Hello Sriv,
If the said Employee has been around for 3 yrs, & the Top Boss knows about it & still no one is practically able to do anything, I am not sure you have all the facts right.
On what basis is this guy so brazen in his attitude, DESPITE THE TOP BOSS MEETING HIM?
Frankly, I don't think it's anymore just a matter of Counselling/rebukes here. THIS GUY IS SIMPLY FEELING INDISPENSABLE [as you mentioned in reply to Srividya's posting]. Try to figure out WHY & on what grounds--to begin with, assume the reason you mentioned is NOT the only one. Only when you do this--maybe discretely if necessary & possible-- will you be able to arrive @ some viable & practical solution to this problem.
THERE'S A STRONG POSSIBILITY that he has some info [either related to the Company or the Boss @ the personal level] that could hurt the Company/Boss if revealed [in small companies, this is very much possible & true also, because most employees handle multiple tasks]. You haven't mentioned if his attitude was this way right from the beginning. If he was OK earlier & his attitude changed in the recent past, then this could be a MORE SURE POSSIBILITY. Just check it out from this angle.
If you don't find anything from this angle, only then can you conclude greatly that the only reason for his attitude is what you mentioned.
After this point suggest discuss with your Boss to check what all activities he handles & identify the BEST POSSIBLE person who can take-over [you may not be able to identify a perfect replacement--else your boss may have done it long back]--WITHOUT THIS GUY'S FEEDBACK OR HANDOVER FORMALITIES [if he does it well & good, but I don't think he will--going by what you mentioned].
And THEN just plainly ASK HIM TO GO--give his pay cheque & whatever you need to give as per rules. I suggest don't give him a chance to get into any argument reg such matters--forget about the notice period, etc. And don't give any scope for him to visit your office AGAIN--unless you people want to see him again :-)
Sometimes from the HR point-of-view, we need to decide if "maximising the gains" is important or "minimising the losses" is more important --something that the Stock/Share market experts are aware of pretty well.
The choice is yours.
All the Best.
Rgds,
TS