INTRODUCTION
In this article, we discuss the importance and relevance of minute legal aspects of conducting valid company board meeting. For this, the landmark case of Dr. T.M. Paul v. City Hospital Pvt. Ltd, 1998 has been used. This case highlights how minute irregularities can lead to major legal consequences and ultimately lead to invalidity of meetings. This case also shows that while board meetings form an important aspect of the functioning of a company, if some of these small but often overlooked considerations are not kept in mind then it can lead to serious ramifications. Some of these overlooked aspects that this article will cover are- discussion on matters not listed on the agenda, service of notice for meetings and appointment of new directors.
RELEVANT FACTS OF THE CASE
City Hospital Private Limited was a company incorporated under the Companies Act with Dr. TM Paul (“appellant”) as its Managing Director. Some of the shareholders gave Dr. Paul a notice to convene an Extraordinary General Body Meeting and accordingly a meeting was scheduled for 18th August, 1992 with the agenda being to- a) pass the resolution of the previous meeting, b) approve the balance sheet, and c) transfer the shares of late Dr. KM Joseph. Three additional issues that were not in the agenda were also taken up for consideration in the meeting, namely, a) to appoint 3 new directors, b) to clear outstanding dues to Bank of India, and c) to lease the hospital premises for a period of 5 years. This meeting was not attended by 4 of the doctors (“respondents”) who had previously asked for postponement of the meeting, but their requests were rejected. One of the doctors who was away in Pondicherry did not even receive notice of the meeting and 2 others received it only at late night 17th August. In yet another meeting convened on 29th August, according to the respondents, a fabricated and highly detrimental resolution was passed by Dr. Paul to sell the shares of one of the doctors despite her opposition.
The prayer before the court was to declare the board meetings held on 18th and 29th August as illegal and void.
ISSUES AND RULING
Issue 1: Whether civil courts can interfere with the internal management of a company?
This argument is based on the principle of ‘Foss v. Harbottle’[1] where the minority shareholders claimed damages on behalf of the company for the fraudulent acts of the directors. The suit was dismissed on the ground that the acts of the directors were supported by the majority and that the court should not interfere with internal management.
This principle, however, was held to have no application in the present case because the acts being complained of here were an attempt to place a heavy financial burden on the company which was against its interest and thus could not have been approved by majority.
Issue 2: When is the notice for a board meeting considered to be served?
286 of the Companies Act requires the notice of a meeting to be given to every director in writing but the mode of service is not prescribed. In ‘Parmeshwari Prasad Gupta v. Union of India’ [2] it was held that notice to all directors of a meeting of the board of directors is essential for the validity of any resolution passed at the meeting. The notice for the meeting was not actually served to one of respondents, it was only left at his residence. It was left on 16th August but he only saw it on 18th August upon returning from Pondicherry by which time the meeting was over. The appellants relied on the provisions for substituted service in the Civil Procedure Code but those provisions were not relevant because in those cases, it is open to the court to consider such service as sufficient and declare that the party is duly served.
In the present case, leaving the notice at the residence of the director in his absence is not sufficient, ergo it was held that he had not been given proper notice of the meeting.
Issue 3: Whether resolutions can be passed on matters not listed on the agenda of the notice of meeting of board of directors?
The respondents contended that since certain matters on which resolutions were passed were not on the agenda, such resolutions should be held invalid. They also challenged these resolutions on the ground of fraud. The appellants responded to this by relying on various cases like that of ‘Needle Industries Ltd. v. NIHL’[3] wherein the court held that there is no necessity to provide an agenda for the meeting of board of directors and upheld certain resolutions passed which were not on the agenda of the meeting.
The court in the present case resolved this issue by stating that S. 172 of the Companies Act only requires an agenda for general meetings and it specifies nothing about the meetings of board of directors. Hence, the court upheld the ruling of the Needle case and denied the first contention of the respondents by stating that the power of directors to decide on matters not in the agenda of meeting of board of directors cannot be doubted and such matters can be decided further on in the meeting. However, the court upheld the second contention of the respondents and said that passing of resolutions which are not in the agenda itself would not amount to fraud but if such matters were “deliberately” omitted from the agenda with the object of passing them then such an act would lead to active concealment of facts and will amount to fraud. The court, after considering the circumstances involved and the evidence adduced, held that since the matters were deliberately omitted, it amounted to fraud and hence the resolutions passed were invalid.
Issue 4: Is it a duty on the director, who has personal interests in a contract/agreement being entered into by the company, to disclose such interests at the board meeting?
The respondents stated that S. 299 of the Companies Act obligated a director to disclose his personal interests in a deal being entered into by the company and contended that the appellants had failed to disclose such interests and thus such resolution passed for purchase of their liabilities by the company should be held invalid. The appellants responded to this contention by relying on the case of ‘Venkatachalapathi v. Guntur Cotton’[4] wherein the Court had held that such a disclosure of interest was not necessary if all the other directors knew of such interests.
The court didn’t uphold this contention since the Venkatachalapathi case cannot apply to the given facts. The resolution here did not disclose the liability of the appellants which amounted to Rs.20 lakhs and the liability of appellants as sureties was also unknown to the other directors. Therefore, it said that Venkatachalapathi case will not apply here as the other directors did not know of these hidden interests. The court ultimately stated that “The decision may not be vitiated by non-compliance with section 299 of the Act but must fail for the reason that it was not disclosed in the agenda and the convening of the meeting itself was invalid.”[5]
CRITICAL ANALYSIS
In light of the discussion of the issues above, the meetings held on 18th and 29th August 1992 were declared illegal and void. A key takeaway from this case is that is it imperative for a director to be well rehearsed with the ambit of his/her duties especially with regard to meetings of the board as they display a responsibility towards all members. Courts in India have previously held how there must be adequate service of the notice of a meeting and regarding the importance of full disclosure of the agenda. However, the court in this case went one step ahead and said that the failure to not comply with these duties as a director can actually amount to fraud. Hence, it is safe to conclude that all these nitty-gritties of our legal framework should always be kept in mind while conducting valid board meetings.
BIBLIOGRAPHY
Statutes
1. The Companies Act, 1956.
Case Laws
[1]. Foss v. Harbottle., (1843) 67 ER 189
[2]. Parmeshwari Prasad Gupta v. Union of India., [9740] 44 Comp Cas 1 (SC)
[3]. Needle Industries (India) Ltd. Needle Industries Newey (India) Holding Ltd., [1981] 51 Comp Cas 743 (SC)
[4]. Venkatachalapathi Guntur Cotton, Jute and Paper Mills Co. Ltd., AIR 1929 Mad 353
[5]. T. M. Paul v. City Hospital Pvt Ltd. & Ors., (1999) 97 Comp Cas 216
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