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Solution required for Case study

Sweety Jain (Article) (40 Points)

08 August 2009

Q1. A company has 2 directors ( Ram & Rahim) having share capital of 99% & 1% respectively. Ram feld away due to some reason. Rahim want to resign. Can he do that? If yes then How?

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3 Replies

Hitesh Kothari (Chartered Accountant M.No. - 134239) (326 Points)
Replied 08 August 2009

Dear Sweety,

He can resign by giving notice oto the company, as there is no such provision of companies act. If AOA or MOA provides any specification then that will aplly.

Article Review

RESIGNATION OF DIRECTOR – When it shall be Effective? By G.P.SAHI

(Published in Sebi and Corporate Laws, March 21-27,2005)

Ravi Jadhav

IV B.S.L.LL.B, A.K.Khan Law College, Pune

The Companies Act, 1956 does not contain any provisions governing resignation of director. Resignation means giving up or relinquishment of ones right. In the absence of a prescribed procedure, this topic regarding resignation of directors assumes critical importance. This article by Mr. G.P.Sahi provides a lucid exposition of the current state of law on the same and is a valuable study for students and professionals in this field.

background information on resignation of directors

1) The resignation of directors :-

I. In order to constitute a complete and operative resignation their must be intention to give up or relinquish the office .A director may by notice to the company resign his directorship.

II. A director can subject to the articles, resign his office and cannot withdraw his resignation without the company’s consent.

III. The director shall resign by giving a notice in writing; he can also resign by word of mouth.

2) The mode and consequences of resignation:-

I. The articles in the companies act giving the right to the directors to resign at any time; the resignation takes place without consulting the company.

3) Intimation to the Registrar of Companies (ROC):-

I. There shall be a form filled up by the director before ROC. Such form is a proof that he has ceased to e a director of particular company.

II. The intimation and information of resignation of any director is the responsibility of the Company Secretary or the Director.

4) Nature of resignation:-

I. Unilateral or Bilateral resignation.

II. The nature of the office and conditions governing it shall determine as the nature of act is unilateral or bilateral.

contents of the article

1) Definition of Resignation

I. Resignation can be defined as the spontaneous relinquishment of one’s own right and it connotes the act of giving up or relinquishing the office.

In general juristic sense it means, in order to constitute a complete and operative resignation, there must be an intention to give up or relinquish the office and the concomitant act of its relinquishment.

II. Palmer’s Company Precedents states that even in the absence of any express power to resign, it is submitted that, unless the articles are specially framed, a director may by notice to the company resign his directorship. A Directors is merely an agent and may determine his agency.

III. Buckley on the Companies Act states that a director can, subject to the articles, resign his office, and cannot withdraw his resignation without the company’s consent. A director can resign by word of mouth. Where director’s resignation is accepted by the board, he is not liable for a report made and the dividend recommended after that time, though his resignation was not disclosed to the company.

2) Provisions under the Companies Act, 1956

I. The companies act, 1956 does not contain any provisions governing resignation of director. Section 284 of the act deals with the removal of the director before the expiry of his period under various conditions enumerated therein. Whereas Section 262 of the act provides for filling of casual vacancies among directors if the office of any directors appointed by the company in general meeting is vacated before his term of office. Further, Section 283 of the act deals with the vacation of office by the directors and the circumstances under which the office is vacated.

II. The word resignation occurs in Section 318(3)(a) and (b) of the act. It stipulates that no payment shall be made to the managing or other directors in pursuance of sub section (1) in the following cases namely:-

(a) where the director resigns his office in view of the reconstruction of the company, or the its amalgamation with any other body corporate or bodies corporate, and it is appointed as the managing director, managing agent, manager or the other officer of the reconstructed company or the body corporate resulting from the amalgamation.

(b)Where the director resigns his office otherwise than on the reconstruction of the company or its amalgamation.

3) Mode and Consequences of Resignation

I. There is no provision in the articles giving specific rights to a director to resign at any time; the resignation will take effect without any need for acceptance by the board or the company in the general meeting. In the absence of any such provision relating to the resignation in the memorandum or articles of association ,it is settled that resignation once made takes effect immediately when the intention to resign is made clear.

II. Ordinary rule as to resignation by an officer, director or Agent must be followed, namely

a. Intimation by notice either to the company or the board and acceptance of the same by them.

b. Any form of resignation is valid whether oral or written, and is sufficient, provided the intention to resign is clear.

c.Resignation is advisable in writing provided it indicates the time when it is to take effect and serve in record of reference in case of nay controversy.

III. The net result of the above analysis is that a director, who has submitted his resignation, will be deemed to have resigned from the date of his resignation, without prejudice to his liabilities and obligations which had occurred up to that date and which he cannot evade by severing his connection with the company.

4) Resignation may be unilateral or bilateral

I. The act of relinquishment may take different forms or assume unilateral or bilateral character, depending on the nature of the office and the conditions governing it.

II. If the act of relinquishment is of UNILATERAL CHARACTER, it comes into effect when such act indicating the intention to relinquish the office is communicated to the competent authority. The authority to which the act of relinquishment is communicated is not required to take any action and the relinquishment takes effect from the date of such communication where the resignation is intended to operate in praesenti.

III. Where the act of relinquishment is of BILATERAL CHARACTER, the communication of the relinquishment, by itself, would not be sufficient to result into relinquishment of the office and some action is required to be taken as such communication of the intention to relinquish.

IV. The nature of the office and the conditions governing it shall be the determining factor for the act of relinquishment, whether Unilateral or bilateral.

5) Intimation to the Registrar

I. The Companies Act under section 302(2) casts a legal obligation on the company to inform the registrar of the companies by filling form no.32 giving particulars of changes, if any, in the office of director. If such a form is filed with the registrar of companies it is a proof of a director ceasing to be a director but, it is not an act to be complied with in order to make resignation valid.

II. The board of directors to whom the act of relinquishment is communicated is not required to take any action by way of accepting resignation and, therefore the relinquishment takes effect from the date of such communication where the resignation is intended to operate in praesenti.

III. In order to make the resignation effective, it is not necessary that the board should accept it.

IV. It is clear that the filling in of the form no .32 and the giving of the due intimation and information to the registrar of companies is the duty of the company secretary or director and not of the individual director resigning from the office.

III

comments of the reviewer

An analysis of the article leads to the following conclusions about the much debated subject relating to the resignation of directors.

I. Resignation should be treated as a choice to be exercised by a director. In case of resignation, it should be sufficient for the director to establish proof of delivery of such information with the company to discharge him of any liability in this regard, or of events taking place subsequent to his having intimated his decision to resign. A copy of the resignation letter should also be forwarded to the ROC within a prescribed period by the Director along with proof of delivery to the company. This is necessary to avoid misuse of this choice through retroactive communications.

II. There should not be any requirement on the part of the company to formally accept such resignation for it to be effective. It should become effective from the date of resignation, provided the filing with the ROC is within the prescribed period.

III. There should be a specific duty on the part of the company to file information with ROC of a director’s resignation within a prescribed period of time of its being received.

IV. A provision should be made that if the number of directors and the additional directors fall below the minimum strength fixed for the Board under the law, due to the resignation of director(s), the remaining directors can co-opt one or more persons as additional directors.

V. In the event of all directors vacating office, the promoters should hold office as directors till the next AGM wherein new directors should be appointed.

VI. If there is a resignation by all directors, then the promoters or persons having controlling interest should either nominate the minimum required number of directors or if they do not, they should be deemed as directors in the intervening period, till the general body of the company appoints new directors.

VII. The Indian public, newly exposed to capital market may easily be misled. Companies may also raise funds behind such a veneer and later on not use them for the avowed purpose. Therefore, to lay down more responsibilities on companies seeking public subscripttion, they should be required to preserve the composition of the Board of Directors for two years or till the procured funds are utilized in accordance with the objectives stated in the prospectus, whichever is earlier. In case the director resigns from such a company, his liability under the prospectus including utilization of funds should continue till the above period.

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Thanks & Regards

Hitesh

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