Director's Resignation Has Immediate Effect Only In Absence Of Explicit Provision In Articles Of Association: J&K High Court

Justice Sanjay Dhar observed,

".. if the Articles of Association of a company make a provision for resignation, the same has to be resorted to in accordance with the provisions contained in the Articles of Association. As to when a resignation is to take effect on acceptance, the same would be governed by the Articles of Association. In the absence of any indication as regards the effect of resignation in the Articles of Association, a resignation would take effect immediately."

The observations were made while hearing an appeal filed under section 10F of the Companies Act, 1956, challenging an order passed by the Company Law Board, Northern Region Bench, New Delhi.

The appellant, a former director, sought the submission of Form 32 by the respondent company, stating his resignation date as 17.09.2010. The Company Law Board while deciding the application of the appellant held that the appellant had automatically ceased to be a Director under Section 283(1)(g) of the Act from 01.07.2011 due to his absence from board meetings after September 2010.

The appellant had originally been appointed as a Director of the respondent Company on 06.02.2009. On 17.09.2010, he sent a resignation letter to the Board of Directors, which was duly acknowledged by the respondent company. On 21.09.2010, another Director of the respondent company informed the appellant that his resignation had been noted, and he was relieved from his duties, with his Form 32 set to be filed with the Registrar of Companies. However, when the respondent company failed to submit Form 32, the appellant made several attempts to have it filed but was unsuccessful. This led him to approach the Company Law Board for a directive to the respondent company to file Form 32, which was declined in favor of the automatic cessation of Directorship on 01.07.2011.

The appellant argued that since the company had acknowledged receipt of his resignation letter dated 17.09.2010 and even issued an acceptance letter, there was no reason for them not to submit Form 32 and the resignation should be considered effective from that date.

However, the company contended that the resignation letter was never presented before the Board of Directors, and thus was not officially accepted.

The primary legal question pertained to when a resignation by a Director takes effect. Under the Companies Act of 1956, there was no explicit provision for the resignation of a Director. Instead, Section 283 of the Act dealt with various circumstances in which a Director's office could become vacant. The court explained that resignation was addressed in Section 318(3)(a) and (b) of the Act.

Referencing Palmer’s Company Precedents 17th Edition, Justice Dhar noted that a Director can resign their position even without explicit resignation powers, provided the company's articles don't specify otherwise. Similarly, in Palmer’s Company Law 21st Edition it is stated that Directors typically have the freedom to resign from their roles at any time, with specific provisions often outlined in the company's articles, the court underscored.

Upon examining the Articles of Association of the company, the court noted that clauses 95 and 96 specify that the office of a Director would become vacant on the resignation of his office by notice in writing and its acceptance by the Board of Directors and at any meeting of the Board, every Director has to sign his name in the book to be kept for the purpose.

Noting that the appellant submitted his resignation letter on 17.09.2010, which was acknowledged by one of the directors of the respondent company on 21.09.2010, the bench observed that the appellant failed to provide any evidence suggesting that the Board of Directors had a meeting to consider his resignation.

"Even the letter of acceptance dated 21.09.2010 does not bear any reference to any resolution of the Board of Directors of the respondent company on the basis of which, the said letter of acceptance has been issued. In the face of this situation, it can safely be stated that letter of resignation dated 17.09.2010 was never placed before the Board of Directors", the bench noted.

In view of these facts, the court held that the appellant's argument, claiming the resignation was effective the moment it was tendered, was not valid. Despite one director acknowledging the resignation, it was not accepted in the manner prescribed by the company's Articles of Association. Hence, the resignation was deemed ineffective and not officially recognized, the court said.

For these reasons, the court could not appreciate any ground to interfere with the impugned order and hence dismissed the appeal.

Case Title: Naveen Bhatnagar vs M/s Sudarsham Consolidated Limited

Citation: 2023 LiveLaw (JKL) 269

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