Removing a director who will not resign

A director has stopped attending, or is working against the company, or the shareholders simply no longer want him on the board. You asked him to resign. He said no. Now what?

A board resolution or an email cannot remove him. The Companies Act 2013 gives the power to the shareholders, and gives the director rights you must respect.

This guide is about the unwilling director. A director who has resigned, or whose office has fallen vacant by itself, is a different route (ss.167 and 168, Companies Act 2013).

What you can still do today

The basic rule is short. "A company may, by ordinary resolution, remove a director, not being a director appointed by the Tribunal under section 242, before the expiry of the period of his office after giving him a reasonable opportunity of being heard" (s.169(1), Companies Act 2013).

An ordinary resolution is one where the votes cast in favour exceed the votes cast against (s.114(1)). So it is a numbers question: will the votes for removal outnumber the votes against at the meeting?

Three points follow straight from the section.

Members remove, not the board. The decision is taken at a general meeting.
A reasonable opportunity of being heard is a condition of the power (s.169(1)), not a courtesy.
Some directors fall outside the simple route. A director appointed by the Tribunal under s.242 cannot be removed this way. An independent director who was re-appointed for a second term under s.149(10) can be removed only by a special resolution, again after a reasonable opportunity of being heard (first proviso to s.169(1)). And the section does not apply where the company has used the option in s.163 to appoint at least two-thirds of its directors by proportional representation (second proviso to s.169(1)).

The special notice that starts the process

Removal needs a "special notice". Section 169(2) says: "A special notice shall be required of any resolution, to remove a director under this section, or to appoint somebody in place of a director so removed, at the meeting at which he is removed."

Special notice is a members' step, not a board step. Section 115 says notice of the intention to move the resolution must be given to the company by members holding "not less than one per cent. of total voting power" or holding shares on which "such aggregate sum not exceeding five lakh rupees, as may be prescribed, has been paid-up". The Act therefore leaves the sum to the rules and caps what they may prescribe at five lakh rupees. Rule 23 of the Companies (Management and Administration) Rules 2014 prescribes it and sets the working detail:

The notice is signed, individually or collectively, by members holding not less than one per cent of total voting power, or shares on which an aggregate sum of not less than ₹5 lakh has been paid up on the date of the notice (rule 23(1)).
It must reach the company not earlier than three months, and at least fourteen days, before the date of the meeting, leaving out the day the notice is given and the day of the meeting (rule 23(2)).
The company must, immediately after receiving it, give its members notice of the resolution at least seven days before the meeting, leaving out the day of dispatch and the day of the meeting, in the same manner as it gives notice of general meetings (rule 23(3)).
If it is not practicable to give notice in that manner, the notice is published in English in an English newspaper and in the vernacular language in a vernacular newspaper, both with wide circulation in the State where the registered office is, and is also posted on the company's website, if any. This must be at least seven days before the meeting (rule 23, Management and Administration Rules).

In plain words: the shareholders who want him out put their intention to the company in writing, well ahead of the meeting. The two wordings do not conflict: section 115 sets the ceiling ("not exceeding" five lakh rupees) and rule 23(1) fixes the amount at ₹5 lakh paid up ("not less than"). The 1% voting-power route is the alternative.

The meeting

The resolution has to be moved at a general meeting. That is either your annual general meeting or an extraordinary general meeting.

Notice of the meeting. A general meeting is called by "not less than clear twenty-one days' notice" in writing or by electronic mode (s.101(1), Companies Act 2013). Shorter notice is possible only if members give written or electronic consent: ninety-five per cent for an AGM, and for any other general meeting a majority in number of members entitled to vote who represent not less than ninety-five per cent of the voting share capital (proviso to s.101(1)). A director who is being removed is a person entitled to notice too (s.101(3)(c)), and so is the auditor (s.101(3)(b)).
Who calls it. Normally the Board does (s.100(1)). If the Board will not, members holding not less than one-tenth of the paid-up voting share capital can requisition an extraordinary general meeting (s.100(2)). If the Board does not proceed within twenty-one days of a valid requisition to call a meeting on a day not later than forty-five days from receipt, the requisitionists may call and hold it themselves within three months of the requisition (s.100(4)).
Business in the notice. The notice must state the business (s.101(2)): the removal and, if wanted, the replacement appointment, which also needs special notice (s.169(2)).
No shortcut by postal ballot. Postal ballot is not available for "any business in respect of which directors or auditors have a right to be heard at any meeting" (s.110(1)(b)). A removal under s.169 falls within that exclusion, because the director has the right to be heard on it (s.169(3)). So plan for a properly convened general meeting, not a postal ballot.

The director's rights, step by step

This is where removals usually go wrong.

He gets a copy at once. "On receipt of notice of a resolution to remove a director under this section, the company shall forthwith send a copy thereof to the director concerned" (s.169(3)). Do this whether or not he is a member.
He may speak at the meeting. He "shall be entitled to be heard on the resolution at the meeting", whether or not he is a member of the company (s.169(3)).
He may send written representations. If he makes a representation in writing about the resolution and asks that members be told, the company shall, if time permits, state in the meeting notice that a representation has been made, and send a copy of it to every member who is sent the notice (s.169(4)(a) and (b)).
If time is too short, it must be read out. If the copy was not sent because of insufficient time or the company's default, he can require the representation to be read out at the meeting, without losing his right to speak (s.169(4)).
The one exception. The copy need not be sent, and the representation need not be read out, if the Tribunal, on application by the company or by anyone claiming to be aggrieved, is satisfied that the rights are being abused "to secure needless publicity for defamatory matter" (proviso to s.169(4)). This needs a Tribunal order.

Keep proof of dispatch and minutes of what he said.

Filling the seat

You have two options for the vacancy.

At the same meeting. If he had been appointed by the company in general meeting or by the Board, the vacancy "may" be filled by appointing another director in his place at the meeting at which he is removed, provided special notice of the intended appointment was given under s.169(2) (s.169(5)). The new director holds office only up to the date to which his predecessor would have held office had he not been removed (s.169(6)).
Later, as a casual vacancy. If you do not fill it at the meeting, it can be filled as a casual vacancy under the Act (s.169(7)). For a director appointed by the company in general meeting, the Board can fill the casual vacancy at a Board meeting, subject to the articles, and the appointment must then be approved by members at the immediate next general meeting (s.161(4)).

One hard stop: "the director who was removed from office shall not be re-appointed as a director by the Board of Directors" (proviso to s.169(7)). Members can vote him back in, but the Board cannot.

The deadline clock

Special notice to the company: not earlier than three months and at least fourteen days before the meeting (rule 23(2), Companies (Management and Administration) Rules 2014).
Company's notice of the resolution to members: at least seven days before (rule 23(3)), and in practice carried in the general meeting notice, which is clear twenty-one days unless shorter notice is validly consented to (s.101(1)).
Copy to the director: "forthwith" on receiving the notice (s.169(3)).
Return to the Registrar: a return of changes among directors must be filed "within thirty days of any change taking place" (s.170(2), Companies Act 2013), in Form DIR-12 (rule 18, Companies (Appointment and Qualification of Directors) Rules 2014). Rule 18 also says "within thirty days of such appointment or change". Neither provision says which day is the change for a removal. The safe course is to count thirty days from the date of the meeting at which the resolution is passed, and for a replacement director from the date of appointment.

Section 172 provides a penalty where a company defaults under this Chapter and no specific penalty is provided: ₹50,000 and a further ₹500 for each continuing day, subject to a maximum of ₹3 lakh for the company and ₹1 lakh for an officer in default. The late-filing additional fee is not set out here; check the current fee on the MCA portal before you file.

Filing after the meeting

Update your registers and file DIR-12 within thirty days of the change.

An ordinary resolution is not among the resolutions listed for filing with the Registrar in s.117(3) of the Act. A special resolution is. So if you removed a second-term independent director by special resolution, a copy goes to the Registrar within thirty days under s.117(1) along with its explanatory statement, in Form MGT-14 (rule 24, Management and Administration Rules). Late filing attracts a penalty of ₹10,000 plus ₹100 for each day after the first, up to ₹2 lakh (s.117(2)).

What not to do

Do not remove him by a board resolution. The Board has no such power under s.169.
Do not skip the special notice or his hearing. Send him the notice and resolution, and let him speak.
Do not use a postal ballot (s.110(1)(b)).
Do not re-appoint him through the Board. The proviso to s.169(7) bars it.
Do not assume the fight ends with removal. Section 169(8) preserves his right to any compensation or damages due under the terms of his contract or appointment, and does not take away other powers to remove a director under the Act.

What to do now

Next step. Count the votes. If members holding the required share of voting power or paid-up capital are willing, have them sign the special notice to the company (s.169(2); s.115; rule 23, Companies (Management and Administration) Rules 2014).
Deadline. Special notice to reach the company at least fourteen days, and not more than three months, before the meeting (rule 23(2)); the meeting itself on clear twenty-one days' notice unless validly shortened (s.101(1)); DIR-12 within thirty days of the change (s.170(2); rule 18, Companies (Appointment and Qualification of Directors) Rules 2014).
Consequence. The reasonable opportunity of being heard is a condition of the power in s.169(1), and special notice and a copy to the director are required by s.169(2) and (3). Missing the thirty-day DIR-12 window is a default under s.170(2).

Have a CA review your facts before you act or file.

FAQs

Can the board remove a director who refuses to resign?
No. Under s.169(1), Companies Act 2013, the company removes a director by an ordinary resolution of its members. The Board's role is to call the meeting and give the notices.

Does the director have to be a shareholder to be heard?
No. The director "whether or not he is a member of the company" is entitled to be heard on the resolution at the meeting (s.169(3)).

How many members have to give the special notice?
Members holding not less than one per cent of total voting power, or shares on which an aggregate sum of not less than ₹5 lakh has been paid up (s.115; rule 23(1), Management and Administration Rules 2014).

Can we appoint his replacement at the same meeting?
Yes, if special notice of the intended appointment was given with the removal notice (s.169(5)). The replacement serves out the removed director's remaining term (s.169(6)).

Can the Board bring him back later?
No. The Board cannot re-appoint a director who was removed under this section (proviso to s.169(7)). Members may vote on his appointment in general meeting.

Does removal end his claim for compensation?
No. Section 169(8)(a) preserves any compensation or damages payable under the terms of his contract or appointment.

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