The only other director resigned - can the company carry on?

You started a private limited company with a co-founder. Now the co-founder has sent a resignation letter. You are the only director left.

You are probably asking three things. Is the company still alive? Can you still sign anything? What do you have to do, and how fast?

Short answers: nothing in the Act says the company ceases to exist. Your power to act at Board level is cut down to a narrow set of things. The board has to be rebuilt. This article walks through each point, with the section that says so.

Why two directors matter

A company has a Board of Directors made up of individuals. The Act sets a floor on its size: at least three directors in a public company, two directors in a private company, and one director in a One Person Company (s.149(1)(a), Companies Act 2013).

So a private company with a single director is below the legal minimum. It is out of line with the Act, and the Act gives you a narrow path back.

One thing first. If your company is a One Person Company, one director is the legal number and the rest of this article does not apply to you. If you are an ordinary private company, read on.

Is the resignation already effective?

Usually yes. A director resigns by giving a written notice to the company (s.168(1), Companies Act 2013). The resignation takes effect from the date the company receives the notice, or from the date the director names in the notice, whichever is later (s.168(2), Companies Act 2013).

So you cannot refuse to accept it or sit on it. The Board must take note of the notice when it is received (s.168(1), Companies Act 2013). Your co-director also stays liable for offences that happened during their tenure, even after resigning (proviso to s.168(2), Companies Act 2013).

Read the letter for the effective date. If it names a later date, the resignation is not yet effective, and you still have two directors until then. That gives you time to line up a replacement. Use it.

Other ways a director can vanish

Resignation is not the only exit. A director's office also falls vacant on a s.164 disqualification, or if the director misses all Board meetings held in twelve months (s.167(1), Companies Act 2013). A person who keeps functioning as a director while knowing the office has become vacant on a disqualification ground is punishable with a fine of ₹1 lakh to ₹5 lakh (s.167(2), Companies Act 2013).

What the one remaining director can do

This is the core point. Quorum is the minimum number of directors who must be present for a Board meeting to be valid.

For a company, the quorum for a Board meeting is one-third of its total strength or two directors, whichever is higher (s.174(1), Companies Act 2013). In computing total strength, vacant places do not count (s.174, Explanation (ii), Companies Act 2013). Any fraction is rounded up to one (s.174, Explanation (i), Companies Act 2013).

With one director left, the quorum is still two. You are below it.

The Act then says the continuing directors may act despite a vacancy. But if their number falls below the quorum, the continuing directors or director may act only for these purposes, and for no other (s.174(2), Companies Act 2013):

• Increasing the number of directors to the number fixed for the quorum.
• Summoning a general meeting of the company.

That is the whole list. So the sole director may act to increase the number of directors to the quorum and to summon a general meeting of the company, and the Act says "for no other purpose". Treat approving accounts, signing new contracts, opening loans, allotting shares or other Board decisions as outside that list until the board is rebuilt.

A One Person Company with a single director is the exception. The Act says s.174 does not apply to it (proviso to s.173(5), Companies Act 2013).

The deadline clock

Be careful here. The Act does not give one neat "you must fix this in X days" for a private company that drops to one director. What it gives you are several clocks that run on different events.

• 30 days from the resignation notice for the company to tell the Registrar, in Form DIR-12 (rule 15, Companies (Appointment and Qualification of Directors) Rules 2014; s.168(1), Companies Act 2013).
• 30 days from the resignation for the resigning director, who may do so, to send the Registrar a copy of the resignation with reasons, in Form DIR-11 (proviso to s.168(1), Companies Act 2013; rule 16, Companies (Appointment and Qualification of Directors) Rules 2014). The fee is set in the Companies (Registration Offices and Fees) Rules 2014. Check the current figure on the MCA portal before you file.
• 30 days from the new director's appointment to file that director's consent with the Registrar (s.152(5), Companies Act 2013; rule 8, Companies (Appointment and Qualification of Directors) Rules 2014).
• 21 clear days' notice for a general meeting. Shorter notice is possible only with written or electronic consent of members holding a majority in number and representing at least 95% of the voting paid-up share capital, for a company with share capital and a general meeting other than the AGM (s.101(1) and proviso, Companies Act 2013).

The real pressure is not a filing date. It is that you cannot run the Board until you have a second director. Treat that as urgent.

How to refill the board, step by step

Step 1. Read the new situation.

Note the date the letter was received and the date it takes effect. Check your Articles of Association for how vacancies are filled.

Step 2. Find your second director.

The person must hold a Director Identification Number (DIN) and must give a declaration that they are not disqualified (s.152(3) and s.152(4), Companies Act 2013). They must also give written consent to act, in Form DIR-2 (rule 8, Companies (Appointment and Qualification of Directors) Rules 2014). Get these before you appoint, not after. A person appointed as a director must not act unless the consent has been given and filed with the Registrar within thirty days of appointment (s.152(5), Companies Act 2013).

Step 3. Choose the route.

The Act gives you more than one door.

• By the members in general meeting. The default rule is that every director is appointed by the company in general meeting (s.152(2), Companies Act 2013). The words of s.174(2) let a continuing director act to summon a general meeting. Give 21 clear days' notice, or use the shorter-notice consent route in the proviso to s.101(1) if you qualify.
• By the Board, if your Articles allow it. The Articles may give the Board the power to appoint an additional director, who then holds office up to the next AGM or the last date by which the AGM should have been held, whichever is earlier (s.161(1), Companies Act 2013).
• By filling the casual vacancy. If the departed director was appointed by the company in general meeting, the Board may fill the casual vacancy at a Board meeting, subject to the Articles. The Act says the Board's choice must then be approved by the members at the next general meeting. The person holds office only for the rest of the departed director's term (s.161(4), Companies Act 2013).

The second and third routes involve a Board act, and the casual-vacancy route is expressed as filling the vacancy "at a meeting of the Board" (s.161(4)). The quorum for that meeting is two (s.174(1)). Section 174(2) says the continuing director may act "for the purpose of increasing the number of directors to that fixed for the quorum". Whether that wording allows a sole director to make a Board appointment under s.161 is not stated in the section, and this article does not take a position. Get a CA's or company secretary's view before you rely on a Board route. The general-meeting route (s.152(2)) does not depend on that question.

Step 4. Hold the meeting and pass the resolution.

Send the notice, hold the meeting, pass the resolution appointing the new director, and keep the minutes. At a general meeting, appoint each director by a separate resolution unless a proposal to move a single resolution for two or more has first been agreed without any vote against (s.162, Companies Act 2013).

Step 5. File with the Registrar.

File the company's intimation of the resignation in Form DIR-12 within 30 days of receiving the notice (rule 15, Companies (Appointment and Qualification of Directors) Rules 2014). File the new director's consent in Form DIR-12 within 30 days of their appointment (proviso to rule 8, Companies (Appointment and Qualification of Directors) Rules 2014). Rule 15 also says to post the information on the company's website, if there is one.

Place the resignation in the Directors' Report laid at the next general meeting (s.168(1), Companies Act 2013). Update the register of directors (s.170 and rule 17, Companies (Appointment and Qualification of Directors) Rules 2014).

What if every director has gone?

If all directors resign or vacate, the promoter, or failing that the Central Government, appoints the required number until the company appoints directors in general meeting (s.168(3), Companies Act 2013; s.167(3) is the same where all directors vacate on disqualification). Do not resign as the last director to force the issue.

What not to do

• Do not carry on as if nothing happened. The quorum is two and s.174(2) limits the sole continuing director to the two purposes above (s.174, Companies Act 2013). Ordinary decisions signed alone are open to question later.
• Do not backdate. The Act fixes the effective date by the notice (s.168(2), Companies Act 2013).
• Do not ignore the resident director rule. Every company must have at least one director who stays in India for at least 182 days in the financial year (s.149(3), Companies Act 2013). If the person who left was your only resident director, your replacement should be someone who meets this.

What if you do nothing?

If the company stays below the minimum of s.149(1)(a), which sits in Chapter XI, it is in default of that Chapter. Where the Act gives no specific penalty for a default in that Chapter, a general one applies. The company and every officer in default are liable to a penalty of ₹50,000, plus ₹500 for each day the failure continues. The cap is ₹3 lakh for the company and ₹1 lakh for each officer in default (s.172, Companies Act 2013).

As the only director you may well be an officer in default, so the penalty can fall on you personally.

What to do now

Have a CA review your facts before you act or file.

FAQs

1. Can the company still operate with one director?

The Act does not switch the company off. It narrows what the sole director may do at Board level to increasing the number of directors and calling a general meeting (s.174(2), Companies Act 2013). Whether your bank or an authority accepts a sole signatory in the meantime is a separate matter. Talk to them early.

2. Do I need to hold a Board meeting to appoint the second director?

Not if you use the general-meeting route. Every director is, as a rule, appointed by the company in general meeting (s.152(2), Companies Act 2013). Section 174(2) lets the continuing director act to summon a general meeting (s.174(2), Companies Act 2013).

3. How long can I stay as the only director?

The Act does not state a number of days for that situation in a private company. But the minimum is two directors (s.149(1)(a), Companies Act 2013), and failure attracts a penalty that grows daily up to the cap (s.172, Companies Act 2013). Fix it as quickly as notice and the DIN paperwork allow.

4. Does my resigned co-director stay liable?

For offences that occurred during their tenure, yes (proviso to s.168(2), Companies Act 2013). The resignation does not wipe out earlier liability.

---

See Also

• How many shareholders and directors does a private company need?
• Converting our LLP into a private limited company
• Startup India (DPIIT) recognition rejected — what to fix and reapply