Discharge of a Director is one of the most important rights vested upon the company or the board of directors by the Companies Act, 2013. This article serves as a brief on the causes and process of the removal.
Directors of a Company
The Companies Act, 2013 treats a company as an individual person. However, to manage a company in reality, some real people are required. A director of a company is any person who is appointed to manage the affairs of a company. The guidelines for the appointment of a director are usually prescribed in the Articles of Association (AoA) of the company. But there are also certain powers vested in the shareholders for the appointment of directors.
Board of Directors of a Company
A collective team of directors acts as the ‘Board of Directors (BoD)’ of a company. The board of directors is the supreme authority for decision-making and protecting the rights and interests of all the stakeholders of the company.
Discharge of a Director
The Board of Directors plays an important role in the removal of any director from the company. The delicate process of removal of a director from his office must be documented properly in the company’s laws. The Company Act, 2013 however has laid down certain rules and guidelines for the removal.
The Common Causes for the Discharge of a Director
It is common for the board of directors to have certain disagreements from time to time. Some issues may arise with specific directors. However, it should be a well-thought and well-discussed decision to remove a director from the company.
The following could act as reasons for the discharge removal by the board:
- Frequent absenteeism from board or committee meetings
- Arising of issues due to some problem with the CEO, or other executives by micromanaging, or otherwise
- Getting involved with the corporation’s competitors
- Violating the organization’s policies by serving the board of another corporation.
- Violating the code of ethics of the organization, or any other documented agreements between the company directors.
- Participating in illegal activities, especially with regard to the securities of the corporation
- Revealing sensitive and confidential information about the company to unauthorized people.
- Turning the board into an unhealthy and dysfunctional boardroom by behaving inappropriately, or disrespecting the other board members.
- Making use of the company for his or her personal gain.
The director termination however should be opted for only when it is absolutely necessary. The decision regarding a director’s removal is up to the other directors and shareholders. If the director has failed to comply with the company’s rules and has not fulfilled his fiduciary duties, the director should be removed from the board.
Exceptions Regarding the Discharge of a Director
The company can remove any director from the company, as long as,
- He is not appointed by the Tribunal
- He is not appointed by any Court of Law.
Disqualification as a Reason for Discharge of Directors
The aforementioned are reasons owing to which the board may find it reasonable to remove a director to ensure the smooth running of the company. There are certain disqualifications, a director may attract which could act as a reason for his removal.
The following are such disqualifications:
- The director is declared as a person of unsound mind by a competent court
- The director is an undischarged insolvent
- The director is convicted by a court for moral turpitude and has been imprisoned for a period of not less than six months.
- The director has been disqualified by the Tribunal or any court of law.
- The director holds shares of any company and has not paid for any such call, provided six months have passed since the last due date to pay such call money.
- The director in the preceding five years has been convicted of an offense involving related party transactions that are governed under Section 188 of the Companies Act,2013.
- The director has not incurred a DIN (Director Identification Number)
The Discharge of a Director
A director can be removed owing to the following causes by the Board of Directors by voting process conducted in a board meeting. In any case, the concerned director has to be given an opportunity to be heard.
The board has to file Form DIR-12 with the Registrar of Companies (RoC) after the removal has been approved by the board. Failing to file Form DIR-12 can attract large penalties. After the completion of all the formalities, the director’s name shall be removed from the database of the Ministry of Corporate Affairs, and then from the website as well.
Why Hire Vakilsearch?
The removal of a director is an intricate process that might attract some legalities. If the procedure of removal is not followed judiciously, it could be deemed void, if appealed in court. In such a case, the expert lawyers and business advisors at Vakilsearch can guide you throughout the removal process in a hassle-free and speedy manner, with proper documents, and submission of forms.
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- How to Find a Legal Way to Fire Directors
- Can the Director of a Company Be Removed During Their Term of Office?
- Is it Possible to Remove a Director of a Company Without his Consent?