RESIGNATION BY A DIRECTOR

[Mr. M. GOVINDARAJAN]

            Sec. 2(3) of the Companies Act, 1956 defines a 'director' as including any person occupying the position of a director by whatever name called.   Thus it is not the name by which a person is called but the position he occupies and the functions and duties which he discharges that determine whether in fact he is a director or not.  In the case 'In Re. Forest of Dean Coal Mining Co., (1878) 10 Ch. D 450 it was stated about directors that a company is indeed a person, but a juridical person and the directors as a body endow the juridical person with human face that can act and react. The directors have different attributes in relation to the company depending upon the facts of each case.

            Sec. 253 of the Companies Act provides that no body corporate, association of firm can be appointed as director of a company.  Only an individual can be appointed as director. The Companies Act has not prescribed any academic or professional qualifications for directors.  Unless the company's Articles of Association contain a provision to that effect, a director need not be a shareholder.  But the articles of the company usually provide a minimum share qualification. If share qualification is fixed by the articles then according to Sec. 270 each director must take his qualification shares within 2 months after his appointment.  The nominal value of qualification shares must not exceed Rs.5000 or the nominal value of one share where it exceeds Rs.5000/-. Further the Companies Act provides for the appointment of director, disqualifications of directors.  Sec. 283 provides for the vacation of office by directors and Sec. 284 provides for the removal of directors but both the sections have no mention about the resignation of the director. In the case "Abdul Huq V. Katpadi Industries Ltd., - AIR 1960 Madras 482" it was held that Sec. 283 of the Companies Act, 1956 relates to the vacation of office of directors and it has nothing to do with the resignation of directors.

            There is no provision in the Companies Act relating to the resignation of his office by a director. Whether a director can resign?  Since the Companies Act has no answer the only way to get the answer is the Articles of the Association of the Company. In the absence of any provision in the articles the terms and conditions of appointment of a Director is the answer. If there is no provision for the resignation of Director in terms and conditions of appointment also then the ordinary rule of common law as regards resignation by an officer must be followed i.e., intimation by notice given either to the company or the Board and acceptance of the same.

            The resignation by a director involves the following questions:

Ø      Whether a director can resign?

Ø      Whether a director intends to resign is give notice to the company?

Ø      Whether the notice must be in writing or by oral?

Ø      To whom the notice of the resignation is to be sent?

Ø      Whether the resignation is to be accepted or not and if so by whom?

Ø      When will the resignation be effective?

Ø      What is the effect of resignation?

For the above questions the decisions of the cases by Courts would be the answer.   Some of the case laws are as follows:

OBC Caspian Ltd., V. Thorp (1998) SLT 653 (Scot)

            In the absence of a specific provision in the articles of association a director can resign without being required to give reasonable notice.

T. MurariV.State (1976) 46 Com. Cases, 613 (Mad)

            In this case the learned Judge said - " I am of the view that even in the absence of a provision in respect of resignation under the Act or under the articles of association of the company, the resignation tendered by a director or Managing Director unequivocally in writing will take effect from the time when such resignation is tendered.

Latchford Premier Cinema V. Ennion (1931) 2 Ch.409

            In this case the court observed - "A verbal resignation accepted at a general meeting is effective, even though the articles provide that a director shall vacate office if by notice in writing he resigns his office."

Palmer's Company Law, 8029 (25^th Edition. 1992)

            A verbal resignation would not, however, be effective in the light of such an article if made to and accepted by the Board, since the Board would have no authority to accept, and the resigning director would be unable to end his contract with the company, except in accordance with its terms, express or implied, or with the company's agreement.

Registrar of Companies V. Orissa Paper Products Ltd., (1988) 63 Comp cases 460 (Ori)

            Resignation of a director must be addressed to the Company. Letter of resignation addressed to third party shall have no effect.

Glossop V. Glossop (1907) 2 Ch.370

            Once a Director has given a notice of resignation, he cannot withdraw it except with the consent of the company properly considered by the directors. But where the articles contain a provision that a director may resign only if the Board consents, the resignation shall not be effective until the Board's consent is given and the resignation may be withdrawn in the meantime.

                        The resignation of a Director would become effective on and from the date it was tendered or submitted and from the articles of the association of the company it would be clear that resignation of a Director would be effective from the date it was tendered. In case of resignation of a Director there is no formality that the Board of Directors should accept it before it becomes operative.

Dushyant D Anjaria V. Wall Street Finance Ltd., (2001) Comp. Cas. 655 (Bom)

            The court held that the resignation of a Director would be effective from the date it was submitted, for the reason that the letter brings out clearly the intention of the person to resign. So far as the formalities like filing up Form 32 and sending it to the Registrar of Companies were concerned, it was for the company to comply with them in conformity with the provisions of Sec. 302 or Sec. 303 of the Companies Act.   Where there was delay or negligence on the part of the company in intimating the Registrar about the date of resignation, the Director who had resigned could not be saddled with responsibility and liability for such delay.

Pandurang Camotim Sancolarcar V. Suresh Prabhakar Prabhu (2003) 53 CLA 265

            The nature of the complaints against the directors who resign are as follows:

Ø      Complainants totally denied the claim of the respondent that he had resigned;

Ø      Complainants without questioning the fact of resignation disputed the date of resignation of the directors.

In the instant case the court held when the articles of association provided that the resignation would be effective from the date it was tendered and when the respondent had raised a defence that he resigned on 6.5.1996 the fact of his resignation was not in dispute; what was in dispute was only the date of resignation. Clearly it was a case where the respondent has resigned on 6.5.1996 and ceased to have any connection with the company. It must be held that he was not in charge of the management of the day to day affairs of the company.

Fateh Chand Kad V. Hindustan (Patiala) Ltd., (1957) 27 Com. Cases 340

            The voluntary resignation of a permanent director when permitted under the articles is not dependent upon its acceptance by the company. He is entitled to relinquish his office.

            Where a director started a competing business and requested the company by means of a letter that he should henceforth be treated merely as a sleeping partner and the directors thinking that this was a letter of resignation, accepted and it and relieved him from directorship, it was held that they could not be held liable for misreading the letter, their mistake being honest.

Transport Ltd., V. Schonberg  (1905) 21 TLR 305

            Where the articles contain certain provisions to be complied with, such conditions must normally be observed before the resignation can be effective.

S.B. Shankar V. Amman Steel Corporation (2002) 51 CLA 341

            The petitioner who was the Chairman and the director of the accused company tendered his resignation both as Chairman and Director on 4.10.1999 and his resignation was sent to the Registrar of Companies in Form 32 on the same date. The respondent company on the other hand has alleged in its complaint that 16 cheques issued by the company between 3.2.2000 and 15.2.2000 amounting to Rs.17.50 lakhs had bounced and sought his prosecution on the ground that the petitioner Chairman was responsible for the conduct of the day to day affairs of the company.

            The court held that where the resignation letter states that it has to take effect immediately, the date of resignation letter is taken to the date on which the director has resigned. Thus unless the Articles of Association of the Company concerned contain any specific provision about the acceptance of resignation by the Board of Directors of the company, the resignation from directorship takes effect immediately i.e., from the date of the resignation letter. The director would be deemed to have been resigned from his office from the date of his resignation i.e., 4.10.1999.  He was no longer on the board after that date either as director of Chairman.  All the cheques were drawn between 3.2.2000 and 15.2.2000 during which the period the petitioner did not function as Chairman and director of the company. Also he was not in charge and responsible for the affairs of the company when the cause of action had arisen. The proceedings are liable to be quashed.

S.S. Lakshmana Pillai v. Registrar of Companies (1977) 47 Com. Cases 652

            The Madras High Court in this case held that in the absence of any provision in the articles, the ordinary rule of common law as regards resignation by an officer/agent  must be followed viz., intimation by notice given either to the company or to the Board and acceptance of the same by them.   Where a resignation states that it is to take effect on acceptance or the Articles so require, acceptance is necessary to end the tenure of office. Where, however, the resignations says that it is take effect immediately, acceptance is not necessary, unless the articles or any provision of law makes it necessary.  Any form of resignation, whether oral or written, is sufficient, provided that the intention to resign is clear.   It is however advisable that the resignation is in writing and also indicates the time when it is to take effect, so that it may serve as a record of reference in case of controversy.   In the absence of any indication otherwise, a resignation takes effect immediately. Resignation will not, however, relieve him from any accountability or other liability which he may have incurred while in office.

SAUMILDILIPMEHTAV.State of Maharastra (2003) 113 Comp. cas 443

            In this case the High Court framed three questions for consideration of this case which are as follows:

Ø      Can a Director of a public or private limited company resign unilaterally by writing a letter to the Chairman or Secretary of the Company?

Ø      Should he fill up Form No. 32 and sent it to Registrar of Company?

Ø      Is the resigning director obliged to give intimation about his resignation to the Registrar of Companies? Whose duty is it to take follow up action?

The court held that when a director has tendered his resignation and the Board of Directors has accepted it such director cannot be held for liabilities incurred by the company after the date of acceptance of his resignation, except the liability incurred by him for purchase of company's shares and nothing more.

            A director of a public company or a private limited company can tender his resignation unilaterally, without filing Form 32 and without sending notice to the Registrar of Companies. All that the director has to do is to send in writing a letter informing either the Chairman or the Secretary of the Company of his intention to resign from the office of director.   Filling in Form 32 and giving intimation to the Registrar is the duty of the Company Secretary and not of the director.  Thereafter the letter has to be placed before the meeting of directors-ordinary meeting, extraordinary or special meeting, as the case may be - and the board of directors have to take decision whether to accept or not to accept the resignation. After passing the resolution intimation should be sent to the director. The Company Secretary is under an obligation to comply with legal formalities.   Thereafter the fact of resignation and its acceptance should be recorded in the concerned registers.  Later it must be brought to the notice of members of the company as early as possible, at least in the annual general meeting.

Department's instructions:

            Vide Circular No. 1/95; F.No.14/6/94-CL-V, dated 16.2.1995 it was clarified that there is no necessity of calling for letters of resignation/minute book.  In fact, the documents filed should not be help up for want of such information and the same should be taken on record. Thereafter, if considered necessary, ROC may call for the desired information - explanation as per the provisions of Sec. 234 of the Act.

Re, Neokratine Safety Explosives Co. of NSW Ltd., (1891) 12 NSW EQ 269(Aust)

            The directors do not have the power to refuse the resignation of a co-director unless such a provision is there in the Articles of association.

Achutha Pai V. Registrar of Companies, (1966) 36 Com. Cases 598 (Ker)

            A Managing Director who was prosecuted for default under Sec. 220 contended that he was not liable as he had resigned before the last date for filing accounts. The court held that a Managing Director combines two capacities, namely, manager and director. It becomes effective only when the company accepts the resignation and relieves him from his duties. 

Mosely V. Koffyontein Mines Ltd., (1991) 1 Ch. 73

            A Managing or whole time Director cannot resign merely by giving a notice. In his case, a formal acceptance of the resignation by the company is essential. This is because of the fact that such a director, besides being an ordinary director, is also in the whole or substantially the whole time employment of the company. He has to be relieved of all the duties and responsibilities attaching to his office. The notice by a director holding office both of a whole time and ordinary director, for resignation shall apply to both the offices.

John D'Silva V. Neosonic Electronics Ltd., (2007) 77 SCL 129 (Bom)

            As a private limited company, respondent No. 1 was entitled by a provision in its articles of association to have a lifetime director. A chairman refers to a member or a director chairing a meeting. The Act confers no other role upon a Chairman. There can be no chairman for life.  Such nomenclature can, therefore, be used to denote a director as a Managing Director. 

            As a permanent director of the company, the resignation from the company was of no consequence. He continued to be the Chairman and, consequently, director of the company until the articles were amended, which had not been done.

            He continued during his life time as the chairman and consequently director of the Company, with a further authority to even nominate his successor.   In fact, such resignation had no effect in law.   No director can wash off his liability, as such director, merely by resigning, for acts done and liabilities incurred prior to his resignation, which may be determined and adjudicated upon after such resignation.

Chokkalingam Chettiar V. Official Liquidator 1943 13 Comp. cas. 263 Mad.

            A director who has resigned would not be liable for anything that happens subsequently.

Mrs. Asanammal Kasim V. CEAT Financial Services Ltd., (2002) 112 Comp. cas 287

            The petitioner was a director of a company. Cheques issued by the company having been dishonored, complaint under Sec. 138 of the Negotiable Instruments Act, 1881 was filed. The petitioner's petition under Sec.482 Cr.PC 1973 she had prayed that the complaint be quashed on the ground that she had already resigned her position as director and that court had no jurisdiction to entertain the complaint.

            The court held that the question whether the petitioner had tendered her resignation from the post of director of the company, whether it was accepted and if so when and when it was notified to the Registrar of Companies, the date from which it came into operation were all matters which were required to be established by adducing evidence. It is settled law that under Sec. 138 a complaint could not be quashed merely on the basis of the averments in the petition.

Jayesh R. Mor V. State of Gujarat (2000) 38 CLA 30

            The Registrar of Companies had issued a notice under Sec. 220(3) of the Companies Act to the Company and its directors, one of whom was the petitioner, although he had resigned from that post much earlier, stating that the company had failed to file its balance sheet and profit and loss account for the year ending 30.10.l997. The petitioner's stand was that he had resigned as director on 23.9.1996, to be effective from that date, which the resignation was accepted by the board of directors who submitted to the Registrar Form No. 32 indicating that the petitioner had ceased to be its director with effect from 17.10.1996, that on the date alleged offence had been committed he was not its director and that, therefore, he could not be held responsible for any lapses on the company's part.

            The court held that on the date on which the alleged offence was said to have been committed by the petitioner his relationship as the company's director had ceased. Even otherwise he could not be held responsible for the offence as he did not fall within the definition of "officer in default" within the meaning of that expression in Sec. 5 of the Companies Act.

            From the analysis of the above said case laws the following could be inferred in respect of resignation by a director:

Ø      In the absence of the provisions relating to the resignation of the Director in the Companies Act, the Articles of association should provide for the resignation of director; procedure for tendering resignation, procedure for acceptance of resignation, date of effect of such resignation etc.,

Ø      The obligations and responsibilities of the resigned director should be put forth in the Articles of Association;

Ø      There is an obligation on the part of the Company Secretaries to fulfill the legal obligations in respect of resignation of a Director.

There are so many cases flooded before the Court in respect of resignation of directors and there may be cases in future also.   To curtail this it is suggested that necessary provisions may be incorporated in the Companies Act in respect of the resignation by the Directors by amending the Companies Act, by which the interests of the companies, shareholders will be protected.  It is hoped that the Government would do the needful in this regard.