File Copyright Online - File mutual Divorce in Delhi - Online Legal Advice - Lawyers in India

Resignation By A Company Director: Law And Practice - A Comparison Of The Position In India And The United Kingdom

Who is a Director of a Company?

The directors are responsible for the company's overall health and for the interests of the shareholders as well. Directors have duties to the corporation and are essentially fiduciary agents. The shareholders of the corporation appoint directors to oversee the management of the business in the shareholders' best interests. Additionally, no firm can succeed if its directors are not good and honest; as a result, corporate success can only be attained if the company's directors carry out their responsibilities and strictly enforce their director duties.

Consequently, directors are essential to all corporate governance systems. Certain equitable principles and common law rules serve as the foundation for the director's general duty.

Ensuring corporate governance and benefiting shareholders, the Companies Act of 2013 has secured the preservation of this power and duty balance to the maximum extent practicable. To ensure effective adherence to regulations, prevent corporate governance errors, and safeguard the organization's legal integrity, it utilizes a combination of punitive and regulatory actions, which may include stringent judicial proceedings.

Powers of the Directors of a Company:
A resolution or separate item specifying that directors lack the authority to perform specific activities has not been passed by the majority of businesses. But in order to define this kind of authority, the Act calls for a resolution at a general meeting. The following choices should be made by the directors, although they usually also need the consent of the shareholders via a resolution:
  • Credit given to the directors
  • Fixed-term employment agreements exceeding two years for directors.
  • Large-scale real estate deals in which the directors personally benefit.
  • The issuance of the shares.
Duties of a Company's Director under the Companies Act, 2013:
The following responsibilities of a company's directors are outlined in Section 166 of the Companies Act 2013:
  1. A director is required to carry out their duties in accordance with the company's bylaws.
  2. A director is required to behave honestly, in the best interests of the company's stakeholders, and to advance the goals of the organization.
  3. A director must exercise independent judgment while using all necessary caution, skill, and diligence in the performance of his duties.
  4. In order to protect the company's interests, a director should be continuously aware of possible conflicts of interest and make every effort to avoid them.
  5. The director must confirm that the transactions are in the best interests of the company and that the necessary considerations have been made before approving related party transactions.
  6. To guarantee that users' rights and the company's monitoring system are not harmed by such use.

Liability of the Director:
Any and all actions detrimental to the company's interests could result in the directors being held individually or jointly accountable. The director may be held accountable on behalf of the Company in the following circumstances, even though the director and the Company are separate legal entities:
Tax Liability:
  • Provided that a current or former director (during the defaulter's time period) can demonstrate that the non-recovery or non-payment of taxes is the result of egregious carelessness or a breach of duty, then the tax shortfall and any associated penalties must be paid.
  • Returning a share application or the excess money applied for a share application.
  • To cover the costs associated with qualifying shares.
  • There is a civil liability in the event that the prospectus contains a false statement.
  • Dishonest business practices, together with all associated obligations and agreements signed.
Director and Board of Directors in a Company-
According to Section 2 (34) of the Companies Act 2013, a "director" is defined as "a director appointed to the Board of a company," where "Board of Directors" or "Board" in the context of a Company refers to the entire group of the company's directors. Every company is required under Chapter XI, Section 149 of the Companies Act 2013 to have a board of directors, with the following members of the board of directors:
  • Public Company: The number of directors to be selected should be three at the very least and fifteen at most. Additionally, the number of independent directors must be at least one-third.
  • Private Company: A private company might have as few as two directors and as many as fifteen.
  • One Person Company (OPC): The appointment of at least one director is required.
Responsibility of Board of Directors-
  • The board of directors of a firm is primarily in charge of:
  • Creating the strategic objectives and strategies of the organization.
  • Monitoring the advancement of objectives and policies.
  • Identifying the senior leadership.
  • Giving appropriate people, such shareholders, an accounting for the company's conduct.

Resignation of Director in a Company:
Though a director can be appointed by the Board of Directors, he/she has to be qualified for that position in a company, the person can be disqualified from his/her position by the BODs through any valid reasons, taken by the BODs.
But a director can also resign from his/her position due to many valid reasons, and it has been mentioned under Section 168 of the Companies Act, 2013.
  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 director may 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.
There used to be no clause describing the process by which a director might leave their position. The provisions outlined in Section 318 of the Companies Act, 1956, were applied to the resignation. It has been decided that a director who resigns from office is not entitled to any compensation under this clause.

Mother Care (India) Pvt. Ltd. v. Ramaswamy P Aiyar.
The court determined that a director's resignation is valid even if he is the sole director holding the position.

Following the Act of 2013, Section 168 now establishes the following provisions:
  • By providing written notice to the business, the director may leave his position.
  • The board is required to act upon receipt of the notice.
  • The company must notify the registrar in accordance with the deadline.
  • It is required of the corporation to include the resignation in the director's report at the next general meeting.
  • Within thirty days of resigning, the director must submit a copy of his resignation to the registrar along with a thorough explanation of his resignation.
The director remains accountable for any wrongdoing connected to him or occurring during his tenure, even after he has resigned.

Possible Reasons behind Resignation by a Director:
  • Better Career Option:
    Resignation is a possibility for directors in the event that they are prevented from serving as directors by AOA or if they are presented with better opportunities. In order to pursue an intriguing career opportunity at a Bangalore-based startup, Ravi Venkatesan resigned from his position as an independent director at Infosys.
  • Disagreement with the Board:
    At any point in time, any of the directors may decide to step down if there is a disagreement among them or a lack of trust among them. This can lead to ego clashes and poor communication, which can negatively impact the company's performance and the crucial role of decision making.
  • Irregularities in the Company Affairs:
    A director may resign from the company to protect himself from personal culpability resulting from actions that may or may not be within his control if he becomes aware of suspicions or dishonest practises in the firm's operations and finds himself drawn into them.
  • Fear:
    Current organisations like SFIO, ED, and EOW as well as laws like the PMLA Act that impose penalties on officials who violate the law, including property attachment or a 10-to 20-year jail sentence. Any violation, even on the part of the KMP, could result in arrest or personal culpability. A director may step down at the first evidence of concern about the company's potential for loss or fraud charges, as shown by the financial statements and cash flows.
  • Removal given the face of resignation:
    In the event that the director defaults, violates, or disregards compliances, the board may wish for him to resign from his position. Occasionally, though, the dismissal is accompanied by a request for the director to resign in order to get a bilateral benefit rather than being fired.
  • Withdrawal of Nomination:
    This pertains to the nominee directors on the BOD who are primarily chosen by the banks, who are investors in NBFC. The nominee director may resign following the completion of the transaction between the entity and the company, or occasionally after the entity withdraws its candidature.

Provisions under the Old Companies Act:
Since the 1956 Act made no mention of a defined procedure, many problems regarding whether a director's departure is unilateral or bilateral were raised.

Pandurang Camotim Sancoalcar v. Suresh Prabhakar Prabhu
The Bombay High Court ruled that the 1956 Companies Act does not contain any provisions regarding a director's resignation and that the Articles of Association 1956 Act should be consulted instead.

If the AOA stipulates that obtaining board approval or following another process, such as shareholder approval, is required, then such guidelines must be adhered to.

T. Murari v. State.
The resignation of the managing director would become effective upon submission to the board in companies where not even the AOA has made a statement regarding the resignation.

Legal Position of the Director in India and United Kingdom:
It is very challenging to describe the precise legal status of directors in a company. The judges have provided distinct definitions for directors, designating them as trustees, agents, or managing partners, respectively. These are the individuals who have been duly appointed by the business to oversee and manage its operations. The terms "agent," "trustee," and other similar terms do not fully describe the roles and obligations of directors.

Ram Chand & Sons Sugar Mills Pvt. Ltd. v. Kanhayalal Bhargava (1966)
That elucidating the legal status of directors in a company is quite challenging. Even though the phrases "agent," "trustee," and "manager" do not have the same legal meaning, judges have summed it up as a multifaceted role that is held in these capacities.

Directors as an Agent:
A business cannot operate independently and in its own right. It would require representation from someone at all times. Since a company can only act through its directors, the relationship is one of principle and agent. The directors have the authority to act and decide on behalf of the firm because of this relationship. The company is responsible for every agreement or transaction entered into on its behalf, not the directors. The directors merely sign and make agreements on the company's behalf; they are not personally liable.

Ferguson v. Wilson (1904)
It has been determined that the directors act as the company's agents. Legal precedent has established that a firm need an agent in order to function because it is unable to function as an artificial person on its own.

Ray Cylinders & Containers v. Hindustan General Industries Limited (1998)
It was noted that directors act as the company's representatives rather than those of the members. This indicates that, with the exception of situations in which a relationship between the two results from unique circumstances, the directors represent the company rather than any one of its individual members. Apart from its members, or shareholders, a company is a distinct legal entity.

Kirlampudi Sugar Mills Ltd. v. G. Venkata Rao [2003]
It was observed that the CEO of the business cannot be accused of taking personal loans if he executes a promissory note and obtains funds from other sources for the business's needs. The person who borrowed money acting as the firm's agent will not be held responsible even if the company is unable to pay the sum promised.

H.P. State Electricity Board v. Shivalik Casting (P.) Ltd. [2003]
It has been established that the company cannot be sued for the amount of surety if a director provides surety in his own or personal capacity rather than for the benefit of the company.

Bhajekar v. Shankar (1933)
It was claimed that a resolution passed by the company can ratify a transaction undertaken by the director that exceeds his authority but still remains under the purview of the company's power.

Director as a Trustee:
A director of a company holds the same status as a trustee. Because they oversee the assets and look out for the company's best interests, directors are referred to as trustees. A trustee is someone who can be trusted with the business's assets and works to forward the objectives of the organization rather than their own interests. A trustee is also granted other powers, referred to as powers in trust, such as the allocation of shares, the ability to make calls, the acceptance or rejection of transactions, etc.

Dale & Carrington Investment (P.) Ltd. v. P.K. Prathapan [2004]
It was observed that the directors must behave in their fiduciary position, which entails that they must operate with the highest care, skill, good faith, and diligence on behalf of the company, with a particular focus on the interests of the business they are serving.

Peskin v. Anderson (2001)
It was decided that a business's directors have an obligation to the firm as a whole and are not trustees for specific shareholders or obligated to them in any way just by virtue of their positions. They can buy their shares while the negotiations to sell the company's undertaking are still ongoing, without saying anything.

Director as a Managing Partner
A company's directors act as a representative of its shareholders' desires. They frequently represent the interests and objectives of the shareholders. As such, they possess immense abilities and are capable of carrying out numerous functions that are exclusive to them. Owing to the clauses outlined in the firms' MOA and AOA, the board of directors serves as the highest policy and decision-making body.

Director as an Employee/Officer
In a general meeting that the company holds, shareholders choose directors. Following his election, the director is entitled to the powers and privileges set forth in the Act. The shareholders are unable to restrict these rights and privileges, nor are they permitted to meddle in the directors' decision-making process. Given their authority and privileges, directors cannot be referred to as company employees. This is due to the fact that employees are not allowed to make decisions on their own; instead, they always follow their employer's instructions and have restricted authority.

Lee Behrens & Co., Re [1932]
It was observed that the shareholders select the individuals who will lead the business's operations on their behalf. This indicates that in this particular situation, they are functioning as an agent. Additionally, it is evident that they are neither the company's servants nor workers.

R.R. Kothandaraman v. CIT (1957)
The Madras High Court ruled that, given the legislation makes no mention of it, nobody may stop the director from taking a job under a particular contract he has with the company.

To summarize the legal position of directors in a company, Jessel M.R can be quoted from:
Forest of Dean Coal Mining Co., Re [1878]
Depending on the context, directors may be referred to as trustees, commercial trustees, managing partners, or trustees. Ultimately, what matters is that you recognizeorganization that directors are essentially businessmen who oversee a trading company for the benefit of all shareholders as well as themselves. They have a fiduciary duty to the company with regard to the authority and resources they manage.

Laws require directors to act fairly and reasonably in the course of carrying out their responsibilities and furthering the objectives of the organization. In addition to their fiduciary connection with the corporation, directors also function as agents. The director does all of these duties simultaneously. The precise legal status of directors is not well understood, but if they abuse or overuse their authority, they will be subject to mandatory legal obligations. Unlike agents, who merely need to follow the principal's directions, directors do, in some circumstances, have their own independent authority.

The management of the company's assets is also assigned to the directors. They have to operate with integrity, in the best interests of the organization, and with moderation while using their authority.

Ultimately, it can be argued that the directors own a distinct identity as well. Simply said, they are not the entirety of managing partners, trustees, or agents; they just have some of those traits. Therefore, it can be concluded that they do not act as the company's agents, trustees, or managing partners.

Law Article in India

Ask A Lawyers

You May Like

Legal Question & Answers

Lawyers in India - Search By City

Copyright Filing
Online Copyright Registration


How To File For Mutual Divorce In Delhi


How To File For Mutual Divorce In Delhi Mutual Consent Divorce is the Simplest Way to Obtain a D...

Increased Age For Girls Marriage


It is hoped that the Prohibition of Child Marriage (Amendment) Bill, 2021, which intends to inc...

Facade of Social Media


One may very easily get absorbed in the lives of others as one scrolls through a Facebook news ...

Section 482 CrPc - Quashing Of FIR: Guid...


The Inherent power under Section 482 in The Code Of Criminal Procedure, 1973 (37th Chapter of t...

The Uniform Civil Code (UCC) in India: A...


The Uniform Civil Code (UCC) is a concept that proposes the unification of personal laws across...

Role Of Artificial Intelligence In Legal...


Artificial intelligence (AI) is revolutionizing various sectors of the economy, and the legal i...

Lawyers Registration
Lawyers Membership - Get Clients Online

File caveat In Supreme Court Instantly