Topics Covered in this article
Section 168 of Companies Act, 2013 lays down the provision for resignation of a director. A director is a person of utmost importance for proper governance of a company. He is a competent person who is responsible to follow the Articles of Association and Memorandum of the Company to manage the affairs of the company. The shareholders of the company elect him. Before the act of 2013, there was no provision for resignation of a director. This was a drawback of previous act, which the 2013 act takes care of and provides for a fast and swift method for the same but at the same time laying provisions to hold a director liable for all the acts done in his tenure, even after resignation.
A director is a top-most position in a company. They together make decisions that affect the company and shareholder’s interest. It is important that directors should be held liable for their actions even after their resignation, or resigning could be a way to overcome liability. This analysis will look at the section deeper and understand its true value and application through cases.
Purpose of Section 168
This section is very important as it clears the grey area created by the previous act of 1956 and provides a uniform system of resignation by directors and also implicitly makes clear their liability. A brief description of section is as follows:
- A director while resigning has to give notice of the same to the company and the board of directors, who will take notice of the resignation and place such notice in the report of directors which have to be presented in general meeting of the company. The resignation cannot be oral.
- The director “may” forward a copy of such resignation to the registrar along detailed reasons within thirty days of resignation.
- The date of resignation shall be the date of notice or any other date as specified by the director whichever is later.
- The director will be liable for the offences that occurred during his tenure even after resignation.
- If all the directors resign at the same time, then the promoter of the company or in his absence the central government will be responsible for appointing such number of director(s) as necessary till the new directors are appointed by the company at the next general meeting.
Section 168 has to be read with Appointment and Qualification of Director rules, 2014. The following are the important ones:
- The director has to file form DIR-11 along with his reasons of resignation to the company and notice of resignation within thirty days of resignation along with the fee as provided in the Companies (Registration Offices and Fees) Rules, 2014.
- Company has to intimate the registrar through filing of form DIR-12 within 30 Days from the effective date of resignation.
Further, by the act of 2013, Schedule IV provides for the code of independent directors, a category of independent directors which form epitome of corporate governance and who protect the minority shareholders. This schedule lays down the procedure of resignation of such directors, stating it to be the same as provided by section 168 of the act, 2013.
Also, it is not necessary that after the resignation by director his shares have to be sold. The shareholder agreement or AOA clauses will determine what will happen to shares of director post resignation.
Situation Before the Enactment of Section 168
The previous company act had no provision for resignation of directors, it is a provision introduced by 2013 companies act. Although before the Companies Act, 2013, orders passed by the courts adhered to the same principle but the new provision leaves no ambiguity. Before the act of 2013, the procedure of resignation of directors was ambiguous. The confusion for procedure was whether it is unilateral or bilateral. In the case of Pandurang Camotim Sancolar v. Suresh Prabhakar, the Bombay court held that as the companies act 1956 is silent on the provision of resignation of directors, a reference must be taken from Article of Association [AOA]. In the case of T. Murai v. State, the court dealt with the dilemma when even AOA provided no procedure for resignation of directors. The court took reference from British law and stated that a resignation once made takes effect immediately when the intention to resign is made clear if the AOA provided no distinct procedure. The court also held that it is the day of notice of resignation, which shall be considered as the date of resignation.
Further if AOA of the company was silent, it was usually followed that the resigning director would send notice to the board and, as a precaution would inform SEBI or registrar of companies or publish his resignation information in a popular newspaper informing the public at large. Also, in the 2002 judgement of Bombay High Court, the court held that a director resignation is unilateral. He has to inform the chairman, or the company secretary and it is then their duty to inform the registrar and approve the same in the board. The board cannot reject a director’s notice of resignation and have to take note of the same, as it is a right of a person to tender his resignation. It was all the judicial pronouncements, which later formed section 168 of the act, 2013.
Application of Section 168
This section brings about implicit clarity on the aspect of resignation of a director. Whenever a director resigns, be it independent director or any other director, the procedure as per this section has to be followed. Further as per section 6 of the act, 2013 if there is any contradiction between AOA and this section, then section shall prevail, but if the requirement of AOA, like a board approval, does not conflict with this provision, the same has to be adhered to. Further this section has applications post a fraud or scam the director resigns, to determine the liability of the director.
The following are the amendments to this section:
- There was no such section in previous companies act of 1956 and the 2013 act brought this section for the first time.
- By the way of 2017 amendment, the filing of DIR-11 by the director to the registrar has been made optional, which was mandated by the provision of section 168(1) of 2013 act as a way to make sure the company does not use the name of the director after resignation. By way of this amendment the rules have been made flexible.
- Ministry of Corporate Affairs have by way of notification dated 4th January 2017, have now also exempted Indian Financial System Code companies’ directors from mandatorily filing DIR-11 with registrar.
Cases at a Glance
- Manav Kumar Agarwal V. Discovery Enterprises Pvt. Ltd & Others: In this case a director resigned, but later found his name to still be displayed as a director of that company, and so he filed a case against the same. His resignation was questioned. It is a case decided under 1956 act and gives a judgement contrary to other company law board in India. The board held that the resignation given by the director has to be approved by the way of resolution to be valid and thus took away the autonomy of the director to resign and made the process of resignation bilateral rather than unilateral as accepted and held by other company law boards.
- Dushyant D. Anjaria vs M/S. Wall Street Finance Ltd: In this case, the board held that it is the duty of the company to submit necessary forms to the registrar on notice of resignation by director and if the same is not done, the liability will be on the company. This case is a safeguard for directors in case of default by company and thus is a very important precedent.
- State of Karnataka vs Pratap Chand & Ors: In this case the court discussed the liability of the director after his resignation. Court implicitly held that the director is only held to be liable if he is responsible for the operation of the company and the acts were done with his consent and connivance. The court restated and upheld the provision in this particular case.
- SS Lakshmana Pillai v. Registrar of Companies: In this case the company in question had two directors, one of them died and the other one wanted to resign. It was a case pre-2013 inclusive of section 168. In 1956 act there was no provision for resignation. The court held that in such a scenario AOA have to be followed and if even that is silent, then terms of resignation have to be followed. Further also the resignation will be effective even when no director is in the office but a director by resigning cannot severe and evade his obligation.
- Glossop v. Glossop: In this case the court held that once a director has given a notice of his resignation, he is not entitled to withdraw the notice, but if it is withdrawn, it must be by the consent of the company.
The Previous 1956 Companies act had a grey area with respect to resignation by directors. It had no implicit provision and thus no procedure related to resignation of director. This led to many cases in the Company Law Board and eventually a dependence on the judicial procurements was established. The Company Law Board gave a clear direction in absence of any law. But this also led to conflict between decisions of different Company Law Boards in the country. The companies act, 2013 brought implicit clarity on this subject, thereby making the jobs of the court easier at the same time while protecting the rights and interests of both directors and the company. Further amendment to the section 168 of the act, 2013 have made the process more flexible for the directors. A unilateral process of resignation by directors has been created by the new act, which safeguards the resigning directors’ interest at the same time does not allow directors to evade their actions during their tenure. It is often seen that after a fraud or scandal, the directors resign but this companies act of 2013, made sure that resignation cannot be used as an indirect means of evading responsibility. It will be interesting to see more cases on the section in 2013 act in coming years, and if the court requires to bring more clarity on related questions of law and facts.
Also read, the healthsouth scam largest corporate accounting scandal.