This article is written by Shristi Roongta, a student from Amity Law School, Kolkata. This article discusses Section 173 of the Companies Act, 2013 and the details related to the Section.
This article has been published by Sneha Mahawar.
Meetings are essential for the working of any organisation. For any company, it is important to hold meetings throughout the year for discussion between the people working in that company. Every meeting holds value because these are held to set new goals and for a discussion on the profits or losses made in a year or within a specified time period. The same goes for the Board of Directors, a meeting holds utmost importance because the Board is the highest authority that governs the working of the company. Therefore, a board meeting is a formal meeting between the directors of the company for setting new goals and objectives, to discuss the issues and profits or losses and the efficient working of the company. Section 173 of the Companies Act, 2013 (“the Act”) states about meetings of a board. In this article, the meeting and its details are discussed.
Board of Directors defined
Basically, a board of directors is a group of directors. Since a company is a legal entity and it has no physical existence, therefore, in order to function, a company needs humans. Hence, for the functioning and management of the company, one or more persons are appointed. Those persons are termed as directors. A director is an important person in a company. They are persons who are appointed to perform the duties and functions as prescribed under the company law. Section 2(34) of the Act states a director who is appointed to the board of the company and a group of directors are collectively known as the board of directors.
Meeting of the Board of Directors
Under Chapter XII, Section 173 to Section 195 of the Act deals with the Meeting of Board and its power, from Section 173 of the Act deals with the meeting of the board of directors. The Section states the number of meetings, how a meeting can be called and what the penalty is for non-compliance of the same. After the incorporation, every company shall hold a meeting of the Board of Directors within 30 days and later on in a year, a minimum of 4 meetings are held.
Number of meetings to be held [Section 173(1)]
According to Section 173(1) of the Act, as stated earlier, after the incorporation of a company, the first meeting of the Board of Directors shall take place within 30 days. After the first meeting, a minimum of 4 meetings of the Board of Directors need to be held in a year. The Section further states that the meeting is to be held in such a manner that there should not be a gap of more than 120 days between the two consecutive meetings of the Board.
However, by a notification from the Central Government, the government can direct that the provisions of this Section shall or shall not apply to a specific class or description of companies. This is subject to the exceptions, modifications or conditions, whatever the case may be, as mentioned in the notification.
Example- The date of incorporation of Company “A” is 20.03.2022. Therefore, the first board meeting must be held by 20.04.2022. The remaining meetings must be held within a gap of 120 days.
Mode of the meeting [Section 173(2)]
Sub-section 2 of Section 173 of the Act states the mode of meeting. According to this Section, whichever method is prescribed, the directors can participate in the meeting either
- in person; or
- through video conferencing; or
- by any other audio-visual means.
These methods must be capable of recording and recognising the directors participating and they should also be able to record and store the meeting along with the date and time of the meeting. The term “video conferencing or other audio-visual means” here means that audio-visual communications through an electronic facility that enables every person who is participating in the meeting can communicate with one another without the help of any intermediary and the participation is effective, as defined under Rule 3 of Companies (Meetings of Board and its Powers) Rules, 2014.
Exceptions to the Section
The Central Government via notification may state the matters that shall not be dealt with in a meeting via video conferencing or any other audio-visual means.
In case of a quorum in a meeting, the directors are physically present, then any other director can participate in the meeting through video conferencing or any other audio-visual means on matters other than the ones specified under exception 1.
Notice for meeting [Section 173(3)]
Section 173(3) of the Act states that a meeting shall be called by a notice to every director in writing and the notice shall give a minimum of 7 days to the directors at their registered addresses as provided by them to the company. The Section further states that such notice shall be sent either by the following ways:
- by hand delivery; or
- by post; or
- by electronic means.
Can a meeting be called on a shorter notice
Yes, a meeting can be called on shorter notice as mentioned under the exception to Section 173(3). The exception to Section 173 of the Act states that if there is an urgent business matter, at least one independent director must be present in the meeting, subject to the conditions. However, if there is an independent director and that director is absent from the board meeting, then the decision shall be circulated among all the directors and the decision shall be final once that independent director ratifies or gives consent to the same.
For example, A is an independent director in a company. Due to some reasons, he could not attend the board meeting. Now the board has come to a decision which is circulated among all the directors. However, that decision will become final only when A gives his approval.
Failure to comply with the provision and penalty [Section 173(4)]
Section 173 (4) of the Act provides the penalty provision. The Section states that in case an officer of the company, i.e. the Company Secretary, who is responsible to give the notice fails to do so, then a penalty of Rs. 25,000 shall be imposed on him.
In case the notice was not served as per the rule and the directors are either present in the meeting or absent, having no complaints about not receiving the notice, the meeting shall not be considered invalid. This was held in the case of Bharat Fire & General Insurance Co. Ltd. v P.P. Gupta (1966).
For example, if X, the Company Secretary, has been given the responsibility of giving the notice as mentioned under the section and if he fails in his task, then a penalty of Rs. 25,000 shall be imposed on him.
One Person Company, small company and dormant company [Section 173(5)]
In cases of a One Person Company (“OPC”), a small company and a dormant company, then every half of the calendar year, at least one board meeting must be conducted and there should be a gap of a minimum of 90 days between two meetings. However, in OPC, if there is only one director on the board then the provisions of this sub-section and Section 174 of the Act shall not be applicable.
Quorum for board meetings
Section 174 of the Act deals with quorum for board meetings. First, let’s understand the meaning of quorum. Generally, a quorum means a minimum number of attendance required in any meeting to make the proceedings of the meeting valid. The same is in the case of companies. In a company, a quorum means a minimum number of directors must be present in the meeting to make the proceedings of the meeting valid.
Section 174(1) of the Act states that for a quorum for a meeting of a board of directors of a company hall, there shall be either one-third participation of directors or two, whichever is higher. In case of participation of directors via video conferencing or other audio-visual means, shall also be counted.
Section 174(2) of the Act states that in case there is a reduction in the number of directors fixed for the quorum of board meetings then the continuing directors may fill in the vacancy.
Section 174 (4) of the Act states that in case a meeting could not be held for want of quorum then such meeting shall be adjourned to the same day, place and time for the next week or in case of a national holiday, the day succeeding it.
Exception– In OPC, this provision is not applicable.
Non-compliance with Section 173 of the Act
Section 450 of the Companies Act, 2013 states the penalty provision for non-compliance with any provision of the Act. Same as Section 173(4) of the Act, this Section also states the penalty. Under Section 173(4) of the Act it is stated particularly for an officer of the company defaulting in case of a notice, however, there is no mention of the default on the part of the company or any other person. Hence, those are covered under this Section.
According to the Section, where a contravention of any section of the Act has been committed either by a company or by an officer of the company or by any other person and no specific penalty or punishment is provided for that particular contravention, then Section 450 of the Act comes to the rescue. The company, officer of the company or any other person defaulting on the provisions of the Act shall be punished with a penalty of Rs. 10,000. If such contravention continues, a further penalty of Rs. 1,000 shall be imposed each day after the first contravention. In the case of the company, a maximum of Rs. 2 lakhs shall be imposed in the case of an officer or any other person, a penalty of Rs. 50,000.
- First contravention- Rs. 10,000
- Further contravention-
- Company- Maximum of Rs. 2 lakhs
- Officer of the company or any other person- Maximum of Rs. 50,000
Companies (Meetings of Board and its powers) Rules, 2014
The rules are read with sections of the Companies Act, 2013. In the case of Section 173 of the Act, the Companies (Meetings of Board and its Powers) Rules, 2014 are to be read with. In these rules, specifically, Rule 3 and Rule 4 are being discussed. As already discussed above about video conferencing meetings. These two rules state the process and exemptions of the meetings conducted via video conferencing mode.
Rule 3 describes the procedure for conducting and convening the meetings via video conferencing or other audio-visual means.
Rule 3(2) – Chairperson and Company Secretary Responsibilities
Rule 3(2) states about the responsibilities of the Chairperson and Company Secretary. The Chairperson and the Company Secretary must take reasonable care in the following ways:
- Safeguard the integrity– they must safeguard the integrity of the meeting by ensuring that security and identification process is available.
- Availability of video conferencing or other audio-visual means equipments– by ensuring that the video conferencing or other audio-video means equipments are available for effective communication of the directors or for other authorised participants, as stated in the definition of “video-conferencing or other audio visual means”.
- Recording of the meeting– they must ensure that the meeting has been recorded and the minutes of the same have been prepared.
- Safekeeping and marking of recording– after recording, its safety is important. Hence, they must ensure that the tape recording of the meeting is safely stored and marked at least till the auditing of that particular year is completed.
- Safety– they must ensure that in a video conferencing or other audio-visual meeting, only the concerned directors are present and attending the same and no other person has access either to the meeting or to the proceedings of the meeting.
- Proper communication– they must ensure that the participants of the meeting are able to see or hear properly and clearly.
However, in the case of differently-abled persons, they can make a request to allow them to let a person accompany them in the meeting.
Rule 3(3) – Notice and director
In this rule, there are two points, one is about the notice of the meeting and the second is about the director’s intimation about their intention as to how they want to participate in the meetings.
- According to Section 173(3) of the Act, a notice shall be sent to all directors.
- A notice shall contain the following information:
- The options available to the directors are to participate through video conferencing or other audio-visual means.
- All important information that allows the directors to participate in the video conferencing or other audio-visual means.
- If any director wants to participate in the meeting via video conferencing or other audio-visual means then such intention must be communicated by them in advance to let the company make suitable arrangements.
- The intention of any director to participate in the meeting via video conferencing or other audio-visual means must be communicated at the beginning of the calendar year and that shall be valid for one year.
- However, if any director fails to communicate his intention of attending the meeting via video conferencing or other audio-visual means then it will be presumed that they will attend the meeting in person.
Other important sub-rules
- The Chairperson shall take roll call with every director by taking the directors’ names, the location of their participation, whether he has received all information regarding the meeting and that no other person except for the concerned directors are attending the meeting.
- The Chairperson and the Company Secretary shall inform the board about the person other than the director participating in the meeting.
- Chairperson makes sure that the required quorum is present in the meeting or not.
- Every video conferencing or other audio-visual means meetings’ scheduled venue must be in India.
- The statutory registers that must be present in a meeting should be placed at the scheduled venue
- Whoever shall be participating in the meeting must identify themselves before they start speaking on any item of business.
- After the discussion in the meeting ends, the Chairperson announces the summary and the minutes of the meetings are also disclosed.
What cannot be dealt with in video conferencing or other audio-visual means meeting
The following matters cannot be dealt with in video conferencing or other audio-visual means:
- Approval of annual financial statements.
- Board report’s approval.
- Audit Committee meetings for consideration of accounts.
- Prospectus’s approval.
- Approval of amalgamation, merger, demerger, acquisition and takeover.
Rupak Gupta v U.P. Hotels Ltd (2016)
In the case of Rupak Gupta v U.P. Hotels Ltd. (2016), the National Company Law Tribunal (“NCLT”) held that according to Rule 3 of the Companies (Meetings of Board and its Power) Rules, 2014, if a director wants to choose video conferencing as a mode for the meeting and they have intimated the same at the beginning of the calendar year, the same shall be valid for 1 year. In case the intimation was not made at the beginning of the year, it is valid. Since it is not said anywhere that if the intimation is not made at the beginning then video conferencing shall not be allowed and it shall not restrain the director from availing the option of video conferencing.
In the above case, the applicant, Rupak Gupta and his mother were the directors of the respondent company, U.P. Hotels Ltd. The applicant received a notice for a board meeting regarding the appointment of a Company Secretary and for dealing with other matters, which was to be held on 4th June 2016 and the notice was given on 28th May 2016. The applicant and his mother had already scheduled a foreign tour from 1st June 2016 to 14th June 2016. However, they also informed the respondents to convene the meeting either on 1st June or after 14th June, as they could be present. Therefore, the meeting was rescheduled for 1st June.
Two days later, they received another notice stating that the candidates would not be available for an interview on 1st June, hence the meeting was again re-scheduled to 4th June. Knowing the importance of the appointment of a Company Secretary, the applicant requested the respondents for a video-conferencing meeting for them and the respondents agreed. However, on the meeting day, the applicant and his mother were not allowed to participate via video-conferencing as it violated the provision of Rule 3 of the Companies (Meeting of Board and its Power) Rules, 2014 (“Rules”).
The respondents reasoned that as per the Rules, it is mandatory that an intimation must be provided at the beginning of a calendar year for video-conferencing participation to make it valid for an entire year, according to sub Rule 3(e) of the Rules.
The NCLT held that sub Rule 3(e) nowhere states that if an intimation is not made at the beginning of the year, then video-conferencing shall not be allowed. Therefore, the prevention of participation of the applicant and his mother was unfair and the Bench passed an interim order.
Dhandho India Private Limited, In Re (2017)
In the case of Dhandho India Private Limited, In Re (2017), the National Company Law Tribunal (NCLT) held that the offence committed under Section 173(1) of the Act falls under the category of Section 450 of the Act punishment. For the applicants’ compounding of offence (check FAQs), the punishment for the same is provided under Section 450 of the Act as discussed later in the case.
- The two directors of the company (“Applicants), Dhandho India Private Limited filed a compounding application to the Registrar of Companies (RoC), Pune with regard to the violation of Section 173(1) of the Act.
- The company was incorporated on 18th May 2015, therefore the first meeting was supposed to be held within a month. However, the company could not conduct the meeting due to the non-availability of both directors.
- The meeting was then held on 17th September 2015 and hence, the applicants had violated the provision of Section 173(1) of the Act.
- The RoC forwarded the application to NCLT, Mumbai Bench.
The NCLT, after review of the application, observed that the said application violated the provisions of Section 173(1) of the Act and the compounding of this offence falls under the punishment mentioned under Section 450 of the Act. The NCLT imposed a fine of Rs. 25,000 on each applicant in default i.e. the company and its two directors.
Application of Section 173 in case of Section 8 of the Act companies
After the notification issued by the Ministry of Corporate Affairs (MCA) dated 5th June 2015, Section 173 of the Act is applicable only to the extent that the meetings held by the Board of Directors shall be at least one within every six calendar months. The notification specifically provides exemptions, modifications and adaptations to Section 8 of the Act.
Circumstances under which the meetings are conducted
- Re-appointment of retiring director– In case of procedure for re-appointment of the retiring director at the annual general meeting, a board meeting shall be convened after sending a notice to all the directors of the company as Section 173 of the Act for considering in the event of re-appointment of the retired director.
- Appointment of Managing director– In case of the appointment of a Managing director, a board meeting shall be convened as per Section 173 of the Act for the following business transactions:
- For taking a decision on the person going to be appointed.
- Approval of the draft agreement to be signed by and between the company and the proposed managing director, although not necessary.
- Fix the time, date and venue for holding the general meeting.
- Approval of the general meeting.
- Authorisation of the Company Secretary to issue a notice for the general meeting.
- Appointment of Company Secretary- for appointing a board Meeting shall be convened as per Section 173 of the Act with the details of the person appointed and passing of a resolution appointing the Company Secretary.
- Removal/Resignation of Company Secretary- for the removal/resignation of a Company Secretary, a board meeting shall be convened after giving notice to all the directors according to Section 173 of the Act and a resolution shall be passed.
Meeting of the board is essential work for the directors. They have to conduct it for taking some important decisions or to pass a resolution. The importance of meetings can be understood by the mere fact that it is conducted for the appointment of a Company Secretary who is also known as an officer of the company or for the removal of the same. If there is any contravention of the provision by anyone then they shall be liable to penalties.
Frequently Asked Questions (FAQs)
Whether the year mentioned in the Section is a calendar year or a financial year?
The year mentioned under Section 173 of the Act is a calendar year since nothing is mentioned in the Section related to the financial year. Therefore, it is interpreted as a calendar year.
Is the hold and conduct of meeting the same?
No, the hold and conduct of the meeting are not the same, there is a difference between these two terms. Hold means to keep and conduct means to carry out. If a meeting is validly called upon then it is said that the meeting was held and if it could not be conducted for want of quorum then it shall not contravene the provisions of Section 173 of the Act since the meeting is held validly.
What is the compounding of offences?
Compounding of offences basically means a settlement between the person committing an offence i.e. offender and the competent authority. Under this settlement, the offender pays an amount to the competent authority, i.e. fine to save himself from imprisonment/ prosecution. Under the Companies Act, 2013, Section 441 deals with the compounding of offence. The fine for compounded offences is decided by NCLT or Regional Director and even the offence committed by the offended is compounded by the NCLT or Regional Director/ officer authorised by the Central Government, where the maximum amount of fine that can be imposed does not exceed Rs. 25 lakhs.
There are two types of compoundable offences:
- Only fine- offences that are punishable with a fine only.
- Fine or imprisonment- offences that are punishable either with fine or with imprisonment.
Who is an independent director?
Among various types of directors, an independent director is a non-executive director. A non-executive director is a director who does not participate in the day-to-day working of the company. Independent directors have no relations with the company and Section 149 of the Act deals with the provisions related to independent directors.
- Taxmann’s Company Law and Practice.
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