Every private company has the right to remove its board of directors if they do not contribute to its growth. Read on to know the right way to remove directors.
Removing Directors: A company director is primarily responsible for operating the business of a company. Hence, they are the person in concern who contributes a lot towards the progress of the company. There are different types of directors which include managing directors, Nominee directors, independent directors etc. However, there are several cases where the director can be underperforming with fewer efforts toward the organisation’s benefits. In such cases, directors are removed from their position and new ones are appointed. A company can remove directors on the grounds of private beach, negligence or any other conditions. There is a whole set of processes to remove directors the right way.
Every private company must have at least two directors, and every public corporation must have at least three directors at all times. Consider three scenarios that could occur during the removal of a director.
Legal Advice On The Removal Of A Director
The director has the ultimate control over the company by acting as a manager and exercising all its powers. They overlook the day-to-day activities of a company complying with the legal requirements set out in the Companies Act 2006.
To serve the greater good, there are many responsibilities for a director to accomplish. The Company Act says that a director:
- Must strive toward the success of the organization.
- Must act within powers.
- Should exercise skill, diligence, and reasonable care.
- Should exercise independent judgment.
- Should not accept any third-party benefits.
- Must avoid conflicts of interest.
- Should register interests in ongoing transitions and company arrangements.
What are the reasons to remove a director?
A company is bound to remove directors for many reasons. Some of them are:Absence from board meetings over a long time, incurring disqualifications under the Companies Act, violating contract arrangements, failing to abide by the protocols or disqualification by a tribunal or a court’s order.
Steps to Remove a Director
A company needs to undergo a few steps before removing director.
Step 1: A notice is to be sent to all the qualified members of the company for a board meeting. This meeting is to be conducted within 7 days starting from the date of issue.
Step 2: After the resolution of the board meeting is a success, a separate resolution regarding the dismissal of the director is to be issued. This is to be approved by the company members on the very day of the meeting.
Step 3: The issue of the 21-day notice is succeeded by another meeting. It is conducted by the board members to vote on the resolution passed earlier. During this time, the concerned director will be allowed to speak on his behalf.
Step 4: The DIR-12 file should be filed positively by the board members. The board resolution and the ordinary resolution are to attach along with it.
Step 5: After the completion of all the formalities and the process, the name of the concerned director is removed from the website as well as from the database of the Ministry of Corporate Affairs.
The above steps are explained in a simplified manner. The process should be executed carefully according to the Companies Act.
Difficulties faced in Dismissing a Director
Legal grounds are provided on the basis of which the removal of directors is done. But, there are certain conditions that consist of several complications and risks. A dispute turns out to be bigger if the directors from the small companies need to be removed. Removing a director can be a necessity but often it is part of some dispute. Problems are expected to arise when:
- The director to be removed is an employee.
- The director is also a shareholder.
- A company whose majority shares are owned equally by two directors.
- Protecting a company if it’s directed against the confidential information of the company.
- Shares associated with the directors are to be removed.
Removing Directors under the Companies Act
Section 168(1) of the Company Act says that the right way of removing directors is by passing an ordinary resolution at a company’s meeting. However, this requires special notice.
Special notice and its importance
Serving formal notice to the company is necessary for the shareholders in case they want to remove a director. This has to be done at least 28 days before a board meeting. Such notice is known as special notice and the board now has the reasons to call for a meeting and send its copy to the concerned director. There are certain requirements to be followed (14 days notice) to call a meeting. This is succeeded by the director’s ability to propose a resolution which is put into a vote for an effective outcome. A company has to be careful while following the requirements as they are important to keep the process alive. Moreover, they should also be careful while proposing a meeting to dismiss directors on short notice.
Employment law risks
If the director to be removed is an employee, the company has to take appropriate care. Although the status of an employee does not object to the decision of the shareholders, the removal often leads to a constructive dismissal. In such cases, the director is privileged to claim unfair removal against the company.
Conclusion – Removing Directors – How to Do It the Right Way?
The director of a company has great responsibilities for working, developing, and striving toward the growth of the company. This is why a company always requires an efficient director to handle all its daily activities. If the director of a company is only acting for their own interest, then they should be removed from the organisation by the board members. However, it is also important that the right process is followed while removing the directors. If you require any legal assistance in the process for the removal of a director from your company, Vakilsearch can be your best bet.
FAQ
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