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BACKGROUND

The Board of Directors { Board} of a company is its highest decision making organ whose actions are however subject to shareholders jurisdictions as per the scheme of the Company jurisprudence. The directors constituting the Board act collectively, as well as individually, depending upon the position they hold and the authorities granted to them by the Board/ shareholders and the statute.

To ensure smooth functioning of the corporate sector it is imperative that the past actions of the directors are protected in case it is noticed later that their appointments have become invalid.

Provision to this effect was already present in the section 290 of the erstwhile Companies Act 1956 , and, in the new Companies Act 2013  this has again be provided in section 176.    

SECTION  176  COMPANIES ACT  2013

“176. No act done by a person as a director shall be deemed to be invalid, notwithstanding that it was subsequently noticed that his appointment was invalid by reason of any defect or disqualification or had terminated by virtue of any provision contained in this Act or in the articles of the company:

Provided that nothing in this section shall be deemed to give validity to any act done by the director after his appointment has been noticed by the company to be invalid or to have terminated.”

ANALYSIS

The section can be understood  better by breaking it in the following manner:-

1. This applies to all companies.

2. No act done by a director shall be deemed to be invalid although it was subsequently noticed that his appointment was invalid by reasons of:-

  • any defect, or
  • disqualification, or
  • had terminated.

3. The invalidity should be by virtue of any provision contained in Companies Act 2013  or  in the articles of association of the company:

4. Exception provided herein is that nothing in this section shall be deemed to give validity to any act done by the director after his appointment has been noticed by the company:

  • to be invalid, or
  • to have terminated.

COMMENTS

This provision is in line as compared to section 290 of the erstwhile Companies Act 1956. Basically this provision defends the proper actions  taken  by a director on behalf of his company.  If subsequently it is noticed that his appointment was invalid due to defect or disqualification or has been terminated by virtue of any provisions in the Companies Act 2013 or in terms of the articles of association of the company, such past actions of the director will continue to remain valid.

It is important to keep in mind that in absence of this provision it could have been held that once a director’s appointment has become invalid or terminated from a particular date, all his past actions could also become invalid. This would have led to confusion and obstruction in the functioning of the directors, individually, as well as collectively as a Board. This is also not a desirable state of affairs for the corporate since past actions taken on its behalf by a director in good faith, not knowing that his appointment, later on, could be held to be invalid, may shake the very foundation of the corporate functioning. 

Protection to outsiders

Pertinently, this provision enables providing protection to third parties which or who are outsiders. [ Ref case : Modal Bank Ltd v Janwi Narain {1932} 2 Com Cases 137, 142 {Lah} ]. Here the doctrine of indoor management will be applicable in terms of which an outsider is able to presume that internal management of  a company is being carried out as per law and hence actions of directors are assumed to be valid. It is however necessary that bona fide contracts have been entered into by outsiders with the company. 

Bonafide acts

This provision, it is reiterated,  fittingly applies where the past actions of the directors are valid and done in good faith, and therefore  no ultra vires acts or any forgery are involved. It was held in the case of Shiromani Sugar Mills Ltd v Debi Prasad [1950] 20 Com Cases, 296 that directors who continued to act even after they were disqualified, but not aware of it, were saved by section 290 of the Companies Act 1956.{ Ref also to the case: Seth Mohan Lal v Grain Chambers Ltd., {1968} 38 Com Cas. 543 {SC}}. It was necessary that after such disqualification, which directors were not aware, if they had acted honestly they should be relieved from prospective liability. {Ref case: Gilt Edge Safety Glass Ltd., In re {1940} 10 Comp Cas 244 { Ch D}

Exceptions

Nevertheless, it was held in the case of Morris v Kanssen {1946} 1 All ER 586 that this provision did not give validity to acts of directors where there was total absence of appointment.  Besides a director cannot take advantage of this provision if he has notice of the defects in his appointment or on his appointment being challenged he does not take steps to know the facts or does not refrain from doing any act on behalf of the company. 

Significantly, the proviso herein goes on to further lay down that nothing in this section shall give validity to any act done by the director after his appointment has been “noticed”  by the “ company” to be invalid or to have terminated. Hence the protection of valid actions by the director can only remain till just before the said notice.

Significantly the word “noticed”  has been used in the main body of the section as well as in the proviso. However, in the main body it is not provided who should take notice but as per the proviso the notice has to be taken by the company and non else.

Moreover, noticing the fact of invalidity of appointment/termination  is relevant and not the happening of the actual fact which could be on an earlier date or perhaps the same date.

Interestingly section 290 of the Erstwhile Companies Act had used the word “discovered” in the main body of the section and the word “shown” in its proviso in place of use of the word “noticed” in the new section.  This new provision appears to be a better drafted law giving a uniform interpretation.

Notice comes to knowledge

The question which may now arise as to in what manner the fact of the defect or disqualification or termination in/of the appointment,  which makes the appointment invalid, is noticed by the company, and, also by the person for whom it is material to know it, viz. the director himself.

The company concerned may become aware of this fact through any notice of the statutory authority or through process of court or suo motu or in any other manner.  It should immediately inform the concerned director.

The director may become aware of the fact of  the defect or disqualification or termination of his appointment, in any manner, in which case he should, immediately, bring this fact to the notice of the company. 

The date of knowledge of the fact, in either case, should be the relevant date. In case the dates are not same or in all cases the date on which the company has noticed the fact is statutorily relevant.  

However, where the facts or conclusions are disputed then a court has to decide upon them and if invalidity or termination is confirmed then it will relate back to the date of knowledge or coming to know of facts of invalidity. [Ref case: Concord Finance {P} Ltd v Rawalpindi Theaters  Pvt  Ltd { 1970}, 40 Com cases 156 {Del}]       

CONCLUSION

These provisions of section 176 of the Companies Act 2013 is  very important  considering the consequences of valid actions taken by directors for working of the corporate and the problems which will arise if their appointments are found to be invalid, later. This could put the working of companies in jeopardy. Thankfully the earlier law in this regard has been tightened in the new section.

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