The Hindu Business Line : First law of business is to know the law right

IN mid-September, with only an hour to go before the AGM, Birla Corporation Ltd rushed to the Company Law Board (CLB) and asked if R. S. Lodha could chair the meeting. The CLB was unable to "understand the need for this clarification" and said, go, look at the company's Articles of Association; and study the Companies Act to find the answer.

Why was the company confused? Because there were multiple interpretations of an earlier order of the CLB - that the poll for directors at the AGM would be conducted under the chairmanship of a director of the company who was not in the re-election race in that meeting; and Lodha was one of the directors running for election.

Simple solution is to realise that you don't need the same chairman from the start to finish, as much as you don't expect drivers not to change in a long-distance train.

As if to match, AGMs are also running longer, and are more loaded to boot. Just about a week ago, the CLB was in the news again, for staying all resolutions passed at a different AGM - that of Federal Bank Ltd. Among the contentious issues was one relating to directors' election.

Power of `stay'

While factional tussle continues in courtrooms, quite a few corporate law questions of interest emerge from company conundrums.

So, top on quiz is this: When AGM resolutions are stayed, can we say that the AGM is over? Ask around, and I bet you'd get different answers. N.R. Sridharan, an expert in corporate law, opines that the physical act of AGM has commenced and ended, unless the chairman said in the end that the meeting is adjourned. "If Section 166 of the Companies Act, on holding of AGM, has been complied with in all respects, injunction of any of the resolutions passed at the AGM would not nullify the AGM itself," he adds.

`Clear' clarified

Another issue that has been a subject of contention is the sufficiency of notice under Section 257 - a provision that is about `right of persons other than retiring directors to stand for directorship'. One side says that directors who seek election should give a clear notice of 14 days, while the other takes shelter under Section 10 of the General Clauses Act, 1897, which gives the benefit of a holiday to be included in the notice period.

(It says that where any act or proceeding is directed or allowed to be done or taken in any court or office on a certain day or within a prescribed period, then, if the court or office is closed on that day or the last day of the prescribed period, the act or proceeding shall be considered as done or taken in due time if it is done or taken on the next day afterwards on which the court or office is open.)

Ramaiya's Guide to the Companies Act cites a decision of the apex court in Pioneer Motors (Private) Ltd v Municipal Council, Nagercoil: "In the context of Section 10 of General Clauses Act, 1897, the Supreme Court held that the words `not being less than one month notice' means `clear one month notice'." If `clear' is not clear, see the decision in Nagappa Chettiar vs Madras Race Club, where it is clarified that clear excludes both the date on which the notice is served and the date of the meeting.

Whether the phrase "not less than fourteen days before the meeting" specified in Section 257 should be understood as `clear' 14-day notice or not is a matter of interpretation, points out Sridharan. "In Section 171, that is on `length of notice for calling meeting', although the word `clear' is not used, the 21-day notice referred to there is understood as 21 clear days, by virtue of decided cases and Section 53, on `service of documents on members by company'."

Wait; in Section 257, we're not serving documents on members but on company. And that comes under Section 51, a short-and-sweet section: "A document may be served on a company or an officer thereof by sending it to the company or officer at the registered office of the company by post under a certificate of posting or by registered post, or by leaving it at its registered office." So, my next question is if we can apply the same `clear' logic of Section 171 to Section 257, too. "Answer is yes," says Sridharan, "because even if Section 51 is not elaborate, we can apply the spirit involved in Section 53 while interpreting Section 257 read with Section 51."

Fit and proper

You have seen enough numbers already, but we're only approaching the third issue now: Whether all directorships have to be routed through the nominations committee of the bank. Based on the recommendations of Dr A.S. Ganguly Group Report, the Reserve Bank of India laid down in June a set of "specific criteria to be fulfilled by the persons before they are appointed on the boards of banks".

This included a procedure of `due diligence' to determine suitability of candidates according to `fit and proper' criteria. The RBI communiqué is worthy of discussion in one of the seminars of the ICAI.

An interesting aspect of the directive is that it prescribes a format for declaration to be made by proposed and existing directors, and one of the queries in it seeks info on disciplinary action in professional bodies. A positive reform that needs to be lauded, though as with any reform, it would take time for it to be seen as working.

Angle of proxy

Factions, proxies and stormy meetings go in tandem, as a formula. Therefore, question four is about proxies. Can employees of a company engage of collection of proxies on behalf of a faction in the board? Is there any explicit prohibition in the Companies Act against such a practice? "There is no direct provision in this regard," says Sridharan, and that should be a relief for staff who may get hassled. "However, Sec 176(4) specifically prohibits invitation by the company and expenditure incurred by the company for the collection of proxy," says Sridharan. An accounting aspect to be taken care of, shall we say?

There is another interesting angle to the proxy war: More than collection of proxies, what is important is the deposit of the same. Sridharan elaborates: "It is a settled issue that though a member can appoint more than one proxy, only the last appointed proxy is valid. In other words, whichever proxy form is deposited the last, within the 48-hour period, would alone be valid, in view of Section 176 (3)." Yet, it would be a good corporate governance practice not to actively solicit proxies from members, he adds.

Law vs business

Companies are governed by ever so many laws; and laws are what courts busy themselves with. How far do company routine tasks such as holding meetings get impacted by courts? "Courts would not interfere unless the situation warrants," observes Sridharan. "No court is interested in disrupting the smooth running of the affairs of any company. Therefore, it must be presumed that if any court has passed an order, there were valid reasons. However, the aggrieved person(s) can seek redressal in a higher court."

He narrates a recent case to illustrate: "In the case of another bank, directions were given by the High Court of Madras to subordinate courts in Tamil Nadu not to pass any orders based on any petition filed by any group of shareholders seeking any type of order, without referring the matter to the High Court."

To wrap, here is therefore, the first law for corporates: Know the law before you do business.

Accountancy | Company Law | Account Speak

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