OBLIGATIONS & DUTIES OF DIRECTORS
There are well established judicial precedents that the directors of companies have fiduciary obligations and also duties to act reasonably, in good faith and in the best interests of the companies where they hold such positions.
Their duties emanate due to holding positions which may be synonymous to trustees as well as agents of their companies.
The director’s duties would include duty to disclose interest to the company and to ensure that his personal interest as an agent of the company and the interest of the company which is the principal, do not conflict. {Ref case : Walchandnagar Industries v Ratanchand, AIR 1953 Bom 285}
It was held in the case of Turner Morrison & Co v Shalimar Tar Products {1980} 50 Comp Cas 296 Cal that greatest good faith is expected in discharge of their duties by the directors.
In spite of the legal position being abundantly clear, in reality, there could be instances of directors indulging in non cash transactions with their companies, which in many cases do not become apparent and given effect without necessary compliances, scrutiny and consents. Thus conflicts of interests could be possible.
The new Companies Act 2013 in pursuance of section 192 for the first time has addressed this issue although in a limited sense of only acquisition of assets vis- a- vis the company and its directors.
ACQUIRING ASSETS
To begin with, in terms of the sub section {1} of section 192, there is restriction to enter into arrangements, which are non cash in nature, for acquisition of assets, amongst the company, its directors & the specified persons & entities. It is evident that no cash should be involved in the arrangement but rarely facts are so simplistic in nature. It is a matter of conjecture what would be the applicability of this provision where a part of the arrangement is in cash {which includes cheque} and the balance is other than cash.
The term “arrangement” has not been defined. This however has been used in various places in the Companies Act 2013. It appears, at times, along with the term “contract”. The term has been used in Chapter XV regarding compromises, arrangements and amalgamations wherein arrangement includes a reorganisation of the company’s share capital. But this does not help in interpretation in this provision. In any case “arrangement” should be read in a wider context comparable to “contract” the effect of which is to give rise to legal rights and liabilities.
In the light of the above, it would be advisable if the Government steps in to clarify the matters.
Specific details of the restricted arrangements are discussed hereinafter:-
Acquisition of assets by director from the company
The clause {a} herein says that no company shall enter into an arrangement by which:—
a director of the company, or
a director of its holding, subsidiary, or
a director of its associate company, or
a person connected with him,
acquires or is to acquire assets for consideration other than cash, from thecompany unless prior approvalof the members of the company for such arrangement is accorded by passing a resolution in a general meeting .
The terms “holding company”, “subsidiary company” and “associate company” have been defined but the words “a person connected with him” have not been defined or explained. This ambiguity could lead to difficulty in interpretation and compliance of this new provision. Hence a clarification from the Government is desirable.
Acquisition of assets by the company from the director
The clause {b} herein says that no company shall enter into an arrangement by which the company acquires or is to acquire assets for consideration other than cash, from:-
such director, or
person so connected.
unless prior approval of the members of the company for such arrangement is accorded by passing a resolution in a general meeting.
Approval of shareholders of holding company
This is an additional requirement. Hence irrespective of whether acquisition of assets is by the director or by the company, in a case where the director or his connected person is also director of the holding company of that company, prior approval shall also be required to be obtained by passing a resolution in general meeting of the holding company.
DOUBTS
In both the cases of acquisition of assets from the company or by the company, it is pertinent to note that persons regulated in clause {a} and clause {b} mentioned above are not exactly the same. Perhaps use of the words “such director” and “person so connected” in clause {b} is intended to cover all the persons mentioned in clause {a} too.
Moreover, it is not mentioned whether aforesaid prior approval by resolution of the members will be special or ordinary. But in such absence it will presumably be ordinary resolution.
Interestingly if an arrangement is entered into “subject to approval of the members”, will that tantamount to prior approval? Due to the time and cost involved in seeking members’ approval where they may be in substantial numbers, could such arrangement be entered keeping a practical view? What would be the legal veracity of such action?
Pertinently the term “acquire” has not been defined in the Companies Act 2013 but it would mean the action of buying or gaining the possession of property {Blacks Law dictionary}. It would appear that the term will have to be given a wide meaning including purchase, gift, lease, license etc? It also appears that present and future acquisitions are also to be covered.
What is more, the word “assets” has not been defined in the said Act but used herein and extensively in the Act. The meaning may have to be understood in the common accounting parlance which would be any property of economic value owned by an individual or corporation, especially that which could be converted to cash. Moreover assets may take into account movable and immovable as well as tangible and intangible. Queries could arise in this important aspect.
It would be better to have clarifications from the Government in these regards.
NOTICE OF GENERAL MEETING
The next sub section {2} states that the notice of the general meeting for seeking the approval of the members of the company or that of the holding company, in terms of sub-section (1), shall include therein:-
the particulars of the arrangement along with
the value of the assets involved in such arrangement duly calculated by a registered valuer.
The purpose behind this provision is that the details of the arrangement of acquisition of assets from the company by the director etc or by the company from directors etc for consideration other than cash, together with the valuation of such assets by a registered valuer should be placed before the members at a general meeting. The Companies Act 2013 lays down for the first time the provisions for valuation by registered valuer in Chapter XVII, in terms of Section 247. The statutory requirement of valuation by registered valuer is to ensure that the concerned assets are not overvalued or undervalued to the detriment of the interest of the company and its members and correct and proper valuation is arrived at. Therefore the valuer has to be non interested and make impartial, true and fair valuation of assets by exercising due diligence and as per rules to be prescribed.
VOIDABLE
This last sub section {3} says that any arrangement entered into by a company or its holding company in contravention of these provisions shall be voidable at the instance of the company.
{1} The clause {a} herein provides an exception which gets triggered where the restitution of any money or other consideration which is the subject matter of the arrangement is no longer possible and the company has been indemnified by any other person for any loss or damage caused to it . The word “restitution” has not been defined but would mean restoration to the original state.
{2} The clause {b} herein provides another exception which gets triggered where any rights and interests are acquired bona fide for value and without notice of the contravention of the provisions of this section by any other person. Hence a transaction of bonafide purchase of assets by a third party for value without notice of defect of title in the assets will be saved.
In either case of invocation of these exceptions, the arrangement although in contravention of the section will have validity and the company cannot avoid such arrangement.
CONCLUSION
Although the objective of bringing into the statute book this provision for the first time is very laudable, many ambiguities and questions can arise. It is a new law and many legal and practical problems could be faced by the corporate and their directors. The Government should issue clarifications & bring amendments as may be called for so that effectiveness of this section is never compromised.
AMITAV GANGULY
CAclubindia
