Contracts or arrangements with related parties under Companies Act 2013

Contracts or arrangements with a related parties under New Companies Act 2013

( Section 2(76), 188 of Companies Act,2013 read with rule 15,16 Companies (Meetings of Board and its Powers) Rules, 2014) 

The new Companies Act 2013 and rules framed there under are throwing new learning and complying challenges to professional in corporate arena. In case of contracts/arrangements with related parties value based approach has been enacted. Companies have been given freedom to approve transactions with related parties without approaching central government. Without elaborating the language of sections an attempt has been made to get insight into the topic.

 Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014 says:

A company shall enter into any contract or arrangement with a related party subject to the following conditions, namely:

(1) The “agenda of the Board” meeting at which the resolution is proposed to be moved shall disclose-

 (a) the name of the related party and nature of relationship;

(b) the nature, duration of the contract and particulars of the contract or arrangement;

(c) the material terms of the contract or arrangement including the value, if any;

(d) any advance paid or received for the contract or arrangement, if any;

(e) the manner of determining the pricing and other commercial terms, both included as part of contract and not considered as part of the contract;

(f) whether all factors relevant to the contract have been considered, if not, the details of factors not considered with the rationale for not considering those factors; and

(g) any other information relevant or important for the Board to take a decision on the proposed transaction.

(2) Where any director is interested in any contract or arrangement with a related party, such director shall not be present at the meeting during discussions on the subject matter of the resolution relating to such contract or arrangement-

(3) For the purposes of first proviso to sub-section (1) of section 188, except with the prior approval of the company by a special resolution-

(i) a company having a paid-up share capital of “ten crore rupees or more” shall not enter into a contract or arrangement with any related party;

or

(ii) a company shall not enter into a transaction or transactions, where the transaction or transactions to be entered into –

(a) as contracts or arrangements with respect to clauses (a) to (e) of sub-section (1) of section 188 with criteria, as mentioned below –

(i) sale, purchase or supply of any goods or materials directly or through appointment of agents exceeding twenty five percent. of the annual turnover as mentioned in clause (a) and clause (e) respectively of sub-section (1) of section 188;

(ii) selling or otherwise disposing of, or buying, property of any kind directly or through appointment of agents exceeding ten percent. of net worth as mentioned in clause (b) and clause (e) respectively of sub-section (1) of section 188;

(iii) leasing of property of any kind exceeding ten percent. of the net worth or exceeding ten percent. of turnover as mentioned in clause (c) of sub-section (1) of section 188;

(iv) availing or rendering of any services directly or through appointment of agents exceeding ten percent. of the net worth as mentioned in clause (d) and clause (e) of sub-section (1) of section 188;

(b) appointment to any office or place of profit in the company, its subsidiary company or associate company at a monthly remuneration exceeding two and half lakh rupees as mentioned in clause (f) of sub-section (1) of section 188; or

(c) remuneration for underwriting the subscription of any securities or derivatives thereof of the company exceeding one percent. of the net worth as mentioned in clause (g) of sub-section (1) of section 188.

Explanation.- (1) The Turnover or Net Worth referred in the above sub-rules shall be on the basis of the Audited Financial Statement of the preceding Financial year.

(2) In case of wholly owned subsidiary, the special resolution passed by the holding company shall be sufficient for the purpose of entering into the transactions between wholly owned subsidiary and holding company.

(3) The explanatory statement to be annexed to the notice of a general meeting convened pursuant to section 101 shall contain the following particulars namely:-

(a) name of the related party ;

(b) name of the director or key managerial personnel who is related, if any;

(c) nature of relationship;

(d) nature, material terms, monetary value and particulars of the contract or arrangement;

(e) any other information relevant or important for the members to take a decision on the proposed resolution.

Special resolution requirements: (prior approval and applicable for both private limited and limited companies)

1. Company having paid up shares capital of Rs 10 crore or more

2. All conditions mentioned below: (even paid up shares capital is less then Rs. 10 Crore)

 Notes :

1. The Turnover or Net Worth referred in the above sub-rules shall be on the basis of the Audited Financial Statement of the “preceding financial year”.

2. Exemption is available for any transaction entered into by the company and related parties in “ordinary course of business and at arm’s length price” (Both criteria)

3. Interested member shall not have right to vote on Special resolution

Interested Point :

In case of Private companies where there is one or two transactions with Related parties ( e.g property buying ..selling from director-member ) . Related parties are usually Directors and members of such companies holding majority of shares… How Sp. Resolution would be passed in such situation.

4. Refer to penal provisions 188(5) for director/ employee of listed and other companies.

5. Refer to section 134(3) (h) which requires attaching with Board report the particulars of contracts/ arrangements with related partied U/s 188(1) in form AOC-2

What if contracts/arrangements entered without consent/approval?

Section 188(3) states that if a contact /arrangement entered by any director/employee without necessary consent of board or prior approval of special resolution of members and if such contract/arrangement is not ratified by board or member in general meeting with in 3 months then:

a)    It is voidable at the option of the Board.

b)   If It is related party to any director or is authorised by any other director, the director concerned shall indemnify the company against any loss suffered.

Also as per section 188(4) company is free to proceed against such defaulting director/employee and can recover any loss sustained by it as a result of such contact/ arrangement.

*In case of all contacts/arrangement mentioned in first proviso to sub section (1) of section 188 (mentioned in tabular form) “Prior approval is must” in order to arrive harmoniums construction.

Register of contracts and Arrangements

Every company shall maintain one or more registers in Form MBP 4 for Disclosure U/s 184 and contracts and arrangements U/s 188.

Author – CS KAPIL DEV VASHISTH can be contacted at E mail: [email protected])