Removal of Director from a Company

A corporation's shareholders own the business, but its directors supervise its administration and operations. There may be instances where a director decides to step down or where shareholders decide to remove them for poor performance or other reasons. Removing a director is a big corporate move that needs to be done carefully and in strict accordance with the legal guidelines set forth by the Companies Act of 2013 or any local regulations that may be relevant. A fair, transparent, and company-interested process must be followed whether the process is started by a regular resolution, board resolution, or court order.

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Reasons for Director Removal

A private limited company must choose at least two directors before it can begin operations, according to The Companies Act of 2013.

Except in the case of directors who are nominated by the government, shareholders may remove a director at a general meeting. A director may be removed for a number of reasons, such as:

• ✔ being excluded in accordance with the standards outlined in the Companies Act.
• ✔ More than a year has passed since the last board meeting.
• ✔ engaged in transactions that are forbidden by Section 184 of the Companies Act.
• ✔ being barred from taking part by an order issued by a tribunal or court.
• ✔ conviction by a judge for a crime carrying a minimum six-month sentence.
• ✔ Failure to adhere to the rules and specifications set forth in the Companies Act of 2013.
• ✔ deciding to leave the board on voluntary resignation.

Procedures for Dismissing Directors from a Company

There are three primary methods to remove a director from a company:

• ✔   Directors' Resignation: Under this approach, directors give their voluntary resignations from their posts.
• ✔  Director Absence from Board Meetings: This method is used to remove a director when they miss 12 months of board meetings.
• ✔  Investor-initiated Removal: This process is used when a company's shareholders decide to remove a director from their role by a vote.

Law Governing the Director Removal

Section 169 of the Companies Act, 2013 governs the removal of a director.

• ✔ Section 169: This section outlines the procedures and guidelines that must be followed in order for a firm to lawfully remove a director.
• ✔ Section 115: Although the focus of this section is on the process of adding new directors, it is helpful to understand all of the regulations pertaining to directors, including the removal process.
• ✔ Section 163: This section addresses the selection of directors to provide equitable representation for all. It's crucial for dismissing directors since it influences the way the business makes choices.
• ✔ The Companies (Management and Administration) Rules, 2014, Rule Number 23: This regulation provides precise instructions on how a business must be managed, including the correct way to remove directors.

Important Conditions for Director Removal

To lawfully remove a director, specific critical steps must be followed:

• ✔ Issuance of Special Notice: In accordance with Section 115 of the Companies Act of 2013, the removal procedure cannot begin until a special notice is sent.
• ✔ Notice Period to Director: In order to provide the concerned director enough time to prepare a response, this special notice must be sent to them at least 14 days prior to the vote on the resolution that would remove them.
• ✔ Right to be Heard: The director who is going to be fired has to be given the opportunity to tell their side of the story. They ought to be permitted to submit a written statement, which might be read out during the meeting or distributed to other members.
• ✔ Reappointment Restrictions: A director who has been dismissed from the board is not eligible to be reappointed.

Filing of Form DIR-12

The Companies Act of 2013 requires the completion and submission of Form DIR-12 in order to officially remove a director from office. An essential component of the legal process for dismissing a director from their position is this form.

Procedure for Director Removal

The procedure for removing a director from a company involves several steps, which are outlined below:

Director's Voluntary Resignation

Essential Obligations:

A director's resignation takes effect on the date the notice is received by the company or, if the director specifies a later date in the notice, on that date.

A director may resign from their role by sending a formal resignation letter to the business. Following receipt of this resignation, the Board must formally accept it. As required by Section 168 of the Companies Act, 2013, the company must tell the Registrar of Companies of the resignation and include this information in the directors' report that is given at the following General Meeting.

Mandatory Requirements

Depending on which comes first, the date of the notice to the company or a later date that the director specifies in that notice is the effective date of the director's resignation. Furthermore, any legal transgressions committed by a departing director are still their responsibility.

The following Procedure is to be followed.

• ✔ Call a Board of Directors Meeting: A board meeting has to be called in accordance with Section 173 and Secretarial Standard-1 (SS-1).
• ✔ Notice of Board Meeting: No later than seven days before to the meeting, the corporation, upon receiving a resignation letter, shall notify each director at their registered address of the upcoming board meeting. A shorter notification period is acceptable in emergency cases.
• ✔ Creating Meeting Documents: A draft resolution, the agenda, and explanatory notes should all be included in the meeting notice.
• ✔ Call for a Board Meeting: The board should meet to discuss the director's resignation letter.
• ✔ Delegation for ROC Filings: Assign the Director, CFO, or Company Secretary to send the required paperwork to the Registrar of Companies.
• ✔ Disclosure Requirements for Listed Companies: Under Regulation 30 & 46(3) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, public companies are required to promptly report resignations to the stock exchange, following specific timelines depending on the nature and origin of the event or information.
• ✔ Distribution of Draft Minutes: In accordance with the established protocols for minute preparation and approval, draft minutes should be distributed by hand delivery, courier, speed post, registered post, or email to every director within 15 days after the board meeting for their assessment.

Submission of Form DIR-12 to the Registrar of Companies (ROC):

Form DIR-12, along with the following papers, must be submitted by the firm to the ROC within 30 days of receiving the resignation notice of the director.

• ✔ A certified true copy of the Board Resolution.
• ✔ The resignation notice from the director.
• ✔ Proof of the director's cessation from the board.

Submission of Form DIR-11 by the Resigning Director:

Within 30 days following the date of resignation, the director may submit a copy of their resignation using Form DIR-11 to the Registrar of Companies (ROC). This entry ought to contain:

• ✔ Evidence of the notice being dispatched.
• ✔ An acknowledgement from the company confirming receipt of the resignation.

Updating the Register of Directors:

The resignation and any other required modifications must be included in the company's Register of Directors and Key Managerial Personnel.

Director Absence from Board Meetings for 12 Months

As per Section 167, a director is deemed to have resigned from their post if they do not show up for any board meetings for a full year, even if they haven't filed a formal leave request. The protocol under these circumstances is outlined in the steps that follow:

• ✔ Acknowledgement of Vacancy: Acknowledge that the applicable corporate governance regulations, such as Section 167, which deals with the automatic vacation of a director's office owing to non-attendance, consider the director's position to be vacated.
• ✔ Form DIR-12 Filing: Next, the business needs to submit Form DIR-12 to the Registrar of Companies (ROC). This form acts as notification of the director's removal or resignation, especially in situations when the director's absence from meetings results in the position being vacated.
• ✔ Update on MCA Database: The director's name will be formally deleted from the Ministry of Corporate Affairs (MCA) database, reflecting the vacancy of their post, following the completion of the required formalities, including the filing of Form DIR-12.

Companies must follow these procedures in order to guarantee that corporate governance regulations are met and that correct records are kept with the MCA.

Director Removal by Shareholders

Unless otherwise noted in the company's articles of incorporation or by applicable law, the following procedures should be followed by the company in order to remove a director by shareholder resolution, usually an Ordinary Resolution:

• ✔ Notice of Board Meeting: Call a board meeting and give each director at least seven days' notice. The proposed removal of the director should be on the agenda item included in this notice.
• ✔ Resolution to Call an EGM: Adopt a resolution to call an Extraordinary General Meeting (EGM) during the board meeting. Additionally, at the EGM, suggest a motion to remove the director, contingent upon shareholder ratification.
• ✔ Notifying Shareholders of the EGM: Notify all shareholders of the upcoming EGM, making sure to provide a specific 21-day notice period that does not include the day of the notice's mailing or the day of the meeting.
• ✔ Voting at the EGM: Put the resolution proposing the director's removal to a vote among the shareholders at the EGM. The resolution is passed if the majority votes in favour of it.
• ✔ Director's Right to be Heard:The director should make their argument or provide an explanation to the attendees of the meeting before the resolution is passed.
• ✔ Filing Forms DIR-11 and DIR-12: Following the passing of the resolution, fill out Form DIR-11 (if the departing director is involved) and Form DIR-12 (the company is involved) and send them to the Registrar of Companies (ROC) together with the required attachments, which should include the passed resolutions. Acknowledge that the applicable corporate governance regulations, such as Section 167, which deals with the automatic vacation of a director's office owing to non-attendance, consider the director's position to be vacated.
• ✔ Update with MCA: The removed director's information will be formally deleted from the Ministry of Corporate Affairs (MCA) database as soon as the documents are successfully submitted and all necessary requirements are fulfilled.

When eliminating a director through an Ordinary Resolution, it is imperative to carefully follow these procedures and make sure that all legal requirements are met, as required by the Companies Act.

Penalties for Delayed Submission of Form DIR-12

A firm faces increasing fines depending on how long it takes to complete Form DIR-12 when a director resigns, starting at 30 days after the resignation.

• ✔ If there is a delay of 30 to 60 days, the penalty will be double the amount of regular government fees.
• ✔ If there is a 60–90 day delay, the fine doubles to four times the amount of government fees.
• ✔ If the delay exceeds ninety days, a substantial penalty equal to 10 times the government fees is imposed.
• ✔ If the delay exceeds 180 days, the corporation may be subject to legal action for compounding violations and a penalty that is twelve times the amount of government fees.

Impacts and Considerations of Director Removal

A director's dismissal from a firm has a number of negative effects on the organisation as a whole as well as the dismissed director:

• ✔ Termination of Directorial Responsibilities: Upon a director's removal, their participation in the management and decision-making of the company comes to an instant end.
• ✔ Revocation of Authority: Upon being fired, a director loses all authority to act on behalf of the company or to represent its interests in any way.
• ✔ Possible Legal Repercussions: If the removal process is not carried out in accordance with the established legal procedures, the company may face legal problems and perhaps be sued.
• ✔ Effect on firm Reputation: When a director is removed, the public perception of the firm may suffer, especially if the reasons for the dismissal are made public. All parties concerned must be given proper consideration and the process must be discreetly managed by the corporation.

Filing Amendments under Various Acts:

The firm might have to apply for amendments under several acts in order to update the official records after the director resigned. These behaviours could consist of:

• ✔ Goods and Services Tax Act
• ✔ Shops and Establishment Act
• ✔ Factories Act
• ✔ Foreign Exchange Management Act
• ✔ Inter-State Migrant Workmen Act
• ✔ Private Security Agencies Act
• ✔ Employee Provident Fund (EPF)
• ✔ Employee's State Insurance (ESI)
• ✔ Other relevant labour laws