Resignation of a Director - When does it take effect - Confusion caused by the Companies Act, 2013

Introduction

Section 168 of the Companies Act, 2013 (hereinafter referred to as "The Act") lays down the provisions relating to resignation of a director from his office. Section 165 of the Act, also, inter alia, lays down that the resignation by a director will be effective upon dispatch by him to the company of the intimation of his resignation. As we will discover during the course of our discussion, both section 168 and 165 contradict each other as to the time at which the resignation tendered by the director will take effect legally. It is important to ascertain as to when the process is legally complete since it has ramifications on the responsibilities of the director for actions taken during his tenure of association with the company. Before we take a deep dive and dissect the law, it would be appropriate, at the outset, to examine the requirements that existed in the predecessor Companies   Act of 1956 (hereinafter referred to as the "56Act") on the subject.   

Position under the 56 Act

It is pertinent to note that there was no corresponding provision in the 56 Act on the point of resignation by a director except for the requirement of the company filing e-form 32 with the Registrar upon receipt of intimation from the director with regard to his resignation within thirty days thereof pursuant to the requirements of Section 303(2). It was also a settled principle that in the absence of any specific   provision in the company’s Articles as to when the resignation shall take effect or alternatively in the absence of any intimation by the director to the effect that the resignation would take effect prospectively, the resignation once made by the director would take effect immediately when the intention to resign made was clear.

It would be appropriate to quote from the judgement of the Madras Court in T.Murari v State (1976)46 Com Cases 613)(Mad) wherein the  learned Judge had opine as under:

"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."

The  Registrar had to be formally informed about the same by filing e-form  32 which would set out the required particulars relating to the resignation. (L.Srinivasan v Raxi Niddhi Ltd.(2005) (124 Com Cases140).Even if the company had failed to submit e- form no.32 after the receipt of intimation regarding resignation, it could not be said that the resigning director continued to be a director of the company as held in Mother Care(India)Ltd v  Ramaswamy P.Aiyar (2004)(51 SCL243(Kant).

Resignation by Director could be oral

Under the 56 Act, there was no provision that the resignation of the director had to be in writing. Even in case, where the resignation was tendered verbally at a general meeting and accepted by the Meeting, it was held to be effective in  Latchford Premier Cinema Ltd v Ennion (1931)(2 Ch 409).Reference may also be made in this connection to the decision in Glossop v Glossop (1907)(2 Ch  370).

The principle enunciated in the above decisions was also followed in State v Sitaram (AIR 1967 Pat 433) and in Mohan Chandra v Institute of Chartered Accountants of India AIR 1972 Del 9).

Resignation need not be accepted by the Board

Unless the terms of the appointment or the Articles of the company provide for the contrary, the voluntary resignation by a director would be effective without its formal acceptance by the company. He is entitled to relinquish his office as held in Fateh Chand Kad v Hindsons (Patiala) Ltd(!957)(27 Com Cases 340) 

Position under the 2013 Act

The settled position under the 56 Act as elaborated above has been unsettled substantially upon the onset of the Act. Section 168 which deals with the resignation of a director is reproduced here under for the sake of facilitating the discussion on the subject.

168. (1) A director may resign from his office by giving a notice in writing to the company and the Board shall on receipt of such notice take note of the same and the company shall intimate the Registrar in such manner, within such time and in such form as may be prescribed and shall also place the fact of such resignation in the report of directors laid in the immediately following general meeting by the company:

[Provided that a director shall also forward a copy of his resignation along with detailed reasons for the resignation to the Registrar within thirty days of resignation in such manner as may be prescribed.]

(2) The resignation of a director shall take effect from the date on which the notice is received by the company or the date, if any, specified by the director in the notice, whichever is later:

Provided that the director who has resigned shall be liable even after his resignation for the offences which occurred during his tenure.

(3) Where all the directors of a company resign from their offices, or vacate their offices under section 167, the promoter or, in his absence, the Central Government shall appoint the required number of directors who shall hold office till the directors are appointed by the company in general meeting.

An analysis of the above Section brings to light the following aspects:

Resignation has to be in writing

A   director who intends to resign from his position has to give a notice in writing to the company. Thus the issue of a notice in writing is a pre-requisite to the act of resignation. The company cannot act on the basis of a verbal communication from the director. This requirement dismantles the position in the 56 Act where the resignation could also be verbal. Given the fact that Section 4 of the Information Technology Act, 2000   has an overriding effect over other legislations, a communication from a director sent through email would also constitute a notice in writing and act as a trigger to complete the procedure relating to resignation.

Upon receipt of the communication, the Board shall take note of the intimation and intimate to the Registrar about the resignation by filing Form DIR-12 with which should be attached a copy of the intimation received from the director. DIR-12 should be filed within 30 days from the date of resignation as provided in Rule 15 of the Companies (Appointment and Qualification of directors) Rules, 2014. There is no need for the Board to formally accept the resignation. Information regarding the resignation shall also be posted on the company’s website, where the company has one as provided in Rule 15 ibid.

The fact that there has been a resignation by the director should be recorded in the Report of the directors which has to be laid in the immediately following general meeting by the company.

Drafting anomaly in Section 169(1)

It is submitted that there exists a drafting anomaly in Section 168(1) on this score. It is common knowledge that the Report of the Board of Directors can be placed only at the Annual General Meeting of the members as part of the "ordinary business" as stated in Section 102(2)(a) (i)of the Act. The Report of the directors cannot be laid before any other General meeting of the Members and therefore the expression "laid in the immediately following general meeting by the company" as appearing towards  the end of Section 169(1)is obviously incorrect and the term "General Meeting" ought to have been substituted by "Annual General Meeting". The fact that there has been the resignation by the director has to be recorded in the directors’ Report which will be placed at the   Annual General Meeting of the members which take place immediately after the resignation.

Proviso under Section 169(1)-Is it mandatory in the application?

The proviso under Section 169(1) stipulates that the director shall also forward a copy of his resignation along with detailed reasons for the resignation to the Registrar within 30 days in Form. DIR-11 as specified in Rule 16 of the above Rules.

The purpose of a proviso in a Statute should firstly be understood before we can analyze its contents. The normal function of a proviso is to except something out of the enactment or to qualify something enacted therein which but for the proviso would be within the purview of the enactment (Kedarnath Jute Manufacturing company Limited v CTO (AIR 1966 SC12 at page 14).In the words of Lord Macmillan "The proper function of a proviso is to except and to deal with a case which would otherwise fall within the general language of the main enactment and its effect is confined to that case".

 A proviso is therefore intended to carve out an exception to the Statute and thus in this instance, the proviso ordains that the director should intimate to the Registrar the fact of his resignation and also adduce the reasons for the same. This requirement was not called for under the 56 Act and our surmise is that it has been inserted in the Act to make sure that the process of resignation culminates through the filing of DIR11 so that the Director can be doubly sure that the fact of his resignation has been made known to the Registrar in case the company fails to file the communication in Form DIR-12.

It is pertinent to note that the proviso under Section 169(!) makes use of the expression "shall" which suggests that the filing of DIR-11 by the director is mandatory. It also leads to an inference that the process of resignation would appear to be incomplete until the director files DIR-11.

The use of the word "shall" raises a presumption that the particular provision is imperative .but this prima facie inference may be rebutted by other considerations such as object and scope of the enactment and the consequences flowing from such construction. In several cases it has been held that the word "shall" be construed as merely directory. (Burjore and Bhawani Pershad v Bhagana (ILR 10 Cal 557 at pages 561 and 562).

In the light of the principle enunciated above, we may consider the question whether the filing of DIR-11 by the resigning director marks the culmination of the process of resignation. Put differently, the question that comes up is whether it is only after the filing of DIR-11 can it be said that the resignation is complete and that he would be absolved of offences, if any, committed by the company after the date of such filing. Section 168(1)postulates that the resignation tendered by the director would be effective once the Board receives the notice. That being so, it would not be appropriate to state as propounded by the Proviso referred to above that the effectiveness of the resignation gets postponed to the time at which the director files DIR-11 with the Registrar. The use of the word "shall" in the proviso which gives it the flavour that it is imperative can be rebutted, having regard to the object underlying Section 168(1). We are therefore of the view that the resignation takes effect as contemplated by Section 168(1) once the notice of resignation is received by the Board and taken note of.

Proposed amendment to the  Proviso under Section 168(1)

It  is pertinent to note that the words "directors shall also forward" as appearing in the proviso under Section 168(1) are proposed to be substituted by the words "director may also forward" by the Companies (Amendment )Bill, 2016 which has been introduced in the Lok Sabha on 16.3.2016 and reportedly is  being examined by a select parliamentary committee.

The proposed amendment is obviously intended to negate and allay the apprehension that the proviso under Section 168(1) as it exists has mandatory application.

Section 165(4)strikes a discordant note

In the discussion above, we have, based on a logical analysis, drawn the conclusion that the resignation of the director takes effect upon the receipt by the board of the communication provided by the director as regards his intention to resign from his position. The above position is somewhat destabilized by the contents of Section 165(4).Section 165 is not exactly on the point of resignation by a director and it is essentially intended to impose a fetter over the number of companies with which a person can be legally associated as a director. Yet it contains sub-section (4) which speaks about the time at which the resignation submitted would become effective. For the sake of our discussion, it would be necessary to reproduce  the sub-section which reads as under:

Section 165(4):

"Any resignation made in pursuance of clause (b) of sub-section(3)shall become effective immediately upon the dispatch thereof to the company concerned.".

Subsection (3) of Section 165 provides, inter alia, that where a person is holding directorships in companies beyond the maximum number as stipulated in sub-section (1) prior to the commencement of the Act, he must firstly choose the number of companies which shall not exceed the maximum prescribed in which he shall continue as director and resign from the other remaining companies within a period of one year from the date of commencement of the Act.

As per Section 165(4) when the director tenders his resignation after exercising his choice as to the companies in which he shall continue as a director, the resignation takes effect immediately upon the dispatch of the intimation to the concerned company. It is not necessary for the director to ascertain whether the company has received his intimation. Section 165(4) runs contrary to Section 168(1) which provides that the resignation is effective once the same has been received by the board and taken note of.

Section 165(4) postulates that there is no requirement that the director should ascertain from the company whether his communication as regards resignation has been received or not. Admittedly one can argue that the application of Section 165(4) is restricted in scope to only those resignations which have been occasioned by the fact that the concerned person was a director in more than the stipulated number of companies. Yet Section 165(4) ought to have been in sync with Section 168(1). If Section 165(4) is read in isolation, it will throw up contentious issues in particular if the director claims that he has dispatched the resignation and the company, on the other hand, denies receipt of such communication. We do not see why there should have been a contradiction as between the two provisions.

Whether Section 168(1) would gain precedence over Section 165(4)

In view of the conflicting views offered by the above two provisions, the question that arises is as to which provision will prevail, in the face of competition between the two. It may be noted that section 168 is a special provision which deals with the resignation by a director. Section 165, on the other hand, imposes fetters over the number of directorships that can be held by a person. It is a settled principle that if a special provision is made on a certain matter, that matter is excluded from the general provision (Venkateshwar Rao v Govt.of Andhra Pradesh (AIR 1966 SC 828). The above principle is expressed in the maxims "Generalia Specialibus non derogant "(General things do not derogate special things) and "Generalibus specialise derogant" (Special things derogate from general things).

Considering the above, we can state that Section 168(1) shall gain precedence over section 165(4) in the face of a conflict. The Directors’ resignation shall, therefore, take effect once his intimation is received by the Board and taken note of.

Conclusion

In the above discussion, we have brought to the fore not only the drafting anomaly is Section 168(1) but also the contradiction between Section 165(4) and Section 168(1). The implications arising out of the use of the word "shall" in the proviso under Section 168(1) has also been subjected to introspection. We will conclude that it would be appropriate if Legislature takes cognizance of the above and suitable changes are brought out in the Statute to remove the cobwebs of doubt amongst the fraternity of stakeholders on the subject. Until that happens, we have but no choice except to accept the law on the subject with all its imperfection.