INTRODUCTION
I. The provision of resignation of director has been introduced for the first time in the Companies Act 2013 {Act} through section 168. Before that, this was mostly given effect by companies as per provisions of their articles of association wherever those existed, common law, court precedents and so forth.
II. There have been plethoras of court rulings, in case of Indian courts mostly based on the erstwhile Companies Act 1956.
III. It was held in the case of Transport Ltd., V. Schonberg (1905) 21 TLR 305 that where the articles contain certain provisions to be complied with, such conditions must normally be observed before the resignation can be effective. In the case of OBC Caspian Ltd., V. Thorp (1998) SLT 653 (Scot) it was held that in the absence of a specific provision in the articles of association a director can resign without being required to give reasonable notice.
IV. Normally the matter is largely left to the discretion of companies with guidance from court rulings. It is to be seen whether the intention of resignation is clear or not and if so when that is to take effect.
V. It was held in the case of SS Lakshmana Pillai v. ROC {1977} 47 Com Cases 652 {Mad} that in absence of any provisions Companies Act 1956 or under the articles of association of a company, a resignation tendered by a director or a managing director, in writing, which is unambiguous, will take effect from the time when such resignation is tendered.
VI. It was held in another case that a verbal resignation accepted at a general meeting is effective even though the articles provide that a director shall vacate his office if by notice in writing he resigns from his office. ( Ref case: T Murari v State {1976} 46 Comp Cases 613, 617 {Mad}).
VII. In the case of a non executive director, i.e. a director who is liable to retire by rotation or a director simpliciter, it is not generally necessary that the resignation should be accepted to end the tenure of his office unless the articles provide for the same. In the case of Mother Care (India) Ltd. v. Prof Ramaswamy P Aiyar (2004) 51 SCL 243 (Kar. HC), it was held that resignation ofa director is not a bilateral act, but his unilateral act of relinquishment. Hence, question of its acceptance does not arise.
VIII. In the matter of resignation of an executive director, say, a managing director {MD}, courts had held that the company had to accept his resignation and relieve him from his duties. In a case, keeping in view that MD held his position in two capacities; that being of a manager and a director, it was decided that the capacity of a manager cannot be terminated by merely sending two resignations but becomes effective only when the company accepts the resignation and relieves him from his duties. {Ref case : Achutha Pai v. Registrar of Companies {1966} 36 Com cases 598 { Ker}.
IX. With regard to withdrawal of resignation by the director it was held in the case of Union of India v Gopal Chandra Misra AIR 1978 SC 694 that in the absence of legal, contractual or constitutional bar, a prospective resignation can be withdrawn at any time before it becomes effective.
X. In another case of Chokkalingam Chettiar V. Official Liquidator 1943 13 Comp. Cases 263 Mad., the court had held that a director who has resigned would not be liable for anything that happens subsequently.
The genesis of the new law in the Act may be traced in the principles laid down in cases like Glossop v Glossop {1907} 2 Ch 370 , T Murari v State {1976} 46 Com Cases 613 { Mad.} and other comparable cases.
NEW LAW IN SECTION 168 OF COMPANIES ACT 2013
WHAT IS THE PROCESS OF RESIGNATION?
A. The sub section {1} of section 168 lays down, basically, a process. The resignation by the director concerned shall be given in writing to the company. Verbal resignation will not suffice. The Board shall on receipt of such notice take note of the same. It is permissible to take note either at a duly convened board meeting or by passing of resolution through circulation by directors in terms of section 175 of the Act. The company is also required to intimate the fact of the resignation to the concerned Registrar of Companies. The process as stipulated in Companies (Appointment and Qualification of Directors) Rules, 2014 reads as follows:-
“15. Notice of resignation of director- The company shall within thirty days from the date of receipt of notice of resignation from a director, intimate the Registrar in Form DIR-12 and post the information on its website, if any”.
B. The Board is also required to place the fact of such resignation in the report of directors which is to be laid in the immediately following general meeting after the resignation. There are certain ambiguities involved here. It is not clear what report of directors denotes? Does it refer to the Report of Board of Directors/ Board’s report prepared in terms of the section 134 of the Act or just a simple report of directors in compliance of section 168? Pertinently Board’s report is laid before the annual general meeting {AGM} of the company, once a year, in terms of sections 96 & 102 of the Act. It may, however, be possible that an extraordinary general meeting {EGM} is held in terms of section 100 of the Act after the resignation of the director, but before the AGM to transact some urgent business. In such a situation whether the fact of resignation will have to be placed before the EGM or the AGM? Clarification from Government should come. However, the safe interpretation will be to place the fact of resignation before both the meetings, firstly in a simple report of directors placed before EGM and, secondly in the Board’s Report placed before the AGM.
C. This sub section also mandates that the resigning director has to forward to the concerned Registrar of Companies a copy of his resignation together with detailed reasons thereof, within 30 days of his resignation. The process has been prescribed in Companies (Appointment and Qualification of Directors) Rules, 2014 as follows:-
“16. Copy of resignation of director to be forwarded by him.-
Where a director resigns from his office, he shall within a period of thirty days from the date of resignation, forward to the Registrar a copy of his resignation along with reasons for the resignation in Form DIR-11 along with the fee as provided in the Companies (Registration Offices and Fees) Rules, 2014.
Provided that in case a company has already filed Form DIR-12 with the Registrar under rule 15, a foreign director of such company resigning from his office may authorise in writing a practising chartered accountant or cost accountant in practice or company secretary in practice or any other resident director of the company to sign Form DIR-11 and file the same on his behalf intimating the reasons for the resignation.”.
Significantly, the requirement of giving detailed reasons of his resignation to the Registrar by the director leads to the inference that he has also to give such reasons to the company in his resignation letter.Moreover, the words “…. the date of resignation…” in this Rule 16 will indicate the effective date of resignation as laid down in the next sub section.
WHAT IS THE EFFECTIVE DATE OF RESIGNATION?
A. The sub section {2} stipulates about the effective date of the resignation of the director. It states that the resignation shall take effect from the date on which the notice is received by the company or the date, if any, specified by the director in the notice, whichever is later. It is to be noted is that the concept of acceptance of resignation of the director by the company in a general meeting or by the Board or by any authority is not present in the provision. Moreover, it makes no distinction between an executive director, say, a managing director or a whole time director, and a non executive director, i.e. a director liable to retire by rotation or a director simpliciter, in the matter of resignation.
However a better interpretation herein would be that in case of executive directors the resignation should also be in compliance of the terms of their appointment which are not contrary to these provisions.
B. From the foregoing it is clear that where the resigning director has specified a date of his resignation in his letter and sent it to the company which has been received by it on another date, the resignation will take effect, between these two dates, from the latter date. As for instance, if the stipulated date of resignation given by the director is 1st January and the letter is received by the company on 3rd January, the effective date will be 3rd January, being the latter date. In another scenario, if the director has given the date of resignation as the 10th January and sent the letter to the company, in advance, which has been received by it on 3rd January, the effective date will be 10th January, being the latter date.
C. The above provision removes the ambiguity where a director resigns from a retrospective date to be made effective from that date only and sends the letter to the company on a subsequent date. This may be done by such director to avoid and escape any legal liability arising for his offences and takes evasive action from a “back- date”. As for instance, the offence has occurred on 15th January and the director knowing this, say on 19th January, resigns effective from the “back date” of 1st January and sends his letter to the company which is received by it on 20th January. The new provision takes care of such negative possibilities as resignation will be effective only from 20th January.
D. Moreover, it has also been specifically provided that the director who has resigned shall be liable even after his resignation for the offences which occurred during his tenure. Therefore he cannot escape such liability by resignation. It was held in the case of V Thangavel v. Associated Business Credits Ltd. (in liquidation) (2006) 69 SCL 190 (CLB), in terms of the erstwhile Companies Act 1956, that the director’s liabilities and obligations which had occurred up to date of his resignation will continue.
WHAT HAPPENS WHEN ALL DIRECTORS RESIGN?
1. In this case it is envisaged that all the directors of a company have resigned from their offices or vacated their offices under section 167.
2. This sub section {3} is in line with section 167 {3} of the Act which envisages a similar situation where all the directors have vacated their office under the disqualifications mentioned therein.
3. This is not usual and can only happen where there is an extraordinary situation. In such a scenario, the provision that the promoter of the company shall appoint the directors, more so where he himself may be one of the Board members who have resigned or he is involved in instigating such situation, does not seem to be law laid down logically.
4. Moreover the law that in the absence of the promoter the Central Government shall make the appointment, needs clarity. It is not clear what absence of the promoter denotes. Could the absence means that there is no promoter in the company, or the promoter is in existence but not able to function for any reason including his complicity in the situation? The matter is of significance for the Central Government to step in with elucidation.
5. The last part of the provision also needs review where it is provided that directors who have been appointed by the promoter or the Central Government shall hold office till they are appointed by the company in general meeting. Significantly the question may arise whether their appointment in general meeting can be postponed indefinitely in absence of the words” immediately following general meeting”? This assumes importance where the appointment is made by the promoters. Does this not open a gateway for misuse? The Government should clarify the position.
CONCLUSION
Although the introduction of the provision of resignation of directors in the Companies Act 2013 streamlines the indistinct legal position which was existing for decades in the corporate, some clarifications are definitely needed from the Government to strengthen this new law.
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