Person in whose advice, directions or instructions Board of Directors of a company accustomed to act

It is very much clear that the expression ‘any person in whose advice, direcctions or instructions the Board of Directors of a company accustomed to act’ is of utmost relavance as the expression has been used at various places in the Companies Act, 2013 alongside with Section 2(69) which defines the term ‘Promoter’. The term promoter was not defined in the Companies Act, 1956, apart from the Company Law, the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 makes an attempt to define the term “promoter” in Regulation 2(1)(oo) but non-availability of the definition was a major hurdle for the interpreters as the definition in SEBI may not be applied in case of every company.

Now, the Companies Act, 2013 has defined the term and also with the expression “any person in whose advice, direcctions or instructions the Board of Directors of a company accustomed to act”, hence such person if there are reasonable grounds to believe that the Board acts in accordance with his directions, advice or instructions shall be the promoter.

There are several other places where the expression has been used, in this article we will be focusing on the provisions where the expression has been used an will try to create a connectivity between them.

INTERPRETATION OF THE EXPRESSION “PERSON IN WHOSE
DIRECTIONS OR INSTRUCTIONS DIRECTORS ARE
ACCUSTOMED TO ACT”
[Sections 2(69), 2(76) & 188, 2(60), 185]

Section 2(69) – Definition of “Promoter”

Promoter “means” a person –

(a) who has been named as such in a prospectus or is identified by the company in the annual return (MGT-7) referred to in Section 92;

OR

(b) who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise;

OR

(c) in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act

Provided that nothing in sub-clause (c) shall apply to a person is acting merely in professional capacity.

Companies Act, 2013 vs. Companies Act, 1956
[Section 7 of the 1956 Act]

Text of Section 7 of the Companies Act, 1956:

Interpretation of “person in accordance with whose directions or instructions directors are accustomed to act”.

7. Except where this Act expressly provides otherwise, a person shall NOT be deemed to be, within the meaning of any provision in this Act, a person in accordance with whose directions or instructions the Board of directors of a company is accustomed to act, by reason only that the Board acts on advice given by him in a professional capacity.

Note: – A person shall be considered as ‘person in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act’ if he advices, directs or instructs the Board NOT IN A PROFESSIONAL CAPACITY.

As Section 7 of the Companies Act, 1956 which made it clear that a person merely acting in his “professional capacity” and the Board has acted under his advice shall not be the officer in default as defined by Section 5 of the Companies Act, 1956 (corresponding to Section 2(60) of the Companies Act, 2013). The Companies Act, 2013 doesn’t have any such provision like Section 7 but in some places where the expression has been used there is expressely written that a person who gives advice in his professional capacity shall be excluded.

Definition of “Officer who is default”: –

Text of Section 2(60):

(“officer who is in default”, for the purpose of any provision in this Act which enacts that an officer of the company who is in default shall be liable to any penalty or punishment by way of imprisonment, fine or otherwise, means any of the following officers of a company, namely:—

(i) whole-time director;

(ii) key managerial personnel;

(iii) where there is no key managerial personnel, such director or directors as specified by the Board in this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified;

(iv) any person who, under the immediate authority of the Board or any key managerial personnel, is charged with any responsibility including maintenance, filing or distribution of accounts or records, authorises, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent, any default;

(v) any person in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act, other than a person who gives advice to the Board in a professional capacity;

(vi) every director, in respect of a contravention of any of the provisions of this Act, who is aware of such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings without objecting to the same, or where such contravention had taken place with his consent or connivance;

(vii) in respect of the issue or transfer of any shares of a company, the share transfer agents, registrars and merchant bankers to the issue or transfer; 

Any person on whose directions the Board has acted would be Promoter and also be covered as an officer who is in default. Consequently, wherever any reference to “promoter” or “officer in default” has been made shall be construed to include any person on whose advice, directions or instructions the Board of Directors are accustomed to act.

Further, apart from Section 2(60) and 2(69), the expression has also been used in Section 2(76) and Explanation (c) to Section 185 also. Section 2(76) of the Companies Act, 2013 defined “related party” and major provisions for related party are contained in Section 188 read with Sections 164(1)(g) and Section 177, if applicable.

This implicates that such a person shall also be a “related party” in relation to a Company alongside promoter and officer in default and any transaction falling under the Section 188 shall be prior approval of the Board apart from this any kind of transaction or shall also require Audit Committee approval if Company falls under Rule 4 of the Companies (Meetings of the Board and its Powers) Rules, 2014.

Whereas Section 2(60), 2(76), 2(69) are in line with each other in a manner that all these three provisions talks about a “person” who can be covered as “promoter”, “related party” and “officer who is in default” provided the such person is not acting in professional capacity, but Explanation (c) to Section 185 implicate any “other body corporate” who is acting under advice, directions or instructions given by the Board of the Company or any Director.

(Author can be reached at E-mail: cs.tejas2017@gmail.com)