Investor Issues
Resignation of directors

What are the rules governing resignation of directors, mainly in private companies

It is a well-known fact that chances of mismanagement are more in private companies. Generally, private companies are formed by relatives, families and such number of directors are appointed on the board of the directors of the companies so as to comply with the minimum requirements of the Companies Act, 1956 (the “Act”).


In most of the cases, private companies, which are family companies and have been formed on principles of quasi-partnerships, have directors representing specific groups. The absence of adequate provisions in the Act and in the charter documents of such private companies with regard to governance of companies often leads to filing of petitions under Section 397/398 of the Act i.e. Oppression and Mismanagement. One of the very common allegations in these matters is illegal removal of directors/unauthorized removal of directors by showing false resignation letters. Hence, it becomes very important to know when does the resignation takes effect in actual and what should be the form of a resignation letter.

Resignations: When Effective?

Section 284 of the Act specifies the manner in which a director can be removed from his post before expiry of his term. Further Section 283 provides certain grounds on which the office of director ceases. However, the Act does not specify any provision relating to cessation from directorship with their own wish and thus the only exit way available to a director is to tender a resignation. Since the Act does not contain any specific provision in this regard, one needs to refer to the Articles of the Association (“AoA”) of the company. In the absence of any provision in the AoA, the terms and conditions of appointment of a director can be seen.  The Madras High Court in T Murari Vs State of Tamil Nadu1 held that

“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.”


However, it is to be noted that director’s resignation takes effect only when resignation is accepted by the company in the general or board meeting and not from the date of communication of same by the director, if the AoA of the company contains specific provision in this regard. Further, the resigning director would also require fulfillment of such additional conditions as may be specified in the AoA of the company. In a nutshell, as the Act does not contemplate any provision for resignation, the same would be completely governed by AoA of the company. In absence of any such provision in AoA also, ordinary and common laws shall prevail. In SS Lakshmana Pillai Vs Registrar of Companies2 the Madras High Court held as follows:


“In the absence of any provision in the articles, the ordinary rule of common law as regards resignation by an officer/agent  must be followed viz., intimation by notice given either to the company or to the board and acceptance of the same by them. Where a resignation states that it is to take effect on acceptance or the Articles so require, acceptance is necessary to end the tenure of office. Where, however, the resignations says that it is take effect immediately, acceptance is not necessary, unless the articles or any provision of law makes it necessary. Any form of resignation, whether oral or written, is sufficient, provided that the intention to resign is clear. It is, however, advisable that the resignation is in writing and also indicates the time when it is to take effect, so that it may serve as a record of reference in case of controversy. In the absence of any indication otherwise, a resignation takes effect immediately. Resignation will not, however, relieve him from any accountability or other liability which he may have incurred while in office.”


A director resigning at a board meeting should make clear whether the resignation is with immediate effect or from the end of the meeting, as he or she is a party to the decisions of the board up until resignation


In SB Shankar Vs Amman Steel Corporation3 the court held that where the resignation letter states that it has to take effect immediately, the date of the resignation letter is taken to the date on which the director has resigned. Thus unless the AoA of the company concerned contain any specific provision about the acceptance of resignation by the board of directors of the company, the resignation from directorship takes effect immediately i.e. from the date of the resignation letter.

Notice Period for Tendering Resignation

As mentioned above, the resignation terms are governed by the AoA and/or the terms of appointment of a director. If the AoA or the terms of appointment requires a notice period to be fulfilled, the resignation can take effect only after meeting such requirement of notice period. However, if there is no specific provision in the AoA, a director can resign without giving a reasonable notice as held in the case of OBC Caspian Ltd Vs Thorp4.


It is to be noted that in case of voluntary resignation of a permanent director when permitted under the AoA, is not dependent upon its acceptance by the company. The permanent director is entitled to relinquish his office as held in Fateh Chand Kad Vs Hindsons (Patiala) Ltd5.{break}

Form and Content of Resignation Letters

A resignation letter should be addressed to the company or the board of directors of the company. If addressed to a third party, such resignations are not acceptable by the company6. It is to be noted that any form of resignation should specify the intention to resign clearly and the date from which such resignation will take effect, any form of resignation will surely not relieve a director from any accountable or any other liabilities.

Oral Resignations: How Much Effective?

Oral resignation at a board meeting will be effective if that resignation and its effective timing are clear and unambiguous and the resignation is accepted by the other directors present, but it is wise to follow up an oral resignation with written confirmation to the company chairman or to the company secretary or as required by the articles.


An oral resignation given by the resigning director in the general meeting and on acceptance of same by the members, can be effective and valid even if the AoA of the company requires a written notice as held in Glossop Vs Glossop7, This international view has also been affirmed in India in State Vs Sitaram8 by the Patna High Court and by Delhi High Court in Mohan Chandra Vs Institute of Chartered Accountant9.

Effect of Filling of Necessary Forms with Concerned Registrar of Companies (RoC)

Section 302(2) of the Act casts a legal obligation on the company to inform the Registrar of Companies (RoC) by filling Form 32 giving particulars of changes, if any, in the office of director. If such a form is filed with the RoC, it is a proof of a director ceasing to be a director but, it is not an act to be complied with in order to make resignation valid. Resignations once made, take effect immediately and the concerned RoC is informed formally in terms of provisions of the Act. However, mere non filing of requisite form with the concerned RoC does not invalidate the resignation of a director. The Bombay High Court in Dushyant D Anjaria Vs Wall Street Finance Ltd10 held that


“…..The resignation of a director would be effective from the date it was submitted, for the reason that the letter brings out clearly the intention of the person to resign. So far as the formalities like filing up Form 32 and sending it to the Registrar of Companies were concerned, it was for the company to comply with them in conformity with the provisions of Sec. 302 or Sec. 303 of the Companies Act. Where there was delay or negligence on the part of the company in intimating the registrar about the date of resignation, the director who had resigned could not be saddled with responsibility and liability for such delay….”{break}

Liability of Resigning Directors

Section 5 of the Act defines “Officer in Default” mentioning a list of officers who will be prosecuted for any violation or offence under the Act. The list includes ‘directors’ also. It is pertinent to note that for the purpose of the said section, the default in reference to an officer means the default during his tenure. In other words, if a default is committed when a person was not even an “officer in default”, he cannot be prosecuted and held liable for such default. In a similar way, if it is proved that a director at the time of the contravention was in-charge of and responsible to the company for the conduct of its business, he will be held liable even if resigns afterwards.


A director who has resigned would not be liable for anything that happens subsequently. However, he can still be held liable for any mischief or offence made during his directorship.


In case of Pandurang Camotim Sancolarcar Vs Suresh Prabhakar Prabhu11 it was held that when the articles of association provided that the resignation would be effective from the date it was tendered and when the respondent had raised a defence that he resigned on 6 May1996, the fact of his resignation was not in dispute, what was in dispute was only the date of resignation. Clearly it was a case where the respondent had resigned on 6 May1996 and ceased to have any connection with the company. It was held that he was not in charge of the management of the day to day affairs of the company subsequent to his resignation.


The Kerala High Court while dealing with a prosecution case against a managing director in Achutha Pai Vs Registrar of Companies12, put additional restriction on resignation of managing directors. In this case, the managing director who was prosecuted for default under Section 220 of the Companies Act, 1956, contended that he was not liable as he had resigned before the last date for filing accounts. The court held that a managing director combines two capacities, namely, manager and director. Hence, resignation of a managing director becomes effective only when the company accepts the resignation and relieves him from his duties as manager as well. 

Resignations by Nominee Directors

It is quite common to appoint nominee directors on a board of directors of a company by lenders. Sometimes, nominee directors are also appointed by another company as its representative pursuant to Shareholders’ Agreement or Joint Venture Agreements. The general law pertaining to resignations is that a resignation is effective once it is tendered. However, the nominee directors so appointed by a nominator owe some duties towards the appointing authority and cannot resign from the directorship without consent of the appointing authority. Any appointment or removal of such nominee directors are governed by AoA of the agreement as entered into with the company. Where nomination is done by an appointing authority, the resignation should be served to the appointing authority and not to the company. Since the nominees have been nominated by such authority only, they acquire the position of agent of the appointing authority and such agency can be terminated only by service to the principal. Once consented by the appointing authority, the nominee director may intimate company also.

Cases with Forged Resignation Letters

As mentioned above, now-a-days, many cases have seen where forged and fabricated resignation letters have been used to show the illegal removal of directors. These cases are quite common in private companies which are lesser regulated and are quasi partnership kind of companies. Forged signatures are used to oust a group/person from the management of a company. Such practice of using forged resignation letters ultimately leads to taking actions before Company Law Boards (CLB) and other appropriate authorities. Thousands of cases under Section 397/398 of the Act are pending with CLBs. Such actions in all cases have been proved to be time consuming and puts heavy cost burden on parties to such dispute. The records available in public domain i.e. records available with the ministry are updated as soon as any form is filed. So, immediately on approval of a Form 32 filed for removal of directors, the name of the removed director, even if removed illegally with the fabricated signature, will disappear from the records of the company.


Presently, RoC approves all forms intimating the resignations of directors without giving any chance of hearing to the removed director. As like in transfers, obtaining consent of transferor has been made mandatory before registering any transfers, such system and procedure also needs to be put in place so that the removed director gets a chance to put his stand. The ministry should formulate the process under which the removed director is intimated before removal. Though, with the time, ministry’s efforts in this respect are commendable as intimation of any removal is intimated to directors vide email, however, yet not sufficient. System should be such so as to provide a prior intimation to the directors before approval of any such form in order to enable them to take necessary action within time.


From the several judicial pronouncements, some of which have been quoted in this write-up, we may conclude that:

  1. Resignations are governed by AoA of a company and if no such provisions are there in the AoA, resignations will be in accordance with the common laws.
  1. Resignations are effective only after acceptance of same by the company in board or general meeting as the case may be. However, resignations may take effect immediately after tendering if so provided by the AoA of the concerned company.
  1. Non filing of requisite form with the concerned RoC does not invalidate the resignations.
  1. Persons cannot be held liable for any breach or default by the company subsequent to their resignations from the post of directorships. However, they may be held liable for any default made during their tenure of directorship.


(The writers can be contacted at [email protected] and [email protected].)

1 (1976) 46 Com. Cases, 613 (Mad)

2 (1977) 47 Com. Cases 652

3 (2002) 51 CLA 341

4 (1998) S.L.T. 653 (Scot)

5 (1957) 27 Com Cases 340

6 Registrar of Companies v. Orissa Paper Products Ltd., (1988) 63 Comp cases 460 (Ori)

7 (1907) 2 Ch 370

8 AIR 1967 Pat 433

9 AIR 1972 Del 91

10 (2001) Comp. Cas. 655 (Bom)

11 (2003) 53 CLA 265

12 (1966) 36 Com. Cases 598 (Ker)



Sensex, Nifty to move sideways with a negative bias: Tuesday Closing Report

The indices will face selling pressure on every intraday rise

The market snapped its two-day losing streak and closed with modest gains after remaining in the positive for the entire trading session. However, political concerns which emerged in the second half of trade saw the benchmarks paring part of their gains. We had mentioned yesterday that the market is likely to remain in a downtrend, subject to pullbacks for the next few days at least. We continue to maintain the stance. The National Stock Exchange (NSE) saw a volume of 70.65 crore shares with an advance decline ratio 987:808.
The domestic market witnessed a gap up opening on support from its Asian peers which were firm in morning trade. However, gains in Asia were restricted as the International Monetary Fund cut China’s growth forecast to 7.8% for 2012 on account of global issues.
The Nifty rose 32 points to resume trade at 5,708 and the Sensex opened at 18,796, up 87 points over its previous close. Gains in power, capital goods and banking stocks pushed the indices higher in early trade.  However, selling pressure in heavy weights in mid-morning trade saw the market paring a part of its early gains.
Buying in select sectors enabled the benchmarks hit their intraday high at around 11.30am wherein the Nifty scaled 5,729 and the Sensex climbed to 18,886. 
Political concerns following a threat by former Uttar Pradesh chief minister Mayawati-led Bahujan Samaj Party that the party would decide on Wednesday whether to continue to support the UPA government saw the market dropping to its lows in noon trade. Subdued opening by the European indices also dented sentiments. At the low the Nifty fell to 5,678 and the Sensex went back to 18,722.
The market witnessed a minor recovery, rising from its lows and closed with modest gains. The Nifty settled 29 points (0.50%) up at 5,705 and the Sensex finished the session at 18,793, a gain of 84 points (0.45%).
Among the broader markets, the BSE Mid-cap index gained 0.47% and the BSE Small-cap rose 0.33%. 
The top sectoral gainers were BSE Consumer Durables (up 1.47%); BSE Healthcare (up 1.14%); BSE IT (up 1.10%); BSE Fast Moving Consumer Goods (up 1.05%) and BSE (0.94%). The losers were BSE Oil & Gas (down 0.45%); BSE Power (down 0.08%) and BSE Auto (down 0.04%).
Nineteen of the 30 stocks on the Sensex closed in the positive. The major gainers were Larsen & Toubro (up 2.06%); Infosys (up 1.85%); Sun Pharma (up 1.62%); Sterlite Industries (up 1.59%) and Hindustan Unilever (up 1.46%). The main losers were GAIL India (down 2.77%); Bharti Airtel (down 1.83%); Hindalco Industries (down 1.62%); BHEL (down 1.52%) and Tata Motors (down 0.95%).
The top two A Group gainers on the BSE were—United Spirits (up 6.67%) and MCX (up 5.76%).
The top two A Group losers on the BSE were—Idea Cellular (down 3.24%) and GAIL India (down 2.77%).
The top two B Group gainers on the BSE were—Jay Bharat Maruti (up 20%) and Sea TV Network (up 20%).
The top two B Group losers on the BSE were—Bio Green Industries (down 11.04%) and Dhanus Technologies (down 9.94%).
Out of the 50 stocks listed on the Nifty, 29 stocks settled in the positive. The key gainers were UltraTech Cement Company (up 2.61%); L&T (up 2.41%); Ranbaxy Laboratories (up 2.04%); Sun Pharma (up 2%) and Lupin (up 1.88%). GAIL (down 2.93%); BHEL (down 1.93%); Bharti Airtel (down 1.83%); NTPC (down 1.54%) and Hindalco Ind (down 1.37%) were the key losers on the index.
Markets in Asia closed mixed as the IMF cut China’s growth forecast to 7.8% on the back of a slowdown in Europe and the US. Meanwhile, home prices in China's 100 big cities rose for a fourth straight month in September, supporting signs of a minor recovery in the economy. Investors are also awaiting the outcome of the meeting of European finance ministers, which got underway after the Asian markets closed for the day.
The Shanghai Composite surged 1.97%; the Hang Seng climbed 0.54%; the Jakarta Composite advanced 0.28% and the KLSE Composite rose 0.19%. Among the losers, the Nikkei 225 tanked 1.06%; the Straits Times dropped 0.35%; the Seoul Composite fell 0.14% and the Taiwan Weighted declined 0.31%.
At the time of writing, the key European markets were mixed with a negative bias and the US stock futures were marginally lower.
Back home, foreign institutional investors were net buyers of shares totalling Rs563.84 crore on Monday. On the other hand, domestic institutional investors were net sellers of equities amounting to Rs778.61 crore.
DQ Entertainment (International), a Hyderabad-based animation, game art and entertainment company, has signed a deal with California-based Foothill for development, co-production and distribution of animated buddy comedy “Raz & Benny”. The stock closed 2.07% higher at Rs19.75 on the NSE.
IRB Infrastructure Developers has completed the acquisition of 74% stake in MVR Infrastructure & Tollways Private Ltd making the latter a subsidiary of IRB. The acquisition of the balance 26% holding will be completed after NHAI approves the transfer of 26% holding to IRB, the company said in a notification to the stock exchanges. The stock closed 0.29% up at Rs153.25 on the NSE.



Inflicting bad education loans on banks: The FM wants to repeat his 2004-05 act

Immediately after becoming the FM once again, P Chidambaram exhorted banks to dole out more educational loans. In 2004-05 he had done exactly the same thing, leading to large losses for government-controlled banks

After P Chidambaram became the finance minister in August this year, one of the first things he did was to rail at banks (read public sector banks) to ensure that they dole out more educational loans. The finance minister even went as far to say that bank officers will be penalised for rejecting education loans without sufficient reasons. “Bank loan is the right of every student who meets the parameter. No bank can turn away an applicant. Every application for a bank loan must be received and acknowledged and every deserving candidate must be given the loan if the student meets the parameter,” Chidambaram had said. While he has laced his admonishment with words like “who meets the parameter”, bank chairmen know better. It was a directive from the FM.

Will the banks feel pressured to lend more for education? Of course they will. If so, is the finance minister pushing the government-owned banks into a hole? Exactly what he did in 2004-05?

Yes, directing banks to dole out more education loans was exactly what P Chidambaram had done in 2004-05—with alarming results.

As the FM, P Chidambaram, had announced several ‘incentives’ to boost education loans during his budget in 2004-05. In the budget speech he said:

* The requirement of collateral was dispensed with for loans up to Rs4 lakh.
* I am happy to say that commercial banks have now agreed to waive the need for collateral for loans up to Rs7.5 lakh, if a satisfactory guarantee is provided on behalf of the student.

* Thus, no student admitted to any professional course, including courses in IITs, IIMs and medical colleges, will be deprived of the opportunity to study because of lack of funds.


What was the impact? In order to please the master, PSBs went into an overdrive—bloating their portfolio of education loans. Education loans multiplied by a stupendous 10 times since FY04 and have grown at a compounded rate of 35% in the same period versus industry credit growth of 23%, according to Espirito Santo Securities, which has compiled a very perceptive report on this.

In the four years post the announcement of the incentives in the FY04 budget, education loans rocketed by 48%+ year-on-year. The proportion of education loans has steadily increased from 0.5% of total non-food credit to about 1.17% of total non­food credit as of FY12. Similarly, the proportion of education loans increased from 1.46% of priority sector credit to 3.59% of priority sector credit as of FY12.

When the FM orders, bank chairmen comply and then retire quietly. The bank is left with a portfolio of assets it would not want in the normal course of business. No wonder, education loans are going bad at an alarming rate. The gross non-performing assets of educational loans has swelled to 6% from 2%, in a couple of years, with a couple of banks having even reported that over 10% of their education loan portfolio is now at risk of being written off.

Amazingly, the FM is doing it again. Either he has a bad memory of his actions, or he does not know or—as is most likely—simply does not care. As long there are public sector banks which can be milked for political ends, the taxpayers and shareholders are there to pick up the tab.

The finance ministry, in the recent budget, had announced the formation of the education loan credit guarantee fund, which will be worth Rs5,000 crore, and where banks will be guaranteed 75% of the loan amount in case a student defaults. However, this is for loans up to Rs7.5 lakh where there is no third-party guarantee or collateral security. Evidently, Rs5,000 crore is still there is to be picked. With Pranab Mukherjee as the FM, the banks may have found ways not to lend. With Chidambaram as the FM now, they know better. As long a he is the FM, we may see a surge of education loans—a lot of which will duly go bad.

Tomorrow: Bad loans are especially concentrated in the southern states, mainly Tamil Nadu from where the FM hails.





5 years ago

I am afraid, you seem to be rather biased against the principle of educational loans. I think, it is necessary even to more broadbase the policy so as to ensure that all academically eligible but economically handicapped students get the benefits, though tightening of the recovery policies must be well publicised and adopted. It would be better to examine each case on merits though the schools/colleges so as to rule out any scope for favouritism, bribery (to a great extent) and partiality. On the whole, it is a necessary evil.

Narain Jagirdar

5 years ago

Politicians build schools and colleges, give fancy names to them, and claim high standards of teaching, charge high fees not commensurate with the standard of teaching they provide to hapless students. As a government wedded to American ideology of commercializing everything, they want to privatize education as well, so they can wash their hands of even this basic responsibility of skilling the next generation of working people.
These very politicians have perhaps appointed PC to advocate easy loans to students from banks. Banks can go to hell!

Dayananda Kamath k

5 years ago

tragedy fo india is every good intentioned schemes are missused by the persons who matter. education loans are taken by wealthy people only. banks will also release these loans faster so that they can show the statistics. when pmry was intorduced with lakh subsidy there was a case where it was released to a wealthy persons daughter and after claiming subsidy it was closed immedietly. 366 subsidised cylinders were given to jindals. no action even afterthe matter came in public domain. education loans will be the next problems for nationalised banks.


5 years ago

So do you want to say that education loan should not be given ? If FM did not give directive then no bank (NO BANK) will give loans without collateral guarantee. And their are many many deserving students who cannot provide collateral and will be deprived of the education. You are pointing gun are wrong end. Problem is not with FM's directive, but students who do not repay even though they are supported by banks in need.

Also you talk about increase in loan amount, Can you also be kind enough to post the percentage increase in cost of eduction ?

Also can you give stat of farmer loan that are in NPA along with percentage increase from 2004 till date ?

Only to clarify even i do not like CHIDAMBARAM as India's FM and Congress in ruling, but request you to not make sensational stories only for sake of it.



Narain Jagirdar

In Reply to Sachin 5 years ago

Sachin, your spirited letter needs a dose of reality. NPAs are not banks', it is our money that banks will be playing with and a bank laden with NPAs doling out loans to students who do not repay or have no intention to repay will ultimately affect us.
Do not get carried away with exhortations of shrewd and manipulative politicians, for their vital interest is not in students but in protecting the income streams of educational institutions floated and run by their fraternal politicians who view education as a money making racket.


In Reply to Narain Jagirdar 5 years ago

Yes Narian,
I agree with your point. Even I am not a socialist person. My point was only to show the real culprit. FM directives were to give loan to students. Now its upto each and every student who took loan to repay it timely. So real culprit for high NPA in eduction loan are students not paying back and not FM.

Regarding the education institution exhorting more money is totally different issue and that is also wrong. Everyone know that all private eduction institutions are run by politicians and these directives are to get easy money for such private institutions. We should fight against high cost of eduction but DEFINITELY WE SHOULD NOT STOP EDUCATION LOAN FOR ANY DESERVING CANDIDATE.
I have personally seen very closely how bank managers treat poor peoples when they ask for loan. For wealthy peoples bank manager themself go home to get signatures.


In Reply to Sachin 5 years ago

I agree with your statement "there are many many deserving students who cannot provide collateral and will be deprived of the education".

Most of the nursing students who took ed-loans could not repay it because nursing profession are underpaid in India. Hospitals and doctors are fleecing patients but nurses are paid peanuts.


5 years ago

if the people who take the laons do not refund the loans they are the does not matter who is the FM. Its very easy to point fingers

Babubhai Vaghela

5 years ago

Only about 3 Per Cent Middle Income Students are beneficiary of Education Loan in India unlike more than 70 Per Cent in US & EU Countries. Not poor but deserving. Need to Prosecute Chidambaram for Corrupt Practice.


5 years ago

Could you please publish the state wide percentage/details of bad educational loans?

Most of the bad ed-loans of Kerala are likely to be loans taken for pursuing nursing education.

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