Other Provisions About the Board and its Officers

The proviso is the whole limit of the section: nothing in it gives validity to any act done by the director after his appointment has been noticed by the company to be invalid or to have terminated.

So the section works forwards to the moment of discovery and no further. Acts done before the company noticed the defect stand; acts done after it noticed do not.

Three points decide most questions on the section.

It covers three kinds of failure, and an answer should list all three: a defect in appointment, a disqualification, and a termination by force of the Act or the articles. The last is the important one, because it catches a director whose office was vacated automatically under section 167 without anybody realising it.

It validates the act, not the office. The man does not become a director. His acts are simply not to be treated as invalid.

Notice is by the company. The trigger in the proviso is that the appointment has been noticed by the company to be invalid or terminated, not that some outsider knew.

Payment for loss of office: section 191

Section 191(1): the prohibition. 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 (i) an offer made to the general body of shareholders; (ii) an offer made by or on behalf of some other body corporate with a view to the company becoming its subsidiary or a subsidiary of its holding company; (iii) an offer made by or on behalf of an individual with a view to his obtaining the right to exercise or control not less than one-third of the total voting power at any general meeting; or (iv) any other offer 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 the company, from the transferee of the undertaking or property, from the transferees of shares, or from any other person, unless the prescribed particulars of the proposed payment, including the amount, have been disclosed to the members and the proposal has been approved by the company in general meeting.

Take the structure apart, because it is the shape of the answer. There is a triggering transaction in clause (a) or clause (b), a payment to a director, a payer who may be anybody including a stranger, and a cure, which is disclosure plus approval in general meeting.

The four offers in clause (b) are worth learning as a list, because they are the four ways control of a company changes hands: a general offer to shareholders, a corporate takeover creating a subsidiary, an individual acquiring one third of voting power, and any offer conditional on a given level of acceptance.

Section 191(2): what the section does not touch. Nothing in sub-section (1) affects a payment made by a company to a managing director, whole-time director or manager by way of compensation for loss of office or consideration for retirement, subject to such limits or priorities as may be prescribed.

So an ordinary severance payment by the company to its own managing director is outside the section and is governed by section 202 instead. Section 191 is about payments connected with a transfer of the undertaking or of control.

Section 191(3): quorum. If the payment is not approved for want of quorum in a meeting or an adjourned meeting, the proposal shall not be deemed to have been approved. A meeting that fails for want of quorum is not deemed consent.

Section 191(4): the trust. Where a director receives payment in contravention of sub-section (1), or the proposed payment is made before it is approved, the amount so received shall be deemed to have been received by him in trust for the company.

That is the section's teeth. The money is the company's in his hands, so the company may trace and recover it, and he cannot keep it merely by offering to pay a penalty.

Section 191(5), as substituted: a director in default is liable to a penalty of one lakh rupees.

Section 191(6): nothing in the section prejudices the operation of any other law requiring disclosure of such payments.

Non-cash transactions with directors: section 192

Section 192(1): the prohibition. No company shall enter into an arrangement by which:

• (a) a director of the company or of 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 the 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 shall also be obtained by a resolution in general meeting of the holding company.

Note three features.

It runs both ways. Clause (a) is the company parting with assets; clause (b) is the company acquiring them. Both need approval.

The approval must be prior. Ratification afterwards is not what the sub-section provides.

Two approvals may be needed. Where the counterparty is a director of the holding company, the holding company's members must also resolve.

Section 192(2): the valuation. The notice for the resolution shall include the particulars of the arrangement along with the value of the assets involved, duly calculated by a registered valuer.

This is what makes the members' approval meaningful. Without an independent figure the members would be voting on a swap whose value only the director knows.

Section 192(3): the consequence. Any arrangement entered into in contravention 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 rights are acquired bona fide for value and without notice of the contravention by any other person.

Clause (a) is conjunctive. Impossibility of restitution alone does not save the arrangement; the company must also have been indemnified. Clause (b) is the ordinary protection of an innocent third party.

The One Person Company's contract: section 193

Section 193(1). Where a One Person Company limited by shares or by guarantee enters into a contract with the sole member who is also the director, 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 held next after entering into the contract.

The proviso takes out contracts entered into in the ordinary course of business. A One Person Company that buys stationery from its own member every week does not have to minute each purchase.

Section 193(2). The company shall inform the Registrar about every contract so recorded within fifteen days of the date of approval by the Board.

Note what the section does and does not require. It does not forbid the contract, and it does not require anybody's approval. It requires a record, and notice to the Registrar. The One Person Company is the one case where the Act's usual technique, taking the interested man out of the decision, is impossible, so the Act settles for evidence instead.

The two sections that are no longer there

Section 194, which prohibited forward dealings in securities of the company by a director or key managerial personnel, was omitted by the Companies (Amendment) Act, 2017 (1 of 2018), with effect from 9 February 2018.

Section 195, which prohibited insider trading, was omitted by the same Act with effect from the same date.

Neither was left unregulated; both were moved. Forward dealing and insider trading are dealt with under the Securities and Exchange Board of India Act, 1992 and the regulations made under it, which is where [Insider Trading: The Definitions] takes up the subject. But an answer that cites section 195 of the Companies Act as the law on insider trading is citing a repealed provision, and that is a costly error in a paper that also asks about insider trading.

A worked example

Vile Parle Instruments Limited is being acquired. Bandra Holdings Limited makes an offer to the general body of shareholders to buy their shares, with the object of making Vile Parle Instruments its subsidiary.

A payment to the directors. Bandra Holdings offers each of the three retiring directors of Vile Parle Instruments twenty lakh rupees described as compensation for loss of office.

Section 191 applies. The transfer is of shares on an offer made to the general body of shareholders and by a body corporate with a view to the company becoming its subsidiary, so both clause (b)(i) and clause (b)(ii) are answered. The payment is by the transferee, which the sub-section expressly covers.

What must be done. The prescribed particulars of the payment, including the amount, must be disclosed to the members of Vile Parle Instruments and the proposal approved by the company in general meeting.

If it is paid first. Under section 191(4) the twenty lakh rupees in each director's hands is deemed to have been received in trust for the company, so the company may recover it; and each director is liable to a penalty of one lakh rupees under sub-section (5).

If the meeting fails for want of quorum. Under section 191(3) the proposal is not deemed approved. The directors cannot argue that the members had their chance.

A payment that is outside the section. Separately, Vile Parle Instruments itself pays its managing director compensation for loss of office on his retirement. Section 191(2) puts that outside sub-section (1), subject to prescribed limits and priorities, and it falls to be judged under section 202.

A defective appointment. It then emerges that one of the three directors had incurred a disqualification under section 164 two years earlier, so his office had vacated automatically under section 167 and everything he did since was done by a man who was not a director.

Section 176 saves the acts. No act done by him as a director is invalid merely because it is subsequently noticed that his appointment was invalid by reason of a defect or disqualification or had terminated by force of the Act or the articles. So the Board resolutions he voted on stand, and the contracts made under them are good.

But only up to the discovery. Once the company notices that his office had terminated, the proviso bites, and anything he purports to do after that is not saved. If he signs a further contract the next week, section 176 does not help.

A non-cash swap. Before the takeover, the company had agreed to transfer a godown at Andheri to a private company in which a director of its holding company is interested, in exchange for shares in that private company.

Section 192 applies, because the company is parting with an asset for a consideration other than cash to a person connected with a director of its holding company. So prior approval by resolution of the company in general meeting is required, and, the counterparty being connected with a director of the holding company, a resolution in general meeting of the holding company as well. The notice for each resolution must carry the particulars and the value of the assets calculated by a registered valuer: section 192(2).

If it goes through without approval. The arrangement is voidable at the instance of the company: section 192(3). It is not voidable if restitution has become impossible and the company has been indemnified by some other person, both together, or if some other person has acquired rights bona fide for value and without notice of the contravention. So if the godown has since been sold to an innocent purchaser for value, the company's remedy lies against the director, not against that purchaser.

A One Person Company. Separately, Mr Shirke is the sole member and sole director of Shirke Tooling (OPC) Private Limited, and he leases his own premises to the company. The contract is oral.

Section 193 requires a record. Because it is not in writing, the terms must be contained in a memorandum or recorded in the minutes of the first Board meeting held next after the contract was made, and the company must inform the Registrar within fifteen days of the Board's approval. Had the lease been in the ordinary course of the company's business, which for a tooling company it is not, the proviso would have excused the record.

Distinctions that carry marks

What this does NOT mean

It does not mean section 176 makes the man a director. It saves the acts, and only those done before the company noticed the invalidity or termination.

It does not mean section 191 forbids the payment. It forbids it without disclosure to the members and their approval in general meeting.

It does not mean section 191 covers every severance payment. A payment by the company to its own managing director, whole-time director or manager is taken out by sub-section (2).

It does not mean an unapproved section 192 arrangement is void. It is voidable at the instance of the company, and not even that where restitution is impossible and the company has been indemnified, or where a third party took bona fide for value without notice.

It does not mean a One Person Company needs approval for a contract with its member. Section 193 requires a record and intimation to the Registrar, not approval, and it does not apply to contracts in the ordinary course of business.

It does not mean section 195 still governs insider trading. It was omitted with effect from 9 February 2018.

Quick revision

• 176: no act done as a director is invalid though it is subsequently noticed that the appointment was invalid by reason of a defect or disqualification, or had terminated under the Act or the articles; proviso, nothing done after the company has noticed it is saved.
• 191(1): a director shall not, in connection with the transfer of the whole or part of any undertaking or property, or a transfer of shares on (i) an offer to the general body of shareholders, (ii) an offer by a body corporate to make the company its subsidiary or a subsidiary of its holding company, (iii) an offer by an individual to obtain or control not less than one-third of total voting power, or (iv) any offer conditional on acceptance to a given extent, receive any payment as compensation for loss of office or consideration for retirement, from the company, the transferee or any other person, unless the prescribed particulars including the amount are disclosed to the members and the proposal is approved in general meeting.
• 191(2) to (6): payments by the company to its managing or whole-time director or manager are outside sub-section (1), subject to prescribed limits; failure of quorum is not approval; money received in contravention is deemed received in trust for the company; the director is liable to a penalty of one lakh rupees; and other disclosure laws are unaffected.
• 192(1): no arrangement by which a director of the company or of its holding, subsidiary or associate company, or a person connected with him, acquires assets from the company for consideration other than cash, or by which the company acquires assets from him so, without prior approval by resolution in general meeting; and where he is a director of the holding company, a resolution of the holding company in general meeting as well.
• 192(2) and (3): the notice must give the particulars and the value of the assets calculated by a registered valuer; a contravening arrangement is voidable at the instance of the company, unless restitution is no longer possible and the company has been indemnified, or rights were acquired bona fide for value and without notice.
• 193: a One Person Company limited by shares or by guarantee contracting with the sole member who is also the director must, unless the contract is in writing, put the terms in a memorandum or the minutes of the first Board meeting held next after it, and must inform the Registrar within fifteen days of the Board's approval; contracts in the ordinary course of business are excepted.
• 194 and 195: both omitted by the Companies (Amendment) Act, 2017 (1 of 2018) with effect from 9 February 2018; forward dealing and insider trading are now dealt with under the SEBI Act, 1992 and the regulations made under it.

Test yourself

1. Are the acts of a director whose appointment was defective valid? Yes. Under section 176 no act done by a person as a director is deemed invalid though it is subsequently noticed that his appointment was invalid by reason of a defect or disqualification or had terminated under the Act or the articles. But the proviso gives no validity to anything done after the company has noticed the invalidity or termination.

2. When may a director receive compensation for loss of office on a takeover? Only where the prescribed particulars of the proposed payment, including its amount, have been disclosed to the members and the proposal has been approved by the company in general meeting: section 191(1). Approval that fails for want of quorum is not approval: section 191(3).

3. What happens to money received in breach of section 191? It is deemed to have been received by the director in trust for the company: section 191(4). The director is also liable to a penalty of one lakh rupees: section 191(5).

4. What does section 192 require, and when are two approvals needed? Prior approval by a resolution of the company in general meeting for any arrangement by which a director of the company or of its holding, subsidiary or associate company, or a person connected with him, acquires assets from the company, or the company acquires assets from him, for consideration other than cash; the notice must carry the particulars and the value of the assets calculated by a registered valuer. A second resolution, of the holding company in general meeting, is required where the director or connected person is a director of the holding company.

5. When is a contravening non-cash arrangement not voidable? Where restitution of the money or other consideration is no longer possible and the company has been indemnified by another person for its loss, or where rights have been acquired bona fide for value and without notice of the contravention by another person: section 192(3).

6. What must a One Person Company do about a contract with its sole member? Unless the contract is in writing, the terms must be contained in a memorandum or recorded in the minutes of the first Board meeting held next after the contract, and the company must inform the Registrar within fifteen days of the Board's approval. Contracts in the ordinary course of business are excepted: section 193.