Steps to Address Employee's Prolonged Sick Leave
You could do the following:
Visit personally to find out the seriousness and genuineness of his illness. Contact his doctor, under whose supervision he is being treated and is submitting the medical certificates, to understand the seriousness and genuineness of his illness with the intention that the organization wants to help him.
Appoint a Medical Panel
Appoint a panel of doctors for his examination or ask him to go to a government hospital for a complete health check-up and find out the cause of his serious illness. While doing so, I would advise you to ask him to do so at the organization's cost so that he cannot claim non-availability of funds to go ahead for such an examination.
Take reports of the examination of his illness (if he is actually ill) and the period required for rest. Also, check with the doctor when, according to them, he will be fit to resume his duty. Will his fitness affect his performance, and what would be the impact of his reduced performance if he resumes his duty?
Consider Future Actions
If he is diagnosed genuinely, then your organization will have to take a stand on the future course of action. It will depend on lots of factors like his past performance, his value in the organization, his role, if his absence will affect the performance and growth of the organization, do you have other competent employees to handle his role, etc. Also, factor in this situation that if he is fit to resume after rest, what is the role he will play when he rejoins. This is where HR and management roles will be critical.
Address Employee Frustration
If, as mentioned in your mail, he is frustrated, has the HR and senior management done anything to understand his reasons for frustration and given him advice if required in writing? Can he be transferred to another department without affecting his performance (if he is a valuable employee)?
If his reasons for frustration are as mentioned by you in the mail, has he been counseled and made to understand the process and company policy that an employee has to follow? As an employer, you have the right to recruit people whom you feel would be right for a certain position irrespective of his age. Knowledge is critical. This should be made clear to the employee in clear terms. Or was he promised this new role and then the promise not kept?
Documentation and Legal Consultation
Whatever you do, it is very critical that you create the required documentation and follow a clear process of natural justice before taking any extreme decision. Follow the path of inclusiveness in such situations.
After taking all these steps, if still, only because of an ego issue, the employee wants to follow his judgment, then you would be right in taking the decision. While doing so, ensure that other staff are also subtly made aware of all your attempts to bring him on board so that when you take this extreme decision, other employees will not have a negative attitude towards your organization.
With regards to legal remedies, the best is to consult your organization's lawyer as it will depend on your industry and which acts your business falls under.
Warm regards.