Removal of Director from a Company

Company Directors oversees the management and operations of a business, while shareholders own the company. Situations may arise where shareholders opt to remove a director due to inadequate performance or other concerns, or a director may choose to resign. Removing a director is a significant corporate action that requires careful deliberation and strict compliance with the legal framework provided by the Companies Act 2013 or applicable local laws. Whether initiated by an ordinary resolution, board resolution, or judicial order, the process must be conducted fairly, transparently, and in the company's best interest.

IndiaFilings specialises in navigating the intricacies of the director removal or resignation process, ensuring full compliance with legal standards and meticulous attention to detail. Let our experts assist you in navigating this critical corporate transition smoothly and effectively. Contact us today to get started.

Reasons for Director Removal

Under The Companies Act 2013, it's mandatory for a private limited company to appoint at least two directors to commence its operations.

Shareholders have the authority to dismiss a director during the General Meeting, barring instances of government-appointed directors. A director may be subject to removal under several conditions, including:

• Being disqualified as per the criteria set out in the Companies Act.
• Not attending board meetings for more than a year.
• Violating the terms of Section 184 of the Companies Act by engaging in prohibited transactions.
• Being prohibited from participating due to a court or Tribunal order.
• Conviction by a court for a criminal offence with a sentence of at least six months.
• Non-compliance with the regulations and requirements of the Companies Act, 2013.
• Choosing to resign voluntarily from the board.

Methods for Director Removal from a Company

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

• Resignation by Directors: This method involves directors resigning voluntarily from their positions.
• Director Absence from Board Meetings: This approach is used when a director fails to attend board meetings for 12 months, triggering their removal.
• Shareholder-initiated Removal: This method is employed when the shareholders of a company vote to remove a director from their position.

Law Governing the Director Removal

Removing a director is governed by the Companies Act, 2013, under Section 169.

• Section 169: This part explains how a company can legally remove a director, detailing the steps and rules that need to be followed.
• Section 115: While this section mainly talks about how to add new directors, knowing it helps to fully understand the rules about directors, including how they might be removed.
• Section 163: This section deals with choosing directors so everyone gets a fair representation. It's essential for removing directors because it affects how decisions are made in the company.
• Rule 23 of the Companies (Management and Administration) Rules, 2014: This rule gives specific guidelines on how a company should be run, including how to remove directors properly.

Essential Requirements for Director Removal

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

• Issuance of Special Notice: According to Section 115 of the Companies Act 2013, a special notice must be issued to initiate the removal process.
• Notice Period to Director: This special notice must be sent to the director in question at least 14 days before the resolution for their removal is voted on, ensuring they have adequate time to prepare a response.
• Right to be Heard: The director facing removal must be allowed to present their side of the story. They should be allowed to make a written representation, which could be circulated to members or read at the meeting.
• Restriction on Reappointment: Once removed, the director in question is not eligible for reappointment to the board.

Filing of Form DIR-12

Form DIR-12, mandated by the Companies Act 2013, must be filled out and submitted to document the official removal of a director. This form is a crucial part of the legal procedure for removing a director from their office.

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 becomes effective on the date the company receives the notice or on a later date specified by the director in the notice, whichever comes later.

Even after stepping down, a resigned director remains accountable for any offences committed during their term.

A director can step down from their position by submitting a written resignation to the company. Upon receiving this resignation, the Board is required to acknowledge it formally. The company must notify the Registrar of Companies about the resignation and include this information in the directors' report presented at the next General Meeting, as stipulated by Section 168 of the Companies Act, 2013.

Mandatory Requirements

The effective date of a director's resignation is either the date the company receives the notice or a later date specified by the director within that notice, depending on which comes last. Additionally, a director who resigns remains responsible for any legal infractions during their time in office.

The following Procedure is to be followed.

• Schedule a Board of Directors Meeting: Following Section 173 and Secretarial Standard-1 (SS-1), a board meeting should be arranged.
• Notification of Board Meeting: After receiving a resignation letter, the company must send out a board meeting notice to all directors at their registered addresses no later than 7 days before the meeting. In urgent situations, a shorter notice period is permissible.
• Preparation of Meeting Documents: The meeting notice should accompany the agenda, explanatory notes, and a draft resolution.
• Conduct the Board Meeting: The board should convene to acknowledge the resignation letter submitted by the director.
• Delegation for ROC Filings: Assign the Company Secretary, CFO, or director to submit the necessary forms and documentation to the Registrar of Companies.
• Disclosure Requirements for Listed Companies: Public companies must report the resignation to the stock exchange promptly, adhering to specific timelines based on the nature and origin of the event or information, as mandated by Regulation 30 & 46(3) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
• Distribution of Draft Minutes: Within 15 days following the board meeting, draft minutes should be sent to all directors via hand delivery, speed post, registered post, courier, or email for their review, per the established procedures for minute preparation and approval.

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

Within 30 days following the receipt of the director's resignation notice, the company must inform the ROC by submitting Form DIR-12, accompanied by the following documents:

• 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:

The director who has resigned can send a copy of their resignation to the Registrar of Companies (ROC) using Form DIR-11 within 30 days from the date of their resignation. This submission should include:

The resignation notice that was submitted to the company.

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

Updating the Register of Directors:

The company must update the Register of Directors and Key Managerial Personnel to reflect the resignation and any other necessary changes.

Director Absence from Board Meetings for 12 Months

When a director fails to attend any board meetings for twelve months, even without formally requesting a leave of absence, they are considered to have vacated their position according to Section 167. The following steps outline the procedure for such situations:

• Acknowledgement of Vacancy: Recognize that the director's position is deemed vacated under the applicable corporate governance laws, such as Section 167, which addresses the automatic vacation of a director's office due to non-attendance.
• Filing of Form DIR-12: The company must then file Form DIR-12 with the Registrar of Companies (ROC). This form serves as a notification of the director's resignation or removal, including cases where the position is vacated due to absence from meetings.
• Update on MCA Database: After the necessary formalities are completed, including the filing of Form DIR-12, the director's name will be officially removed from the Ministry of Corporate Affairs (MCA) database, reflecting the vacancy of their position.

It's essential for companies to adhere to these steps to ensure compliance with corporate governance requirements and maintain accurate records with the MCA.

Director Removal by Shareholders

To remove a director through shareholder resolution, typically an Ordinary Resolution unless specified otherwise in the company's articles or applicable laws, the company should follow these steps:

• Board Meeting Notice: Begin by scheduling a Board Meeting, providing a minimum of seven days' notice to all directors. This notice should include the agenda item for the proposed removal of the director.
• Resolution to Convene an EGM: At the Board Meeting, pass a resolution to hold an Extraordinary General Meeting (EGM). Also, propose a resolution for removing the director, subject to shareholder approval at the EGM.
• Issuing EGM Notice: Send out notices for the EGM to all shareholders, ensuring a precise notice period of 21 days, which excludes the day the notice is sent and the day of the meeting.
• Voting at EGM: During the EGM, present the resolution for the director's removal to the shareholders for a vote. If the majority supports the resolution, it is passed.
• Director's Right to be Heard: Before the resolution is passed, the director should present their case or explanation to the meeting attendees.
• Filing Forms DIR-11 and DIR-12: After the resolution is passed, complete and submit Form DIR-11 (by the outgoing director, if applicable) and Form DIR-12 (by the company) to the Registrar of Companies (ROC), along with the necessary attachments including the resolutions passed.
• Update with MCA: Once the forms are successfully submitted and all procedural formalities are completed, the removed director's details will be officially removed from the Ministry of Corporate Affairs (MCA) database.

Adhering to these steps carefully and ensuring legal compliance, as mandated by the Companies Act, is essential when removing a director via an Ordinary Resolution.

IndiaFilings experts can assist in this process to ensure a smooth and compliant director removal.

Penalties for Delayed Submission of Form DIR-12

If a company fails to file Form DIR-12 within the stipulated 30-day period following a director's resignation, it faces escalating penalties based on the extent of the delay:

• 30 to 60 days delay: The penalty incurred will be double the standard government fees.
• 60 to 90 days delay: The penalty increases to four times the government fees.
• Beyond 90 days delay: A significant penalty of ten times the government fees is applied.
• Exceeding 180 days delay: The penalty reaches twelve times the government fees, and the company might also face legal actions for compounding offences.

It's crucial for companies to adhere to the filing deadlines to avoid these penalties and ensure compliance with regulatory requirements.

Impacts and Considerations of Director Removal

The removal of a director from a company carries several consequential impacts for both the individual director and the organisation:

• End of Directorial Responsibilities: The immediate effect of a director's removal is the cessation of involvement in the company's management and decision-making processes.
• Revocation of Authority: With their removal, the director forfeits any power to act in the company's name or represent its interests in any capacity.
• Potential Legal Ramifications: Failure to adhere to the prescribed legal protocols during removal can lead to legal challenges and possible claims directed at the company.
• Impact on Company Reputation: Removing a director can adversely affect the company's public image, particularly if the circumstances surrounding the removal become widely known. The company must manage the process discreetly and with due consideration for all parties involved.

Filing Amendments under Various Acts:

Following the director's resignation, the company may need to file amendment applications under several acts to update the official records. These acts may include:

• 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
• Industry-specific regulations

These updates ensure compliance with regulatory requirements and reflect the company's current governance structure.

Why choose IndiaFilings for Director removal?

Choosing IndiaFilings for director removal offers several advantages:

• Expertise and Experience: IndiaFilings has a team of professionals who are well-versed in corporate law and the specific procedures outlined in the Companies Act 2013 for director removal.
• Compliance Assurance: With a deep understanding of legal requirements, IndiaFilings experts ensure that every step of the director removal process complies with statutory regulations, thereby minimizing the risk of legal complications.
• End-to-End Support: From the initial consultation to the final submission of necessary forms like DIR-12, IndiaFilings provides comprehensive support, guiding companies through each process phase.
• Customized Solutions: Understanding that each company's situation is unique, IndiaFilings offers tailored advice and solutions that best fit the specific circumstances and objectives of the company.

By choosing IndiaFilings, companies can ensure that the director removal process is conducted smoothly, compliantly, and with a professional touch that respects the interests of all parties involved.