Milton Verskin

 

barrister and solicitor

practicing in Toronto, Ontario

4.1 When can a Director Resign

 

           When a company is incorporated, the articles of incorporation say who the first directors are.  They run the company until the first meeting of shareholders takes place. 

 

What happens if, before the first meeting of shareholders takes place, one of the directors wants to resign?  He can do so only if his successor is elected or appointed.  This is because the Ontario Companies Act, section 119(2) provides that “Until the first meeting of shareholders, the resignation of a director named in the articles shall not be effective unless at the time the resignation is to become effective a successor has been elected or appointed.”

 

           What happens if one of them resigns after the first meeting of shareholders, and no successor director is appointed or elected? Is his resignation effective?  The answer is not clear. 

 

           In the case of Cybulski v MNR, there were two directors named in the articles. Some time after the first meeting of shareholders, one of them, Mr. Cybulski, resigned, but no successor director was elected or appointed. 

 

           The question of whether his resignation was effective or not arose in the following circumstances.  The company failed to remit employees’ source deductions. Since this is something for which directors are personally responsible, Revenue Canada claimed these source deductions from Mr. Cybulski personally.  He raised the defence that he had resigned, Revenue Canada answered that his resignation was not effective because no successor had been appointed, and he answered that a successor was not necessary because the first meeting of shareholders had taken place.

 

           So the issue which arose was clear: can a director named in the articles of incorporation resign after the first meeting of shareholders even if no successor has been elected or appointed?

 

           The judge did not answer this question.  Instead, he exonerated Mr. Cybulski on the ground that he had “exercised the degree of care, diligence and skill to prevent failure that a reasonably prudent person would have exercised in comparable circumstances.”  In other words, the judge said that, for the purposes of his decision, it did not matter whether the resignation was effective or not because, even if Mr. Cybulski were still a director he would not have been liable to Revenue Canada in respect of the deductions.  For this reason, the judge did not come to any conclusion as to whether the resignation was effective or not.

 

           The result is that no one knows the answer.  Perhaps a director named in the articles of incorporation can resign after the first meeting of shareholders even if no successor is elected or appointed, or perhaps he cannot.  Anyone in this position should therefore take the precaution of doing his utmost to ensure that a successor is elected or appointed in his place.

 

           What about a director who is not named in the articles of incorporation, one who was elected or appointed some time after incorporation?  He can resign simply by handing in his resignation.

4. COMPANY LAW