The board of directors of a company is primarily an oversight board. It oversees the management of the company to ensure that the interest of non-controlling shareholders is protected. It also functions as an advisory board.[1]
This paper is divided into two parts. The first part of the paper talks about the corporate governance provisions relating to meetings of the Board of Directors using statutes and Indian case laws. The second part of the paper deals with the restrictions of the powers of the Board of directors.
Board meetings are very important for the effective management of a company. According to section 173(1) of the Companies Act, 2013, the first meeting of the board of directors has to be held within 30 days of the incorporation. There have to be at least four meetings in a year with a gap between the consecutive meetings not being more than 120 days. In the case of a one-person company, small company, or dormant company, at least one meeting should be held in each half of the calendar year with the gap between them not being less than 90 days. Section 173(2) provides for the participation of the directors in the board meetings could be in person, through video conferencing, or through audiovisual means. However, according to Rule 4, there are certain restrictions on the matters that can be dealt with in meetings through video conferencing and audio-visual conferences. The following are the matters which cannot be included:
- the approval of the annual financial statements;
- the approval of the Board’s report;
- the approval of the prospectus;
- the Audit Committee Meetings for consideration of accounts; and
- the approval of the matter relating to amalgamation, merger, demerger, acquisition, and takeover.[2]
Secretarial standards related to board meetings:
For the first time in the history of Company Law in India, the Companies Act, 2013 has given statutory recognition to the Secretarial Standards issued by the Institute of Company Secretaries of India.[3] According to section 118(10) of the Companies Act, 2013 states that secretarial standards shall be observed by every company with respect to general and board meetings specified by the Institute of Company Secretaries of India constituted under section 3 of the Companies Secretary Act, 1980 and approved by the Central Government. In the context of this provision, observance of Secretarial Standards issued by the Institute of Company Secretaries of India (ICSI) assumes special relevance and companies will have to ensure that there is compliance with these standards on their part. The ICSI is in the process to bring out the Secretarial Standards in line with the Companies Act, 2013, and has already issued the exposure draft of Secretarial Standard related to Board and General Meeting.[4]
Section 174 of the Company Act, 2013 provides the provision for the Quorum for the Board Meetings. According to the section, one-third of the total strength or two directors whichever is higher shall be the quorum for a meeting. In Maharashtra Power Development Corporation Ltd. and Ors. Vs. Dabhol Power Co. and Ors.,[5] the board meeting held on June 4, 2002, was challenged by the appellant and it was also contended that the decisions taken at the meeting were illegal and oppressive.
The first issue was regarding the absence of the notice of the board meetings to the appellant. Section 173(3) states that a minimum 7-day notice has to be given to all the directors by hand, by post, or by electronic means at the address registered with the company. In this case, Article 10.7 of the company states that the notice of the meeting is to be given to the directors and not the shareholders. The court, in this case, held that the finding of the Company Law Board that the directors are only entitled to the notice of the board meeting and non-sending of the notice for the board meeting held on June 4, 2002, cannot be termed as the act of oppression is also affirmed. The second contention was regarding the quorum of the meeting. According to Article 10.8 of the Articles of Association, the quorum of the meeting for the board was a minimum of three directors. Regulation 75 of Table A states that “The continuing directors may act notwithstanding any vacancy in the board, but, if and so long as their number is reduced below the quorum fixed by the Act for a meeting of the board, the continuing directors or director may act for the purpose of increasing the number of directors to that fixed for the quorum, or summoning the general meeting of the company, but for no other purpose”. The purpose of Regulation 75 is to ensure that the board does not become non-functional due to the want of quorum. Thus, it was held that the continuing directors can convene a board meeting for the purpose of increasing the number of directors as fixed by the quorum and it is neither illegal nor oppressive.
The next issue to be dealt with was regarding the agenda of the board meeting. In Smt. Abnash Kaur v. Lord Krishna Sugar Mills Ltd. [1974] 44 Comp Cas 390, it was held that there is a distinction between section 172 of the Act which deals with general meetings of the company, and 286 which deals with board meetings of the company. The court held that any business whatsoever can be transacted in board meetings whereas the shareholders have been given notice in advance regarding the agenda of the meeting. The rigors of section 172 that the notice has to be given in advance do not apply to the board meetings. Assuming that the notice cannot be waived, the period of notice can certainly be waived and there is nothing in the case of Parmeshwari Prasad Gupta Vs Union of India, MANU/SC/0395/1973: [1974]1SCR304 that the requirement as to the period of notice cannot be waived.[6]
According to section 286 of the Company Act, 1956, Notice of every meeting of the board of directors of a company shall be given in writing to every director for the time being in India, and at his usual address in India to every director. Every officer of the company whose duty it is to give the notice fails to do so, shall be punished with a fine of rupees one hundred.
In Parmeshwari Prasad Gupta V Union of India, it was held that notice to all the directors of the meeting of the board of directors is essential for the validity of any resolution to be passed at the meeting.
In DR. T.M. Paul Vs City Hospital (Pvt.) Ltd. and Ors,[7] the first plaintiff had not been served with the notice of the meeting. It was contended that notice was left in his residence and it was sufficient to service of the notice in compliance with the provisions of section 286 of the Act. But it has been specifically stated in the provisions of section 286, that the notice has to be served in writing to the directors. “Learned counsel for the appellants relied on the provisions for substituted service in the Civil Procedure Code and also the provisions for service of notice on companies to contend that service on a close relative or leaving it at the residence is sufficient. But those provisions were not relevant. In the case of court notice, the court first attempts direct service and when it is not feasible, substituted service of notice on a close relative or by affixture or by publication. In all those cases, it is open to the court to consider such service as sufficient and declare that the party is duly served.”[8] The court held that due to the absence of such machinery in the case of company meeting, leaving the notice at the residence of the director when he is absent cannot be treated as proper notice.
The next contention, in this case, was about the vital resolutions which were passed at the meeting but were not added to the agenda for the meeting. It was discussed in the aforesaid case, the provisions of the Company Act, do not require the presence of an agenda for the meeting of the board of directors. However, in the present case, the contention of the plaintiff is that consideration of the resolutions not included in the agenda amounted to fraud. From the facts and circumstances of the case, it was found that the defendant no. 2 had a knowledge that the second plaintiff will be away and call for the meeting on that particular day only. Had Plaintiff no. 1 and Plaintiff no. 2 known about the convening of the meeting and passing of the resolution which would in future affect the interest of the company and their own interest, they would have made arrangements to attend the meeting. It was clear in this case that the second defendant took advantage of the absence of plaintiff no. 2 and called a meeting in August 1992, without disclosing the real agenda and in the absence of the plaintiffs, got all the resolutions passed. Therefore, the holding of the meeting and passing of the resolution was held to be invalid, and adopting the resolutions without including them in the agenda amounted to fraud.
Restrictions on the powers of Board of directors
Section 179 entitles the Board to exercise all such powers and do all such acts and things as a company are authorized to do so except such power or act required to be done at a general meeting. The power of the board is subjected to limitations and provisions of the Companies Act, 2013, other statutes, Articles of Associations and Memorandum of Association or the regulations made by the company in General Meeting.
Section 179(3) states that the following powers can be exercised by the board of directors on behalf of the company by means of a resolution passed at the meetings of the board;
- Making calls on shareholders with respect to money unpaid on their shares;
- Authorizing buyback of securities under section 68;
- Issuing securities, debentures, in or outside India;
- To borrow monies;
- To invest the fund of the company;
- To grant loans or to give guarantee or provide security in respect of loans;
- Approving financial statement and board’s report;
- To diversify the business of the meeting;
- Approving amalgamation, merger, and reconstruction;
- Taking over a company or acquiring control or substantial stake in other companies;
- Any other matter which may be prescribed.
In case of section 8 Company, matters related to the borrowing of monies, investing funds of the company and giving loans, and providing security may be decided by the by circulation instead of a meeting, vide Notification No. 466(E) dated 5th June 2015. This exception shall be applicable to a Section 8 Company, which has not committed default in filing its financial report under section 137 of the act or annual return under section 92 of the act with the Registrar, vide amendment notification G.S.R 584(E) dated 13th June 2017.[9]
Under Rule 8 of Companies (Meetings of Board and its Powers), Rules, 2014;
In addition to the powers provided under section 179(3) of the Act, the board of directors shall exercise the following powers only by the means of resolutions passed at the meeting of the boards;
- Making Political Contribution;
- Appointment and Removal of Key Managerial Personnel (KMP);
- Noting of Appointment(s) and Removal(s) of one level below KMPs;
- Appointing internal auditors and secretarial auditor;
- Noting of disclosure of director’s interest or shareholding;
- Buying or selling investments held by the company (other than trade investments), constituting five percent or more of the paid-up share capital and free reserves of the investee company;
- Inviting or accepting or renewing public deposits or other related matters;
- Renewing and changing the terms of Public Deposits;
- Approving quarterly, half-yearly, or annual financial results or statements.
Section 180 of the Companies Act, 2013 provides restrictions on the powers of the Board and states that Approval of Shareholders (Special Resolution) is required to exercise the following powers by the Board of the Company;
- Matters related to sale, lease, or otherwise disposal of the undertaking;
- Investing otherwise in trust securities the amount of compensation received as a result of any merger or amalgamation;
- Borrowing in excess of the paid-up share capital and free reserves;
- Remit or give the time to the repayment of any debt due to a director.
Articles of Association Shareholder Agreements as a limitation on the powers of the Board of Directors:
The “agency problems” which arise when the interest of the board members are not aligned with those of owners, the owners, (i.e., the shareholders) can impose certain requirements and limitations on the powers of the Board by legislating it through the companies by-laws i.e., Articles of Association. The company may also have raised funds through private investors who can frequently negotiate detailed terms as a condition for their investment, which would be reflected in a shareholder’s agreement. To ensure enforceability of such terms and as ruled in V.B Rangaraj Vs V.B. Gopalakrishnan,[10] the investors require the company’s shareholders to pass a resolution to include such terms and provisions in the Company’s Articles of Association, failing to which the investor’s recourse to enforceability would be limited to contract law other than with respect to certain types of provisions.
[1] Meetings of Boards and Its Powers, Companies Act, 2013
[2] Ibid.
[3] Ibid.
[4] Ibid.
[5] [2003]117C ompC as506(Bom)
[6] Ibid.
[7] [1999]97C ompC as216(Ker)
[8] Ibid.
[9] Section 179 of Companies Act, 2013 – Powers of Board, Corporate Law Reporter, http://corporatelawreporter.com/companies_act/section-179-of-companies-act-2013-powers-of-board/ (last visited Jun 10, 2020).
[10] AIR 1992 SC 453
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