Section 202 of the Companies Act, 2013 provides that company may make payment of compensation for any loss of office. Such compensation is payable to Managing Director (MD) or Whole-time Director (WTD) or Manager of company. However, no compensation shall be payable to any other director for loss of office.

As per section 202(2), compensation is not payable in following circumstances:

Where Managing Director or Whole time Director or Manager resigns his office in view of reconstruction of the company or amalgamation with other company and he is appointed as Managing Director or Whole time Director or Manager of the reconstituted company or body corporate resulting from such amalgamation. In the present case, since Manan has taken up directorship in Nimbo Ltd. Pursuant to a reconstruction within the group companies (in the form of slump sale of one of the undertakings to another group company), he cannot ask for the compensation for loss of office.

Ojas is not eligible for compensation at all as per the provisions of section 202 of the Companies Act, 2013.

When a director (MD/WTD) resigns from his office at his / her will (i.e., otherwise than because of the reconstruction or amalgamation) he cannot claim compensation for the loss of office. Accordingly, Naman also cannot claim any compensation for the loss of his office as he has resigned voluntarily.

Case Study

Introduction :

Disha Beauty Products Limited (the company), incorporated five years ago with its registered office in Mumbai, India, began manufacturing cosmetic products under the brand name 'Kasturi.' The product range includes nail enamel, foundation cream, compact, mascara, eye pencil, etc. Due to its organic composition and maintaining the consistency in the quality the company's products quickly gained popularity, capturing a significant share of the Indian market. Under the leadership of Disha, the Managing Director, the company experienced growth in turnover and profitability, earning a strong reputation in both consumer and industry circles.

#### {#section .unnumbered}

#### Additional Directors : {#additional-directors .unnumbered}

To facilitate future expansion, the company intended to appoint Joe and Jogesh as additional directors due to their extensive experience and business acumen. Disha had previously proposed Joe for a regular director position at the Annual General Meeting (AGM), but the motion failed, and Joe was not appointed, Jogesh is proposed to be appointed as an additional director for the first time. The Board of Directors, exercising powers conferred by the Articles of Association, appointed both Joe and Jogesh as additional directors in the board meeting held on 31st March 2024.

The AGM, originally due on 30th September 2024, could not be held on the due date. The company obtained a three-month extension from the Registrar of Companies and held the AGM on 31st December 2024.

#### {#section-1 .unnumbered}

#### Loan/Security to other Company : {#loansecurity-to-other-company .unnumbered}

The company provided security for a loan of \` 25 lakh taken by Rupa Chemicals Limited (RCL), in which Harshal and Sujit, directors of the company, hold 10% and 15% equity shares, respectively, with voting rights. The Secretarial Auditor observed that this transaction might be invalid. The company argues that it has complied with all legal formalities and asserts that none of the directors is interested in RCL as per the law.

#### Board Meeting : {#board-meeting .unnumbered}

The Board of Directors planned to issue equity shares to the public and held a meeting on 15th May 2024 to approve the prospectus. Out of the 12 directors, three attended the meeting physically, and one attended via audio-visual means. One other director had informed the company secretary on 1st April 2024, of his intention to attend the next board meeting electronically. The company advised him to attend in person, stating that electronic arrangements could not be made as the intimation of his intention to attend the meeting electronically was not given at the beginning of the calendar year 2024.

Appointment of relative of the Managing Director :

Juley, a company secretary and sister of Disha, the Managing Director, is proposed to be appointed as a 'Consultant' with a monthly remuneration of Rs. 2.75 lakh. Disha seeks clarification on the applicable legal provisions concerning this appointment.

Based on the above information and referring to the provisions of the Companies Act, 2013 you are requested to address the following :

(a) Examine the validity of the appointment of Joe and Jogesh as additional directors of Disha Beauty Products Limited. Also, discuss the tenure of their appointment. (5 marks)

(b) The Secretarial Auditor has observed that the transaction involving Disha Beauty Products Limited providing security for a Rs. 25 lakh loan taken by Rupa Chemicals Limited is invalid. Analyse the validity of this transaction. (5 marks)

(c) Determine, whether the quorum was present at the Board meeting held on 15th May, 2024 for the approval of the Prospectus. Additionally, assess whether the company's advice to a director to attend the meeting in person instead of electronically -- due to the notice of electronic participation not being given at the beginning of the calendar year -- was valid. (5 marks)

(d) Determine, discussing the relevant provisions of the Companies Act, 2013, whether the appointment of Juley as a consultant for Disha Beauty Products Limited constitutes a related party transaction. Additionally, explain the necessary approval and disclosure compliance requirements for such transactions. (5 marks) (Dec, 24) (New Syllabus)

### Ans. {#ans. .unnumbered}

### (a) Validity of appointment and tenure of Additional Director: Provision: {#a-validity-of-appointment-and-tenure-of-additional-director-provision .unnumbered}

Section 161(1) of the Companies Act. 2013, provides that the articles of a company may confer on its Board of Directors the power to appoint any person, other than a person who fails to get appointed as a director in a general meeting, as an additional director at any time who shall hold office up to the date of the next annual general meeting or the last date on which the annual general meeting should have been held, whichever is earlier.

#### Analysis and Answer: {#analysis-and-answer .unnumbered}

In case of default in holding annual general meeting, the additional director shall vacate his office on the last day on which the annual general meeting ought to be held. A person who fails to get appointed as a director in a general meeting cannot be appointed as Additional Director. Section 161(1) of the Companies Act, 2013 applies to all companies, whether public or private.

Joe was previously proposed to be appointed as a regular director in the Annual General Meeting (AGM) by completing the required formalities. However, the motion to appoint him a director failed and he could not, therefore, be appointed as proposed. Hence, the Board of Directors can't appoint him as an additional director. His appointment is invalid ab initio and the question of tenure in his case does not arise as he has not occupied his office of director at any point of time.

Jogesh is validly appointed as an additional director by the Board in term of the power conferred by the Articles. Since, the company has obtained from the Registrar an extension of time for holding the AGM till 31st December, 2024 the company is not in default in not-holding the AGM on 30th September, 2024. The applicable due date of AGM in this case is 31st December, 2024 on which date the company has held the AGM. Hence, Joseph shall vacate his office at the commencement of the AGM held on 31st December, 2024, if not appointed as a regular director at that meeting.

### {#section-2 .unnumbered}

(b)

According to section 185(2) of Companies Act 2013, a company may advance any loan including any loan represented by a book debt, or give any guarantee or provide any security in connection with any loan taken by any person in whom any of the director of the company is interested, subject to the condition that --

(a) A special resolution is passed by the company in general meeting:

Provided that the explanatory statement to the notice for the relevant general meeting shall disclose the full particulars of the loans given, or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security and any other relevant fact; and

(b) the loans are utilised by the borrowing company for its principal business activities.

Explanation-For the purposes of this sub-section, the expression "any person in whom any of the director of the company is interested" means --

(a) any private company of which any such director is a director or member;

(b) anybody corporate at a general meeting of which not less than twenty-five per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or

(c) anybody corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.

#### Analysis and Answer {#analysis-and-answer-1 .unnumbered}

Section 185(2) of the Companies Act, 2013 is applicable in the situation where the lending corporate is giving loan or providing guarantee or security in connection with the loan taken by the other corporate in which the director/s of lending are interested. Harshal and Sujit, directors of lending company- Disha Beauty Products Limited are together holding 25% voting powers in Rupa Chemicals Limited, Hence, in term of clause (b) of explanation to Section 185(2) Rupa Chemicals Limited is a body corporate in which the directors of the lending company are interested. The transaction of providing security shall be valid, if the following two conditions are fulfilled:

Disha Beauty Products Limited should pass a special resolution in the general meeting, and

A declaration should be given by Rupa Chemicals Limited that the loans are utilised for its principal business.

The transaction would be invalid if Disha Beauty Products Limited had passed a resolution in the general meeting but not a special resolution. The requirement of declaration has been satisfied.

In view of above, as Disha Beauty Products Limited (the lending company) failed to pass a special resolution in the general meeting the security has been provided in violation of section 185(2) of the Companies Act, 2013 and hence the observation of the Secretarial Auditor that the transaction is invalid is correct.

### (c) {#c .unnumbered}

Quorum for the Board meeting: As per Section 174(1) of the Companies Act, 2013, one third of total strength or two directors, whichever is higher, shall be the quorum for a Board meeting.

For the purpose of determining the quorum, the participation by a director through Video Conferencing or other audio-visual means shall also be counted, unless he is to be excluded for any item of business under any provisions of the Act or the rules.

Para 1.2.3 of SS-1 provides that any Director may participate through Electronic Mode in a Meeting unless the Act or any other law specifically prohibits such participation through Electronic Mode in respect of any item of business

The MCA vide Notification dated June 15, 2021 has omitted Rule 4 of the Companies (Meetings of Board and its Powers) Rules, 2014 which was related to the matters not to be dealt with in a meeting through video conferencing or other audio-visual means. Approval of prospectus was such an item which was included in the list of restricted items prior to this notification. Accordingly, with the said amendment, now the previously restricted matters including inter alia the item of approval of the prospectus can be considered in a Board Meeting held through video conferencing or other audio-visual means.

Total directors on the Board of the company are 12 and one third of them i.e. 4, being higher than 2, shall constitute the quorum. 3 directors participated in the meeting through physical presence and 1 director through electronic mode who will also be counted for the quorum making the presence of total 4 directors. Hence, the quorum in the Board meeting was present.

#### Validity of the advice of the company: {#validity-of-the-advice-of-the-company .unnumbered}

Para 1.3.4 of SS-1 provides that the Notice shall inform the Directors about the option available to them to participate through Electronic Mode and provide them all the necessary information.

If a Director intends to participate through Electronic Mode, he shall give sufficient prior intimation to the Chairman or the Company Secretary to enable them to make suitable arrangements in this behalf.

The Director may intimate his intention of participation through Electronic Mode at the beginning of the Calendar Year also, which shall be valid for such Calendar Year. Though such declaration shall not debar him from participation in the meeting in person, in such case a sufficient intimation of attending in person is required to be sent to the company.

In view of above it is to be noted that a director is required to give sufficient prior intimation of his intension to participate in the Board meeting not necessarily at the beginning of the calendar year.

In the case scenario, the director concerned has given sufficient prior intimation of his intention to participate in the Board meeting through electronic means. Hence, he will be entitled to attend the meeting through electronic means or in person as per his discretion. Giving such a notice at the beginning of the year is an enabling provision and not the mandatory requirement.

Hence, the advice of the company to the director concerned to attend the meeting in person and not through electronic mode for the reason that he had not given the intimation at the beginning of the calendar year is not valid.

(d)

The appointment of Juley as a consultant of Disha Beauty Products Limited attracting the relevant provisions regarding related party transaction are identified as below:

#### Related Party {#related-party .unnumbered}

Under Section 2(76) of Companies Act 2013, inclusive definition of "related party", with reference to a company, has been given which include inter alia (i) a director or his relative;

Relative: As per Section 2(77) Companies Act, 2013 the sister is deemed to be a relative of another being related to another person.

#### {#section-3 .unnumbered}

#### Nature of Related Party Transactions: {#nature-of-related-party-transactions .unnumbered}

Section 188 of the Companies Act, 2013 provides that except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as prescribed under Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014, no company shall enter into any contract or arrangement with a related party with respect to :

such related party's appointment to any office or place of profit in the company, its subsidiary company or associate company:

#### Office or Place of Profit {#office-or-place-of-profit .unnumbered}

As per Explanation to Sub-Section (i) of Section 188 the expression "office or place of profit" means any office or place where such office or place is held by:

(a) a director, if the director holding it receives from the company anything by way of remuneration over and above the remuneration to which he is entitled as director, by way of salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;

(b) an individual other than a director or by any firm, private company or other body corporate, if the individual, firm, private company or body corporate holding it receives from the company anything by way of remuneration, salary, fee, commission, perquisites, any rent-free accommodation, or otherwise.

#### Prior Approval of the Company by a Resolution {#prior-approval-of-the-company-by-a-resolution .unnumbered}

First Proviso to the Section 188 (1) of the Act provides that no contract or arrangement, in the case of a company having a paid-up share capital of not less than such amount, or transactions not exceeding such sums, as prescribed, shall be entered into except with the prior approval of the company by a resolution.

Rule 15 of the Companies (Meetings of board and its Powers) Rules, 2014 provides that except with the prior approval of the company by a resolution, a company shall not enter into a transaction or transactions, where the transaction or transactions to be entered into, -

(a) as contracts or arrangements with respect to clauses (a) to I of sub-section (1) of section 188, with criteria as mentioned below-

Clause V: Appointment to any office or place of profit in the company, its subsidiary company or associate company- Monthly remuneration exceeding ₹ 2.50 lakh.

#### Disclosure in Board's Report {#disclosure-in-boards-report .unnumbered}

Section 188(2) of the Companies Act, 2013 provides that every related party contracts or arrangement shall have to be disclosed in the Board's report and referred to shareholders along with the justification for entering into such type of transactions in the prescribed form i.e., Form no. AOC-2 \[pursuant to Section 134(3)(h) and Section 188(2)\]. Form AOC-2 shall be signed by the persons who have signed the Board's Report.

#### Analysis and Answer {#analysis-and-answer-2 .unnumbered}

Nature of transaction and approval compliance: Appointment of Juley who is a sister (i.e. relative) of Disha, a managing director of a company is a related party transaction by way of holding office or place of profit. Since the monthly remuneration involved in this related party transaction is exceeding Rs. 2.50 lakh (which is Rs. 2.75 lakh in this case) the prior approval of the Board of directors and the shareholders by passing an ordinary resolution in the general meeting of the company is required.

#### {#section-4 .unnumbered}

#### Disclosure compliance: {#disclosure-compliance .unnumbered}

The related party transaction of appointing Juley shall be disclosed by the company in the Board's report and referred to shareholders along with the justification for entering into such type of transactions in the prescribed form i.e., Form no. AOC-2.