Volume VIII Part 4 August 25, 2014 7 Business Advisor

Resignation of director – A new provision:

Duty of director, Board and company

Dr S. Chandrasekaran

The Companies Act, 1956 (old Act) was silent on

resignation of director; conflict relating to the same was

usually resolved on the basis of precedents set by

courts in this regard. Director was clueless about mode

of communication (oral or written) of his decision to the

company for effective discharge and his liabilities

thereafter.

Companies also followed divergent practices on effective

date of resignation (date of communication or

acceptance by the Board) and so on. The Companies Act, 2013 (the Act)

while introducing several new provisions also considered and introduced the

provision relating to “resignation of director”. The new provision is expected

to resolve several issues and of course with a duty cast on the resigning

director as well as on the company.

Notice in writing

The resigning director has to express his desire to relinquish from the

directorship in writing. The articles of association (articles) of a company

may contain an article that a director may resign by informing orally but the

Act overrides the articles and, therefore, an intending director has to

express his intention of resigning in writing.

The Act provides that a meeting of the Board shall be called by giving notice

in writing to every director at his address registered with the company and

such notice shall be sent by hand delivery or by post or by electronic means.

In the similar way, an intending director may communicate his intention of

resigning by sending e-mail to the company.

Communication to the company

The Act has also made it clear that the communication of resignation by a

director has to be sent to the company. The relevant section of the Act on

service of documents made it clear that document, if it is intended to be

served through physical mode, should be served to the company at its

registered office. Therefore, a company may have its corporate office and the

managerial personnel such as managing director, functional director(s) and

Volume VIII Part 4 August 25, 2014 8 Business Advisor

company secretary may operate from such corporate office but sending of

documents to the company would require sending it to the registered office

and of course, in addition to sending to the registered office, an intending

director may also send the copy of his resignation notice to the corporate

office.

Similarly, sending resignation letter by electronic means would be sufficient

if it is sent to the valid e-mail address of the company.

Effective date of resignation

There may be chances for a minute disparity on the effective date of

resignation as communicated by a director and by the company respectively

in the respective prescribed forms to the Registrar of Companies.

The Act, on one side, provides that the resignation of 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. The

resignation of director is with immediate effect on which the notice of

resignation of a director is received by the company.

The Act, on the other side, mandates an intending director to forward a copy

of his resignation along with detailed reasons for the resignation to the

Registrar within thirty days of resignation. The said communication to the

Registrar by such a director is in Form DIR-11 as provided in the

Companies (Appointment and Qualification of Directors) Rules, 2014 (the

Rules).

The minute disparity would be that a director while filing his Form DIR-11

may consider the date of his resignation letter or specified date of

resignation (date being earlier than the date of receipt of letter by the

Company) as effective date. On the other side, the company receiving the

resignation letter by post would, in terms of the provisions of the Act,

consider the date on which such resignation letter is received as the

effective date.

Role of Board of directors

The Act requires that the Board of directors (Board) shall, on receipt of

notice of resignation, take note of the same. There is no mandate that the

notice of resignation needs to be accepted by the Board.

A duty is also cast on the Board that the fact of resignation of a director has

to be reported in its report which is to be laid in the immediately following

general meeting of the company.

Volume VIII Part 4 August 25, 2014 9 Business Advisor

Intimation to Registrar of Companies

The intimation of notice of resignation of a director shall be given to the

Registrar within thirty days from the date of receipt of notice of resignation

from a director. The said intimation is to be given in Form DIR-12 as

provided in the Rules. The duty to intimate is cast on the company. There

may be chances that a Board may not meet in the near future, say in the

next thirty days, after the receipt of notice of resignation of a director,

whereas, the duty of the company is to file the said form DIR-12 within

thirty days from the date of receipt of notice of resignation of a director.

The company secretary or the managing director, as a good corporate

governance may immediately circulate the notice of resignation of director to

all the directors and file the said form DIR-12 with the Registrar of

Companies. However, where a company is not required to appoint key

managerial personnel, it is the duty of every director or more particularly of

the director who has been generally authorised at any previous Board

meeting of the company for signing and filing of forms to take appropriate

steps for proper compliance in this regard.

The company is also to post the said information on its website, if any.

Duty of resigning director

The Act also casts a duty on the resigning director so as to avoid or

minimise any litigation in this regard. He has to file form DIR-11 within

thirty days from the date of resignation. The said notice of resignation shall

provide the reasons for resignation and shall be attached along with form

DIR-11. The providing of reasons for resignation may harm the company;

however, the director has to provide the reasons, and merely providing

reasons such as “personal reasons” would not suffice.

Interestingly, two factors on the part of resigning director need to be

considered. The first one is that he has to file the Form DIR-11 with

prescribed fee as provided in the Companies (Registration offices and Fees)

Rules, 2014. The second one is that filing of form DIR-11 needs his digital

signature and, therefore, it seems that every director has to have one such

digital signature and to renew the same from time to time.

Liability of resigning director

The Act has made it clear that the director who has resigned shall be liable

even after his resignation for the offences which occurred during his tenure

as director. Normally, one has a right to withdraw his resignation before its

acceptance. In such a case, there would be no scope for withdrawal of notice

Volume VIII Part 4 August 25, 2014 10 Business Advisor

of resignation if such a director also communicates the same to the

Registrar as there being no concept of acceptance of notice of resignation of

a director by the Board.

However, it is debatable what would be the consequences where the director

is yet to communicate his notice of resignation to the Registrar and the

company persuades him to withdraw his notice of resignation and he does

so.

Similarly, if an intending director has not filed form DIR-11 with the

Registrar, will his resignation be valid? It is also debatable whether the

Registrar can initiate any legal proceedings against such director for not

filing DIR-11.

In one of the court decisions, a director who resigned had signed post-dated

cheques, and such cheques bounced back for insufficient funds. The said

director was not held liable for such bounce back of cheques.

Conclusion

The Act has made responsible all the three, namely, the resigning director,

the Board and the company, for proper compliance of provisions on

resignation of director.

A duty is cast on the director to give his intention in writing to the company

and also to file his copy of resignation with the Registrar.

The Board has to take note of the resignation of the director and has to

include the same in its immediate report to the shareholders.

A duty is also cast on the company to file the notice of resignation with the

Registrar and also to post the information on its website, if any. The new

provision would certainly minimise the litigation and would provide great

relief to the directors who intend to resign from the office of directorship.

(Dr S. Chandrasekaran is Senior Partner, Chandrasekaran Associates, Delhi)

The Act has made responsible all the three, namely, the

resigning director, the Board and the company, for proper

compliance of provisions on resignation of director.