Removal vs Resignation of Directors

With each passing day more and more start-ups are being launched in the Indian ecosystem. While ensuring their survival among the stiff competition and multiple challenges, what sets a start-up apart from other start-ups even having better business models, is its ability to successfully grow from a seed into a profitable business often depends on its decision-making. In particular, one of the key challenges faced by the start-ups is the selection of their board of directors.

Directors in a start-up are responsible for controlling, managing, and directing the affairs of a company. They collectively set up the tone for every crucial event happening in its day-to-day business from the very day of its existence in pursuance of the rights and obligations entrusted to them through the memorandum & articles of association of a company. It may include decisions like the appointment of auditors for the company, decisions regarding the issuance of stock in the corporation, making investments, purchasing business assets, or providing guidance to shareholders on whether the corporation should merge with or acquire competitors or other businesses to help them in better decision-making. Hence, a director is entrusted with several positions such as the agent, officer, employee, and above all trustee of the company.

Even though the employees & officers are in the trenches managing the general operations, the directors monitor the business activities of the start-up as a whole and help wherever any interference is required as situations develop and growth opportunities arise. In the effective performance of their duties, they are expected to display utmost diligence and use their skills, knowledge, and experience as if the person carrying out such functions for himself.

Meaning & Definition of Director

According to the Companies Act 2013, a director means a person appointed by the Board of Directors through a board resolution. The Act also mandates the minimum number of directors required in each type of company, for instance, every public limited company shall have at least three directors and in the case of a private company, there must be at least two directors minimum. However, in the case of a One Person Company, the requirement of minimum directors reduces to at least one. Typically, the term of such directors appointed in the company shall be five years from the date of appointment after the completion of which they shall be eligible for reappointment through a board resolution.

Types of Directors in the Company

i. Residential Director

As per the law, every company shall have at least one resident director in India who has stayed in India for at least 182 days in the preceding calendar year.

ii. Independent Director

Independent directors are non-executive directors of the company who are appointed to examine and improve the governance standards and the corporate credibility of the company from an independent point of view. Like any other director, they are appointed for a term of five years from the date of appointment and are eligible for reappointment by passing a special board resolution in a board meeting and disclosure of the fact in the Board’s report.

Following companies should appoint at least one independent director in the company-

iii. Small Shareholders Directors

A small shareholders director is a director who holds shares with a maximum nominal value of Rs 20,000 in a public limited company and has been elected by the small/minority shareholders to represent their opinions and interests in a listed company.

iv. Women Director

Irrespective of a company is either a public or a private company, each company shall have at least one woman director on its board if it fulfills the criteria as provided below-

v. Additional Director

The Board of Directors may decide to appoint any person except who has failed to get appointed at a board meeting for any specific purpose as an additional director who shall hold the office till the date of the Annual General Meeting or the last date till which the annual general meeting should have been held, whichever is earlier.

vi. Alternate Director

According to the Companies Act, 2013, whenever the original director of a company is absent in the country for more than a period of three months altogether, the board of directors might appoint an Alternate Director who shall hold the office of the original director until he comes back. However, in the event, the term of the original director comes to an end or he resigns from his position, the alternate director’s tenure shall come to an end.

vii. Nominee Directors

Nominee directors are generally appointed to secure the interests of one or more parties who appoint them i.e. any specific class of shareholders, banks or lending financial institutions, third parties through contracts, or by the Central Government in case of any possibility of oppression or mismanagement going on in the company.

viii. Executive Director

By definition, an executive director is a director who is in full-time employment of a company and do participate in its day-to-day business affairs. They are expected to diligent and careful in the fulfillment of their duties and possess a higher responsibility towards the company.

ix. Non-executive Director

A non-executive director is a director who is not involved in the day-to-day workings of the company and participates in any specific matters such as the planning or policy-making process and suggests improvements if required to ensure the protection of the interests of the company.

Therefore, there are terms of appointment for every director to be followed till the expiry of the validity period (for instance five years). In case the director fails to abide by the terms of his appointment, he may be removed by the company. On the other hand, if he decides to leave the company before the expiry of his term, he may resign from his job by offering a resignation letter to the board of directors of the company. Let’s study them one by one to understand them better.

 Removal of a Director

Removal of a director is a situation where the board of directors of a company decides to suo-motu remove the director from the company under the provisions of section 169 of the Companies Act 2013. Any director removed by the company shall not be eligible for re-appointment in the same company. Further, it should be noted that it shall be necessary to obtain either a two-thirds majority or at least a special resolution to remove an independent director in a company(ordinary resolution for other directors).

Now, the reasons for taking such a step are huge and vary from company to company and may be prescribed in the AOA of the company such as-

i. If the director incurs any disqualification prescribed under section 164 of the Companies Act 2013.

ii. If a director is absent from board meetings for over twelve months without any proper reasons or proper intimation.

iii. If they fail to disclose their interests in relation to any contracts or arrangement as provided under Section 184.

iv. If they stand disqualified to hold their positions as a director in pursuance of any orders of a court or tribunal.

v. If they are convicted by a court of any offense and accordingly have been imprisoned for a term not lesser than six months

vi. If they fail to abide by the terms & conditions of their appointment or the rules & regulations under the Companies Act of 2013

However, a director cannot be removed from his position by the board of directors in the following two exceptional cases-

i. If such director has been appointed by any court or Tribunal;

ii. Where the board of directors has applied the principle of proportional representation under the Companies Act of 2013 and has exercised its option to appoint not less than two-thirds of the total number of directors.

Process of Removal of Director

The process of removal of a director is governed by the provisions of section 169 of the Act, any failure to comply with the requirements shall constitute an offense for which the company and its board of directors could be liable for penalty & punishment under the Companies Act, 2013.

Following is the step-by-step process of removal of a director in a company-

i. Draft & prepare a notice of the board meeting including the resolution to be passed for the removal of the director at the meeting.

ii. Send a copy of the notice to the director to inform him of the decision regarding his dismissal from services.

iii. Convene a board meeting and pass a resolution to discuss the removal of the concerned director and send a notice of the general meeting with agenda to the members of the company.

iv. The notice of the general meeting must be sent to all the existing shareholders, including the auditors and Debenture Trustee of the company at least 21 days before the day of the general meeting.

v. Finally, a general meeting must be held and after providing an opportunity of being heard must be given to the concerned director, after which an ordinary resolution must be passed to remove the director in case they appear to be just and equitable.

vi. Prepare minutes of the shareholder’s meeting including the final resolution passed and send the minutes to the chairman of the meeting.

vii. File e-form MGT-14 and e-form DIR-12 within 30 days of passing the resolution in the general meeting along with attachments with the Registrar of Companies within thirty (30) days of passing the resolution.

Meaning of Resignation of a Director

Sometimes a director wishes to leave the company either due to personal or professional reasons, if he wishes to do so he may give detailed notice of his intention of resignation to the board of directors of the company. Section 168 of Companies Act, 2013 read along with Rule 15 & 16 of The Companies (Appointment and Qualifications of Directors) Rules, 2014 prescribes the detailed procedure for the Resignation of a Director.

Once he hands over such notice of his intention, the resignation shall be deemed to take effect either from the date on which the notice is received by the company or the date, if any, specified by the resigning director in such notice, whichever is later. Although, the resignation of a director from his position shall not free him from any liability incurred by him during his tenure before the date of resignation. The detailed facts of such resignation must be disclosed in the board’s report which shall be displayed in the next general meeting.

Process of Resignation of Director

i. The director shall serve a detailed notice upon the board of directors expressing his intention to resign from his position in the company with the effective date.

ii. Upon receiving the notice, the board of directors shall call a board meeting and pass an ordinary resolution accepting the resignation of the Director and authorize a director to file the return with the Registrar of Companies.

iii. A Return of Resignation from Directorship shall be filed in e-form DIR-12 Within 30 days of resignation along with a copy of the Board Resolution and a copy of Resignation letter to the ROC of companies within 30 days of passing board resolution. On approval of DIR-12 by the ROC, the details of the resigning director shall be removed from the MCA registry under the details of the company.

iv. Finally, the resigning director shall forward e-form Form DIR-11 along with the reasons for resignation within 30 days from the date of resignation to the Registrar of Companies (ROC).

Difference between Removal and Resignation

Therefore, the removal and resignation of a director are the common processes that result in a director ultimately leaving a company. The directors of the company have been entrusted with crucial rights which should be used in the best interests of the company and not be misused with ulterior motives. Further, the director being removed without for any insufficient or invalid reason has the right to appeal to the National Company Law Appellate Tribunal seeking compensation and/or restoration of his position in the company.

Nevertheless, the procedure of removal and resignation of a director is different from each other and should be complied with efficiently during the process of removal/ resignation and even after the completion of the process as any failure to do so may lead to penalty & prosecution of the company & its board of directors as well as may adversely affect the goodwill of the start-up business. For instance, if the company fails to file DIR-12 after the removal/resignation of a director, a minimum penalty of Rs. 200 per day after the completion of 30 days from the date of passing resolution could go up to 12 times the applicable fee.