Updated : September 02, 2024Ordinary Resolution Under Companies Act, 2013
Overview :This guide helps you understand the role of ordinary resolution in the decision-making process of a company. It explains everything from the legal framework to how ordinary resolutions are passed and what are the matters requiring ordinary resolutions in the first place. It also covers comparison between ordinary resolutions to special resolutions for providing you better clarity of concept. To gain better insights, read the blog thoroughly.
Stakeholders often struggle to make efficient decisions for their companies, be it regarding day-to-day operations or achieving long-term ideas and objectives. To make things easier, the Companies Act prescribes two kinds of resolutions-
- Special resolutions passed with three-fourth majority and required for crucial decisions
- Ordinary resolutions passed with simple majority and required for decisions on day-to-day operations.
In this blog, we’ll discuss how to pass an ordinary resolution to help you navigate the day-to-day operations of a company seamlessly. You can also read our detailed blog on Special Resolutions for complete clarity on the subject. Let’s begin!
What is an Ordinary Resolution?
An ordinary resolution is a process within a company’s decision-making framework, where a simple majority vote by shareholders is used to decide on the company’s day to day affairs. These include routine matters such as the appointment or removal of directors, approval of annual financial statements, declarations of dividends, changes to the company’s articles of association, and so on.
Despite their routine nature, ordinary resolutions are crucial in the overall governance of a company. They provide an efficient means for shareholders to voice their opinions on general operational matters, ensuring their greater participation in the decision-making process.
Legal Framework for Passing Ordinary Resolution in a Company
Passing ordinary resolutions within a company is governed by the Companies Act, of 2013. Section 114 of the Act specifies the matters requiring ordinary resolutions and include the appointment of directors, approval of financial statements, declaration of dividends, and so on.
The Act also provides details regarding procedures for convening general meetings, giving notice to shareholders, and conducting voting to pass ordinary resolutions through a legitimate process. Moreover, section 114(2) of the Companies Act specifies that an ordinary resolution is considered passed if it receives more votes in favor than against it, from members present in the general meeting and voting.
Ordinary Resolution vs Special Resolution
Ordinary resolutions differ from special resolutions primarily in terms of the approval majority. While ordinary resolutions require a simple majority (more than 50% of the total votes), special resolutions require a three-fourth majority (75% of the total votes) for approval. Moreover, special resolutions address decisions which make significant changes to a company’s structure or constitution, whereas ordinary resolutions are required to approve its day-to-day affairs. The table below discusses key differences between the two.
| Parameters | Special Resolution | Ordinary Resolution |
|---|---|---|
| Approval Threshold | Requires a higher majority vote, typically 75% or more. | Requires a simple majority vote, usually more than 50% |
| Nature of Decisions | Reserved for significant matters, such as changes to articles of association, company dissolution, etc | Pertains to routine matters in company operations, such as appointment of directors, approval of financial statements, etc |
| Legal Requirements | Specified in the Companies Act | Also governed by the Companies Act |
| Impact on Company Governance | Significantly impacts the company’s structure, constitution, or major decisions | Addresses day-to-day operations and administrative decisions |
| Process | More stringent procedural requirements and documentation | Generally a more simple and straightforward process |
| Consequence of Failure to Pass | Failure to pass may hinder the company’s ability to make significant changes or decisions | Failure to pass may impede routine operations but may not have as significant implications |
Matters Requiring Ordinary Resolution
Ordinary resolutions are an effective means for shareholders to voice their opinions and concerns in a company using the voting rights they receive. Unlike special resolutions, which require a higher majority for approval, ordinary resolutions can be passed with a simple majority only. Here’s a detailed list of matters requiring ordinary resolutions in a company’s decision-making procedures.
- Change the name of the Company under a direction from the Registrar of Companies
- Change the name of a company under the directions of the Central Government when identical or too nearly resembling the name of another company or a trademark.
- An issue of equity shares with differential rights of Companies.
- Alternation of a capital clause of MoA in a company limited by shares.
- An issue of shares to employees under the employee stock option scheme
- An issue of bonus share
- To invite deposits from its members
- Transaction of ordinary business at AGM (including a declaration of dividend, appointment of auditors
- Appointment of first auditors at EGM when auditor not appointed within 30 days of incorporation
- Ratification of the appointment of auditors to be passed every year during the tenure of the auditors
- Approval of auditor appointed by Board following casual vacancy (except companies subject to audit
- Ratification of remuneration of cost auditor appointed by the board
- Appointment of director (except as expressly provided in the Act) in a general meeting
- Authorizing the Board to appoint an alternate director
- Removal of the director before the expiry of his office (not applicable to the director appointed by the Tribunal)
- Permitting contributions to charities and charitable funds where such contributions exceed five percent. of the net profits
- Approval of related party transactions in certain cases
- Approval of proposal for payment of compensation to a director for loss of office or as consideration for retirement from office or approval for non-case consideration to directors/ transferees about an acquisition of assets
- Appointment of MD/WTD/Manager and payment by Schedule V and s. 197
- Authorizing remuneration to WTD/MD/Manager exceeding 11% of net profits (after obtaining Central Government approval)
- Authorizing payment of commissions as per section 197(1) to Non-Executive Directors
- Voluntary winding up of a company following the expiry of a period of its existence as provided in the article
- Appointment of company liquidator and filing casual vacancy in the office of Company Liquidator
- Dissolution of a company after considering a report of the Company Liquidator
How to Pass an Ordinary Resolution? - Step-wise Process
The process of passing an ordinary resolution begins with identifying the matter requiring approval. A proposal for the resolution is then drafted, stating the matter and the purpose behind it. Shareholders are notified through an advanced notice to participate in the general meeting discussing the proposal. When the meeting is organized, one of the board members introduces the proposal to the shareholders. Following this, discussions are held to explain the proposal, cross-questions are asked and answered, and finally, the proposal is circulated for approval.
In the next step, voting is conducted, and shareholders are asked to cast their votes in favour or against the proposal. If a simple majority is in favor, the resolution is considered passed, leading to appropriate action for its execution. A copy of the resolution is also submitted to the Registrar of Companies in Form MGT-14 to intimate the approval of the decision, within 30 days from the end of the general meeting. Recording the minutes of meetings, the discussions held, and the outcome of the vote are also necessary to ensure a transparent process.
Conclusion
Ordinary resolutions are key to an efficient day-to-day decision-making process in a company. They provide a structured and transparent approach to shareholders for voting on routine matters like changes in the company’s name, appointment or removal of directors, appointment of auditors, issue of shares, and so on. Hopefully, this blog has proved helpful in understanding various aspects of ordinary resolutions like legal framework, the role of shareholders in execution, manner of passing, and matters requiring ordinary resolutions in the first place.
