Tuesday, March 2, 2010

Quorum for the Board Meeting When All the Directors are Interested

Can the quorum for the board meeting be achieved for the purpose of passing a resolution when all or all but one of the directors are interested in an item of business to be transacted therein in the event that the board members are not interested to take the matter in general meeting?

Section 287 of the Companies Act, 1956 reads as follows:

(1) In this section- (a) "total strength" means the total strength of the Board of directors of a company as determined in pursuance of this Act, after deducting there from the number of the directors, if any, whose places may be vacant at the time; and (b) "Interested director" means any director whose presence cannot, by reason of section 300, count for the purpose of forming a quorum at a meeting of the Board, at the time of the discussion or vote on any matter.

(2) The quorum for a meeting of the Board of directors of a company shall be one-third of its total strength (any fraction contained in that one-third being rounded off as one), or two directors, whichever is higher :

Provided that where at any time the number of interested directors exceeds or is equal to two-thirds of the total strength, the number of the remaining directors, that is to say, the number of the directors who are not interested present at the meeting being not less than two, shall be the quorum during such time.

As provided in sub-section (2), at least two dis-interested directors or one-third of the total strength, whichever is higher, must be present at the meeting in order to constitute the quoru. If all or all but one of the directors are interested there can be no quorum and, therefore, no meeting.

Quorum means a minimum number of directors required for transacting business. The directors cannot proceed with a meeting unless the required quorum of directors is present. Provision for quorum for meeting of directors is not directory but it is mandatory. Any decision taken by a lesser number than the quorum is void. See: Alma Spinning Co., In re. [(1880) 16 Ch. 681] ; Re, North Eastern Insurance Co. Ltd., [(1919) 1 Ch. 198] . Also see: Needle Industries (India) Ltd. v. Needle Industries Neway (India) Holding Lid., [(1981) 51 Comp. Cases 743 (SC)].

Regulation 75 of Table A of Schedule I to the Companies Act, 1956 reads as follows:

"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, but for no other purpose."

Where all or all but one of the directors are interested, and there is no quorum, the proper way out of the difficulty will be to have the matter decided by the company in general meeting by an ordinary resolution, or, if the articles so require by a special resolution. This is so because all residual matters are supposed to vest in the general body. Regualtion 75 of Table A, if it is adopted by a company, would authorise the directors to continue to act in such cases for the purpose of increasing the number of directors so as to bring the number upto the quorum requirement or to call a general meeting for the purpose.

The directors cannot act unless the munimum number is first made up. See: Sly, Spink & Co., [Re, (1911) 2 Ch. 430] ; Owen & Ashworth Chaim, [(1901) 1 Ch. 115]. Also that, the Department of Company Affairs has issued a clarification in this regard. The DCA had advised to increase the board strength either by way of co-option or appointment of additional directors, if so authorised by the articles, and to transact the business and if this way out is not possible to call a general meeting. See: Taxmann's Circulars & Clarifications, 1992 Edition at p. 294.

However, in Trayner's Latin Maxims, 4th Edition, 2008 at p. 502, the meaning of the maxim "Quando aliquid prohibetur, prohibetur et omne quod devenitur ad illud" is provided as follows: "When anything is forbidden, everything which amounts to the forbidden thing is forbidden also. This maxim means that when the law has forbidden the doing of anything directly, it equally forbids the doing of it indirectly, and that mere device or colourable evasion will not protect the doer from the consequences of his act."

"... and a transaction will not be upheld which is "a mere device for carrying into effect that which the legislature has said shall not be done." See: Per Martin, B., in Morris v. Blackman, [2 H. & C. 912, at p. 918] ; See also: Minty v. Sylvester, [84 L. J. K. B. 1982] as cited in Broom's Legal Maxims, 10th Edition, 2006 at p. 315. The above clarification is partly erroneous because, the very act of appointment of additional directors is to pass the transaction in which all the existing directors are interested. Thus, as all the directors are even interested in the appointment of additional directors how can they, in the spirit and principle of Section 287, appoint additional directors? Again, even to co-opt a director to make up the quorum there should be at least one disinterested director. It is a well settled legal principle that 'what the law prohibits cannot, in some other way, be legally accomplished'. In view of the above, the directors may, in accordance to the law laid down in the above case laws as also the DCA clarification, first increase the strength of the board and put the item in issue to vote in board meeting if it wants to avoid the item to be put to vote in general meeting. However, it is a moot question whether the transaction would be able to stand against the well laid and followed principle of law, if and when challenged.
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1 comment:

  1. is there any exception that if there all the directors interested qurum will formed?