Companies Act_Practical problems_25

The paid up capital of Needy Private Limited is Rs. 5 lakhs. Liberal Finance Ltd. has agreed to grant a loan or Rs. 2 crores to Needy Private Limited on the condition that Liberal Finance Ltd. shall have a right to nominate Mr. Successful, Mr. Achiever and Mr. Reliable as directors on the Board of Needy Private Limited. The articles of Needy Private Limited require every director to hold qualification shares of a nominal value of Rs. 20,000. Answer the following in view of the provisions of the Companies Act, 1956:

(i) Whether appointments of the three directors by Liberal Finance Ltd. can be made in accordance with the Loan Agreement entered into by Liberal Finance Ltd. and Needy Private Limited?

(ii) Whether the three directors nominated by Liberal Finance Ltd. shall have to obtain the qualification shares. If yes, what will be the value of the qualification shares?

(ii) Assuming that all legal requirements for appointment of the three directors are complied with, and the three directors hold requisite qualification shares, if any, whether these directors are required to disclose their interest in an agreement put for consideration in the Board meeting of Liberal Finance Ltd., and can they vote thereat?

Companies Act_practical problems_3

Every one Airways is proposing an IPO and for this purpose it proposed a Lead Merchant Banker for managing the issue. Mr. Spice one of the Director, is also a director in the said merchant banking company. Advise on the following situation:
(a) Is Mr. Spice, a concerned director for the purpose of disclosing his interest under Section 299 of the Act?
(b) Should he disclose his interest to the company?
(c) What would be your answer, if the company is already aware of the fact of his interest?

(a) According to Section 297, a director of the company or his relative, a firm in which such a director or relative is a partner, any other partner in such a firm or a private company of which the director is a member or director, must not enter into contracts with company for the sale, purchase, or supply of goods, materials or services or for underwriting shares or debentures except with the consent of the Board of Directors [sub-section (1)]. According to the proviso to sub-section (1) in the case of a company having a paid-up capital of Rs.1 crore or more no such contract shall be entered into except with previous approval of the Central Government The consent of the Board is deemed to have been given only if it is accorded by a resolution of the Board and not otherwise, either before or within three months of the date of entering into the contract [sub-section (4)].

If the consent is not accorded to any contract under Section 297, anything done in pursuance of the contract shall be voidable at the option of the Board. [sub-section (5)]. But as a matter of good corporate governance practice, the concerned director may disclose his interest in the proposed contract/arrangement.

(b) The term ‘disclosure’ means to make others aware of something, which they are not aware. The disclosure of interest by a director has been provided in Section 299 only with a view to know that the director occupies fiduciary position in the company should disclose his interest in any arrangement or contract either directly or indirectly so that the company is in a position to know whether he is acting in any way prejudicial to the interest of the company or for his own benefit.

(c) When board is aware of the fact of the interest of a director in a particular transaction, it would not be necessary for such a director to formerly disclose his interest. (Ramakrishna Rao vs. Bangalore Race Club, 40 Comp. Case 674 (Mysore). A. Sivasailam vs. Registrar of Companies.