Director Disqualification

Different Modes of Removal of Directors – An Overview

calendar07 Jan, 2023
timeReading Time: 6 Minutes
Different Modes of Removal of Directors - An Overview

Boards are always considered as the power centres of a corporate entity. Therefore every company that has been incorporated as per the rules of the Company Act of 2013 or the Limited Liability Partnership Act is required to maintain a minimum number of directors in the company. These are two in the case of a Private Company, three in the case of a Public Company, one in the case of a One Person Company (OPC), and two in the case of a Limited Liability Partnership (LLAP). In this blog, we will discuss different modes, and procedure for the removal of Directors.

The process for appointing a director in the company other than a retiring director is outlined under Section 160 of the Companies Act, 2013 and Rule 13 of the Companies (Appointment and Qualification of Directors) Rules of 2014. 

As a general rule, the appointing authority should be the one to remove a director, but this is not always the case. The right to terminate a company director is not limited to shareholders alone. Any change in company’s directors need to be reported to the concerned ROC (Registrar of Companies) at the time of alteration. A corporation can intimate such change in the Board of Directors by filing e-Form DIR-12 with the Registrar of Companies (ROC) within 30 days from the date the resolution for change in director is moved in the company meeting.

Who Are Directors?

The Companies Act of 2013 does not contain a detailed definition for directors; it has very simply explained the term director under Section 2(34) as, “Any person exercising the function of Director, by whatever name called.

So to elaborate on this, a director or board of directors are appointed to perform the duties and functions of the company as per the Companies Act. They are entrusted with the responsibility to act in the best interest of the company. Therefore with time and circumstance, they work as a trustee, an agents and sometimes as managing partners. Directors are viewed differently according to circumstances.

Types of Directors in a Company:

According to the provisions of the Company Act of 2013[1], a company can appoint the following directors as per their requirements:

  1. Residential Director
  2. Independent Director
  3. Small Shareholders Directors
  4. Women Director
  5. Additional Director
  6. Alternate Director
  7. Nominee Directors

Removal of Directors as Per Section 169 of the Companies Act

The procedure for the removal of directors from a company is outlined under Section 169 of the Indian Companies Act of 2013. As per the section, all the rights are given in the hands of shareholders of the company to remove the director by passing an ordinary resolution in a general meeting.

The steps for the procedure for the removal of directors are as follows: 

  • Shareholders only have the right to remove the directors by passing an ordinary resolution in the general meeting.
  • A special notice has to be given by the shareholders of the intention for such removal from the company.
  • After the company has received the notice, it should send the notice to all the members at least seven days prior fr4om the date of the meeting.
  • The company should issue a notice of intimation to the concerned director about his removal. The director must be given an opportunity of being heard.
  • All the resolutions passed in a company must be filled within a period of thirty days of passing such special resolution under form MGT-14 with ROC (Registrar of Companies).
  • The draft notice, along with the draft resolution to be discussed in the board meeting.
  • Prepare all the related documents, and finally the company can remove the concerned director from the company.
  • Once a director of a Company has been removed from the board of directors of a company, he cannot be rehired again as a director in the same company.

Section 167(1)(b) of Companies Act of 2013 – Removal of Directors

As per Section 167(1)(b), a director cannot be absent from the board meetings for a period of 12 Months. To elaborate this, if it is found that a director is absent from all the board meetings held during a period of 12 months, with or without seeking leave of absence from the board, the board will consider that he has vacated his office as per Section 167.

(The Companies Act of 2013 under Section 168 provides a comprehensive explanation of the resignation of directors, which was missing from the original Act of 1956.)

The biggest question here is, how to calculate 12 months or what do we mean by 12 months? The period of 12 months is not the same as “the financial year” or “the calendar year. For this, one has to consider the definition of ‘month’, which has been defined by the General Clauses Act of 1897. According to the act, a month means “A month reckoned according to the British calendar.”

Following are the steps of procedure to remove a director as per Section 167(1)(b) of the Companies Act:

  • Step one in the process includes, issue a notice of intimation to the concerned director about his removal. The director must be given an opportunity of being heard.
  • Step two in the process includes, file the form DIR-12.
  • In the final step of the process, complete all the related responsibilities and concerned

Removal of Directors by the National Company Law Tribunal

The company has to make an appeal to NCLT to provide them relief from oppression and mismanagement of a company’s affairs by the concerned director(s). The appeal has to be made in accordance with Section 241 of the Companies Act of 2013. 

The tribunal will investigate in the matter and, if satisfied, will order for the removal of directors from the board of directors of the company. The process of such removal of Directors has been mentioned under Section 242 of the Companies Act of 2013.

What Are The Exceptions To The Removal Of Directors?

The exception for the removal of a director from a company are as follows:

  • A director who has been appointed by the tribunal;
  • A company cannot remove director(s) from the company in a case where the company has exercised the option of appointing a total of 2/3rd numbers of directors. 

Are There Any Preconditions Before Removing A Director?

Yes, the company act of 2013 has deliberately mentioned that directors should be given an opportunity to be heard before their removal. 

Penalties for Not Following with the Provisions of the Act

Suppose a company fails to comply with any provisions of Section 169 of the act. In that case, the company, as well as the officer(s) of the company who is in default, is liable to a fine of INR Fifty Thousand and, in case of continuing failure, with a further fine of INR Five Hundred for each day during which such failure continues, subject to a maximum of INR Three Lakhs in case of a company and INR One Lakh in case of an officer who is in default.

Also, all the offences committed by any person under Section 169 of the Companies Act of 2013, read with the Rule 23 of the Companies (Management and Administration) Rules of 2014, are compoundable in nature under Section 441 of the Companies Act of 2013.

What Are The Consequences For Not Complying With Form DIR-12?

All the companies that are incorporated as per Indian laws (irrespective of the fact whether new or existing) are required to comply with the rules regarding eform DIR-12. Under this form the company has to furnish the information regarding the appointment or the removal of the director as per the Section 7(1) (c), Section 168 and Section 170 (2) of the Companies Act of 2013 along with Rule 17 of Companies (Incorporation) Rules and Rule 8, Rule 15 and Rule 18 of Companies (Appointment and Qualification of Directors) Rules of 2014.

A company is required to file e-form DIR-12 within a period of thirty days from the date of such removal, but if the company fails to comply with this, it may attract the following penalties:

  • If it is filed within a period of 31 days to 60 days: twice the government fees
  • If it is filed within a period of 60 days to 90 days: 4 times the government fees
  • If it is filed after 90 days: 10 times the government fees
  • If it is filed after 180 days: 12 times the government fees and will be booked for the compounding offence as well

Conclusion

In the real sense, a direct plays many roles in the company; he can be an agent, a trustee, or the managing partner. The function keeps on changing with different circumstances. A company’s director is required to act responsibly in the best interest of the company. It is said that a director has a fiduciary relationship with the company and as well the shareholders of the company. They are appointed as per Section 160 of the Companies Act of 2013. 

The Act of 2013 also provides the procedure for the removal of directors from the company. The removal of directors is the inherent right of the shareholders. If it is found that a director is unprofessional or unfit to hold his position as a director of the company, he will be removed by filing form DIR-12. Though the removal of a director is a very sensitive activity, therefore the, due care and diligence ought to be exercised.

Read Our Article: Companies Act 2013 Provides Procedure For The Removal Of The Director

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