Interim Dividend, Director’s Duty, and Board Meeting Quorum: A Deep Dive into Corporate Governance under Indian Company Law

In the realm of corporate governance, decisions made in the boardroom are not just procedural; they are legal acts that carry significant implications for companies, directors, and shareholders alike. Among the most debated issues are those surrounding interim dividends declared without full financial clarity, the obligations of directors in such cases, and the legal validity of decisions made when the quorum of a board meeting is in question.

This article examines three tightly linked issues in corporate governance under the Companies Act, 2013:

1. The legality of declaring interim dividends based on potentially misleading financials.

2. The scope of director liability, especially when a director was not present at a crucial meeting.

3. The validity of decisions made at board meetings where the quorum fluctuates.

These issues are not hypothetical; they often surface in litigation and internal disputes and have been subject to judicial scrutiny.

Interim Dividend on Misleading Financials: Is the Board at Fault?

Let us begin with the concept of interim dividend. Under Section 123(3) of the Companies Act, 2013, the Board of Directors is empowered to declare an interim dividend out of the surplus in the profit and loss account or out of profits for the current financial year. However, this discretion is not unchecked.

In the case of ABC Limited, the Board declared an interim dividend based on accounts which were later objected to by the audit committee. The financials had allegedly overstated profits due to overvaluation of inventory and failure to record outstanding liabilities. As a result, the company did not distribute the declared dividend, prompting a shareholder lawsuit.

Legal implication:

The declaration of interim dividend based on distorted financials can lead to legal consequences. According to Section 129, financial statements must provide a true and fair view and comply with accounting standards. Directors, under Section 166, owe a fiduciary duty to act in good faith and in the best interest of the company.

If the financials were indeed misleading, then the very basis for the dividend declaration becomes invalid. Moreover, non-payment of the dividend could amount to a breach of promise to shareholders if it was formally declared. However, no distribution should be made based on fraudulent or materially incorrect data.

Can a Director Escape Liability by Claiming Non-Attendance?

One of the directors of ABC Limited claimed that he was not present at the board meeting in which the interim dividend was declared and therefore should not be held responsible.

Relevant law:

While non-attendance at a meeting may suggest non-participation, it does not automatically absolve a director of liability. Directors have an ongoing duty to exercise diligence. As per the landmark judgment in Sunil Bharti Mittal v. CBI (2015), directors can be held liable for corporate acts if there is evidence of active involvement or failure to exercise due care.

Key insight:

Section 166 places a duty on directors to exercise independent judgment and reasonable care. Merely being absent from a meeting does not discharge a director from the obligation to review financial statements or raise red flags when necessary.

Resolution by Circulation: Not Always an Option

The Companies Act allows for decisions of the board to be taken by resolution by circulation under Section 175. This facilitates operational flexibility by allowing directors to approve routine matters without convening a meeting.

However, Rule 8 of the Companies (Meetings of Board and its Powers) Rules, 2014 limits the scope of such resolutions. Some matters that must be decided at an in-person board meeting include:

• Approval of financial statements and the Board’s report

• Approval of amalgamations, mergers or reconstructions

• Appointment or removal of key managerial personnel such as the Managing Director

• Making calls on shareholders in respect of unpaid share capital

Why it matters:

These limitations exist to preserve accountability and ensure robust discussion on critical company matters.

Is a Board Decision Valid If Quorum Drops Mid-Meeting?

Let us consider LMN Limited, which has 12 directors. A valid board meeting commenced with 5 directors present, meeting the quorum requirement as per Section 174, which mandates quorum as one-third of the total strength or two directors, whichever is higher. However, two directors left during the meeting, leaving only three.

Legal question: Are the decisions taken by the remaining three directors valid?

Answer:
Yes, typically. As per standard legal interpretation, if the quorum is present at the commencement of the meeting, the meeting is considered valid even if some directors leave later. However, this is contingent on the absence not affecting specific procedural rules under the company’s Articles of Association or any statutory provision requiring continued quorum.

Conclusion:
The decisions made by the remaining three directors are likely to be valid, provided the meeting was not adjourned and there were no express rules requiring continued presence.

Conclusion

Corporate governance is a delicate balance of accountability, transparency, and adherence to statutory procedures. Directors cannot hide behind technicalities like non-attendance to escape scrutiny, and companies must ensure that declarations, especially those involving financial outflows like dividends, are based on sound and accurate data.

Board meetings must be conducted in compliance with quorum rules, and key decisions must be deliberated in formal meetings, not rushed through by circulation. Understanding these principles is vital not just for legal compliance but also for maintaining the trust of shareholders and stakeholders.

For directors, company secretaries, and corporate legal advisors, these scenarios serve as essential case studies in staying within the four corners of corporate law while ensuring ethical and transparent governance.

For expert corporate legal advisory, compliance audits, and governance support, connect with our team at LawCite Advocates