RESIGNATION OF A NOMINEE DIRECTOR

[Mr. M. GOVINDARAJAN]

A nominee director is a person who acts as a non-executive director on the board of directors of a company, on behalf of another person or firm such as bank or lender.  The term ‘nominee director’ is not defined under the companies act.  Section 2(13) of the Companies Act, 1956 (‘Act’ for short) defines the term ‘director’ which includes any person occupying the position of director, by whatever name called.   Hence the nominee director is also a director under Section 2(13) of the Act. The Act thus makes no distinction between the directors on the basis of their being nominee directors as far as liability for violation of the provisions of the Act and other Acts are concerned.  The directors occupy a fiduciary position. They are expected to work bonafide in the interest of the company and must not exercise their powers for any collateral reasons. A director must not place himself in a position where his duty to the company and his personal interests clash and he must not profit from his position as a director. This legal position is equally applicable to the nominee directors, whether appointed by the Central Government or by the financial institutions.  The nominee directors are neither required to acquire the qualifications shares nor will they be taken into account for the purpose of calculating the total number of directors in the company. As far as their liabilities are concerned, these directors cannot claim any special privilege. They will have to prove that they have acted honestly and reasonably, and they are required to show that they cannot be considered to be ‘officer-in-default’ in respect of the alleged offence. taxmanagementindia.com

What is the legal position in case of a resignation of a nominee director?  Whether it is different from that of regular directors?

In ‘Mother care India Limited V. Prof. Ramaswamy P. Aiyar’ – 2003 (10) TMI 397 - HIGH COURT OF KARNATAKA the High Court held that there is no provision in the Companies Act for the acceptance of the resignation since the appointment of a director is not bilateral in character.  As the appointment of a director is not a bilateral character, the question of acceptance of the request to relinquish the office would not arise. Filing of Form 32 in terms of Section 303(2) of the Act is only a consequential act to be performed by the company in obedience to the statutory provision. 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 a resignation valid. Therefore, as the resignation by a direction, relinquishing his office as such director is of an unilateral character, it comes into effect when the act of such resignation to relinquish the office 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. In order to make the said resignation effective, it is not required that the Board should accept it. Whether the Board accepts the resignation or not if the resignation is intended to operate in praesenti the resignation comes into effect when such intention to relinquish the office is communicated to the Board.   In that view of the matter, once a resignation letter is submitted to the Board, the data of which the intention to relinquish is communicated to the Board, that is the date from which the director ceases to be a director of the company.

In respect to the nominee director’s resignation the procedure is elaborately discussed by High Court, Madras in ‘Renuka Ramanath V. Yes Bank Limited’ – (2012) 111 CLA 426 (Mad).  In this case the first accused ‘Subhiksha Trading Services Limited’ is a banking company having operations all over India engaged in the business of running a countrywide claim of retail stores.   For the purpose of business the complainant bank extended financial assistance to the tune of Rs.50 crores as per the terms of the financial facilities. But the amount was not repaid promptly.  In partial discharge of the amount due to the complainant, on behalf of the first accused, the 3^rd and 4^th accused issued a cheque dated 20.01.2009 drawn on the complainant’s bank branch at Nungambakkam, Chennai for a sum of Rs.61 lakh.  The said cheque was presented for collection and the same was later was dishonored for want of sufficient funds.

As required under Section 138 of the Negotiable Instruments Act, individual notices were issued to all accused demanding payment representing the cheque amount.  The petitioner (5^th accused) received the said notice and caused a reply notice in which the petitioner contended that she was no more a director of the 1^st company on or after 08.01.2009.  She resigned as a nominee director of the 1^st accused company by sending a letter of resignation to the ICICI Ventures Funds Management Co., Limited which had earlier nominated her as a nominee director to the 1^st accused company.  She was not liable to pay the amount as demanded in the legal notice and she was not in charge of the affairs of the company. Despite the notice prosecution has been launched against all the 9 accused including the petitioner.  The petitioner wants to quash so far it relates to the petitioner.

The petitioner contended before the Court that based on her resignation letter sent to ICICI Venture Funds Management Co. Limited which sent a letter to the 1^st accused company withdrawing the nomination of the petitioner as a nominee director of the 1^st accused company. The company also sent a letter to the Registrar of Companies, Chennai, informing that they had withdrawn the nomination of the petitioner as a nominee director of the 1^st accused company with effect from 08.01.2009.  

The petitioner further contended that the cheque in question was issued on20.01.2009 much later from the date of resignation/withdrawal of the petitioner from the nominee directorship of the 1^st accused company on 08.01.2009. The respondent contended that they found the name of the petitioner still reflects as one of the directors of the company and she continued to be a nominee director of the 1^st accused company. As per the memorandum of articles of association of the 1^st accused company, there has to be at least one nominee director on behalf of ICICI because it was holding more than 2% of the equity shares of the 1^st accused company.  Therefore so-called withdrawal and the resignation have got no validity in law. 

The High Court held that the petitioner is not a director of the company on account of any election or on account of her having personal shareholdings of the 1^st accused company. She was only a nominee director.  As per Article 21A of the Memorandum of Articles of association of the 1^st accused company the ICICI Venture Funds Management Co. Limited has got the right to nominate more than one director known as ‘nominee director’ for the first accused company. According to the petitioner she resigned from the nominee directorship of the 1^st accused company with effect from 08.01.2009. Following the company has also sent information on the withdrawal of the nominee directorship from the first accused company.   The respondent contended that the said letters are created for the purpose of this case. The High Court rejected the contentions of the respondent because the court found the signature of Registrar of Companies in the letter.  The Registrar of Companies, being a public authority, cannot be doubted.

The High Court further held that Article 21A gives only a right to the venture company to have a minimum of one nominee director and subject to a maximum number of directors which shall be proportionate to the shareholdings.  But it does not create any liability on the part of the venture company to have at least one nominee director.   The Court held that in case of a nominee director he is responsible for the company which nominated him.   He may send his resignation to the company which nominated him and even without such resignation letter the company which nominated him will be at liberty to withdraw his nomination to the company which nominated him, thereafter it is for that company to act upon the same and to withdraw the nomination of the nominee director.   As there is no provision for resignation by the director, there is no provision for withdrawal also in the act. Therefore the petitioner is not liable for punishment under Section 138 of the Act to have been committed by the 1^st accused company subsequent to 08.01.2009. Further there are no averments in the complaint that the petitioner was responsible for the day-to-day affairs of the company.  The High Court quashed the proceedings against the petitioner.