Directors Resignation: How, and when is it effective?

The resignation of a director is a debatable topic within the jurisdiction of Bangladesh, much because of the governing company law legislation’s (the Companies Act, 1994) silence in relation to the issue of resignation of a director. What makes the topic more debatable and the Companies Act, 1994 the subject matter of scrutiny is that the Act, despite being silent on the matter of resignation of directors, lays down provisions appertaining the appointment and removal of directors.

The question then arises, whether the draftsmen of the statute had intentionally turned a blind eye to the matter of resignation of the directors or whether in the process of drafting such an exigent legislation, they had forgotten to accord sufficient attention to this pressing issue. Whether the desire to keep the matter untouched was influenced by either of the two aforementioned reasons or some other reason, the position remains the same: that the law on this topic is unclear and ambiguous!

Directors can be fairly considered to be the most important organ of a company. The management of a company is entrusted to the directors, who under the law, have to exercise their powers in the interest of the company as a whole.[1] The fact that directors are vested with the responsibility of managing the day to day affairs of the company, that is why company law legislation in almost every jurisdiction seeks to provide for provisions concerning directors. For instance, Section 90 of Companies Act, 1994 of Bangladesh requires the appointment of directors in private and public limited companies while Section 172 of the Companies Act, 2006 of the UK obligates directors to promote the interests of the companies. It is thus tenable to require company law legislation, which necessitates the appointment of directors and governs how they are to discharge their duties, to provide for not only how directors are to be appointed but also how they can be removed and how they can resign.

The absence of a statutory provision prescribing the resignation of a director is highly regrettable. This puts directors of companies, the companies themselves and the company law experts in a huge amount of stress as it cannot be ascertained when would the resignation of a director be considered effective: will it be effective when a director expresses his desire to resign in written form or when a company, acting upon a director’s resignation requests, removes the directors name from its register and updates the Registrar of the Registrar of Joint Stock Companies and Firms of the change?[2] The lack of legislative intervention in this avenue of company law makes either of the two possibilities likely. Nevertheless, inferences can be drawn from case laws and customary practices and it might be possible for us to find a single answer at the end of this paper.

The Companies Act, 1994 of Bangladesh is similar to the Companies Act, 1956 of India and thus it may be helpful to seek directions on this issue from Indian case laws decided under the Indian Companies Act, 1956.

In practice, the appointment and resignation of directors are usually specified in the articles of association of limited companies. The appointment procedure of directors is stated ensuring compliance with Section 91 of the Companies Act, 1994. As for resignation of directors, the absence of any statutory provision endows on the companies the right to design the procedure in according to what is more convenient to the concerned company and what is customary within the nature of the business the company is undertaking. The power of companies to lay down their own method of resignation can be said to have been derived from Section 108(2) of Companies Act, 1994. This allows companies to provide for grounds, in addition to Section 108(1) of Companies Act, 1994, by virtue of which the office of a director can be vacated. A company, by virtue of Section 108(2) of Companies Act, 1994, can thus include voluntary resignation by a director in a particular manner to be a ground through which the office of a director can be vacated.

Although the inclusion of the resignation procedure within the articles of association may slightly remedy the absence of a statutory provision appertaining director’s resignation, it does not, however, provide the complete solution. A director resigning in according to the procedure laid down in the company’s articles of association may very well have satisfied the procedural requirements, but that may not be sufficient to make his or her resignation effective. It may only be considered effective when the company has the director’s name removed from its register as required by Section 115(2) of Companies Act, 1994 or after the acceptance of the resignation by the company or after the appointment of a new director in the resigning director’s position. It is difficult to provide one right answer.

The situation is far abysmal and puzzling when a company’s articles of association does not provide for director’s resignation. This can be slightly repaired by amending the articles of association to include director’s resignation. Alternative solution could be to follow the ordinary rule of common law as regards resignation by an officer or agent, namely intimation by notice given either to the company or the board and acceptance of same by them (Glossop v. Glossop, [1907] 2 Ch 370 and Latchford Premier Cinema Ltd. v. Ennion, [1931] 2 Ch 409)[3] In the latter case, even resignation orally tendered at a general meeting and accepted by the meeting was held to be effective.[4]

The Indian Companies Act, 1956 provided no express provision for vacancy by resignation and as to when a resignation by a director takes effect. However, case laws decided under the aforementioned Act sought to provide guidance on the matter. In the case of T. Murari vs State on 5 September, 1975, Krishnaswamy Reddy, J stated:

“13.     … If there is any provision in the articles giving right to a director to resign at any time, the resignation will take effect without any need for its acceptance by the board or the company in the general meeting. In the absence of any provision relating to resignation in the articles of association, it is well-settled that a resignation once made takes effect immediately when the intention to resign is made clear.”

In relation to whether acceptance of resignation is required for the resignation to take effect, he opined that:

“19.     In the decision in State of Bihar v. Sitaram Jhunjhunwala, in considering as to when the resignation takes effect, it was held that the acceptance of resignation is unnecessary for the resignation to take effect when once it is tendered in writing. In that case, the articles of association of the company itself provided that the director will cease to hold office ipso facto upon giving the notice of resignation in writing.”

Krishnaswamy Reddy, J further observed:

 “21.     … 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 above decision of the Madras High Court is fortified by the judgment of the Supreme Court of India in the case of Moti Ram v Param Dev[5] where in defining “resignation”, the Supreme Court observed:

 “15.     As pointed out by this Court, ‘resignation’ means the spontaneous relinquishment of one’s own right and in relation to an office, it connotes the act of giving up or relinquishing the office. It has been held that in the general juristic sense, in order to constitute a complete and operative resignation there must be the intention to give up or relinquish the office and the concomitant act of its relinquishment.  It has also been observed that the act of relinquishment may take different forms or assume a unilateral or bilateral character, depending on the nature of the office and the conditions governing it.  See: Union of India v. Gopal Chandra Misra, 1978 (3) SCR 122 at p.21: (AIR 1978 SC 694 at pp. 699-700)). If the act of relinquishment is of unilateral character, it comes into effect when such act indicating the intention to relinquish the office communicated to the competent authority. The authority to whom the act of relinquishment is communicated is not required to take any action and the relinquishment takes effect from the date of such communication where the resignation is intended to operate in praesenti. A resignation may also be prospective to be operative from a future date and in that event it would take effect from the date indicated therein and not from the date of communication.”      

The above two cases clarified the position in respect of resignation of directors where the statute and articles of association are silent on the issue by allowing directors to resign by communicating resignation to the respective authority. The resignation is deemed to take effect from the date when it is communicated or where it is intended to take effect from a future date, it will be operative from the specified future date.

The current company law legislation of India, the Companies Act, 2013 broke the silence on director’s resignation through Section 168 which allows a director to resign from his or her office by giving a notice in writing to the company and this resignation takes effect from the date on which the notice is received by the company or on the date, if any, specified by the director in the notice, whichever is later. The same approach could also be adopted in Bangladesh through an amendment of the Companies Act, 1994.

However, in the absence of any such amendment, it is advisable for companies to incorporate a provision concerning resignation by directors within their articles of association or where they do not, they should follow the directions of the earlier mentioned Indian case laws, i.e. to allow directors to resign by communicating their intent in writing and such resignation will be deemed to be the effective from the date of communication unless a future date is mentioned by the directors on the resignation notice.

References:

[1] Serajuddin Ahmed vs AKM Saiful Alam 56 DLR (AD) (2004) Page 40 (Mainur Reza CJ)

[2] Section 115(2) of Companies Act, 1994 of Bangladesh.

[3] Para 18, T. Murari vs State on 5 September, 1975, 1976 46 CompCas 613 Mad

[4] IBID

[5] AIR 1993 SC 1662

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Mohammad Taqi Yasir

Mohammad Taqi Yasir is a LLB graduate of the University of London International Programmes. He is one of the 15 students around the world who was awarded first class in 2017 by the University of London. After completing his LLB in 2017, he commenced his legal career at a leading law firm in Dhaka and is currently practicing in civil law, more specifically in the areas of company law. He is also an entrepreneur holding board position at a digital marketing and event management company, Planet X Incorporated. His interests extend to the field of philanthropy as well and he current performs the role of an advisor for a charity called Born To Smile and holds the position of Vice President of a social enterprise named, Footsteps Foundation.

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