Bar Of Voting On Related Parties Under Section 188 Of Companies Act 2013 Operates Only At The Time Of Entering Into Contract Or Arrangement: Supreme Court

The Supreme Court has upheld an order of Securities Appellate Tribunal holding that the bar of voting as per Section 188 of the Companies Act, 2013 on related parties operates only at the time of entering into a contract or arrangement.

In this case, the company R. T. Exports Limited proposed to enter into a transaction with one Neelkanth Realtors Private Limited for purchase of 40,000 sq. ft. of residential space. This proposal was treated as a related party transaction and was required to be approved by the shareholders of the Company. Accordingly, a special resolution was approved by R. T. Exports Limited and in terms of Section 188 of the Companies Act, 2013, the related parties abstained from voting on this special resolution. Thereafter, an Extra-Ordinary General Meeting was convened for rescinding the resolution in which, the related parties also voted.

SEBI took up the matter on a complaint against the said voting by related parties and issued notice alleging violation of Regulation 23 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015. Penalty was imposed against these parties. In appeal, the SAT held that the bar of voting as per Section 188 of the Companies Act, 2013 on related parties operated only at the time of entering into a contract or arrangement, i.e., when the resolution dated 15.07.2014 was passed; and therein the said related parties indeed abstained from voting. It found no fault in the said parties voting in the recalling/rescinding of the said resolution. Aggrieved with this, the SEBI approached the Apex Court.

"The view, as taken by the Appellate Tribunal, in the given set of facts and circumstances of the present case, appears to be a plausible view of the matter. In fact, nothing of ill-intent on the part of the respondents has been established in the present case. The hyper-technical stance of the appellant could have only been, and has rightly been, disapproved on the given set of facts and circumstances.", the bench comprising Justices Dinesh Maheshwari and Aniruddha Bose observed while dismissing the appeal.

Case details

Securities And Exchange Board Of India vs R.T. Agro Private Limited | 2022 LiveLaw (SC)  424 | CA 2957 OF 2022 | 25 April 2022

Coram: Justices Dinesh Maheshwari and Aniruddha Bose

Counsel: Sr. Adv S. Niranjan Reddy appeared for the appellant and Sr. Adv Pesimodi and AOR Lakshmeesh S. Kamath appeared for the respondents

Headnotes

Companies Act, 2013 ; Section 188 - Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 ; Regulation 23- Related parties abstained from voting in special resolution which approved a related party transaction - They voted in Extraordinary GM convened for rescinding the said resolution - SAT held the bar of voting as per Section 188 of the Companies Act, 2013 on related parties operated only at the time of entering into a contract or arrangement, i.e., when the resolution dated 15.07.2014 was passed; and therein the said related parties indeed abstained from voting. It found no fault in the said parties voting in the recalling/rescinding of the said resolution -  The view, as taken by the Appellate Tribunal, in the given set of facts and circumstances of the present case, appears to be a plausible view of the matter.

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