PRACTICAL PROBLEMS
Problem-1. A and B were only two members of a private limited company. Both of them have been killed in a bomb blast. Does this company cease to exist? Explain. [B.COM. (H), D.U., 1993, 1996]
Ans. A company is an artificial person. It exists only in contemplation of law and is distinct from the members constituting it. Being distinct from the members, the death, insolvency or retirement of its members leaves the company unaffected. Members may come and go but the company can go forever. It continues even if all its human members are dead. Even where during the war all the members of a private company, while in general meeting were killed by a bomb, the company survived. Not even a hydrogen bomb could have destroyed it. [K/9 Meat Suppliers (Guildford) Ltd., Re (1996) 1 W.L.R. 1112]. The shares will be registered in the name of the nominees or legal successors.
Thus, the company does not cease to exist.
Common Seal- A company being an artificial person is not bestowed with a body of natural being. Therefore, it has to work through its directors, officers and other employees. But, it can be held bound by only those documents which bear its signatures. Common seal is the official signature of a company.
Problem-2 . A public limited company has only seven shareholders, all the shares being paid up in full. All the shares of one such shareholder are sold by the Court in an auction and purchased by another shareholder. The company continues to carry on its business, thereafter. Discuss the liabilities of the shareholders of the company.
Ans. The Problem in question relates to reduction of membership below the statutory minimum. Section 12 of the Companies Act requires a public company to have a minimum of seven members. If at any time the membership of a public company falls below seven and it continues its business for more than six months, then according to Section 45 of the Companies Act, 1956 every such member who was aware of this fact, would be individually (personally) liable for all debts contracted after six months.
Thus, in the above Problem, the remaining six members shall incur personal liability for the debts contracted by the company :
(i) If they continued to carry on the business of the company with that reduced membership (ie., 6) beyond six month period;
(ii) Only those members who knew of this fact of reduced membership shall be liable, for instance, one of the members who was abroad and thus not aware of those developments, shall not be liable;
(iii) The liability shall extend only to the debts contracted after six months from the date of auction of that member's shares.
Problem-3. The number of members in a public company got reduced to six on 10th Sept., 2006. The company incurs trade debts on 11th Sept., 2006, 2nd February, 2007 and 17th March, 2007. How far are the remaining six members liable for the debts?
Ans. Six members shall be personally liable only for the debt incurred on 17th March, 2007. In respect of the earlier two debts company alone shall be liable.
** For law on the subject, please see Answer to above Problem.
Problem-4. Directors of a public limited company accepted a bill of exchange on behalf o the company. But the word 'limited' was omitted from the name of the company at the time of acceptance. Who can be held liable for the payment of the bill?
Ans. According to Section 147 of the Companies Act, 1956, where an officer of a company signs on behalf of the company any contract, bill of exchange, hundi, promissory note cheque or order for money, such person shall be personally liable to the holder if the name of the company is either not mentioned, or is not properly mentioned. Thus, where on a cheque, the name of a company was stated as 'LR agencies limited' whereas the real name of the company was 'L&R Agencies Ltd.' the signatory directors were held personally liable (Hendon v. Adelman 1973, New Delhi LR 637).
However, personal liability, as aforesaid, will not be attracted where there is an accidental omission of the word 'limited' - Dermatine Co. v. Ashworth [1905] 21 T.L.R. 510. In this case a bill of exchange was accepted on behalf of a limited company but the size of the paper was shorter than the company's seal. As a result, the word 'limited' did not appear on the instrument. Held, the directors who accepted the bill of exchange were not personally liable because the omission was neither deliberate nor of negligent origin. It was an obvious error of most trifling kind and the mischief aimed at by the Act, did not exist here. Thus, if the omission is not deliberate or the result of negligence on the part of the Directors, they shall not be held liable.
Problem-5 . Two joint Hindu families carry on together a business as joint owners. The first family consists of 3 brothers and their respective sons, being 12 in number. The second family consists of the father, 4 major sons and 2 minor sons. Is the business illegal?
Ans. Where two joint families combine to carry on business as joint owners or in partnership, all major persons shall be counted as members. Minors are, however, to be excluded. An association comprising of more than 20 members is an illegal association if engaged in business other than banking. Since in the given Problem, it is not indicated that they are engaged in banking business, it may be assumed that they are not and thus since the total persons in the two joint families come to 22 including 2 minors, Le., only 20 major persons, business is not illegal.
Problem-6 . In a private limited company, it is discovered that there are, in fact, 54 members. C an enquiry, it is ascertained that 6 of such members have been employees of the company in a recent past and that they acquired their shares while they were still employees of the con Is it necessary to convert the company into a public limited company?
Ans. As per Section 3(l)(j), a company to be registered as a private company must restrict its membership to 50 only. However, in counting this number of 50 members, employee members and ex-employee members (ie., those who become members while in the employment of the company but now having ceased to be in the employment still continue to retain membership) are to be excluded. Thus, in the given case, the company shall continue to be a private company. There is no need for conversion.
Problem-7. The paid-up share capital of XYZ (Private) Company Ltd. is Rs. 20 lakhs consisting of 2,00,000 equity shares of Rs. 10 each fully paid-up. ABC (Private) Ltd. and its subsidiary DBF (Private) Ltd. are holding 60,000 and 50,000 shares respectively in XYZ (Private) Co. Ltd.
Examine with reference to the provisions of the Companies Act, 1956, whether XYZ (Pvt.) Co. Ltd. is a subsidiary of ABC (Pvt.) Ltd. Would your answer be different if DBF (P.) Ltd. is holding 1,10,000 shares in XYZ (Pvt.) Co. Ltd. and no shares are held by ABC (Pvt.) Ltd. in XYZ (Pvt.) Co. Ltd. ?
Ans. Section - 4 of the Companies Act, 1956, inter alia, provides that a company shall be deemed to be the holding of another where it holds more than half in nominal value of the equity share capital of the other. But, in this regard, shares held or power exercisable by a subsidiary shall be treated as held or exercisable by the said company. Thus, the shares held or power exercisable by a subsidiary shall be treated as 'held' or 'exercisable' by the holding company. Thus, in the given case XYZ (Pvt.) Ltd. shall be deemed to be the subsidiary of ABC (Pvt.) Ltd.
The second situation is rather simpler inasmuch as under Section 4(l)(c), a company which is a subsidiary of a subsidiary shall also be deemed to be the subsidiary of the holding company. Accordingly, XYZ (Pvt.) Ltd. shall be, or the basis of majority shareholding criterion, the subsidiary of DEF (Pvt.) Ltd. and DBF (Pvt.) Ltd. being subsidiary of ABC (Pvt.) Ltd.; XYZ (Pvt.) Ltd. shall also be subsidiary of ABC (Pvt.) Ltd.
Problem-8. Few friends purchased a property. Later on they promoted a company and sold this property to the company at huge profit. Can the company recover this profit from the promoters? [B. COM. (H) D.U. 1999]
Ans. Promoters are allowed to make profits and accordingly remunerate themselves provided they make a due disclosure of the same. Thus, the only prohibition is to make secret profits [See Gluckstein v. Barnes]. Thus, in the given case, company shall be entitled to recover the profit made by the promoters if they failed to disclose the same to an independent Board of Directors or alternatively to whole body of shareholders including future shareholders, Le., through prospec¬tus.
Problem.-9 All the seven signatures on a Memorandum of Association were forged by a person and a certificate of incorporation was duly obtained. Is the certificate of incorporation valid ? Explain. [BCOM. (H) D,U. 1992, 1995].
Ans. Yes; [See Section 35.]
Problem-10. A company was formed on the basis of a Certificate of Incorporation obtained by threatening the Registrar of Companies. Is the company legally formed?
Ans. Yes; [See Section 35.] [B. COM. (H)D.U. 1997].
Problem-11. A, a furniture dealer, entered into a contract with the company for the furnishing the offices of the company. The company went into liquidation before it could obtain certificate of commencement of business. Can A prove in the winding-up for the price of the furnishing supplied to the company?
Ans. No. All contracts after incorporation but before certificate to commence business is reed' are Provisional. In other words, they shall, on certificate to commence business being recei\ become enforceable against/by the company and shall become void if the same is not recei* Since the company has gone into liquidation, the question of certificate to commence busin being issued does not arise.
Problem-12. Advise 'Asiatic Government Security Life Insurance Co. Ltd.' whether it can seek, injunction against 'The New Asiatic Insurance Co. Ltd.' which was subsequently formed restarting it from having in its name the word 'Asiatic' on the ground that it has caused confusions can deceive the public.
Ans. The Act permits the promoters of a company to choose any suitable name for the company provided the name chosen is not undesirable. A name may be considered undesirable where it is too similar to the name of an already exist by company. In the present, problem since the two companies are in insurance business, it may Is to a natural inference on the part of the public that the two are inler-related because of thewu 'Asiatic'which is quite an imaginary word and does not mean anything. Mere addition of the wo? 'New' is not likely to give an impression that the two companies are different. Therefore, on asJ by Asiatic Government Security Life Insurance Co. Ltd. Court is likely to advise the New Asian Insurance Co. Ltd., to change its name and remove the word 'Asialic' therefrom.
Problem-13. M/s India Computers Ltd. was registered as a Public Company on 1st July, 2005 info State of Maharashtra. Another company by name M/s All India Computers Ltd, was registered! Delhi on 15th July, 2005. The promoters of ‘India Computers Ltd.’ have failed to persuade the Management of All India Computers Ltd. to change the company's name, as it closely resembles with the name of the first registered company.
Advise the Management of India Computers Ltd. about the remedies available to them under! provisions of the Companies Act, 1956.
Ans. If through inadvertence or otherwise, a company on its first registration or on its registration by a new name has been registered with a name which, in the opinion of the Central GovernmeiH is identical with or too closely resembles the name of an existing company, the company ma] change its name by passing an ordinary resolution and by obtaining the approval of the Centra Government in writing [Sec. 22]. Again, the company may change its name by following the aforesaid procedure, where an application has been made by a registered proprietor of a trade mark and, in the opinion of the Central Government, the name is identical with or too nearl resembles a registered trade mark of such proprietor under the Trade Marks Act, 1999. Thus, in the given case M/s India Computers Ltd- should approach the Central Government, am seek directions to be given to M/s All India Computers Ltd. to change its name by following the procedure as aforesaid. The application for the purpose must be made within 1 year ol the date of registration of M/s Al! India Computers Ltd. Period of 12 months is a statutory limitation to the right of a company to .seek change of name of the other company registered with a too similar name [Sidhvi Constructions (India) (P.) Ltd. v. Registrar of Companies (1997)].
Problem-14. ABC (Pvt.) Ltd. was incorporated on 10th June, 2003. A similar company with identical name and same objects was also incorporated on 10th June, 2004. ABC (Pvt.) Ltd. came to know about this and filed a petition on 10th January 2005. Explain the remedies available to the first company.
Ans. If a company is inadvertently registered with a name which, in the opinion of the Central Government, is identical with or too nearly resembles, the name by which a company in existence has been previously registered, the company registered later;
[See under name clause.]
(a) may, by ordinary resolution and with previous approval of the Central Government, signified in writing, change its name,.
(b) shall, if the Central Government so directs within twelve months of its registration, change its name by ordinary resolution within a period of three months from the date of such direction or such longer period as the Central Government may allow.
In the given case, ABC (Pvt.) Ltd. can complain to the Central Government or can make a representation (o the Regional Director under section 22 of the Companies Act, 1956 to issue suitable directions to the company incorporated on 10th June, 1997 for change of its name by passing an ordinary resolution.
In the instant ease, the company filed a petition on 10-1-2005 within 12 months of date of registration of second company and so cognizance shall be taken of the complaint. ABC Ltd. may also file a suit for injunction or other appropriate relief. The facts of the given case arc similar to KGK Compressors Ltd. v. K.E.Ltd. AIR 1986 Del. 181
Problem-15:. XY Ltd. has its registered office in Bihar. For better administrative control, the company plans to shift its registered office from Bihar to Delhi. The Bihar Government opposes such shifting on the ground that such transfer will cause revenue loss to the Slate. Discuss the validity of such opposition with reference to the case law on the subject.
Ans. LOSS OF REVENUE OR EMPLOYMENT OF STATE, WHETHER RELEVANT CONSIDERATION - In Orient Paper Mills Ltd. v. State (1957), it was observed that a State whose interests are affected by the change of the registered office to a different Stale has a locus standi to oppose shift of the registered office of a company. Accordingly, the Orissa High Court declined to confirm change of registered office from Orissa to West Bengal, in teralia, on the ground that in a Federal constitution every State has the right to protect its revenue and, therefore, the interest of the State must be taken into account.
But, Minerva Mills Ltd..Govt, of Maha.rashlra[1915], Justice Ray of the Bombay High Court held that the Company Law Board (now Central Government)* cannot refuse confirmation of the shifting of the registered office on the ground that the change would cause loss of revenue to a State or would have adverse effects on the general economy of the State. The question of loss of revenue to one State would have to be considered in the prospects of total revenues for the Republic of India and no parochial consider¬ations should be allowed to turn the scale in regard to change of registered office from one State to another within India.
Similar view was expressed in Rank Film Distributors of India Ltd. \. Registrar of Companies, West Bengal (1969), A Division Bench of the Calcutta High Court observed that State has no statutory right under section 17 to oppose the shifting of the registered office from one State to another.
It was further held that the argument that employment or sales tax or income-tax revenue of the State will be affected by transfer of registered office, is not tenable.
Articles contain a restrictive clause on shifting of registered office from one State to another.
Company Law Board has held mJindal Vijaynagar Steel Ltd., In re [2005] 63 SCL 7 that existence of restrictive clause in respect of inter-State change of registered office in the Articles is against the spirit of section 17 of the Act. This clause was included in the Articles as a result of a joint venture agreement of the company with KS1IDC, a Karnataka Government Industrial Development Corporation and it was held that this clause in the Articles cannot be forced by the company.
A printed or a typewritten copy of the special resolution both under section 146 and section 17, should be sent to the Registrar of Companies within 30 days of its passing.
A certified copy of the Company Law Board (now Central Government's)* order should be filed within three months thereof with the Registrar of Companies of each State la., old and the new. If it is not filed within the prescribed time, then the alteration shall, at the expiry of such period, become void and inoperative.
A notice of the new location of the registered office must be given to the Registrar of the State to which the of ficehas been shifted, within thirty days after the change of the office (section 146).
A company is in a position to shift its registered office from one State to another for certain purposes only. These are discussed in the following paragraphs (under 'Alter¬ation of objects'- the grounds being common).
Problem-16. The Management of Ambitious Properties Ltd. has decided to take up the business of food processing activity because of the downward trend in real estate, business. There is no provision in the object clause of the Memorandum of Association to enable the company to carry on such business. State with reasons whether its object clause can be amended. State briefly the procedure to be adopted for change in the object clause.
Ans. The given case falls under Section n(i)(d), viz, to carry on some business which under existing circumstances may be conveniently or advantageously be combined with the business of the company. Thus, the company can amend its object clause to take up the business of food • processing.
Problem-17. The object clause of the Memorandum of a company empowers it to'carry on distillery business and any other business that is allied to it. The company wants to alter its Memorandum so as to include the cinema business in its objects clause. Advise the company.
Ans. Section 17(1) of the Act permits alteration of memorandum to carry on some business which under existing circumstances may conveniently or advantageously be combined with the business of the company. Thus, Section 17(1) does not prohibit a company to diversify in areas other than those specified in the Memorandum. But, the business sought to be added must be such which can conveniently or advantageously be combined with the business of the Company. The High Court in Distilling Industries Ltd. v. Registrar of Companies [1963J 83 Comp. Cas. 811 (Punj.). [The facts of the given problem are based on this case] held that the cinema business could not be either conveniently or advantageously combined with the distillery business and, therefore, disallowed change of objects. Accordingly, alteration shall not be allowed.
5.4-3e. TO RESTRICT OR ABANDON ANY OF THE OBJECTS SPECIFIED IN THE MEMORAN¬DUM [SECTION 17(1 )(e)] - Even for deleting any portion of the object clause, the procedure laid down in Section 17 has to be followed.
Can shift of objects from 'other objects' to 'main objects' be permitted under section 17?
The Company Law Board which was faced with the aforesaid issue in the case of Mafatlal Consultancy Services (India) Ltd., In re [1995] answered it in the negative. Since the Amendment Act of 1996 though no approval of Company Law Board (now Central Government**) is necessary, the aforesaid case being the precedent, the same shall not be allowed,
TO SELL OR DISPOSE OF THE WHOLE OR ANY PART OF THE UNDERTAKING [SEC. - Where a company wishes to adopt a cut-back or retrenchment strategy, i.e.,
1. A company, in which the directors hold majority of the shares, altered its Articles so ve power to directors to require any shareholder, who competed with the company's to transfer his shares, at their full value, to any nominee of the directors. S had some the company, and he was in competition with the company. Is S bound by the alteration? ..power of the members to effect alteration in the Articles by passing special resolution is inasmuch as the alteration must be bona fide and in the interest of the company. In the «e, alteration requires taking over the shares of only those who competed with company's (i Therefore, empowering the directors to takeover shares of such members seems to be peral interest of the company as a whole and hence shall be valid. S shall be held bound toration. [see Side Bottom v. Kershaw Lease & Co. (1920)]
Problem-18 Thc Articles of a company provided that the shares of a member who became bankrupt would be offered for sale to other shareholders at a certain price. Is the provision binding on the shareholders?
Ans: The facts of the given Problem are based on the decided case oiBordand Trustee \. Steel Bros. |4Co. Ltd., in which case, the provisions in the Articles were held to be binding on the members. |The learned judge observed that "Shares having been purchased on these terms and conditions, lit is impossible to say that those terms and conditions are not to be observed". Thus, since Articles '""stitute a binding contract between the company and its members, the shareholders shall be \ bound by the stated provisions in the Articles.
Problem-19. A limited Company is formed with its Articles stating that one Mr, Srivastava sh the solicitor for the company, and that he shall not be removed except on the groui misconduct. Can the company remove Mr. Srivastava from the position even though he guilty of misconduct?
Ans. As between outsiders and the company, Articles do not give any right to outsiders again company, even though their names might have been mentioned in the Articles. An outsider c take advantage of the Articles to found a claim thereon against the company. Thus, in the case, the company shall succeed in removing Mr. Srivastava as the solicitor of the con without incurring any obligations. The facts given arc based on the decided case of Eleyv.Pt Government Security Life Assurance Co. in which similar decision was pronounced.
Problem-20 -Company 'A' lends money to Company 'B' on a mortgage of its assets and the procedure laid down in the articles was not complied with and the directors of the two companies were the same. Is the mortgage binding upon Company B?
Ans. Protection under the rule of Indoor Management is not available to anyone who is aware of the irregularity. In the given case, directors of the two companies being the same, they shall be deemed to have knowledge of the non-compliance of the prescribed procedure. Thus, mortgage shall not be binding on Company B.
**. NO KNOWLEDGE OF ARTICLES - Again, the rule cannot be invoked in favour of a person who did not consult the memorandum and articles and thus did not rely on them.
In Rama Corpartition v. Proved Tin & General Investment Co. [1952], Twas a director in the investment company. He, purporting to act on behalf of the company, entered into a contract with the Rama Corporation and took a cheque from the latter. The articles of the company did provide that the directors could delegate their powers to one of them. But Rama Corporation people had never read the articles. Later, it was found that the directors of the company did not delegate their powers to T. plaintiff relied on the rule of indoor management. Held, they could not, because they even did not know that power could be delegated.
Problem-21. The plaintiffs contracted with a director of the defendant company and gave him a cheque under the contract. The director could have been authorised under the company's articles, but was not in fact so authorised. The plaintiffs had not seen the Articles. The director misappropriated the cheque and the plaintiffs sued the company, Is the company liable?
Ans. The Problem relates to the protection that the outsider may claim against lack of authority on the part of the officers of the company. The rule commonly known as the Doctrine of Indoor Management, was first laid down in the case of The Royal British Bank v. Turquand However, it has been held that the rule of indoor management cannot be invoked in favour of a person who had no knowledge of the Articles of the company. It is because, in such a case the person cannot assume that the power (of which he has no knowledge) has been rightly exercised. In Rama Corporation v. Proved Tin and General Investment Co., on which the Problem in question is based, it was held that the plaintiffs could not rely on the rule of indoor management because they did not know the existence of the power to authorise the director.
Thus, in the present case, company shall not be held liable by the act of the director who has transacted beyond the scope of his authority. A principal can be held liable for the frauds of his agent only to the extent they are committed within the scope of the authority conferred upon him.
Problem-22. The authorized signatory of a company issued a share certificate in favour of X, which apparently complied with the company's articles as it was purported to be signed by two directors and the secretary and it had the company's common seal affixed to it. In fact, the secretary had forged the signatures of the directors and affixed the seal without any authority. Will the) certificate be binding upon the company?
Ans. In the case of Ruben v. Great Fingall Consolidated Ltd. (1906), the secretary of the company! issued a share certificate in favour of Ruben, which apparently complied with the company's | articles, as it was purported to be signed by two directors and the secretary and it had company's common seal affixed to it. In fact, the secretary had forged the signatures of the] directors and affixed the seal without any authority.
It was held that the certificate was not binding upon the company. Lord Lorcburn held: "It is quite] true that persons dealing with limited liability companies are not bound to inquire into their indoor] management but this doctrine which is well established, applied to irregularities which otherwise] might affect genuine transactions. It cannot apply to a forgery."
NEGLIGENCE- The 'doctrine of indoor management
Problem-23. X Co. Ltd., intended to buy a rubber estate in Peru. Its prospectus contained extracts from an experts report giving the number of rubber trees in the estate. The report was inaccurate. Will any shareholder buying the shares of the company on the basis of the above representation have any remedy against the company? Can the persons authorising the issue of the prospectus] escape from their liability?
Ans. In the event of any mis-statement in a prospectus, the allottees have certain remedies against I the company as well as those responsible for the issue of the prospectus. Thus, in the present case, the allottee shall have the right to claim compensation from the company for any loss that he might have sustained in terms of the value of shares. But, his claim against those responsible for issue of prospectus shall not succeed since they made the statement on the basis of the report of an expert whom they believed to be competent. Section 62(2) provides that in such circumstances, | one shall not incur liability. However, expert can be proceeded against.
Problem-24. A prospectus issued by a company contained a promise of subscription of a substantial amount by some persons so as to induce the public to subscribe. The plaintiff who was allotted 10 shares alleged material misrepresentation. Decide?
Ans. The Companies Act charges the company as well as every officer who may be guilty of '• inducing the members of the public to subscribe for its shares or debentures by including material misrepresentations as to a matter of fact. In such cases not only the party defrauded shall have a right to return the shares and claim his money back but damages can also be claimed. Besides these civil remedies, Section 63 imposes criminal liability on every person who authorises the issue' of such a prospectus. Liability under this Section may be imprisonment up to 2 years or fine up to Rs. 5,000 or both. Further, Section 68 imposes a penalty on every person responsible for inducing public to subscribe for the shares or debentures of a company by making false statements. Under Section 68, the liability may be punishment with imprisonment for a term up to 5 years or willi fine up to Rs. 10,000 or with both. In the present case, representation that substantial amounts were promised to be subscribed by some persons may be taken to induce the public if this happens to be untrue. Thus, those responsible for making such a statement shall be held liable for the above listed consequences,
Problem-25. A purchased from B 1000 shares of a company on the basis of a prospectus containing wrong statement. What remedies are available to A against the company?
[B.COM (II) D.U. 2000].
Ans. A shall have no remedy against the company; there being no privity of contract between A I and the company. The reliefs in terms of right of rescission and claim for damages are available i only to the parties to the contract. The concept of 'stranger to the contract' is not recognized. 'A1 in this case having purchased shares from 'B' and not from the company cannot have any remedies against the company; company not being a party to the contract.
Problem-26 Amar subscribed shares issued by FasUrak Ltd. The prospectus of Fasttrak Lid. included a statement which was misleading in the form and content. On the faith of the prospectus believing it to be a true. Amar subscribed for shares and sustained loss. Can Amar sue for compensation of loss? If so, who will be sued for such loss?
Ans. Yes; Amar can sue for compensation of luss: Section 62 of the Companies Act provides that an allottee is entitled to claim compensation from directors, promoters and any other persons who authorised the issue of a prospectus, for damages sustained by reason of any untrue statement in it.
However, he will have to prove that (i) misrepresentation was of material fact; (ii) he acted on misrepresentation; and (t'i'0 has suffered damages in consequences.
The following persons are liable to pay compensation for loss or damage sustained by reason of untrue statement included in a prospectus:
(i) every person who is a director of a company at the time of issue of prospectus;
(ii) every person who has authorised himself to be named in the prospectus and is so named cither as a director, or as having agreed to become a director either immediately or after an interval of time;
(iii) every person who is a promoter of the company; and (iv) every person who has authorised the issue of the prospectus.
However, where a person named in the prospectus has given a consent in the manner required for the issue of prospectus, shall not, by reason of having given such consent, be liable as a person who has authorised the issue of prospectus except in respect of untrue statement, if any, purporting to be made by him as an expert.
Mr. Amar having sustained loss because of having believed the facts given in the prospectus issued by Fasttrak Ltd. to be true, can sue for four categories of persons mentioned above lor compensation of his loss. Apart from above, he may sue the company for damages for deceit.
Problem 27. All statements in a prospectus issued by a public limited company were literally true, but it failed to disclose that the dividends stated in it as paid were not paid out of the realized profits. The statement that the company had paid dividend for a number of years was true. But the fact that company had incurred losses for all these years was not disclosed in tbe prospectus. An allottee of shares wanted to avoid the contract on the ground that the prospectus did not disclose this fact, which in his opinion, was very material. Will he succeed? Give reasons.
[B.Com (H) D.U. 2007]. [HINTS: REX V. KYLSANT, SEE PARA 7.9.1
Problem-28 The capital of 'X' Ltd. is Rs. 50 lakhs, consisting of Equity Share Capital of Rs. 40 lakhs anil Redeemable Preference Share Capital of Rs. 10 lakhs. The preference share capital is to be redeemed before 31st August 2007. The company is running in losses and its accumulated losses aggregated to Rs. 15 lakhs. The company wants to borrow Rs. 20 lakhs from financial institutions lo improve its working and also to redeem the preference share capital. Advise.
Ans. According to Section 80, redemption of preference share capital is permitted unly out of (i) profits of company, or (it) out of a fresh issue of shares made for the purposes of redemption. Thus, borrowing from financial institutions for redemption of preference shares shall not be permis¬sible. The amount may, however, be raised for improving its working. The limits to deposits do not apply to borrowing from financial institutions since the same is excluded from the expression 'deposit' as per Rule 2(b)(ii) of the Companies Acceptance of Deposits Rules, 1975.
Problem-29. ABC Company Limited at a general meeting of members of the company pass an ordinary resolution to buy-back 30% of its Equity Share Capital. The Articles of the Company empower the company for buy-back of shares. The company further decides that the payment for buy-back be made out of the proceeds of the company's earlier issue of equity shares. Explaining the provisions of the Companies Act, 1956, and stating the sources through which the buy-back of the companies own shares be executed. Examine. (i) Whether company's proposal is in order?
(») Would your answer be still the same in case the company instead of 30% decide to buy-back only 20% of its Equity Share Capital?
Ans. The Companies (Amendment) Act, 1999 has permitted companies to buy-back their own shares but subject to certain limitations and compliances. Sections 77A, 77AA and 77B contain the necessary provisions in this regard. Besides other requirements, in case of buy-back of equity shares, buy-back beyond 25% of the paid-up equity capital in a financial year is not allowed. Again, buy-back cannot be effected out of the proceeds of an earlier issue of the same kind of shares/ security. Moreover, special resolution of shareholders is required to be passed. Thus, the buy-back effected by the company is not valid on the following counts:
(i) Instead of special resolution, ordinary resolution has been passed.
(ii) Buy-back of 30% of equity share capital exceeds the maximum permissible buy-back, viz. 25%.
(iii) Buy-back could not have been effected from the proceeds of an earlier issue of equity shares.
Sources of Buy-back
Please see discussion in the aforesaid para.
'Substituted for 24 months by the Companies (Amendment) Act, 2001
Problem-30 A, the secretary of a company issues a certificate in favour of B by forging the signatures of two directors. He also affixes the seal of the company on the certificate without authority. Can B hold the company liable for the shares covered by the share certificate? Give reasons [B. COM. (H) D.U. 1998J
Ans. No - see Rubben v. Great Fingall Consolidated Co. [1906] under para 8.17-
Problem-31 DJA Company Ltd. is holding 40% of total equity shares in MR Company Ltd. The Board of Directors of MR Company Ltd. (incorporated on 1.1.1998) decided to raise the paid-up equity share capital by issuing further shares and also decided not to offer any shares to DJA Company Ltd. on the ground that it was already holding a high percentage of shares in MR Company Ltd. Articles of Association of MR Company Ltd. provides that the new shares be offered to the existing shareholders of the company. On 1.3.2001 new shares were offered to all the shareholders excepting DJA Company Ltd. Referring to the provisions of the Companies Act, 1956, examine the validity of decisions of Board of Directors of MR Company Ltd. of not offering any further shares to DJA Company Ltd.
Ans, In view of Section 81, decision of the Board of Directors of MR Company Ltd. is not valid. (For details see aforesaid discussion on Rights Issue)
Problem-32 "Sunrise Ltd." is authorised by its articles to accept the whole or any part of the amoun of remaining unpaid calls from any member although no part of that amount has been called 1 'X', a shareholder of the Sunrise Ltd., deposits in advance the remaining amount due on his shara without any calls made by "Sunrise Ltd."
Referring to the provisions of the Companies Act, 1956, decide the rights and liabilities of Mr.) which will arise on the payment of calls made in advance.
Ans. Section 92 of the Act provides that the directors may, if authorised by the Articles, alia shareholders to pay the whole or a part of the amount remaining unpaid on any shares held! them, although no part of that amount has been called up. On the amount so received the compa may pay interest at such a rate as may be agreed upon between the Board and the members payaj this sum in advance. In this regard, Regulation 18 of Table A provides as follows:
"18. The Board may. if it thinks fit, receive from any member willing to advance the sum, all or in] of the money, uncalled and unpaid upon any shares held by him; and (b) upon all or in part of the moneys so advanced, may (until the sum would, but for such advance, become presently payable) pay interest at such rate exceeding, unless the company in general meeting shall otherwise direct; 6% per annum, as may be agreed upon between the Board and the member paying the sum in advance."
According to Section 92(2) a member of a limited liability company having share capital shall not be entitled to any voting rights in respect of the moneys so paid in advance by him until the same becomes payable.
However, Section 93 provides that dividends may be paid on advance calls, if so authorised by the Articles.
1. Discuss the law relating to forfeiture of shares.
2. Explain the requirements of valid forfeiture of shares.
3. State the circumstances under which shares can be forfeited. Discuss the procedures in forfeiture of shares by a company which has adopted Table A of Schedule I to Companies Act, 1956 as its Articles of Association.
4. When and how shares may be forfeited? What is the legal effect of forfeiture?
5. State the conditions to be satisfied before a company may forfeit the shares. Whatisl effect of such forfeiture? [B. COM. (H) D.U. 1994,20
Surrender of shares
Surrender of shares means voluntary return of shares by the shareholder to the company for cancellation. There is no provision for surrender of shares either in I Companies Act or in Table A. In Bellerby v. Rowland & Marwood Steamship Co. [1902], it was observed that a company cannot accept a surrender of its shares, "asev^ surrender of shares, whether fully paid-up or not involves a reduction of capital wh is unlawful... forfeiture is a statutory exception and is the only exception". However,! articles of some companies may allow surrender of shares as a short cut to thelfl procedure of forfeiture, where their forfeiture is otherwise justified - Trevor
Problem-33 .Ram Lalis a shareholder of a company holding 100 shares. Ram Lal dies leaving Mohail as his legal representative. Mohan is not a member of the company. Till then, the shares do nut vestj in him and, therefore, he has no right to transfer the same. [B. COM. (H) D.U. 20(
Ans. No; Transfer is not valid. Mohan can effect a valid transfer only after the succession in I favour is duly registered with the company. Till then, the shares do not vest in him and, therefore,! he has no right to transfer the same.
Problem-34 . (a) State whether the following persons can be counted for the purpose of quo.. a general meeting of a public company: (0 a person representing three member companies; (ijj the joint owners of shares arc present at the meeting.
(&) State also whether it is possible for a single member to constitute a meeting of a comp
Ans. («}((). To be counted as three members personally present. (n) To be counted as one member personally present.
(/>) yes. (z) under Section 167 [AGM convened or directed to be convened by Central Govern (ii) under Section 186 [EGM at the direction of Tribunal]; (Hi) in case of class meetings
Problem-35: Prosperity Limited Issued a notice for holding of its Annual General Me on November 7, 2006. The notice was posted to the members on October 16, 2006. Some me of the company allege that the company had not complied with the provisions of the Co Act with regard to the period of notice and as such the meeting was not validly called. (i) Whether the meeting has been validly called? (ii) If there is a shortfall in the number of days by which the notice falls short of the statij requirement, state and explain by how many days docs the notice fall short of the stati requirement?
(ii) Can the shortfall, if any, be condoned? [B.COM (H) D.U.',
Ans. The Companies Act, 1956 charges the company as well as every officer who may be j, inducing the members of the public to subscribe for its shares or debentures by including ma misrepresentations as to a matter of fact. Tn such cases not only the parly defrauded shall I a right to return the shares and claim his money back but damages can also be claimed. Ba these civil remedies, Section 63 imposes criminal liability on every person who authorises thei of such a prospectus. Liability under this Section may be imprisonment up to 2 years or fin to Rs. 5,000 or both. Further, Section 68 imposes a penally on every person responsible for indu, public to subscribe for the shares or debentures of a company by making false statements. Under Section 68, the liability may be punishment with imprisonment for a term up to 5 years or with fine up to Rs. 10,000 or with both.
In the present case, representation that substantial amounts were promised to be subscribed by some persons may be taken to induce the public if this happens to be untrue. Thus, those responsible for making such a statement shall be held liable for the above listed consequences.
Problem-36 : A company served a notice of a general meeting upon its members. The notice stated that a resolution to increase the share capital of the company would be considered at such i meeting. A shareholder complains that the amount of the proposed increase was not specified in the notice. Is the notice valid?
Ans. Section 173 of the Companies Act, 1956 requires a company to annex an explanatory statement to every notice for a meeting of company, at which some 'special business' is to be transacted. This explanatory statement is to bring to the notice of the members all materials facts related to each item of special business. Section 173 further specifies that all business in case of any meeting other than the annual general meeting is regarded as special business. Thus, the objection of the shareholder is valid since the details on the item to be considered arc lacking. The information about the amount is a material fact with reference to the proposed increase of share capital. The notice is, therefore, not a valid notice under Section 173 of the Companies Act, 1956.
Problem-37:. A general meeting was properly convened and was subsequently adjourned by the Chairman for want of quorum. No fresh notice is given for the adjourned meeting which is held subsequently. State whether the adjourned meeting is valid?
Ans. According to the Section 174 of the Companies Act, 1956, if within half an hour from the time appointed for holding a meeting of the company, quorum is not present, the meeting, shall stand adjourned lo the same day in the next week, at the same time and place unless the directors determine otherwise. No fresh notice is, therefore, required to hold the adjourned meeting. Besides, no quorum is necessary in the adjourned meeting. Thus, the adjourned meeting in question is valid.
Problem-38. The secretary of a company while sending out to members of the company notices of a special resolution to be proposed at the Annual General Meeting inadvertently omitted to send notice to one member. The resolution was passed at the meeting. Discuss whether the resolution is valid or not?
Ans. Section 172(3) of the Companies Act requires that proper notice must be served on all the persons entitled to receive such notice. Deliberate omission to give notice even to a single member entitled to notice, shall invalidate the proceedings of the meeting.
But, it provides that an accidental omission to give notice lo a member or if the member does not receive the notice, the meeting cannot be held invalid. Thus, in the present case, the resolution shall be a valid one and binding since the omission is stated to be inadvertent (ie., unintentional).
Problem-39: Mr. M, a member, appointed Mr. P as his proxy for the annual general meeting of a company in the form as set out in Schedule IX to the Companies Act, 1956. The company did not permit Mr. P to attend the meeting on the ground that the special requirements for the instrument in the articles have not been fulfilled.
Ans. As per Section 176(5), the appointment of proxy must be made by a written instrument signed by the appointer or his duly authorised attorney. Further, sub-section of the Section 176 provides that an instrument appointing a proxy, if in any of the forms set out in Schedule IX, shall not be questioned on the ground that it fails lo comply with any special requirement specified for .such instrument by the Articles.
Problem-40: AGM of a public company was scheduled to be held on 15.12.2001. Mr. X, a shareholder, issued two proxies in respect of the shares held by him in favour of Mr. A and Mr. B. The proxy in favour of B was lodged on 12.12.2001 and the one in favour of Mr, A was lodged on 15.12.2001. the company rejected the proxy in favour of Mr. B as the proxy in favour of Mr. B was dated 12.12,001 and that in favour of Mr. A was 'dated 13.12.2001. Is the rejection by the company in order?
Ans. In case more than one proxies have been appointed by a member in respect of the same meeting, one which is later in time shall prevail and the earlier one shall be deemed to have been revoked. Thus, in the normal course, the proxy in favour of Mr. A. being later in time, should he upheld as valid. But as per Section 176, a proxy should be deposited 48 hours before the time of the meeting. In this case, the proxies should have, therefore, been deposited on or before 13.12.2001 (the date of the meeting being 15.12.2001). But Mr. A deposited the proxy on 15.12.2001. Therefore, proxy in favour of Mr. A has become invalid. Thus, rejecting the proxy in favour of Mr. B is unsustainable. Proxy in favour of Mr. B is valid since it is deposited in time.
Problem-41 'A' appoints 'B' as proxy. Just before the meeting 'A' comes to attend the meeting. Explain the position of proxy appointed by 'A'. [B.COM (H) D.U. 2007],
Ans. Subject to articles, proxy may be revoked unless made irrevocable for valuable consider¬ation. If the shareholder, after appointing a proxy himself attends the meeting, he can vote in person, the proxy stands revoked - Cousins v. International Brick Co, Ltd. [1931] 2 Ch. 90. ite at the meeting without revoking, death of the shareholder revokes
Problem-42: A Company has 100members.lt sends notice of the general meeting to all of them.2li members do not attend the meeting. Out of 80 members who are present 20 abstain from voting,] How many members should vote in favour of a resolution if it is to be passed as a Special] Resolution?
Ans. As per Section 189(2), for a valid special resolution, votes cast in favour must at least be 3 times' (he votes cast against the resolution, if any. Those who abstain are not to be counted. Thus, 3/4tli of 60, ie., at least 45 members must vote in favour of the resolution.
Problem-43 : Diyas Limited issued a notice for holding of its Annual General Meeting on 7thj November, 2006. The notice was posted to the members on 16-10-2006. Some members of the! company allege that the company had not complied with the provisions of the Companies Act with I regard to the period of notice and as such the meeting was not validly called. Decide …
(i) Whether the meeting has been validly called?
(ii) If there is a shortfall in the number of days by which the notice falls short of the statutory requirement, state and explain by how many days does the notice fall short of the statutory requirement?
(iii) Can the shortfall, if any, be condoned?
Ans. (j) 21 days' clear notice of an AGM must be given [section 171]. In case of notice by post. Section 53(2) provides that the notice shall be deemed to have been received on expiry of 48 hrs. from the time of its posting. Besides, for working out clear 21 days, the day of the notice and the day of the meeting shall be excluded. Accordingly, 21 clear days' notice has not been served (only 19 clear days' notice is served) and the meeting is, therefore, not validly convened,
Problem-44 . The Annual General Meeting of XYZ Ltd., for the financial year ending 31 -3-2005 was held on 27-9-2005. But since the accounts had not been audited, it was adjourned and finally held on 31-3-2006 at which the audited balance-sheet was adopted. The annual general meeting for the previous year had been held on 29-6-2004.
Decide whether the holding of the annual general meeting on 31-3-2006 for the year ending 31-3-2005 is valid.
Ans. The facts of the Problem have been based on the case of Bejay Kumar Karnaniv. Asstt Registrar of Companies [1985] wherein it was held that even adjourned annual general meeting of a company, inter alia, must be held within 15 months of the previous meeting. The meeting of 31-3-2006 is, therefore, not valid.
Problem-45 One general meeting was called by a company in December, 2005. This meeting was adjourned to March 2006 and then held. Subsequent meeting was held in February, 2007. Is the company liable for any irregularity?
Ans. Section 166 of the Companies Act, 1956 requires a company to hold its annual general meeting every calendar year. So there should be one meeting per year and as many meetings as there are years. Thus, in the above case the meeting held in March 2005 is actually the meeting of December 2006. Since, next meeting is held only in February 2007, the meeting of 2006 has been missed. Under these circumstances, unless permission of the Registrar was obtained for extension of lime which may be granted upto a period of 3 months under certain special circumstances, the company shall be proceeded against.
In fact, the facts of the given Problem are based upon the decided case of Shree Meenukshi Mills Co. Lid. v. Assistant Registrar of Joint Stock Companies in which case similar decision was given.
Problem-46: 40 out of 100 members of a company submitted a requisition for holding of i extraordinary general meeting in order to remove managing director from office. On the failu of the company to call the meeting, the requisitionists themselves called the meeting at I registered office of the company. On the appointed day, they could not hold the meeting at I registered office, as it was kept under lock and key by Ihc managing director himself. The memb held the meeting elsewhere and adopted resolution removing the managing director from offic Is the resolution valid?
Ans. Section 169 of the Companies Act contains provisions regarding holding of extraordin general meetings. It provides that if directors fail to call a properly requisitioned meeting, I requisitionist? or such of the requisitionists as represent not less than l/10th of the total votip rights of all ihe members (or a majority of them) may call a meeting to be held on a date fixed with 3 months of the date of the requisition.
Where a meeting is called by the requisitionists and the registered office is not made available! them, it was decided in R. Chettiarv. M. Chettiar that the meeting may be held anywhere I
Further, resolutions properly passed at such a meeting, arc binding on the company.
Thus, in the given case, since all the ahovemcntioned provisions are duly complied with, resolution removing the managing director shall be valid.
Problem-47: 2-M/s ABC Ltd. is a big sized public company managed by a Board of Directors consistin of 12 Directors including one Managing Director and two Joint Managing Directors. Four direct! «present the financial institutions, which together hold more than 50% of the equity capital of the company. The Board of Directors took certain decisions which are opposed by the directors representing the financial institutions as they felt that the decisions were not in the interests of the company. The financial institutions, therefore, sought to remove the Directors under section 284 of the Companies Act and served a requisition under section 169 of the Companies Act for extraordinary general meeting. The financial institutions refused to give any reasons for the removal of the directors. The company refused to convene the meeting on various grounds including that the requisition is not accompanied by a proper explanatory statement. Discuss. [B.COM (H) D.U. 2000]
Ans. The contention of the company is not valid. The facts of the Problem are based on the case t&UC\.Escorts Ltd. [1986]. In this case, it was held that ever)' shareholder of a company including an institutional shareholder has the right, subject to the provisions of the statute, to call an . extraordinary general meeting in accordance with the provisions of the Act, He cannot be restrained from calling a meeting and he is not bound to disclose the reasons for the resolution proposed to be moved at the meeting.
Regarding explanatory statement, the Court held that it was a duty cast on the management to disclose, in an explanatory note, all material facts relating to the resolution coming up before the general meeting to enable the shareholders to form a judgment on the business before them. Section 173(2) does not require the shareholders calling a meeting to disclose the reasons for the resolution which they propose to move at the meeting.
Class meetings [Sections 106 and 107]
11.13 Section 106 provides that where the share capital of a company is divided into different classes of shares, the rights attached to the shares of any class may be varied with the consent in writing of the holders of not less than three-fourths of the issued shares of that class or with the sanction of a special resolution passed at a separate meeting of the holders of the issued shares of that class—
(a) if provision with respect to such variation is contained in the memorandum or articles of the company; or
(b] in the absence of any such provision in the memorandum or articles, if such variation is not prohibited by the terms of issue of the shares of that class.
Problem-48 State the legal position in the following circumstances :
The articles of association of a company provide for minimum share qualification. Mr X who, appointed as a director of the company failed to obtain qualification shares within the specific time limit,
Ans. Following effects shall follow.
1. He shall be liable to fine upto Rs. 50 for every day until he stops acting as such {Section27}
2. He shall be liable to a further penalty under section 283(2A) upto Rs. 500 for each
day functions as a director. It appears that the penal provisions of sections 272 and 283(2A), cumulatively apply.
3. He automatically vacates the office under section 283(1 }(a).
Problem-49 Mohan, a director of XYZ Ltd., died in an air crash. It has been decided to appoint Murari in his place. Will the company be required to call extraordinary general meeting to approve the latter's appointment as a director? When appointed, how long Murari would remain in office?
Ans. The vacancy being a casual vacancy can be filled by the Board of directors at its meeting under section 262. It may also be filled in a general meeting. Thus, there is no need to call an EGM for the purpose.
Murari's tenure will be the period for which Mohan, if he had not died would have continued.
Problem-50 Mr. X who was appointed as a Director at the last annual general meeting resigned. The Board filled up the casual vacancy by appointing Mr. Y. But within a few days of his becoming Director, Y died. The Board wishes to fill up the casual vacancy by appointing Mr. Z in place of Mr. Y in the next Board meeting. State the legal position.
Ans, Section 262 provides that in the case of a public company or a private company which is a subsidiary of a public company, if the office of any director appointed by the company in general meeting is vacated before the expiry of his term of office in the normal course, the resulting casual vacancy may, subject to any regulations in the Articles of the company, be filled by the Board of Directors at a meeting of the Board.
It would thus be noted that Board of Directors is empowered to fill a casual vacancy only in respect of a director appointed by the company in general meeting. If a casual vacancy arises in the office of a director appointed in the casual vacancy under Section 262, there is no casual vacancy within the meaning of Section 262 and cannot be filled up by the Board of Directors. Consequently, Board should not be empowered to appoint Mr. 2 in place of Mr. Y. However, the Depart merit of Company Affairs has opined that the vacancy may be filled by the Board as a casual vacancy. Certain commentary writers do not subscribe to this view and suggest that vacancy should be filled not as a casual vacancy but by appointing the person as an additional director so that he ceases to hold office by the next AGM.
Problem-51: In Parween Woodcraft Co. Ltd., Mr. James was named in the list of first directors. He, however, died before he could assume office. How can the Problem regarding the appointment of a director be solved in this case?
Ans. The vacancy in question is not a casual vacancy under Section 262 and cannot, therefore, be filled by the Board of Directors. Accordingly, it will be necessary for the subscribers to the Memorandum (who will then be only mem bers) to convene a meeting for the appointment of the director. To the extent to which the Articles do not make any other provision in this behalf subscribers who would be entitled to requisition a meeting may call the meeting. A meeting is not necessary if all the subscribers concur in the appointment.
In the present case, representation that substantial amounts were promised to be subscribed by some persons may be taken to induce the public if this happens to be untrue. Thus, those responsible for making such a statement shall be held liable for the above listed consequences.
Problem-52:. X, an employee of ABC Ltd., was appointed as an alternate director. In the meantime, the original director returned and wanted to attend the Board meeting. Advise.
Ans. In terms of Section 313 of the Act, an Alternate Director can act on behalf of the Original Director during the latter's absence for a period of not less than three months from the State in which the meetings of the company are ordinarily held.
Alternate director has to vacate office when the Original Director returns to the State in which meetings of the Board are ordinarily held. Thus, the original director only can attend the Board meeting. Even if the alternate director so desires, he cannot attend the Board meeting. Assignment of office by a director [Section 312]
13.10 Section 312 prohibits assignment of his office by a director. The Section applies to all companies. Section reads:
"Any assignment of his office made after the commencement of this Act by any director of a company shall be void."
Problem-53: 'X' was appointed as Managing Director for life by the Articles of Association of a private company incorporated on 1st June, 1970. The articles also empowered 'X' to appoint a successor. 'X' appointed, by will, 'G' to succeed him after his death. Answer the following: Can 'G' succeed 'X' as Managing Director after the death of 'X' ?
Ans. 'G' can succeed 'X'. Appointing a successor under a power conferred under the Articles is not considered as 'assignment of office' which is prohibited under section 312 [Oriental Metal Pressing v.Bhasker Kashmath Thakoor[l96\] 31 Comp. Cas. 143 (SC)]
Problem-54 Articles of Association (AoA) of XY7, Ltd. provide for 10 as the maximum strength of the Board of Directors. Present strength of the Board is 8 directors. On 1st January, 2005 company by passing a special resolution alters its AoA raising the maximum permissible strength of the Board from 10 to 15. On 1st February, 2005, company proposes to raise the present strength of the Board from 8 to 13. Company has been advised to only pass an ordinary resolution. Is it in order?
Ans. No; company cannot be allowed to circumvent the provisions of Section 259 by phasing out the increase in the aforesaid manner. Approval of the Central Government shall be necessary. The only case where Central Government's approval is not necessary for raising the strength of tfie Board beyond 12 is where Articles, as originally registered, provide for a number beyond 12 and increase is within the number prescribed.
Problem-55 The maximum number of Directors of each of the following Companies as per their Articles of Association is 11.
"(i) ABS Company Ltd.
(ii) DSP Trading Private Ltd.
(iii) Traders Association (a Company registered under Section 25 of the Co.anies Act, 1956)
(i'v) Hindustan Paper Ltd. (A Government Company registered under Section 617 of the Companies Act, 1956)
The Board of Directors of the Company wants to increase the number of Directors to 15.
State with reference to the provisions of the Companies Act, 1956, whether the Directors can do so?
Ans. The Problem is based on Section 259 of the Companies Act, 1956. As per Section 259, a company can increase the strength of its Board beyond the maximum number prescribed by the Articles by passing special resolution at a general body meeting of its members and if the increase is beyond 12, approval of the Central Government shall also be necessary. However, a private company which is not subsidiary of a public company, a Section 25 company and government companies need not obtain the approval of the Central Government, Thus, in case (r), the company being a public company and not falling under any of the aforesaid exemptions, it shall require special resolution and approval of the Central Government. Cases (w). («0 and (»$ fell under exemption from the Central Government's approval. These companies shall, therefore, be able to increase the strength of the Board to 15 by passing special resolution only.
Problem-56 Mr. PMC is Director in 14 Public Limited Companies as on 30th July, 2006. He continues to be so till Septem ber 24,2006. The following companies appointed Mr. PMC as a Director at their respective Annual General Meetings held on dates mentioned against their names. (i) PQR Ltd. (AGM held on 29th September, 2006)
(ii) BCD Private Ltd. (AGM held on 25th September, 2006)
(iii) City Traders Association (A company registered under Section 25 of the Companies Act, 1956 - AGM held on 26th September, 2006)
(iV) TSP Ltd. (AGM held on 25th September, 2006)
You are required to state with reference to the relevant provisions of the Companies Act, 1956 the options available to Mr. PMC in respect of accepting or not accepting the appointment of Director of the above companies.
Ans. As per Sec. 277(2), where a person already holding the office of director in 14 companies or less is appointed, after the commencement of the Companies (Amendment) Act, 2000 as a director of other companies, making the total number of his directorships more than 15, he shall choose the directorships which he wishes to continue to hold or to accept, so, however, that the total number of the directorships, old and new, held by him shall not exceed 15. None of the new appointments of director shall take effect until suHi choice is made; and all. the new appointments shall become void if the choice is not made within 15 days of the day on which the last of them was made.
However, as per Section 278, directorships in certain companies shall not be included for the purposes of Section 277. These, inter alia, include directorship in private company and Section 25 company. Accordingly, on 25th September, 2006 appointment in TSP Ltd- alone shall be added to the directorship of Mr. PMC thus raising his total directorships to 15. Thus, the case shall be covered under Section 277(1) and not under Section 277(2). As per Section 277(1), he should make a choice of 15 companies within 15 days, in the present case, from 29th September, 2006.
Problem -57. After serious disagreement and difference of opinion among the shareholders of tig company in the last annual general meeting, some of the directors took the steps as noted belt) Discuss the validity and effect of the following:
(z) Mr. John, the managing director sends his notice of resignation. (if) Mr. Paul, an ordinary director verbally resigns and not in writing. (iit) Mr. David, another ordinary director, had sent his resignation, but withdrew it before L.
Board meeting was held for accepting his resignation.
Ans. (/) Mr. John, the managing director cannot resign merely by giving a notice. In his case a formal acceptance of resignation by the company is essential so as to make it complete and effective. Th' is because he occupies two positions or possesses two capacities, viz., one that of a director, an the other that of manager or officer of the company in the sense of a whole- time employee. An employee cannot give up office at his pleasure simply by giving notice. The notice or the letter of resignation is required to be approved or accepted by the company and the officer concerned. has to be relieved of his duties and responsibilities attached to the office which he has resigned from. (Achutha Pal vs. Registrar of Companies (1956) 36 Comp. Cas. 598). (if) A director can resign from his office in the manner laid down in the Articles of the company. Where Articles do not contain any provision in this regard, a director may still resign ai anytime by giving a reasonable notice to the company, In Latchford Premier Cinema vs. Ennion it was held thai a verbal notice accepted at a meeting is sufficient, even if the articles provide for resignation in writing.
Thus, verbal resignation cannot be held valid unless accepted at a meeting of the Board/ Shareholders.
Even written notice of resignation to be valid must be addressed to the company and not to any third party.
(iii) Once a director has given a notice of resignation, he cannot withdraw it except with the consent of the company properly considered by the directors. It makes no difference that the withdrawal is sought before the Board's meeting. However, where articles provide that a director may resign only if the Board consents, the resignation shall not be effective until the Board's consent is given and the resignation may be withdrawn in the meantime.
Problem -58. The Board of Directors of a public company in the private sector having made an average net profit of Rs. 1 crore during the last three financial years propose to donate during the current year the following amounts :
(j) Rs. 1,00,000 to a school run exclusively for the benefit of employees,
(«) Rs. 40,000 to a general charitable fund, and
(ill) Rs. 4,00,000 to a political party.
Advice the Board of Directors about the powers in respect of the above explaining the relevant provisions of the Companies Act.
Ans. (i) Since the donation relates to a purpose connected with the welfare of the employees, Board of directors are empowered to donate any amount under section 293(l)(e).
(ii) The amount of donation being less than Rs. 50,000, the same shall be in order and not require the approval of shareholders.
(iii) Board of Directors is empowered to contribute to a political party upto 5% of its average net profits for the last three financial years. Accordingly, donation to a political party, in the given case being, less than Rs. 5 lakhs (5% of Rs. 1 crore), it shall be in order under section 293A.
Problem-59 A public limited company intends to contribute: (i) to a charitable fund not related to compant's business; and (11) for political purpose.
Ans, See above answer
Problem-60 The Board of Directors of M/s ABC Motors Ltd. made the following appointments at its meeting held on 1st January, 2006 :
(i) Mr. X, a Director of its subsidiary company, namely, M/s ABC Forgings Ltd., was appointed as Purchase Manager on a consolidated salary of Rs. 11,000 per month with effect from 1st January, 2006.
(ii) Mr. Y was appointed as the Sales Manager on a consolidated salary of Rs. 11,000 per month with effect from 1st January, 2006. Answer the following explaining the relevant provisions of the Companies Act:
• (t) Does the appointment of Mr. X require the approval of the members in a general meeting of any company? Will your answer be different if M/s ABC Motors Ltd. is the subsidiary of M/s ABC Forgings Ltd.? (it) Mr. P, a relative of Mr. Y was appointed as a Director of M/s ABC Motors Ltd. on 1st
January, 2007. Does it affect the continuation of Mr. Y as the Sales Manager? Ans. (i) Yes, the appointment of Mr. X is hit by section 314(1) and therefore shall require the approval of general meeting by way of special resolution.
However, it will not require the aforesaid approval if M/s ABC Motors Ltd. is the subsidiary of M/s ABC Forgings Ltd. Section 314(1) does not prohibit a Director of a subsidiary company from holding an office or place of profit in its holding company.
(») Section 314(1) does not apply since at the time of appointment of 'Y' as the sales manager, his relative 'P' was not the director of the company, [Section 314(1A)]
Problem. State whether the restrictions under Section 314 of the Companies Act, 1956 would apply if a relative of the director of a private company is appointed as managing director of the company,
Ans. Section 314 applies to both public as well as private companies. However, the instant case is covered under the exceptions contained in Section 314(1) as regards the position of the managing director is concerned.
In other words the requirement of a special resolution is not applicable in the instant case. Problem 3. Mr. X is a director of a private Co. Mr. A, who is the husband of Mr. X's grand-daughter, is appointed as a Genera! Manager of the Co. on a remuneration of Rs. 8,000 per month, without the approval of the general body of the company.
(0 Is the appointment valid?
(«) Does it make any difference if the remuneration is Rs. 10,000 per month? Ans. Section 314( 1). Limits have been raised under this section by notification dated 5.2.2003. special resolution shall be required only if the remuneration payable is more Rs. 10,000 and special resolution as well as approval of the Central Government shall be C8 if the remuneration exceeds Rs. 50,000,
Problem. XYZ Machineries Ltd. having a paid up share capital of Rs, 80 lakhs proposes! into contract with the following parties for the supply of certain components for a perio years with effect from 1st January, 1995 :
(i) ABC Forgings Private Limited where 'X', a director of XYZ Machineries Lin interested as a director and member.
(it) DBF Casting Limited, where 'Y', a director of XYZ Machineries Limited, is interest member holding 25 per cent of the paid up share capital. I State briefly the legal requirements to be complied with under the Companies Act to give! to the above proposals. Will the agreements continue to be valid after the paid up share cff XYZ Machineries Ltd. is increased to Rs. 4 crores in December 1995 by further issue of!
Ans. ', ,
(i) Under section 297, it will require a resolution of the Board of Directors to be passed] meeting.
In the event of capital of XYZ Ltd. being increased to Rs. 4 crores, previous approvals Central Government shall also be required under section 297. Approval of the Ci Government is required where the paid up share capital of the company is Rs. 1 end more. But, applicability of the section is to be determined at the time of entering infa contract. If no permission under this section is required at the time of entering inlij contract, subsequent permission is not necessary even though there may be a chs circumstances which would require permission to be taken for a fresh contract. Thus, it appears that, where contracts entered into by companies when their paid up< was less than Rs. 1 crore, and raised upwards subsequently [as in the given case], app of the Central Government would not be necessary until the expiry of the contract,
Also under section 299, 'X' must disclose his interest to the Board and not participates said meeting/deliberations.
Section 297 does not cover cases of public limited companies. Tbus, the aforesaid appr shall not be necessary.
Problem 1. A company sold one of its flats to one of the directors and received 50% of the price in cash and agreed to receive the balance in instalments. Wpuld you consider this as a loan granted to director attracting the provisions of Section 295?
OR
M/s. International Carrier Ltd. purchased a flat in Mumbai to give residential accommodation to Shri Ravi Mehta, the Managing Director. At the time of purchase of flat, the Managing Director was given an option to buy the flat during the course of his employment. The Managing Director exercised his option and paid the company half of the purchase price and requested for lime to pay the balance amount in three year half-yearly instalments at 10% interest per annum. Examine whether the arrangement would amount to a loan to the Managing Director and if so, whether the loan was in order.
Ans. The facts of the Problem are based on the case Dr. Fredie Ardeshir Mehta vs. Union of India [1991] 70 Comp. Cas. 210 (Bom.). In this case the Bombay High Court held that when a company gives official accommodation in the matter of payment of debt to one of its directors, it is not, and does not amount to, a loan and company cannot be prosecuted for contravention of provisions of Section 295. The Court held that Section 295(1) prohibits a company from, directly or indirectly, making any loan to its directors without the previous approval of the Central Government in that behalf. However, the Court said that the essential requirement of a loan is the advance of money (or some article) upon the understanding that it shall be returned; it may or may not carry interest. The debt here arose not out of an advance but out of the sale of the flat by the company to the managing director. The company gave time to the managing director to pay a part of the purchase price. The managing director was thus given official accommodation by the company in the matter of payment of the debt. Such official accommodation was not and did not amount to a loan. When Section 295 refers to an indirect loan to a director, what it means is that the company shall not give, a loan to a director through agency of one or more intermediaries. The word 'indirectly' in the I Section cannot be read as converting what is not a loan into a loan. Thus, there was no) contravention of Section 295.
Problem 2. Following transactions are made by a public company. You are required to examine! the same whether these transactions can be termed as Loans to Directors requiring the approval] of the Central Government as required under Section 295 of the Companies Act, 1956:
(i) A salary advance of Rs.5,000 to an employee, who is the wife of the managing director of] the company.
(if) Loan to its 100% (one hundred per cent) subsidiary company. Ans.
(0 According to Section 394 of the Companies Act, 1956, a company cannot give, without! obtaining prior approval of the Central Government any loan (directly or indirectly) to, inter] alia, any relative of a director. 'Wife' is a relative under Section 6 of the Companies Act, 1956, j However, where wife of a director is also an employee of the company then in Electronic Components Ltd v. Asstt. Registrar of Companies (1987) 61 Comp. Cas. 8 (Mad) I the Madras High Court held that in the absence of any evidence that there has been) circumvention of the Section by disguising the loan to the wife of a director, who is also an j employee, as salary advance, the same may not be admitted as contravention of Section 295.;
(a) The restrictions of Section 295 are not applicable to a holding company in respect of any loan given by it to its subsidiary or any security or guarantee provided by it for any 1 given to its subsidiary. Thus, loan to a 100% subsidiary shall not require any approval of the Central Government.
315
Problem 1. The Board of Directors of a public company met on three times in the previous year, the fourth meeting though called could not be held for want of quorum on two occasions successively. Discuss whether any provisions of the Companies Act has been contravened.
Ans, As per Section 285 of the Companies Act, 1956, a company must hold a meeting of its Board of Directors at least once in every 3 calendar months and there should be at least 4 meetings of the Board every year. But, Section 288(2) provides that where a meeting is called but could not be held for want of quorum, there is no contravention of Section 285. Thus, as per the facts in the above case, there has been no contravention of any provisions of the Companies Act, 1956.
330
Problem 1. X, Y and Z, directors of a company were the major shareholders of the company. X was the chairman of the company. At a meeting of the Board of Directors, it was decided to increase the share capital. Y and Z did not have the money to take up additional shares and feared thai in consequence, X would corner all shares and become predominant in the company. So a general meeting was called and it was resolved that the present members alone should not benefit from the prosperity of the company, but others also should share, and a special resolution was passed that the new shares may be offered to about a dozen persons who were not members of the company.
X rushed to the Court, complaining of oppression, saying that Y and Z wanted to throw him out as director and chairman of the company ;ind they had passed a special resolution to bring about a change in the management.
(i) Define what amounts to oppression.'
{«) Discuss fully the chances, if any, of X succeeding in the proceeding. Ana. The person claiming oppression has to prove on the part of majority:
- lack of probity
- unfair conduct
- prejudice to him in the exercise of legal and proprietary rights as a shareholder - rsktmti Prasad Jaw v. Kalinga Tubes Lid. (1965); Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holdings Ltd. [1981]].
The facts in the case do not point to the conduct of majority falling under any of the aforesaid grounds. Seeking change of management does not, prima facie, amount to oppression. Accord¬ingly, X would not succeed.
Problem 1. XYZ Company Limited ceased to operate its business in the field of its activities for 14 months. The company did not do any business as stated in its objects clause of memorandum of association. Instead, it became a holding company by forming two subsidiary companies, viz., ABC Company Limited and KJD Limited. These companies are engaged in the pursuit of objects for which XYZ Company Limited was incorporated. Some members of XYZ Company Limited want to move the Court for winding-up of the company on the ground that the company had suspended its business for a whole year. Advise the members.
Ans. Section 433(c); the company having suspended its business for more than a year. Hence, prima fade, ground for winding-up. However, in Easter Telegraph Co. Ltd., In re [1947], it was held that where a company ceases to do any business but becomes a holding company of subsidiaries engaged in pursuit of the business, which it was previously doing, it cannot be said that the company has suspended its business, for the whole year, so as to justify an order for its winding-up.
The members of XYZ Co. Ltd. should, therefore, not move the Court for winding-up of the company.
Problem 2. Company was incorporated for the purpose of manufacturing machine tools, implements, etc. It spent a substantial part of its subscribed capital on fixed assets. It borrowed a sum of Rs. 30 lakhs from a bank for providing working capital. As the company was unable to pay back this loan otherwise, the stock-in trade, plant and machinery and all the fixed assets of company were sold out in execution of a decree obtained by the bank, leaving no surplus for the
company.
Would it be just and equitable to wind-up the company in the circumstances?
Ans. In a ease where the subject-matter (substratum) of the company has gone or the objects for which the company was incorporated have substantially failed, it was held In re Kaithal General Mills Co, Ltd, [1951] that it shall be just and equitable to wind-up the company. The substratum of the company is deemed to have gone in such a case.
Thus, the company in question may be wound-up on just and equitable grounds since its substratum is gone.
Problem 3. Y Estates Ltd. was incorporated with the object of developing land for residential houses as well as purchase and sale of flats. It had, therefore, purchased 5 acres of land near the airport at Calcutta. But Government acquired the same for defence purposes. The company would not replace the land as the prices of land of other places were prohibitive.
What will be the decision of the court in the following cases: (0 The company suspends its business for a whole year?
(if) The company fails to resume its operations (business) for 5 years and the prospects seemed gloomy?
Ans. (i) The court may refuse to grant winding-up order. Suspension uf business for a whole year is a ground under section 433(c) seeking winding-up by the court but the power of the Court in this regard is discretionary. The Court shall refuse winding-up on this ground if the intention of the company not to resume its business is absent. Thus, in the given case, winding-up order shall not be issued. Similar decision was given under similar circumstances in the case of Murlidhurv. Bengal Steamship Co. Ltd. [192QJ.
(ii) Where the company fails to resume its operations for 5 years and prospects also seem gloomy, the Court may order the winding-up of the company [Kupu Bharati Lid. v. Registrar uf Companies [1969]].
Problem 4, The Official Liquidator of a public company in liquidation instituted misfeasance proceedings against the Managing Director of the Company. During the pendency of the proceedings, the Managing Director passed away.
What is meant by misfeasance? Can the legal representatives of the Managing Director be impleaded and the proceedings continued against him?
Ans, The facts of the case in question are similar to the case of Official Liquidator v. Panhasarthi Sinha[\ 983], wherein it was held that misfeasance proceedings initiated under section 543, against a director of a company in winding-up can be continued on his death against his heirs and legal representatives for the purpose of determining and declaring the loss or damage caused to the company. The expression 'misfeasance' means grave breach of duty or abuse of power usually associated with taking undue benefit or advantage at the cost of the company.
Problem 5. R and W formed a private limited company in which they were the only directors and shareholders having equal voting rights. Differences arose between them. They were not even on speaking terms. One of them shareholders filed a winding-up petition. Will he succeed in getting a winding-up order?
Ans. Facts similar to the case of re Yenidje Tobacco Co, [I916J. The company was ordered to be wound-up because of dead lock in management. Such a ground will fall under just and equitable.
Problem 6, The Balance Sheet of an investment company J Ltd. as on 31st March, 1980, disclosed an accumulated loss of Rs. 3 lakhs against the paid-up capital of Rs. 28,000 and that whereas its tangible assets were worth Rs. 6 lakhs, its liabilities amounted to Rs. 8 lakhs. The Registrar of Companies filed a petition for winding-up of the company on the ground that the company was unable to pay its debts. The Managing Director had stated that the paid-up capital of the company had been increased and the business of the company was also increasing every year, with the result that the company was making profits and all the creditors, whose claims had matured, had been paid-ofl. Decide, giving reasons whether the Registrar's petition for winding-up of the company is tenable.
Ans. Registrar is allowed to make a petition for winding-up of a company, inter alia, where it is felt to be just and equitable that the company be wound-up. Where the business of the company cannot be carried on except at a loss, it has been held to be a just and equitable ground for winding-up the company. However, merely the fact that the company has made losses, and is even likely to make further losses will not fall within the aforesaid ground and the Court shall not be justified in making a winding-up order [Re Shah Steamship Navigation Co, [1901]]. Based on the above and the given facts, the Registrar's petition shall not be tenable.
Problem 7.There are only two members of a company and both of them are not on speaking terms. Can the company be wound-up on this ground?
Ans. Yes, company can be wound-up on just and equitable ground under section 433. In Re Yenidje Tobacco Co. Ltd. [1916], on which the given Problem is based there were only two shareholders who were also the directors of the company and had become so hostile to each other that neither of them would speak to the other except through the Secretary. Held that there was a complete deadlock and consequently the company was ordered to be wound-up.
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9 comments:
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thank you
raghu
email:-raghuramnetha@gmail.com
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