Removing a Director Under the Companies Act, 2013

The process of director removal under the Companies Act 2013 involves a company board’s resolution followed by shareholder approval.

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Director Removal

The removal or resignation of a director from a company involves legal and procedural steps, such as submitting a resignation letter, passing board or shareholder resolutions, and notifying the Registrar of Companies with the necessary filings.

 

Removal can be initiated by the board, shareholders, or under specific legal circumstances, while resignation is a voluntary act by the director. Both processes require compliance with the Companies Act and the company’s Articles of Association to ensure proper governance and record-keeping.

Min & Max Number of Directors based on type of Company

Essential Documentation for Director Removal

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Medical Benefits
Disability Benefits
Maternity Benefits
Unemployment Allowance
Dependents' Benefits
Funeral Expenses
Medical Benefits

Provides comprehensive medical care to employees and their families, including medical expenses, hospitalization, and other healthcare services.

Disability Benefits

Offers financial assistance to employees in case of temporary or permanent physical disablement due to employment injury or occupational disease.

Maternity Benefits

Entitles pregnant employees to paid leave for a specified period before and after childbirth, ensuring financial support during maternity.

Unemployment Allowance

In case of involuntary job loss or unemployment, ESI provides an unemployment allowance under the Rajiv Gandhi Shramik Kalyan Yojana.

Dependents' Benefits

In the event of the death of an employee due to employment injury, dependents receive a monthly pension as financial support.

Funeral Expenses

ESI offers a one-time payment to cover funeral expenses, easing the financial burden on the family of the deceased employee.

Procedures for Director Removal in a Company

The removal of a director from a company’s board can occur through various methods, each governed by specific regulations and procedures outlined in the Companies Act, 2013, in India. Below is a detailed presentation of the procedures involved in the resignation of a director, removal by the board, removal by the shareholders, and removal by the Central Government or Tribunal.

Reasons for Resignation:

  • Personal reasons, health issues, or other professional commitments.
  • Disagreements with the board or management over company policies or practices.
  • Inability to fulfill directorial duties effectively.

Procedure:

Notice of Resignation: The director wishing to resign must submit a written notice to the board.

Board Meeting: The company’s board of directors convenes a meeting to discuss and acknowledge the resignation.

Board Resolution: A resolution is passed to accept the resignation and the board records the resignation and its effective date.

Filing with RoC: The company must then file the resignation with the Registrar of Companies using Form DIR-11 (by the director) and Form DIR-12 (by the company), along with the resignation letter and the board resolution as attachments.

Update Records: The company’s internal records, such as the Register of Directors, must be updated to reflect the change.

Reasons for Board Removal:

  • Non-performance or failure to meet the directorial duties as outlined in the Companies Act or the company’s Articles of Association.
  • Conflicts of interest that impact the director’s ability to serve the company’s best interests.

Procedure:

Grounds for Removal: The board can only remove a director under specific grounds outlined in the Articles of Association or under automatic vacation clauses as per Section 167 of the Companies Act, 2013 (e.g., non-attendance at board meetings for 12 months, insolvency, etc.).

Board Resolution: The Board of Directors convenes a meeting to discuss and vote on the removal of the director. A majority vote is usually required for the resolution to pass.

Notice and Hearing: The director in question must be given a fair opportunity to be heard before any decision is made, depending on the company’s Articles and the nature of the removal.

Filing with RoC: If the removal is approved, the company must file the necessary forms (such as Form DIR-12) with the RoC, along with the resolution passed and relevant details.

Reasons for Shareholder Removal:

  • Loss of confidence or dissatisfaction with the director’s performance.
  • Actions detrimental to the interests of the company or its shareholders.
  • Mismanagement or involvement in fraudulent activities.

Procedure:

Special Notice: To initiate the removal of a director by shareholders, a special notice of intention to move a resolution must be given to the company at least 14 days before the meeting, excluding the day of the notice and the meeting day.

Board Notification: Upon receiving the special notice, the Board must notify the shareholders about the resolution to remove the director.

General Meeting: A general meeting is called where the resolution for the director’s removal will be proposed.

Director’s Right to be Heard: The director targeted for removal must be given a chance to present their case to the shareholders at the meeting.

Ordinary Resolution: The removal of the director is subject to an ordinary resolution passed by the shareholders at the general meeting. This requires a simple majority of votes cast by shareholders entitled to vote.

Filing with RoC: Following the removal, the company must file the outcome with the RoC using Form DIR-12, along with the resolution and the details of the new director appointed, if any.

Reasons for Government or Tribunal Removal:

  • Fraudulent practices or embezzlement of funds.
  • Serious misconduct or abuse of power.
  • Actions that are prejudicial to public interest or the interests of the company.

Procedure:

Grounds for Removal: This method is typically reserved for cases involving fraudulent practices, mismanagement, or where the interests of the public or the company’s creditors are at stake.

Application to Tribunal: An application is made to the National Company Law Tribunal (NCLT) by the Central Government, any member, or creditor of the company.

Tribunal Hearing: The NCLT will hear the case, and the director in question will be given an opportunity to present their case.

Order for Removal: If the inquiry or proceedings justify the removal of the director, the Tribunal or the Central Government will issue an order for the director’s removal.

Compliance with Order: The company must comply with the Tribunal’s order and file the necessary documents with the RoC to record the removal.

Post-appointment compliance MBP-1 DIR-3KYC Update Company Records

After a director’s removal from a company, key post-removal compliances include:

Updating Company Records

Register of Directors: The company must update its internal statutory registers, particularly the Register of Directors and Key Managerial Personnel, to reflect the removal of the director.

Minutes of Meeting: The minutes of the meeting in which the removal was decided or approved should be duly recorded and maintained in the company’s records.

Notifying Stakeholders

Depending on the circumstances and the company’s policy, it may be appropriate to notify stakeholders, including shareholders, employees, creditors, and other relevant parties, about the change in the company’s directorship.

This can be done through official communications, press releases, or updates to the company website.

Reviewing Contracts & Agreements

The company should review any contracts, agreements, or obligations where the removed director was a signatory or had a significant role.

Necessary actions may include reassigning roles, amending contracts, or notifying relevant parties about the change in the company’s representation.

Submit Required Amendment Applications Under the Following Legislation

If you need to make amendments or modifications to your business operations or compliance with various regulations, you may be required to file necessary amendment applications under the following acts:

 

► Goods and Services Act
► Shops & Establishment Act
► Factories Act
► Foreign Exchange Management Act
► Inter-State Migrant Workmen Act
► Private Security Agency Act
► Employees’ Provident Fund (EPF)
► Employees’ State Insurance (ESI)
► Other Labor Laws
► Industry-Specific Laws


These applications are crucial to ensure your business is in compliance with the ever-evolving legal landscape, and they may vary depending on your specific circumstances and the nature of your business. Always consult with relevant authorities or legal experts for guidance on filing the necessary amendments under these acts.

How V Smart Auditor Can Help ?

  • Regulatory Guidance

    Expert advice on the regulatory requirements and compliances needed for the removal of a director, ensuring adherence to the Companies Act and other relevant regulations.

  • Documentation Assistance

    assist in preparing and reviewing all necessary documentation, such as board resolutions and notices, ensuring that they are accurate, complete, and in compliance with statutory requirements.

  • Digital Signature Facilitation

    Help’s in obtaining the required Digital Signature Certificates (DSC) for the removal of director and for filing forms electronically with the MCA.

  • Filing and Submission

    Manage the entire process of electronically filing the necessary forms, such as DIR-12, with the MCA, ensuring timely and accurate submission.

  • Board Meeting Coordination

    Assist in organizing and documenting the board meeting where the resolution to remove a director is passed, including drafting minutes and resolutions.

  • Post-Removal Compliance

    Post-removal, the auditor can help ensure that all necessary filings, such as Form DIR-12 with the Registrar of Companies, are completed accurately and in a timely manner. They can also assist in updating internal records and advising on any necessary notifications to regulatory bodies or financial institutions.

Frequently asked questions

What is director removal, and when is it necessary?

Director removal is the process of removing a member of a company's board of directors from their position. It is necessary in cases of serious misconduct, non-performance, or violations of the company's bylaws.

Who has the authority to initiate director removal?

Typically, the board of directors initiates the director removal process, but in some cases, shareholders may have the authority to do so.

Do shareholders always have the power to remove directors?

Not necessarily. Shareholders' ability to remove directors depends on the company's bylaws and applicable state laws. Some companies may require shareholder approval, while others may allow the board to make this decision.

What is the process for removing a director from the board?

The process can vary but often includes steps such as a board resolution, shareholder vote, and adherence to legal procedures outlined in the bylaws and state laws.

Are there legal consequences for removing a director?

Director removal can lead to legal consequences if it is not done in accordance with the law or if the director believes their removal was unjust. Legal counsel is crucial to navigate potential litigation.

Can a director be removed without cause?

Depending on the company's bylaws and state laws, directors may be removed with or without cause. It's essential to review the specific requirements for removal in each case.

What is the role of the company's bylaws in director removal?

Bylaws often outline the procedures and requirements for director removal, including the grounds for removal, the voting process, and any necessary notifications.

Is there a notice period for director removal?

Notice periods can vary but are typically included in the company's bylaws. It is essential to follow these notice provisions to ensure a fair process.

Can a director be reinstated after removal?

In some cases, a removed director may be eligible for reinstatement if certain conditions are met, as specified in the company's bylaws or by shareholder vote.

Can a director be removed due to a conflict of interest?

Yes, a conflict of interest that significantly impairs a director's ability to fulfill their duties can be a valid reason for removal.

How does director removal impact the organization's operations?

Director removal can lead to changes in the organization's leadership structure. New directors may need to be appointed or elected to fill the vacancy.

What are the implications of director removal on the organization's reputation?

Director removal can negatively impact the reputation of both the individual and the company. Transparent communication and adherence to legal procedures are essential to mitigate reputational damage.

Can a director refuse to be removed from the board?

A director can challenge their removal through legal means, but the final decision is typically made in accordance with the company's bylaws and applicable laws.

Are there any restrictions on director removal for non-profit organizations?

Non-profit organizations often have specific regulations governing director removal outlined in their bylaws and applicable non-profit laws.

What role does transparency play in the director removal process?

Transparency is crucial to maintain trust among stakeholders. Clear communication of the reasons for removal and the steps taken is essential to ensure a fair and just process.