Participation by Directors in Meetings of the Board/Committee of Directors under the Companies Act, 1956 through electronic mode- Is it legally tenable.
Introduction-Position under the Companies Act,2013
Section 173(2) of the Companies Act,2013 (hereinafter referred as The New Act) lends validity to the participation of Directors at a meeting of the Board either in person or through video conferencing or other audio visual means as may be prescribed which are capable of recording and recognizing the participation of the Directors and of recording and storing the proceedings of such meetings along with date and time.
The proviso to the above Sub-section empowers the Central Government to stipulate by notification such matters which shall not be dealt with in a meeting through video conferencing or other audio visual means.
Pursuant to the above, the draft Rules for facilitating conduct of business at Meetings of the Board through video conferencing or other audio visual means have been prescribed under Chapter XII and these Rules await finalization as on date. It is also important to note that Section 173 of the New act has not yet been notified for implementation.
Having regard to the above, as and when the Rules on the subject are formalized and Section 173 is notified, it should be certainly possible under the new Act for Companies to transact business of the genre provided in the draft Rules, at Meetings of the Board at which some Directors are present only through the video conferencing or any other audio visual means.
However, in as much as the provisions in the new Act on the above issue have not yet been notified it would be meaningful to examine the legality of the above procedure under the framework of the Companies Act,1956 (hereinafter referred to as the 56Act)
Attendance at Board Meetings through video conferencing- Legal position under the Companies Act, 1956.
The Ministry of Corporate affairs (MCA) as a part of its green initiative in corporate governance came out with two separate circulars to make it possible for directors of a company to participate in a meeting of the Board/Committee of Directors through electronic mode under the ambit of the 56 Act. The first of the two circulars (circular No.28/2011) was issued on 20.5.2011 and the other circular No.35/2011 was issued soon after on 6.6.2011.As the second circular of June 2011 only clarified the position that provision of video conferencing at Meetings of both the Board and that of members would not be mandatory , we shall confine ourselves in this discussion to examine whether the circular dated 20.5.2011 is legally tenable ,against the backdrop of the 56 Act.
Relevant Extract from MCA Circular examined
To facilitate a discussion on the subject it would be necessary to reproduce below the relevant extract from the circular dated 20.5.2011.
The Ministry of Corporate Affairs has taken a Green Initiative in the Corporate Governance by allowing paperless compliances by the Companies after considering sections 2,4,5,,13 and 81 of the Information Technology Act, 2000 for legal validity of compliances under Companies Act, 1956 through electronic mode.
2. The Ministry has been receiving representations from various industry bodies to recognize participation by directors in meetings of Board/Committee of directors under the Companies Act, 1956 through electronic mode.
3. Section 13 of the Information Technology Act, 2000, inter-alia provides time and place of dispatch of notices in electronic mode, which may be applicable for the purpose of notice period in the Companies Act, 1956 or in the Article of Association of the Company.
4. In the light of the above provisions and circumstances, it is hereby clarified that directors of a Company may participate in a meeting of Board/Committee of directors under the provisions of Companies Act, 1956 through electronic mode.™
A plain reading of the above Extract makes it obvious that the circular draws its strength from certain provisions of the Information Technology Act ,2000.(IT Act)
It would be interesting to ascertain whether the specific provisions of the IT Act , referred to in the circular provide any legal fortification to the above circular.
Section 2 of the IT Act provides the definition to various expressions used in the Act. It is pertinent to note that none of the Expressions defined in the Section have any co-relation with the participation/holding of Meetings through electronic means.
Section 4 extends legal recognition to electronic records. The Section overrides the provisions of other laws. However, as it is restricted in application only to maintenance of records in electronic form it does not in any way espouse the cause of facilitating holding of meetings through audio visual means.
Section 5 of the IT Act merely has the effect of granting legal recognition to digital signatures.
Section 13 speaks about the time and place of dispatch and receipt of electronic records and does not in any way lend succor to the procedure of participation by Directors at Meetings through electronic means.
Finally Section 81 of the IT Act clarifies the legal position that the said Act would have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.
It is submitted that from a plain reading of the extant provisions in the IT Act referred to in the MCA circular which is the moot issue of our discussion, it is evident that the Circular does not and cannot , in any way draw any legal force from the IT Act and it is therefore inconsistent with those provisions of the 56 Act which deal with the procedure to be followed for holding Meetings of the Board and the committees constituted by it.
Position under the Companies Act, 1956
We will preface our discussion by stating that having regard to the fact that at the time when the 56 Act was enacted, use of electronic means were beyond comprehension of the corporate Sector , the said Act could hardly be expected to lend validity to the concept of an electronic Meeting .In fact , over the years ,very little attempt has been made to make the Act contemporaneous through appropriate . amendments so that it could fall in line with the dynamics of the business/economic environment. Therefore all the related provisions in the 56 Act envisage that Meetings of the Board/Members be held only physically. Teleconferencing of Meetings has no legal validity as far as the 56 Act is concerned. For the purpose of our discussion, we shall dwell upon specific provisions in the 56 Act as under:
- Section 285
The Section ,inter alia, postulates that a Meeting(Emphasis supplied) of the Board shall be held at least once in every three months. The term Meeting has been legally defined as A coming together of persons. .As per the Oxford Reference Dictionary, the term refers to an assembly of persons for discussion or entertainment. The Section therefore pre-supposes that for a Meeting to be validly held there must be an assemblage of directors physically.
- Section 288
Section 288(1) provides ,inter alia, that if a Meeting of the Board could not be held for want of quorum, then unless the Articles otherwise provide, the Meeting shall automatically stand adjourned till the same day in the next week ,at the same time and place.(Emphasis supplied).From the above it is obvious that the statutory expectation is that the Directors are expected to assemble together at a particular place for conduct of their Meeting. There is therefore the need for a specific venue for the Meeting to actually take place.
- Section 300
The Section precludes a Director from taking part in any discussion or to vote on any contract or arrangement entered into by the company in which he is either directly or indirectly concerned or interested. His presence at the Meeting shall not be considered for the purpose of forming the Quorum at the time of the discussion and vote and in case he does vote, the vote shall be void. The language used in the Section unequivocally confirms the view that the Act envisages that a discussion and vote on the subject does take place physically before any contract in which a Director is interested is sanctioned by the Board.
- Section 301
Section 301(2) contemplates that the Register of contracts in which the Directors are interested shall be placed physically before the next meeting of the Board and shall then be signed by all the directors present at the Meeting. There is therefore no way by which compliance of the above requirement can be ensured unless the Board meets physically at a pre-determined venue.
- Section 309
In accordance with the provisions of Section 309(2) a Director is entitled to receive remuneration by way of fees only in respect of any Meeting of the Board or Committee which is attended by him. It is obvious that the Law envisages that the Director physically attends the Meeting in respect of which he is paid sitting fees.
- Regulation 71 of Table A
It is pertinent to note that the above Regulation in Table A expects that the director who is physically present at the Meeting shall sign as a token and affirmation of his presence an Attendance Register maintained for this purpose.
From the above discussion it can be stated emphatically that the 56 Act and the amendments thereto made from time to time , do not in any way validate a meeting of the Board which facilitates participation through video conferencing.
Is the MCA circular dated 20.5.2011 legally valid
In the light of the above discussion it becomes imperative for us to raise the question whether the impugned circular of the MCA which is the raison d™etre of our discussion can really stand the test of legal scrutiny.. We have proved beyond doubt above that the 56 Act and its amendments does not in any way sanctify the procedure of video conferencing. The extant provisions in the IT Act on which the Circular relies so heavily do not also in any way validate the procedure of video conferencing, notwithstanding that the IT Act overrides any provision in any other Act in force which is inconsistent with the provisions of the said Act.
Circulars are sub-ordinate legislation
It is a settled principle of law that Rules, circulars , notifications which are issued on the strength of executive Authority are subservient to the substantive law and cannot extend the contours of the law unless such an intention is apparent from the statute . Any such sub-ordinate legislation which is inconsistent with the law is liable to be struck down for want of judicial authority. There is therefore considerable doubt on whether the impugned circular can pass muster if subjected to judicial scrutiny.
From the tenor of our discussion it should not be concluded unfairly that we are not advocating the procedure of attendance by directors through video conferencing. On the contrary , we welcome the practice as it takes away, where the directors are concerned, the physical inconvenience caused by travel It is also cost effective from the side of the company. Further physical absence of a Director from the Meeting does not in any way vitiate the proceedings particularly when one considers that the concerned Director is in a position to contribute in the same vein through electronic communication as if he were physically present at the Meeting. The 2013 Act sanctifies the above procedure ,albeit, as stated hereinabove for transacting specific items of business as specified in the draft rules under Chapter XII. The fact that some companies are already adopting the above procedure under the aegis of the 56 Act suggests that corporate Inc. is whole heartedly in support of the concept which is contemporaneous and is in line with the rigours of the present day.
Notwithstanding the above, we would submit that the legal framework of the 56 Act ought to have been appropriately enabled as a pre-requisite to the ushering in of the above procedure. We would conclude that the impugned circular of the MCA which validates the participation of Directors at Meetings through the electronic mode is open to serious judicial inquisition at an appropriate forum. The related question that springs from the above as a natural corollary is whether decisions taken through participation of directors through electronic means are legally binding and sustainable. We shall leave it for posterity to address this question.