Loan to a Chairman's Family Firm: Quorum, Interest and Delegated Powers
A primary agricultural credit society in the Kumaon hills has an eleven-member board and a delegated lending limit of ₹5 lakh per borrower; anything above that must go to the loan committee of the district cooperative bank. At a meeting attended by six directors, the agenda includes a cash credit facility of ₹12 lakh for Himalaya Agro Traders, a partnership firm in which the chairman's son is a partner. The chairman does not leave the room, takes part in the discussion and votes in favour. The resolution is carried 5–1, with one director recording dissent, and the secretary enters it in the minutes as approved. Separately, one-third of the members have submitted a requisition for a special general meeting, citing this loan and asking for an audit of the society's lending. The bye-laws require fifteen days' notice for a special general meeting and are silent on interested directors. The statutory audit is due next month and the branch is already classified as weak.
1. Was the ₹12 lakh sanction validly passed? Identify every defect and state the likely consequences for the society and the directors who voted for it.
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Three defects operate together.
- Delegated power. The board's own limit is ₹5 lakh per borrower. A ₹12 lakh facility is outside its competence; only the district cooperative bank's loan committee can sanction it. Even a unanimous, disinterested board could not have passed this resolution. The correct course was to recommend the proposal upward with the board's comments.
- Conflict of interest. The chairman's son being a partner gives the chairman an indirect interest. Cooperative law and ordinary fiduciary standards require disclosure, abstention from discussion and abstention from voting. His participation vitiates the decision-making process; the fact that the resolution would still have carried 4–1 among the other five directors does not cure the taint, because the board never decided the matter free of his influence and the minutes do not record a disclosure.
- Record-keeping. The minutes describe the resolution as 'approved' without noting the dissent, the interest or the limit problem.
Consequences: the sanction is vulnerable to being set aside; any disbursement made on it exposes the voting directors to personal liability for loss; the auditor is likely to qualify the accounts and the Registrar may order an inquiry. The society should immediately place the proposal before the loan committee, with the chairman recusing himself and the recusal minuted.
2. What is the correct procedure for dealing with the members' requisition, and what can the Registrar legitimately do at this stage?
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The secretary must first verify the requisition: that it is signed by the required proportion of members, states its purpose, and is dated. On verification, the board should be convened to fix the special general meeting, and fifteen days' notice must be given to all members with the agenda confined to the subjects requisitioned. If the board fails or refuses to call the meeting within the period allowed by the bye-laws and the Act, the requisitionists may ordinarily call it themselves after following the prescribed notice, and may bring the default to the Registrar's notice.
The Registrar does not sit as an appellate board over every management decision. The proper routes are: a statutory audit and, if the audit throws up irregularities, an inquiry; arbitration where a dispute is covered by the Act; and inspection of records. A requisition for a special general meeting is a members' democratic remedy, not a substitute for audit. The Registrar should therefore be asked to take the audit objection on record, not to pre-judge the loan. Advising members in writing of this sequence is better administration than ignoring them.
3. Draft a three-point standing policy the board should adopt so that this situation is not repeated.
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Point 1 - Register of interests. Every director files an annual declaration naming relatives, firms and companies in which he or she is interested. The register is tabled at the start of each meeting and any director whose interest arises in an agenda item records the disclosure in the minutes, withdraws from the discussion and abstains from voting. The chair countersigns the recusal entry.
Point 2 - Sanction grid on the table. A one-page delegation chart showing who may sanction how much, and under what conditions, is placed before the board each time and displayed in the office. Items beyond the limit are routed upward as recommendations, with the board's reasons and the borrower's documents, and are not voted upon as final sanctions.
Point 3 - Pre-sanction checklist and minutes discipline. No loan note reaches the board without: account and KYC details, latest audit classification, defaulter check, valuation, and a conflict-of-interest column. The minutes record the votes, dissents and recusals separately from the resolution. A quarterly internal review checks compliance, and the compliance report is read with the audit report.