Removal of Director under The Companies Act, 2013

When we talk about a company, Board of directors of company are important persons who are responsible for operating a business operation of company. However, there some situations when the Management of company decides to remove a director due to any negligence, breach of privacy or any other condition. Term which a director was supposed to abide by. Let us go through different types of director with their other aspects.

Who is a Director?

As per the Companies Act, 2013 means a director appointed to the Board of a company. In literal sense, it is natural person who has certain qualifications and/or experience which adds up to the growth of company.

The collective group of these individual directors are referred as Board of Directors of company. There are different type of directors like:-

1. Managing Director:- As per the Companies Act, 2013 “Managing Director” means a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director, by whatever name called.

2. Additional Director: As per the Companies Act, 2013 a director can only be appointed by members of the company. However, till there appointment is approved by members, the Board of company an appoint a director as additional Director.

3. Nominee Director: A Nominee Director is a director who is appointed as nominee who watches the working of company or the operations or activity for which they are appointed. Again, there is no definition prescribed under The Companies Act, 2013. The Board may appoint any person as a director nominated by any institution in pursuance of the provisions of any law for the time being in force or of any agreement or by the Central Government or the State Government by virtue of its shareholding in a Government company.

4. Whole time director: As per The Companies Act, 2013 a whole-time director includes a director in the whole-time employment of the company. So, any director who is on permanent payroll of the company is referred as whole time director.

5. Independent Director: As per “Independent Director” means an independent director other than a managing director or a whole-time director or a nominee director and who falls into below given criteria:-

(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;

(b) (i) who is or was not a promoter of the company or its holding, subsidiary or associate company;

     (ii) who is not related to promoters or directors in the company, its holding, subsidiary or associate company;

(c) who has or had no pecuniary relationship, other than remuneration as such director or having transaction not exceeding ten per cent. of his total income or such amount as may be prescribed, with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year;

(d) none of whose relatives—

   (i) is holding any security of or interest in the company, its holding, subsidiary or associate company during the two immediately preceding financial years or during the current financial year:

Provided that the relative may hold security or interest in the company of face value not exceeding fifty lakh rupees or two per cent. of the paid-up capital of the company, its holding, subsidiary or associate company or such higher sum as may be prescribed;

  (ii) is indebted to the company, its holding, subsidiary or associate company or their promoters, or directors, in excess of such amount as may be prescribed during the two immediately preceding financial years or during the current financial year;

  (iii) has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, its holding, subsidiary or associate company or their promoters, or directors of such holding company, for such amount as may be prescribed during the two immediately preceding financial years or during the current financial year; or

(iv) has any other pecuniary transaction or relationship with the company, or its subsidiary, or its holding or associate company amounting to two per cent. or more of its gross turnover or total income singly or in combination with the transactions referred to in sub-clause (i), (ii) or (iii) as referred above.

(e) who, neither himself nor any of his relatives—

  (i) holds or has held the position of a key managerial personnel or is or has been employee of the company or its holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed;

 Provided that in case of a relative who is an employee, the restriction under this clause shall not apply for his employment during preceding three financial years.

(ii) is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of—

   (A) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or

   (B) any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten per cent. or more of the gross turnover of such firm;

(iii) holds together with his relatives two per cent. or more of the total voting power of the company; or

(iv) is a Chief Executive or director, by whatever name called, of any non-profit organisation that receives twenty-five per cent. or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two per cent. or more of the total voting power of the company; or

(f) who possesses such other qualifications as may be prescribed.

6. Small shareholder director: As per The Companies Act, 2013, a listed company have liberty to appoint a small shareholder director. Not less than one thousand small shareholders or one-tenth of the total number of such shareholders, whichever is lower, have a small shareholders’ director elected by the small shareholders and small shareholder director shall always be Independent Director.

For how long a Director can be appointed in a company?

As discussed above the different types of director have different appointment terms. Like Managing Director and whole-time directors have term of five (5) years, Additional Director has term upto next ensuing General Meeting, Nominee director has term upto the term as written into the agreement or other arrangement, etc.

Can a company remove director?

First, we need to understand what is removal of director. A removal of Director is a situation where the Board management of the company decided Suo-moto to remove director from company.

Now, the reasons for taking such step is huge and varies from company to company but Yes, a company can remove any of its director but there is procedure for removal of director from company.

Which laws/provisions governs the removal of Director?

Section 169 of the Companies Act, 2013 deals with the removal of director. The company needs to comply with this provision other wise company and its officer will attract penal provisions under The Companies Act, 2013.

Is there any exception to removal of director?

Yes, there is exception to removal of director, i.e., company cannot remove following persons from the post of directorship: –

1. a director appointed by the Tribunal
2. the company has availed itself of the option to appoint not less than two-thirds of the total number of directors according to the principle of proportional representation asper the provision of the Companies Act, 2013.

What is the process to remove a director?

The procedure to remove a director is as follows:-

• Prepare notice of board meeting along with draft resolution(s) to be passed in the board meeting.
• Company should give intimation to the concern director about his removal.
• Sending of Notice along with Agenda of Board meeting to all the Directors of company.
• Convene board meeting and pass the Board Resolution for considering the removal of concerned Director and notice of general meeting to members of company.
• Sending of general meeting notice to all the members atleast 14 days before date of general meeting along with special notice with the intention of removing a director by the specified no. of members of the company has to be passed at least before 14 days before the concerned meeting at which it has to moved excluding the day on which the notice is served and the day of the meeting.

A special notice required to be given to the company shall be signed, either individually or collectively by such number of members holding not less than one percent of total voting power or holding shares on which an aggregate sum of not more than five lakh rupees has been paid up on the date of the notice.

• Holding of General Meeting, allowing the removing director to be heard and speak. Passing of ordinary resolution if it is seems just and equitable.
• Preparation of Documents for removal of director and intimation to concerned departments.

*Note that once the director who was removed from office shall not be re-appointed as a director by the Board of Directors.

** Also note that an to remove a director, two third of consent of members/Special resolution is required to remove an Independent director.

What are prerequisites before removing a director?

The very first thing is that the director in question is given fair chance to explain why he should not be removed.

What are the forms involved in removal of Director?

Only two (2) forms are involved for removal of Director:-

• E-form MGT-14
• E-form DIR-12

What are post compliances once a director has been removed from company?

The Company needs to file the above said forms with relevant attachment to the Registrar within thirty (30) days from the passing of ordinary resolution in general meeting.

Making suitable entry in the statutory registers of the company within time as prescribed under the Companies Act, 2013.

What if company fails to comply with provisions?

If a company contravenes said provisions, the company and every officer of the company who is in default shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees.

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Disclaimer: – The above article is prepared keeping in mind all the important and basic question as well as provision of section 169 of the Companies Act, 2013 which comes in mind of a professional or other stakeholder while removal of director by a company suo-moto. The author has tried to cover all the important and basic question. Under no circumstance, the author shall not liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information.

(The Author is Corporate Consultant and provides varied array of services including Start-ups mentor, Secretarial, Legal, Trademark, taxation, Audit, GST, Book keeping and other ancillary advisory service in Delhi, Chandigarh as well as The National Capital Region (NCR) and can be contacted through email id:- [email protected] and Contact Number: 91-8178515005)