Mca 21 filling

What are the rules governing resignation of directors, mainly in private companies

It is a well-known fact that chances of mismanagement are more in private companies. Generally, private companies are formed by relatives, families and such number of directors are appointed on the board of the directors of the companies so as to comply with the minimum requirements of the Companies Act, 1956 (the “Act”).

In most of the cases, private companies, which are family companies and have been formed on principles of quasi-partnerships, have directors representing specific groups. The absence of adequate provisions in the Act and in the charter documents of such private companies with regard to governance of companies often leads to filing of petitions under Section 397/398 of the Act i.e. Oppression and Mismanagement. One of the very common allegations in these matters is illegal removal of directors/unauthorized removal of directors by showing false resignation letters. Hence, it becomes very important to know when does the resignation takes effect in actual and what should be the form of a resignation letter.
 

Resignations: When Effective?

Section 284 of the Act specifies the manner in which a director can be removed from his post before expiry of his term. Further Section 283 provides certain grounds on which the office of director ceases. However, the Act does not specify any provision relating to cessation from directorship with their own wish and thus the only exit way available to a director is to tender a resignation. Since the Act does not contain any specific provision in this regard, one needs to refer to the Articles of the Association (“AoA”) of the company. In the absence of any provision in the AoA, the terms and conditions of appointment of a director can be seen.  The Madras High Court in T Murari Vs State of Tamil Nadu¹ held that

“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.”

However, it is to be noted that director’s resignation takes effect only when resignation is accepted by the company in the general or board meeting and not from the date of communication of same by the director, if the AoA of the company contains specific provision in this regard. Further, the resigning director would also require fulfillment of such additional conditions as may be specified in the AoA of the company. In a nutshell, as the Act does not contemplate any provision for resignation, the same would be completely governed by AoA of the company. In absence of any such provision in AoA also, ordinary and common laws shall prevail. In SS Lakshmana Pillai Vs Registrar of Companies² the Madras High Court held as follows:

“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.”

A director resigning at a board meeting should make clear whether the resignation is with immediate effect or from the end of the meeting, as he or she is a party to the decisions of the board up until resignation

In SB Shankar Vs Amman Steel Corporation³ the court held that where the resignation letter states that it has to take effect immediately, the date of the resignation letter is taken to the date on which the director has resigned. Thus unless the AoA 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.
 

Notice Period for Tendering Resignation

As mentioned above, the resignation terms are governed by the AoA and/or the terms of appointment of a director. If the AoA or the terms of appointment requires a notice period to be fulfilled, the resignation can take effect only after meeting such requirement of notice period. However, if there is no specific provision in the AoA, a director can resign without giving a reasonable notice as held in the case of OBC Caspian Ltd Vs Thorp⁴.

It is to be noted that in case of voluntary resignation of a permanent director when permitted under the AoA, is not dependent upon its acceptance by the company. The permanent director is entitled to relinquish his office as held in Fateh Chand Kad Vs Hindsons (Patiala) Ltd⁵.

GOOD LUCK