Should the Government prescribe how frequently should the Board meet ?

30 August 2022 • Gyanendu & Samrish

Recommended

Should the Government prescribe how frequently should the Board meet ?

30 August 2022 • Gyanendu & Samrish

Why the Government mandates a company to hold board meetings, a company where public is not interested? Even a One Person Company, a small company and a dormant company is required to hold couple of meetings through the year. On the other hand, there is no such requirement for an LLP to hold partners meeting. Government has thankfully desisted from prescribing on matters which are probably seen as internal affairs of LLPs. Has this distinction between Companies and LLPs resulted because the law framed for LLPs is relatively recent while the legal framework in companies is the result of past baggage which somehow stayed in spite of a newer version of Companies Act coming in to existence in 2014 and few many amendments carried out as a response to new realization.

Companies Act, 2013 prescribes the number of board meetings which the company must hold as has been elaborated in the later part of the article. The minutes, the final document including the notice and explanatory statement for the meetings, are printed and become a legal document. Frequency of board meeting as stipulated under Companies Act, 2013 is tabulated below:

Sl No. Type of Company Frequency of Board Meeting
1. One Person Company (OPC)

one meeting in each half of calendar i.e. at least 2 board meetings in a calendar year and gap between the two meetings shall not be less than ninety days

2.

Small Company as defined under Section 2 (85) of the Companies Act, 2013

3.

Dormant Company as defined under section 455 of the Companies Act, 2013

4. Start up companies
5. OPC having only one Director

Not required to hold Board Meeting. The rationale behind this is absence of need to take joint decisions by all the directors

6. Section 8 Company

at least one meeting in every six calendar months

Companies Act, 2013 vide Section 173 (1) casts responsibility on every company other than those mentioned above, to hold a minimum number of four meetings of its Board of Directors every year in such a manner that not more than one hundred and twenty days shall intervene between two consecutive meetings of the Board. However, MCA vide General Circular No. 2/1/2020-CLV dated 24.03.2020, extended the gap between two board meetings as required under section 173 of Companies Act, 2013 from 120 days to 180 days due to COVID-19. Here is a matter which came up for adjudication before the Registrar of Companies (RoC) in case of a private limited company which made the mistake of looking at this relaxation in absolute.

BRIEF FACTS OF THE CASE

The company ‘Cable and wireless global (India) Private Limited’ approached the Registrar of Companies, Karnataka for adjudication for violation of Section 173 (1) of the Companies Act, 2013 (for not convening board meeting during a quarter in the calendar year 2020).

In conformity with ibid MCA Circular, the company held three board meetings during the year 2020-2021. The first meeting was held on 24.03.2020, the second meeting was held on 19.08.2020 the third meeting was held on 14.12.2020. The 4th meeting was held on 17.02.2021.

The ROC held that the company has violated the provisions of Section 173 (1) of the Companies Act, 2013 as no Board Meeting was held in the quarter between April to July 2020 even though the difference between the board meeting did not exceed 180 days. Further, it imposed penalty of Rs 25000/- each on three directors and the Company Secretary who were officers in default during the period.

ANALYSIS OF THE VIOLATIONS BY THE COMPANY

This violation needs to be analysed by conjoint reading of Section 173 (1) and Section 118 (10) of the Companies Act, 2013. Section 173 (1) mandates the requirement of holding 4 Board Meetings in a year so that the maximum gap between any two meetings should not exceed 120 days (gap allowed upto 180 days vide ibid MCA Circular). Section 118 (10) mandates that every company shall observe secretarial standards (SS-1) with respect to General and Board meetings specified by the Institute of Company Secretaries of India.

Frequency of Meetings as per Secretarial Standards (SS-1)

SS-1 clearly stipulates that the Board shall meet at least once in every calendar quarter, with a maximum interval of one hundred and twenty days between any two consecutive Meetings of the Board, such that at least four Meetings are held in each Calendar Year. This is in conformity with Section 173 (1) but it additionally clarifies that the meeting should be conducted once in each calendar quarter.

It can be seen that the Company has contravened the provisions of Section 173 (1) as there was a requirement to conduct 4 Board Meeting during the calendar year and 1 Board Meeting should have been conducted in each quarter as specified in SS-1. It is also established beyond doubt that the Company has also contravened the provisions of 118 (10) of the Companies Act, 2013 by not following the SS-1 in letter and spirit.

Was there any unfair advantage or disproportionate gain made or the contravention of not holding the board meeting as prescribed has resulted in any loss to an investor ?

In a very similar case, in the matter of Wasankar Wealth Management Limited,  while adjudicating the default under section 173, it was observed by ROC Mumbai it is difficult to quantify the unfair advantage made by the company or the loss caused to the investors in a default of this nature. Hence, the ROC levied penalty of Rs 25000/- each to every director / officer in default.

In our opinion, a little more explanation on this would have been helpful.

The notification by the Ministry in 2020 giving relaxation at the time of Covid was rendered meaningless if the company still has to hold meetings in every quarter.

The relaxation in extending the gap between two consecutive meetings from 120 days to 180 days carries no meaning if the companies still have to hold meetings every quarter just because another legal mandate requires it do so. How difficult was it to see that there was some very pressing circumstances prevailing worldwide that the Govt considered bringing in a circular providing more time to the companies to hold the next board meeting. There were no strings attached to this circular. This certainly not have resulted in any unfair or disproportionate gain to the company.

Coming to the bigger point whether Govt needs to mandate the frequency of the board meetings, for some companies such as  listed entities, companies where public have substantial pecuniary interest, the provision revolving around frequency and other requirements seems reasonable and necessary. Then there are many closely held, family owned, small private limited companies. What is the rationale to require those companies to just hold board meetings even if they do not have any matter for board’s consideration? Companies Act, 2013 mandates passing of resolutions in prescribed manner as a part of procedure for many items such as issue of shares, borrowing, appointment of directors, alteration in object clause or shifting of registered office, etc. Aren’t these requirements sufficient to ensure notice to Government and public at large? Besides, it’s a well accepted and recognised mode to form smaller committees to conduct business efficiently and not have to call board meetings every now and then.

You may also like to read:

Leave a comment

Your email address will not be published.