CONTRACTS INVOLVING DIRECTORS

Contracts in which directors are involved are one of major corporate governance issue. Many corporate failures may be attributed to contracts related to directors under some intention which are not in consistency with fiduciary duties of directors. We have already discussed contract in which directors are interested and related party transaction in this earlier post.

REGISTER OF CONTRACTS OR ARRANGEMENTS IN WHICH DIRECTORS ARE INTERESTED (SECTION 189):

Every director or key managerial personnel shell within a period of thirty days of his appointment disclose to the company particulars relating to his concern or interest in other companies or organisation.

Every company shall keep registers giving the particulars of all contracts and arrangements in which directors are interested (Section 184) or which are related party transactions (Section 188). After entering the particular, such registers shall be placed before the next meeting of the Board of directors present at the meeting, whether interested or related party or not.

This register shall be kept at the registered office of the company and it shall be open for inspection during business hours by members. Members may also take extracts or require copy from the register.

This register shall also be produced at the commencement of every annual general meeting ad shall remain open and accessible during the period of the meeting. Every person who has right to attend the meeting; members, directors, auditors, representative and proxies, may access the register.

This section shall not apply to any contract or arrangement for the sale, purchase or supply of any goods, material or services if the value of such goods or material or the cost of such services does not exceed five lakh rupees in aggregate in any year.

This section shall also not apply to contract or arrangement by a banking company for the collection of bills in the ordinary course of its business.

Every director who fails to comply with the provisions of this section shall be liable to a penalty of twenty – five thousand rupees.

CONTRACT OF EMPLOYMENT WITH EXECUTIVE DIRECTORS (SECTION 190):

Every company shall keep a copy of contract of service with managing or whole – time director in writing. Where the contract is not in writing, a written memorandum setting out terms of contract shall be kept.

The copies of the contract or the memorandum shall be open to inspection by any member of the company without payment of fee.

In case of any default under this section the company shall be liable to a penalty of twenty-five thousand rupees and every officer of the company who is in default shall be liable to a penalty of five thousand rupees for each default.

This section is not applicable to private company.

PAYMENT TO DIRECTOR FOR LOSS OF OFFICE (SECTION 191):

No director of a company shall, in connection with—

(a)  the transfer of the whole or any part of any undertaking or property of the company; or

(b)  the transfer to any person of all or any of the shares in a company being a transfer resulting from—

1. an offer made to the general body of shareholders;
2. an offer made by or on behalf of some other body corporate with a view to a company becoming a subsidiary company of such body corporate or a subsidiary company of its holding company;
3. an offer made by or on behalf of an individual with a view to his obtaining the right to exercise, or control the exercise of, not less than one-third of the total voting power at any general meeting of the company; or
4. any other offer which is conditional on acceptance to a given extent,

receive any payment by way of compensation for loss of office or as consideration for retirement from office, or in connection with such loss or retirement from such company or from the transferee of such undertaking or property, or from the transferees of shares or from any other person, not being such company, unless particulars as may be prescribed with respect to the payment proposed to be made by such transferee or person, including the amount thereof, have been disclosed to the members of the company and the proposal has been approved by the company in general meeting.

There are two pre – conditions; disclosure to members ad approval in general meeting.

This is permitted for a company to pay compensation to a managing director or whole time director or manager for loss of office or a consideration for retirement from office subject to limits or priorities.

These payments under this section should be approved by a general meeting or adjourned meeting with proper quorum.

Any amount received by a director before the approval or received in contravention of this section shall be deemed to have been received by the director in trust for the company.

If a director of the company contravenes the provisions of this section, such director shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees.

RESTRICTION ON NON – CASH TRANSACTION INVOLVING DIRECTORS (SECTION 192):

No company shall enter into an arrangement by which—

(a)  a director of the company or its holding, subsidiary or associate company or a person connected with him acquires or is to acquire assets for consideration other than cash, from the company; or

(b) the company acquires or is to acquire assets for consideration other than cash, from such director or person so connected,

unless prior approval for such arrangement is accorded by a resolution of the company in general meeting and if the director or connected person is a director of its holding company, approval under this sub-section shall also be required to be obtained by passing a resolution in general meeting of the holding company.

This is notable that resolution shall be passed by the company in case said person is director in the company and by the holding company where said person is director in holding company.

The notice for approval of the resolution by the company or holding company in general meeting shall include the particulars of the arrangement along with the value of the assets involved as calculated by registered valuer.

Any arrangement entered into by a company or its holding company in contravention of this section shall be voidable at the instance of the company, unless –

(a)  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; or

(b) any right are acquired bona fide for value and without notice of the contravention of the provisions of this section by any other person.

CONTRACT BY ONE PERSON COMPANY (SECTION 193):

Contracts (Photo credit: NobMouse)

Where One Person Company limited by shares or by guarantee enters into a contract with the sole member of the company who is also the director of the company, the company shall, unless the contract is in writing, ensure that the terms of the contract or offer are contained in a memorandum or are recorded in the minutes of the first meeting of the Board of Directors of the company held next after entering into contract.

The company shall inform the Registrar about every contract entered into by the company and recorded in the minutes of the meeting of its Board of Directors within a period of fifteen days of the date of approval by the Board of Directors.

PROHIBITION ON FORWARD DEALINGS IN SECURITIES OF COMPANY BY DIRECTOR OR KEY MANAGERIAL PERSONNEL (SECTION 194):

No director of a company or any of its key managerial personnel shall buy in the company, or in its holding, subsidiary or associate company—

(a)  a right to call for delivery or a right to make delivery at a specified price and within a specified time, of a specified number of relevant shares or a specified amount of relevant debentures; or

(b) a right, as he may elect, to call for delivery or to make delivery at a specified price and within a specified time, of a specified number of relevant shares or a specified amount of relevant debentures.

If a director or any key managerial personnel of the company contravenes such director or key managerial personnel shall be punishable with imprisonment for a term which may extend to two years or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both.

Any contravention by director or key managerial personnel be shall liable to surrender the same to the company and the company shall not register the securities so acquired in his name in the register, and if they are in  dematerialised form, it shall inform the depository not to record such acquisition and such securities, in both the cases, shall continue to remain in the names of the transferors.

PROHIBITION ON INSIDER TRADING (SECTION 195)

No person including any director or key managerial personnel of a company shall enter into insider trading.

“Insider trading” means—

(i)   an act of subscribing, buying, selling, dealing or agreeing to subscribe, buy, sell or deal in any securities by any director or key managerial personnel or any other officer of a company either as principal or agent if such director orkey managerial personnel or any other officer of the company is reasonably expected to have access to any non-public price sensitive information in respect of securities of company; or

(j)   an act of counselling about procuring or communicating directly or indirectly any non-public price-sensitive information to any person.

“price-sensitive information” means any information which relates, directly or indirectly, to a company and which if published is likely to materially affect the price of securities of the company.

If any person contravenes the provisions of this section, he shall be punishable with imprisonment for a term which may extend to five years or with fine which shall not be less than five lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of insider trading, whichever is higher, or with both.

In next post, we will discuss issues related with managerial remuneration.

Please note: I welcome your comments and feedback. This blog post is not a professional advice. Readers may share this post on social media by using buttons given here.

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