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Removal of Director

Removing a director from a company involves following the provisions outlined in the Companies Act 2013. The removal process requires passing a board resolution, issuing a special notice, and obtaining shareholder approval in a general meeting. Kanakkupillai assists with seamless compliance and documentation to ensure the director’s removal is legally valid and hassle-free.

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Removal of a Director From a Company

A director is an essential asset to the company who is responsible for carrying out strategic decisions, overseeing operations, ensuring compliance with legal and regulatory requirements, and guiding the company toward growth and success. Sometimes, to protect the interest of the shareholders, maintain legal standing, and prevent financial mismanagement of the company, the removal of directors becomes crucial to ensure good corporate governance. In India, the removal of a director is governed by the Companies Act, 2013. The act outlines the procedure for the eligible shareholders to remove the director. The process requires timely filing of the form DIR-12 with the Registrar of Companies (RoC). Understanding the meaning, requirements, and process ensures informed decision-making and seamless compliance.

Who is the Director of the Company?

Section 2(34) of the Companies Act 2013 states that a director is an individual who is appointed to a company's board. Directors are the officers of the company who have the director control over the management and affairs of the company.

What is the Removal of a Director?

The removal of a director is the legal process of terminating a director’s position in a company. A director can be removed by the company's shareholders or by other directors.

Why is the Removal of a Director Important?

Removal of a Director is necessary due to a variety of reasons, such as:

Good Corporate Governance: The company needs to maintain strong leadership and integrity. Removing an ineffective or non-compliant director helps in upholding corporate governance and ethical business practices.
Protect Shareholder Interests: Shareholders invest in a company and expect responsible management. If a director acts against their interests, removing them ensures transparency and protects investments.
Prevent Financial Mismanagement: If a director engages in fraud or financial misconduct, which can potentially harm a company’s finances, removing such individuals helps safeguard assets and maintain financial stability.
Maintain Legal Compliance: Company directors are responsible for ensuring that the company complies with laws. If a director fails to meet legal obligations, removing them prevents penalties and legal actions against the company.
Avoid Conflicts of Interest: The company's directors must act in the best interest of the company. If a director has personal interests that conflict with company goals, removal ensures unbiased decision-making.
Operational Efficiency: If a director lacks the skills or leadership qualities required for effective decision-making, their removal allows the company to appoint a more competent individual, improving business operations.
Protecting the Company’s Reputation: The presence of a director involved in unethical activities can damage the image and reputation of the company. Removing them helps restore trust among employees, stakeholders, and customers.

Disqualification of a Director

A person cannot be appointed or continue as a director of a company if they meet any of the following disqualifications under Section 164(1) of the Companies Act, 2013:

Declared Mentally Unfit: If a court has declared the person to be of unsound mind, and this decision is still valid.
Insolvent or Bankrupt: If the person has been legally declared insolvent and has not yet been discharged from their debts.
Pending Insolvency Proceedings: If the person has applied for insolvency and their case is still pending.
Convicted of a Criminal Offence: If the person has been convicted of an offense involving fraud, dishonesty, or moral misconduct and sentenced to at least six months in prison. If convicted of another offense later, they are disqualified for five years from the date of the second conviction.
Failure to Pay for Company Shares: If the person has failed to pay for the shares they own in the company, and the amount has been overdue for more than six months.
No Valid Director Identification Number (DIN): If the person does not have a Director Identification Number (DIN), it is mandatory for all directors.
Conviction Under the Companies Act: If the person has been convicted of an offense under the Companies Act, 2013, in the past five years.

Removal or Director by the Shareholders

Unless the Tribunal appoints a director under Section 242 of the Companies Act, 2013, the company's shareholders, after passing the Ordinary Resolution, can remove a director under Section 169 of the Companies Act, 2013.

Shareholders eligible to remove a director from the company:

Have 1% voting power in the company or
Have ₹4 lakhs paid up share capital in the company- whichever is lower

Steps to Remove a Director from a Company

Follow the below-mentioned steps to remove a director from the company:

STEP 1: Prepare and send a Special Notice

Shareholders who are eligible according to the above-mentioned eligibility criteria will prepare a Special Notice to the Company to remove a director from a Board Meeting at least 14 days before the Annual General Meeting or Extraordinary General Meeting.

STEP 2: Special Notice to the Director

The company shall send a copy of the Special Notice to the director, who is proposed to be removed 14 days before the Annual General Meeting or Extraordinary General Meeting.

STEP 3: Representation Letter by Director

Section 169 of the Companies Act 2013 clearly states that a director cannot be removed from a company until he is given an opportunity to be heard. The proposed director, after receiving the Special Notice, will submit a signed written response in the form of a Representation Letter to the company.

STEP 4: Circulation of Special Notice and Representation Letter

The Company shall circulate the Copy of the Special Notice of the Shareholders and Representation Letter to the rest of shareholders 7 days before the Annual General Meeting or Extraordinary General Meeting.

STEP 5: Passing the Ordinary Resolution

If the shareholders pass the Original Resolution with the majority of votes, the proposed director shall be removed from the Company.

STEP 6: File the DIR-12 Form

Within 30 days of passing the Ordinary Resolution, the company needs to file the DIR-12 Form with the Registrar of Companies (RoC). The following documents will be attached to the form:

Board meeting where the Special Notice was passed:
- Copy of the Resolution
- Copy of the Special Notice
- Attendance Sheet of personnel in the meeting
- Minutes of Meeting
- Proof of dispatch of Special Notice
- Proof of receipt of Special Notice
Representation Letter signed by the Resigning Letter
Annual General Meeting or Extraordinary General Meeting:
- Copy of the Resolution
- Minutes of Meeting
- Attendance Sheet of personnel in the meeting
Updated List of the Directors

Consequences of Removing a Director from the Company

Removing a director in India can have several significant implications, both for the company and for the director involved, such as:

Impact on Corporate Governance: Removing a director, especially one who plays a crucial role in the company, can disrupt the board's composition and decision-making dynamics and affect the business's operations.
Financial Considerations: If the director was involved in fiduciary duties or contractual obligations on behalf of the company, their removal might trigger claims or liabilities.
Reputational Effects: For the company, the removal of a director might affect stakeholder confidence, including investors, employees, and business partners.
Strategic and Operational Adjustments: The sudden removal of a director might necessitate strategic realignments, mainly if the director was important in steering key projects or decisions.

Removing a director from the company is a crucial step that impacts the overall management and operation of the company. Shareholders who have a 1% voting right in the company or Paid-Up Share Capital of ₹5 lakhs are eligible to remove a director after passing a Special Notice in the Board Meeting. The Indian legal framework believes in audi alteram partem. Therefore, section 169 of the Companies Act 2013 mandates that a director cannot be removed from a company until he is provided with an opportunity to be heard. After removing a director, the company must file the DIR-12 form with the Registrar of the Companies at the MCA portal.

Frequently Asked Questions

Who is a director in a company? +

A director is an individual appointed to the company’s board who plays a key role in managing operations, making strategic decisions, and ensuring that the company complies with legal and regulatory requirements.

What does the removal of a director mean? +

Removal of a director refers to the legal process of terminating a director’s position within the company.

Under which law is the removal of a director governed in India? +

In India, the removal of a director is governed by the Companies Act, 2013, which provides detailed procedures and guidelines for how the removal should be conducted.

What are the key steps involved in removing a director? +

The process involves several steps:  Affected shareholders send a Special Notice to the company at least 14 days before the meeting.  The company then notifies the director about the proposed removal.  The director is given an opportunity to respond with a representation letter.  The Special Notice and the representation letter are circulated among all shareholders.  An Ordinary Resolution is passed during a meeting to affect the removal.  Finally, the DIR-12 form is filed with the Registrar of Companies (RoC) along with supporting documents.

What is a Special Notice in the context of director removal? +

A Special Notice is a formal written communication sent by eligible shareholders to the company proposing the removal of a director. It must be issued at least 14 days before the Annual General Meeting or Extraordinary General Meeting where the vote takes place.

How is a director given the opportunity to defend themselves before removal? +

Before a director is removed, they are served with the Special Notice and are allowed to submit a written representation letter. This letter gives the director a chance to explain their side or counter the allegations.

What documents are required when filing the DIR-12 form after a director’s removal? +

When filing the DIR-12 form, the company must have the board meeting minutes where the Special Notice was discussed, copies of the resolutions, attendance sheets, proof of dispatch and receipt of the Special Notice, the director’s representation letter, and the updated list of directors.

What are some common disqualifications that prevent someone from being appointed as a director? +

Under Section 164(1) of the Companies Act, 2013, disqualifications include being declared mentally unfit, being insolvent or involved in insolvency proceedings, being convicted of criminal offences involving fraud or dishonesty (with a specified period after conviction), failing to pay for company shares, or having a recent conviction under the Companies Act, 2013.