Prohibition on voting on related parties under section 188 of the Companies Act 2013 only operates at the time the contract or arrangement is entered into: Supreme Court

The Supreme Court has upheld an order of the Securities Appeals Tribunal ruling that the ban on voting under section 188 of the Companies Act 2013 on related parties only applies at the time of the entering into a contract or arrangement.

In this case, the company RT Exports Limited offered to enter into a transaction with a certain Neelkanth Realtors Private Limited for the purchase of 40,000 square feet of residential space. This proposal was treated as a related party transaction and had to be approved by the shareholders of the Company. Accordingly, a special resolution has been approved by RT Exports Limited and in terms of Section 188 of the Companies Act, 2013, the related parties abstained from voting on this special resolution. Subsequently, an Extraordinary General Meeting was convened to cancel the resolution on which the related parties also voted.

SEBI took up the matter following a complaint against the said vote by related parties and issued a notice alleging breach of Regulation 23 of the Securities and Exchange Board of India (Registration and Filing Requirements) Regulations 2015 disclosure). A sanction was imposed on these parties. On appeal, the SAT held that the ban on voting under section 188 of the Companies Act 2013 on related parties only operated at the time of entering into a contract or agreement, that is to say when the resolution of 15.07.2014 was adopted; and in this document, said related parties have in effect abstained from voting. He found no fault in the fact that the said parties voted for the recall/cancellation of the said resolution. Hurt by this, SEBI went to the Apex Court.

“The view, as taken by the Appeals Tribunal, on all the facts and circumstances of this case, appears to be a plausible view of the matter. In fact, nothing ill-intentioned on the part of the respondents was The hypertechnical position of the appellant could only have been, and was rightly, disapproved of in this case..,” observed the bench consisting of Justices Dinesh Maheshwari and Aniruddha Bose in rejecting the appeal.

Case details

Securities And Exchange Board of India v RT Agro Private Limited | 2022 LiveLaw (SC) 424 | CA 2957 FROM 2022 | April 25, 2022

Coram: Judges 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

Summaries

Companies Act, 2013; Section 188 – Securities and Exchange Board of India (Registration and Disclosure Requirements) Regulations 2015; Regulation 23- Related parties abstained from voting in a special resolution that approved a related party transaction – They voted at a special general meeting called to rescind said resolution – The SAT held the voting ban pursuant to 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 of 15.07.2014 has been passed; and in this document, said related parties have in effect abstained from voting. He found no fault in the fact that the said parties voted to recall/rescind the said resolution – The view, as adopted by the Appeals Tribunal, on the whole given of the facts and circumstances of this case, seems to be a plausible view of the matter.

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