Jammu & Kashmir and Ladakh High Court: Director’s Resignation Effective Instantly in Absence of Explicit Articles of Association Provision

Jammu & Kashmir and Ladakh High Court: Director’s Resignation Effective Instantly in Absence of Explicit Articles of Association Provision

An appeal was filed under Section 10F of the Companies Act, 1956, challenging an order passed by the Company Law Board

The Jammu & Kashmir and Ladakh High Court has clarified that the resignation of the director of a company would take immediate effect only in cases where the Articles of Association did not specify its effect.

The bench of Justice Sanjay Dhar observed, “If the Articles of Association of a company make a provision for resignation, it has to be resorted to in accordance with the provisions. As to when it is to take effect on acceptance, it would be governed by the Articles of Association. In the absence of any such indication, it would take effect immediately.”

The judge was 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. While deciding his application, the Company Law Board 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.

Originally, the appellant was appointed as director of the 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 company. On 21.09.2010, another director of the company informed the appellant that his resignation was noted, and he was relieved from his duties with his Form 32 set to be filed with the Registrar of Companies.

However, when the company failed to submit Form 32, the appellant made several attempts to apprise the former but failed. Thereafter, he approached the Company Law Board for a directive. However, it was declined in favor of the automatic cessation of directorship on 01.07.2011.

The appellant argued that since the company acknowledged receipt of his resignation letter 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. Thus, it meant, it was not accepted officially.

The primary concern was when a resignation by a director takes effect.

Under the Companies Act, there was no such explicit provision. Instead, Section 283 dealt with various circumstances in which a director's office could become vacant. The Court explained that Section 318(3)(a) and (b) addressed the issue.

Thus, while referring to the Palmer’s Company Precedents 17th Edition, Justice Dhar noted that a director could resign from his position even without explicit resignation powers, provided the company's articles didn’t specify otherwise. In its 21st Edition, it was stated that the directors had the freedom to resign at any time, with specific provisions often outlined in the company's articles.

The Court noted that Clauses 95 & 96 specified that the director’s office would become vacant on his resignation by notice in writing and its acceptance by the Board of Directors. At any board meeting, every director had to sign his name in the book.

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

It stated, “Even the letter of acceptance does not bear any reference to a resolution of the Board of Directors, based on which the acceptance letter was issued. Therefore, it can be stated that the resignation letter was never placed before the Board of Directors.”

Thus, while dismissing the appeal, the Court held that the appellant's argument, claiming the resignation was effective the moment it was tendered, was not valid.

It added that despite one director acknowledging the resignation letter, 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.