THE TERM 'DISCLOSURE' AS USED IN SECTION 299 OF THE COMPANIES ACT, 1956 MEANS TO MAKE OTHERS AWARE OF SOMETHING WHICH THEY ARE NOT AWARE OF

[Mr. M. GOVINDARAJAN]

Sec. 299 of the Companies Act, 1956 ('Act' for short) provides that every director of a company who is in any, whether directly or indirectly, concerned or interested in a contract or arrangement on behalf of the company shall disclose the nature of his concern or interest at a meeting of the Board of Directors. For this purpose a general notice shall be given by him to the Board of Directors. Any such general notice shall expire at the end of the financial year in which it is given, but may be renewed for further period of one financial year at a time, by a fresh notice given in the last month of the financial year in which it would otherwise expire.  Every director who fails to comply with shall be punishable with fine which may extend to fifty thousand rupees. Sec. 300 of the Act provides that interested director shall not participate or vote in Board's proceedings.

In 'Avanthi Explosives (P) Ltd., V. Principal Sub Ordinate Judge, Thirupathi' (1987) 62 Comp cas 301 the Andhra Pradesh High Court held that the obligation of a director to disclose his interest in a contract entered into or to be entered into is an obligation similar to that of a trustee and directors are in the position of trustees according to common law and they have a fiduciary relation towards the shareholders. The trustees become disqualified if they have any interest adverse to that of the beneficiaries and that they have to account for any secret profit made by them. The director of a company could, therefore, maintain a suit before the civil court challenging the validity of the resolution passed by its Boards of directors to that effect that he has been disqualified from the company as a director as he has not disclosed his interest as required under sections 283 and 299 of the Act.

In 'A. Sivasailam V. Registrar of Companies' - (1995) 17 CLA 96 THE Company Board has considered the disclosure of interest and had observed that 'disclosure of interest' has to be in the meeting of the Board and the object of the provision in the section is not that a director should not have any personal interest in a contract or arrangement but only stipulates that the same should be disclosed and if directors already know the interest of each other the question of further disclosure does not arise.

In 'Ravi Raj Gupta and others V. Hans Raj Gupta & Co., (P) Ltd., and others' - (2010) 94 CLA 1 (Del) the plaintiff No.1 is the director of the Defendant Company No. 1 which is a family company in which all directors are related to each others.   They are all also members of HUF. Defendants No. 2 to 4 are also the directors of Defendant company No. 1. The petitioner No.1 was a tenant in the property leased by Defendant No. 5 to defendant No.1 company for residence of its officers. The company by a resolution in the meeting of Board of Directors held on 27.02.1974 allotted this property to late Hanraj Gupta in his capacity as Chief Executive Officer/Chairman of the Company. After his death his wife, the plaintiff No. 1 and 2 continued to occupy the property leased to the company without any formal allotment from the company. The plaintiff No.1 at one point of time was the Chief Executive Officer of the company for which no objection was raised for the occupation of the property. The Board of Directors removed plaintiff No. 1 from the post of CEO of the company. He did not vacate the property even after that. The company filed a criminal complaint under the Act before the Additional Chief Metropolitan Magistrate in this respect. Thereafter a resolution was passed by the company on 12.1.2002 surrendering this property to the defendant No. 5.

The plaintiff has filed this suit seeking a declaration that the resolution dated 12.1.2002 passed by the Board of Directors of the company was null and void and permanent injunction restraining from acting on the said resolution and the defendants be restrained from dispossessing the plaintiff's from the premises.

The plaintiffs put forth the following contentions:

§         The resolution was in contravention of Sec. 299 of the Act since the directors who passed the resolution did not disclose their interests;

§         The company has hold leasehold of the disputed property for more than 25 years and there was no reason for the company surrendering the leasehold rights by passing the impugned resolution;

§         The defendants were acting to further their own interest and misuse their capacity as directors to cause grievance to the plaintiffs.

The Court held that the question of non disclosure of interest by any of the directors does not arise since plaintiff No.1 is a director of defendant No. 1 company in which all directors are related to each other and they are also members of HUF and all the directors know each others' interests. The term 'disclosure' used in Sec.299 of the Act means to make others aware of something, which they are not aware. Since the relationship between the plaintiffs and the defendants is such that they were all aware that the property was HUF property and the coparceners had interest in the property, there was no question of making others aware of this interest and the plea taken by the plaintiff is a baseless plea.

The Court further held that plaintiff No.1 is a director of the company; he himself had ratified this resolution at the subsequent meeting of the Board of directors as a director. He has no right to challenge the resolution of the company of surrendering of tenancy before a civil court. Even if he was living in the premises with the permission of the company or without the permission of the company, he has no locus standi to challenge the resolution of the company on the ground of violation of section 299 of the Act, since he and other directors were aware of the interests of all the directors.

Plaintiff 2 is only a shareholder of the company. He has no right to challenge the resolution passed by the Board of Directors of the company. The Court held that a shareholder has a right only to the dividend and of participation in the annual general meetings and to vote there. A shareholder has no say in the management unless and until he becomes part of the management.

The Court further held that the plaintiffs in this case are motivated by their self interests. The plaintiffs want to continue in possession of the company's property without any right. A property leased out to the company, can be allotted by the company to any of the officials. The plaintiffs have no prerogative to live in a company's property without the permission of the company.  The plaintiffs have approached the court with an ulterior motive of retaining the property illegally.  The excuse of the Board's resolution having been void has been just taken as a façade. 

Since the Board of Directors of defendant No.1 company knew each others' interests there was no violation of section 299 of the Act. The suit filed by the plaintiffs is not maintainable being a frivolous suit.

Discussions to this article

[Mangal Ahire]

Hi guys,

can anybody can help with board resolution for discloser of Directors.