How to Appoint and Remove Directors under the Companies Act 2013?

Directors are vital to any company, as they are responsible for making important decisions and guiding the company’s operations. The Companies Act 2013 outlines specific procedures for appointing and removing directors, ensuring everything is done legally and transparently. Here’s a straightforward explanation of how these processes work.

Types of Directors under the Companies Act 2013

Before we discuss the processes of appointment and removal, let’s first understand the different types of directors:

1. Executive Directors: These directors handle the company’s day-to-day operations.
2. Non-Executive Directors: They are not involved in daily operations but provide oversight and advice.
3. Independent Directors: They have no personal or financial ties to the company and are appointed to ensure impartial decisions.
4. Managing Director: This person is in charge of the overall management and holds significant decision-making authority.
5. Additional Directors: Temporarily appointed and serve until the next annual general meeting (AGM).
6. Alternate Directors: Appointed when a regular director is absent for an extended period.

How to Appoint Directors?

The Companies Act 2013 clearly lays out the steps to appoint directors. Let’s look at the different methods:

1. Appointment by Shareholders

In most cases, shareholders are the ones who appoint directors. The process includes:

• Notice to Shareholders: The company informs shareholders about the proposed director, detailing their qualifications and experience.
• Voting: Shareholders vote on the appointment through an ordinary resolution, which requires more than 50% approval.
• Consent from the Director: The person being appointed must provide written consent to take on the role.
• Director Identification Number (DIN): The director must have a valid DIN, which is required for anyone to hold the position of director.

2. Appointment by the Board of Directors

The board can also appoint directors in certain situations, including:

• Additional Director: The board may appoint an additional director if the company’s Articles of Association allow it. This director holds office until the next AGM.
• Alternate Director: If a regular director is absent from India for more than three months, the board can appoint an alternate director to temporarily take their place.

3. Appointment of Independent Directors

Companies, especially listed ones, are required to have independent directors. These individuals must meet specific criteria outlined in the Companies Act. Their appointment is typically approved by the shareholders, and their term usually lasts up to five years.

4. Appointment of a Managing Director

A managing director is appointed by the board, subject to approval by the shareholders at the next general meeting. Their term of office generally cannot exceed five years.

How to Remove Directors?

Removing a director is sometimes necessary to protect the company’s interests. The Companies Act 2013 provides several ways for this to happen:

1. Removal by Shareholders

Under Section 169 of the Companies Act 2013, shareholders have the right to remove a director before their term ends. The steps are as follows:

• Special Notice: A special notice must be given to the company, and the director is informed about the proposed removal at least 14 days before the meeting.
• Opportunity to Defend: The director being removed must be given a chance to present their case, either in writing or at the meeting.
• Vote by Shareholders: Shareholders vote on the removal through an ordinary resolution (simple majority).

Exceptions: Independent directors appointed for a fixed term cannot be removed without valid reasons, and additional rules may apply to their removal.

2. Removal by Tribunal

In cases of misconduct, fraud, or failure to fulfill responsibilities, the National Company Law Tribunal (NCLT) has the power to remove a director. This usually happens after a complaint is filed by shareholders or the company itself.

3. Automatic Disqualification

Directors can be automatically disqualified from their position under certain conditions. These include:

• Failure to submit financial statements or annual returns for three consecutive years.
• Defaulting on dividend payments.
• Being convicted of a crime involving fraud or dishonesty.

Once disqualified, the director is immediately removed, and the company must report this change to the Registrar of Companies (RoC).

Key Points to Remember

• Consent and Documentation: Always ensure the director’s consent and the proper paperwork is completed for both appointments and removals.
• Filing with the RoC: The company must file the necessary forms, such as DIR-12, with the Registrar of Companies within 30 days of any changes.
• Check the Company’s Articles: The company’s Articles of Association may have specific rules for appointing or removing director, so it’s essential to follow those as well.

Conclusion

The Companies Act 2013 sets out clear guidelines for appointing and removing directors, ensuring a structured approach to maintaining proper governance. Appointing directors brings fresh leadership to the company, while the ability to remove them helps maintain accountability. Understanding these processes is crucial for ensuring the company stays on track and complies with the law.