One of the major processes by which companies formally, legally decide on matters under company law is the passing of resolutions. Resolutions are formal expressions of the board of directors’ or shareholders’ will, which is supported and documented through correctly convened meetings. Resolutions give a company the legal justification for its acts and are necessary to help maintain open, democratic, and lawful decision-making. The Companies Act of 2013 specifies certain rules on notification, quorum, voting, and documentation that apply to the procedure of approving resolutions in India.
Resolutions are usually passed in board meetings for directors or general meetings (annual or extraordinary) for shareholders. Resolutions are of three types: Ordinary Resolutions, Special Resolutions, and Resolutions Requiring Special Notice, depending on the nature and importance of the business to be dealt with. Resolutions that are ordinary are used to pass normal business like the appointment of directors or approval of accounts, while special resolutions are used for more important matters like a change to the company’s constitution or commencement of a winding-up. Some controversial issues, like the removal of directors or auditors before completion of their term, are done through resolutions that require special notice.
As a result, the adoption of resolutions provides legal sanction for multiple business ventures as well as group decision-making.
Types Of Resolutions
The Companies Act of 2013 divides resolutions into three categories: ordinary resolutions, special resolutions, and resolutions that necessitate special notice.
- An Ordinary Resolution is approved by a simple majority of the members present and voting.
- A Special Resolution is one that requires a minimum of 75% votes in its favor and has to be clearly mentioned in the notice of the meeting.
- A Resolution calling for special Notice is not a distinct category but applies to certain situations (like removal of auditors or directors) where members need to provide specific notice before moving the resolution. Both play different legal and procedural functions in the decision-making of the companies.
Ordinary Resolution
An Ordinary Resolution is a kind of resolution passed by the members of a company at a general meeting. It is the most commonly used resolution for dealing with routine day-to-day business matters. As per Section 114(1) of the Companies Act, 2013, an ordinary resolution is considered to be passed if more than 50% of the votes of the members entitled to vote are in agreement with the resolution. Voting can be done by a show of hands, poll, electronic ballot, or postal vote, as may be the nature of the company and the circumstances of the meeting.
Ordinary resolutions have no special mention in the notice of the meeting. Notice must be dispatched to all the members eligible to attend the meeting at least 21 clear days before the meeting. The affairs that can be transacted by way of ordinary resolutions are the appointment or reappointment of directors, the approval of accounts, the declaration of dividends, the appointment or removal of auditors, and the determination of remuneration of the auditors.
The simplicity and flexibility of an ordinary resolution make it suitable for most operational decisions. It ensures that the company’s business can be conducted efficiently while still reflecting the views of the majority of its shareholders, without needing an enhanced approval threshold.
Special Resolution
A Special Resolution is a formal decision taken by a company’s shareholders that requires a higher percentage of shareholders’ approval than an Ordinary Resolution. According to Section 114(2) of the Companies Act, 2013, a special resolution is considered to be passed if a majority of 75% or more of the votes of the eligible members present in person or by proxy vote in its favor. This implies that there should be three times as many votes in favor of the resolution as against it.
The reasons for the passing of the special resolution should be stated clearly in the general meeting notice. Furthermore, such notice should be dispatched to all qualified members no less than 21 days before the meeting is conducted, together with an explanatory statement explaining the material facts and reasons for the decision.
Special resolutions are meant for major and strategic decisions that have a substantial bearing on the organisation of the company or its business. Such choices involve alterations to the company’s Articles or Memorandum of Association, change of name, reduction of share capital, issue of sweat equity shares, buy-back of shares, and voluntary winding up of the company.
Because they have such serious legal consequences, special resolutions require a higher level of agreement between shareholders for thorough and collective decision-making.
Ordinary Resolution Vs Special Resolution
In the field of company law and corporate governance, resolutions by shareholders or the board of directors are often employed to make decisions within a corporation. There are two categories of resolutions: ordinary resolutions and special resolutions. Both are critical to the operation of a business but differ in matters of concern, voting thresholds, and legal status.
1. Definition
- Ordinary resolutions require a majority of votes at a general meeting from members who are eligible, either present in person or represented by proxy. This means that the resolution would need over 50% of the votes to pass.
- Special resolutions, however, require a higher level of approval. More specifically, at least 75% of the votes cast by eligible voters (in person or by proxy) need to be in favor of the resolution. The Companies Act 2013 requires that the intention to move a special resolution is clearly indicated in the notice of the general meeting.
2. Legal Provisions of the Companies Act, 2013
- An Ordinary Resolution is defined under Section 114(1) of the Companies Act, 2013. A Special Resolution is defined under Section 114(2) of the Companies Act, 2013.
- These two sections lay down the legal grounds for constituting these resolutions at general meetings.
3. Documentation and Filing with ROC
- Ordinary Resolution may need to be filed with the Registrar of Companies (ROC) only if required by certain sections.
- A Special Resolution is required to be filed with the ROC through Form MGT-7A or MGT-7 along with Form MGT-14 within 30 days from the date of passing the resolution.
4. Importance and Legal Impact
- Ordinary Resolutions are the majority will of the shareholders and are well-suited to usual business choices. They are less onerous and allow companies to run more flexibly.
- Special Resolutions mark a higher degree of shareholder consensus and are used only for strategic, structural, and long-term decisions. Their passing reflects a wide shareholder consensus and has greater legal significance.
5. Record Keeping
- Minutes of a meeting in which either resolution is approved must be signed and recorded according to Section 118 of the Companies Act, 2013.
- In case of special resolutions, the explanatory statement under Section 102 shall be attached to the notice that provides an explanation for material facts.
6. Every Matter Needs to be Settled
Ordinary Resolutions are used mostly for day-to-day business issues, such as:
- Passing financial statements
- Declaration of dividends
- Appointment or reappointment of directors
- Appointment and remuneration of auditors
- Authorisation to raise share capital (in extraordinary situations).
Special Resolutions are used in case of important and crucial decisions like:
- Alteration of the company’s name
- Change in the registered office from one state to another
- Alteration of share capital
- Issue of sweat equity shares
- Repurchasing of shares
- Conversion of a public company into a private company and vice versa
- Voluntary winding up of the company.
7. Voting Procedures
Both types of resolutions can be carried out through:
- Show of hands
- Poll
- E-voting
- Postal ballot (for both listed and unlisted public companies)
But, for special resolutions, postal ballots and e-voting are preferred more, particularly in publicly listed companies.
8. Voting Requirements
An Ordinary Resolution is passed if the majority of votes cast in favor of the resolution outweigh those against it by a simple majority, i.e., more than half of the members present and voting in person or by proxy must be in favor of the resolution. No special notice in the meeting notice declaring it to be an ordinary resolution is required; a normal notice of not less than 21 clear days before the general meeting is acceptable.
On the other hand, Special Resolution requires a higher degree of consensus. For a special resolution to be passed, at least 75% of the votes cast by members having a right to vote (either in person or through proxy) have to be of a similar opinion. Additionally, the company is statutorily required to clearly state in the notice of a meeting that the resolution proposed is a special resolution. This notification is also required to be sent at least 21 clear days prior to the meeting.
Thus, although both kinds of resolutions involve notice prior to the meeting, a special resolution necessitates a supermajority of three-fourths of votes, in addition to clear disclosure in the notice, while an ordinary resolution needs only a simple majority and a general meeting notice.
Conclusion
All in all, the distinguishing factor between a special resolution and an ordinary resolution is based on the extent of authorization needed and the nature of the activity carried out. While ordinary resolutions are adequate for common operational decisions that require a simple majority, special resolutions are used where more significant issues could impact the company’s structure or functions and necessitate a three-fourths majority. An understanding of these differences is necessary for compliance with the Companies Act of 2013 and ensuring that corporate governance procedures are carried out effectively and legally.
