Introduction
Quorum refers to the minimum number of members required to constitute a valid meeting. It may have reference to the meetings of Board of Directors (Board), Committees thereof (Committees), or of Shareholders/Members of the Company. Generally, this requirement is specifically provided by law governing these meetings. Hence, in the context of the Companies Act, 2013 (the Act), it can be seen from the various provisions i.e. Section 103 (Quorum for General Meetings), Section 174 (Quorum for Meetings of Board) and for Committee meetings Section 177 and 178 are the relevant provisions, further, the Board is generally authorised to specify the terms of reference and quorum requirements of any other committee constituted under the Act or any other law for the time being in force.
For the meetings convened on the directions of the Tribunal/Court, quorum or other requirements are specified by the Tribunal/Court giving such directions.
Further, all the members are entitled to be counted towards the quorum based on their presence in the meeting, even this presence could also be by way of Video Conferencing/Other Audio-Visual Means (VC or OAVM) as specifically provided by the provisions of the Act. There may be the scenario, the members present in the meeting, could be interested in the agenda item to be considered in the meeting and the member(s) have to recuse themselves from being participating, voting or not to be counted towards quorum for that particular item. This situation gives rise to two separate categories of directors for that particular agenda item i.e. “Interested Director(s)” having interest in the subject matter of discussion, this interest could be either personal or pecuniary relationship, and “Disinterested Director(s)” having no conflict of interest.
Further, a company enters into different types of contract(s) or arrangement(s) with certain parties in the ordinary course of its business, these parties may be having a sort of relationship with the directors on the board of the company and becomes related party(ies) to the company. Hence, when such transactions are being undertaken at the terms other than ordinary terms at which these transactions are undertaken with not a related party, it becomes important to ascertain the nature of relationship, extent of conflict of interest of members of the Board with related party, so that no undue benefit flows to the related party, by virtue of interested director being the decision maker in that particular transaction. Interested directors are not counted towards the quorum, are not entitled to vote and have to recuse themselves from participating in any other way, when such matters are placed before the Board with certain exceptions as prescribed.
Through this study we will try to understand the quorum requirements for Transactions undertaken under Section 184(2) i.e. Disclosure of Interest and non participation by Director and Section 188(1) i.e. Related Party Transactions (RPT) of the Act and consequent restrictions on participation of interested directors in these transactions.
Section 174 of the Act – Quorum for Meetings of Board (as reproduced)
(1) The quorum for a meeting of the Board of Directors of a company shall be one third of its total strength or two directors, whichever is higher, and the participation of the directors by video conferencing or by other audio-visual means shall also be counted for the purposes of quorum under this sub-section.
(2) 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 of summoning a general meeting of the company and for no other purpose.
(3)Where at any time the number of interested directors exceeds or is equal to two-thirds of the total strength of the Board of Directors, the number of directors who are not interested directors and present at the meeting, being not less than two, shall be the quorum during such time.
Explanation.—For the purposes of this sub-section, “interested director” means a director within the meaning of sub-section (2) of section 184.
(4) Where a meeting of the Board could not be held for want of quorum, then, unless the articles of the company otherwise provide, the meeting shall automatically stand adjourned to the same day at the same time and place in the next week or if that day is a national holiday, till the next succeeding day, which is not a national holiday, at the same time and place.
Explanation. — For the purposes of this section,—
(i) any fraction of a number shall be rounded off as one;
(ii) “total strength” shall not include directors whose places are vacant.
Quorum Explained-
Sub-section 174(1) –
Generally, to constitute a valid meeting, the quorum prescribed under Section 174(1) is taken into account, wherein 1/3rd of its Total Strength or 2 directors, whichever is higher, is the quorum for a Board Meeting.
Pursuant to the explanation appended to Section 174, Total Strength means the total numbers of directors on the board excluding the directors whose places are vacant.
For example, a public company has 10 directors on the Board.
| Quorum | = 1/3rd*10 or 2 directors, whichever is higher
= 3.33 or 2 directors = 4 or 2 directors = 4 directors |
Note: any fraction of a number shall be rounded off as one
Sub-section 174(3) –
In case at any time the number of interested directors under Section 184(2) exceeds or is equal to two-thirds of the Total Strength of the Board of Directors, the number of directors who are not interested directors and present at the meeting, being not less than two, shall be the quorum for such meeting.
If, in the above case 2/3rd or more, out of 10 directors become interested under Section 184(2) i.e. 7 directors (any fraction of a number shall be rounded off as one), then remaining 3 disinterested directors shall be the required quorum for this particular agenda item.
Provided that such number in any case shall not be less than 2 directors.
Now, if the company does not comply with Section 174(3) i.e. number of disinterested directors is less than 2, then company has to resort to Section 174(2) and the Board shall increase the number of directors so as to form a required quorum (such directors should be disinterested) or alternatively, such matter can be referred to the shareholders to be decided at the general meeting.
Section 184(2) – Disclosure of Interest and non participation by Director (as reproduced)
(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:
Provided that where any director who is not so concerned or interested at the time of entering into such contract or arrangement, he shall, if he becomes concerned or interested after the contract or arrangement is entered into, disclose his concern or interest forthwith when he becomes concerned or interested or at the first meeting of the Board held after he becomes so concerned or interested.
Disclosure of interest under Section 184(2) Explained –
If any transaction is being/has already undertaken by the company pursuant to any contract or arrangement (existing or proposed) and any of the director(s) has an interest as mentioned above in clause (a) or clause (b), 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.
The interested director has to ensure that he has recused himself from voting on such resolution and shall also not be counted towards the quorum for this particular agenda item.
Section 188(1) Related Party Transactions (RPT) (as reproduced)
(1) Except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as may be prescribed, no company shall enter into any contract or arrangement with a related party with respect to—
(a) sale, purchase or supply of any goods or materials;
(b) selling or otherwise disposing of, or buying, property of any kind;
(c) leasing of property of any kind;
(d) availing or rendering of any services;
(e) appointment of any agent for purchase or sale of goods, materials, services or property;
(f) such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company; and
(g) underwriting the subscription of any securities or derivatives thereof, of the company:
Provided that no contract or arrangement, in the case of a company having a paid-up share capital of not less than such amount, or transactions not exceeding such sums, as may be prescribed, shall be entered into except with the prior approval of the company by a resolution;
Provided further that no member of the company shall vote on such resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party.
Provided also that nothing contained in the second proviso shall apply to a company in which ninety per cent. or more members, in number, are relatives of promoters or are related parties:
Provided also that nothing in this sub-section shall apply to any transactions entered into by the company in its ordinary course of business other than transactions which are not on an arm’s length basis.
Provided also that the requirement of passing the resolution under first proviso shall not be applicable for transactions entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval
Rule 15(2) of the Companies (Meetings of Board and its Powers) Rules, 2014 (as reproduced)
(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.
Section 188(1) read with Rule 15(2) Explained –
This section specifically covers the 7 transactions to be considered as the Related Party Transactions, if the other party to contract or arrangement is the Related Party (RP) as defined under Section 2(76) of the Act, of the company.
Generally, the RPT is approved by the Board of Directors in the meeting except those transactions where it is required to pass an ordinary resolution by the shareholders in general meeting, in case the thresholds as specified in Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014 are triggered.
The interested directors should recuse themselves from participating, when such transactions are placed before the board for discussion. The required quorum for these transactions is under Section 174(1), wherein 1/3rd of Total strength or 2 directors, whichever is higher, is the required number of members for meeting. Here, minimum 4 directors need to be present in the meeting to constitute a valid meeting. Interested directors shall not be present in the meeting during discussions on the subject matter of the resolution relating to such contract or arrangement.
Contrasting Quorum under Section 184(2) and Section 188
The moot point to note here is that the option available under Section 174(3), i.e. where the Board comprises of equals to or more than 2/3rd of interested directors and the remaining disinterested directors being not less than 2 directors, can approve the matter placed before the meeting, is the required quorum for that particular item, is not available to a transaction undertaken pursuant to a contract or arrangement under Section 188(1) i.e. a Related Party Transaction.
This is because, that the explanation appended to Section 174(3), refers the “interested director” only with reference to interest of a director in a contract or arrangement under Section 184(2). Meaning thereby that in case any interest of the director arising from a transaction not classified as RPT with respect to a contract or arrangement is triggered under Section 184(2), wherein as a default rule quorum under Section 174(1) should be complied i.e. 4 directors (as per the above example), but if, the conditions under Section 174(3) are fulfilled then, the option under Section 174(3) i.e. the remaining disinterested directors being not less than 2 directors i.e. 3 directors (as per the above example) can make a valid quorum for the purpose of that particular item.
In the above scenario, the company gets a benefit under Section 174(3) to approve a particular matter in which 7 directors (as per the above example) are interested as per Section 184(2) with a quorum of only 3 directors, whereas the required quorum as per default rule is 4 directors under Section 174(1).
However, if it would be the case of RPT, even if company complies with conditions mentioned under Section 174(3) i.e. 7 interested directors and 3 disinterested directors, the required quorum is 4 directors under Section 174(1). Since, the interest of director referred under Section 174(3) refers only to such interest as per Section 184(2) and not to interest under Section 188(1).
In this particular case, the company has to satisfy quorum requirements under Section 174(1) and not under Section 174(3). Consequently, the company has to increase the number of directors on the Board by appointing additional directors, who should be disinterested of such contract or arrangement.
Further, the interested director after disclosure of his interest in the contract or arrangement under Section 184(2), may be present at the meeting during discussions but shall not be counted towards quorum and not be entitled to vote on such particular agenda item. Whereas, with respect to RPT, pursuant to Rule 15(2) of Companies (Meetings of Board and its Powers) Rules, 2014, the interested director shall not be present at the meeting during discussions on the subject matter of the resolution relating to such contract or arrangement. Hence, the interest under Section 188(1) is subject to more stringent participation requirements by directors as compared to interest under Section 184(2).
Further, point to note here is, if the transaction undertaken is not a related party transaction under Section 188, then Section 184(2) should be checked whether the conditions under clause (a) or clause (b) is triggered or not, then disclosure shall be made accordingly to the company, in pursuance of the contract or arrangement.
Conclusion– The purpose of this study was to critically examine the quorum requirements for the contracts or arrangements under Section 184(2) and Section 188 of the Act, to avoid any bad decision by the Board of the company, in case interested directors are there on the Board and to maintain the integrity of the spirit of the law, as envisaged in the Act through various provisions regulating the manner of decisions in case any of the director has interest in any proposed contract or arrangement.
Links to Sources:
| Section 174 | https://www.mca.gov.in/content/mca/global/en/acts-rules/ebooks/acts.html?act=NTk2MQ==#Quorum_for_Meetings_of_Board |
| Section 184(2) | https://www.mca.gov.in/content/mca/global/en/acts-rules/ebooks/acts.html?act=NTk2MQ==#Disclosure_of_Interest_by_Director |
| Section 188 | https://www.mca.gov.in/content/mca/global/en/acts-rules/ebooks/acts.html?act=NTk2MQ==#Related_Party_Transactions |
| Rule 15(2) | https://www.mca.gov.in/content/mca/global/en/acts-rules/ebooks/rules.html |
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