[FAQs] on Secretarial Practice in Drafting Notice | Board Meetings | Agenda

A company is incorporated under Companies Act, 2013. It is an artificial judicial person created by law having its own entity distinct from its members. Following are the landmark judgments:-

• In the case of Salomon vs. Salomon and Company Limited (1897) A.C. 22, the principle of the separate legal entity of a company was recognized by the House of Lords. It was held that once the company is incorporated, it becomes a separate entity in the eyes of law independent of a company from Mr. Salomon.
• In the case of Re. Kondoli Tea Co. Ltd., (1886) ILR 13 Cal. 43, the Calcutta High Court recognised the principle of separate legal entity much earlier than the decision in Salomon’s case.

Certain persons transferred a Tea Estate to a company and claimed exemptions from ad valorem duty on the ground that they themselves were also the shareholders in the company. It was nothing but a transfer from them in one name to themselves under another name. While rejecting this plea, Calcutta High Court observed:

“The company was a separate person, a separate body altogether from the shareholders and the transfer was as much a conveyance, a transfer of the property, as if the shareholders had been totally different persons.”

Thus a company being an artificial judicial person, it is capable of acting in its own name, entering into contracts. owning and holding property in its own name, sue and to be sued in its name. However, it expresses its will or takes its decisions through natural persons i.e. directors or members.

A company is a separate legal entity. It is an artificial judicial person created by Law. It acts though its directors and members by passing resolutions at validly held meetings.

A Meeting has been defined in the case of In Re. Associated Color Laboratories Ltd. (1970) 12 D.L.R. as

“Coming together of two or more persons face to face so as to be in each other’s presence or company”

Decisions of the Board of Directors

The will of the Board of Directors is expressed through Resolutions at meetings of the Board or those passed by circulation. General Meetings of the members provide a forum for them to express their will with regard to the management of the affairs of the company. The primary purpose of a Meeting is to ensure that a company gives reasonable and fair opportunity to those entitled to participate in the meeting to take decisions as per the prescribed procedures.

The meetings of a company under the Companies Act, 2013 can be classified as under:

• Meetings of the Directors and their Committees
• Meetings of Members which can further be classifies as:-

1. 1. Annual General Meetings (AGM)
   2. Extraordinary General Meetings (EGM)
   3. Class Meetings.

The following resolutions can be passed at general meetings or through postal ballots:

• Ordinary Resolutions: Resolution by majority of ≥51%
• Special Resolutions: Resolution by majority of ≥75%

Meaning: According to the doctrine of indoor management, a person entering into a transaction with the company needed to satisfy that his proposed transaction is not inconsistent with the articles and memorandum of the company. He is not bound to see the internal irregularities of the company and if there are any internal irregularities, the company will be liable to honour its part of the contract. This doctrine was laid down in the case of:

Royal British Bank v. Turquand (1856) 6 E&B 327

The directors of the company borrowed some money from the plaintiff. The article of the company provides for the borrowing of money on bonds but there was a necessary condition that a resolution should be passed in general meeting. Now in this case shareholders claims that as there was no such resolution passed in general meeting so the company is not bound to pay the money. It was held that the company is bound to pay back the loan. As directors could borrow but subjected to the resolution, so the plaintiff had the right to infer that the necessary resolution must have been passed. It was held that

“Outsiders are bound to know the external position of the company, but are not bound to know its indoor management.”

Conclusion

In the present case, Individual will succeed to recover his money as he was totally oblivious of the fact that a resolutions needs to be passed by the company before issuing of any bond. According to the doctrine of indoor management, A is well within its capacity to assume that all the necessary resolutions must have been passed by the directors of the company.

A company is a legal entity separate from its shareholders. The Court will not interfere with the internal management of companies acting within their powers. Where an ordinary majority of members can ratify the act, the Court will not interfere. This simply means, if the majority can ratify an act, the minority cannot sue.

Foss v. Harbottle (1843) 2 Hare 461, 67 ER 189

In this case two shareholders commenced legal action against the promoters and directors of the company alleging that they had misapplied the company assets and had improperly mortgaged the company property.

The Court rejected the two shareholders’ claim and held that a breach of duty by the directors of the company was a wrong done to the company for which it alone could sue. In other words, the proper plaintiff in that case was the company and not the two individual shareholders.

Conclusion

Thus the suit filed by two shareholders against the directors of a company for alleged fraudulent act causing losses to the company will not succeed because if the majority of shareholders had the power to confirm the act of the directors, in such case any suit against the directors will not survive.

The following are the differences between Ordinary Resolution and Special Resolution:-

Doctrine of indoor management

According to the doctrine of indoor management, a person entering into a transaction with the company only needed to satisfy that his proposed transaction is not inconsistent with the articles and memorandum of the company. He is not bound to see the internal irregularities of the company and if there are any internal irregularities, the company will be liable to honour its part of the contract.

Exception to doctrine of indoor management

The doctrine of indoor management will not apply if the person dealing with the company has a slight knowledge about the lack of authority of the person who is acting on behalf of the company in this situation the doctrine will not apply.

Howard vs. Patent Ivory Company (1888) 38 Ch D 156, the article of the company empowered directors to borrow up to 1000 pounds only. However, they could extend the limit of 1000 pound by consent in general meeting. Without such permission, they took 3500 pounds from one of the directors who took debentures. Later on, the company refused to pay back. The court held that the company is only liable to pay back 1000 pounds because the director had noticed about the limit and condition.

Conclusion

This problem refers to the exception to doctrine of indoor management. In this case, the company is liable for only ` 20000 which was authorized by Article of Association. The company will not be held liable for ` 50000 as this amount was in excess of the borrowing capacity of the company under Articles of Association and the director of a company should be well informed of the internal affairs and capacity of the company.

Subject to the provisions of the Articles of the company, the Board may delegate any of its powers to Committees with or without such restrictions and limits as may be imposed. According to First Proviso to sub-section (3) of section 179 of the Act, the Board may, by a Resolution passed at a Meeting, delegate certain powers to any Committee of Directors, the Managing Director, the Manager or any other principal officer of the company or in the case of a branch office of the company, the principal officer of the branch office, on such conditions as it may specify.

For delegation of powers, a board resolution must be passed at meeting of Board of Directors. A list of such powers is given in Annexure IF.

The following points should be remembered while drafting resolutions, both for Board and general meetings:

a. All essential facts are included in the resolution g.the resolution for re-appointment of a managing director should indicate that the re-appointment is subject to the approval of the Central Government if approval of the Central Government is required and should also cover the period of appointment, terms and conditions of such appointment.

b. Surplus and meaningless words or phrases should not be included in resolutions.

c. Resolutions must indicate the relevant provisions or sections of the Act and the Rules pursuant to which they are being passed.

d. If a resolution is one which requires the approval of the Central Government or confirmation of the National Company Law Tribunal/Court, this must be stated in the resolution.

e. A resolution must indicate when it will become effective.

f. A resolution must confine itself to one subject matter and two distinct matters should not be covered in one resolution.

g. A resolution should be crisp, concise and precise and should be flexible enough to take care of eventualities.

(Note: This list is inclusive and not exhaustive)

Secretarial Standard-1 issued by The Institute of Company Secretaries of India is applicable on meeting of Board of Directors as well as Meetings of Committees of the Board as given below:-

• Applicability of Secretarial Standard-1 on meeting of Board of Directors: Secretarial Standard-1 prescribes a set of principles for convening and conducting meetings of the Board of Directors. According to section 118(10) of the Companies Act, 2013, every company is required to observe Secretarial Standard-1 except:

(i) One Person Companies (OPC) having only one Director on its Board and

(ii) Such other class or class of companies which are exempted by Central Government through Notification. E.g. companies licensed under Section 8 of the Companies Act, 2013.

Exemptions shall be applicable to a Section 8 company provided it has not committed a default in filing its Financial Statements or Annual Return with the Registrar of Companies.

• Applicability of Secretarial Standard-1 on Meetings of Committees of the Board: SS-1 is also applicable to the Meetings of Committees of the Board. At present, Companies Act, 2013 provides for the constitution of following mandatory committees of the Board based on the certain thresholds:

1. 1. Audit Committee
   2. Nomination and Remuneration Committee
   3. Corporate Social Responsibility (CSR) Committee
   4. Stakeholders Relationship Committee

In case any other committee of the Board is constituted voluntarily or pursuant to any other statute or regulations etc., the company may comply with SS-1 with respect to meetings of such committee as a good governance practice.

Applicability of Secretarial standards in the following cases:—

(a) SS-1 is applicable to all companies incorporated under the Act except One Person Company (OPC) in which there is only one Director on its Board.

(b) Section 118(10) of the Companies Act, 2013, provides that every company shall observe Secretarial Standards with respect to general and board meeting specified by the Institute of Company Secretaries of India constituted under section 3 of the Company Secretaries Act, 1980 and approved as such by the Central Government. Thus Secretarial standards are applicable on a private company having two directors.

(c) In terms of sub-section (10) of Section 118 of the Act, every company is required to observe SS-1. Such class or class of companies which are exempted by Central Government through Notification e.g. companies licensed under Section 8 of the Companies Act, 2013, however, this exemptions shall be applicable to a Section 8 company provided it has not committed a default in filing its Financial Statements with the Registrar of Companies.

(d) In terms of sub-section (10) of Section 118 of the Act, every company is required to observe SS-1. Such class or class of companies which are exempted by Central Government through Notification e.g. companies licensed under section 8 of the Companies Act, 2013, however, this exemptions shall be applicable to a Section 8 company provided it has not committed a default in filing its Annual Return with the Registrar of Companies.

According to Section 174 of the Companies Act, 2013, following shall be the Quorum for meetings of Board:-

• 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. 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.
• 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.
• 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.
• 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.
• The Companies Act, 2013 does not provide cap on higher number of quorum. As per Secretarial Standard- 1, Articles of Association may provide for higher number of directors for quorum.

‘Passing the Resolution by Circulation’ is an alternative method for urgent matters instead of convening the Physical Board Meeting. Resolution shall be considered as passed when approved by the majority of Directors. Resolutions passed by circulation are deemed to be passed at a duly convened Meeting of the Board and have equal authority.

As per the provisions of section 175 of Companies Act, 2013:

i. No resolution shall be deemed to have been duly passed by the Board or by a committee thereof by circulation, unless the resolution has been circulated in draft, together with the necessary papers, if any, to all the directors, or members of the committee, as the case may be, at their addresses registered with the company in India by hand delivery or by post or by courier, or through such electronic means as may be prescribed and has been approved by a majority of the directors or members, who are entitled to vote on the resolution:

Provided that, where not less than one-third of the total number of directors of the company for the time being require that any resolution under circulation must be decided at a meeting, the chairperson shall put the resolution to be decided at a meeting of the Board.

ii. A resolution under sub-section (i) shall be noted at a subsequent meeting of the Board or the committee thereof, as the case may be, and made part of the minutes of such meeting.

Companies Act, 2013 as well as Secretarial Standard 1 on Meetings of the Board of Directors lists certain items of business which shall not be passed by circulation and shall be placed before the Board at its Meeting. However, other business that requires urgent decisions can be approved by means of resolutions passed by circulation.

Resolutions passed by circulation are deemed to be passed at a duly convened meeting of the board and have equal authority.

Procedure for Resolutions passed by circulation

• The chairman of the board or in his absence, the Managing Director or in their absence, any Director other than an Interested Director, shall decide whether the approval of the board for a particular business shall be obtained by means of a resolution by circulation.
• Where not less than one-third of the total number of directors for the time being require the resolution under circulation to be decided at a meeting, the chairman shall put the resolution for consideration at a meeting of the board.
• A resolution proposed to be passed by circulation shall be sent in draft, together with the necessary papers, to all the directors.
• Each business proposed to be passed by way of Resolution by circulation shall be explained by a note setting out the details of the proposal.

Following are the powers of the Board to be exercised at Board Meetings as prescribed under the Act:-

a. To make calls on shareholders in respect of money unpaid on their shares.

b. To authorise buy-back of securities under section 68 of the Act.

c. To issue securities, including debentures, whether in or outside India.

d. To borrow monies.

e. To invest the funds of the company.

f. To grant loans or give guarantee or provide security in respect of loans.

g. To approve financial statement and the Board’s report.

h. To diversify the business of the company.

i. To approve amalgamation, merger or reconstruction.

j. To take over a company or acquire a controlling or substantial stake in another company.

k. Any other matter which may be prescribed, which at present are as follows:

i. To make political contributions.

ii. To appoint or remove key managerial personnel (KMP).

iii. To appoint internal auditors and Secretarial Auditor.

Following are the specific contents of minutes of a meeting:-

(a) The Record of election, if any, of the Chairman of the Meeting.

(b) The fact that certain registers, documents, the Auditor’s Report and Secretarial Audit Report, as prescribed under the Act were available for inspection.

(c) The Record of presence of Quorum.

(d) The number of Members present in person including representatives.

(e) The number of Proxies and the number of shares represented by them.

(f) The presence of the Chairmen of the Audit Committee, Nomination and Remuneration Committee and Stakeholders Relationship Committee or their authorised representatives.

(g) The presence if any, of the Secretarial Auditor, the Auditors, or their authorised representatives, the Court/Tribunal appointed observers or scrutinisers.

(h) Summary of the opening reMarks of the Chairman.

(i) Summary of the clarifications provided on various Agenda Items.

(Note: This list is inclusive and not exhaustive)