SECTION 188 OF THE COMPANIES ACT 2013 "

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 IMPOSSIBLE  TO  PERFORM  

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SECTION  188  OF  THE  COMPANIES  ACT  2013  

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RELATED  PARTY

 Sub  section 1  of  Section 188  provides  certain  contract or  arrangement with  related  party  requires  shareholders  resolution.

No company shall enter into any contract or arrangement with a related party with respect to—

(a) sale, purchase or supply of any goods or materials;

(b) selling or otherwise disposing of, or buying, property of any kind;

(c) leasing of property of any kind;

(d) availing or rendering of any services;

(e) appointment of any agent for purchase or sale of goods, materials, services or property;

(f) such related party's appointment to any office or place of profit in the company, its subsidiary company or associate company; and

(g) underwriting the subscription of any securities or derivatives thereof, of the company

Proviso  to  sub  section 1  of  Section 188  of  the  Companies  Act,  2013  provides  that  t no contract or arrangement, in the case of a company having a paid-up share capital of not less than such amount, or transactions not exceeding such sums, as may be prescribed, shall be entered into except with the prior approval of the company by a special resolution

For  the purpose  of  fist  proviso  to  sub section 1  of  Section 188    the  following  two   conditions  are   to  be fulfilled  to   pass  special resolution

1)       Paid  up  capital  of  Rs.10  crore  or  more

2)         A ) Contracts  or  arrangement

a)       Sale,  purchase    or  supply  of  any  goods  or  materials  directly  or  through  appointment  of agents   exceeding 25%  of  the annual  turnover

b)      Dealing  in  all  immovable  property   directly or  through  appointment  of  agents  exceeds  10%  of  net worth

c)      Leasing  of  property  of  any  kind   exceeding   of  10%  of  net  worth

d)     Availing  or  rendering  of  any  services   directly  or  through  appointment of agents  exceeding  10%    of  the  networth  as  mentioned

B)    appointment  of  any  office  or  place  of  profit  in  the  company,    the  subsidiary  company  or  associate  company   at a  monthly     remuneration exceeding  Rs.2.5  lakhs

C)   Remuneration  for  underwriting  the  subscription   of  any securities  or derivatives  thereof of  the  company exceeding   1%  of  the  net woth.

Second  proviso  of  sub  section 1  of  section 188  of  the  Companies Act,  2013  that   no member of the company shall vote on such special resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party

Example:   There  are  four  brothers  or husband and wife  inter  related   each  company   having  paid  up capital  of  Rs.10  crore  or  more  and  fulfilled  the above  criteria  i.e.  sale  or  purchase  of  goods   exceeding  25%  of  annual  turover   then   it  is  not  possible  to  pass  the  special  resolution.

In the instant  case  the  resolution cannot  be  taken up  or  moved  since  there  is  no  dis- interested  shareholders,

The  moot  point  is  that  how  can we deprive  shareholders rights ?

We  agree  interested  director  not  to  participate  in  the   proceedings in the  board  meeting  but  not  in  the  general  meeting,

 

There  is  no  interested  shareholders  definition  in  Companies Act, 2013

Conclusion:  It  is  impossible  to  perform.   It  is  welcome  move to  increase  the  higher  limit  of  paid  up  capital  Rs,10  crore  and  above   but not making  it  impossible  to  perform.  It  is  suggested  that  the  proviso  clause  prohibiting  right  to  vote  on  special  resolution by  interested/related  shareholder  be  removed.  Another  classic  example  of  poor  drafting