Akhilesh Kumar Jha
According to Section 299 of the Companies Act, 1956, the Directors of the Company place Form 24AA, when they are appointed in the Board and every year at the last month of the Financial Year after its renewal.
The format of Form 24AA is prescribed under Companies (Central Government’s) General Rules and Forms, 1956. The Form 24AA is shown the nature of interest in any Contract or Arrangement of Directors.
It is the duty of Directors to give disclosure in Form 24AA for their nature of interest in such Contract or Arrangement. The nature of interest may be shown in any situation or condition either at the time of appointment of an Additional Director or execution of any contract. Either it will be directly or indirectly.
As we are aware, the all Contracts or Arrangements cover under Section 297 and 299 of the Companies Act, 1956. However, some Contracts or Arrangements are not covered under Section 297 of the Companies Act, 1956, such contracts must be covered under Section 299 of the Companies Act, 1956.
The Section 299 of the Companies Act, 1956 has wider than Section 297 of the Companies Act, 1956. In simple way, we can say that there is no definition of “Concern or Interest” in the Companies Act, 1956. Therefore, as soon as any Director executes any Contract or Arrangement where he has interest, he hit the Section 299 of the Companies Act, 1956.
Thereafter, it will be duty of such Director to make disclosure in Form 24AA in the Board Meeting about his nature of interest in such Contracts or Arrangement.
Appointment of Director
Further, if any person is appointed as a Director of the Company, the duty of such Director will give a General Notice about his directorship or membership, if any, of other Bodies Corporate or Firms to the Board where he has been appointed and it will be deemed that he has made disclosure of his nature of interest or concern in relation to such Contract or Arrangement.
As per Section 299 of the Companies Act, 1956
(1) Every director of a company, who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into, by or on behalf of the company, “shall” disclose the nature of his concern or interest at a meeting of the Board of directors.
(2) (a) In the case of a proposed contract or arrangement, the disclosure required to be made by a director under subsection (1) shall be made at the meeting of the Board at which the question of entering into the contract or arrangement is first taken into consideration, or if the director was not, at the date of that meeting, concerned or interested in the proposed contract or arrangement, at the first meeting of the Board held after he becomes so concerned or interested.
(b) In the case of any other contract or arrangement, the required disclosure shall be made at the first meeting of the Board held after the director becomes concerned or interested in the contract or arrangement.
(3) (a) For the purposes of sub-sections (1) and (2), a general notice given to the Board by a director, to the effect that he is a director or a member of a specified body corporate or is a member of a specified firm and is to be regarded as concerned or interested in any contract or arrangement which may, after the date of the notice, be entered into with that body corporate or firm, shall be deemed to be a sufficient disclosure of concern or interest in relation to any contract or arrangement so made.
The Section 299 (3) (a) is related to Section 299 (1) and (2) that means it is “compulsion” of each Director to disclose his nature of his concern or interest in the Board Meeting of the Company. If any Director in the Board contravenes the provisions of Section 299 of the Companies Act, 1956, the office of Directors shall become vacant under Section 283 of the Companies Act, 1956 and other penal provisions will also be attract.
Quorum
There are number of Public Companies in India where only Three Directors are in the Board. If any one of Directors is interest in any way, either directly or indirectly, in any Contract or Arrangement, such Director will not be counted as quorum of that Board Meeting. Now, for better understanding, we go through the below example:-
A Company is ZYX Ltd. The name of thee Directors of the Company is Mr. Z, Mr. Y and Mr. X. These three are relatives. Mr. Z is the father of Mr. Y and Mr. X. Mr. Z has also a step son Mr. K. and wants to introduce in the Board of ZYX Ltd.
Due to non availability of definition of “Concern or Interest” and “Contracts or Arrangements” under the Companies Act, 1956, the below situation is faced by the Board of ZYX Ltd:-
Mr. Z has interest to introduce Mr. K in the Board of ZYX Ltd, meanwhile, Mr. X is not attending the Board Meeting.
If Mr. Z introduces Mr. K in the Board, The Section 287 as well as Section 300 will be attract. The result of the situation is the quorum of the Board Meeting will be reduced from two to one.
Therefore, the Board Meeting is not possible due to non availability of quorum and Mr. K cannot be appointed as an Additional Director of the Company.
The Madras High Court gave decision in the regard:-
The scope of the expression “Contract” or “Arrangement” was examined by the Madras High Court in Madras Tube co. Ltd. V Hari Kishon Somani, (1985). The question before the court was whether the appointment of an Additional Director would come within the scope of the word “Contract” or “Arrangement”. The company has four Directors, only two of them attended the Meeting. They appointed two Additional Directors who were related to them as brother and wife respectively.
The court came to the conclusion that although appointment as Director does not come within the scope of the expression “Contract” because the position of a Director may be conferred on a person by any method other than contract but that it would amount to an arrangement. The attending Directors, therefore, became interested Directors. Without them there was no in depended quorum. Consequently the appointment was a nullity.
According to above decision, the Board Meeting cannot be held by ZYX Ltd due to non availability of quorum and Mr. K cannot be appointed in the Board of ZYX Ltd.
After 10 years in 1995, the Bombay High Court re examined the matter again and gave valuable decision in the case of Shailesh Harilal Shah v Matushree Textiles Limited which is as below:-
The Bombay High Court re-examined the matter in Shailesh Harilal Shah v Matushree Textiles Limited AIR 1994, Bom(1995)82 Com cases 5 and after giving due consideration to the authorities which influenced the Madras decision nevertheless came to the conclusion that the appointment as an Additional Director of a person who is related to a Director does not violate the requirement of Section 300 (1) because such appointment does not constitute any “Contract” or “Arrangement” of the Company with the sitting Directors. The director in question was not accordingly disentitled from participation and voting.
In the view of above discussion and decision, now, Mr. Z can appoint Mr. K on 15th May, 2002 in the Board of ZYX Ltd as well as the duty of Mr. K shall give General Notice to the Board of ZYX Ltd in Form 24AA about his Directorship or Membership, if any, of other Bodies Corporate or Firms where he has been appointed and it will be deemed that he has made disclosure of his nature of Interest or Concern in relation to such Contract or Arrangement and the validity of the Notice which is in Form 24AA up to the end of the Financial Year, 2003 and thereafter it will be expire until it will not be renewed.
Necessity of Renewal??
Before I discuss the topic of renewal I want to discuss the language of below Sub Section of 299 of the Companies Act, 1956:-
3(b) Any such general notice shall expire at the end of the financial year in which it is given, but “may” be renewed for further periods of one financial year at a time, by a fresh notice given in the last month of the financial year in which it would otherwise expire.
(c) No such general notice, and no renewal thereof, shall be of effect unless either it is given at a meeting of the Board, or the director concern
General Notice shall expire, it is mandatory that it will be expire at the end of the Financial Year but may be reviewed for further periods of one Financial Year. Now it is not mandatory to renew General Notice in Form 24AA where there is “no Contract or Arrangement” made by the Directors of the Company during the Financial Year.
If the Directors has interest in any contract either directly or indirectly which is made during the year, if any, it is mandatory to renew Form 24AA otherwise “no need to renew”.
Suppose the Directors of Company ZYX Limited do not make any Contract or Arrangement, directly or indirectly, during the Financial Year 2002-2003, 2003-2004, 2004-2005 and 2005-2006.
There is no need to take Form 24AA, until and unless any Contract or Arrangement will not be made by them, Whether the Form 24AA expire at the end of Financial Year 2002-2003 because the “may” word is mentioned in Section 3(b) of 299 of the Companies Act, 1956 which is not creating any compulsion to renew.
Finally, we can say that there is no need to comply Section 299 of the Companies Act, 1956 each year where there is no change in Directorship of the Company during the Financial Year, Where there is no Contract or Arrangement has been execute during the Financial Year. Where there is no interest in any Contract or Arrangement of Directors of the Company.
(Author may be contacted at akhilesh_jha@live.com or gtka.akhilesh@mail.com)
Correctly explained. Deserves appreciation.