How Can a Company Remove a Director?

Background

The Companies Act 2013 (the “Act”) clearly separates the rights and responsibilities of the board and shareholders. Shareholders are the owners of the company. They bear the right to elect representatives of the board, whereas the elected representative i.e., directors are responsible for organising and managing the day-to-day affairs of the company.

Therefore, the appointing authority, shareholders, have the power to remove a director. One of two conditions may arise in the event of removal of a director:

• When There is a Quorum for the Board Meeting
• When There is No Quorum for the Board Meeting

Removal of Directors

When there is a Quorum for the Board meeting, then according to Section 169 of the Act, the company may call the Extraordinary General Meeting (EGM) before the end of the director’s office term. The director will be provided a reasonable opportunity to present their case before calling the meeting.

The Company will make the decision with ordinary resolution and remove director in question. The grounds for removal may be any of the following:

• Director is convicted of any offense by a court of law.
• Director is insolvent or been declared bankrupt.
• Director has been declared of unsound mind by a competent court.
• Director has not attended Board meetings for a continuous period of 12 months without obtaining leave of absence from the Board.
• Director has been found guilty of any fraud or breach of trust.
• The director has violated any provision of the Act or any other law.

An independent board member who is appointed for a second term in accordance with Section 149 of the Act shall be removed by the company by passing a special resolution and after giving them an opportunity to present their case.

Section 169 also comes with set exceptions for removal of director. The Company cannot remove the persons from the position of director when,

• Directors are appointed by the Tribunal;
• The company exercised its right to elect at least 2/3 of the total number of board members according to the principle of proportionality.

Resolutions Requiring Special Notice.

If there is no Quorum for the Board meeting, then according to Section 115 of the Act, read with Rule 23 of the Companies (Management and Administration) Rules, 2014, (the “Rules, 2014”), the company has the power to remove the director by issuing a special notice. A decision to remove a director, or to appoint a person to replace a director so removed, requires special notice at the meeting at which they are recalled.

A special notice is a notice of intention to pass a certain resolution as per the Act or the Articles of Association (AOA) of the Company. It must be published and issued at least 14 days before the board meeting, except for the day on which the notice does serve.

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 INR 5 Lakh has been paid on the date of such notice. The Special Notice shall be sent at least 14 days prior to the date of the general meeting where the specific agenda for which this notice is to be sent shall be considered.

The procedure required to be followed by the Companies upon receipt of Special Notice is,

Step 1: Send a notice of the Board Meeting at least 7 days before the meeting to consider the Special Notice received from the shareholder/s of the Company. The Special Notice shall be annexed to the notice of the board meeting.

Step 2: The Company shall, at the same time, send a copy of this Special Notice to the concerned Director.

Step 3: Convene and hold a board meeting, where the special notice received from the shareholder/s is noted. Fix date, time, and venue for holding an EGM.

Step 4: Send notice of the EGM 21 clear days before the EGM or as specified in the AOA of the Company. If the general meeting is held with a shorter notice period, the company must obtain the shorter consent of 95% of the shareholders entitled to vote at the meeting.

Step 5: If it is not possible to deliver the notice to the members in such a manner, the notice will be published in a widely disseminated English-language newspaper and in a vernacular newspaper of the country where the registered office of the company is located. In addition, such notice must also be published on the company's website, if any. The notice must be published at least 7 days before the meeting, except for the date of publication of the notice to the meeting and the day of the meeting.

Step 6: Convene and hold an EGM where the director to be removed would have a chance to be heard following which the decision would be made.

Step 7: Form MGT 14 and Form DIR 12 to be filed with Register of Companies (ROC), within 30 days of passing of such resolution.

Step 8: It noted that Form DIR 12 is an approval form, and the ROC may send the form for resubmission for the requirement of the additional documents. The additional documents may include:

• Copy of representation letter by the concerned Director;
• Copy of the Special Notice;
• Copy of Affidavit from the director who has signed the form stating that they have complied with all the legal requirements for removal;
• Copy of indemnity from the director who signed the form;
• Copy of certificate from the practicing Company Secretary who has signed the form;
• Copy of proof of dispatch of documents to the director being removed; and
• Copy of minutes of board and EGM and attendance register thereof.

Step 9: After resubmission of Form DIR 12 and upon satisfaction of the ROC, Form DIR 12 would get approved. The timeline for approval from the date of filing of Form DIR 12 will be between 3 to 6 months.

Penalty for Failure to Comply with Provisions of the Act.

• Violation of Section 169

If the company fails to comply with any of the provisions of Section 169, the company and all the officers of the company shall pay INR 50,000. A continued failure shall attract an additional penalty of INR 500 for each day during which the defect continues up to INR 3,00,000 for a company and INR 1,00,000 if the officer is in default.

• Violation of Rule 23 of the Rules, 2014

According to Rule 30 of the Rules, 2014, in the event of contravention of Rule 23, the company and every officer of the company in default are punishable with a fine upto INR 5,000. If the violation is a continued, then a fine of INR 500 for each day of violation.

The offenses committed under Section 169 of the Act read with Rule 23 of the Rules, 2014 are compoundable under Section 441 of the Act.

Conclusion

It is not important for the director to have consent in the process of their removal from the board. While the protocol necessitates hearing the director’s defense against the allegations, the shareholders can choose to overlook the same, if the circumstances demand it.