A CEO, a Chair and a Related-Party Loan

The loan direction is invalid and should not be executed.

• The proposal is a related-party transaction: the borrower is owned by the chair's brother-in-law. The chair has a direct personal interest and should have recused himself from both the discussion and the vote.
• The ₹3.5 crore request is more than three times the society's ₹1 crore single-borrower exposure limit. The board cannot authorise a transaction that breaches its own risk limits without a proper policy amendment, and even then the related-party conflict remains.
• No audited accounts and only a personal guarantee are inadequate credit support for a loan of this size. The chief executive's refusal was a proper exercise of delegated credit authority, not insubordination.

The removal resolution is also vulnerable. A bylaw permitting removal by simple majority does not dispense with the contract's 90-day notice and hearing requirement, nor with natural justice. 'Loss of confidence' must be bona fide and based on reasons connected to performance, not retaliation for refusing an improper loan. The 24-hour notice and the immediate appointment of the chair's nephew strengthen the inference of a colourable exercise of power. The resolution may be void or voidable, and the interim appointment is conflict-tainted.

A board has power to appoint and remove a chief executive, but it must exercise that power for the society's purpose, not to punish a lawful refusal.

Chief executive:

• Do not sanction or disburse the loan. Put the refusal in writing with the exposure-limit and related-party reasons.
• Preserve the loan proposal, board notice, resolution, minutes and correspondence; keep a contemporaneous file.
• Inform the audit committee, the statutory auditor and, if necessary, the Registrar in writing. Seek legal advice on the removal and contract.
• Continue to perform lawful duties unless physically prevented; if removed, treat the action as a governance dispute and challenge it through the prescribed forum.
• Avoid signing any document that regularises the loan or the interim appointment without authority.

Audit committee:

• Meet independently and review the related-party transaction and the credit limit breach.
• Ask for a conflict-of-interest register and check whether the chair voted.
• Consider a forensic review of the society's lending and procurement, not only this loan.
• Report material findings to the board, the Registrar and the auditor, with a copy to the chief executive.

The aim is to create a documented record before the dispute is recast as a personality clash.

The society needs structural safeguards, not just a reprimand:

1. Related-party policy: define related parties, require disclosure, mandatory recusal and independent approval; prohibit loans to directors' relatives outside a transparent scheme.
2. Delegation matrix: clarify what the chief executive may sanction, what requires board approval and what requires a higher committee. Credit limits should not be waived by a board resolution passed in a hurry.
3. Audit committee with independent members: review related-party transactions, internal audit and credit exceptions.
4. CEO appointment and removal procedure: written performance grounds, notice, hearing, and a supermajority for removal to prevent capture.
5. Board code of conduct and training on fiduciary duty, co-operative principles and conflict of interest.
6. Whistleblower protection for executives who refuse improper directions.

Democratic member control does not mean that a board majority can treat society funds as its own. The reform test is whether a director's relative would receive the same loan on the same terms as an ordinary member. Here, the answer is clearly no.