Resignation of directors during the Corporate Insolvency Resolution Process

Directors of companies often tender their resignation during the Corporate Insolvency Resolution Process (CIRP). Therefore, a pertinent question arises as to whether such resignation requires acceptance/approval from the Interim Resolution Professional (IRP) or the Resolution Professional (RP) or the Committee of Creditors (CoC) of the corporate debtor

Furthermore, it is often contended that directors of a corporate debtor must continue in order to ensure smooth completion of the CIRP. Hence, in addition to checking whether RP/IRP/CoC approval is required for acceptance of resignation of a director during CIRP, this article also tends to examine whether directors are required to remain with a corporate debtor to ensure their assistance and co-operation during the CIRP.

Section 168(1) of the Companies Act, 2013 specifies that a director may resign by giving a notice in writing to the company and the Board of Directors (Board) shall, on receipt of such notice, take note of the same. Further, the Section also specifies that 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.

Therefore, it may be noted that the Companies Act doesn’t require Board approval or acceptance over the resignation furnished by a director. The above mentioned provision of the Companies Act has also been judicially reaffirmed in a plethora of cases. The High Court of Delhi, in JS Gambhir v. Millennium Health Institute & Diagnostics Pvt. Ltd. has mentioned in paragraph 28 of its judgment that:

“A resignation by a director implies a relinquishment of his office. This is a unilateral act which unless the Articles of Association otherwise provide, is not contingent on the acceptance by the company. Directors act as agents of the company and are, thus, also entitled to terminate their agency. The act of resignation or relinquishment of the office would not require the consent of the company and, therefore, would become effective from the time when the intention to relinquish the office as a Director is communicated.”

Similarly, the Madras High Court, in T Murari v. State has stated:

“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.”

The above mentioned provisions related to unilateral resignation of a director have also been identified by the Bombay High Court in Saumil Dilip Mehta v. State of Maharashtra, and by the Patna High Court in The State of Bihar v. Sitaram Jhunjhunwala.

In view of the unilateral act of resignation by a director, special attention may also be provided to the Supreme Court of India’s judgment in the case of Moti Ram v. Param Dev, wherein the Court mentioned:

“If the act of relinquishment is of unilateral character, it comes into effect when such act indicating the intention to relinquish the office is 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 prasenti.”

In view of this, it is amply clear that in the absence of any provision relating to resignation in the articles of association (AoA), a director doesn’t need any approval for resignation tendered by him. Further, various judicial pronouncements also establish that the AoA of a company can make the requirements of the Companies Act more stringent. Therefore, the operation of a clause in the AoA that requires acceptance of resignation by a director will be treated as mandatory provision.

Examining the provisions of the Insolvency & Bankruptcy Code, 2016 (IBC)

From the date of appointment of IRP, the powers of the Board of the corporate debtor stand suspended and exercised by the IRP (and subsequently by the RP). However, such directors, even after suspension of their powers, continue as de facto directors of a corporate debtor.

In view of the above, the following scenarios may emerge in case of resignation of a director during the CIRP:

i) The AoA of a corporate debtor stipulates Board approval for acceptance of a director’s resignation

As mentioned earlier, the powers of the Board of a corporate debtor stand suspended during CIRP and are exercised by the IRP/RP of the corporate debtor. Hence, the onus to approve such resignation rests on the IRP/RP of the corporate debtor.

Section 28 of the IBC inter alia provides that the resolution professional, during the CIRP, shall not make any change in the management of the corporate debtor without the prior approval of the CoC. Section 28(3) further requires an approval by a vote of sixty-six per cent of the voting shares on such matters.

In view of the above-mentioned provisions, it appears that where the AoA of the corporate debtor requires Board approval for acceptance of a director’s resignation, the RP/IRP may approve such resignation after getting approval by a vote of sixty-six per cent of the voting shares of the CoC.

ii) AoA of a corporate debtor do not stipulate Board approval

In the absence of any provision relating to resignation in the AoA, it is well-settled that a resignation takes effect immediately when the intention to resign is made clear. In such a situation, the act of resignation becomes effective from the time when the intention of resignation is communicated by a director. Approval from the IRP/RP or the CoC shall not be required in such a case.

It may also be noted that Section 28 of the IBC, to the extent that it stipulates CoC approval for the IRP/RP to make any change in the management of the corporate debtor, does not appear to apply in such a case, as the RP’s approval or role in accepting the resignation of directors is not required on the first place.

iii) The notice for resignation provides that it is subject to Board approval

As also mentioned by the Madras High Court in T Murari v. State, where a resignation states that it is to take effect on acceptance, such acceptance is necessary to end the tenure of office. Hence, in a case where the resignation letter furnished by a director mentions that it is subject to Board approval, in view of the explanation made in point (i) of this article, such resignation shall need to be approved by sixty-six per cent of the voting share of the CoC. Post such approval, the IRP/RP may accept the resignation.

It is also often argued that directors of a corporate debtor must stay in order to ensure smooth resolution of the CIRP. However, it may be noted that it is not necessary for the directors to remain with a corporate debtor in order to render their assistance during a CIRP. The National Company Law Tribunal, Chandigarh, in the matters of Mr. Ashwini Mehra v. Mr. Vinod Kumar Dandona & Ors., and Oasis Agro Infra Ltd. v. Mandeep Singla & Ors, has specified that Section 19 of the IBC also requires ex-personnel of the corporate debtor (including ex-directors of a company) to fully cooperate with and extend all assistance to the IRP/RP as may be required by him in managing the affairs of the corporate debtor. In view of the same, even after a director relinquishes office, the IRP/RP may seek any assistance and cooperation from such director as may be required in managing the affairs of the corporate debtor.

Furthermore, on behalf of an IRP/RP, it may be noted that in case of en masse resignation of all directors of a corporate debtor, steps should be taken for appointment of new directors in order to meet certain mandatory compliances under the Companies Act and related rules.

Conclusion

The director(s) of a corporate debtor undergoing CIRP may resign unilaterally and without approval from the IRP/RP or the CoC, unless such approval is required in the AoA of a corporate debtor or if the notice for resignation itself provides that it is subject to Board approval. However, such directors continue to be duty-bound to extend all assistance and cooperation to the IRP/RP as may be required by him in managing the affairs of the corporate debtor even after their resignation.

Abir Lal Dey is a Partner and Avinash Kumar is an Associate at L&L Partners, Law Offices.