Case BriefsForeign Courts

Court of Appeal for the Democratic Socialist Republic of Sri Lanka: The petition of a liquidator was entertained by Samayawardhena, J. and was eventually dismissed due to lack of locus standi. 

The petitioner was the liquidator of Dart West Asia Holdings Ltd., he filed an application for issue of certiorari against the order of Commissioner General of Labour directing the Director of the said company to pay EPF and Gratuity to a former employee of the aforementioned company. 

At the argument, learned senior counsel for the respondent inter alia took up a preliminary objection regarding the standing of the petitioner to file an application. He further contended that the petitioner wanted to give an impact that the said company is still under liquidation. 

The Court observed that, winding up procedure is now concluded and the final account of the liquidator has also been sent to the Registrar General of Companies. Hence, declared that such winding up was voluntary and after the affairs of the company were fully wound up, Final General Meeting was held. Court highlighted the provisions of Companies Act, 2007 which provided that the Registrar General of Companies upon receiving the final accounts shall forthwith register them and on the expiration of three months, the company is dissolved automatically.

Court further held that from the application of petitioner it was clear that the application was filed several months after the company was dissolved. The contention of the petitioner that he was still a liquidator was not maintainable and the writ was disposed because the petitioner didn’t have any locus standi once the company was dissolved. [Chandanie Rupasinghe Weragala v. Deputy Commissioner, CA. Writ No. 429 of 2015, decided on 02-05-2019]

Experts CornerGaurav Pingle and Associates

The provision relating to “related party transactions” have been incorporated for the first time in the Indian Company Law. The provisions are prescribed in Section 188 of the Companies Act, 2013 (Act). Under the Companies Act, 1956, there was no explicit provision as “related party transaction”, however, it can be said that Section 297 of the Companies Act, 1956 slightly corresponds to Section 188 of the Act. The scope and nature of transactions, number of related parties involved, compliances and disclosure requirements contemplated have significantly been enhanced under the provisions of Section 188 of the Act.

This article is a compilation and analysis of the relevant provisions relating to related party transactions. The article also contains the checklist on ensuring compliance of relevant provisions relating to related party transactions.

Following is the basic checklist for identifying the applicability of Section 188 of the Act:

(1) Transactions with company— It is necessary that a company is a party to the said transactions. The company can either provide or avail the necessary services or the company can sell or purchase or supply of any goods or materials.

(2) Identification of prescribed transaction— It is necessary that the company enters into a prescribed transaction [as provided in sub-section (1) of Section 188 of the Act], which includes: (i) sale, purchase or supply of any goods or materials; (ii) selling or otherwise disposing of, or buying, property of any kind; (iii) leasing of property of any kind; (iv) availing or rendering of any services; (v) appointment of any agent for purchase or sale of goods, materials, services  or property; (vi) such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company; and (vii) underwriting the subscription of any securities or derivatives thereof, of the company.

(3) Identification of prescribed “related party”— It is necessary that the company enters into a prescribed transaction with a “related party” [as provided in sub-section (76) of Section 2 of the Act]. Some of the related parties are: director, relative of director, key managerial personnel, relative of key managerial personnel, firm in which director or director’s relative is a partner, private company or public company in which director or manager is interested [as prescribed in Section 2(76) of the Act], subsidiary company, holding company, associate company, investing company, venturer company (as defined).

If all the three conditions are satisfied, then it is necessary to proceed with the approvals, compliances and disclosures under the provisions of Section 188 of the Act. The checklist for the identified related party transactions is as follows:

(1) Approval of Audit Committee (under Section 177 of the Act)— The Audit Committee shall approve the related party transactions or approve any modification to the related party transactions. The Audit Committee can also give an omnibus approval to certain related party transactions. The Committee shall consider two factors while specifying the criteria for making omnibus approval, namely, (i) repetitiveness of the transactions (in part or in future); and (ii) justification for the need of omnibus approval. Such omnibus approval for the related party transactions shall be obtained on annual basis [Rule 6-A of the Companies (Meetings of Board and its Powers) Rules, 2014]. Such omnibus approval shall be valid for a period not exceeding 1 financial year and shall require fresh approval after expiry of such financial year. Omnibus approval shall not be made for transactions in respect of selling or disposing of the undertaking of the company.

(2) Approval of the Board of Directors (under Section 188 of the Act)— The Board of Directors shall give consent to the related party transactions at its meeting only. Such meeting can be held in person or through video conferencing or other audio-visual means as may be prescribed. Such consent of the Board of Directors cannot be obtained by passing a circular resolution or by any other mode (as prescribed in Section 175 of the Act). Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014 provides for the requisite disclosures to the Board of Directors in agenda of the meeting at which the resolution is proposed to be moved. The director interested in any contract or arrangement shall not be present at the meeting during discussion on such subject- matter of the resolution relating to such contract or arrangement.

(3) Approval of the shareholders (under Section 188 of the Act)— Prior approval of the shareholders by ordinary resolution shall be required if the company is entering into a contract or arrangement with a related party if the transaction(s) exceeds the prescribed limits [i.e. as prescribed in Rule 15(3) of the Companies (Meetings of Board and its Powers) Rules, 2014]. The said rule has prescribed monetary threshold for each type of prescribed transaction. The limits specified shall apply for transaction(s) to be entered into either individually or taken together with the previous transactions during a financial year. The said rule provides for the disclosures in the explanatory statement to be annexed to the notice of general meeting. Following are some important points relating to approval of shareholders:

  (i) Member of the company shall not vote on the ordinary resolution approving related party transaction if such member is a related party (this provision is not applicable to private companies. MCA Notification dated 5-6-2015).

  (ii) Approval of the shareholder is not applicable in the cases where 90% or more members (in number) are the relatives of promoters or are related parties (applicable to private company and public company, both).

  (iii) In case of wholly-owned subsidiary company, the ordinary resolution passed by the holding company shall be sufficient for the purpose of entering into the transactions between the wholly-owned subsidiary company and the holding company, subject to the condition that the accounts of the subsidiary company are consolidated with holding company and placed before shareholders at the general meeting for its approval.

  (iv) Certain exemptions are applicable to government company (MCA Notification dated 5-6-2015).

(4)Exemption from the compliances of Section 188 of the Act— Consent of the Board of Directors and prior approval of the shareholders is not required when such related party transaction is in the ordinary course of its business and on arm’s length basis. The Act has not defined “ordinary course of its business”. For this purpose the Board of Directors is required to exercise their judgment. However, the Act has defined transaction on arm’s length basis. It means a transaction between two related parties that is conducted as if they were unrelated so that there is no conflict of interest. There is no exemption for obtaining the approval of the Audit Committee.

(5)Disclosures in Board’s report— Every contract or arrangement entered into by the company shall be referred to in the Board’s report to the shareholders along with the justification for entering into such contract or arrangement [Section 188(2) of the Act]. Pursuant to Section 134(3) of the Act, the Board’s report shall include particulars of contracts or arrangements with related parties in prescribed form (Form AOC-2).

(6)Register of contracts or arrangements in which directors are interested— According to Section 189 of the Act, the company shall maintain a register (Form MBP-4) for related party transactions. After entering the particulars in the register, such register shall be placed before the next Board meeting and signed by all directors present at the meeting. The entries in the register shall be made at once, whenever there is a cause to make entry, in chronological order and shall be authenticated by the Company Secretary of the company or by any other person authorised by the Board for the purpose. Such register shall be kept at the registered office of the company. The register shall be preserved permanently and shall be kept in the custody of the Company Secretary of the company or any other person authorised by the Board for the purpose.

(7)Other important checkpoints— Section 188 (3) of the Act provides for ratification of the related party transaction entered into by a director or any other employee without consent of the Board of Director or approval of shareholders in general meeting. Ministry of Corporate Affairs (by its Circular dated 17-7-2014) has exempted companies from the compliance of Section 188 of the Act, arising out of compromises, arrangements and amalgamations dealt under the specific provisions of the Companies Act.

The provisions relating to related party transactions are one of the most amended provisions under the Act. In my view, “related party transactions” is one of the critical tests of corporate governance. The above checklist relates to related party transactions by private companies or unlisted public companies. In case of listed companies, the provisions of Section 188 of the Act and Regulation 23 of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, both shall be complied with.


* Gaurav N Pingle, Practising Company Secretary, Pune. He can be reached at gp@csgauravpingle.com.

Experts CornerGaurav Pingle and Associates

Section 186 of the Companies Act, 2013 (“the Act”) relates to “loan and investment by company”. It provides for monetary threshold, approval matrix, recordkeeping, exemption from compliances, restrictions for giving loan, guarantee, security or making investment in another entity. The other relevant provisions are Rules made under Section 186 of the Act, Section 179 (relating to “powers of the Board of Directors”), Section 185 (relating to “loans to Directors”), Section 187 (relating to “investments of company to be held in its own name”). This article is a compilation and analysis of the relevant provisions relating to giving loan, guarantee or security or making investment under Section 186 of the Act. The article also contains the checklist for maintenance of documents, records and register under Section 186 of the Act. The company shall ensure compliance of the following provisions:

(1) Monetary threshold for approval of the Board of Directors— A company (i.e. private company or public company) with the approval of the Board of the Directors can directly or indirectly: (i) give any loan to any person or other body corporate; (ii) give any guarantee or provide security in connection with a loan to any other body corporate or person; and (iii) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate, up to 60% of its paid-up share capital, free reserves and securities premium account or 100% of its free reserves and securities premium account. In a company, the Accounts Department or Finance Committee or Chief Financial Officer (CFO) or Company Secretary (CS) shall monitor such limits on a regular basis.

(2) Exclusion from the said monetary limit—The word “person” does not include any individual who is in the employment of the company i.e. loan, guarantee or security provided by the company to its employees shall not be counted in the said limits. Therefore, loans, guarantee or security given by the company to its employees shall not be considered in the prescribed monetary limits.

(3) Monetary threshold for approval of the shareholders—Company shall not make any further investment, loan, guarantee or security unless it is previously authorised by a special resolution passed in a general meeting, if the aggregate of such investment, loan, guarantee or security made or given by the Board of Directors, exceed the prescribed limits (as discussed above). The special resolution passed at a general meeting shall specify the total amount up to which the Board of Directors is authorised to give such loan or guarantee, to provide such security or make such acquisition. The company shall obtain the prior approval of shareholders and the resolution shall specify further monetary limit i.e. the resolution cannot be an open-ended resolution.

(4) Exemption from the approval of shareholders—The previous approval of the shareholders by special resolution shall not be required where a loan or guarantee is given or where a security has been provided by a company to its wholly-owned subsidiary company or a joint venture company, or acquisition is made by a holding company, by way of subscription, purchase or otherwise of the securities of its wholly-owned subsidiary company. However, the company shall disclose the details of such loans or guarantee or security or acquisition in the financial statement.

(5) Disclosure in the financial statement—The company shall disclose to the members in the financial statement the full particulars of the loans given, investment made or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security. Such disclosure can be part of Board’s report [Section 134(3)(g) of the Act] and notes to accounts.

(6) Mode of obtaining the approval of the Board of Directors—Investment, loan, guarantee or security shall be given by the company after the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present at the meeting i.e. not by circular resolution. Pursuant to Section 179(3) of the Act, the Board of Directors of a company shall exercise the power to invest the funds of the company by means of resolutions passed at meetings of the Board of Directors. Such power can be delegated by the Board of Directors to any committee of directors, managing director, manager or any principal officer of the company or in the case of a branch office of the company, the principal officer of the branch office. Such delegation shall be made by passing a resolution at its meeting i.e. not by circular resolution.

(7) Prior approval of the public financial institution, in certain cases—The prior approval of the public financial institution is required where any term loan is subsisting and there is default in repayment of loan installments or payment of interest thereon as per the terms and conditions of such loan to the public financial institution. The prior approval of public financial institution is required when there is default in payment of loan or interest and not when the payment is made regular basis.

(8) Rate of interest of the loan—The loan shall not be given under Section 186 of the Act at a rate of interest lower than the prevailing yield of 1-year, 3-year, 5-year or 10-year government security closest to the tenor of the loan.

(9) Restriction on giving loan, guarantee or security—A company which has defaulted in the repayment of any deposits accepted or in payment of interest thereon, shall not give any loan or give any guarantee or provide any security or make an acquisition till such default is subsisting. Such prohibition is applicable company makes a default in payment of loan or interest on deposits.

(10) Loan, guarantee or security to directors or relatives of directors—Section 185 of the Act relates to “loans to directors”. A company (whether private company or public company) shall not advance any loan (including any loan represented by a book debt to) or give any guarantee or provide any security in connection with any loan taken by: (i) any director of company, or director of a company which is its holding company or any partner or relative of any such director; and (ii) any firm in which any such director or relative is a partner. Therefore, the company shall confirm the party and its relation with the directors before advancing any loan or giving any guarantee or providing any security in connection with any loan. In certain cases, the company shall ensure compliance of Sections 185 and 186 of the Act.

(11)?Maintenance of register— Every company giving loan or giving a guarantee or providing security or making an acquisition shall keep a register which shall contain such particulars and shall be maintained in such manner as may be prescribed. Following are some important points relating to maintenance of the register :

(i) The company shall, from the date of its incorporation, maintain a register in Form MBP 2 and enter therein separately, the particulars of loans and guarantees given, securities provided and acquisitions made.

(ii) The entries in the register shall be made chronologically in respect of each such transaction within 7 days of making such loan or giving guarantee or providing security or making acquisition.

(iii) The register shall be kept in the custody of the Company Secretary of the company or any other person authorised by the Board for the purpose.

(iv) The register can be maintained either manually or in electronic mode.

(v) The entries in the register (either manual or electronic) shall be authenticated by the Company Secretary of the company or by any other person authorised by the Board of Directors for the purpose.

(12) Inspection and extracts of the register—The register maintained under Section 186 of the Act shall be kept at the registered office of the company. Such register shall be open to inspection at such office. The extracts of the register may be taken therefrom by any member, and copies thereof may be furnished to any member of the company on payment of such fees.

(13) Non-applicability of the provisions—The provisions of Section 186 of the Act (except the provisions relating to layers of investment companies) shall not apply: (i) to any loan made, any guarantee given or any security provided or any investment made by a banking company, or an insurance company, or a housing finance company in the ordinary course of its business, or a company established with the object of and engaged in the business of financing industrial enterprises, or of providing infrastructural facilities; (ii) to any investment made by an investment company, investment made in shares allotted in pursuance of rights issues; and  (iii) to any investment made in respect of investment or lending activities, by Non-Banking Finance Company (NBFC) registered the Reserve Bank of India (RBI) Act and whose principal business is acquisition of securities.


Gaurav N Pingle, Practising Company Secretary, Pune. He can be reached at gp@csgauravpingle.com

Case BriefsHigh Courts

Patna High Court: The Bench of Ahsanuddin Amanullah, J. allowed an application filed under Section 482 of the Code of Criminal Procedure, 1973 seeking quashing of a criminal case.

Respondent 2 herein had filed a complaint against petitioner and few other people alleging that he had induced him to invest Rs 28 lakhs in a construction company. The Magistrate took cognizance of the said offence under Sections 120 B, 420 of the Penal Code, 1860 and Section 138 of the Negotiable Instruments Act, 1881 and issued summon against the petitioner. Aggrieved thereby, the instant application was filed.

The petitioner’s case was that there was no material on record to show that he had induced respondent 2 to invest in the company. It was argued that making the petitioner an accused in the case, only because he was a Director of the Company, was abuse of process of the Court.

The Court noted that there being absolutely no allegation against petitioner in the entire complaint with regard to either inducement or entrustment of money or even issuance of cheque; just because he was a Director in the concerned company, it would not make him liable for any of the allegations levelled against other co-accused. It was concluded that prosecution against the petitioner was with malafide intention and only to harass him. Accordingly, the entire criminal proceeding against him was quashed.[Ramanjee Jha v. State Of Bihar, 2019 SCC OnLine Pat 228, Order dated 21-02-2019]