Removal of Director Under the Companies Act 2013

Running a company is like steering a ship, with directors acting as the captains responsible for its direction and operations. Directors are responsible for making critical strategic decisions. But what if a captain isn't doing a good job? Or what if they want to leave? This is when you need to know about the removal of a director.

• Who is a Director Under the Companies Act, 2013?

A director, as defined under Section 2(34) of the Companies Act, 2013, is a leader appointed by the shareholders, who are the company's owners.

A director's main job is to manage the company. Together, they form the Board of Directors, the team responsible for guiding the company in the right direction. The Companies Act, 2013, serves as the rulebook, outlining who directors are and their responsibilities.

• Role of a Director in a Company

A director has many important jobs. Directors must act in good faith and the best interests of the company, as outlined in Section 166 of the Companies Act, 2013. Their role is to steer the company in the right direction while ensuring its success. Here are some of their key tasks:

• Strategic Decision-Making: Directors are responsible for setting the company's long-term strategy and making pivotal decisions about its future direction.
• Managing the Company's Money: They oversee the company's finances. They ensure money is used wisely.
• Following the Law: Directors ensure the company obeys all rules and regulations.
• Hiring Senior Staff: They often appoint top-level managers. These managers handle daily work.
• Protecting Shareholder Interests: They work to increase the company's value for its owners.
• Holding Board Meetings: They meet regularly to discuss important matters. These meetings are very important for the company's health.

• Law Governing the Director's Removal

The Companies Act, 2013, governs the removal of a director, with Section 169 giving shareholders the power to remove a director through an ordinary resolution. Other important sections include:

• Section 167: Explains when a director’s office becomes vacant automatically.
• Section 168: Describes how a director can resign voluntarily.
• The National Company Law Tribunal (NCLT): Can also remove a director in certain cases.

• When Can a Director Not Be Removed Under Section 169 of the Companies Act?

Section 169 gives shareholders a lot of power. But there are some limits. A director cannot be removed by shareholders in these cases:

• Director Appointed by the Tribunal: If the National Company Law Tribunal (NCLT) has appointed a director under provisions such as Section 242 (in case of oppression and mismanagement), shareholders cannot remove them. This is done to protect the company from mismanagement.
• Director Representing a Certain Group: Some companies have a system of proportional representation under Section 163. This helps smaller groups of shareholders appoint a director. A director appointed this way cannot be removed by the majority shareholders. This protects the rights of minority shareholders.

A director can be removed for various reasons, ranging from poor performance and misconduct to conflicts of interest.

• Poor Performance: The director is not contributing to the company’s growth.
• Misconduct: The director has done something wrong or unethical.
• Conflict of Interest: The director's personal interests are harming the company.
• Disqualification: Under Section 164 of the Companies Act, 2013, a director may be disqualified from acting as a director if they are declared bankrupt or fall under other disqualification criteria.
• Health Issues: The director is unable to perform their duties due to poor health.
• Breach of Trust: The director has acted against the company's interests.
• Continuous Absence: Under Section 167, if a director is absent from board meetings for 12 consecutive months, their office becomes automatically vacant.

There are three main ways a director can be removed from their position.

1. By the Company's Shareholders: The owners of the company can vote to remove a director. This is the most common method.
2. Resignation by the Director: A director can choose to leave the company on their own.
3. By the National Company Law Tribunal (NCLT): The NCLT can order the removal of a director, typically in serious cases of fraud or mismanagement. This often arises from a complaint under Section 241 of the Companies Act, 2013.

For the removal process to be valid, some conditions must be met. These are like essential rules that cannot be ignored.

• Proper Notice: A special notice under Section 115 of the Companies Act must be given by shareholders who wish to remove a director. This notice must be sent at least 14 days before the meeting (excluding the date of the notice and the meeting date).
• Opportunity to Be Heard: The director who is being removed must be given a fair chance to explain their side of the story. They can speak at the shareholder meeting.
• Correct Voting: The removal must be approved by the required number of votes at a properly called shareholder meeting. This is usually a ordinary resolution as per Section 169.
• Filing with the Registrar of Companies (ROC): After the removal, the company must inform the ROC. The ROC is the government body that keeps records of all companies.
• Director’s Representation: Under Section 169(4), the director has the right to make a written representation regarding their removal. If requested within time, the company must circulate this representation to the shareholders.

Having the right documents is very important. It ensures the process is smooth and legal. Here is a simple checklist:

• Special Notice: A written notice from shareholders to the company.
• Board Meeting Notice: The notice sent to all directors for the board meeting.
• Board Resolution: A formal decision passed by the Board of Directors.
• General Meeting Notice: The notice for the shareholder meeting where the voting will happen.
• Ordinary Resolution: The final decision passed by the shareholders to remove the director.
• Director's Representation: A written statement from the director being removed (if they provide one).
• Form DIR-12: The official form to be filed with the ROC.
• Proof of Dispatch: Proof that notices were sent to everyone.
• Proof of Resignation Letter (for resignation cases): A copy of the resignation letter submitted by the director.
• Attendance Sheet/Minutes (for 12-month absence cases): Record of the director's absence from board meetings for 12 consecutive months.
• Representation Letter by Director: If the director has provided a representation, a letter confirming this should be included.

Now, let's look at the step-by-step process for different removal methods.

Case 1: Resignation by Directors

A director may decide to resign for personal or professional reasons. This is a voluntary process.

1. Submission of Resignation Notice: The director initiates the process by submitting a formal, written resignation letter to the Board of Directors.
2. Board Meeting: The company holds a board meeting to discuss the resignation.
3. Board Accepts Resignation: The other directors formally accept the resignation.
4. Director Informs ROC: While filing Form DIR-11 with the ROC was mandatory for directors before May 7, 2018 (under an MCA notification), it is no longer a requirement post this date. However, it is still recommended for record-keeping and safety purposes.
5. Company Informs ROC: The company must file Form DIR-12 with the ROC. This form updates the official records. The company must file this within 30 days of the resignation.

Case 2: Director's Absence from Board Meetings for 12 Months

A director must attend board meetings, and if they miss all meetings for a continuous period of 12 months, their office becomes vacant. This is not a direct removal but a vacation of office under Section 167(1)(b) of the Companies Act.

1. Check Attendance: The company checks its records. It confirms the director has missed all meetings for 12 months. This includes meetings they attended via video call.
2. Board Takes Note: The Board of Directors passes a resolution. This resolution confirms that the director's seat is now vacant.
3. Inform the Director: The company informs the director about their removal.
4. File Form DIR-12: The company files Form DIR-12 with the ROC. This updates the public record.

Case 3: Procedure for Removal of Director by Shareholders (Section 169)

This is a very important power given to shareholders. It ensures that they have control over who manages their company. The process is detailed in Section 169 of the Companies Act.

1. Shareholders Send a Special Notice: A group of shareholders sends a special notice to the company. This notice states their intention to remove a director.
   • Who can send this notice? Shareholders holding at least 1% of the total voting power or holding shares on which at least Rs. 5 lakhs has been paid up.
   • Note: If the company is a private limited company, the Articles of Association (AoA) should be reviewed, as they may impose restrictions on removal powers or define a different procedure for director removal.
2. Company Informs the Director: The company immediately sends a copy of this notice to the director who is to be removed.
3. Director's Right to Speak: The director has the right to make a written representation. They can ask the company to send this representation to all shareholders.
4. Company Calls a Board Meeting: The Board of Directors meets to decide on holding a shareholder meeting.
5. Company Calls a General Meeting: The company then calls a shareholder meeting (an Extraordinary General Meeting or EGM). The notice for this meeting must be sent at least 21 days before the meeting. The notice must mention the proposal to remove the director.
6. Voting at the Meeting: At the meeting, the shareholders vote on the resolution. The director is given a chance to speak at the meeting.
7. Passing the Ordinary Resolution: If more than 50% of the shareholders present and voting say 'yes', the resolution is passed. The director is officially removed.
8. Filing with ROC: The company must file Form DIR-12 with the Registrar of Companies (ROC) within 30 days to report the removal.

Case 4: Removal of Nominee Director

A nominee director is appointed by a bank, financial institution, or another third party. They are appointed to protect the interests of the entity that nominated them.

The removal of a nominee director is simple. The entity that appointed them can remove them at any time as per the terms of the agreement and subject to AoA. They just need to inform the company in writing. The company's shareholders do not have the power to remove a nominee director.

Case 5: Removal of Director by Tribunal

The National Company Law Tribunal (NCLT) can remove a director. This is a serious step taken in extreme cases under Section 242(2)(h).

The NCLT can remove a director if a complaint is filed against them for:

• Oppression and Mismanagement: The director is managing the company in a way that is unfair to other members or harmful to the public interest.
• Fraudulent Conduct: The director is involved in fraud.

If the NCLT finds the director guilty, it can order their removal. A director removed by the NCLT cannot be appointed as a director in any company for five years.

The fees for removing a director are paid to the Registrar of Companies (ROC) for filing the required forms, mainly Form DIR-12. The government fee depends on the company's authorized share capital, as follows:

Professional Fees: In addition to government fees, you can expect charges for the professional services involved in the removal process. These typically include:

• Drafting of Legally Compliant Documents: We will expertly draft the Special Notice, Board/Shareholder Resolutions, and Explanatory Statements required under the Companies Act.
• Legal Consultation: Providing expert advice on the removal process to ensure full compliance with the Companies Act, 2013, and addressing any concerns regarding shareholders and directors.
• ROC Filing Support: Assistance with filing Form DIR-12 and other necessary forms, ensuring accuracy and timely submission.
• End-to-End Process Management: Handling all administrative tasks, from shareholder notifications to ROC follow-ups.
• Compliance Assurance: Ensuring the process adheres to legal requirements and deadlines, helping you avoid penalties.

These fees vary based on the complexity of the process and the services required.

Form DIR-12 is a very important e-form. It is used to notify the ROC about any changes in the Board of Directors.

This form must be filed whenever a director is:

• Appointed
• Removed
• Resigned

The company must file Form DIR-12 within 30 days of the resignation/removal/appointment of a director. The form needs to be digitally signed by a continuing director or a key managerial person of the company.

Consequences of Failing to File Form DIR-12

Not filing Form DIR-12 on time can lead to serious problems for the company.

As per the latest MCA guidelines:

• Initial Penalty: ₹50,000 for the company and each officer in default.
• Daily Penalty: ₹500 per day of continuing default.
• Maximum Cap:

• • ₹3,00,000 for the company
  • ₹1,00,000 for each officer in default

This means the penalty now accrues daily after the initial 30-day window, making delays significantly more expensive over time. For example, a 208-day delay recently led to a total penalty of ₹4.54 lakh for a company and its directors.

The removal of a director has consequences for both the director and the company.

For the Director

• They lose their position and power in the company.
• If removed for misconduct, it can damage their professional reputation.
• They may still be liable for any wrongful acts they committed while they were a director.
• They may be entitled to compensation or damages for loss of office, depending on their employment contract.

For the Company

• The composition of the board changes.
• The company needs to find a new director if required by law.
• It can affect the company's stability and operations for a short time.
• If the removal is controversial, it can lead to negative publicity.