Circular Resolution

Definition

A circular resolution is a decision made by a company's board of directors through written circulation of a draft resolution to all directors, rather than through discussion at a duly convened board meeting. Under Section 175 of the Companies Act, 2013, a resolution can be passed by circulation if approved by a majority of the directors entitled to vote, provided that no director has requested that the matter be decided at a board meeting. The process involves circulating the draft resolution along with the necessary papers to all directors at their registered addresses or email IDs, and collecting their written approvals, which may be done electronically. The resolution is deemed passed on the date on which it receives the requisite majority of affirmative votes.

Circular resolutions offer significant practical benefits, they eliminate the need to coordinate schedules for a board meeting, enable faster decision-making when time-sensitive approvals are required, and reduce travel and meeting logistics costs, particularly for companies with directors spread across different cities or countries. Common matters approved by circular resolution include opening or closing bank accounts, granting powers of attorney, authorizing specific transactions within pre-approved limits, appointing representatives for legal proceedings, and approving routine administrative matters. The Companies Act requires that resolutions passed by circulation must be noted at the next board meeting, and entries of such resolutions must be made in the minutes book accordingly.

However, there are important limitations on the use of circular resolutions. Section 179(3) of the Companies Act, read with Rule 8 of the Companies (Meetings of Board and its Powers) Rules, 2014, lists specific matters that must be transacted only at a physically (or electronically) convened board meeting and cannot be passed by circulation. These include making calls on unpaid share capital, authorizing buyback of securities, issuing securities, approving financial statements, diversifying the business, making investments, taking over companies, granting loans above prescribed limits, and several other significant decisions. Any circular resolution passed for these reserved matters would be invalid, making it essential for company secretaries to carefully verify the nature of each resolution before choosing the circulation route.

Key Points

• Section 175 of the Companies Act, 2013 permits resolutions to be passed by circulation, approved by a majority of eligible directors without a formal meeting.
• The draft resolution and supporting documents must be circulated to all directors at their registered addresses or email IDs simultaneously.
• Circular resolutions must be noted at the next board meeting and recorded in the minutes book as required by the Companies Act.
• Matters reserved under Section 179(3) (such as approving financial statements, issuing securities, and granting large loans) cannot be passed by circulation.
• Any director can object to the circular resolution route and request that the matter be decided at a duly convened board meeting.
• Electronic approvals via email or digital signatures are valid for circular resolutions, facilitating remote participation by directors in different locations.