The approval of Board of Directors and modes of obtaining such approval is one of the most critical aspects of corporate compliance management. The Companies Act, 2013 (“the Act”) provides for certain decisions to be taken by the Board of Directors in its meeting. The Act also provides for passing of resolution by circulation by the Board of Directors of the company.
According to Section 179 of the Act, the Board of Directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorised to exercise and do. However, in exercising such power or doing such act or thing, the Board of Directors shall be subject to the provisions contained in that behalf in the Act, or in the memorandum of association or articles of association, including regulations made by the company in general meeting. Sub-section (3) of Section 179 of the Act provides for certain transactions or resolutions, wherein the Board of Directors of a company shall exercise by means of resolutions passed at Board meetings.
Section 175 of the Act relates to “passing of resolution by circulation”. This article analyses the provisions of Section 175 of the Act and provides for compliance checklist for passing of resolution by circulation. Necessary references are made to the secretarial standards issued by the Institute of Company Secretaries of India (ICSI).
- Meaning of “Circular Resolution”.—It is an alternative method of obtaining the approval of the Board of Directors. Section 175 of the Act creates an exception to the general rule that the Board of Directors of the company shall exercise their powers collectively by means of resolution passed at its meeting.
- Certain Resolutions that Cannot be Passed by Circulation.—Sub-section (3) of Section 179 of the Act and Rule 8 of the Companies (Meetings of Board and its Powers) Rules, 2014 provides for certain transactions or resolutions, wherein the Board of Directors shall exercise by means of resolutions passed in its meetings. Such transactions/resolutions are: (a) to make calls on shareholders in respect of money unpaid on their shares; (b) to authorise buy-back of securities; (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) to make political contributions; (l) to appoint or remove key managerial personnel; and (m) to appoint internal auditors and secretarial auditor. For companies incorporated under Section 8 of the Act, the board of directors may decide the following matters by circular resolution (instead of meeting): (a) to borrow monies; (b) to invest the funds of the company; (c) to grant loans or give guarantee or provide security in respect of loans. [MCA Notiifcation No. GSR 466 (E)] dated June 5, 2015].
- Resolutions that can be Passed by Circulation.—Any resolution other than the abovementioned resolutions can be passed by circulation by Board of Directors. The Act has not prescribed for list of transactions that can be approved by passing a circular resolution. However, the Company Secretary or Chairman of the company shall ensure the nature of resolution before proposing before the Board of Directors or Committee.
- Applicability.—The Board of Directors or any committee (e.g. Audit Committee, Nomination and Remuneration Committee, Corporate Social Responsibility Committee, etc.) can pass a resolution by circulation.
- Decision to Pass a Resolution by Circular or Not.—According to the Secretarial Standard 1, the Chairman of the Board or in his absence, 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.
- Explanation of Business by Note.—According to the Secretarial Standard 1, 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, relevant material facts that enable the directors to understand the meaning, scope and implications of the proposal, nature of concern or interest, if any, of any director in the proposal, which the director had earlier disclosed and the draft of the resolution proposed. The note shall also indicate how a director shall signify assent or dissent to the resolution proposed and the date by which the director shall respond.
- Serial Numbering of Circular Resolution.—Secretarial Standard 1 mandates serial numbering of every circular resolution.
- Modes of Sending Necessary Documents.—The draft resolution together with necessary papers, if any, to all the directors, or members of the committee, as the case may be, shall be sent at their addresses registered with the company. The said documents can be sent by hand delivery or by post or by courier, or through such electronic means as may be prescribed [Section 175(1) of the Act]. A resolution in draft form may be circulated to the directors together with the necessary papers for seeking their approval, by electronic means which may include e-mail or fax [Rule 5 of the Companies (Meetings of Board and its Powers) Rules, 2014].
- Time-Limit for Approval.—The Act has not prescribed the time-limit for providing the approval of directors or committee members. However, according to the secretarial standards, not more than 7 days from the date of circulation of the draft of the resolution shall be given to the directors to respond. Additional 2 days may be provided, where the resolution and documents have been sent by the company by speed post or by registered post or by courier. However, in certain cases, the articles of association of the company may provide for such time-limits.
- Approval.—The?circular resolution shall be approved by a majority of the directors or committee members, who are entitled to vote on the resolution. After the time-limit is over, it is desirable that the outcome of resolution is communicated to the directors (i.e. whether the resolution is passed or not).
- Voting by Interested Director.— Section 175 of the Act does not provide for any reference to a situation wherein a director is interested in a circular resolution. However, according to the Secretarial Standard 1, an interested director shall not be entitled to vote on such resolutions.
- Recording the Resolution in Minutes of Meeting.—Where a resolution is passed by circulation, the same shall be noted in the minutes of the subsequent meeting of the Board of Directors. As a good corporate secretarial practice, it is desirable that following points are included in the minutes of the meeting: (i) date of circulation of draft resolution and papers; (ii) cut-off date for receiving the decision of directors; (iii) names of directors giving assent/dissent or abstain from voting; (iv) names of directors, if interested in the resolution; and (v) decision –whether the resolution is passed or not.
- Validity of Resolution by Circulation.—According to the secretarial standards, the passing of resolution by circulation shall be considered valid as if it had been passed at duly convened meeting of the Board of Directors. However, the said compliance shall not dispense with the requirement for the Board to meet at the specified frequency as prescribed under Section 173 of the Act.
- Discussion at Meeting, in Exceptional Cases.—In certain cases, 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. As a good corporate secretarial practice, such decision taken by the directors is noted in the minutes of the subsequent board meeting.
- Maintenance of Certain Documents.—The Company Secretary or the Chairman may maintain records of communication received from directors of company (i.e. with respect to assent/dissent or abstain from voting).
Generally, important matters are discussed at the meetings of Board of Directors and accordingly resolutions are passed. A resolution by circulation is passed when such approval is urgent in nature and cannot be kept on hold for passing such resolution in the ensuing Board meeting. Sometimes such matters are discussed in the earlier Board meetings but a resolution to that effect is not passed. Such decisions may include extension of lease agreement, opening bank account, changing signatories of the bank account, appointing consultants, etc. The passing of circular resolution and maintenance of corporate secretarial documents in relation to the resolution is important from the perspective of secretarial audit process, statutory audit process, internal audit process and issuance of certificate by practising Company Secretary under Section 92(2) of the Act.
*Gaurav N Pingle, Practising Company Secretary, Pune. He can be reached at email@example.com.