CS Mohit Singh Kharayat

INTRODUCTION

As we are aware of the fact that, the Company is one of the forms of separate legal entity and it can act on its behalf and in its own name. This fact is also sound accepted that the Company for making the growth enters into contract of arrangement or various transactions on daily basis with various parties. Mainly, into closely held companies and may also on other companies, it happens that such transaction is made with Director(s) of the Company or with any such other person, which exert a pull on interest of director in the said transaction. But, this is to be noted that there are certain limit on the involvement of the director in the said transaction, stipulated by the Companies Act, 2013. The Companies have to take care of certain provisions while considering such contract(s) or arrangement(s).

In this article, we will be focusing on the disclosure to be made in the notice of the Board Meeting and voting to be done by the related party, at the Board meeting of the Company while dealing in such matters by analyzing various provisions under the Companies Act, 2013. Secretarial Standard-1 and Securities And Exchange Board Of India (Listing Obligations And Disclosure Requirements) Regulations, 2015 (LODR).

Basic Terms:

1. Contract or Arrangement: Refers to all those contact or arrangement which are proposed to be entered into by a company with any other person or entity or body corporate, as discussed in the later part of the article, where any of the Director(s) of the Company have any interest, irrespective of the fact that if those are covered under section 188 of the Companies Act, 2013 or not.

2. Related Party: Means the parties with whom the Contact or arrangement is proposed.

Related party here refers to only those parties who are specified in the section not as per the definition of the related party.

Applicability:

Section 184 and secretarial Standards are applicable to all kind of Companies, however, certain exemption have been provided to a private company under section 184(2) which are in contravention to secretarial standard, therefore, in such contravention the Act will prevail over the Secretarial Standard, as well as the notification for exemption have come after the secretarial stand on the same subject.

Disclosures to be made at the Notice of the Board Meeting of a company.

Legal provisions:

Companies Act, 2013

Secretarial Standard- 1 LODR
Section 184 (2):

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—

(a) with a body corporate in which such director or such director in association with any other director, holds more than two per cent. shareholding of that body

corporate, or is a promoter, manager, Chief Executive Officer of that body corporate;

(b) with a firm or other entity in which, such director is a partner, owner or member, as the case may be, shall disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed and shall not participate in such meeting:

Standard 1.3.8:

“Each item of business requiring approval at the Meeting shall be supported by a note setting out the details of the proposal, relevant material facts that enable the Directors to understand the meaning, scope and implications of the proposal and the nature of concern or interest, if any, of any Director in the proposal, which the Director had earlier disclosed.”

 

Regulation (4)(2)(f)(1):

Members of board of directors and key managerial personnel shall disclose to the board of directors whether they, directly, indirectly, or on behalf of third parties, have a material interest in any transaction or matter directly affecting the listed entity.

 

1. Companies Act, 2013:

By reading the above section we can make out that

i. when a company proposes to enter in to a contract or arrangement with a body corporate, and the all the related directors of the company holds more than 2% of the shareholding or a director is a promoter, manager or CEO of that body corporate then such Director shall disclose his concern or interest in that body corporate.

ii. When company proposes to enter in to a contract or arrangement with a firm where such interested directors are partners, owners or member, whatsoever in that firm,

Then in such case the nature or interest of such Director(s) interest shall be disclosed in the agenda of the notice, so that the remaining directors shall have a prior intimation of such interest or concern.

Points to be noted out of this: If, the interested director(s) does not have more than 2% shareholding in a body corporate, than as per clause (i) a Whole Time Director, Managing Director,  Independent Directors, director and his relatives are not covered in the above criteria, are not required to disclose their interest in such proposed resolution.

2. Secretarial Standard- 1

By reading the above standard we can see that the director(s) have to give disclosure of his interest or concern whereby the resolution proposes to be passed by company of any contract or arrangement and also by the Directors who were not covered by the section 184 of the Companies Act, 2013.

3. LODR

It only provides that the declaration is to be made when the resolution with the related party if material in nature only.

Crux: Even though Section 184 has provided that the directors can skip the disclosure of nature of concern or interest in some case as pointed out above, but the such scope have covered up in Secretarial Standard-1, thus the agenda shall contain the details about the nature of concern or interest of the interested director(s) and also by the Directors who were not covered by the section 184 of the Companies Act, 2013 and in any other transactions the Director is not liable to disclose his interest.

If such transaction is occurring in a Listed Company and is a material related party transaction then the nature of concern or interest in such resolution.

Voting in a Board Meeting by the Related Party

Companies Act, 2013

Secretarial Standard- 1 LODR
Section 184 (2):

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—

(a) with a body corporate in which such director or such director in association with any other director, holds more than two per cent. shareholding of that body corporate, or is a promoter, manager, Chief Executive Officer of that body corporate; or

(b) with a firm or other entity in which, such director is a partner, owner or member, as the case may be,

shall disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed and shall not participate in such meeting.

Standard 3.2 :

A Director shall not be reckoned for Quorum in respect of an item in which he is interested and he shall not be present, whether physically or through Electronic Mode, during discussions and voting on such item. For this purpose, a Director shall be treated as interested in a contract or arrangement entered into or proposed to be entered into by the company:

(a) with the Director himself or his relative; or

(b) with any body corporate, if such Director, along with other Directors holds more than two percent of the paid-up share capital of that body corporate, or he is a promoter, or manager or chief executive officer of that body corporate; or

(c) with a firm or other entity, if such Director or his relative is a partner, owner or Member, as the case may be, of that firm or other entity.

 

 

Nothing has been mentioned in the LODR regarding the voting by Directors in a resolution in which they are interested.

1. Companies Act, 2013

i. By the above provision we can see that the director cannot vote on the transactions whereby all the related directors are holding along with other directors more than 2% of the shareholding or is a promoter, manager or CEO of that body corporate then such Director shall not vote on that resolution.

ii. When company proposes to enter in to a contract or arrangement with a firm where such interested directors are partners, owners or member,

In such case the interested Directors shall not participate in the proceedings of that meeting.

Author’s view: Refraining the Director from the proceeding of the meeting shall be reads as refraining to participate in the discussion and at the time of voting on the resolution as there are other items also were the director might not be interested or not be a related party and in such case he cannot be refrained from participation.

Points to be noted out of this: If, the interested directors does not have more than 2% shareholding in a body corporate than as per clause (i) a Whole Time Director, Managing Director, Independent Directors or any other Director not covered above, can vote in the resolution where that are interested.

2. Secretarial Standard -1

Secretarial stands contains similar provisions to section 184, whereby only one new provision has been added that any contract or arrangement with the Director or with his relative will also be covered.

Crux: Every contract or arrangement done with the Director or his relative, or where all the related directors are holding more than 2% of the shareholding or a Director is a promoter, manager or CEO of other body corporate or where the director is partner, owners or member of a firm, then such interested Director(s) shall not vote on that resolution.

However, if any of the director does not fall in the above criteria then he can vote on such meeting irrespective of the fact that if his interested or not.

Summary: All the provisions for the Disclosure and Voting at the Board Meeting are same except in voting, a new point had been added via  SS-1, whereby any contact with the Director and his relative are also covered, consequently, the directors have to disclose such interest in such Resolution at the meeting. By adding this point the loophole (the WTD, MD, Independent Directors, Director and his relative were not covered under these criteria) has been covered.

Further, the Directors are liable to disclose their nature of concern in case where the proposed resolution contains the contact or arrangement where the Director is a related party and such relation is in such form that the all the related directors are holding more than 2% of the shareholding or is a promoter, manager or CEO, of the related body corporate or such director(s) are partners, owners or member in the in the related firm or with the director or his relative.

Furthermore, as per notification G.S.R. 464(E) dated 05.06.2015 states that interested Directors in a Private Company may participate in such meeting after disclosure of his interest. That means he can participate and vote on such resolution also. However, Secretarial Standard had no such exemption but in this case the provisions of the Companies Act, 2013 will prevail.

Also, it is to be noted that Secretarial Standards are not applicable on One Person Company, therefore, being a One Person Company, the provisions of Secretarial Standards will not be applicable but the provisions of section 184 will be applicable and thus, the Director can take the benefit of the loop hole and when the contact or arrangement entered into with a with a Director or his relative and he need not disclose his nature of concern or interest and can vote.

Following questions might arise in your mind:

1. What if all the directors in a company are interested or only one director is left in the company that is not having interest in the Resolution?

Author’s View: In such case, the Company may appoint in the Additional Director at the Board Meeting of the Company, to pass such resolution.

If the power of appointing an Additional Director is delegated to the Board by the Articles, the Board can appoint Additional Director without taking this item on the Agenda of its Meeting- Needle Industries V Needle Industries Newly (India) Holding Ltd. {1981}

2. What does the term Nature of concern or Interest mean?

Author’s View: The term Nature of concern or interest has nowhere been defined in the act and therefore needs our reasonable understanding and interpretation.

As per my understanding the tern “concern” means the position or the way the director is related with the related party such as the director is CEO, promoter, shareholder etc in the other body corporate.

The term Interest has been defined as per the Case law and the department has also given its view:

Interest means the personal interest and not official or other interest. But it is not limited to financial interest only and may include interest arising out of fiduciary duties or closeness of relationship. In other words, the interest should be an “interest” conflicting with duty as Director- Mukkattukara Catholic Co. Ltd, V M.V. Thomas {1995} 6 SCL 135/{1999} 96 Comp. Cas. 864 (ker.)

Department’s view”

The principal is that the Contract or arrangement hit the section is the one in which the director has personal interest or conflict with the duties towards the Company as its Director. Even Where the Director himself has no personal interest in any cataract or arrangement but any of his relative has, the director would be deemed to be indirectly interested within the meaning of this section.

Author’s view: The interested Director means the interest of any kind that will benefit the director of the company or will have affect on his independent views or decisions whether in his official or personal capacity including the where the Director himself has no personal interest in any cataract or arrangement but any of his relative has.

Some other important Case Laws on nature of concern or interest:

1. To attract the related party provision, the interest or concern need not be direct, it may even be indirect- Firestone Tyre & Rubber Co. V Synthetics & Chemicals Ltd. {1971} 41 Comp Cas 377 (Bom)

2. A relationship of friendliness with directors who are interested in a contract or arrangement will not make a person an interested Director. The interest or concern cannot be merely a sentimental interest or ideological concern- Needle Industries (India) Ltd. V Needle Industries Newey (India) Holding Ltd. {1981} 51 Comp Cas 743 (SC)

3. Where a Director is sub partner with the other party to the contract, he is deemed to have an interest in the contract which he is bound to disclose- Pydah Venkatachalapathi V Guntur Cotton, Jute & Pare Mills Co. Ltd. AIR 1929 Mad 353.

For any Query or Discussion you can reach the author on “pcs.mohitsingh@gmail.com”

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