Over the past year, India has seen some of the biggest corporate dramas, from Cyrus Mistry being removed from Tata's Board of Directors to Chanda Kochhar's role in the ICICI Bank controversy. According to the board, Mistry's removal is the result of a trust deficit, but it was Ms. Kocchar's abuse of trust in granting loans without diligence procedures to her husband, which led to her removal. As a matter of politics, Alok Verma's removal as director of the CBI has raised contentious questions about the position of responsibility directors hold as well as the dynamics of the situations that lead to their removal.
The Ministry of Corporate Affairs (MCA) has recently issued a Standard Operating Procedure (SOP) regarding prosecution or internal adjudication proceedings initiated for removing independent and non-executive Directors. All Registrars are directed to immediately follow the SOP concerning all ongoing cases.
Recent times in India have seen some of the top executives in some of the biggest brands like Tata and ICIC being removed from their positions. The reasons for their removal may vary, but the result is the same. This article aims to elucidate how the director of a company can be ousted.
In this post, we highlight the factors that may lead to the removal of a director from the company’s board and the build-up to such removal.
In case the Director does not attend three Board Meetings in a row
One of the most important fiduciary duties of the director is to participate in deliberations for giving shape to company policies and assist in decision-making through board meetings. As per Section 167 of the Companies Act, 2013 if a Director does not attend a board meeting for 12 months, starting from the day on which he was absent at the first board meeting, even after the company gives due notice for all the meetings, it will be deemed that he has vacated the office and a Form DIR – 12 can be filed to remove his/her name from records of the Ministry of Corporate Affairs.
Removal by shareholders
Section 169 of the Companies Act, 2013 states that the shareholder agreement can remove the director by passing an ordinary resolution in the general meeting. A special notice with the intention of removing a director by the specified number of members of the company has to be passed at least 14 days before the concerned meeting at which it has to move 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 a number of members holding not less than one percent of the total voting power or holding shares on which an aggregate sum of not more than five lakh rupees, which has been paid upon the date of the notice.
The company is also required to send a notice of intimation to the concerned director intended to be removed, who further has a right to be heard at the meeting. A written representation is also allowed, which is to be sent to all members compulsorily by the company and maybe read at the meeting. This rule of natural justice embodied in the Act is intended to ensure that the director gets a fair chance to explain his conduct. The voting threshold and special resolution requirement are meant to act as a protective safeguard to ensure that a director is not unnecessarily hindered by political/business motives of a select few.
Directors and shareholders – A relationship of trust, honesty and good-faith
The ultimate responsibility of a director is towards the company, and hence, its draft shareholders. The Companies Act mentions several duties of a director – such as duty to act in good faith, exercising reasonable care, due diligence, independent judgement, working towards the interest of shareholders, and preventing undue advantages to related persons among other duties and liabilities. Thus, the ultimate power to oust an erring director is also vested with the shareholders, albeit with safeguards and appeal provisions in the Companies Act.
Conclusion
Basically speaking, there are two ways for a director to be removed from the board: if the director does not attend 3 consecutive meetings of the board, then the shareholders can propose that he or she be discharged from the board. The ultimate decision regarding whether to oust a director rests with the shareholders, but there are safeguards in place to ensure that they are protected.
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