Change in Business

Removal of Directors as per Companies Act 2013

Section 2(34) the Companies Act, 2013 defines the term “director”. A director means any individual who is appointed as the director of the Company by its board to perform such duties and functions for/on behalf of the company in accordance with the provisions of the Companies Act, 2013.

Only an individual can be appointed as a director of a Company. No association, body corporate or firm can be appointed as a director of a Company. Section 169 of the Companies Act, 2013 deals with removal of Directors.

Section 149 of the Companies Act provide that a public limited company is required to have a minimum three directors, whereas minimum two directors are required in the case of a private company and one director is required to be appointed in case of a One Person Company. Maximum fifteen directors can be appointed by a company. However, a company can appoint more than fifteen directors only after passing a special resolution at its general meeting.

Disqualifications for Appointment as Director

Section 164 of the Companies Act, 2013 provides that a person is ineligible for appointment as a director of a company if he —

• Is of unsound mind;
• Has been declared insolvent or has applied to be adjudicated as an insolvent;
• Has been convicted of any offense involving moral turpitude or otherwise, and sentenced in respect thereof to imprisonment for six months or more by a court and a period of five years has not elapsed from the date of expiry of a sentence. However, a person is ineligible to be appointed to any company if, has been convicted of any offense and was sentenced to imprisonment for a period of seven years or more;
• Has been disqualified from appointment as a director by any court or Tribunal;
• Has failed to pay any call money in respect of any shares of the company held by him and a period of six months has elapsed from the day on which the call money was to be paid;
• Has been convicted of the offense dealing with related party transactions under section 188 in the preceding five years;
• Does not have a DIN.

Duties of Director

Section 166 of the Companies Act, 2013^[1] defines the duties of Directors. A Director of a company should perform the following duties:

• He should act in accordance with the articles of the company.
• He should always Act in good faith for promoting the objects of the company and for the benefit of its members and act in the best interests of the company, shareholders, its employees and the community at large.
• Exercise his duties with due and diligence and should exercise independent judgment.
• Should not involve in situations which directly or indirectly conflict with the interest of the company.
• Should not achieve or take undue gain or advantage of his office whether for himself or for his relatives, associates or partners.

If the director contravenes any provisions of this section, he shall be punishable by a fine of Rs. 1,00,000 or more, which may extend up to Rs. 5,00,000.

Overview on Removal of Directors

Section 169 of the Companies Act, 2013 deals with removal of Directors. A company may remove a director before the expiry of the term of his office by passing an ordinary resolution and after giving him a reasonable opportunity of being heard. However, any director who has been appointed by National Company Law Tribunal u/s 242, is not subject to the provisions of section 169.

The provision is not applicable where the company has availed the option to appoint not less than two – thirds of the total number of directors in accordance with the principle of proportional representation.

A special notice is required for any resolution, for removing a director or for appointing any person in place of a director removed.

On receipt of notice of a resolution under this section, the company shall send a copy of the same to the director and the director, irrespective of whether or not he is a member of the company, is entitled to be heard on the resolution at the meeting.

Where notice of a resolution to remove a director has been given under this section and the concerned director makes a representation in writing to the company and requests its notification to members of the company, the company shall do so, if the time permits –

• The Company shall state the fact that the representation has been made by the director concerned, in any notice of the resolution given to members of the company.
• A copy of the representation is required to be sent to every member of the company to whom notice of the meeting is sent, and if the company is unable to send the same because of insufficient time or default, the director has the right to be heard orally, required that the representation shall be read out at the meeting.

However, the copy of the representation is not required to be sent to and read out at the meeting if, an application is filed either by the company or by any other person who is aggrieved by it and the Tribunal is satisfied that the rights conferred by this sub-section are being abused for unnecessary publicity &for defamatory purposes. The Tribunal may also order the director to pay the company’s costs on the application in whole or in part.

The vacancy created by the removal of such director shall be filled by appointment of another director in his place at the meeting in which he is removed, provided that a special notice of such appointment has been given under subsection (2).

The director who is appointed shall hold office until the date to which his predecessor would have held office had he not been removed.

In case such vacancy is not filled under the provisions of subsection (5), it may be filled a casual vacancy in accordance with the provisions of the Act provided that, the director who was removed is not be re-appointed as a director of the Board.

Exception to removal of Directors

There are some exceptions to the removal of director. It means that a company can’t remove following persons:

• A director appointed by the tribunal;
• The company has availed of the option to appoint not less than two third of the total number of directors.

Prerequisites before removal of director

Every director before his or her removal should be provided with a fair chance to explain as to why such director should not be removed.

Procedure for Removal of Directors

The procedure is as mentioned below:

• Intimate the concerned director about his removal;
• Convene board meeting and pass board resolution for removal of director.
• Send general meeting notice to all members 14 days before the date of general meeting.
• Hold general meeting and allow the director to be removed to be heard and speak. If it’s just and equitable pass the ordinary resolution.
•  Prepare documents for such removal and intimate the concerned departments.

It may be noted that two third of consent of members/special resolution is needed to remove an independent director.

Post compliances to be followed after the removal of the director

The company is required to file relevant forms with relevant attachment to the registrar in 30 days time from the passing of ordinary resolution in general meeting.

Conclusion

One should comply with the above mentioned provisions in order to avoid penal consequences. There could be various reasons as to why the management want the removal of directors but the director should be given the opportunity of being heard before he or she is removed.

Read our article: Procedure related to Shifting of Registered Office Under Companies Act, 2013