All India Bar Examination (AIBE) 3-III Previous Year Question Papers with Answers

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92.

In a meeting of the board of directors of ABC Private Limited, it was proposed that DEF Art Supplies Private Limited shall be its sole supplier of all art material. This resolution was passed by all directors unanimously. It was later revealed that G a director of ABC Private Limited, had not revealed that G is also the majority shareholder and Chief Executive Officer of DEF Art Supplies Private Limited. The resolution was sough to be set aside. Which of the following statements most accurately applies the principles below?


Principle :

A director who is interested in any matter that is being discussed by the board of directors, must disclose her interest to the other directors on the board. The interested director must not take part in any discussion pertaining to such matter and must refrain from voting on the same.

A: The resolution shall not be set aside as DEF Art Supplies is a separate legal entity from its shareholders and directors, and therefore it cannot be penalized for an act done by G.
B: The resolution shall not be set aside, as G's failure to declare an interest in DEF Art Supplied Private Limited is not culpable.
C: The resolution shall be set aside as G did not exhibit the duty of care and diligence as required by a director of the Company.
D: The resolution shall be set aside as G is the majority shareholder and chief executive officer of DEF Art Supplies Private Limited, and was required to declare the same to the board of ABC Private Limited prior to the resolution being put to vote, and refrain from voting on that particular resolution.
E: The resolution shall not be set aside, as the resolution was passed unanimously and would have been passed so even if G had informed the board of g's interest in DEF Art Supplies Private Limited.

The answer is: D

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Explanation

The correct option is D: The resolution shall be set aside as G is the majority shareholder and chief executive officer of DEF Art Supplies Private Limited, and was required to declare the same to the board of ABC Private Limited prior to the resolution being put to vote, and refrain from voting on that particular resolution.

Explanation:

According to the principle, a director who is interested in any matter that is being discussed by the board of directors, must disclose her interest to the other directors on the board. The interested director must not take part in any discussion pertaining to such matter and must refrain from voting on the same.

In this case, G is a director of ABC Private Limited, which passed a resolution to make DEF Art Supplies Private Limited its sole supplier of all art material. G is also the majority shareholder and chief executive officer of DEF Art Supplies Private Limited, which means that G has a direct and substantial interest in the resolution. G did not disclose this interest to the other directors of ABC Private Limited, and participated in the voting on the resolution. This violates the principle of disclosure of interest and amounts to a breach of fiduciary duty by G. The resolution can be challenged and set aside on this ground.

The other options are incorrect because they either ignore or contradict the principle. The resolution can be set aside, as DEF Art Supplies Private Limited is not a separate legal entity from its shareholders and directors, and therefore it can be penalized for an act done by G. The resolution can be set aside, as G's failure to declare an interest in DEF Art Supplies Private Limited is culpable and not excusable. The resolution can be set aside, as G did not exhibit the duty of care and diligence as required by a director of the Company, but also violated another duty of disclosure of interest. The resolution can be set aside, as the resolution was passed unanimously does not matter, as G's vote was invalid and could have influenced the other directors' votes.