What Is The Removal Of a Director?
The foundation of a company lies on the pedestal of a director's performance. Either a proficient director can build your business, or an insufficient director can break it. Thereby it is indispensable for the shareholders to be vigilant during the appointment of directors. A company can remove a director before the completion of his tenure period under Section 169 of the Companies Act, 2013. Besides, removal of the director becomes ineffective, if the Central Government appoints a director.
Roles and Responsibilities of a Director
The directors play a significant part in managing the daily operations of a company. Since an organization is an artificial person, it cannot fulfill the objectives that were set before starting the company. Therefore a company appoints a board of directors to take the required course of action. Here is the list of duties that a director ought to perform:
- Determine and implement progressive strategies;
- Prepare statutory documents and file it with the company’s office or other agencies;
- To summon shareholders in the meetings, call an annual meeting of shareholders;
- Maintain and keep financial records;
- A director must act as per the articles of the company;
- The directors should always work towards the interests of the company for the benefits and good faith of its employees, members, shareholders and others;
- Bind the company to seal contracts with lenders, suppliers, or other dealings with the company.
If a director breaches any regulations and doesn't perform his duties well, then the company can clench onto the procedure of removal of director.
Types of Directors
Irrespective of a company’s business structure, it is essential to appoint different types of directors. The Companies Act has segregated the Board of directors in the following forms:
Residential Director - According to the law, every company should appoint that director who is the resident of India for not less than 182 days in the previous calendar year.
Small Shareholders’ Director - Upon the notice of minimum thousand small shareholders or 10% of the total number of small shareholders, whichever is less, a listed company shall have a director that will be elected by the small shareholders.
Nominee Director - A nominee director is an individual appointed by financial institutions, banks, and other entities to monitor financial assistance like loans, investment into shares, etc.
Women Director - Regardless of Private or Public, a company needs to appoint a minimum of one woman director in case of:
- The listed company with its securities also listed on the stock exchange.
- If the paid-up capital of a company is INR 100 crore or has a turnover of INR 300 crores or more.
Additional Director - As the name suggests, it is an added person to occupy the post of a director till the next Annual General Meeting.
Alternate Director - It refers to a person appointed by the Board as a substitute for the director who wasn’t present in the country for more than three months.
Independent Director - It is the non-executive director that helps the company to enhance its corporate credibility and elevate the governance standards.
Liabilities of a director
Considering the amount of work that a director undertakes in the company, it goes without saying that he has to bear certain liabilities. As the company and its directors are two distinct entities, a director does not carry any personal liabilities on behalf of a company. However, under specific scenarios, the directors may be held liable, such as:
Liable for Tax:
If a Private company has tax due under the Indian Income Tax Act, in regards to an income of a previous year, then each director of that company becomes liable, for the payment of such tax during the relevant previous financial year.
A Debt of the Company:
Generally, a director is not liable for any personal debts of the company unless he commits any fraud during his tenure period as a director in that company.
Repay share application money refund:
In case, the share application money or surplus share application money was not repaid within a specified period, then the Board of directors is jointly liable to repay the same.
Liable to pay for qualification shares:
When a director does not obtain the qualification shares within a stipulated time frame, it affects the company in the form of liquidation after the expiry of that period. Thus, the Official liquidator summons that director to pay for such shares which he was supposed to acquire. In extreme cases a company may also choose the option of removal of director.
Misstatement in the company’s prospectus:
Company’s prospectus should always be authentic and accurate. If a director incorporates any false statement in the prospectus, he has to pay massive repercussions for it. Civil liability can be imposed on the directors for any fraudulent statement if he issues such a prospectus, except in the cases mentioned below:
- When the director proves that he withdrew his consent before the prospectus got issued.
- Provides evidence that the prospectus was issued without his consent/ authority or knowledge.
- Justifies he withdrew his consent and issue a public notice of the same, as soon as he became aware of the false statement.
- Confirms to the fact that he believed the doubted statements to be true.
Removal of a Director under Section 169 of Companies Act, 2013
Section 169 of the Companies Act, 2013 clearly defines the removal of a director and the circumstances under which it can take place. Take a look at the various cases that incurs during removal of directors:
1. Where the director submits his resignation to the Board : -
In such a case, follow these steps to remove his name from the register of directors:
- The first step is to hold a Board Meeting by issuing seven days of Clear Notice which implies to 21 days notice excluding the day on which it was sent and received.
- Then the Board will deliberate and determine whether to accept the director’s resignation or not.
- After accepting the resignation, the Board will pass a resolution stating acceptance of the director’s resignation.
- The next step that the outgoing director and Board need to take is to file a Form DIR – 11. Affix a proof of the resignation letter’s delivery and a copy of the resignation letter along with the form.
- Subsequently, the company must file a form DIR – 12 with the Registrar of Companies (ROC) along with the Board Resolution and Resignation letter.
- Lastly, after filling all the forms, the name of the director will get excluded from the master data of the company on the official portal of the MCA.
2. Removal of director Suo-moto by the Board : -
A Company has the power to remove a director via passing an Ordinary Resolution unless the Central Government or the Tribunal hasn’t appointed that director. A company partakes Suo-moto in the following way
- The primary step involves calling a Board meeting by giving seven days’ notice to all the directors. That notice will inform the directors about the removal of the concerned director.
- Finally, on the day of the Board meeting, a resolution shall be passed for holding of an extraordinary general meeting along with the special resolution for removal of directors under shareholder's approval.
- After that, the company shall have a general meeting by giving 21 days Clear Notice. Thereby, all the members will vote in the meeting, and if a majority of people shows their consent to the decision, a resolution shall be passed.
- Besides, the company will give an opportunity of being heard to the director before passing the resolution.
- Once the company passes the decision, then, the same procedure will be followed for removal of director. Wherein Forms DIR – 11 and DIR – 12 shall be filed with the same attachments of the Board Resolution, Ordinary Resolution.
- Thus, the name of the director will be removed from the Ministry of Corporate Affairs website.
3. If the director does not attend three Board Meetings Consecutively
As per Section 167 of the Companies Act, 2013, if a director has not attended a Board Meeting for 12 months, it will be considered that he has vacated the office. Therefore, a Form DIR – 12 will be filed on his name and his name will get eliminated from the Ministry of Corporate Affairs.
Frequently Asked Questions (FAQs)
A Company has the authority to conduct removal of a director by passing an Ordinary Resolution except for that the director who has been appointed by the Central Government or the Tribunal. Thereby a Board Meeting shall be called by giving seven days notice to all the directors.
The member who proposes the dismissal should provide a 'Special Notice' of a resolution to remove a director at least 28 days before the meeting at which the director may be removed. While once you provide documents to Swarit Advisors, our team takes five working days to lead the procedure further.
There may be no alternative option left for the company than to seek the removal of such a director. The companies have the power to remove a director by consulting to the Board and with a majority of shareholders under (AOA) of the company.
The shareholders must serve a special notice on the company of any resolution to remove a director under the provisions of the Companies Act. The company must give the notice at least 28 clear days before the general meeting on which the resolution shall be moved.
Under the Companies Act, 2013, in a private company, a shareholder can appoint a director so ideally only they hold the authority to remove directors. However, in proprietary companies, the removal of director can be commenced by a majority of directors if the constitution permits it.