Corporate Governance in Meetings and Powers of the Board of Directors under Indian Law

INTRODUCTION

Ever since the India’s biggest corporate fraud and governance failure in 2009 at the Satyam Computer Services India Limited, an awareness around ‘corporate governance’ has phenomenally increased leading to enactment of the Companies Act, 2013 on 30th August 2013. Prior to this corporate governance was ensured by the Companies Act, 1956. ‘Corporate governance’ has been aptly defined by the Cadbury Committee as ‘the system by which companies are directed and controlled.’

In order to properly direct and control a company, the Companies Act, 2013 (hereinafter referred to as “the Act”) includes certain provision relating to meetings of the board of directors ensuring that there is proper management at the top level subsequent to which the other management would be looked after with a better vision. The provisions are such that they bridge the gap between the different management levels, directors and shareholders of the company, also ensuring that certain powers be vested in hands of directors to allow him/her to reward and use it for proper corporate governance and functioning of the company. In addition to the, Companies Act, 2013, Companies (Meetings of Board and its Powers) Rules, 2014 ensures a proper framework for corporate governance in India with respect to the directors’ board meetings.

KEY PROVISIONS IN THE 2013 ACT

Chapter XII of the 2013 Act deals with meeting of board and its powers. The provisions of Chapter XII of the 2013 Act has been made effective from April1, 2014 but some provisions like Section 180, Section 181, Section 182, Section 183, Section 185, Section 192, Section 194 and Section 195 of the Act have been made effective from September 12, 2013.Under Section 118(10) of the Act companies have an obligation to observe secretarial standards in relation to general and board meetings as specified by the Institutes of Company Secretaries of India.

Meetings of Board, Quorum, Notice and Agenda

Section 173 of the Act describes the meetings conducted by the board of directors. The first proviso ensures that the first meeting should be within thirty days of the incorporation of the company. It provides a time gap of one hundred and twenty days between two consecutive meetings and that in a year a minimum of four meetings be held by board of directors the company but not applicable for one-person company, small company and dormant company. Section 173(2) of the Act allows participation of directors in a meeting of the Board by way of video conferencing or audio-visual means which can be recorded and stored as well. This section is read with Rule 3 of Companies (Meetings of Board and its Powers) Rules, 2014 giving us a detailed aspect of do’s and don’ts as was also amended in 2018 guiding in conducting a meeting using video conferencing. It waves off matters related to prospectus, financial statements and Board’s report, audit committee meetings for consideration of accounts, matters relating to amalgamation, merger, demerger, acquisition and takeover and other such crucial matters to be raised in an audio-visual Board Meeting. Technicalities like avoiding of failure of internet connection have been pointed out. Only directors are allowed to attend meeting by through this mode and thereby a notice is required to be issued including the option of the video conference. Presence of director by this mode is counted in quorum and it is essential for the quorum to be present throughout the meeting like was observed in the case of Bell v. Royal Western India Turf Club Ltd. Minutes of the meeting is required to include details like name of director present through the video conferencing, location from where is participating and others. Section 173(3) of the Act provides the way to call for a Board meeting by delivering a notice of minimum seven days by means of hand delivery, post or electronic means at the registered address with the Company. The court held in A. Chettiar v. Kaleeswarar Mills Ltd. that if directors are told in advance about the time of the meeting on a particular day of every month then it will amount to compliance with law. This section also provides for a meeting to be called upon for urgent business at a shorter notice. Section 173(4) of the Act ensures that the notice is given by officer responsible for it. Section 173 (5) of the Act deals with the one-person company(OPC), small company and dormant company allowing them to have at least one board meeting in each half year calendar with a gap of minimum ninety days between. OPC does not fall within the ambit of this sub-section and Section 174 of the Act.

Section 174 of the Act provides for a quorum which we also observe in the Kotak Committee Report published by Securities Exchange Board of India (SEBI) on 5 October 2017, which provides for a quorum. The quorum for a meeting is one-third of total strength of the Board or two directors whichever is higher. It was held in the case of Pradeep Kumar Baneerjee v. Union of India that of AOA of the company provides for 15 directors as quorum but at the time only 6 were present in office then quorum would be one-third of six that is two directors present for the meeting. If the quorum is not available due to reasons like number of directors being reduced below the quorum then continuing directors would be included like was observed in the case of Ranbaxy Laboratories Ltd. v. Jayaram Chigurupati. In case of excess number of directors, ones not interested can leave without disturbing the quorum. Quorum is essential for the meeting to be conducted, if not fulfilled will be postponed or as provided in AOA of the Company.

Surprisingly, Section 173 of the Act does not talk about the agenda for the board meeting. In fact, the law does not require an agenda for the Board meeting. The chairman is allowed to consider matters not included in agenda as observed in case of Suresh Chandra Marwaha v Ladis Pvt. Ltd. In the case of Maharashtra Power Development Corporation v. Dabhol Power the veracity of a board meeting was challenged by a shareholder on grounds of absence of notice, lack of agenda and unlawful biasness by appointing new director in the meeting. This clarified the fact that notice will be issued only to the directors of the Company and that no agenda is required in a Board Meeting. The court remarkably distinguishes between ‘general meeting’ and ‘board meeting’ stating that shareholders are required to be informed prior to general meeting but not in case of board meetings. Similar, is the case of agenda as in board meetings agenda are not required to be laid down and informed before the meeting while in general meeting it has to be done so. In a board meeting, issues can be voiced at a later stage in the meeting and can be addressed then. The court also held that decisions on other matters taken by the reconstituted board is not illegal. In the other case of T. M. Paul (Dr.) v. City Hospital (P.) Ltd., the notice being served at footsteps of the door of the house knowing the director would not see was fraudulent and on the contention of pre-mentioning of agenda, court held that the same is not required but due to concealment of facts is illegal.

Passing of resolution and miscellaneous provisions

Section 175 of the Act is read with Rule 5 states that the resolution would be passed by Board or its committee by circulation only when the draft resolution along with necessary documents is circulated to all directors or members of the committee by due means of delivery and if more than one-third directors or members require then the circulation can be passed by a physical meeting. Section 118 of the act states for minutes of the meeting.

LIMITATIONS ON THE POWERS OF THE BOARD OF DIRECTORS

Section 2(10) of the Act defines board of directors. They are head of a company and acts as the ‘corporate conscience’. In his book, Gower had observed that till the end of the nineteenth century the directors were agents of the Company and all powers were exercised in the general meeting only. With the advent of The Act in 2013, meetings of Board of Directors strengthened the position and under Section 179 of the Act granted powers to them in order to enable them to discharge their functions of control, management and administrative affairs. Along with powers, comes restrictions, as excess power will destroy the purpose of power itself.

Section 179 (1) of the Act read with Rule 8 lays down how the board must exercise its powers, but these powers are subjected to provisions of AOA or MoA of the company and the board of directors are restricted from dealing with the matters on which regulations are made in general meetingonly. Section 179 (3) read with Rule 8 refers to the matters which can be decided only by physical meeting usually dealing with shareholder’s interest, related party transactions, key managerial personnels and others. Section 180 of the Act states Special Resolution matters which can be approved only by the shareholders. ISection 180 of the Act depicts that public companies and private companies are at par. AOA can alter the power of board of director as it is a contract signed by the members giving consent in respect of directors. This idea looks abrupt at once but if pierced through, will depict the notion of corporate governance of ensuring proper management along with satisfying interest of people related to the Company. In the case of V. B. Rangaraj v. V. B. Gopalakrishnan the two brothers with an oral agreement had agreed to divide the shares of the company first amongthemselves before allotting it outside the family. The issue before the court was whether shareholders can enter into an agreement among themselves which is inconsistent with the AoA of the Company. The court held that no such agreementis valid. This case is indeed an incredible reference to restrictions on powers which are granted by the Act underlying the principle that MoA and AoA supreme and no matter how the directors and shareholders bend to achieve their ends, the Act will safe guard the company from another scandal like the Satyam scandal. Even though overwriting of this principle was tried but no matter it cannot be disputed that V. B. Rangaraj principle still prevails.

In tangling, detangling of shareholders and directors among themselves the Companies Act 2013 in achieving corporate governance has succeeded as on one hand it grants power to board of directors on other keeps a check on it by providing restriction. The board should be accountable to the shareholders and shareholders signs the AOA. Granting AOA and MoA supreme status ensured a check all level of managements and stabilizing the company as a whole.

CONCLUSION

The provisions of the 2013 Act in respect of meetings of the board of directors depicts the that proper corporate governance vests in hands of directors. The directors receive their identity from the company and so should ensure proper functioning. By including one-person company in the provisions, the Act has ensured well-being of all the companies. Unambiguous provision depicts the true motive of the Act in ensuring that a company, an integral part of economy of a nation and its individuals stands on strong roots. The provisions have ensured that the decisions for the company are taken after vigilant deliberation.

REFERENCES

1. Hemang Parekh, Jayesh Kothari, Supallab Chakraborty and Saumya Malviya & DSK Legal, Corporate governance and directors’ duties in India: overview, THOMSON REUTERS PRACTICE LAW, July 1, 2019, https://content.next.westlaw.com/Document/I2ef128031ed511e38578f7ccc38dcbee/View/FullText.html?contextData=(sc.Default)&transitionType=Default&firstPage=true&bhcp=1.

2. Sakshi Sethi, Meeting under Company Act, 2013, LAW TIMES JOURNAL, February 22, 2020, http://lawtimesjournal.in/meetings-under-company-act-2013/#_edn26.

3. Anonymous, Role of directors in Corporate Governance, INFLIBNET (June 7, 11:00 AM), https://sg.inflibnet.ac.in/bitstream/10603/125485/10/10_chapter%204.pdf.

4. Editor, Board Meetings Under Secretarial standard and Company Law, TAX GURU, April 27, 2018. https://taxguru.in/company-law/board-meetings-under-secretarial-standard-company-law.html

5. Anonymous, Management and Board Governance, MINISTRY OF CORPORATE AFFAIRS ( June 6, 2020, 12:30 PM), http://www.mca.gov.in/MinistryV2/management+and+board+governance.html.

6. Anonymous, The Companies Act, MINISTRY OF CORPORATE AFFAIRS (June 6, 2020, 1:00 PM), http://www.mca.gov.in/MinistryV2/companiesact2013.html.

7. Vaish Associates Advocates, India: Corporate Governance Framework in India, MONDAQ, January 8, 2016.https://www.mondaq.com/india/shareholders/456460/corporate-governance-framework-in-india.

8. Taxguru Team (Companies (Meetings of Board and its Powers) Amendment Rules, 2018], May 7, 2018.  https://taxguru.in/company-law/companies-meetings-board-powers-amendment-rules-2018.html

9. GOWER, PRINCIPLES OF MODERN COMPANY LAW 130 (3rd ednSweet & Maxwell 1997).

10. Arti Sharma, Structure and Powers of Board of Directors of Public and Private companies- How far significant for Corporate Governance comparison between India and other Common Law Countries, 4 THE LAW BRIGADE (PUBLISHING) GROUP 23, 37 (2018). http://thelawbrigade.com/wp-content/uploads/2019/05/Arti.pdf.

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