopted at a general meeting gives shareholders the power to remove a director.

5. When is it possible to remove a director?

Answer:

Directors may be removed for a variety of reasons, including misbehavior, incapacity, conflicts of interest, or disqualification according to the Companies Act.