In this article, Shamika Vaidya, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses the procedure for the resignation of directors
Introduction
Section 168 of the Companies Act has been instrumental in giving a clear view about the resignation of directors which was absent in the early Act, 1956. Although before the Companies Act, 2013, orders passed by the courts adhered to the same principle but the new provision leaves no ambiguity.
Types of Directors
There are different types of directors in a company who play a different set of exclusive roles, therefore, the grounds for resigning can be different.
- Managing Director – They are empowered with an overall charge of running the Company.
- Executive Director/ Whole Time Director – They look after the day to day working of the company. Thus, MD and WTD are more responsible as they run the company.
- Non-Executive Director – They are not involved in day to day working and decision making.
- Nominee Director – These are appointed by the PE/VC investors/banks who have advanced loans or shareholders in case of a listed company to represent their interests.
- Independent Director – These directors have no pecuniary relationship with the company, they are there to guide the company and ensure good governance. Regulation 16 (1)(b) of the LODR Regulation defines an Independent Director
Section 2(60) defines Officers in Default which includes directors under whose authority, direction or who had the knowledge and had consented to the contravention.
Possible reasons behind Resignation
Better Career Options
Directors may resign if they have better opportunities or have to be part of some venture which he is restricted as a director by AOA. Ravi Venkatesan resigned as an independent director from Infosys to pursue an interesting career opportunity in a Bangalore based company
Disagreement with the Board
When a difference of opinion and lack of trust arise within the directors which nevertheless also results into ego clashes and lack of effective communication, hampering the important role of decision making which is entrusted to them possibly affecting the performance of the company, any of the directors may choose to resign at such a time.
Irregularities in the Company Affairs
When a director, is aware of some suspicions or unscrupulous practices in the affairs of the company and finds himself dragged into it, he may resign from the Company to save himself from personal liability arising out of those activities which may or may not be beyond his power.
Although, Regulation 25(5) of the LODR regulation states that the liability of the independent director is limited to the acts which occur with his knowledge, consent or connivance.
Fear
The present bodies like SFIO, ED, EOW and the punishments under acts like PMLA Act which can get the officers in default arrested for 10-20 years or attach properties. Any contravention even by the other (KMP) may attract personal liability or even arrest. Any slightest hint or early signs of warning from the financial statements and cash flows about the possibility of the company getting either into loss or accusations of fraud can make a director resign.
Removal given the face of resignation
Defaults, contravention or non-adherence to compliances by the director lands him in trouble and the board may want him to vacate the office. However, sometimes this removal is given a face of resignation being a bilateral benefit where the director is asked to resign himself instead of getting thrown out of the office.
Withdrawal of nomination
This applies to the Nominee directors mostly appointed by the banks, NBFC’s investors on the BOD. Once the transaction between the entity and company is complete the Nominee director may resign or sometimes after the withdrawal of nomination by the entity.
Provisions under the old company Act
Many questions were raised whether the resignation of the director of a company is unilateral or bilateral as there was no clear provision mentioned in the 1956 Act.
In Pandurang Camotim Sancoalcar v. Suresh Prabhakar Prabhu, it was held by the Bombay High Court that the Companies Act,1956 is silent on the provisions with regards to the resignation of the director and a reference has to be made in Articles of Association.
If the AOA has provided that permission of the Board is needed or some other procedure like approval of shareholders the same had to be followed.
In Companies where even the AoA is silent about the resignation of the Managing Director, the resignation would take effect when it is rendered to the board as stated in T. Murari v. State.
Provision under the new Companies Act
Section 168 of the Companies Act,2013 provides a procedure for the resignation of the director.
Notice
A notice has to be served by the director to the company mentioning about the resignation.
Form DIR- 11 have to be filed by the Director under his digital signature.
Steps to be taken by the company
Upon receiving the receipt of the notice, the company has to pass the board resolution and has to intimate the RoC by filing form DIR 12 with Reason for Resigning, Proof of Dispatch and Notice that is sent to the Company (Copy) within 30 days of resignation along with prescribed fees as per Rule 15 of Companies (Appointment and Qualification of Directors) Rules, 2014 and also publish on website. In the Report of Directors of the preceding General Meeting of the Company, it is required to disclose the same.
In Manav Kumar Agarwal v. Discovery Enterprises Private Limited & Ors, CLB passed an order, that if the Board of Directors have not passed a resolution on submission of the letter then the director is seen as to be continuing the post. The same was set aside by the Delhi High Court which was of the view that the moment the letter is rendered by the director he is resigned unless the AoA demands approval and it was remitted to NCLT and was appealed before NCLAT which held the High Court’s judgment.
There is a long list of compliances for the listed companies, the same is not the case with private firms and can take undue advantage. The promoters in order to safeguard the directors in an instance of default can show the resignation letter with an explanation that the director was in no way related to the company as he had resigned long back. In Dushyant D. Anjaria v. Wall Street Finance Ltd., the Bombay High Court held that the submission of Form 32 was compliance on part of the company and negligence or delay in intimating it to the Registrar of the Companies was their liability.
If all the directors of the company resign and in the absence of promotor the government can appoint director until the next General Meeting.
AoA
Section 6 of the Company’s Act speaks about the prevalence of the statute over the agreements, resolution, articles, and clauses unless they come under other statutes. In case the AoA of a company specifically states that the approval of Board in certain situation the same will be needed unless it doesn’t conflict with the intent of Section 168.
When a director submits a resignation, even after having liabilities incurred then it will not require Board approval unless mentioned in the AoA, although he can be held liable for his acts. When the resignation letter specifically mentions the approval of the board and the AoA is silent, the approval will be taken. There is no obligation on the director to co-opt other directors before leaving the office unless mentioned in AoA of the company.
Listed Company
Companies listed in stock exchanges are regulated by the Security and Exchange Board of India. Rule 30, of SEBI (Obligations of Listed Entity which has Listed its Specified Securities) Regulations,2015 speaks about disclosing certain information and events which according to the SEBI is important. Such information should also be available on the company’s website and a letter stating the same should be forwarded to the stock exchanges where the company is listed.
The Companies Act,2013 amended the Schedule which earlier mentioned 180 days for the appointment of a new director after the resignation of the independent director to 90 days. This was effective in tuning up Requirements of 25(6) of SEBI (Listing Obligations and Disclosure Requirement), 2015 and Rule (4) Companies(Appointment and Qualification of Directors), 2014 with Schedule IV.
Corporate Governance and Investments
The resignation of Independent Directors can be a ringing bell for the shareholder as some mismanagement or unscrupulous activities. It can affect the investment of the company including Foreign Direct Investment. One of the things that are often been looked at by the investors is the board of directors to invest in a company.
Liability pursuant to Resignation
In, State of Karnataka v. Pratap Chand & Ors. the court ruled that the Director is only liable when he is responsible for the operations of the company and for the acts done with his consent and connivance. Thus, on proving the same the directors can be free from personal liability. However, the provisions have been made more stringent. Independent Directors on the board of Nirav Modi’s company were high profile executives like, Sanjay Rishi (American Express president), Gautham Mukkavilli (former PepsiCo executive) and Suresh Senapathy (former Wipro CFO). Most of them opted for resignation post fraud. Personal assets of these directors are frozen, although independent director is seldom held liable, is not involved in day to day business the (MCA) is in the process of making them held liable, presuming that they know the affairs of the company.
Two independent directors from IDFC sent the resignation letter after being named in FIR by the CBI. Their contention was, being part time directors, their role was limited in the process, however, the ex-deputy MD was arrested due to advancing loans to defunct companies.
The directors can also be held liable after their resignation if found guilty.
Shares of director after Resignation
Shareholder Agreement or Articles of Association clauses determine whether a director has to transfer his shares after resignation. If they are silent then it is totally his decision whether or not to sell his shares post-resignation. If he does not sell his shares he remains a shareholder of the company.
Conclusion
With frauds coming out and the directors being held personally liable, the position of a director of a company is that of responsibility. The new Companies Act has made the process of resignation more certain and unilateral providing easy exit options for directors. However, it might depend on each case with reliance on AoA of the company as to the approval of the Board.
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Sources
https://web.iima.ac.in/assets/snippets/workingpaperpdf/8968550572016-03-36.pdf
https://www.forbesburton.com/blog/94-does-a-director-leaving-their-company-need-to-sell-their-shares
https://taxguru.in/company-law/resignation-director-subject-approval-acceptance.html |Gurminder|03rd June 2018|
