March 26, 2025
Balancing Procedure and Substance: The Legal Weight
of Unanimous Consent
Under Section 203,
a board must pass a unanimous resolution, when
appointing a managing director who already holds
the position of a managing director in another
company. Failure to explicitly document this
unanimous approval can lead to regulatory penalties
and potential invalidation of the appointment. The Registrar of Companies
ruled that implied unanimity is insufficient—explicit
documentation is required when appointing an
MD under such circumstances. The company’s
failure to record a unanimous board resolution
led to penalties, reinforcing strict compliance
standards. Recent case law underscores
the Companies Act’s strict liability framework,
highlighting that both substantive and procedural
compliance are essential. Companies must ensure
accurate record-keeping of board minutes and
adherence to governance protocols to avoid financial
and reputational risks.
Background:
In organizational management, the recording of
board meeting minutes is a fundamental requirement
to ensure transparency, compliance, and accountability.
Accurate and comprehensive minutes serve as a legal
record and provide an audit trail of the decision-making
process. This becomes even more critical when the
board is required to pass unanimous
decisions, as these resolutions often have
far-reaching implications on the company’s
governance, financial health, and strategic direction.
Board minutes serve as prima facie evidence
of decisions taken and discussions held during meetings.
Under the Companies Act, 2013 in India and various
governance codes across the world, well-maintained
minutes of a board meeting are a legal necessity.
Section 203 of the Companies Act, 2013, is a
crucial provision aimed at ensuring that certain
class of companies appoint Key Managerial Personnel
(KMP) to uphold these principles1.
Section 203 provides for the appointment/reappointment
of the key managerial personnel in the company.
To appoint a Managing Director, a company needs
to inquire if the nominated person is already holding
any position of managing director at any other company.
The maximum already held position is one in order
to be eligible for the position of managing director
in any other company2. Furthermore, appointing
company needs to pass a board resolution unanimously
as mentioned under sub-section 3 of the foregoing
section. As established in multiple rulings of the
Registrar of Companies (RoC), this
condition is held to be mandatory, and a company
cannot bypass this section. Otherwise, the appointment
may be held to be unlawful. Resultantly, it can
be rendered invalid by the RoC.
Recent Case on Compliance of
Section 203:
In Sastasundar Healthbuddy Limited3,
the RoC reinforced the mandatory nature of the unanimous
requirement under Section 203 of the Companies Act,
2013. The purpose of requiring unanimous consent
is to take the consent of all the directors in order
to ensure that any shared interest would not hamper
the functioning of the appointing company. The case
arose from an inspection under Section 203(5) of
the Companies Act, 2013, which revealed non-compliance
in the nomination of a Managing Director. The specific
issue concerned the appointment of Mr. Banwari Lal
Mittal as the Managing Director of Sastasundar Healthbuddy
Limited while he was simultaneously serving as the
Managing Director of Sastasundar Ventures Limited.
The core issue was that the company had failed to
explicitly document a unanimous board resolution
in its board meeting minutes authorizing this dual
appointment, contrary to Section 203.
The company argued that although the word “unanimously”
was not explicitly stated in the board resolution
dated July 1, 2016, all board members present had
accepted the appointment. The absence of any recorded
opposition in the meeting minutes, it claimed, implied
unanimous agreement. Further, the company contended
that Secretarial Standard 14 requires
dissenting views to be explicitly recorded in board
meeting minutes. Since no dissent was noted, the
resolution should be deemed unanimously accepted.
Lastly, the appointment had been approved by the
Board, the Nomination and Remuneration Committee,
and subsequently by shareholders at the Annual General
Meeting. The company asserted that this multi-tiered
approval process was sufficient to meet Section
203 compliance requirements.
The company distinguished between a technical
and a substantive violation, arguing that
any lapse in record-keeping should fall under Section
118 of the Companies Act 2013 (which governs
the maintenance of minutes) rather than constituting
a breach of Section 203. It maintained that the
issue was procedural rather than substantive.
The adjudicating officer categorically rejected
the company’s arguments, emphasizing that
Section 203 is a substantive compliance requirement
aimed at ensuring transparent and unambiguous governance
processes, stating:
A unanimous board resolution
is essential to ensure transparency and prevent
conflicts of interest. The company could not
retrospectively claim unanimity based on the
absence of recorded dissent. The law requires
explicit approval, and failing to formally document
unanimous consent invalidates the compliance
claim. The reliance on Secretarial
Standard 1 was dismissed, as regulatory compliance
demands express approval rather than merely
inferring consensus. The violation was deemed
a breach of Section 203, not merely a record-keeping
lapse under Section 118. The ruling underscored
that compliance must align with both the letter
and spirit of the law to uphold corporate governance
principles.
Given the non-compliance with Section 203, the
adjudicating officer imposed a cumulative penalty
of INR 6.5 lakhs (approximately USD 7,500),
including fines of INR 1.5 lakhs (approximately
USD 1,750), on three officers-in-default. The
penalties reinforced the Companies Act, 2013’s
strict liability framework, holding companies and
their officers accountable for governance lapses
regardless of intent.
Evolving Jurisprudence Under
Section 203:
The jurisprudence surrounding Section 203 of
the Companies Act, 2013, reflects a nuanced interpretation
of the statutory requirements concerning the appointment
and responsibilities of Key Managerial Personnel
(KMP). Through a comparative analysis of judicial
and regulatory orders, a clear pattern emerges regarding
the enforcement of compliance with Section 203 and
the penalties imposed for violations.
In the case of Gwalior Smart City
Development Corporation Limited5,
the RoC held that a chief financial officer cannot
hold office in other company without prior approval
of the board. Section 203(5)6 of the
Act prescribes punishment for the violation. The
penalty to the tune of INR 50,000 is imposed for
its violation. On similar lines, Landomus
Realty Private Limited7,
the RoC decided that a company can’t bypass
this requirement by incorrect usage of designation
without prior approval of the statute.
LSF10 Rose Investment S.A.R.L. v.
Ratan India Finance Private Limited8,
the National Company Law Tribunal underscored the
importance of compliance of the key managerial personnel
giving due regard to all the requirements under
Section 203 of the Companies Act, 2013 and stated
the importance of key managerial personnel to act
independently. Otherwise, it would hamper the interest
of the company. Due Diligence requirement must also
be met.
In another landmark case of Western
Carrier (India) Limited9,
RoC underlined the importance of complying with
the requirement before being appointed as a Whole
Time Director of a Company. This requirement can’t
be avoided at any cost in order to get away with
penalty.
Through these cases, the overarching principle
emerges that compliance with Section 203 is not
merely a statutory formality but a fundamental aspect
of corporate governance. The judiciary and regulatory
bodies have consistently held that violations, whether
intentional or inadvertent, attract penalties to
uphold corporate transparency and accountability.
Further, these cases illustrate that companies cannot
circumvent these obligations by delaying compliance
or pleading ignorance, as the law imposes a strict
liability framework on corporate officers and entities.
Conclusion:
The ruling in Sastasundar Healthbuddy Limited
is a crucial decision reinforcing the necessity
of explicit and precise compliance with Section
203. It establishes that even minor lapses, such
as the omission of a single word in board minutes,
can lead to significant financial and reputational
consequences. For corporate boards and secretarial
teams, this case serves as a crucial reminder:
governance is not just about substantive compliance
but also about the meticulousness of procedural
adherence. To mitigate risks, organizations
must prioritize transparent decision-making and
detailed documentation in all governance processes.
Companies must recognize that regulatory bodies
are moving towards a zero-tolerance approach
for governance lapses. Future enforcement actions
will likely focus on both substantive compliance
and the accuracy of procedural documentation. Therefore,
businesses must proactively revise their governance
policies to ensure strict adherence to legal requirements,
safeguarding themselves against regulatory scrutiny
and potential financial liabilities.
Authors:
–
Maulin Salvi
You can direct your queries or comments to the relevant member.
(The author would like to acknowledge and
thank Aditya Kumar, Fifth Year, LLB, Chanakya National
Law University, Patna, for his contribution to this
article.)
1Sec 203 of the Companies Act, 2013
2Third Proviso to sec 203(3) of the
Companies Act, 2013
3In the matter of Sastasundar Healthbuddy
Limited ROC/ADJ/55/160195/2023 (ROC, Kolkata, West
Bengal)
4Secretarial Standard 1 issued by
the Institute of Company Secretaries of India
5In the matter of M/s. Gwalior Smart
City Development Corporation ROC-G/Adj. Pen./ Sec.
203/247,248 (Madhya Pradesh)
6Companies Act, 2013
7In the matter of Landomus Realty
Private Limited, No. ROCB/Adj. Order/Sec.454/Section
170(2) r/w 203/Co.No.081640/2021/ 5818
8LSF10 Rose Investment S.A.R.L. Vs.
Rattan India Finance Private Limited, NCLT Delhi,
IA-19/ND/2022 in CP-76/ND/2021
9In the matter of Western Carriers
(India) Limited ROC/LEGAL/ADJ/ 21-161111/389/2023
(West Bengal)
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