[The following guest post is contributed by Nivedita Shankar, Partner, Corporate Law Division at Vinod Kothari & Co.]
Paragraph 7.6.4 of Secretarial Standards - 1 (“SS-1”) states that signed board minutes have to be circulated to all directors within 15 days of their signing. This is a novel requirement and is an addition to the already lengthy process surrounding finalisation of board minutes. This post attempts to dissect the provisions of paragraph 7.6.4 to examine how and when companies should comply with paragraph 7.6.4, and if such a provision is at all in the best interests of a company. Should corporate boards choose not to comply, is there a way out?
Genesis of Paragraph 7.6.4 of SS-1
As much as the secretarial standards were introduced with the noble intention of ensuring uniformity of secretarial practices across companies, some of their provisions seeming appear contrary to the provisions of Companies Act, 2013 (‘Act, 2013’). More so, certain provisions defy the very intent behind certain provisions of Act, 2013. A case in point is paragraph 7.6.4 of SS-1 which reads as follows:
A copy of the signed Minutes certified by the Company Secretary or where there is no Company Secretary, by any Director authorised by the Board shall be circulated to all Directors within fifteen days after these are signed.
The intent behind introduction of paragraph 7.6.4 was to ensure that board minutes are not changed subsequently, i.e. after all the directors have affirmed to the contents of the board minutes. This is mainly to weed out the possibility of using minutes as a tool in cases of internal rivalry. For long, minutes have been the most favoured tool to misstate facts in cases of mismanagement or oppression. Hence, with the sole intention to thwart the plans of internal factions to use minutes as a tool to concoct facts, paragraph 7.6.4 has been introduced.
The Downside of Para 7.6.4
Although there is no doubt that the intent behind paragraph 7.6.4 is noble, it has led to a peculiar situation for all companies. It is important to understand that the secretarial standards were introduced with the intent to ensure uniformity of secretarial practices across companies i.e. they were intended to be an add-on to the provisions of Act, 2013. However they have stretched beyond the intent behind their enforcement such that they have taken the task upon themselves to prevent malpractices! By subjecting every company to paragraph 7.6.4, SS-1 has taken to writing rules for every company based on some instances of malpractices. In this pursuit, it has also threatened the sanctity of board minutes.
Listed below are certain pertinent provisions of Act, 2013 and SS-1:
1. On a reading of section 118 of the Act, 2013 it is apparent that the minutes have to be maintained by the company. In fact, section 118(11) makes the company liable to a penalty of Rs. 25,000 and every officer in default liable to a penalty of Rs. 5,000 in case of any default in complying with the provisions of section 118;
2. Section 118 read with Rule 25 of Companies (Management and Administration) Rules, 2014 and paragraph 7.1.7 of SS-1 states that the minutes of board meetings have to be maintained at the registered office of the company or at some other place as the board may decide;
3. Further paragraph 7.7.2 of SS-1 states that a director is entitled to receive copy of board minutes. Of course the same has to be requisitioned for.
The Act, 2013 nowhere envisages the possibility of directors also maintaining copies of board minutes with themselves. The reason behind the same is also obvious. Board minutes record the management level decisions of a company. It is only the directors who are privy to such discussions and decisions. In fact, the sanctity of board minutes is even acknowledged by the provisions of paragraph 7.7.2 of SS-1 since it allows board minutes to be shared with the lone condition that the same has to be requisitioned for. In fact, there is no provision in the statute which allows complete copy of signed minutes to be provided to directors. At best, directors can inspect the board minutes.
In fact neither the UK Companies Act, 2006 nor the UK Corporate Governance Code, from which the Act, 2013 and clause 49 of Equity Listing Agreement are largely borrowed, prescribe circulation of signed copy of board minutes.
However, paragraph 7.6.4 has now led to a peculiar position wherein parallel minutes books could be maintained by all the directors of the company. Considering the sensitive matters contained in board minutes, the sanctity of board minutes book is seriously jeopardised by paragraph 7.6.4. Further, what if any director was to misuse the records of board minutes maintained with such director? Will such director subjected to similar penal provisions in section 118(11) as the company? This pertinent question remains unanswered.
Waiver of Provision by Corporate Boards
Before discussing the possibility of doing away with the need to circulate, it is first necessary to understand the repercussions of circulation of board minutes. By circulating board minutes, where on one hand parallel board minutes will be maintained with all directors, the sensitivity and security of board minutes is also at risk. This is because there is nothing in law which prescribes the method of maintaining minutes by the director. Hence, once the director is served with the copy of board minutes, there is the risk that multiple persons may have access to it. The sanctity of board minutes may be well known to directors of a company. But one cannot expect similar maturity from non-board members. Hence, the sensitive matters contained in board minutes run the risk of being misused.
Herein arises the question – can the provisions of paragraph 7.6.4 be waived by corporate boards? The only pre-requisite when it comes to waiver is that it must be an intentional act done with knowledge about the right that the individual has. The same has also been discussed by Mulla on the Contract Act at page 198 to say that “agreements which seek to waive an illegality are void on grounds of public policy”. Simply put, doctrine of waiver is applicable to such cases where a right has been bestowed by law. Hence where any right or protection has been bestowed by law, the same may be waived.
In the instant case, the obligation cast upon the company to circulate signed copies of minutes cannot be said to be statutory obligations as the statutory obligation is limited to recording of the minutes as laid down in section 118. The additional requirement of the SS-1 to circulate the minutes once signed may merely be said to be for unauthorised alterations thereof, or for the ready reference of the directors and therefore, it is not a statutory obligation. Looking at the sensitivity of board minutes, the directors of corporate boards may choose to waive the requirement of paragraph 7.6.4. The waiver of such a requirement will not be construed to mean waiver of a statutory right - and hence, the waiver will not be void. In any case there is no public policy issue involved here. Further, the obligation to circulate board minutes is the obligation of the company towards the directors and not towards law. Hence waiver of requirement of paragraph 7.6.4 is an option that corporate boards may explore.
Period of Applicability of Paragraph 7.6.4
SS-1 came into force from July 1, 2015. Now consider the following scenarios:
1. Board meeting of A Ltd was held on 2 July 2015. The minutes were confirmed and signed at the board meeting held on 1 September 2015.
2. Board meeting of X Ltd was convened on 20 June 2015. The draft minutes were circulated on 2 July 2015. The minutes were then confirmed and signed at the board meeting held on 1 August 2015.
3. Board meeting of Y Ltd was convened on 24 May 2015. The draft minutes were circulated and confirmed within 30 days. However they were signed after placing the minutes in the board meeting held on 1 August 2015.
Will these companies have to comply with paragraph 7.6.4? In the first scenario, the answer is clearly in the affirmative. However for the remaining two scenarios, one is tempted to answer in the negative. This is because SS-1 was made effective from 1 July 2015. Both the board meetings were held prior to 1 July 2015. However considering the provisions of section 118(11), one may take a view that paragraph 7.6.4 have to be complied with by X Ltd and Y Ltd.
Additional Compliance Requirements
Not only does paragraph 7.6.4 require the certified copy of signed board minutes to be certified by the company secretary or an authorised director, it also requires a copy of the signed minutes to be circulated to all directors within 15 days after these are signed. This is in addition to the draft minutes being anyway circulated to all directors (paragraph 7.4) and also being placed in the ensuing board meeting following the date of entry (paragraph 7.3.5). Additionally, paragraph 1.3.8 of SS-1 also requires the draft resolution to be circulated as a part of notes to agenda or be placed at the meeting itself. Hence paragraph 7.6.4 is another addition to the already mundane clerical work pertaining to circulation of minutes.
With SS-1 already been implemented, companies are also gearing up to convene board meetings to approve quarterly results. Considering the enormity of the provisions of para 7.6.4, it is time that corporate boards take note of the same and act fast.
- Nivedita Shankar