Resignation of Director: An analysis

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Resignation of Director

The word resignation means an act of giving up a job or position in a formal or official way.[1] The Companies Act, 1956 did not have any specific provision regarding the resignation of a director. The next option was to refer to the Articles of Association (AoA) of the company if there was any procedure prescribed there. Generally, companies do not have a clause in their AoA regarding the resignation of a director. This remained a grey area until 2013 when the Companies Act, 2013 was passed and introduced a much-needed clause on the resignation of a director. Moreover, as the 1956 act was silent about the procedure, thus the best way out was probably to look at the ordinary common law principles regarding the resignation. The resigning director was supposed to inform the company or the board of his decision by notice, as a precaution he could inform SEBI or the Registrar of Companies (ROC) or publish an advert in a popular newspaper informing the public of his decision.  This project will discuss the controversies and position of law on this subject as it was before the passing of the 2013 Act and as it stands now.

Hypothesis

Position under the Companies Act, 1956

Section 284[2] of the Act specifies the way in which a director could be removed from his post before the expiry of his term. Further Section 283[3] provided for certain grounds on which the office of director ceased to exist. The Companies Act, 1956 did not have a provision on the procedure of resignation of a director, however, the position was made clear by the courts in the cases that came before them. There was confusion regarding the date from which the resignation would take effect, or whether a Director needed the acceptance by the board to resign.  As the act is silent about any provisions in this regard, one must refer to the Articles of Association (AoA) of the company. If the AoA is also silent about resignation then it would be beneficial to look at the terms and conditions of the contract with the Director. The Madras High Court[4] held that:

“In the absence of a provision in respect of resignation under the Act or under the Articles of Association of a company, the resignation tendered by a Director or Managing Director unequivocally in writing will take effect from the time when such resignation is rendered.”

Further, the same High Court in S.S. Lakshmana Pillai v. ROC[5] laid down certain conditions:

1. If a resignation stipulates that it will take effect after acceptance by the board, or if the Articles require the Director to seek permission of the board, then acceptance is required to end his tenure.

2. If the resignation clearly states that it is to take effect immediately, then acceptance is not required, except when any provision of the Act or the Articles make it mandatory.

3. Both written and oral form of submitting the resignation is allowed but the intention to resign should be clear. However, it is advisable to submit one’s resignation in writing as it indicates the date, time and all the specifics that may help the court to refer to in case of a dispute. If there is no indication as to when the resignation will take effect, the resignation takes effect immediately.

4. Resignation, however, will not absolve the resigning director from incurring any liability for an act that took while he held office.

Abiding by the above mentioned principles, we can safely assume that the resignation of a Director depends upon nature and the terms and conditions of the office.

In 2002, the Bombay High Court in Saumil Dilip Mitra v. State of Maharashtra[6] held that a Director can end his tenure by resignation unilaterally. There is no need for him to file Form No. 32 and intimation about his resignation to the Registrar of Companies is also not required. It is the duty of the company secretary to give intimation about resignation to the registrar and to file Form No 32. If a Director wants to resign, he can do so by sending a written letter of resignation either to the Chairman or the company secretary. The Chairman will then move the resignation in a meeting of directors. An important question arises here. What if the Board refuses to accept the resignation of the Director? If we read the Bombay High Court judgment with the ruling in Registrar of Companies v. Bihar Investment Trust Ltd[7]., then it becomes clear that the director can resign unilaterally as it was held that:

1. It is a right of a person to tender he resignation whenever he wishes and cannot be made to go against his will.

2. A resolution will be moved in a meeting and the resigning director will be intimated about his resignation. Thereafter, it is the duty of the Company Secretary to complete all the formalities which include the filing of Form No. 32.

Position under the Companies Act, 2013

The position under the new Companies Act regarding the resignation of a director is much more simplified than the last one. Section 168 of the Companies Act, 2013 provides for the resignation of the director of a company.  A director of a company may resign by giving a notice in writing to the company. The Board will take notice after it receives a receipt of resignation and will take note of it by passing a board resolution to that effect. The company has a duty to intimate the registrar about the resignation of a director by filing form no DIR-12 within 30 days of effective date of resignation. The Company is duty bound to maintain a report of directors and take note of resignations immediately after the general meeting of the company. According to Rule 15 of Companies (Appointment and Qualification of Directors) Rules, 2014, a company has 30 days to inform the registrar and file form DIR-12. The resigning director, on the other hand, is also bound to send a copy of his resignation in addition to the reasons for the resignation within 30 days of resignation. The acceptance of the resignation by the board is not necessary but the board has to take note of the resignation. The resignation will take effect from the date on which the notice is received by the company. The resigning director will be liable, even after his term has ended, for the offenses committed by him during his tenure. In Renuka Datla and Ors. Vs.  Biological E Limited[8], a question arose as to whether the director had ceased to be the director from a specified date. According to the article 129 of AoA of the Company, the office of a director becomes vacant if a director sends his notice of resignation in writing to the company. The Court held that this clause doesn’t require the acceptance of the resignation by the board for resignation to take effect. Further, where a person had sent his notice of resignation to the company on a date, clearly expressing that he wants to relinquish his post, ceased to be the director of that company from a specified date. In the case where all the directors of a company resign, then the Central Government will appoint the required no. of directors until new directors are appointed by the company.

Conclusion

As discussed above, there was no specific provision in the previous Companies Act (1956) which governed the resignation of a director. From the case laws mentioned in the Hypothesis we can conclude that the main principles regarding resignation before the codification were: (a) Decision to resign is unilateral and is with the director, (b) It is on the company to complete all the legal formalities after a director has resigned, (c) A director cannot be made liable for a breach that was made by the company after that director has resigned, (d) Resignation will not absolve a director from the breaches made by him or the liability incurred by him while in office. The passing of the Companies Act, 2013 has to lead to an end of controversies and litigation regarding the subject matter as the clause has incorporated most of the important principles that were there during the 1956 act. The controversies regarding the date of resignation have also been resolved as the clause specifically mentions that the date of resignation will be the day when the company receives the resignation notice.

Frequently Asked Questions(FAQs)

1. Whether there has been a change in the procedure for affecting resignation of the Director after passing the Companies Act, 2015?

The procedure for the resignation of a director has been codified as Section 168 of the Companies Act, 2013, however, it cannot be said that the procedure for resignation has changed. It cannot be denied that the introduction of the clause has made things simpler and convenient yet the procedure as it stood before the passing of the 2013 act was more or less the same.

2. What is the procedure for the resignation of Director?

The procedure for the filing of the resignation of a director is such that, firstly a notice has to be served by the director to the company regarding the resignation from his post. Form DIR-11 has to be filed by the director or his resignation to be accepted and preceded at the next step. After the completion of these two steps the director’s role ends, and the company has to take further steps for the process to complete.

Now, upon receiving the receipt of the notice by the director to the company, the company has to pass the Board Resolution and has to intimate the RoC regarding the same by filing form DIR-12 with the reason for resigning, proof of dispatch and notice by director to the Company within 30 days of resignation along with the fees a prescribe in Rule 15 of Companies Rules, 2014. The directors are also required to disclose the same in companies General Meetings.

3. When the resignation of Director becomes effective?

According to section 168 (2), the resignation of a director shall take effect from the date on which the notice is prepared and is also received by the company or the date, if any, specified by the director in the notice, whichever is later the resignation of director comes into effect.

4. What can be the possible reason for the resignation of Director?

There can be varied reasons for the director to give resignation, some of the common are:

a. Better career option:

Directors may many times resigns from their position when they got some new and better career opportunity or opportunity to work in the field which they like, or is being restricted while holding the position of director.

b. Personal reason

There might be some family problem or some other reasons because of which they might want to discontinue their position.

c. Differences with Board

When there is miscommunication between the Board members or there are some internal clash between or lessen trust, which are ultimately resulting in hampering of decision and loss to the company the director can ultimately take decision for resignation.

d. Irregularities in company

When director finds or feels there are some suspicious or unscrupulous practices going on which may result in some of the other cases of arising legal actions, therefore at such times he may feel better to resign rather than being dragged into it without any wrong.

Therefore there can be an enormous number of reasons for the director to give resignation, which may differ from case to case, but above all this the resignation of the director could only be effective or the director could only be granted full relief from such duty or position when he has either serve the proper notice to the company or he is not liable for any wrong done by him at the time of his holding the position.

Edited by Ankita Jha

References:

[1] https://www.merriam-webster.com/dictionary/resignation

[2] The Companies Act, 1956

[3] Ibid.

[4] T.Murrari v. State of Tamil Nadu (1976) 46 CompCas 613 Mad

[5] (1977) 47 Com Cases, 652 Mad

[6] (2002) 48 CLA 21

[7] (1978) CompCas 579 (Pat)

[8] MANU/AP/0196/2015

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