APPLICABLE LEGAL PROVISIONS
Section 174 of the Act – Quorum for meetings of the 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)….. (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.”
Section 184(2) – Non participation by interested director
As per the said section, 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; is required to disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed and is also not allowed to participate in such meeting (i.e. not allowed to vote).
Section 188 read with Rule 15(3) of Companies (Meetings of Board and its Powers) Rules, 2014
Except with the prior approval of the company by a special resolution- (i) a company having a paid-up share capital of ten crore rupees or more shall not enter into a contract or arrangement with any related party; OR (ii) a company shall not enter into a transaction or transactions, where the transaction or transactions to be entered into contracts / arrangements with a related party with respect to – a) sale, purchase or supply of any goods or materials directly or through appointment of agents exceeding 25% of the annual turnover; b) selling or otherwise disposing of, or buying, property of any kind directly or through appointment of agents exceeding 10% of net worth; c) leasing of property of any kind exceeding 10% of the net worth or exceeding ten percent. of turnover d) availing or rendering of any services directly or through appointment of agents exceeding 10% of the net worth; e) related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company at a monthly remuneration exceeding 2.5 lakh rupees; f) remuneration for underwriting the subscription of any securities or derivatives thereof of the company exceeding 1% of the net worth;
Note: As per section 2(76) of the Act, the following are considered to be Related Parties under the Act: a) Director or his relative, b) Key managerial personnel (KMP, i.e. a whole time director, a managing director, a CEO, a CFO, a manager and a C.S.) or his relative; c) a firm, in which a director, manager or his relative is a partner; d) a private company in which director or manager is a member or director; e) public company in which a director or manager is a director or holds along with his relatives, more than 2% of its paid up share capital; f) any body corporate whose Board, MD or manager is accustomed to act in accordance with the advise, directions or instructions of a director or manager; g) any person on whose advise, directions or instructions a director or manager is accustomed to act; (advise, directions or instructions given in a professional capacity excluded); h) any company which is a holding, subsidiary or an associate company of such company and fellow subsidiaries. i) a director or a KMP of the holding company or his relative The following persons are considered to be relatives:- (1) Father (includes step-father,) (2) Mother (includes the step-mother), (3) Son (includes step-son,) (4) Son’s wife. (5) Daughter, (6) Daughter’s husband, (7) Brother (includes step-brother), (8) Sister (includes the step-sister).
Rule 15 (2) of Companies (Meetings of Board and its Powers) Rules, 2014
As per the said rule, 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 2(49) of the Act – Definition of “interested director”
“interested director” means a director who is in any way, whether by himself or through any of his relatives or firm, body corporate or other association of individuals in which he or any of his relatives is a partner, director or a member, interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into by or on behalf of a company
Second proviso to Section 188 of the Act
No member of the company shall vote on such special resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party.
General Circular no. 30/2014 (Clarifications on matters relating to related party transactions) issued by MCA on July 17, 2014
The said circular inter alia states that related party as specified in the second proviso to section 188 of the Act has to be construed with reference only to the contract or arrangement for which the said special resolution is being passed. Thus, the term related party in the above context refers only to such related party as may be a related party in the context of contract or arrangement for which the said special resolution is being passed.
DISINTERESTED QUORUM AND PROHIBITION ON VOTING
In view of the provisions of section 174 of the Act, an interested director cannot be counted for the purpose of quorum only if he is regarded as interested as per provisions of section 184(2) of the Act. As per provisions of section 184(2) of the Act, a director is regarded as interested only under two conditions, namely: a) In case a contract is to be entered into with a body corporate, the director either himself or 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) In case a contract is to be entered into with a firm then such director is a partner in that firm.
For prohibition on voting
In a Board meeting a director is not allowed to vote on a resolution under two circumstances: (a) Contracts in which he is regarded as interested as per provisions of section 184(2) mentioned above. or (b.) where any director is interested in any contract or arrangement with a related party. (i.e. considered to be interested as per definition of interested director mentioned under section 2(49) of the Act.
In a general meeting
As per second proviso to section 188 of the Act read along with the aforesaid circular clarification of July 17, 2014, if the company is proposing to enter into a related party contract and the said related party is also a member, then the member cannot vote on the special resolution. However, the other members even though considered to be related parties as per the definition given in section 2(76) of the Act can vote on the special resolution because contract is not being entered into with those related parties. For example, where a holding company is entering into a related party contract with a subsidiary company, in the general meeting of the subsidiary company, the holding company, being a member of the subsidiary company and also the being related party with whom the contract is entered into cannot vote on special resolution. However, directors of the subsidiary company who are also members (shareholders) of the subsidiary company despite being regarded as “related parties” as per definition of section 2(76) of the Act can vote on special resolution.
About Bulwark Solicitors
Bulwark Solicitors is a law firm pioneered by Solicitor Chirag Sancheti and Advocate Deep Shridharani. The firm has expertise in the areas of both Litigation and non-Litigation. Under the non-litigation Law practice, the firm practices in the areas of Corporate Law, Intellectual Property Law, Bankruptcy & Insolvency Law, Competition Law, Real Estate and Conveyancing and DTAA Advisory. Further, under Corporate Law area, we practice Company Law, Securities Law, Mergers and Amalgamations, Private Equity and Venture Capital Investment Transactions, Legal Due Diligence and Foreign Exchange Management Law.