How to time resignation to comply with due managerial care
According to the Supreme Court (SC), members of a corporation’s elected body may resign from their offices and the corporation cannot stop them. However, if they do so at a time unsuitable for the corporation, they shall be liable for the damage they have caused to the corporation by doing so. This means that the duty of due managerial care also applies to acts terminating the office of a member of a corporation’s body.
The Corporations Act explicitly prohibits the members of a corporation’s elected bodies to resign from their offices at a time unsuitable for the corporation. The act, however, does not stipulate the legal consequences of such a ban, leaving this issue to case law. Lower-degree courts have repeatedly adjudicated that resignations from office at an unsuitable time were invalid. In other words, they allowed corporations to force disloyal members of their bodies to remain in office, even against their will.
However, the SC construed that the purpose and meaning of the prohibition to resign at an unsuitable time does not necessarily require that such an (unlawful) resignation should be invalid. Therefore, the members’ office shall indeed terminate upon their resignation, but they will be liable for damage caused to the corporation by this. Although the commentaries leave certain hope that some cases of resignation might be treated as invalid, it would have to be exceptional cases requiring a special approach by the courts.
In view of the liability connected with due managerial care, it is advisable to pay attention to the timing of a resignation. Problems may arise in situations where the company is in financial difficulties or finalising negotiations on a significant business opportunity. Such situations usually require the involvement of a statutory body member or their professional insight. In cases like these, it may also be hard for the company to find a replacement for the resigning member, as any substitutes may lack their predecessor’s key knowledge of the current situation.
However, the loyalty duty to the corporation is not boundless. Its limits may be the justified interest of the body’s member in terminating their office. The SC concluded that such an interest is equally important as the corporation’s interest of being able to respond adequately to the member’s resignation. The corporation should therefore take all measures necessary to prevent possible damage, within a statutory deadline of one month after being delivered the resignation notice, or another deadline stipulated by the memorandum of association, deed of foundation or executive service agreement.
Usually, a new member is elected, but it is also possible to redistribute the resigning member’s responsibilities among the remaining members of the elected body. If the corporation fails to do so, it shall bear the consequences of its inactivity. The situation will be quite different though if the corporation is unable to prevent the harmful consequences – for instance, if nobody is willing to take up the office of its statutory body because the corporation is facing bankruptcy, which the resigning member must have been aware of. Regardless of the timing of the resignation, members of the corporation’s body should also not be liable for consequences when other important interests clearly prevail over the corporation’s protection: this may include serious health problems preventing the members from exercising the office.