Can a Foreign Majority Stakeholder Director Remove an Indian Director?

When it comes to the decisions that can be taken by stakeholders, there is a lot of room to discuss how things would go in case of certain situations like the scope of a foreign director with 99% shareholding removing an Indian director with 1% shareholding in a private limited company.

The directors of a Company are liable to manage and take care of the daily affairs of their organization. The Directors are appointed by shareholders who are the owners of the company, to act as their representatives in the organization. The Companies Act, 2013 has clearly defined the separate rights, roles and responsibilities of directors and shareholders in any organization.

Note: As a rule, the power to remove a director shall lie with the authority appointing them.

Considering directors are somewhat the supreme managing authority in a company, it is imperative to understand the intricacies of the procedure to remove a director to ensure there are no potential issues in the future.

Applicable provisions of the Companies Act, 2013

• Section 169 of the Companies Act 2013
• Section 115 of the Companies Act 2013
• Rule 23 of the Companies (Management and Administration) Rules, 2014

Read on as we list out the various aspects associated with the removal procedure of a director in a company with three or more Directors.

Can a Foreign Director with 99% Shareholding Remove an Indian Director with 1% Shareholding in a Private Limited Company?

The answer is No.

A foreign director with 99% shareholding cannot remove an Indian director (1%shareholding) in a private limited company. As a Private Company must have a minimum of two Directors and at least two shareholders, the quorum to call the Board Meeting or General Meeting cannot be fulfilled.

If the Private Company has more than two Directors and two shareholders and most of them are foreigners, the company has to follow the procedure laid down under the Companies Act 2013 to remove a director.

Requirements for Removal of Director

The following requirements must be met for a director to be removed:

• Issuing a Special Notice under Section 115 of the Companies Act, 2013 to remove a director.
• The Special Notice must be sent to the concerned director at least 14 days before the date of passing the resolution.
• The concerned director must be given an opportunity to be heard. The representation of such a director shall be in writing.
• Any director that is removed shall not be eligible to be reappointed.

Provisions of Section 169 of the Companies Act, 2013

Pursuant to provisions of Section 169 of the Companies Act, 2013, a Company may, by passing an ordinary resolution in its extra-ordinary general meeting, remove a director before their office period expires and after they have given such an individual a reasonable opportunity of being heard.

In the case of an independent director, who has been reappointed for second term, under Section 149 of the Companies Act, 2013 shall be removed by the company only by passing a special resolution and after giving them a reasonable opportunity of being heard.

Exceptions for Removing of a Director under Section 169

A Director cannot be removed by a company if:

• The Tribunal has appointed the director.
• The Company has implemented the method of appointing not less than two-thirds of the total number of directors as per the proportional representation principles.

Provisions of Section 115 of the Companies Act, 2013

As per Section 115 of the Companies Act, 2013 read with Rule 23 of the Companies (Management and Administration) Rules, 2014, a special notice refers to a notice of an intention to move a specific resolution. This is mandatory under the provisions of the Companies Act, 2013 or in accordance with the article of association of the organization.

Members who hold not less than 1% of the total voting power or who hold shares of not less than INR 5 lakhs can give a special notice. This notice must be sent at least 14 days prior to the date of the general meeting – the day when the topic of this specific notice shall be discussed.

A Special Notice is vital for any resolution – to remove directors or appoint any individual in place of the director that has been removed.

Procedure for Companies on Receipt of Special Notice

• Sending out notices of the Board Meeting at least seven days prior to the meeting to take note of Special Notice received from the Company’s shareholder(s).
• The concerned director shall be sent a copy of the Special Notice by the Company.
• Convening and conducting a Board Meeting, where the Special Notice that will be sent to shareholders shall be drafted. Fixing the date, time and venue for holding an Extra-ordinary General Meeting (EGM) should also be done.
• The notice of the EGM must be dispatched 21 days prior to the meeting date or as required under the Company’s Articles of Association (AOA). In case a meeting has to be held at shorter notice, it is vital for the company to get the consent of 95% of the shareholders who hold voting rights at such meetings.
• In case it is not feasible to dispatch the notice in such a way to the members, the same shall be published in English in an English newspaper and in vernacular language in a vernacular newspaper that is widely circulated in the State where the registered office of the company is located. Besides, if there is a company website, such notice shall also be posted there as well.

Note: The notice shall be published at least seven days in advance, exclusive of the day of publication of the notice and day of the meeting itself.

• The EGM where the director shall be removed would thereafter be conducted, where such the director shall be given an opportunity to be heard as well. Post this meeting, an ordinary resolution shall be passed.
• Forms MGT 14 and DIR 12 must be filed with Register of Companies (ROC), within 30 days of passing of such resolution.

Form DIR 12 is an ‘Approval Form’ and might be sent by the ROC for resubmission if any additional documents are required. The requested documents may include:

• Copy of certificate from the Practicing Company Secretary who has signed the form.
• Copy of representation letter by the concerned Director
• All legal requirements for removal
• Copy of Special Notice
• Copy of Affidavit from the Director who has signed the form that they have complied with
• Copy of Indemnity from the Director who signed the form
• Copy of the Minutes of the Board and Extraordinary General Meeting and attendance register thereof
• Copy of proof of dispatch of documents to the director being removed.

This list is inclusive and may include different documents as per the requirements understood by the ROC for each situation.

Note: After Form DIR 12 is resubmitted and approved by the ROC, FORM 12 shall be approved. The approval time for the form lies between three to six months from the date of filing.

What are the Penalties for Failing to Comply with Provisions under Companies Act, 2013

Contravention of Section 169

If a company fails to comply with any of the provisions stated under Section 169, the company and every officer of the company who is at fault shall be required to pay a fine of INR 50,000. Besides, in cases of continued failure, an extra fine of INR 500 for each day that such failure occurs shall be levied. It should be noted that the maximum amount of such fines shall vary for companies at fault and officers at fault.

Defaulter	Fine
Company	INR 3 lakhs
Officer	INR 1 lakh

Contravention of Rule 23 of the Companies (Management and Administration) Rules, 2014

In accordance with Rule 30 of Companies (Management and Administration) Rules, 2014, contravention of Rules made under Section 169, the organization and each officer of the organization who is in default shall be punishable with a fine of up to INR 5,000. If the contravention continues, the fine levied shall be an additional INR 500.

The offenses committed under Section 169 of the Companies Act, 2013 read with Rule 23 of the Companies (Management and Administration) Rules, 2014 are compoundable under Section 441 of the Companies Act, 2013.

Conclusion

Removing a director is a crucial right of the shareholders. Such removals may occur if the directors are incompetent or unfit to continue as the Director of the company. However, it is strongly advised to explore all the legal options before starting the Director’s removal process.

Considering removing a director is quite a sensitive subject, due care and due diligence must be exercised if you wish to invoke the above-mentioned provisions for the removal process.

Besides, it must also be duly noted that the various aspects covered in this article shall not be applicable in case the private limited company has only two directors, as that is the minimum requirement for such companies to conduct its proceedings under the Companies Act.