Amount paid on behalf of md

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

29 January 2014 MD of a unlisted Public company has requested company to make the payment on behalf of him to the vendor for the purchase of plot of land(MD Personal) and deducted from the remuneration accordingly by the company.
My query in this case, what are the ideal formalities to be completed before proceeding for the payment by the company to commensurate with Companies Act,1956.And also please provide me with the difference,if any, in amended provisions as per Companies Act,2013(Amended)

Querist : Anonymous

Querist : Anonymous (Querist)

29 January 2014 Please reply to my query.

Querist : Anonymous

Querist : Anonymous (Querist)

29 January 2014 The query was not resolved.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
Follow

14 July 2024 The scenario described involves a transaction where a Public Company's Managing Director (MD) requests the company to make a payment on his behalf to purchase a plot of land, which is intended for personal use. To ensure compliance with the Companies Act, whether it's the 1956 version or the amended provisions under the 2013 Act, specific formalities and considerations need to be addressed.

### Companies Act, 1956:

Under the Companies Act, 1956, the provisions relating to transactions with directors primarily focus on ensuring that such transactions are conducted at arm's length and are in the best interests of the company. Here are the key formalities and considerations:

1. **Board Approval**: The transaction should be approved by the Board of Directors of the company. The approval should be obtained in a board meeting where the details of the transaction (purpose, amount, terms) are disclosed and discussed.

2. **Shareholder Approval (if applicable)**: Depending on the nature and size of the transaction, shareholder approval may be required. If the transaction exceeds certain thresholds as per the Act, approval in a general meeting of shareholders might be necessary.

3. **Disclosure in Financial Statements**: The transaction should be disclosed in the financial statements of the company, particularly in the notes to accounts or related-party transactions section, providing details of the transaction, the name of the director involved, and any terms and conditions.

4. **Interested Director's Disclosure**: The MD should disclose his interest in the transaction to the Board of Directors, providing all relevant details about the plot of land, the vendor, and the terms of purchase.

5. **Compliance with Related Party Transaction Rules**: Ensure compliance with the rules regarding related-party transactions as per the Companies Act, which may include obtaining approvals and ensuring that the transaction is conducted on an arm's length basis.

### Companies Act, 2013 (Amended):

The Companies Act, 2013 introduced stricter provisions and more comprehensive rules regarding transactions with directors and related parties. Here are the differences and additional provisions compared to the 1956 Act:

1. **Approval Thresholds**: The Act specifies monetary thresholds beyond which shareholder approval is mandatory for transactions with directors or related parties.

2. **Audit Committee Approval**: Larger companies are required to have an Audit Committee, which must approve certain related-party transactions before they are executed.

3. **Independent Director Approval**: In certain cases, transactions with directors or related parties require approval from independent directors to ensure transparency and fairness.

4. **Disclosure Requirements**: Enhanced disclosure requirements are mandated under the 2013 Act, ensuring that all related-party transactions are adequately disclosed in the financial statements of the company.

5. **Penalties and Enforcement**: The 2013 Act introduces stricter penalties for non-compliance with related-party transaction rules, including fines and potential legal liabilities for directors involved in non-compliant transactions.

### Ideal Formalities to be Completed:

To proceed with the payment for the plot of land on behalf of the MD in compliance with the Companies Act:

- **Obtain Board Approval**: Hold a board meeting to approve the transaction, ensuring that all directors are informed and have the opportunity to discuss and approve the transaction.

- **Ensure Disclosure**: Disclose the transaction in the financial statements of the company, providing comprehensive details as required by the Act.

- **Compliance with Related-Party Transaction Rules**: Ensure that the transaction complies with the rules regarding related-party transactions, including obtaining necessary approvals and conducting the transaction at arm's length.

- **Document the Transaction**: Maintain proper documentation of the transaction, including approvals, disclosures, and any agreements or correspondence related to the purchase of the plot of land.

By following these formalities and considering the specific provisions of the Companies Act, whether the 1956 version or the amended 2013 Act, the company can ensure compliance and mitigate any potential legal or regulatory risks associated with the transaction. Consulting with legal and financial advisors familiar with corporate governance and company law is advisable to navigate these requirements effectively.

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now