COMPANY LAW
(QUESTIONS & ANSWERS)
Q. 1. An unlimited company is a company not having any limit on the liability of its members. [June 2009, 5x1 = 5]
Answer:
As per Sec. 12(2)(c) of the Companies Act, 1956, an “unlimited company” is a company not having any limit on the liability of its members. Thus, the maximum liability of the member, in the event of its being wound up, might stretch upto the full extent of their assets to meet the obligations of the company by contributing to its assets. However, the members of an unlimited company are not liable directly to the creditors of the company, as in the case of partners of a firm. The liability of the members is only towards the company and in the event of its being wound up, only the Liquidator can ask the members to contribute to the assets of the company which will be used in discharging of the debts of the company.
Q. 2. A company can mortgage or charge any part of its ‘reserve capital’.
Answer: [June 2009, 5x1 = 5]
Reserve Capital: It is that part of the uncalled capital of a company which the limited company has decided by special resolution in terms of Section 99 of the Companies Act, 1956 not to call except in the event of the company being wound up and thereafter that portion of the share capital shall not be capable of being called up except in that even and for those purposes.
Example: Rs.5 per share uncalled capital of which Rs.2 per share may be resolved to be kept as reserve capital
According to Sec. 125 of the Companies Act, 1956, a company can register a charge on the uncalled share capital of the company. However, a company cannot mortgage or charge any part of its “reserve capital”.
Q. 3. There is no statutory requirement that a director must hold qualification shares in the company in which he is a director. [June 2009, 5x1 = 5]
Answer:
Qualification Shares: There is no statutory requirement that a director must hold qualification shares in the company in which he is a director. However, the articles usually provide for a share qualification clause. It makes the director more responsible towards well being of the company. If the articles of a company provide for share qualification, Sec. 270 lays down that:
a) Each director must obtain his qualification shares within 2 months after his appointment as a director;
b) Any provision in the articles shall be void in so far as it requires a person to hold the qualification shares before his appointment as a director or to obtain them within a shorter time than 2 months after his appointment as such;
c) The nominal value of the qualification shares shall not exceed Rs.5,000 or the nominal value of one share where it exceeds Rs.5,000/-
d) The bearer of a share warrant should not be deemed to be the holder of the shares specified in the warrant.
Conclusion: A Director who accepts his qualification shares as a secret gift from promoters of a company is guilty of a gross breach of trust and he is liable to give up the shares. If a Director fails to acquire his qualification shares within two months after his appointment or at any time thereafter ceases to hold the share qualification, his office shall become vacant on the expiry of that period u/s 283(1)(a). And u/s 272 of the Companies Act, 1956 such Director shall be punishable with fine which may extend to Rs.500/- for every day during which the default continues if he acts as a director after the expiry of the said period of 2 months.
Q. 4. Statutory meeting can be held at any time and place as suited to the company. [June 2009, 5x1 = 5]
(or) Statutory meeting is held only once in the lifetime of a company.
Answer: [June 2008, 5x1 = 5]
Section 165 of the Companies Act, 1956 lays down that “Every company limited by shares, and every company limited by guarantee and having a share capital, shall, within a period of not less than one month nor more than 6 months from the date at which the company is entitled to commence business, hold a general meeting of the members of the company which shall be called “the statutory meeting”. Moreover the notice must indicate that it is a statutory meeting (Case Law: Gardener vs. Iredale).
Applicability: Statutory meeting is not applicable to Pvt. Co., Co. limited by guarantee and not having share capital.
Failure to Conduct Statutory Meeting:
(a) Company liable to be wound up under Sec. 433(b).
(b) Directors can be punished with a fine of Rs.5,000/-
Statutory Report u/s 165(2): The Board of Directors, atleast 21 days before the day on which the meeting is held, forward a report called Statutory Report to every member of the company.
Certification of Statutory Report:
• By atleast 2 Directors.
• Statutory Auditor. 2W Q Aaeeeeeeeeeeeee
• Register the Report to ROC atleast before 21 days of conducting meeting.
Q. 5. Provisions of section 58A are not applicable to guarantee companies and section 25 companies (i.e., associations not for profit). [June 2009, 5x1 = 5]
(or) Certain companies are exempted from the provisions of section 58A of the Act. [Dec. 2007, 5x1 = 5]
Answer:
The provisions of Section 58A and 58B of the Companies Act, 1956 and Companies (Acceptance of Deposits) Rules, 1975 are also applicable to companies limited by guarantee and associations not for profit, i.e., Section 25 companies having share capital and formed for promoting commerce, art, science religion, charity etc. However, guarantee companies which have no share capital have to comply with the requirements of provisions of these sections and Rules to the extent applicable.
Exemptions: Sub-section (7) of Section 58A provides that the provisions of Section 58A of the Act shall not apply to:
1. Banking company;
2. such other companies as the Central Government may, after consulting the RBI;
3. Small Scale Industry
a. The paid-up capital of the company does not exceed Rs.25 lakhs;
b. The company accepts deposits from not more than 100 persons;
c. There is no invitation to public for deposits; and
d. The amount of deposits accepted by the company does not exceed Rs.20 lakhs or the amount of its paid up capital, whichever is less.
Q. 6. What are the modes in which a director of a company can be appointed ? Answer: [June 2009, 8x1 = 8]
Directors may be appointed in the following ways:
(i) By subscribers to the Memorandum (First Directors) Section 254
a. Section 254 of the Act, provides that the subscribers of the memorandum who are individuals (not body corporates) shall be deemed to be the first directors of the company until the directors are duly appointed in accordance with Section 255. The articles at the time of registration may contain the names of the first directors until directors are appointed at the first general meeting.
(ii) By members in general meeting – Sections 255, 256, 257 265
a. Section 255 of the Act, provides that unless the articles provide for the retirement of all directors at every annual general meeting, not less than 2/3rd of the total number of directors of a public company, or of a private company which is subsidiary of a public company.
b. Section 256 of the Act, provides that in the case of a public company or a private company which is subsidiary of a public company, at the first annual general meeting in accordance with Section 255 and at every subsequent annual general meeting, 1/3rd of such of the directors for the time being as are liable to retire by rotation.
c. Section 257 of the Act, provides that a person (even a non-member) other than retiring director may give a notice in writing to a public company or a private company which is subsidiary of a public company not less than 14 days before a general meeting about his candidature as a director or any other member may give such notice. Such notice should be accompanied with a deposit of Rs.500/- which shall be refunded to such if the person succeeds in getting elected as a director.
d. Section 265 of the Act affords an opportunity to the minority shareholders to have their representatives on the Board of Directors.
(iii) By Board of Directors – Sections 260, 262 and 313
a. Section 260 of the Act lays down that if the AOA of a company empower its directors to appoint additional directors, the Board may exercise such power. Such additional director shall hold office only upto the date of the next annual general meeting of company. The power of the Board of Directors to appoint an additional director is not affected by the provisions of Section 255.
b. Section 262 empowers the Board to fill casual vacancies in the case of a public company or a private company which is a subsidiary of a public company. The BOD shall have the power at any time and from time to time subject to the provisions of Section 260 of the Companies Act, 1956 to appoint any person to be a director to fill a casual vacancy among directors of the company. Section 262(2) says that, the person appointed as director to fill up a casual vacancy, will hold office not until the next annual general meeting only but for the entire period for which the person in whose place he has been appointed would have held office.
c. The BOD of a company may if so authorized by its AOA or by a resolution passed by the company in the general meeting appoint an alternate director in accordance with Section 313 of the Act for a director during his absence for a period of not less than 3 months.
(iv) By Central Government – Sections 408 and 409
a. Section 408 of the Act, vests overriding powers in the Central Government to nominate directors. Sub-section (1) provides that notwithstanding anything contained in this Act, the Central Government may appoint such number of persons as the CLB may by order specify being necessary to effectively safeguard the interests of the company or its shareholders to hold office as directors for such period not exceeding 3 years on any one occasion. The period of 3 years mentioned herein means full term of 3 years excluding the period during which an injunction by Court on instance of company restraining director for acting operates.
(Case Law: Union of India vs. Shri Changdeo Sugar Mills Ltd.)
b. An application under Section 408 and Section 409 of the Act is required to be made to the Principal Bench of the CLB in Form No.1 to the CLB Regulations with a fee of Rs.500/- to prevent oppression and mismanagement.
(v) By third-parties if the articles provide
a. Nominee Director (Watchdog): Sometimes financial institutions or banks or other lenders et., nominate a director to represent their interest on the Board. They have to ensure that the money is only used for the purposes for which it was borrowed. The nominee directors can be appointed only if a provision exists in the MOA or AOA of the company unless where a statute provides for such nomination.
b. Sometimes a company may not accept the appointment of a director nominated by the third party. The third party might insist that the director nominated by it must be accepted and may thus refuse to provide an alternative. (Case Law: British Murac Syndicate Ltd. Vs. Alperton Rubber Co. Ltd.)
(vi) By small shareholders if the articles provide.
a. Section 252(1) of the Companies (Amendment) Act, 2000 provided that a public company having:
(i) A paid-up capital of Rs.5 crores or more;
(ii) 1000 or more shareholders;
may have a director elected by such small shareholders in the manner as may be prescribed.
Q. 7. Write short notes on the following:
(i) Doctrine of constructive notice
(ii) Red-herring prospectus
(iii) Managerial remuneration [June 2009, 4x5= 20]
Answer:
(i) Constructive Notice:
(iii) Red-Herring Prospectus: “Red-herring prospectus” means a prospectus which does not have complete particulars on the price of the securities offered and the quantum of securities offered. The information memorandum and red-herring prospectus carry same obligations as are applicable in the case of prospectus.
(iv) Managerial Remuneration: Managerial remuneration may take the form of monthly payments, say, salary or a specified percentage of net profits or a commission or by way of a fee for each meeting of the Board (called sitting fee). Section 198 lays down that, the total remuneration to all the directors (including M.D. and W.T.D. and manager) shall not exceed 11% of the net profits. Section 309 provides that the remuneration payable to any M.D. or W.T.D or Manager shall not exceed 5% of the net profits. If he has received any salary or commission or sitting fee aggregating the total payments to him shall not exceed 5% of the net profits, if it exceeds then the excess amount shall be returned to the company by M.D. or W.T.D. or Manager.
Q. 8. What is ‘floating charge’ ? When does it crystallise ? What is effect of crystallization of a floating charge ? [June 2009, 8x1 = 8]
Answer:
Floating Charge: A floating charge is a type of security is peculiar to companies as borrowers. A floating charge is not attached to any definite property but covers property of a fluctuating type e.g., raw material, stock-in-trade et. And is thus necessarily equitable. A floating charge is a charge on a class of assets present and future which in the ordinary course of business is changing from time to time and leaves the company free to deal with the property as it sees fit until the holders of charge take steps to enforce their security.
Crystallisation of Floating Charge:
The company has a right to carry on its business with the help of assets having a floating charge till the happening of some event which determines this right. A floating charge crystallizes and the security becomes fixed in the following cases:
(i) When the company goes into liquidation;
(ii) When the company ceases to carry on the business;
(iii) When the creditors or the debenture holders take steps to enforce their security e.g., by appointing receiver to take possession of the property charged;
(iv) On the happening of the event specified in the deed.
Effect of Crystallisation of a Floating Charge: On crystallization, the floating charge converts itself into a fixed charge on the property of the company. It has priority over any subsequent equitable charge and other unsecured creditors. But preferential creditors who have priority for payment over secured creditors in the winding-up get priority over the claims of the debenture holders having floating charge.
Q. 9. What are the salient features of limited liability partnership (LLP) ?
Answer: [June 2009, 8x1 = 8]
Salient Features of LLP:
1. The LLP shall be a body corporate and a separate legal entity from its partners.
2. The mutual rights and duties of partners of an LLP inter se and those of the LLP. Its partners shall be governed by an agreement between partners or between the LLP and the partners subject to the provisions of the proposed legislation.
3. The LLP will be a separate legal entity and liable to the full extent of its assets with the liable of the partners being limited to their agreed contribution in the LLP which may be tangible or intangible in nature or both.
4. Every LLP shall have atleast two partners and shall also have atleast 2 individuals as Designated Partners of whom atleast one shall be a resident of India.
5. The LLP shall be under an obligation to maintain annual accounts reflecting true and fair view of its state of affairs.
6. The Central Government shall have powers to investigate the affairs of an LLP, if required, by appoint of competent inspector for the purpose.
7. The proposed legislation would confer powers on the Central Government to apply such provisions of the Companies Act, 1956, to provide, inter alia, for mergers, amalgamations, winding up and dissolutions of LLPs, as appropriate by notification with such changes or modifications as deemed necessary.
8. The Indian Partnership Act, 1932 shall not be applicable to LLPs.
9. The Central Government shall have powers to make rules for carrying out the provisions of the proposed legislation.
Q. 10. List out the various registers required to be maintained statutorily under the Companies Act, 1956. [June 2009, 8x1 = 8]
Answer:
Statutory Books/Registers: Every company incorporated under the Companies Act, 1956 is required to keep at its registered office, inter alia, the following books and registers:
1. Register of investments in securities not held in company’s name. [Sec. 49(7)]
2. Register of deposits [Sec. 58A and the Companies (Acceptance of Deposits) Rules, 1975 and the RBI Non Banking Financial Companies Directions]
3. Register of securities bought back [Sec. 77A]
4. Register of charges. [Sec. 143]
5. Register and index of members. [Secs. 150, 151 and the Companies (Issue of Share Capital with Differential Voting Rights) Rules, 2001]
6. Register and index of debenture holders. [Sec. 152]
7. Register and index of beneficial owners. [Sec. 152A]
8. Foreign register of members and debenture holders and their duplicates. [Secs. 157(1) and 158(4)]
9. Annual Return. [Sec. 163]
10. Books containing minutes of general meeting and of Board meetings and of committees of Directors. [Sec. 193(1)]
11. Register of Postal Ballot. [Sec. 192A and the Companies (Passing of the Resolutions by Postal Ballot) Rules, 2001]
12. Books of accounts. [Sec. 209(1)(a) to (c)]
13. Cost of account records for companies engaged industries so specified by Central Government. [Sec. 209(1)(d)]
14. Register of contracts with companies/firms in which directors are interested. [Sec.301(5)]
15. Register of Directors/Managing Directors/Managers/Whole-time Directors/Secretary. [Sec. 303]
16. Register of director’s shareholdings. [Sec. 307]
17. Register of loans or investments made, guarantees given and security provided to other body corporates. [Sec. 372A]
18. Register of renewed and duplicate share certificates. [Rule 7 of the Companies (Issue of Share Certificate) Rules, 1960]
19. Register of records and documents destroyed. [Sec 163 and Companies (Preservation and Disposal of Records) Rules, 1966]
20. Register of sweat equity shares. [Sec. 79A and the Unlisted Companies (Issue of Sweat Equity Shares) Rules, 2003]
21. Dividend register.
Q. 11. Briefly explain the various modes of winding-up of a company.
Answer: [June 2009, 8x1 = 8]
Modes of Winding up:
1. Winding up by the Court/Tribunal: A company may be wound up by the Court if:
a) The company has passed a special resolution of its being wound up by Court;
b) Not conduct of statutory meeting or non delivery of the statutory report to the Registrar;
c) Does not commence business within a year from its incorporation or suspends business for one whole year;
d) Reduction of membership below minimum level (7 in case of public companies and 2 in case of private companies);
e) Unable to pay its debts;
f) Court of the opinion to wound up;
g) Failure in submission of BS or P&L or annual returns for 5 consecutive years;
h) Company has acted against the sovereignty and integrity of India;
i) Tribunal forms an opinion for wound up u/s 424G and made an application under clause (h) by the Central Govt. or State Govt.
It is primarily the High Court which has the jurisdiction to wind up companies under Section 10 of the Companies Act, 1956 in relation to the place at which the registered office of the company is situated. The Central Government may empower any District Court to exercise that jurisdiction presumably to reduce the burden of the High Court only in respect of small companies with the paid-up capital of not more than Rs.1 lakh and having their registered office within the District, with a view to achieving expeditious and efficient disposal of winding up proceedings.
2. Voluntary Winding up:
a) Members Voluntary winding up: A winding up in which a declaration has been made and delivered in accordance with Section 488 is referred to as a “member’s voluntary winding up”. In Shri Raja Mohan Manucha vs. Lakshminath Saigal, it was held that where the declaration of solvency is not filed in accordance with the law, the resolution for winding up and all subsequent proceedings will be null and void. Such a declaration must be made within 5 weeks immediately preceding the date of passing the resolution for winding up and be delivered to the Registrar for registration before that date.
b) Creditor’s Voluntary winding up [Sec. 488(5)]: Where a declaration of solvency of the company is not made and delivered to the Registrar, it is a case of creditor’s voluntary winding up.
3. Winding up subject to the Supervision of Court [Sec. 522]: When a company has by special or ordinary resolution resolved to wind up voluntarily, the Court may make an order that the voluntary winding up shall continue, but subject to such supervision of the Court and with such liberty for creditors, contributories or others to apply to the Court and generally on such terms and conditions, as the Court thinks fit.
Q. 12. A managing director of a company stood as surety for the repayment of loan taken by it for which he was paid guarantee commission. Does this commission amount to managerial remuneration ? Support your answer with decided case law, if any. [June 2009, 5x1 = 5]
Answer:
The sanction of the Central Government under Section 310 is not required for paying remuneration to a director for services of a professional nature, since such remuneration is excluded from total remuneration mentioned under Sec. 309(1)(a). (Case Law: Ruby Mills Ltd. Vs. Union of India). Journalist, Editor, Author, Engineer, Solicitor, Auctioneer, etc., have been taken to be exercising a profession.
Raising of remuneration of a director by way of commission constitutes an increase which would require Central Government approval under Section 310 entitled the Central Govt. to impose restrictions and conditions in the exercise of its powers under Section 637A and Section 637AA (Case Law: National Engineering Industries Ltd. Vs. Secretary, Ministry of Law Justice and Company Affairs).
Q. 13. A whole-time director of a company made an invention during the course of his employment with the company. He patented the invention in his own name and appropriated the benefits to himself. Can he do so ? Cite case law, if any. [June 2009, 5x1 = 5]
Answer:
The term executive director and whole-time director has not been defined in the Companies Act except saying that he is in the whole-time employment of the company. Since a whole-time director and an executive director are also directors and additional responsibility is entrusted to them, their appointment shall be subject to the provisions of Section 274 of the Act, which lays down certain disqualifications of directors.
Q. 14. Articles of association of a company reserved the powers for calling the annual general meeting. The managing director of the company, without reference to the Board, called an annual general meeting. Is the annual general meeting validly called ? If not, what should be done to make it valid ? Discuss with reference to case law, if any. [June 2009, 6x1 = 6]
Answer:
Requisites of Valid General Meeting: The foll. conditions to be satisfied:
1. It must be duly convened. This means that (a) the person entitled to attend it must have been summoned by the proper authority i.e., normally the Chairman of the Board of Directors and (b) proper and adequate notice must have been given to all those entitled to attend.
2. It must be proper constituted. This means that (a) the proper person must be in the chair, (b) the rules as to quorum must be observed, and (c) the provisions of the Act and the articles must be complied with.
3. The business at the meeting must be validity transacted and sense of the meeting ascertained on matter before it.
Conclusion: Where a M.D. issued notice calling a general meeting but he had no power to do so under the articles of association of the company, it was held that the notices were null and avoid and meeting held pursuant thereto was also null and void. (Case Law: Al-Amin Seatrans Ltd. Vs. Vessel M.V. ‘Loyal Biard’). But it will be valid if before the meeting is held the Board ratifies the act. (Case Law: Hopper vs. Kevr Start & Co.). A meeting convened by or under the authority of the Board which was subsequently found to have been irregularly constituted was however held to be not invalidated for that reason.
Q. 15. Common seal of a company will have to be affixed on all the letters and documents of the company. [Dec. 2008, 5x1 = 5]
Answer:
Common Seal: A body corporate is not a living person who can sign, therefore every company should necessarily have an instrument known as common seal which is used for making a physical impression to act as its signature on certain important documents. Section 147(1)(b) provides that the name of the company should be engraven, it appears that the seal should be made of metal.
Transactions not valid without Common Seal:
1. Power of attorney in favour of a person to execute deeds on behalf of the company;
2. Share certificates;
3. Share warrants;
4. Any deed as may be specified by the AOA.
Q. 16. Private companies can commence business immediately after receipt of ‘certificate of incorporation’. [Dec. 2008, 5x1 = 5]
Answer:
A private company or a company having no share capital may commence business and exercise its various powers immediately after it is incorporated. Once it has received its ‘Certificate of Incorporation’, nothing further is required.
Q. 17. Bonus issue may be viewed as a ‘rights issue’ except that money is paid by the company on behalf of the investing shareholders from its reserves.
Answer: [Dec. 2008, 5x1 = 5]
Issue of Right shares Bonus Shares
Section 81 of the Companies Act, 1956 provides that the existing shareholders in proportional to the capital paid-up on their shares at the time of issue. The shareholders may accept the offer or renounce it fully or partly. Price of each share in rights issue, number of shares offered etc., is mentioned in the application form. The application duly filled in along with cheque/DD will have to be submitted, as directed, on or before the last date. Bonus shares are allotted by the company to the existing shareholders in proportional to the number of shares they have been holding. The existing shareholders are neither required to make any application nor have to pay anything. Accumulated profits of the company transferred to reserve are converted into capital and the company divides the capital amongst the existing shareholders in the form of bonus share.
Q. 18. A resolution was passed by the shareholders in an annual general meeting approving final dividend @ 20% for the financial year 2007-08 and one month later the Board of directors decided to pay further dividend @ 5% for the financial year 2007-08. [Dec. 2008, 5x1 = 5]
Answer:
It has been considered by the CLB that whether a company is prohibited from declaring a further dividend at a general meeting of a company other than the AGM after a dividend had already been declared at an AGM. CLB is of the opinion that it is beyond the powers of a company to declare a further dividend after the declaration of dividend at the AGM. It was decided in the Case Law: Biswa Nath Pd. Khaitan vs. New Central Jute Mills Ltd. Thus a company which could not declare a dividend at an AGM may do so at a subsequent General Meeting. On the other hand, where a company has declared a dividend at a general meeting neither the company nor its directors can declare a further dividend for the same year.
Q. 19. Under Section 205, depreciation will have to be provided for working out distributable profit. Though, the present value of land of a company, dealing with land, is much less than the book value, the difference between the book value and market value was not amortised before declaring dividend. Discuss. [Dec. 2008, 4x1 = 4]
Answer:
A loss of capital need not be made good before declaring or payment of dividend out of capital profits (Case Law: Botton vs. Natal Land & Colonisation Co. Ltd.). In this case, the plaintiff sought to restrain the payment of dividend by a company dealing with land on the ground that the book value of the land was much higher than the true value and must be written down before profit can be distributed. Held that a loss of capital need not be made good before declaring a payment of dividend out of current profits.
Q. 20. What are the provisions regarding disclosure in the directors’ report of the events of great importance to the business developed after closure of accounts of the company ? [Dec. 2008, 4x1 = 4]
Answer:
According to the guidelines published by the ICAI, significant events occurring after the balance sheet date and the date on which the financial statements are approved, both favourable and unfavourable, which have significant effects on the financial result may require adjustment to asset and liabilities or may require disclosure. Those significant events which occur during that period, i.e., balance sheet date and their approval date, which do not have material effect on the financial results as on balance sheet date may be disclosed through Director’s Report or Chairman’s statement/speech.
Two types of events have been identified:
1. those that provide further evidence of conditions that existed at the b/s date, and
2. those that are indicative of conditions that arose subsequent to the b/s date.
Q. 21. Enumerate the differences between ‘statutory books’ and ‘statistical books’ of a company. [Dec. 2008, 4x1 = 4]
Answer:
Statutory Books:
Statistical Books: The keeping of such books has become a necessity although there is no legal compulsion for the same. The following is the list of some of such important books:
1. Share Application and Allotment Book.
2. Share call book.
3. Share certificate book.
4. Share transfer book.
5. Debenture interest book.
6. Director’s attendance book.
7. Agenda book.
8. Dividend Mandate register.
9. Share warrants register.
10. Register of certified transfers.
Q. 22. What is the procedure regarding authentication of annual accounts of a private company when only one director is available in India .
Answer: [Dec. 2008, 4x1 = 4]
According to Section 215 of the Companies Act, 1956, the balance sheet and the profit and loss A/c shall be signed on behalf of the Board by
a) The manager or secretary if any and
b) Two directors one of whom shall be a managing director where there is one.
If there is no managing director, then by
a) The manager or secretary if any and
b) Any two directors shall sign the same.
If only one director or managing director is, for the time being in India, he can sign the balance sheet and profit and loss A/c. However, in such a case he is required to file with the Registrar of Companies, along with the balance sheet and the profit and loss A/c, a signed statement explaining the reason as to why compliance with the provisions of sub-section(1) of Section 215 was not possible.
Q. 23. Is it mandatory for all the directors to obtain DIN ? Discuss.
Answer: [Dec. 2008, 4x1 = 4]
Sections 266A to 266G of the Companies Act, 1956 contains the provisions for DIN. As such, all the existing directors and individuals intending to become directors have to obtain DIN within the prescribed manner and time frame. Central Government has prescribed Director Identification Rules, 2006, governing DIN.
1. DIN is allotted by the Central Government within 1 month from the date of receipt of application for allotment of DIN.
2. No one can obtain more than one DIN.
3. DIN number will have to be quoted while furnishing any return, information, etc. relate to the Director or contain information/reference of any director.
4. Intimation of DIN will have to be given to the Registrar or any other officer or other specified authority within a week of obtaining the number.
Q. 24. Write short notes on the following:
(i) The golden rule or golden legacy; and
(ii) Corporation sole. [Dec. 2008, 4x2 = 8]
Answer:
(i) The Golden Rule or Golden Legacy: This Golden Rule was enunciated by Kinderseley, V.C. in New Brunswich, etc. Co. vs. Muggeridge, and has come to be known as the “golden legacy”. “Those who issue a prospectus hold out to the public great advantages which will accrue to the persons who will take shares in the proposed undertaking. Public is invited to take shares on the faith of the representation contained in the prospectus. The public is the mercy of company promoters. Everything must, therefore, be stated with strict and scrupulous accuracy. Nothing should be stated as a fact which is not so and no fact should be omitted, the existence of which might in any degree affect the nature or quality of the privileges and advantages which the prospectus holds out as inducement to take shares. In short, the true nature of the company’s venture should be disclosed. If concealment of any material fact has prevented an adequate appreciation of what was stated, it would amount to misrepresentation. Thus, even if every specific statement is literally true, the prospectus may be false if by reason of the suppression of other material facts, it conveys a false impression”.
(ii) Corporation Sole: A corporation sole is a single individual constituted as a corporation in respect of some office held by him or function performed by him. The Crown or a Bishop under the English law is an example of this type of corporation. It may be noted that though a corporation sole is excluded from the definition for the purposes of the Companies Act, it continues to be a legal person capable of holding property and becoming a member of a company.
The classic examples for ‘corporation sole’ in India are the President of India and the Governors of the Indian States. Under Article 299 of the Constitution of India, all contracts for and on behalf of the Governments in India are required to be in the name of the President of India (for India) and the Governors of the States (for States).
Q. 25. Jolly is one of the preference shareholders of Jack & Jill Ltd., a company registered under the Companies Act, 1956. The annual general meeting of the said company is scheduled to be held on 8th January, 2009. In this context, Jolly wants to exercise his voting rights at the scheduled general meeting. Can he do so ? [Dec. 2008, 8x1 = 8]
Answer: Under Section 87(2) of the Companies Act, 1956, a preference shareholder has the right to vote only on a resolution which directly affects the rights attached to his preference shares. For this purpose, any resolution for winding up of the company or for the repayment or reduction of its share capital shall be deemed directly to affect the rights attached to preference shares.
However, a preference shareholder shall be entitled to vote on every resolution placed before the company at any meeting. If the dividend has remained unpaid for specified period, viz.,
a) In the case of cumulative preference shares, in respect of an aggregate period of not less than 2 years preceding the date of comment of the meeting; and
b) In the case of non-cumulative preference shares, either in respect of a period of not less than 2 years ending with the expiry of the financial year immediately preceding the commence of the meeting or in respect of an aggregate period of not less than 3 years, comprised in the 6 years ending with the expiry of the financial year aforesaid.
Therefore, Jolly can exercise his voting rights at any GM only on matters as discussed above.
Q. 26. What is ‘class meeting’ ? What are the purposes, provisions and procedure for holding class meeting ? [Dec. 2008, 8x1 = 8]
Answer:
Class Meeting: Class meetings are those meetings which are held by holders of a particular class of shares, e.g., preference shares. Need for such meetings arises when it is proposed to vary the rights of a particular class of shares. Thus, for effecting such changes, it is necessary that a separate meeting of the holders of that class of shares is held and the proposed variation is approved at the meeting. For example, for deciding not to pay the arrears of dividends on cumulative preference shares, for which it is necessary to call a meeting of such shareholders and pass the resolution as prescribed in Section 106 of the Companies Act, 1956.
Procedure for conducting Class Meetings: Regulation 3 of the Table A of Schedule I of the Act provides as under:
1. If at any time, the share capital is divided into different classes of shares, the rights attached to any class may, subject to the provisions of Sections 106 & 107, and whether or not the company is being wound up, be varied with the consent in writing of the holders of 3/4th of the issued shares of that class or with the sanction of special resolution passed at the separating meeting of the holders of the shares of that class.
2. To every such separate meeting, the provisions of these regulations relating to general meeting shall mutates-mutandis apply, but so that the necessary quorum shall be two persons at least holding or representing by proxy 1/3rd of the issued shares of the class in question.
Note: The AOA will have to be suitably modified depending on the needs of each case on the above lines. The other procedures like serving of notices, persons to whom notices should be given, chairman, voting, proxy, minutes, poll, etc. are similar to those provided in case of general meetings.
Q. 27. Discuss the following:
(i) Front office represents the interface of the corporate and public users with
the MCA-21 system.
(ii) For MCA-21, four types of users which are identified as users of digital signature.
(iii) SMART governance. [Dec. 2008, 3x3 = 9]
Answer:
(i) MCA-21: Front office represents the interface of the corporate and public users with the MCA-21 system. This comprises of Virtual Front Office and Registrar’s Front Office.
a) Virtual Front Office (VFO): VFO merely represents a computer facility for filing of digitally signed e-forms by accessing the MCA portal through internet.
b) Registrar’s Front Office (RFO): When a company does not have the computer facilities required for e-filing, it can avail of these facilities at the designated facilitation centers, known as Registrar’s Front Office (RFO) or Physical Front Office (PFO).
For MCA-21, the following four types of users are identified as users of Digital Signatures and are required to obtain digital signature certificate:
1. MCA Employees (Govt. Employees).
2. Professionals (CSs, CAs, Cost Accountants and Lawyers) who interact with MCA and companies in the context of Companies Act, 1956.
3. Authorized signatories of the company including M.D., Directors, Manager or Secretary.
4. Representatives of Banks and Financial Institutions.
(ii) Smart Governance: E-governance is the application of information technology to the Government functioning in order to bring about simple, moral, accountable, responsive and transparent (SMART) Governance. The system aims at moving from paper based to nearly paperless environment. It is based on the Government’s vision of National e-governance in the country.
Q. 28. What do you understand by the term ‘illegal association’ ? What are the rights and liabilities of a member of illegal association ? [Dec. 2008, 8x1 = 8]
(or) Every member of an illegal association shall be personally liable for all liabilities incurred in carrying on the business. [Dec. 2008, 5x1 = 5]
Answer:
Illegal Association: According to Section 11 of the Companies Act, 1956, no company, association or partnership consisting of more than 20 persons (10 in case of banking companies) can be formed for the purpose of carrying on any business for gain, unless it is registered as a company under the Companies Act, or is formed in pursuance of some other Indian Law, or is a Joint Hindu Family carrying on business for gain.
Section 11 of the Act does not apply to the case of a single joint family carrying on any business whatever may be the number of its members. But if 2 or more Joint Hindu Family firms carry on business together and the combined number of members exceed 20, then their association will become illegal. If minor member of a joint family on attaining majority, the number of persons exceeds the statutory limit, it will become an illegal association. The liberal view under such circumstances seems to be exemption from the penal provision since illegality supervenes at a subsequent stage. (Case Law: Niraban vs. Lalit). But by strict interpretation of the provisions of the said section one may hold such illegal association liable.
Rights and Liabilities of a Member of Illegal Association:
Under sub-sections (4) and (5) of Section 11, every member of an illegal association is:
a) Personally liable for all liabilities incurred in carrying on the business of, or by the illegal association, and
b) Punishable with a fine of upto Rs.10,000/-.
Q. 29. An association of 15 members (not being HUF) started banking business without being registered. After one year, six members retired. Thereafter, three members instituted a suit for partition of assets of the association. Discuss the fate of such a suit. [Dec. 2008, 8x1 = 8]
Answer:
Under Sec. 11 of the Companies Act, 1956, an association consisting of more than 10 persons carrying on banking business (not being a HUF business) should be registered. If it is not registered, it would be an illegal association, and the effect would be that it has no legal existence. An illegal association cannot become a legal association even if later on the number of members falls below the required numbers. It was held that in the (Case Law: MST Kumarswami Chettiar vs. MSM Chinnathambi Chettiar), that an association contravening Sec. 11 of the Companies Act, is an illegal association and while it cannot sue anyone on a contract made by it, its members will be individually liable on such contract. There can be no cause of action on the basis of an illegal association.
Thus, the association will remain illegal notwithstanding the fact that its number has fallen below 10. Therefore the suit will not be tenable.
Q. 30. Promoters of a company stand in a fiduciary position towards it.
[Dec. 2008, 5x1 = 5]
(or) “A promoter is not a trustee or agent for the company, but he stands in a fiduciary position towards it.” [June 2007, 5x1 = 5]
(or) ‘Promoters’ though not defined in the Companies Act, 1956, can still be identified and liability can be attached on them. [Dec. 2006, 5x1 = 5]
Answer:
Promoter: The word “Promoter” is not defined in the Companies Act, 1956. The term ‘Promoter’ for the purpose of Section 62 of the Act means a promoter, who was a party to the preparation of the prospectus or any portion thereof containing any untrue statement. The word “promoter” has also be used in Sections 69, 76, 478 and 519 of the Companies Act, 1956.
SEBI has given an exhaustive definition of the term promoter in SEBI (SAST) Regulations, 1997. While the accurate description of a promoter is difficult, his legal position is quite clear. A promoter is neither an agent nor a trustee for the company because it is not in existence. But he occupies a fudiciary position in relation to the company and therefore, full disclosure of relevant facts including any profit made is required from him. A promoter is made expressly liable under Section 56 (matters to be stated and reports to be setout in the prospectus), Section 62 (civil liability for misstatements in prospectus), Section 63 (criminal liability for misstatements in prospectus), 203 (power to restrain fraudulent persons from managing companies), Section 478 (power to order public examination of promoters, directors, etc. and Section 543 (power of Tribunal to assess damages against delinquent directors etc.) of the Companies Act, 1956.
Q. 31. Hindu undivided family (HUF) form of business is significantly different from a corporate form of business organisation. [Dec. 2008, 5x1 = 5]
Answer:
Differences between HUF and Corporate:
1. A company consists of heterogeneous members, whereas a HUF consists of homogeneous members.
2. In a HUF business the Karta (manager) has the sole authority to contract debts for the purpose of the business, other coparceners cannot do so. There is no such system in a company.
3. A person becomes a member of HUF business by virtue of birth in that particular family. There is no provision to that effect in the company.
4. No registration is compulsory for carrying on business for gain by a HUF even if the number of members exceeds 20 (Case Law: Shyamlal Roy vs. Madhusudan Roy) whereas Registration of a company is compulsory.
Q. 32. The role of Chairman-cum-Managing Director of an average sized company in India is vital in the management of the company. [Dec. 2008, 5x1 = 5]
Answer:
Chairman: A Chairman is an important element of company meeting and is usually appointed by the AOA. Section 175 of the Companies Act, 1956 provides that unless the Articles of the company otherwise provide, the members personally present at the meeting shall elect one of themselves to be the Chairman thereof by show of hands.
Managing Director: Section 2(26) of the Companies Act, 1956 defines M.D. “It stipulates that a Managing Director means a director who, by virtue of an agreement with the company or of a resolution passed by the company in general meeting or by its Board of directors or by virtue of its MOA or AOA, is entrusted with substantial powers of management which would not otherwise be exercisable by him, and includes a director occupying the position of a managing director, by whatever name called”.
Role of Chairman-cum-M.D: A chairman-cum-managing director (CMD) is sometimes called a whole-time chairman whereas a director, who is not a whole-time director of the company, is called a part-time chairman. The effectiveness and success of a Board, therefore, depends to a great deal, on the clarity of the mind of such CMD, the home work done by him and the manner in which the Board meetings are conducted and he is expected to take pains to go through all the items on the agenda of a meeting in detail so as to help the participating directors in appreciating the real nature of the problem, matters and issues to be discussed, decisions to be taken and policies to be formulated. Thus the role of CMD of an averaged size company in India is vital to the management of Co.
Q. 33. A director of a company wants to hold an office or place of profit.
Answer: [Dec. 2008, 5x1 = 5]
Office or Place of Profit: Sub-section (3) of Section 314 defined as “an office or place of profit shall be deemed to be an office or place of profit in the company:
(a) In case the office or place is held by a director, if the director holding it obtains from the company anything by way of remuneration over and above the remuneration to which he is entitled as such director, whether as salary, fees, commission, perquisites, the right to occupy free of rent any premises as a place of residence, or otherwise.
(b) In case the office or place is held by an individual other than a director or by any firm, private company or other body corporate, if the individual, firm, private or body corporate holding it obtains from the company anything by way of remuneration whether as salary, fees, commission, perquisites, the right to occupy free of rent any premises as place of residence or otherwise.
Sub-section (1) of Section 314 provides that except with the consent of the company accorded by a special resolution:
(a) No director of a company shall hold any office or place of profit, and
(b) No partner or relative of such director, no firm in which such director, or a relative of such director, is a partner, no private company of which such director is a director or member, and no director or manager of such a private company can hold any office or place of profit carrying a total monthly remuneration of such sum as may be prescribed [sum prescribed vide Sub-rule (1) of Rule 10C of Companies (Central Government’s) General rules and Forms 1956 is present Rs.20,000/-]
Section 314(1B) provides that notwithstanding anything contained in sub-section (1)
(a) No partner or relative of a director or manager;
(b) No firm in which such director or manager, relative of either, is a partner;
(c) No private company of which such a director or manager, or relative of either, is a director or member;
shall hold any office or place of profit in the company which carries a total monthly remuneration of such sum as may be prescribed except with the prior consent of the company by a special resolution. The prior approval of the Central Government shall be referred in case the said total monthly remuneration exceeds Rs.50,000/- per month.
Q. 34. What are the restrictions imposed on the borrowing powers of the Board of
Directors ? [Dec. 2008, 5x1 = 5]
Answer:
Section 58A – Restrictions on Borrowing Powers
The BOD and others who exercise borrowing powers for or on behalf of any non-banking company have to take particular care to see that the directions of Reserve Bank as well as the provisions of Section 58A are complied with. Whenever any company receives any money in the form of deposit it must be noted that the Reserve Bank directions under Section 45-L of the RBI Act have effect notwithstanding anything otherwise provided in the Companies Act, or any other law, as it is so expressly provided by Section 45-Q of that Act.
Q. 35. Define a ‘member’. Distinguish between a ‘member’ & a ‘shareholder’. In what ways may a person become and cease to be a member? [Dec. 2008, 6x1 = 6]
(or) In what manner ‘membership’ in a company be sought ? [June 2009, 8x1=8]
(or) All the shareholders of a company are members and all the members of a company are shareholders. [Dec. 2008, 5x1 = 5]
(or) Explain the circumstances when a person ceases to be a member of a company. [Dec. 2007, 4x1 = 4]
(or) Whether a member of a company can be expelled ? Discuss with reference to a case law. [June 2007, 4x1 = 4]
(or) Define ‘member’. What are the various modes of acquiring membership of a company ? [June 2008, 4x1 = 4]
(or) Under what circumstances can a person become a member of a company ?
[June 2006, 5x1 = 5]
Answer:
Member: According to Section 41 of the Companies Act, 1956, a person may acquire the membership of a company:
(a) By subscribing to the MOA (deemed agreement); or
(b) By agreeing in writing to become a member:
(i) by making an application to the company for allotment of shares; or
(ii) by executing an instrument of transfer of shares as transferee; or
(iii) by consenting to the transfer of share of a deceased member in his name; or
(iv) by acquiescence or estoppel.
(c) By holding equity share capital of a company whose name is entered as beneficial owner in the records of a depository (Under the Depositories Act, 1996).
Accordingly, there are two important elements before a person can quire member of a company:
(i) Agreement to become a member; and
(ii) Entry of the name of the person so agreeing, in the register of members of the Co.
Distinguish between Shareholder and Member: The terms “members” and “shareholders” are usually used interchangeably being synonyms as there can be no membership except through the medium of shareholding. Thus, every shareholder is a member and every member is a shareholder. However, there may be some exceptions to this statement. For eg., a person may be a holder of shares by transfer but would not become its member until the transfer is registered and his name is entered in the register of members. Similarly, a member who has transferred his shares, though he does not hold any shares but he continues to be a member of the company until the transfer is registered and his name is removed from the register of members maintained by the Company u/s 150 of the Companies Act, 1956.
Eligibility to become a Member:
1. Company as a member of another company: A company is a legal person and so is competent to contract. Therefore, it can become a member of any other company.
2. Partnership firm as a member: Only partners can become joint shareholders.
3. Section 25 company: If MOA of the Section 25 company permits to invest in other Co.
4. Foreigners as members: Subject to the provisions of FEMA Act.
5. Minor as member: By Guardian
6. Insolvent as member
7. Pawnee: A pawnee cannot be treated as the holder of the shares pledged in his favour and the pawnor continues to be a member and can exercise the rights of a member.
8. Receiver: Mere appointment of a receiver in respect of certain shares of a company without more rights cannot deprive the holder of the shares whose name is entered in the register of members of the company, the right to vote at the meeting.
9. Bankrupt
10. Persons taking shares in fictitious names: He may become a member but liable for criminal liability under Section 68A of the Act, wherein punishment provided is imprisonment upto 5 years.
11. Trade Union as member: Registered under the Trade Union Act can become a member.
Cessation of Membership: A person ceases to be a member when his name is removed from the register of members on the following occasions:
1. He transfers his shares to another person and transfer is registered by the company.
2. His shares are forfeited.
3. His shares are sold by the company to enforce a lien.
4. He dies.
5. He is adjudged an insolvent and the Official Assignee disclaims his shares.
6. His redeemable preference shares are redeemed.
7. He rescinds the contract of membership on the ground of fraud or misrepresentation or a genuine mistake.
8. His shares are purchased by another member or by the Company under an order of the Court under Section 402 of the Companies Act, 1956.
9. Company is being wound-up in India and the liquidator disclaims the shares.
10. Company is wound-up.
11. Share warrants have been issued in exchange of fully paid shares.
Expulsion of a Member: The Department of Company Affairs clarified that an article for expulsion of a member is opposed to the fundamental principles of the Company Jurisprudence and is ultra vires the company, the powers of the Central Govt. as an appellate authority u/s 111 of the Act and the powers of the Court u/s 107, 395 and 397 of the Companies Act. According to Section 9 of the Companies Act, the Act overrides the MOA and AOA and any provision contained in these documents repugnant to the provisions of the Companies Act, is void.
Q. 36. Discuss the role of the Company Secretary as a statutory officer, as a co-ordinator and as an administrative officer. [Dec. 2008, 5x1 = 5]
(or) “Every company must have a whole-time Secretary.” [June 2007, 5x1 = 5]
(or) Write a note on ‘compliance certificate’ under section 383A.
Answer: [June 2008, 5x1 = 5]
Company Secretary: According to Section 2(45) of the Companies Act, 1956, a secretary means a company secretary as defined in Section 2(1)© of Companies Secretaries Act, 1980. Thus, secretary, as per this definition, should either be a member of the ICSI having passed the final exam and acquired all the qualities for practising or be an individual possessing qualifications as may be prescribed by the Govt. Section 5 of the Companies Act, 1956 defines a Company Secretary as Officer in default.
Section 383A of the Companies Act, 1956 as amended by the Companies (Amendment) Act, 1988 introduced sub-section (1) which provides that every company having a paid-up share capital of Rs.5 crores or more shall have a whole-time secretary and where the Board of Directors of any such company comprises of only 2 directors, neither of them shall be the secretary of the company who should be a member of the ICSI. Further, the Companies (Appointment and Qualifications of Secretary) Rules, 1988 also provide that in case a company with a lesser paid-up share capital, where the paid-up share capital of such company is increased to Rs.5 crores or more, the company shall within a period of 1 year from the date of such increase appoint a person as a whole-time secretary.
Section 383A has been further amended by the Companies (Amendment) Act, 2000 and a proviso to sub-section has been inserted with provides that every company which is not required to employ a whole-time secretary under sub-section (1) and having a paid-up share capital of Rs.10 lakhs or more, shall file with the ROC a certificate from a secretary in whole-time practice and a copy of such certificate shall be attached with Board’s report referred to Section 217 of the Act. The Govt. has prescribed the rules called the Companies (Compliance Certificate) Rules, 2001 which says that the Compliance Certificate is required to be in the prescribed form and admit in respect of each financial year. This certificate is to be filed within 30 days from the date on which AGM was held or the latest day on which the AGM should have been held in accordance with the provisions of the Act.
The role of a Company Secretary may be divided in the following 3 categories:
1. As a Statutory Officer:
2. As a Co-ordinator:
3. As an administrative officer:
Q. 37. Briefly mention the provisions of the Companies Act, 1956 relating to appointment and re-appointment of the sole selling agent. [Dec. 2008, 5x1=5]
And What are the duties of the Company Secretary in respect of appointment/re-appointment of sole-selling agent ? [Dec. 2006, 6x1 = 6]
Answer:
Salient duties of Company Secretary relating to Appointment/Re-appointment of sole selling agent are:
1. No prohibition by the Central Govt. under Section 294AA.
2. Appointment shall not made for a term exceeding 5 years at a time.
3. Examine the terms and conditions of appointment of sole selling agent keeping in view of the provisions of Indian Contract Act, 1872 and also the MRTP Act, 1969 and Section 294(2) of the Companies Act, 1956.
4. The sole selling agreement is drafted properly and no scope for any ambiguity.
5. Proposal of appointing sole selling agent should be placed before the BOD with full disclosures, particularly the interest of any of the directors of the company.
6. The Board resolution approving the agreement and also authorize for execution of agreement and affixation of common seal.
7. Proposal of appointment should get approved by the shareholders. If the share capital is less than Rs.50 lakh, subsequent approval a general meeting shall suffice. The proposal of appointment should be included in the notice calling the general meeting along with explanatory statement.
8. Make an application to Central Govt. in the prescribed form for obtaining approval if the share capital is above Rs.50 lakhs.
9. Prior approval of Central Government to be obtained where the individual, firm or body corporate appointed as sole selling agent had substantial interest in the company.
10. Form 23 has been duly filed.
Q. 38. In a general meeting of Zora Textiles Ltd., only 15 members were present. The quorum, as per the AOA of the company, was 10 members personally present. For a special resolution, only 9 members voted for the resolution, 2 members voted against the resolution and 4 members abstained from voting. No poll was demanded. The Chairman of the meeting declared the special resolution to be carried. Examine the validity of the resolution.
Answer: [Dec. 2008, 6x1 = 6]
According to Section 189(2) of the Companies Act, 1956, the votes cast in favour of the resolution (which on a show of hands or a poll, as the case may be), by members entitled to vote are not less than 3 times the number of votes, if any, cast against the resolution by members entitled to vote. A special resolution requires a majority of 3/4th of the votes, voting on a show of hands or on a poll. In the present case, total votes polled are 11 (9+2) out of 15 (9+2+4). The votes in favour of the resolution are 9, more than 3 times of 2 votes cast against the resolution. Therefore, the special resolution is a valid resolution.
Q. 39. Discuss the rule in Foss vs. Harbottle. Enumerate the main advantages that flow from the said rule. [Dec. 2008, 5x1 = 5]
(or) Discuss the rule of Foss vs. Harbottle. [Dec. 2007, 4x1 = 4]
Answer:
The general principle of company law is that every member holds equal rights. In case of differences amongst the members, the issue is decided by a vote of the majority. But the protection of the minority is not generally available when the majority does anything in the exercise of its powers for internal administration of the company. The Court will not usually intervene at the instance of shareholders in matters of internal administration, and will not interfere with the management of a company by its directors so long they are acting within the powers conferred on them under the AOA of the company. In other words, the articles are the protective shield for the majority of shareholders who compose the Board of Directors for carrying out their object at the cost of minority of shareholders. This basic principle of non-interference with the internal management of company by the Court is laid down in the celebrated case of Foss vs. Harbottle.
The rule, is as follows: After all, the directors who have been fraudulent, have injured the company and the members on the whole. Any loss to the company is loss to the members, so why should not member sue as he has been injured. This is so, because the plaintiff must not only show that injury has been caused but the injury has been caused by a breach of duty made to him. The individual shareholders or even the minority shareholders who try to show that the directors owe a duty to them personally in their management of the company’s assets will definitely fail. The directors owe no duty to the individual members, but only to the company as a whole. A company is a person and if it suffers injury through breach of duty owed to it, then the only possible plaintiff is the company itself acting, and it must always act, through its majority.
Advantages of Rule in Foss vs. Harbottle:
1. Recognition of the Separate Legal Personality of Company
2. Need to Preserve Right of Majority to Decide
3. Multiplicity of Futile Suits Avoided
4. Litigation at Suit of a Minority Futile if Majority does not wish it
Case Law: Mac Dougall vs. Gardiner
Q. 40. Insertion of section 58AAA is intended to take a strict view against companies that accept deposits and do not repay the same on maturity. Comment. [Dec. 2008, 5x1 = 5]
Answer:
Section 58AAA was inserted by the Companies (Amendment) Act, 2000 and it makes every offence connected with or arising out of acceptance of deposits under Section 58A or Section 58AA as a cognizable offence under the Code of Criminal Procedure, 1973. This provision was inserted to provide for a strict and immediate action against companies that accept deposits and do not repay the same on maturity. As such, the offence is not compoundable under Section 621A of the Act. However, it has been provided that no Court shall take cognizance of the offence except on a complaint made by the Central Government or any officer authorized by it in this behalf.
Q. 41. The Board of directors of Fairdeal 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 objects clause of the Memorandum of Association to enable the company to undertake the business of food processing activity. State with reasons whether the objects clause may be amended and if so, mention the procedure therefor.
Answer: [Dec. 2008, 6x1 = 6]
Alteration of Objects Clause:
Procedure:
1. Board Resolution
2. Special Resolution
3. Form 23 within 30 days of Special Resolution to be filed with ROC
4. Submission of Altered MoA alongwith Form 23.
Q. 42. You are the Company Secretary of a public limited company which was incorporated on 25th March, 2007. The company has earned huge profits for the financial year 2008-09. The management of the company wants to make some political contribution.
Discuss the relevant factors and advise the management on making political contributions by your company. Will your suggestion be a different one, if the company was incorporated and was in existence for more than three financial years ? [Dec. 2008, 8x1 = 8]
Q. 43. What is ‘debenture trust deed’ ? What are the advantages of execution of such a deed ? [Dec. 2008, 5x1 = 5]
Answer:
Debenture Trust Deed: The Companies (Amendment) Act, 2000 had inserted Section 117A which provides that:
(a) A trust deed for securing any issue of debentures shall be in such form and period as may be prescribed.
(b) A copy of the trust deed shall be open to inspection to any member or debenture holder and also be entitled to obtain copies of such trust deed on payment of such sum as prescribed.
(c) If a copy of trust deed is not made available for inspection to any member or debenture holder, the company and officer in default shall be punishable for each offence with a fine which may extend to Rs.500/- for every day during which the offence continues.
Advantages of Trust Deed:
1. In case of a default, the debenture trustees are have the power to take steps instead of leaving it to the initiative of some debenture holders.
2. The trustee is normally given the power to sell and thus realize the security without the aid of the Court.
3. Where necessary the mortgage or charge is registered. This prevents a subsequent legal mortgage from priority.
4. The title deeds of mortgaged property are deposited with trustees, thus preventing the company from misusing deeds for any other purpose.
5. The trustees ensure that the mortgaged property is kept insured and maintained in a proper condition.
Q. 44. Who is a Company Secretary in Practice ? What are the areas of practice for a Company Secretary in Practice ? What are his duties towards the profession ? [Dec. 2008, 5x1 = 5]
(or) Companies are required to obtain Secretarial Compliance Certificate in certain cases. What are these ? Who is competent to issue the said certificate?
Answer: [June 2008, 5x1 = 5]
Company Secretary in Practice: Section 2(45A) of the Companies (Amendment) Act, 1988 defines “Secretary in whole-time practice” means a secretary who shall be deemed to be in practice within the meaning of sub-section (2) of the Company Secretaries ct, 1980 and who is not in full-time employment. Thus, a member of the ICSI in practice and not in full-time employment becomes a Secretary in whole-time practice. Section 6 of the Companies Secretaries Act, 1980 provides that only a member of ICSI whether in India or elsewhere shall be entitled to practice provided he has obtained from the Council of the Institute, a Certificate of Practice.
Areas of Practice: Section 2(2) of The CS Act, 1980 prescribes the following areas for practice of a company secretary in practice:
1. Compliance Certificate.
2. Services in relation to promotion, formation, incorporation, amalgamation, reconstruction, reorganization or winding-up of companies.
3. An authorized representative of a company with respect to filing, registering, presenting, attesting or verifying any documents on behalf of any company.
4. A share transfer agent.
5. An issue house.
6. A share and stock broker.
7. A secretarial auditor or consultant.
8. An adviser to a company on management.
9. Issue certificates on behalf of a company.
10. Render such other services as in the opinion of the Council may be rendered by a Company Secretary in practice.
Duty towards the Profession:
(a) Conduct and Dignity:
(b) Representative of the Profession in National and International Stages:
(c) Helping the Younger Members:
Q. 45. What is ‘secretarial audit’ ? What aspects shall be covered by such audit ? Who are authorised to conduct such an audit ? [Dec. 2008, 5x1 = 5]
Answer:
Q. 46. A company cannot ratify its pre-incorporation contracts. [June 2008, 5x1=5]
Answer:
Pre-Incorporation Contract (or) Preliminary Contract: Preliminary contracts are purported to be made on behalf of a company before its incorporation. Hence, a contract by a promoter purporting to act on behalf of a company prior to its incorporation never binds the company because at the time of the contract was concluded the company was not in existence. (Case Law: Northumberland Avenue Hotel Co.) Thus even if the company takes some benefit from a preliminary contract which is made before its incorporation, the contract is not binding on the company. (Case Law: English and Colonial Produce Co.) A company cannot ratify a pre-incorporation contract, but it is open to it to enter into a new contract after its incorporation to give effect to a contract made before its formation (Case Law: Howard vs. Patent).
Q. 47. Registered office of a company can be shifted from one State to another without the approval of the State Government. [June 2008, 5x1 = 5]
(or) Whether the State government can object to the transfer of registered office on the ground of loss of revenue to or of employment of citizen of the State? Comment in the light of judicial pronouncements. [Dec. 2006, 4x1 = 4]
Answer:
Under the provisions of Sec. 17 of the Companies Act, 1956, a company may alter the objects of the MOA by passing a special resolution so as to change the place of its registered office from one state to another or comply with Clauses (a) to (g) of Section 17(1). The alteration of the provisions relating to change of place of registered office from one state to another shall not take effect unless it is confirmed by CLB/Central Government. It was decided in (Case Law: Bharat Commerce & Industries Ltd. Vs. ROC) that a state government cannot object to the transfer of registered office on the ground of loss of possible future revenue to or of employment of citizen of the state. Moreover, it is for the members of the company and not for the state to decide whether the registered office of the company, should be transferred from one state to another in the interest of the company. (Case Law: Minerva Mills ltd. Vs. Government of Maharashtra) and (Case Law: Rank Film Distributors of India Ltd. Vs. RTOC). However, if the company has existing liability in respect of taxes (i.e., there are arrears of revenue), the state becomes a creditor of the company and if its interest as a creditor is likely to be affected by the alteration, it would be entitled to oppose the change of registered office.
Q. 48. A company can accept deposits by issuing advertisement. [June 2008, 5x1=5]
(or) “A company can accept deposits without issuing advertisement.”
[June 2007, 5x1 = 5]
(or) A company cannot raise deposits for an unlimited amount. [Dec.2006, 5x1=5]
(or) Bright Ltd. desires to raise funds by accepting deposits from the public. Explain the provisions to acceptance of deposits. [June 2006, 10x1=10]
(or) What is the overall limit on acceptance of deposits by a non-government public company ? [Dec. 2008, 4x1 = 4]
(or) Briefly explain the procedure relating to inviting and accepting deposits.
[June 2007, 6x1 = 6]
Answer: [Dec. 2006, 6x1 = 6]
Section 58A and 58B of Companies Act, 1956 and Companies (Acceptance of Deposits) Rules, 1975 made thereunder, Section 58A(1) provides that the Central Government, may, in consultation with the RBI, prescribe the restrictions and limitations subject to which deposits may be invited and accepted by the companies. Accordingly, under Rule 3(2) of the Companies (Acceptance of Deposits) Rules, 1975, a company other than a Government company can accept deposits subject to the following limits:
(a) Deposits against unsecured debentures or deposits from shareholders or deposits guaranteed by any person, who, at the time of giving the guarantee, is a director of the company, together with such deposits, if any, accepted already cannot exceed 10% of the aggregate paid-up share capital and free reserves.
(b) Any other deposit together with such or other outstanding deposits on date of acceptance or renewal cannot exceed 25% of the aggregate paid-up share capital and free reserves of the company.
According to Section 58A(2) of the Act, if any non-banking non-financial company wants to invite any deposit, it must satisfy the following conditions:
(a) Such deposit is invited or is caused to be invited, in accordance with the rules made under sub-section (1);
(b) An advertisement including a statement of showing the financial position of the company issued in such form and in such manner as may be prescribed; and
(c) The company is not in default in repayment of any deposit, or part thereof and any interest thereupon in accordance with the terms and conditions of such deposit.
An invitation of deposits from the public at large will require an advertisement to be published in the newspapers. The procedure as follows:
1. The company must prepare the text of the advertisement containing the particles laid down in Rule 4(2) of the Deposit Rules and also highlights the major features of the scheme of deposits. Contents of the advertisement are as follows:
a. Name of the company;
b. Date of incorporation of the company;
c. Business carried on by the company and its subsidiaries;
d. Brief particulars of the management of the company;
e. Names, addresses and occupations of the directors;
f. Profits of the company, before and after making provision for tax, for 3 financial years, immediately preceding the date of advertisement;
g. Dividends declared by the company for 3 financial years;
h. A summarized financial position of the company as in the last two audited B/S immediate preceding the date of advertisement.
2. Translation of advertisement text in vernacular language under Rule 4(1).
3. Place both the texts of the advertisement before the Board at its meeting and pass a resolution approving the texts.
4. Arrange to file one copy of the text of advertisement with the Registrar alongwith the requisite filing fee.
5. Publication of advertisement at least once in a English national daily and one in vernacular language newspaper, of the region in which the registered office of the Co.
A NBNFC company, intending to accept deposits without making an invitation to the public by advertisement, must ensure that a statement in lieu of advertisement has been filed in the manner prescribed under the Rules. No deposit should be taken which is repayable:
(a) On demand; (b) On notice;
(c) Within 6 months from the date of acceptance/renewal unless it is eligible for the exception under the proviso to Rule3(1)(a);
(d) After 36 months from the date of acceptance/renewal.
If the company proposes to make repayment of any deposit before the date of expiry of the period for which it was taken, ensure that it is done at a reduced rate of interest in accordance with the provisions of Rule 8.
A company with a net owned fund of less than Rs.1 Crore cannot invite deposits as per the Rules. At no point of time, a company should accept deposits in excess of the limits under Rule 3(2). If the company has accepted any deposits to which the provisions of the Deposit Rules are applicable, the company must deposit/invest before 30th April of each year, a sum constituting atleast 15% of the amount of deposits maturing during the year, ending on the 31st day of March, next following in the methods provided in Rule 3A.
Q. 49. Buy-back of shares does not amount to reduction of share capital.
Answer: [June 2008, 5x1 = 5]
Dimunition of Capital or Reduction of Capital:
Buy Back of Securities:
Q. 50. Discuss provisions relating to ‘registration of charges’. [June 2008, 6x1 = 6]
(or) What are the effects of non-registration of charges ? [Dec. 2008, 6x1 = 6]
(or) What are the consequences of non-registration of a charge ?
[June 2007, 4x1 = 4]]
(or) What particulars in respect of each charge are required to be filed with the Registrar of Companies ? [Dec. 2008, 7x1 = 7]
(or) State the procedure relating to registration of charges. [June 2007, 5x1 = 5]
[Dec. 2006, 5x1 = 5]
(or) State the procedure for creation, modification and satisfaction of charges.
Answer: [June 2006, 8x1 = 8]
Answer in the B-Law of PE-II Notes.
Q. 51. Discuss the majority rule and minority rights. [June 2008, 10x1=10]
(or) Discuss the provisions related to ‘majority rule’ and ‘minority rights’ with reference to the concept of rights of majority. [Dec. 2006, 10x1=10]
Answer:
As per Section 87 of the Companies Act, 1956 every shareholder shall be entitled to vote on every resolution placed before the company at any meeting. The resolution of a majority of shareholders passed at a duly convened and constituted general meeting, upon any question with which the company is usually competent to deal is binding upon the minority and consequently upon the company (Case Law: North West Transportation Co. vs. Beatty). Thus whatever resolutions are passed by majority are binding on the minority also. But this is subject to two important limitations – firstly, the powers of the majority members is subject to the provisions of the company’s memorandum and articles of association; secondly, the resolution of majority must not be inconsistent with the provisions of any Act or constitute a fraud on minority depriving it of legitimate rights.
However, the supremacy of the majority does not prevail in all situations, as over a period of time, certain exceptions have developed. For instance under common law ultra vires acts, fraud on minority, wrongdoers in control, breach of duty, etc. Also under Companies Act, 1956, protection is afforded under Section 106, 397, 398, 234, 391 to 394 etc. Apart from these, scope of further exceptions is admitted where the rule of justice so requires.
Q. 52. When is a trust said to be extinguished and when revoked ?
Answer: [June 2008, 8x1 = 8]
Extinction of a Trust (Section 77 of The Indian Trusts Act, 1882)
1. When its purpose is completely fulfilled; or
2. When its purpose becomes unlawful; or
3. When the fulfillment of its purpose becomes impossible by destruction of the trust property or otherwise; or
4. When the trust being revocable, is revoked.
Revocation of a Trust (Section 78 of The Indian Trusts Act, 1882)
If a trust is created by a Will, it may be revoked by the revocation of the Will. If a trust has been created otherwise, then it can be revoked only:
(a) With the consent of all the beneficiaries competent to contract;
(b) By the exercise of power of revocation expressly reserved by the author of the trust;
(c) Where the trust is created for the payment of debts of the author of the trust, and has not been communicated to the creditors, at the pleasure of the author of the trust.
All other trusts are irrevocable. Besides if a trust is created for charitable or religious purposes, such a trust cannot be revoked.
Q. 53. An existing company wants to commence a new business. Elucidate the procedure laid down therefor. [June 2008, 8x1 = 8]
Answer:
Section 149 prohibits a company from commencing any business stated under other objects without obtaining a prior approval of the shareholders in the general meeting by a special resolution. It also requires the filing with the Registrar a declaration in e-form No.20A verified by one of the directors or the Secretary. The Central Government, may, however on application by the BOD allow the company to commence a new business, even if the special resolution is not passed by the company in general meeting, by passed by a simple majority [Section 149(2B)]. The Department of Company Affairs has clarified that new business means a business which is not germane to the existing business carried on by the company. The guiding criterion is whether the new activity is germane to the original business or not. In case the reply is yes, no special resolution is necessary and vice versa.
Q. 54. Write short notes on the following:
(i) Government company
(ii) Investor Education and Protection Fund [June 2008, 4x5 = 20]
Answer:
(i) Government Company: Section 617 defines a Government Company in which not less than 51% of the paid-up share capital is held by the Central Government or by any State Government or partly by the Central and partly by the one or more State Governments. A subsidiary of a Government company is also treated as a Government company.
Exemptions: Section 620 empowers the Central Government to direct by notification in the Official Gazette that any provisions of the Act shall not apply to Government companies or apply only with such exceptions as may be specified in the notification. However, the provisions of Section 618, 619 and 619A mandatorily apply to such companies.
(ii) Investor Education and Protection Fund
Q. 55. Two companies are incorporated with the same set of shareholders. Are they
same or distinct under the Companies Act, 1956 ? Discuss.
Answer: [June 2008, 4x1 = 4]
Two companies incorporated by the same promoters shall stand 2 separate legal entities.
(Case Law: Patinson vs. Bandhya Devi)
Q. 56. The entire assets of a company are acquired by another company. Will it constitute taking over the management of the company ? Why ?
Answer: [June 2008, 4x1 = 4]
Q. 57. Explain ‘independent director’ and ‘inside director’. Does inside director and interested director connote the same meaning ? [June 2008, 5x1 = 5]
Answer:
Inside Director: Inside directors are those directors who are in the whole-time employment with the company. This category includes a Managing Director, Whole-time Director, Technical Director, Executive Director, etc.
Interested Directors: Any director whose presence cannot, by reason of Section 300, count for the purpose of forming a quorum at a meeting of the Board, at the time of the discussion or vote on any matter.
Q. 58. When is dividend payable ? When may dividend be payable out of capital profits? [June 2008, 6x1 = 6]
(or) What is ‘capital profit’ ? Can dividend be declared out of capital profit ? If so, under what circumstances ? [Dec. 2008, 6x1 = 6]
(or) Can the dividend be declared out of previous years’ profits transferred to reserve ? Discuss. [Dec. 2008, 6x1 = 6]
Answer:
Dividend: The term “dividend” has been defined under Section 2(14A) of the Companies Act, 1956, as “dividend” includes any interim dividend. Under Section 207 of the Companies Act, 1956, dividend has to be distributed within 30 days from the date of declaration.
Capital Profits: The term ‘capital profits’ may be defined to mean those profits which arise otherwise than in the normal course of the business and earned out of capital transactions. The usual sources of capital profits are:
1. Profits on sale of fixed assets.
2. profits on revaluation of fixed assets.
3. Premium on issue of shares/debentures/bonds.
4. Profits on reissue of forfeited shares.
5. Capital redemption reserve account.
6. Profit prior to incorporation i.e., profits which accrues to a Co. till date of incorp.
Conclusion: The Companies Act does not mention specification whether capital profits arise out of the above reasons, can be distributed as dividend or not. However, in the two important cases of (Lubbock vs. British Bank of South America and Foster vs. The New Trinidad Co. Ltd.), the Courts have held that capital profits cannot be considered as available for distribution as dividend unless:
(a) The AOA authorize such a distribution; and
(b) The surplus is realized and remains after a valuation of the whole of the assets and liab.
In case of absence or inadequacy of profits, dividend can be declared out of the accumulated profits earned by the company in the previous years and transferred by it to reserves under Section 205A(3) of the Companies Act, 1956. If such a declaration does not comply with the rules, the declaration of dividend will require the previous approval of the Central Government. The Central Government has framed rules known as Companies (Declaration of Dividend Out of Reserves) Rules, 1975. Under these rules dividend can be declared from amounts drawn from reserves (i.e., free reserves only and not from any specific reserve) in case of absence of inadequacy of profits subject to the foll. conditions:
(a) The rate of dividend declared shall not exceed the average of the rates of dividend declared by it during the immediately preceding last 5 years or 10% of the paid-up capital, whichever is less;
(b) The amount to be drawn shall not exceed 10% of its paid-up capital and free reserves and the amount so drawn should be first utilized to set off the losses incurred in the financial years before any dividend in respect of preference and equity shares is declared; and
(c) The bal. of reserves after such drawal shall not fall below 15% of paid-up share capital.
Q. 59. Distinguish between the following: [June 2008, 4x2 = 6]
Answer:
(i) Certificate of Incorporation: Once the required documents have been delivered to the Registrar of Companies alongwith the necessary fee paid, the Registrar, shall retain and register the MOA and AOA both and on registration, after satisfying himself, issues a certificate of incorporation. Certificate of incorporation constitutes the birth certificate of the company.
Certificate of Commencement of Business: A public company must obtain a certificate to commence business from the Registrar before it can commence business or exercise its borrowing powers. In order to obtain this certificate, the company must comply with Section 149 of the Companies Act, 1956. This certificate is not applicable to a private company or a company having no share capital.
(ii) Mortgage: According to Section 58 of Transfer of Property Act, 1882, a mortgage is the transfer of an interest in specific immoveable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing/future debt or the performance of an agreement which may give rise to pecuniary liability.
Differences between a Mortgage and a Charge:
1. A mortgage is created by the act of parties whereas a charge is create either by the act of parties or by operation of law.
2. A charge created by operation of law does not require registration whereas registration is prescribed for mortgage under the Transfer of Proper Act. But a charge created by act of parties require registration under Co. Act.
3. A mortgage is for a fixed term whereas the charge may be in perpetuity.
4. A simple mortgage carries personal liability whereas in case of charge, no personal liability is created. But where a charge is the result of a contract, there may be a personal remedy.
5. A charge only gives a right to receive payment out of a particular property whereas mortgage is a transfer of an interest in specific immovable property.
Q. 60. Chairman of the general meeting of a company can follow any of the methods for ascertaining sense of the meeting. [Dec. 2007, 5x1 = 5]
Answer:
Chairman of the general meeting is required to ascertain the sense of the meeting to arrive at the decision. Sense of the meeting means the will or intent of the assembly. Following are various alternative methods of ascertaining the sense of the meeting:
1. By Acclamation: Adopted unanimously by applause/shouting/cheering by members.
2. By voice: This method is not used in company meetings.
3. By show of hands: The Chairman calls upon the persons present who are entitled to vote to raise hands in favour of the motion and against the motion.
4. By Divisions: The Chairman requests those present to divide themselves into two different blocks/rooms or lobbies. Those in favour of motion walk into one block and those against the motion into another block.
5. By Ballot: Under this method ballot papers are distributed to everyone entitled to vote. These papers are either deposited in a box or collected by tellers.
6. By Poll: Poll means “counting of heads”. Section 179 provides that the poll be taken if the Chairman or a prescribed number of members are dissatisfied with the result of voting by show of hands.
Q. 61. A certificate of incorporation is the conclusive evidence that all the requirements of the Companies Act, 1956 have been complied with.
Answer: [Dec. 2007, 5x1 = 5]
According to Section 35 of the Companies Act, 1956 a certificate of incorporation given by the Registrar in respect of any association shall be conclusive evidence that all the requirements of the Act have been complied with in respect of registration and matters precedent and incidental thereto. The company has come into existence from the earliest moment of the day of incorporation stated therein with rights and liabilities of a natural person, competent to enter into contracts (Case Law: Jubilee Cotton Mills Ltd. vs. Lewis). The validity of the registration cannot be questioned after the issue of the certificate of incorporation. (Case Law: Moosa Goodlam vs. Ebrahim Goodlam), it was held that the certificate prevents anyone alleging that the company does not exist.
Even if the two signatures to a Memorandum were made by one person or were forged, the certificate would be conclusive evidence that the company was duly incorporated. (Case Law: Hammond vs. Prentice Bros.). But it is to be clearly understood that it is for the purpose of incorporation only that the certificate was made conclusive by the legislature and the certificate cannot legalize objects contained in the MOA (Case Law: Performing Right Society Ltd. Vs. London Theatre of Varieties).
Q. 62. All investments made by a company must be held by it in its own name.
Answer: [Dec. 2007, 5x1 = 5]
According to Section 49(1) of the Companies Act, 1956, investments made by a company (other than an investment company) on its own behalf shall be made and held by it in its own name. The requirement that the investment made by the company must be held in its own name is confined to only those investments which are made by it on its own behalf and not on behalf of someone else.
Section 49(2) provides that where a company has right to nominate a director or directors on the Board of another company, it would be open to the appointing or nominating company to hold the shares upto the amount of qualification shares (i) in its own name, (ii) jointly in its own name and the name of appointee or nominee director, or (iii) exclusively in the name of the appointee or nominee.
As per Section 49(3), a company may hold any share or shares in its subsidiary through nominee or nominees of the company if it is so required to ensure that the number of members of the subsidiary does not fall below the minimum number prescribed under the Act for public and private companies.
Q. 63. State, with reasons and relevant legal provisions/case law, wherever applicable, whether the following statements are correct or incorrect.
(i) Company form of business organisation is not a popular form of business organisation.
(ii) Foreign company has opened an office for operating bank accounts in India. Hence it is supposed to ‘carry on business’ in India.
(iii) Stock exchange registered under the Companies Act, 1956 can carry a provision in their articles of association empowering directors to expel any member of the company under any of the given conditions.
(iv) Registrar of Companies has power to condone the delay beyond 30 days of the date of satisfaction of charge and allow filing of satisfaction of charge.
Answer: [Dec. 2007, 4x4 = 16]
(i) Company form of organization is popular due to the following reasons:
1. Corporation Personality: (Case Law: Solomon vs. Solomon)
2. Limited Liability of Shareholders:
3. Perpetual Succession:
4. Separate Property of the Co: (C Law: Gramophone & Typewriter Co. vs. Stanley)
5. Transferability of Shares
6. Common Seal
7. Capacity to Sue and be Sued:
8. Contractual Rights:
9. Separate Management:
10. Voluntary Association for Profit:
11. Flexibility and Autonomy:
12. Termination of Existence:
(ii) Following activities are held as not constituting “carrying on business”
1. Carrying on small transactions
2. Conducting meetings of shareholders and directors.
3. Operating bank account.
4. Transfer of shares or other securities.
5. Operating through independent contractors.
6. Procuring orders.
7. Creating or Financing debt.
8. Securing or collecting debts or enforcing claims to property of any kind.
(iii) Expulsion of a Member:
But the Stock exchanges, registered under the provisions of the Companies Act, can carry such a provision in its Articles, because the Companies Act is a general law whereas the Securities Contracts (Regulations) Act, 1956 is a special law. The regulation of stock exchanges is done by SCR Act and SEBI Act and not by Companies Act. Hence, the Articles of Stock Exchange may provide for additional matters as per SCR Act, which may not be possible for inclusion in theArticles of a company as per the provisions of the Companies Act.
(Case Law: Madras Stock Exchange Ltd. Vs. S.S.R. Rajkumar)
(Case Law: Naresh Chandra Sangal vs. Calcutta Stock Exchange Association Ltd.)
(iv) Section 138 of the Companies Act, 1956 requires that a company has to file Satisfaction of Charge in Form No.17 within 30 days of the full payment or satisfaction of the charge with the Registrar of Companies. But Registrar does not have the power to extend this time limit. The power to extend the limit lies with CLB under Section 141 of the Act. Accordingly, the CLB after its satisfaction that omission of intimation to the Registrar was due to a genuine reason beyond the control of the Company which enables the CLB may extend the time limit.
of the payment or satisfaction of a charge, within the time required was accidental or due to inadvertence or some other sufficient cause or is not of a nature to prejudice the position of creditors or shareholders of the company, it may on the application of the company or any other person interested and on such terms and conditions as seem just and expedient to it; direct that the time for giving of intimation of payment or satisfaction shall be extended.
Q. 64. The doctrine of ultra vires is a protection to the shareholders of the company.
Discuss. [Dec. 2007, 6x1 = 6]
Q. 65. Dinesh, one of the joint-holders of shares of a company, sent a requisition to the company to split the shares equally amongst him and the other joint-holders, by issuing fresh share certificates. State whether the company is bound to comply with this requisition. [Dec. 2007, 4x1 = 4]
Answer:
When shares are held in joint names and one of the joint shareholders makes a request to the company to split the shares held by the joint shareholders equally between all the joint shareholders by issuing fresh share certificates on their individual names, the company shall not be legally bound to do so unless the transfer deeds executed jointly by all the three joint shareholders must be duly stamped and executed and lodged with the company together with the relevant joint share certificates in terms of Section 108 of the Companies Act, 1956. (Case Law: Dr. Rajiv Das vs. United Press Ltd.) It was held that where the consent of other joint shareholders was not taken, the original certificates or transfer deeds duly signed and stamped were not furnished, the refusal by the company was held to be justified.
Q. 66. Distinguish between the following:
(i) ‘Forfeiture of shares’ and ‘surrender of shares’.
(ii) ‘Whole-time director’ and ‘managing director’.
(iii) ‘Preliminary contracts’ and ‘provisional contracts’. [Dec. 2007, 4x3 = 12]
Answer:
S.No. Forfeiture of Shares Surrender of Shares
1. Initiative: By company By shareholder himself
2. Reason: Nonpayment of calls Various reasons
3. Object: Penalization of nonpayment of calls May be he wants to exchange with new shares of the same name value.
4. Legal Technicalities: Strict following of rules and regulations. No such technicalities are required.
S.No. Managing Director Whole Time Director
1. Powers: Directorship with substantial powers. Only directorship.
2. Period of Office: 5 years Full time employment
3. No. of companies: One more company in same capacity as M.D. Full time employment only with the company which it employs him.
4. Appointment with Manager: No manager is provided to an M.D. A W.T.D. can be appointed in a company having a manager.
Provisional Contracts: Provisional contracts are those contracts, which are made after incorporation of a company but before certificate of commencement of business is obtained by the company. These are not binding on the company until the company is entitled to commence business on the grant of certificate of commencement of business. But once this certificate is issued, such contracts automatically become binding on the company as per Section 149(4).
Q. 67. The chairman at a Board meeting counts 6 votes in favour and 7 votes against the resolution. Can the chairman cast his own vote, which he had not exercised earlier, in favour of the resolution and also the casting vote which the articles of association authorise, and declare the resolution as passed
Answer: [Dec. 2007, 4x1 = 4]
Casting Vote of a Chairman: A Chairman does not have an inherent right to the casting vote nor it is a right given by the state, it has to be conferred on the Chairman by the Articles of the company. However, the Guidance Note on Meetings of the BOD issued by ICSI provides that where the Chairman chooses to exercise his vote as a director, he should do so before the voting is concluded and it should be a second or deciding vote. It is only in the event of equality of votes that the question of a casting vote assumes relevance.
Therefore, in the given case, the Chairman cannot cast his own vote which he had not exercised earlier as the voting has concluded. He cannot cast his casting vote as the votes are not divided equally, and where the votes are divided unequally, the question of using a casting vote does not arise.
Q. 68. Amol, a non-member of Shristhi Ltd., has been appointed as a director of the company. Later on, he has become the chairman of the company. In an annual general meeting of Shristhi Ltd., Amol presided over the meeting. Zahir, a member of the company, objected to his chairmanship on the ground that Amol is not a member of the company. Discuss the validity of objection.
Answer: [Dec. 2007, 4x1 = 4]
Regulation 50 of Table A of Schedule I appended to the Companies Act, 1956 stipulates that the Chairman, of the Board shall preside as Chairman at every general meeting of the company. Though the shareholders do not have the power to elect a person who is a non-member as Chairman, but the Articles can provide otherwise and may permit a non-member to the Chairman.
Q. 69. Discuss the provisions relating to change of name of a company.
[Dec. 2007, 4x1 = 4]
(or) What are the contents of Form No. 1A relating to availability or change of name ? [June 2008, 4x1 = 4]
(or) Outline the steps to be taken for change of name of a company.
Answer: [June 2006, 8x1 = 8]
Alteration of Name Clause (Section 21): Changing the name of a company involves alteration to the name clause in the MOA. As per Section 21 of the Companies Act, 1956, special resolution has to be passed and approval from the Central Government has to be obtained. The powers of the Central Government have been delegated to the ROC. The change in the name will not affect any rights and obligations of the company or legal proceedings.
Procedure for Alteration of Name Clause: A Board Resolution is required containing the new name selected for the alteration which has to be checked with the Registrar of Companies for availability. For this purpose an application is required to be made to the Registrar in e-Form No.1A with a fee of Rs.500 to ascertain availability of name. The period of validity is 60 days. The change must be communicated to the Registrar by filing e-Form No.23 prescribed under the Companies (Central Government’s) General Rules and Forms, 1956 alongwith a copy of special resolution and explanatory statement within 30 days from the date of passing the special resolution. Along with filing of e-Form No.23, the altered MOA and AOA of the company are also required to be attached. ROC will issue a fresh certificate of incorporation with the name changed and old certificate will be withdrawn.
Contents of e-Form No.1A:
1. Existing Name
2. New Name
3. Type of Business
4. Names and Addresses of the Promoters
5. Pvt Ltd./Public Ltd.
6. Authorised Capital
7. Share Capital
8. No. of Directors
9. DIN Number
10. Digital Signature
11. Liability of the company
12. Place (mention only State)
Q. 70. Briefly discuss the doctrine of cypres. [Dec. 2007, 4x1 = 4]
Answer:
Doctrine of Cypres: While forming a charitable trust, the objects are specified by the settler. When the objects of the trust subsequently become impossible or impracticable or unlawful, the trust will not fail. In such cases the Court has power to apply the trust to some other charitable object as nearly as possible resembling the intention of author. This power of the Court is known as “doctrine of cypres”. When a particular mode of charity indicated by the author is not capable of being carried out, the Court would execute it ‘cypres’ i.e., in a way as nearly as possible to that which testator specified.
Q. 71. A private limited company in its articles of association provides a format of ‘proxy form’ different from the one prescribed by the Companies Act, 1956 in Schedule IX. A shareholder submits an instrument appointing proxy to the company in the form as prescribed in Schedule IX. But the company rejects the proxy on the ground that it is not in the form prescribed in its articles of association. Is the rejection valid ? Discuss citing legal provisions.
Answer: [Dec. 2007, 4x1 = 4]
Validity of Proxy Form: The provisions of Section 176(6) provides that the an instrument appointing a proxy, in any of the forms as set out in Schedule IX of the Companies Act, shall not be questioned on the ground that it fails to comply with any special requirements specified for such instrument by the Articles. However in terms of Section 170(1)(ii), provisions of Section 176(6) shall not be applicable to the private company in question (not subsidiary of a Public Co.) and that it has specifically provided a format of ‘proxy form’ in its AOA. Therefore, the rejection of the company is valid.
Q. 72. A public limited company forfeited 80 equity shares and re-issued the same which resulted in earning a surplus of Rs.2,000. The company did not file return of allotment with the Registrar of Companies in respect of re-issued shares. Explain whether the company has contravened any provision of the Companies Act, 1956 by non-filing of the return. [Dec. 2007, 4x1 = 4]
Answer:
Return of Allotment: No Return of Allotment (Form No.2) of the re-issued shares need to be filed with the Registrar of Companies. Infact such re-issue, cannot be called an allotment. According the provisions of Section 75(5) of the Companies Act, 1956, forfeited shares can be re-issued further at a premium without any legal formalities and it is treated as a sale and not as allotment of shares. The word allotment used for such re-issue in Section 75(5) seems to have its origin in a confusion of thought (Case Law: Sri Gopal Jalan & Co. vs. Calcutta Stock Exchange Ltd.)
No, the public company has not contravened any provisions of the Companies Act, 1956.
Q. 73. Can a company reduce its share capital without sanction of the court ?
Answer: [Dec. 2007, 4x1 = 4]
Reduction of Share Capital (Section 100):
Cndn 1: Special Resolution
Cndn 2: High Court Approval
In the following cases, the reduction of share capital does not require approval of the Court:
1. Surrender of Shares: Where shares are surrendered to the company by the member, it will have the same effect as a transfer in favour of the company and amounts to a reduction of capital.
2. Forfeiture of Shares: A company (if authorized in AOA) after serving 3 notices to the member has the right to forfeit shares for non-payment of calls and the same will not require confirmation of the Court.
3. Diminution of Capital:
4. Redemption of redeemable preference shares.
5. Purchase of shares of a company by the company under Section 402.
6. Buy-back of its own shares under Section 77A.
7. Reduction of Capital when company is Defunct: Under Section 560, ROC is empowered to strike off the name of the company from the register on the ground of non-working. (Case Law: Great Universal Stores Ltd.)
8. Unlimited Company: Section 100 does not apply to it. It can reduce its capital. (Case Law: Borough Commercial and Building Society).
Q. 74. Anant buys 20 shares of a public company from Basant through a stock broker. Anant receives the share certificate and the blank transfer deed countersigned by Basant but does not lodge the transfer deed for registration. Examine the legal effect of unregistered transfer between the transferor and the transferee. [Dec. 2007, 4x1 = 4]
Answer:
There is a binding contract between A and B and the title of the transferee i.e., A is complete and he becomes the equitable beneficial owner of the shares even though the transfer has not been lodged with the company and he has not acquired the legal title to shares. The dividends or other benefits received by B, subject to any agreement to the contrary, must be handed over to A who must indemnify B against calls made after that date. (Case Law: Hardoon vs. Bellilios), it was held that the transferee becomes a member of a company only when the transfer of shares is registered by the company. Pending registration, the transferor is trustee of the shares for the transferee and the transferor continues to be the holder of the shares until his name is removed from the Register of Members and the name of the transferee entered in his place.
Q. 75. A meeting of the Board of directors of a company was convened on 31st December, 2007 to discuss some important matters. 5 Directors out of 7 directors write to the chairman that they would like to attend the meeting but could not do so due to other pre-occupations. The last meeting was held on 29th September, 2007. Advise the chairman. [Dec. 2007, 4x1 = 4]
Answer:
As per Section 288(1) of the Companies Act, 1956, if a meeting of the Board could not be held for want of quorum, then, unless the articles otherwise provide, the meeting shall automatically stand adjourned till the same day in the next week, at the same time and place, or if that day is a public holiday, till the next succeeding day which is not a public holiday.
Section 288(2) specifies that the provisions of Section 285 shall not be deemed to have been contravened merely by reason of the fact that a meeting of the Board which had been called in compliance with the terms of that Section could not be held for want of a quorum.
Q. 76. What is ‘corporate veil’ ? State the circumstances when it can be lifted.
[Dec. 2007, 8x1 = 8]
(or) In the State of Uttar Pradesh & Others vs. Renusagar Power Co. & Others., the Hon’ble Supreme Court has observed thus : “The concept of lifting the corporate veil is a changing concept. The veil of corporate personality, even though not lifted sometimes, is becoming more and more transparent in modern jurisprudence. It is high time to reiterate that, in the expanding horizon of modern jurisprudence, lifting of the corporate veil is permissible: its frontiers are unlimited ……..” In the light of this observation, state the circumstances in which corporate veil may be lifted. [Dec. 2008, 8x1 = 8]
(or) Explain ‘lifting of corporate veil’. [June 2006, 8x1= 8]
Answer:
By the provision of law, a corporation is clothed with a distinct personality, yet in reality it is an association of persons who are in fact, the beneficial owners of the property of the body corporate. A company, being an artificial person, cannot act on its own, it can only act through natural persons. This is known as corporate veil.
Lifting of Corporate Veil under Judicial Interpretation
Ever since the decision in the Salomon vs. Salomon & Co. Ltd. normally Courts are reluctant or atleast very cautious to lift the veil of corporate personality to see the real persons behind it. Nevertheless, Courts have found it necessary to disregard the separate legal personality of a company in the following situations:
1. Where the corporate veil has been used for commission of fraud or improper conduct (Case Law: Gilford Motor Co. vs. Home). In this case, a former employee of a company made a covenant not to solicit its customers but formed a company which undertook solicitation the principle was applied.
2. Where a corporate facade is only an agency instrumentality.
(Case Law: R.G. Films Ltd.)
3. Where the doctrine of conflicts with public policy.
(Case Law: Connors Bros. vs. Connors), it was held that the principle was applied against the M.D. who made use of his position contrary to public policy and the company was determined to be enemy character, the native countries being at war.
4. For determining the character or status of the company, the Court may ignore the separate entity.
(Case Law: Daimier Co. Ltd. vs. Continental Tyre & Rubber Co.)
5. Where the veil has been used for evasion of taxes and duties.
(Case Law: Commissioner of Income Tax vs. Meenakshi Mills Ltd.)
6. Where it was found that the sole purpose for which the company was formed was to evade taxes, the Courts have ignored the concept of separate entity and made individuals liable to pay taxes.
(Case Law: Sir Dinshaw Manakjee Petit)
7. Where the company has been formed for the avoidance of welfare legislation such as to reduce the amount to be paid by way of bonus to workmen, the principle of lifting of corporate veil has been upheld.
8. In quasi criminal cases also, the Courts have sometimes applied this doctrine.
9. Non performance of duties of PSUs.
Q. 77. What are the provisions for payment of interest out of capital ?
Answer: [Dec. 2007, 4x1 = 4]
As a prudent financial policy, dividend is to be paid out of profits and must not be paid out of capital. However, a provision has been made in Section 208 of the Companies Act, 1956, which provides that where shares are issued for financing a project having a very long gestation period, the company may pay interest on the amount of capital paid up and such interest is to be capitalized towards cost of the project. This payment of interest out of capital is subject to following conditions:
Cndn 1: The payment of interest should be sanctioned by the Central Government.
Cndn 2: The payment can be made only upto the close of the half year after the half year in which the project was completed.
Cndn 3: Rate of interest is 4% or such rate as may be approved by Government.
Cndn 4: Payment of interest on capital should not amount to reduction of amount paid up on shares.
Q. 78. Write short notes the following:
(i) Minimum subscription [Dec. 2007, 4x4 = 16]
Answer:
Minimum Subscription: As per SEBI DIP Guidelines, if a company does not receive 90% of the issue amount from the public subscription including development from underwriters in case of underwritten issue within 60 days from the date of closure of the issue, the amount of subscription received is required to be refunded to the applicability. If there is delay beyond 8 days, after the company becomes liable to pay the amount, the company shall pay interest prescribed under Section 73 of the Companies Act, 1956. In case of non-underwritten public issue, if the company does not receive the minimum subscription of 90% of the issued amount till the closure of the issue, or if subscription level falls below 90% due to cheque having been returned unpaid or withdrawal of applications, the company shall forthwith refund the entire subscription amount received.
Q. 79. In a public limited company, some group of rich people joined and have acquired by paying very high prices of shares, a controlling interest. The company is well managed showing very good profits in the last three years. They want to appoint their own nominees as directors of this prosperous company. It is considered that this change in the Board of directors would prejudicially affect the affairs of the company. Discuss whether this change in the composition of Board of directors can be prevented.
Answer: [Dec. 2007, 4x1 = 4]
According to Section 409, if any director or manager of a company complaints to the CLB that as a result of a change in the ownership of shares, a change in the Board of Directors is likely to take place and such change would prejudicially affect the affairs of the company, the CLB, may order that no such change in the Board of Directors or membership of the company can be made. Therefore, the CLB, by its orders, can prevent the desired change in the Board of Directors of the company.
Q. 80. In a general meeting of Kutumbh Ltd. only 15 shareholders were present. For a special resolution, only 9 out of 15 shareholders voted for the resolution, 2 voted against the special resolution and 4 did not vote at all. No poll was demanded and chairman of the meeting declared the special resolution to be carried. Examine the validity of the resolution.
Answer: [Dec. 2007, 4x1 = 4]
Refer Q.No.38 similar to this question.
Q. 82. “A company does not have unlimited powers to alter its articles of association.” [June 2007, 5x1 = 5]
Answer:
Limits on the Alteration of Articles: Every company has a right to alter its articles. Matters as to which the memorandum is silent can be dealt with by the alteration of articles. Such alteration is effective by passing a special resolution. The right to alter the article is subject to the following limitations:
1. The alteration should not be in conflict with the provisions of the Memorandum of Association. In the event of conflict the memorandum will prevail.
2. The alteration should not be inconsistent with any of the provisions of the Constitution or any laws made thereunder.
3. The altered articles must not be illegal.
4. The alteration must not constitute a fraud on minority nor inflict any kind of hardship on them.
5. The alteration must be in the bona fide interests of the company as a whole and not just for the benefit of a group of shareholders or otherwise.
6. The alteration must not be inconsistent with an order of the Court.
7. A company cannot justify a breach of contract with other parties by altering its articles. Though the right to alter the articles cannot be questioned, it shall remain liable for damages for its breach.
8. An alteration should not increase the liability of a member unless he has agreed thereto in writing.
9. A reserve capital once created cannot be unreserved but may be cancelled on a reduction of capital.
10. No alteration in the articles can be made to convert a public company into a private company without approval of the Central Government.
Q. 83. “The directors have uncontrolled and unfettered powers to refuse registration of transfer of shares.” [June 2007, 5x1 = 5]
(or) Wasim and Hamid, each held half the issued share capital of a company, whose articles of association provide thus : “The Board of directors may, at any time, in their absolute and uncontrolled discretion, refuse to register any transfer of shares.” Wasim died and his executor applied to have Wasim’s shares registered in his name. The Board of directors refused to register the transfer of shares under the above mentioned provision of the articles of association. State with reasons whether the court can come to the rescue of Wasim’s executor. [Dec. 2008, 5x1 = 5]
Answer:
Board of Directors Refusal to Register Transfer of Shares: Where the AOA give the directors absolute and uncontrolled power to refuse registration of transfer of shares, such power must be exercised actively by the directors, and unless they do so, the transfer must be registered. This means that there must be a resolution of the Board of Directors in respect of refusal to register a transfer of shares passed either unanimously or by majority. Consequently, if the consent of the Board for registration of share transfer cannot be obtained, the Court will order that the transferee should be entered on the register of members. (Case Law: Gopal Varnish Co. Ltd.)
Conclusion: The Court has laid down three tests to determine the proper exercise of power by the Board of Directors (Case Law: Bajaj Auto Limited vs. N.K. Firodia) which are:
1. Whether the directors acted in the interest of the company;
2. Whether they acted on a wrong principle; and
3. Whether they acted on oblique motive or for a collateral purpose.
If the directors have absolute and uncontrolled discretion in regard to declining registration of transfer of shares, the Court would consider whether the reasons were legitimate or the directors acted on a wrong principle or from corrupt motive. Similarly, if the reasons for refusal given by the directors were legitimate, the Court would not over-rule their decision merely on the ground that the Court would not have come to the same conclusion.
Q. 84. A listed company is having an executive chairman. Explain the provisions regarding composition of the Board of directors in terms of the listing agreement. [June 2007, 4x1 = 4]
Answer:
Q. 85. State the provisions of the Companies Act, 1956 regarding issue of shares at a premium. For what purpose the share premium may be applied ?
Answer: [June 2007, 5x1 = 5]
Issue of Shares/Securities at a Premium (Section 78): A company may issue shares/securities at a premium when it is able to sell them at a price above par or nominal value irrespective of the fact whether the securities are listed on a Stock Exchange or not.
1. The premium cannot be treated as a profit and as such the amount of premium is not available for distribution as dividend.
2. The amount of premium whether received in cash or in kind must be kept in a separate account, known as the “Securities Premium Account”.
3. The amount of premium is to be maintained with the same sanctity as the share capital.
According to the provisions of Section 78(2) of the Companies Act, 1956, the securities premium can be utilized only for:
(a) Issuing fully paid bonus shares;
(b) Writing off preliminary expenses, if any;
(c) Writing of commission paid or discount allowed or expenses incurred on issue of shares or debentures; and
(d) Premium payable on redemption of any redeemable preference shares or D.B.
Note: A private company and an unlisted company not making a public issue is at liberty
to issue capital at a premium as may be decided by the Board of Directors.
Q. 86. What is ‘forfeiture of shares’ ? State the procedure for forfeiture of shares.
Answer: [June 2007, 10x1=10]
Forfeiture of Shares: A company (if authorized by its AOA) after serving 3 notices to the member has the right to forfeit the shares for non-payment of calls and the same will not require confirmation of the Court. Once a forfeiture takes place, the forfeited shares become the property of the company.
The following rules may be noted in connection with forfeiture of shares:
1. Articles to Authorise:
2. Resolution for Forfeiture:
3. Proper Notice:
4. Power of Forfeiture must be exercised bonafide and for the Benefit of the Company:
Q. 87. Define ‘small depositors’ and state how their interest is safeguarded.
Answer: [June 2007, 4x1 = 4]
Small Depositors: Any person who has deposited a sum of not more than Rs.20,000/- in a financial year:
1. Any default in repaying to the small depositor should be intimated.
2. Within 60 days to Company Law Board.
3. CLB may pass an Order after hearing the depositor.
4. The fact of default be stated in all future advertisements.
5. A Loan obtained from bank shall be utilized in repayment.
6. Every director shall be deemed guilty on default of repayment.
7. The contravention is a cognizable offence
Q. 88. Garima Ltd., a public company in which 32% of the subscribed capital is held by the Central Government, wishes to reappoint Lal Pal & Co. as its auditors in the annual general meeting proposed to be held on 30th June, 2007. Advise Garima Ltd., about the procedure to be followed in this regard.
Answer: [June 2007, 6x1 = 6]
Section 224A provides that in case of a public company in which not less than 25% of the subscribed share capital is held, whether singly or in combination with:
(a) A public financial institution or Central Government company or State Government company; or
(b) Any financial or other institution established by any Provincial or State Act in which State Government holds not less than 51% of the subscribed share capital; or
(c) A nationalized bank or an insurance company engaged in general insurance business;
Procedure: The appointment or re-appointment of an Auditor at each AGM shall be made by a special resolution.
Q. 89. In line with the judicial pronouncements, define the term ‘indoor management’. Under what circumstances ‘doctrine of indoor management’ cannot be used as a tool to protect the outsiders against the company ? [Dec. 2006, 4x1 = 4]
(or) Where the outsider has knowledge of irregularity, the doctrine of indoor management protects the outsider. [Dec. 2007, 4x1 = 4]
Answer:
The doctrine of constructive notice proved too inconvenient for business transactions and hindered the smooth flow of business. It was replaced by the Doctrine of Indoor Management in 1856 in the Royal British Bank vs. Turquand case. According to this doctrine, the outsider, dealing with the company are entitled to assume that as far as the internal proceedings of the company are concerned, everything has been regularly done. They are bound to read the registered documents and to see that the proposed dealing is not inconsistent therewith, but they are not bound to do more, they need not inquire into the regularity of the internal proceedings as required by the Memorandum and Articles. Thus the doctrine of Indoor Management aims to protect outsiders against the company.
Exceptions: In the following circumstances, an outsider dealing with the company cannot claim any relief on the ground of ‘Indoor Management’:
1. Knowledge of Irregularity: Where a person dealing with a company has actual or constructive notice of the irregularity as regards to internal management, he cannot claim the benefit under the rule of Indoor Management.
2. Negligence: Where a person dealing with a company could discover the irregularity if he had made proper inquiries, he cannot claim the benefit under the rule of Indoor Management. The protection of the rule is also not available where the circumstances surrounding the contract are so suspicious as to invite inquiry, and the outsider dealing with the company does not make proper inquiry.
3. Act void ab initio and Forgery: Where the acts done in the name of a company are void ab initio, the doctrine of Indoor Management does not apply. The doctrine applies only to irregularities that otherwise might affect a genuine transaction and it does not apply to a forgery. A company can never be held liable for forgeries committed by its officers.
4. Acts Outside the Scope of Apparent Authority: If an officer of a company enters into a contract with a third party and if the act of the officer is beyond the scope of his authority, the company is not bound.
5. A person having no knowledge of Articles cannot seek protection under Indoor Management.
Conclusion: (Case Law: Howard vs. Patent), In this case, the articles of a company empowered the directors to borrow upto one thousand pounds only. They could, however, exceed the limit of one thousand pounds with the consent of the company in general meeting. Without such consent been obtained, they borrowed 3,500 pounds from one of the directors who took debentures. The company refused to pay the amount and held, that the debentures were good to the extent of one thousand pounds only because the director had notice or was deemed to have the notice of the internal irregularity.
Q. 90. The name of Piyush is found entered in the register of members of a company. But, Piyush contends that he is not a member of the company. The company maintains that Piyush had orally agreed to become a member of the company, and hence, his name was entered in the register and so he is a member. Is the contention of Piyush valid ? [June 2007, 5x1 = 5]
Answer:
Refer Q.No.35 about Member.
Q. 91. A proxy was appointed by a member on an instrument duly executed. Will the vote cast by the proxy be valid in the following cases:
(i) When the member himself attended and cast his vote at the meeting without revoking the authority of the proxy; and
(ii) When the member died in the meantime ? [June 2007, 3x2 = 6]
Answer:
(i) The vote given by a proxy is valid notwithstanding its revocation provided no intimation in writing of the revocation is received at the office of the company or by the Chairman of the meeting before the vote is given. (Case Law: Narayan Chettiar vs. Kaleswara Mills Ltd.) It was held that a shareholder’s mere presence at the meeting will not have the effect of revocation. The revocation should be communicated before the meeting and if it is not communicated, then in such case, the votes cast by the proxy will be valid in a poll.
(ii) Proxy can be revoked by the member at any time, and is automatically revoked by the death or insolvency of the member. Therefore, if the proxy has casted his vote before the death of the member, the vote will stand valid and timing of vote is beyond the member’s death, then proxy’s vote will be nullified.
Q. 92. Explain the provisions relating to ‘no compensation to sole-selling agent for loss of office’ under section 294A. [June 2007, 5x1 = 5]
Answer:
No Compensation to Sole-Selling Agent for Loss of Office: According to Section 294A, no company shall pay or liable to pay compensation to its sole selling agent for the loss of his office in the following cases:
(a) Where the appointment of sole selling agent ceases by virtue of Section 294(2A).
(b) Where the sole selling agent resigns his office in view of the reconstruction or amalgamation of the company with any other body corporate.
(c) Where the sole selling agent resigns his office other than reconstruction and amalgamation of the company as aforesaid.
(d) Where the sole selling agent has been guilty of fraud or breach of trust or gross negligence or breach of his duty towards the company.
(e) Where the sole selling agent has instigated either directly or indirectly in bring about the termination of the sole selling agency.
Apart from the above cases, compensation for loss of office may be paid as laid down in Section 294A(2) which lays down that:
“Compensation shall not exceed the remuneration which he would have earned if he had been in office for the unexpired residue of his term, or for 3 years, whichever is shorter, calculated on the basis of the average remuneration actually earned by him during a period of 3 years immediately preceding the date on which his office ceased or terminated.
Q. 93. 40 out of 100 members of a company submitted a requisition for holding of an extraordinary general meeting in order to remove the managing director from the office. On the failure of the company to call the meeting, the requisitionists themselves called the meeting at the registered office of the company. On the appointed date, they could not hold the meeting at the registered office, as it was kept under lock and key by the managing director himself. The members held the meeting elsewhere and adopted a resolution removing the managing director from office. Is the resolution valid ? Give reason. [June 2007, 6x1 = 6]
Answer: Section 169 of the Companies Act, 1956, provides that:
EGM: If the Board does not, within 21 days from the date of deposit of valid requisition in respect of any matter, shall proceed to call a meeting for the consideration of those matters on a day not later than 45 days from the date of deposit of the requisition, the meeting may be called:
(a) by the requisitionists themselves;
(b) in case a company having share capital, then 1/10th of the total shareholders;
(c) in case a company having voting rights, then 1/10th of total voting members;
Impracticability includes holding of a meeting is impracticable where registered office of the company is locked and is not available (Case Law: MRSR Chettiar vs. MRSM Chettiar). Section 186(1) provides that, “if for any reason it is impracticable to call or to hold or to conduct the meeting of the company in the manner prescribed in this Act or the Articles, the CLB may either of its own motion or on the application of any director o any member of the company:
(a) Order a meeting of the company to be called, held and conducted in such a manner as CLB thinks fit; and
(b) Give such ancillary or consequential directors as the CLB things expedient, including modifying the directions to the calling, holding and conducting of the meeting, the operation of the provisions of this Act and the company’s Articles.
Q. 94. Prof. Grower rightly said, “Members may come and go, but the company can go on for ever”. [Dec. 2006, 5x1 = 5]
Answer:
Perpetual succession means that the membership of a company may keep changing from time to time, but that does not affect its continuity. Thus, perpetual succession denotes the ability of a company to maintain its existence by the constant succession of new individuals who step into the shoes of those who cease to be members of the company. Prof. LCB Gower rightly said that “members may come and go, but the company can go on forever”. Because of transferability of shares, members may change from time to time and eventhough a shareholder dies, his heirs or nominees become shareholders. Thus, even death or insolvency of individual members does not affect the existence of the company.
Q. 95. Memorandum and articles bind the individual members inter se and the company to the members. [Dec. 2006, 5x1 = 5]
Answer:
Memorandum of Association: The MOA is a document which sets out the constitution of the company and it is the foundation on which the structure of the company stands. It defines the scope of the company’s activities and its relations with the outside world. Its purpose, as observed by Lord Mcmillan is to enable shareholders, creditors, and those who deal with the company to know, what is the permitted range of the company.
Articles of Association: The AOA of a company are its bye-laws or Rules and Regulations that govern the management of its internal affairs and the conduct of its business. The Articles play a very important role in the affairs of the company. It deals with the rights of the members of the company inter se. AOA are subordinate and it is controlled by the MOA of the company.
Q. 96. Every company must hold an annual general meeting in every calendar year.
[Dec. 2006, 5x1 = 5]
(or) An annual general meeting of Hum Log Ltd. called on 30th December, 2004 was adjourned to 31st March, 2005, and was held on that date. The next meeting was held in February, 2006. Can the company be held liable for not holding any meeting in 2005 ? [June 2007, 5x1 = 5]
Answer:
Refer Answer from the B-Law notes of PE-II.
A combined impact of Sections 166 and 210 of the Companies Act, 1956 provide that the subsequent AGM should be held on the earliest of the following dates:
(a) 15 months from the date of the last AGM;
(b) Last day of the calendar year;
(c) 6 months from the close of the financial year.
Q. 97. Write short notes on the following:
(i) Information memorandum
(ii) Effect of irregular allotment [Dec. 2006, 4x3 = 12]
Answer:
(i) Information Memorandum: Section 2(19B) of the Companies Act, 1956 provides that ‘information memorandum’ means a process undertaken prior to the filing of a prospectus by which a demand for the securities proposed to be issued by a company is elicited, and the price and the terms of issue for such securities is assessed, by means of a notice, circular, advertisement or document.
(ii) Effect of Irregular Allotment: Allotment made without complying with the provisions of Sections 69 and 70 of the Act, shall be irregular allotment. Consequences of such irregular allotment are as under:
1. Where allotment has been made without delivering a copy of prospectus to the ROC, the company and every person who is knowingly a party to the issue of the prospectus shall be punishable with a fine which may extend to Rs.50,000/- as per Section 60(5). However, the allotment shall remain valid.
2. The irregular allotment is voidable at the option of the applicant within the period specified in Section 71(1). Irregular allotment is voidable even if the company is in the course of being wound-up.
3. Any director having knowledge of irregular allotment shall be liable to compensate to the company and the allottee, provided proceddings shall commence within specified period but not after the expiry of 2 years from the date of allotment.
Q. 98. Distinguish between the following:
(i) ‘Shares’ and ‘debentures’.
(ii) ‘Ordinary business’ and ‘special business’.
(iii) ‘Extra-ordinary general meeting’ and ‘annual general meeting’.
Answer: [Dec. 2006, 4x3 = 12]
S.No. Shareholders Debentures
1. Represents share capital of company. Represents loan of the company.
2. They are members. They are creditors.
3. No charge over the assets. Normally have a charge on the assets.
4. Return as dividend. Return as interest.
5. Voting rights. No voting rights.
6. Dividend is payable out of profits. Interest is payable whether profit ornot.
7. Dividend is an appropriation of profit. Interest is an allowable business expdr.
8. Shares can be brought back. Debentures can redeemed as per terms.
(ii) Ordinary Business and Special Business: As per Section 173(1) of the Companies Act, 1956, in case of an AGM, all business to be transacted at the meeting shall be deemed to be special, with the exception of business relating to:
(a) adoption of accounts, balance sheet and report of directors and auditors;
(b) declaration of dividend;
(c) appointment of directors in place of those retiring;
(d) appointment/re-appointment of and fixing remuneration of auditors.
In case of any other general meeting, all business is deemed to be special business. Section 173(2) provides that where any item to be transacted at a meeting is special, there shall be annexed to the notice of the meeting, a statement setting out all material facts concerning each such item of business including particularly the nature of concern or interest, if any, therein of every director and the manager, if any.
(iii) Extra Ordinary General Meeting and Annual General Meeting
S.No. EGM AGM
1. EGM is conducted whenever it is necessary under Section 169. AGM is conducted on the close of the financial year under Section 166.
2. It should be conducted very rarely on the requisition of members. It is to be conducted every year in accordance with the provisions of Act
3. Only special business is to be transacted at an EGM. Both ordinary and special business is to be conducted at an AGM.
4. If BOD fails to convene the EGM, the requisitionists themselves can conduct meeting. AGM should be convened by the BOD by sending notice by the appropriate authority.
Q. 99. Sampath, managing director of a listed company, wants to put a proposal before the Board of directors for reduction of financial year from 12 months to 9 months, i.e., the financial year to end on 31st March, 2006 is proposed to be closed on 31st December, 2005. Before putting the proposal for deliberation to the Board, he wants to understand the legal provisions in this regard. As a company secretary of the listed company, draft a suitable note clarifying the legal provisions involved with regard to reduction of financial year. [Dec. 2006, 8x1 = 8]
(or) Gel-Well Ltd. Wants to change the period of its financial year. Can it do so ? If yes, then state the procedure to be followed by the company.
Answer: [Dec. 2008, 8x1 = 8]
Subject: Change/Reduction of Financial Year
Respected Sir,
We would like to bring into your kind notice some of the provisions of the Companies Act, 1956 and some ancillary aspects which regulate and govern the “period of financial year” of a Company.
Section 2(17) of the Companies Act, 1956 inter alia provides that a ‘financial year’ in respect of any body corporate, means the period in which any Profit and Loss A/c of the body corporate laid before it in AGM is made up, whether that period is in an year or not. Section 210 of the Companies Act, 1956 provides that the Board of Directors of the Company is required to lay before every AGM of the Company, a Balance Sheet at the and a Profit and Loss A/c at the end of the financial year as specified in Section 210(3) and 210(4) of the Companies Act and the business to be transacted at the meeting must be in relation to the financial year. As per Section 210(4), “Financial Year” may be less or more than a calendar year, i.e., 12 months, but it shall not, normally exceed 15 months. And with the special permission of the Registrar of Companies, the annual accounts may be prepared for a period upto 18 months. However, for the purpose of Income Tax Act, all companies are required to furnish to the assessing authorities. Statement of Affairs as at March 31st. Section 216 and 218 of the Companies Act, 1956 provides that the Auditor’s report and the other specified documents shall be attached/annexed to the Annual Accounts.
From the above provisions it appears that no approval from ROC, is required if the financial year ends within 9 months i.e., till December 31st. The Board of Directors of the Company may accordingly decide/fix the financial year.
Further, SEBI have from time to time amended Clause 41 of the Listing Agreement pertaining to publishing of quarterly financial results. For the last quarter of the financial year, if the company intimates to the stock exchange that it would publish audited results for the last quarter of the financial year, unaudited results need not be published or given to the Stock Exchange.
In view of the above, Board may approve change of financial year as on _______ and also decide whether they want to published unaudited financial results or audited results for the last quarter ending _________ so that advance intimation to the SE may be given.
Submitted please.
Your’s sincerely,
XYZ
Company Secretary.
Q.100. “A body corporate cannot be a member of a company which is its holding company and any allotment or transfer of shares in a company to its subsidiary shall be void.” Explain the statement and comment on the exception to the said general clause. [Dec. 2006, 4x1 = 4]
Answer:
According to Section 42(1) of the Companies Act, 1956 a body corporate cannot be a member of a company which is its holding company and allotment or transfer of shares in a company to its subsidiary shall be void subject to the exceptions laid down below. Therefore, any allotment or transfer of shares whether in the shape of equity, preference, right, bonus etc. by a holding company to its subsidiary is void.
Exceptions:
1. As per Section 42(2)(a) and (b), a subsidiary can be a member of holding company:
(a) In the capacity of a legal representative of a deceased member of Holding Co;
(b) In the capacity of a trustee (unless the holding company or subsidiary is beneficially interested under the trust).
2. If the subsidiary company was a member prior to becoming subsidiary then as per sub-section (3) of Section 42, it may continue as a member of holding company. However, in such a case right to vote will not be available to the subsidiary company at the meeting of the holding company.
3. A subsidiary company can hold shares in its holding company where it is a part of a scheme of amalgamation sanctioned by the Court.
Q.101. When is the prospectus not required to be issued ? [Dec. 2006, 4x1 = 4]
Answer:
Prospectus is not required to be issued in the following circumstances:
1. Where the person is a bona fide invitee to enter into under writing agreement.
2. Where the shares/debentures are not issued to public.
3. Where the shares and D.B. are offered to the existing shareholders and D.B.
4. Where prospectus is published as a newspaper advertisement.
Q.102. Give your opinion whether the Registrar of Companies can take balance sheet and profit and loss account on record even if it is not laid before annual general meeting or placed before the extra-ordinary general meeting.
Answer: [Dec. 2006, 4x1 = 4]
Section 220(1) of the Companies Act, 1956 provides that the Balance Sheet and Profit and Loss A/c shall be laid before a company at an AGM before sending it to Registrar for filing and hence Balance Sheet and Profit and Loss A/c are required to be placed only at an AGM and not in any other General Meeting.
Where the AGM of a company for any year has not been held, three copies of the Balance Sheet and Profit and Loss A/c, duly signed, shall be filed with the Registrar within 30 days from the latest day on or before which that meeting should have been held in accordance with the provisions of the Act. Section 220(2) provides that if for any reason, the AGM before which a balance sheet is laid does not adopt it, or is adjourned without adopting the balance sheet or if the AGM of a company for any year has not been held, a statement of the fact and reasons therefore must also be annexed to the Balance Sheet and to the copies thereof be filed with the Registrar.
Q.103. “Decision taken by the Board of Directors cannot be altered or changed by the shareholders even if they want to approve it with unanimous majority.”
Comment. [Dec. 2006, 4x1 = 4]
Answer:
The provision in the second proviso of sub-section (1) of Section 291 that while exercising any power, the Board shall be subject to the provisions contained in that behalf in the Companies Act, 1956 or any other Act or in the MOA or AOA or any regulations not inconsistent therewith and duly made there under including regulations made by the company in general meeting does not mean that the company in general meeting can override the Board’s powers of carrying on business, by prescribing a regulation or passing a resolution taking away the power given to the Board of Directors by the articles.
The Directors exercise their powers bona fide and in the interest of the company. The directors while exercising their powers do not act as agents for the majority or even all the members and so the members cannot by resolution passed by majority or even unanimously supercede the director’s powers, or instruct them how they shall exercise their powers. This sovereignty of the directors within the limits of the powers conferred on them by the articles, and within the limit laid down by the Act was clearly expressed in (Case Law: John Shaw & Sons (Salford) Ltd. vs. Peter Shaw & John Shaw).
It was observed that the modern doctrine is that a resolution of members disapproving the commencing of an action by the directors would be nullify, for if the powers are vested in the directors, they and they alone can exercise these powers. The shareholder can impose their will by changing the directors or by altering the articles if the power arises from the provision made in AOA.
Q.104. Write a short note on ‘right to inspection of books of account’ by a director or his duly appointed attorney. [Dec. 2006, 4x1 = 4]
Answer:
“Books and Papers” have been defined in Section 2(8) to include accounts, deeds, vouchers, writings and documents. Section 209(4) of the Companies Act, 1956 provides that books of account and other books and papers should be available for inspection by any director on working days during business hours.
The right for inspection is not so restricted that only the director can inspect the books of accounts personally. In (Case Law: Vakahria vs. Supreme General Film Exchange Co. Ltd.), it was held that a director is entitled to take inspection of accounts personally or through an agent. Provided that there is no reasonable objection to the person chosen and the agent undertakes not to utilize the information obtained by him for any purpose other than the purpose of his principal.
The right of inspection can however, be refused if it is found that the inspection is being sought to pass on the information to a rival business of the company.
Q.105. Outline the provisions with regard to compulsory transfer of profits to reserves which should be borne in mind at the time of declaration of dividend by a company. [Dec. 2006, 6x1 = 6]
Answer:
As a prudent financial policy, every company must keep certain percentage of its profits as reserves. Keeping the spirit of this policy, Section 205, sub-section 2A prescribes that every company before declaring dividend, must transfer certain percentage of profits to reserves. The Companies (Transfer of Profits to Reserves) Rules, 1975 prescribe the following:
Rate of dividend to be declared Percentage of profits to be transferred to reserves shall not be less than
Exceeding 10% and upto 12.5% of the paid up capital. 2.5% of current profit
Exceeding 12.5% and upto 15% of the paid up capital 5% of current profit
Exceeding 15% and upto 20% of the paid up capital 7.5% of current profit
Exceeding 20% of the paid up capital 10% of current profit
Q.106. State the provisions relating to unclaimed dividend. [Dec. 2006, 6x1 = 6]
Answer:
Dividend once declared, becomes a debt, against the company. The amount of dividend has to kept apart in a separate account. Company has to dispatch the dividend warrants within 30 days from the date of declaration of dividend. Dividend warrants are paid by bank from the special dividend account. Section 205A of the Companies Act, 1956 provides that if a dividend declared by a company has not been paid or claimed within 30 days, from the date of declaration, the same shall be transferred to a special account within 7 days to be opened by the company. Such special account has to be opened in any scheduled bank under the name and style “Unpaid dividend account of ______________ Company Ltd./Pvt. Ltd.” Dividend warrants presented for payment thereafter shall be paid from this unpaid dividend account. If default is made in transferring the total amount to the unpaid dividend account, the company shall pay interest @ 12%p.a. on the amount which has not been transferred to the said account. At the end of 7 years, from the date of such transfer, amount so remaining unpaid/unclaimed together with any interest credited thereto should be transferred to the “Investor Education and Protection Fund”.
Q.107. Distinguish between the following:
(i) ‘Interim dividend’ and ‘final dividend’.
(ii) ‘Motion’ and ‘resolution’. [June 2007, 4x2 = 8]
Answer:
Final Dividend Interim Dividend
Final dividend is recommended by the BOD in its report to the shareholders as per Section 217 of the Companies Act, 1956. It is declared by the shareholders at theAGM. Usually, the AOA provide that the shareholders cannot increase the rate of dividend that the one recommended by the Board. But the shareholders may, declare the rate of dividend on equity share at a rate lower than the one recommended by the BOD in their report. Section 2(14A) of the Companies Act, 1956, as “dividend” includes any interim dividend. The BOD may declare interim dividend and is paid between two AGMs. A company can normally estimate its profits for the current financial year on a fairly reasonable basis and in that event it can allocate to the reserves the prescribed percentage of profits on the basis of its estimated profits.
(ii) Motion and Resolution: ‘Motions’ and ‘Resolutions’ are used synonymously but in legal sense there are differences between the two. A motion is a proposal submitted for a discussion and a decision adopted by means of a resolution. A motion becomes a resolution only after the requisite majority of members have adopted it. A motion should be in writing and signed by the mover and put to the vote at the meeting by the Chairman. There is no provision in common law or under the Companies Act, which provides that a motion should be proposed and seconded though this is commonly accepted practice.
Q.108. What could be the ‘objects’ of a multi-State co-operative society ?
Answer: [Dec. 2006, 5x1 = 5]
Section 5 of Multi State Cooperative Societies Act, 2002 provides that no multi-state co-operative society shall be registered under the Act unless:
(a) its main objects are to serve the interests of members in more than one State; and
(b) its by-laws provide for social and economic betterment of its members through self-help and mutual aid in accordance with the co-operative principles.
These may be as follows:
1. Membership being voluntary and open to all without any discrimination.
2. One member one vote.
3. Surplus savings belonging to the society.
4. Co-operation with other co-operative societies – local, national or international.
5. To propagate principles and practice of co-operation amongst members, office bearers and employees.
6. Utilization of surplus for development of society’s business etc.
7. Democratic set up of administration.
8. Accountability of the management to its members.
The multi-state co-operative societies may also be formed with the object of facilitating the operations of other such societies or cooperative societies or both.
Q.109. State the rights and disabilities of trustees. [Dec. 2006, 5x1 = 5]
Answer:
Rights of Trustee:
Disabilities of Trustees:
1. A trustee who has once accepted the trust, cannot renounce it except with the permission of the Court, consent of competent beneficiaries or by virtue of a special power in trust deed.
2. A trustee cannot delegate his office subject to exceptions and in case of more than one trustees, all must join in the execution of the trust.
3. A trustee cannot exercise arbitrary discretion or use the trust property for his own use.
4. Unless expressly mentioned, trustee has no right to remuneration.
5. No trustee or person who has recently ceased to be a trustee may, without Court’s permission become mortgagee or lessee of trust property.
6. The trustee and the co-trustee cannot lend the interest amount to themselves.
Q.110. In the context of managerial remuneration, explain what does the expression ‘inadequate profits’ mean. [Dec. 2006, 6x1 = 6]
Answer:
Under Section 309(3) of the Companies Act, 1956, a company can without the approval of the Central Government but subject to the provisions of Schedule XIII pay remuneration of 5% of its net profit if there is one M.D./W.T.D. or 10% of its net profits if there are more than one M.D./W.T.D. If in a company the profits are not adequate to meet this yardstick or remuneration, the company is said to have inadequate profits and in such an event payment of remuneration would be governed by Section 198 of the Act.
Q.111. What are the remedies available to the minority shareholders ?
[Dec. 2006, 6x1 = 6]
(or) What relief are available to the minority shareholders against wrongful conduct of the majority ? [Dec. 2008, 7x1 = 7]
(or) A company was in dire need of further capital. The majority representing 98% of the shares were willing to provide the capital if they could buy-up the 2% minority shares. The majority passed a resolution altering the articles and enabling them to purchase the minority shares. The minority shareholders refused to surrender their shares and challenged the validity of the majority resolution. Decide. [June 2007, 5x1 = 5]
Answer:
Remedies in Common Law:
1. Ultra vires or illegal acts committed by majority.
2. Where an act done by majority constitutes fraud on minority.
3. If wrongdoers are in control, the minority can bring an action for fraud on minority.
4. If resolutions requiring a special majority are passed by a simple majority.
5. Individual membership rights cannot be invaded by the majority shareholders.
6. Where there is breach of duty by directors and majority to the detriment of the company, the minority shareholder may bring an action against the company.
Remedies under the Companies Act, 1956
1. Variation of class rights under Section 106 is permitted but can be cancelled under Section 107 by holders of not less than of 10% of shares.
2. In a scheme of reconstruction and amalgamation, the minority shareholders are provided protection.
3. In cases of oppression and mismanagement, the provisions of Section 397 and 398 come to the rescue of minority shareholders.
4. Aggrieved shareholder can make winding up petition under Section 397.
5. At the instance of minority shareholders, the Central Government can commence investigation under Section 235 of the Act.
Q.112. Distinguish between the following:
(i) ‘Trust’ and ‘bailment’.
(ii) ‘Transfer of securities’ and ‘transmission of securities’.
Answer: [June 2006, 5x2= 10]
(i) Trust and Bailment: The definition of ‘Bailment’ is given in Section 148 and the definition of ‘Trust’ is given in Section 3 of Indian Trust Act, 1882. Trust is defined as an obligation annexed to the ownership of property and arising out of confidence reposed in and accepted by the owner or declared and accepted by him, for the benefit of another or of another and the owner. On the other hand, bailment is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them.
The following are also the differences between Trust and Bailment.
1. A Trustee becomes the full owner of trust property. A bailee acquires special property only.
2. The obligation of the bailee is legal whereas that of a trustee is equitable.
3. A bailment may be created for movable property only. A trust may be created for both movable and immovable properties.
(ii) Transfer of Securities and Transmission of Securities: Transmission refers to those cases where a person acquires an interest in property by operation of any provision of law, such as by right of inheritance or succession or by reason of the insolvency or lunacy of the shareholder or by purchase in a Court-sale, while a transfer is effected by an act of parties (Case Law: Maheshwari Ketan Sugar Mills vs. Ishwari Ketan Sugar Mills). Thus transmission is the transfer by operation of law or involuntary assignment.
Distinction between Transfer and Transmission of Securities:
1. Transfer takes place by a voluntary act of the transferor while transmission is the result of the operation of law.
2. An instrument of transfer is required in case of transfer but no instrument of transfer is required in case of transmission.
3. Transfer is a normal course of transferring property whereas transmission takes place on death or insolvency of a shareholder.
Q.113. The Board of directors of an Indian company passed a resolution for incorporation of a company in Singapore with the initial paid-up capital of $10,000. Comment whether investment to be made in the Singapore company is exempt from the provisions of section 372A. [June 2006, 4x1= 4]
Answer:
Provisions of Section 372A of the Companies Act, 1956 will be attracted as the restrictions contained therein are applicable to investments in a body corporate, as a company incorporated in Singapore will be a body corporate there will be no exemption. Therefore, investment made by the company for incorporation of a company in Singapore has to be within the prescribed parameters and not exempt as specified under Section 372A(8) of the Companies Act, 1956. However, further investment in Singapore Company, if any, (after making it a wholly owned subsidiary) will be exempted.
Q.114. Gold Ltd. is a listed company with paid-up capital of Rs.125 crore and free reserves of Rs.250 crore. Silver Pvt. Ltd. has approached Gold Ltd. for a loan of Rs.300 crore to set up a manufacturing plant. Comment whether Gold Ltd. can give aforesaid loan to Silver Pvt. Ltd. keeping in view that Raman is a director in both the companies. [June 2006, 4x1= 4]
Answer:
As per Section 372A read with Section 295 of the Companies Act, 1956, prior approval is required from Central Government for giving a loan by a Public Limited Company to a Private Limited Company in which a director of Public Company is a Director or member.
Further as per Section 372A(1),
(a) the loan should not exceed 60% of the lending company’s paid up share capital and reserves, authorized by a special resolution passed in a general meeting (or)
(b) 100% of its free reserves, whichever is more.
In the given case, amount of loan proposed i.e., Rs.300 crores, is in excess of 60% of the paid up capital and free reserves of the Public Ltd. Company or 100% of the free reserves of the Company. (60% of 375 crores = Rs.225 crores; 100% of 250 crores = 250 crores). Hence Gold Limited has to obtain prior approval of Central Government and approval of its shareholders by passing Special Resolution.
Q.115. Inspection of profit and loss account of a private limited company is permitted only to the members of the company. Comment.
Answer: [June 2006, 4x1= 4]
Proviso to Section 220(1) of the Companies Act, 1956 provides that in case of:
(a) a private company which is not a subsidiary of public company;
(b) a private company whose entire paid up capital is held by one or more body corporates incorporated outside India;
No person other than a member of the company concerned shall be entitled to inspect or obtain copies of the Profit and Loss A/c of that company under Section 610 of the Act. If a person seeks inspection of the Profit and Loss A/c’s of a private company, the Registrar should make sure that he is a member of the Company by referring to the list of members and demanding to see share script duly endorsed in his favour.
Q.116. How will you ascertain the depreciation of assets, which is destroyed before providing for depreciation in full ? [June 2006, 4x1= 4]
Answer:
Section 350 of the Companies Act, 1956 provides that the amount of depreciation to be deducted on assets as shown by the books of the company at the end of the financial year at the rates specified in Schedule XIV of the Companies Act. Under a proviso to Section 350, where any asset is sold, discarded, demolished or destroyed for any reason before depreciation of such asset has been provided for in full, excess if any, of the written down value of such asset over its sale proceeds, its scrap value shall be written off in the financial year in which the asset is sold, discarded, demolished or destroyed.
Q.117. Explain powers of the Company Law Board to prevent oppression or mismanagement. [June 2006, 8x1= 8]
Answer:
Section 402 of the Companies Act, 1956 defines the powers of the CLB to prevent oppression and mismanagement. This section provides that without prejudice to the generality of the powers of the CLB, any order under Section 397 or 398 passed by it for prevention of oppression and mismanagement, may provided for:
1. The regulation of company’s code of conduct of its affairs in future.
2. The purchase of shares or interest of any member of the company by other members or by the company.
3. In the case of purchase of its shares by the company, the consequent reduction of its share capital.
4. The termination, setting aside or modification of any agreement between the company and managing director, or any other director, and the manager upon such terms and conditions as may, in its opinion, be just and equitable in all the circumstances of the case.
5. The termination, setting aside or modification of any agreement between the company and any person, (other than stated above) provided due notice has been given to him and his consent obtained.
6. Setting aside of any fraudulent preferences made within 3 months before the date of the application.
7. Any other matter which in the opinion of the Court, is just and equitable that provision should be made.
If the CLB pursuant to Section 397 or 398 orders any alteration of MOA or AOA of the company, the company shall not be at liberty to introduce any provision inconsistent with the order without the leave of CLB as per Section 404. If the order sets aside or modifies any agreement with any management personnel referred to in Section 402, it will not give rise to any claim for damages or compensation for loss of office as per Section 407(1)(a). Further any managerial personnel whose appointment is so set aside shall not be capable of serving the company in any managerial capacity for the period of 5 years except with the leave of the CLB as per Section 407(1)(b). Where the CLB for the purposes of fulfilling the objects of Section 397, orders the company to purchase the shares of the outgoing shareholders, the other provisions of the Act, like those of Section 77A, would not be attracted. (Case Law: Gurmit Singh vs. Polymer Papers Ltd.)
Q.118. Explain ––
(i) Sweat equity; and
(ii) Employees’ Stock Option Scheme (ESOS). [June 2006, 3x2 = 6]
Answer:
(i) Sweat Equity Shares:
(ii) Employees’ Stock Option Scheme (ESOS): The term ‘Employee Stock Option Scheme’ (ESOS) has been defined under Section 2(15A) of the Companies Act, 1956, according to which ‘employee stock option’ means the option given to the whole-time directors, officers or employees of a company, which gives such directors, officers or employees, the benefit or right to purchase at a future date, the securities offered by the company at a pre-determined price.
SEBI has issued SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 according to which Employee Stock Option Scheme means a scheme under which the company grants option to its employees and a right but not an obligation granted to an employee in pursuance of ESOS to apply for shares of the company at a pre-determined price.
Q.119. State the disqualifications of a director. [June 2006, 6x1 = 6]
(or) Mention the disqualifications of directors under Section 274(1)(g) and the duties of statutory auditors in this regard. [Dec. 2008, 5x1 = 5]
Answer:
Disqualifications of Directors: The salient disqualifications of a director are laid down in Section 274 of Companies Act, 1956, if :
He has been found to be of unsound mind by a Court;
He is an undischarged insolvent;
He has applied to be adjudicated as an insolvent and his application is pending;
He has been convicted by a Court for any offence involving moral turpitude and sentenced to imprisonment for not less than 6 months, and a period of 5 years has not elapsed from the date of expiry of the sentence.
He has not paid any call money in respect of shares of the company held by him and months have elapsed from the last day fixed for the payment of the call; or
An order disqualifying him for appointment as a director has been passed by a Court in pursuance of Section 203 and is in force, unless the leave of the Court has been obtained for his appointment in pursuance of that section.
Such person is already a director of a public company which:
has not filed annual accounts and annual returns of the company for continuous 3 financial years; or
Provided that such person shall not be eligible to be appointed as a director of any other public company for a period of 5 years from the date on which such public company in which he is a director failed to file annual accounts and annual returns under sub-clause (A) or has failed to repay its deposit or interest or redeem its debentures on due date or pay dividend referred to in clause (B).
Conclusion: However, the Central Government may, by notification in the Official Gazette remove the disqualifications by virtue of clause (d) and (e) of Sub-section (1).
Q.120. Debentureholders are widely protected under the Companies Act, 1956 in case of defaults in making their payments by the company. Discuss.
Answer: [June 2006, 5x1 = 5]
Pursuant to Section 117C(3) of the Companies Act, 1956, the company is bound to pay interest and redeem the debentures in accordance with the terms and conditions of their issue. If the company fails to redeem the debentures on the date of maturity, the CLB may on the application made by any debenture holder after hearing the parties concerned, by order, the company to redeem the debentures forthwith by the payment of principal and interest thereon as per Section 117C(4). If defaults are made in complying with the order of the CLB, every officer of the company who is in default, shall be punishable with imprisonment which may extend to 3 years and shall also be liable to fine of not less than Rs.500/- for every day during which the default continues. Also, the defaulter company cannot accept deposits, make loans, made investments, etc. Section 274(1)(g) also imposes a disqualification on the directors of a company which has failed to redeem its debentures on due date and such failure continues for one year or more. The remedies available to a debenture holder vary according to their position whether secured or unsecured.
Q.121. Suresh, a solicitor, is appointed as director on the Board of Sam Organic Ltd. The company has obtained legal opinion from Suresh and paid a fee of Rs.5 lakh during the financial year 2004-05. Auditor has raised an objection that fee payable to Suresh exceeds the limit prescribed under sections 309 and 198 and hence payment made to him is illegal, as the company has not obtained permission from the Central Government. Therefore, the company should take steps to recover the same from Suresh. Keeping in view the provisions of the Companies Act, 1956, give your opinion on the objection raised by the auditor. [June 2006, 5x1= 5]
Answer:
According to Section 309(1) of the Companies Act, 1956, the remuneration payable to the directors of a company, including any M.D. or W.T.D., shall be determined, in accordance with the provisions of Section 198 and Section 309, either by AOA of the company, or by a special resolution passed by the company in general meeting and the remuneration payable to any such director determined as aforesaid shall be inclusive of the remuneration payable to such director for services rendered by him in any other capacity. However, any remuneration for services rendered by any such director in any other capacity shall not be so included if:
the services rendered are of a professional nature, and
in the opinion of the Central Government, the director possesses the requisite qualifications for the practice of the profession.
In the present case, the matter should have been put up before the shareholders at the AGM for their approval. Simultaneously, an application should have been made to the Central Government for obtaining their opinion that Mr. Suresh is competent to render professional services which he rendered to the company. As the same have not been obtained, the contention of the auditor appears to be valid.
Q.122. Write a short note on ‘pledge of shares held in demat mode’.
[June 2006, 4x1 = 4]
(or) Mohan, a person holding shares in demat form, wants to raise money by pledging his demat shares. Is it possible and, if so, advise him on the manner of creating a pledge or hypothecation of such shares ? [Dec. 2008, 6x1 = 6]
Answer:
Regulation 58 of SEBI (Depositor & Participants) Regulations, 1996 deals with the provision relating to manner of creating a pledge or hypothecation of securities held in the demat mode. For the purpose of creating a pledge, the Depository Participant (DP) should ensure that:
(a) an application should be submitted by the client to the Depository through the DP;
(b) note of pledge should be made in the records only after ensuring that sufficient security balances are available for pledge;
(c) DP should confirm creation of a pledge to the Depository within 15 days of receipt of the application;
(d) DP should inform the pledger as well as pledgee about the creation of a pledge;
(e) If the DP does not create the pledge, an intimation to this effect should be sent to the participants alongwith reasons.
Q.123. What is the meaning of ‘specified number’ referred to in section 224(1B) ?
Answer: [June 2006, 4x1 = 4]
For the purpose of Section 224(1B) of the Companies Act, 1956 the term “Specified Number” means:
(a) In case of a person or firm holding appointment as auditor of a number of companies each of which has a paid up share capital of less than Rs.25 lacs, twenty such companies.
(b) In any other case, 20 companies out of which not more than 10 shall be the companies each of which has a paid up share capital of Rs.25 lacs or more, as per Explanation I of Section 224(1C).
Conclusion: In computing the specified number, the number of companies in respect of which or any part of which any person or firm has been appointed as an auditor, whether singly or in combination with any other person or firms shall be taken into account as per Explanation II of Section 224(1C).
Q.124. The Board of directors of Shinewell Ltd. in its meeting held on 24th April, 2005 has declared interim dividend. Subsequently, the Board came to know that accounts were not made properly and hence, interim dividend declared is not justifiable and it is necessary to revoke the interim dividend. What steps will you take to revoke the payment of interim dividend ?
Answer: [June 2006, 4x1 = 4]
Dividend once declared (including interim dividend) becomes debt, against the company and cannot be revoked except with the consent of the shareholders. But if the declaration is not supported by available profits, it is no declaration and hence the decision could be rescinded. If a dividend is declared and paid to shareholders, the character of the payment cannot be altered by a subsequent resolution.
The following steps should be taken for revocation of interim dividend:
1. The BOD shall consider the reason for revocation and pass the necessary resolutions rescinding the previous resolution declaring interim dividend.
2. The revocation of dividend shall be decided before dispatch of dividend warrants to the shareholders.
3. Suitable news inserted in one English national daily newspaper having wide circulation throughout India and shall indicate in brief the reasons for revocation of interim dividend and regretting the inconvenience caused to the shareholders.
Q.125. What do you understand by ‘bonus shares’ and what are the advantages of issuing bonus shares ? [June 2006, 4x1 = 4]
Answer:
A company may issue fully paid-up bonus shares by capitalizing its profits provided AOA contains provision in this regard. The vesting of the rights in the bonus shares takes place when the shares are actually allotted and not from any earlier date.
The advantages of bonus shares as follows:
1. Fund flow is not affected adversely.
2. Market value of the shares comes down to their nominal value by issue of bonus shares.
3. Market value of the members’ shareholding increases with the increase in number of shares in the Company.
4. Bonus shares are not an income. Hence, it is not taxable.
5. Paid up share capital increases with the issue of bonus shares.
Q.126. State the provisions relating to payment of remuneration to non-executive directors. [June 2006, 4x1 = 4]
Answer:
Section 309(4) of the Companies Act provides that a director who is neither in the whole time employment of the Company nor a Managing Director may be paid remuneration either:
(a) with the approval of the Central Government by way of a monthly, quarterly or annual payment; or
(b) by special resolution authorizing such payment by way of commission;.
However, in either case the remuneration paid to such director or where there are more than one such directors to all of them together shall not exceed.
(i) one percent of the net profits of the Company if the Company has Managing or Whole-time Director or Manager;
(ii) three percent of the net profits of the Company in any other case.
The Company in general meeting may with the approval of the Central Government authorize the payment of commission at a rate higher than 1% or 3% of the net profit as the case may be. The special resolution by which pament sanctioned will remain in operation for not more than 5 years but may be renewed for 5 years term from time to time provided the renewal is made in the last year of the previous terms. The percentage of 1% and 3% should include sitting fees, if any paid by the company.
Q.127. Explain the concept of ‘producer company’. [June 2006, 4x1 = 4]
Answer:
A Producer company means a body corporate, having objects or activities specified in Section 581B of the Companies Act, 1956 and registered as a Producer Company. Section 581B provides that:
The objects of a Producer Company shall relate to all or any of the following matters:
(a) Production, harvesting, procurement, grading, pooling, handling, marketing, selling, export of primary produce of the Members or import of goods or services for their benefit:
Provided that the Producer Company may carry on any of the activities specified in this clause either by itself or through other institution;
(b) Processing including preserving, drying, distilling, brewing, venting, canning and packaging of produce of its Members;
(c) Manufacture sale or supply of machinery, equipment or consumes mainly to its Members;
(d) Providing education on the mutual assistance principles to its Members and others;
(e) Rendering technical services, consultancy services, training, research and development and all other activities for the promotion of the interests of its members;
(f) Generation, transmission and distribution of power, revitalization of land and water resources, their use, conservation and communications relatable to primary produce;
(g) Insurance of producers or their primary produce;
(h) Promoting techniques of mutuality and mutual assistance;
(i) Welfare measures or facilities for the benefit of Members as may be decided by the Board;
(j) Any other activity, ancillary or incidental to any of the activities referred to in clauses (a) to (i) or other activities which may promote the principles of mutuality and mutual assistance amongst the Members in any other manner;
(k) Financing of procurement, processing, marketing or other activities specified in clauses (a) to (j) which include extending of credit facilities or any other financial services to its Members.
According to Section 581B(2) of the Companies Act, 1956, every Producer Company shall deal primarily with the produce of its active Members for carrying out any of its objects specified in this section.
Q.128. Vinay was appointed as an additional director by the Board of directors of Prudent Ltd. in its meeting held on 20th July, 2005. Further, Vinay was appointed as a director by members of the company in its annual general meeting held on 2nd September, 2005. Comment whether Vinay is again required to file consent to act as a director. [June 2006, 4x1 = 4]
Answer:
According to Section 264(2)(b), a person other than an additional or alternate director, or a person filling up a casual vacancy in the office of a director under Section 262, appointed as a director or re-appointed as an additional or alternate director, immediately on the expiry of his term of office shall not act as a director of the company unless he has within 30 days of his appointment signed and filed with the Registrar, his consent in writing to act as such director.
Therefore, as Mr. Vinay already appointed as additional director is re-appointed as a director immediately on the expiry of his term, no fresh consent should be filed.
Q.129. State whether a company can appoint more than one Company Secretary keeping in view the increasing compliance requirements. [June 2006, 4x1 = 4]
Answer:
This shall mean that the Company should have a minimum of one Secretary in practice, there is no bar on appointment of two or more secretaries in a single company. Hence if there are 2 or more secretaries in a company, it shall not be in violation of the provisions of Section 383A. However, Form No.32 shall be filed with ROC in respect of every individual appointed as Secretary of the Company.
Q.130. State the items that are to be covered under the director’s responsibility statement prepared under section 217(2AA). [June 2008, 8x1 = 8]
Answer:
Director’s Responsibility Statement [Section 217(2AA)]
i In the preparation of annual accounts, the applicable accounting standards had been followed along with proper explanation.
ii The directors had selected such accounting policies and applied them consistently and made judgment and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit or loss A/c for that period.
iii The directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities.
iv The directors had prepared the annual accounts on a going concern concept.
Conclusion: Directors Responsibility Statement is aimed at highlighting the accountability of the directors with a view to ensuring good corporate governance.
Q.131. Enumerate the matters to be passed by resolutions requiring special notice.
Answer: [June 2008, 5x1 = 5]
Section 190 of the Companies Act, 1956 provides that special notice is required of any resolution, notice of the intention to move the resolution shall be given to the company not less than 14 days before the meeting in which it is to be moved. On receipt of such a notice, the company must give to its members, notice of the resolution in the manner in which it gives notice of the meeting. If it is not practicable, then the company must give a minimum of 7 days notice to members through an advertisement in a newspaper having wide circulation or in any other mode allowed by the articles.
1. Removal of Auditor u/s 225
2. Removal of Director u/s 284
3. Appointment of another Auditor.
4. Appointment of another Director.
Q.132. What are the duties of a Company Secretary in respect of holding an extra-ordinary general meeting ? [June 2008, 10x1=10]
Answer:
Q.133. When does a small shareholders’ director vacate office.
Answer: [June 2008, 6x1 = 6]
Tenure of small shareholders director shall be for a maximum period of 3 years and on the expiry, if so decided by small shareholders, the same person may be elected for another period of 3 years. Such director shall be treated as director for all purposes but he/she cannot be appointed as M.D. or W.T.D. Such director cannot hold office of the small shareholders director at the same time in more than 2 companies. Such director shall have to vacate the office as provided in the Rules and he can also be removed in pursuance of Section 284 of the Act.
Q.134. Every advertisement inviting deposits must contain certain information. What are these information ? [Dec. 2008, 8x1 = 8]
Answer: Refer Q.No.48 (iii)
Q.135. “All resolutions cannot be passed by the Board of directors of a company by circulation.” Comment. [June 2008, 4x1 = 4]
(or) Resolution passed by circulation by directors. [Dec. 2006, 4x3 = 12]
Answer: [Dec. 2008, 4x1 = 4]
Circular Resolution: It is purely considered as a substitution of the Board Meeting. Section 289 of the Companies Act, 1956, provides that the right to pass a resolution by circulation has been given only to the directors and their committees and no resolution deemed to have been passed unless:
1. It has been circulated in draft form together with necessary papers to all the directors or to all members of the Committee of Directors, in India and to all other directors or members at their usual address in India; and
2. It has been approved by the directors as are then in India or by a majority of them, as are entitled to vote on the resolution. The number of directors in India to whom resolution is circulated should not be less than quorum fixed for a Board Meeting or Meeting of Committee of directors.
Note: Section 285 is still applicable.
Q.136. Write a note on proportional representation and illustrate your answer.
Answer: [Dec. 2008, 6x1 = 6]
Proportional Representation: Section 265 of the Companies Act, 1956 affords an opportunity to the minority shareholders to have their representatives on the Board of Directors. Section 265 provides that, a public company or a private company, may provide in its AOA for the appointment of not less than 2/3rd of the directors, according to the principal or proportional representation, whether by single transferable vote or by a system of cumulative voting or otherwise. The appointments are made once in 3 years and any casual vacancies can be filled in by the BOD as in other cases. The directors appointed according to this principle hold office for 3 years and cannot be removed by the company in general meeting under Section 284.
Q.137. What are the key benefits of MCA-21 project ? [Dec. 2008, 6x1 = 6]
Answer:
1. On-line incorporation of companies.
2. Simplified and easy mode of filing of Forms/Returns.
3. Registration as well as verification of charges anytime and from anywhere.
4. Inspection of public documents of companies anytime from anywhere.
5. Corporate-centric approach.
6. Building up a centralized database repository of corporates operating in India.
7. Enhanced service level fulfillment and customer relationship building.
8. Total transparency through e-Governance.
9. Timely redressal of investor grievances.
10. Availability of more time for MCA employees for qualitative analysis of corporate info.
Q.138. What are the broad contents of clause 49 of the listing agreement ? Write each point in brief. [June 2008, 8x1 = 8]
May be covered in SLP Material
Q.139. When is section 228 applicable ? Outline the procedure for appointment of branch auditor. [Dec. 2008, 8x1 = 8]
Answer:
Audit of Branch Accounts: Section 228 of the Companies Act, 1956 provides that if a company has branch offices, the accounts of every branch office must be audited by the company’s auditor or it may appoint another qualified auditor for this purpose. Where the company in general meeting decides to have the accounts audited of a branch office otherwise than by the company’s auditor, then the company in that meeting shall for the audit of those accounts appoint a person qualified for appointment as auditor of the company under Section 226 or where the branch office is situated in a country outside India, a person who is either qualified as aforesaid or an accountant duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country. The appointment of a branch auditor must be made and his remuneration fixed, by the company in general meeting or by the BOD if so authorized by the general meeting, in consultation with the company’s statutory auditor. The branch auditor shall have the same powers and duties in respect of the branch audit as the company’s auditor and he shall submit his report to the company’s auditor.
Q.140. Outline the procedure for removal of the statutory auditor.
Answer: [Dec. 2007, 6x1 = 6]
Removal of Auditors: Section 224(7) of the Companies Act, 1956 states that any auditor appointed under this Section may be removed from office before the expiry of his term only by the company in the general meeting, after obtaining prior approval of the Central Government in this behalf. A special notice of any such resolution proposed to be passed in the general meeting and a copy of the resolution is required to be sent immediately to the auditor as he has the right to make a representation. A copy of the auditor’s representation, if so desired by the auditor, should be sent to every member to whom notice of the meeting has been sent, and if this is not practicable, the representation should be read out at the meeting according to Section 225(3). But the representation need not be to sent or read out at the meeting, if CLB satisfied that the right of representation is being abused to secure needless publicity for defamatory matter, on any application made by company or any aggrieved person. The CLB may also direct that the company’s costs on publishing such application to be paid by the auditor.
Q.141. What are the requirements with regard to quorum and frequency of Board meetings ? [June 2006, 6x1 = 6]
(or) The quorum for Board meeting should be present throughout the meeting.
Answer: [Dec. 2007, 5x1 = 5]
Quorum of Directors: Quorum is the minimum number of directors required to be present to validly transact any business. Provision for quorum for Board Meeting is not directory but it is mandatory. Section 287(2) of the Companies Act, 1956 has fixed the quorum as 1/3rd of the total strength of the Board or 2 directors, whichever is higher. If at any time the number of interested directors exceeds or is equal to 2/3rd of total strength, the number of remaining directors present at the meeting being not less than 2 shall be the quorum during such time. The quorum of the Board is required at every stage of the meeting and unless a quorum is present at every such stage, the business transacted is void. (Case Law: Balakrishna vs. Balu Subudhi).
Q.142. “Members of a limited company may nevertheless have unlimited liability.”
Answer: [June 2007, 5x1 = 5]
Section 2(23) of the Companies Act, 1956 defines Limited Company as “a company limited by shares or by guarantee”. The liability of the members, in the case of a limited company, may be limited with reference to the nominal value of the shares, respectively held by them or to the amount which they have respectively guaranteed to contribute in the event of winding up of the company. According a limited company can be further classified into: (a) Company limited by shares and (b) Company limited by guarantee.
Q.143. Distinguish between ––
(i) ‘Public limited company’ and ‘private limited company’.
Answer: [June 2006, 4x1 = 4]
S.No. Private Ltd. Company Public Ltd. Company
1. Private Company: According to Sec. 3(1)(iii) of the Companies Act, 1956 a ‘private company’ means a company which has a minimum paid-up capital of Rs.1,00,000/- or such higher paid-up capital as may be prescribed and by its articles:
(a) Restricts the right to transfer its shares if any.
(b) Limits the number of its members to 50 not including its employee members (joint holders of shares are treated as a single member)
(c) Prohibits any invitation to the public to subscribe for any shares or debentures of the company.
(d) Prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives.
(e) There should be atleast two subscribers to form a private company and also it should have atleast two directors. Public Company: According to Section 3(1)(iv) of the Companies Act, 1956, a ‘public company’ means a company which:
(a) Is not a private company.
(b) Has a minimum paid-up capital of Rs.5 lakhs or such higher paid-up capital as may be prescribed.
(c) Is a private company which is a subsidiary of a company which is not a private company.
2. Minimum of 2 members and maximum of 50 members. Minimum of 7 members and maximum is unlimited.
3. Minimum of 2 directors. Minimum of 3 directors.
4. Private company to certify the compliance of Section 3(1)(iii) every year. No such compliance need not be provided.
Q.144. Set out the procedure for declaration and payment of interim dividend.
[June 2007, 5x1 = 5]
Answer: [Dec. 2006, 5x1 = 5]
With the enactment of Companies (Amendment) Act, 2000, interim dividend stands on the same footing as that of the final dividend and both when declared becomes debt against the company and are payable within 30 days of declaration. The interim dividend has already been accounted for in the Balance Sheet and Profit & Loss A/c which are to be adopted by the members of the company. As such, the interim dividend declared and paid carries the confirmation of the members of the company automatically and no separate confirmation is required.
Q.145. As a Company Secretary, what steps would you take for (i) incorporation; and (ii) commencement of business of a public limited company having share capital ? [June 2007,12x1 =12]
Answer: [Dec. 2006, 12x1=12]
I Name
II MOA
1. Name clause
2. Situation clause
3. Objects clause
4. Capital clause
5. Liability clause
Subscription clause (declaration of abiding terms and conditions)
6. Territories of operations
7. Guarantee amount by the Guarantors, if any
III AOA
1. Name
2. Situation
3. Capital
4. BOD
5. AGM
6. Appointment of Statutory Auditors
7. Share capital increment
8. Inspection
9. Indemnity
10. Secrecy ….. etc.
Subscription clause (declaration of abiding terms and conditions)
IV Submission of Forms
1. Form 1: It is also called a pre-incorporation certificate attested by a CS or CA in practice along with the Director with digital signature.
2. Form 18: Registered Title under Section 146
(a) Name of the company
(b) Address
(c) Email: id
(d) Nearest police station
3. Form 32: No of Directors
(a) DIN Number
(b) Date of Appointment always Date of Incorporation
(c) No. of companies in which he is a Director
4. CIN No: This number will be allotted on the Incorporation but before incorporation, it will ask for SRN (Service Request Number) for the last time and afterwards CIN No. always.
Q.146. Write short notes on the following:
(i) Dematerialisation of shares
(ii) Statement on corporate governance in the Board’s report.
Answer: [June 2006, 4x2 = 8]
Already covered in SLP Material.
Q.147. “A private company can accept deposits from friends, relatives and associates without invitation from the public.” Comment. [June 2008, 4x1 =4]
Answer:
Acceptance of Deposits from Friends, Relatives and Associates
1. Hold a Board meeting and decide acceptance of deposits.
2. Approve statement in lieu of advertisement.
3. Get it signed and file it with ROC.
4. Prepare application form and circulate.
5. Obtain application from limited number of persons.
6. Issue receipts for deposits accepted.
7. Keep and maintain a Register of Deposits.
8. Pay interest on due date and repay deposit on maturity date.
Q.148. State three things that are required to be covered in any explanatory statement to a resolution. [Dec. 2008, 3x1 = 3]
Answer:
Explanatory Statement u/s 173(2)
1. A full disclosure of all material facts.
2. Interest of Directors/Manager in the resolution (interest to the extent 20% of the paid-up share capital of that other company)
3. Inspection of documents, if any.
4. Specific particulars in case of buy-back, preferential issue, issue of ESOPs, etc.
Q.149. What is the procedure adopted by the Board of directors at its meeting for making inter-corporate loans, investments, etc. ? [June 2008, 6x1 = 6]
Answer:
Within the Prescribed Limits:
1. Board Resolution (not a Circular Resolution) with unanimous consent (100%) of all directors’ present at the meeting;
2. Prior approval from the Financial Institution, if any.
In case, exceeding the Limits:
1. Board Resolution with unanimous consent is passed to give guarantee/loan;
2. B.R. is only in case of an emergencies where it is not possible to pass a special resolution in the general meeting;
3. Special Resolution to be passed within 12 months or next AGM, (whichever is earlier) confirming the Board Resolution.
Section 372A not applicable to:
1. Private Company which is not a subsidiary of a public company.
2. Bank or Insurance or Financing Company or Investment Company.
3. Holding company to its 100% WOS.
Q.150. Write short notes on the following:
(i) E-forms DIN-1 and DIN-2 [Dec. 2007, 4x1 = 4]
Answer:
1. Section 266D provides that Director to inform DIN to company within 1 month from receipt of number from Central Government in form DIN-2.
2. Intimation of DIN will have to be given to the Registrar or any other officer or other specified authority within a week of obtaining the number in form DIN-3.
3. DIN 3 for Directors appointed before 1st July, 2007.
4. DIN 4 for change in address or any other particulars.
Q.151. What is ‘compounding of offences’ ? Who are vested with such powers under the Companies Act, 1956 ? What amount of fines can be levied against the companies ? [Dec. 2007,7x1 = 7]
(or) What is ‘compounding of offences’ under the Companies Act, 1956 and who has got such powers ? State the procedure for compounding of offences.
Answer: [June 2006, 8x1 = 8]
Compounding means, settlement by a mutual agreement or to condone a liability or offence in exchange for money. The defaulting person agrees to pay a sum (maximum fine) to the Central Government and the Government agrees to withdraw the prosecution or not to institute the prosecution. The following offences can be compounded:
(a) fine only
(b) fine or imprisonment or both
Compounding of Offences means similar offences cannot be compounded within 3 years of first compounding but different offences may be compoundable.
Compounding Authority: A joint application by the defaulting person and the complainant to:
1. Regional Director: Offences punishable with fine upto Rs.50,000/- be compounded with R.D.
2. Company Law Board: All other prescribed offences including fine of more than Rs.50,000/- be compounded with CLB.
3. Intimation by the company to ROC within 7 days of compounding.
4. Intimation by ROC to Court if offence is compounded is pending for prosecution.
Q.152. Can a director of a company act as such immediately on his appointment to the office of a director ? [June 2006, 5x1 = 5]
Answer:
Steps After Appointment:
1. Obtain and fill director details in “Register of Directors” under Section 303.
2. Make entries in “Register of Directors Shareholding” under Section 307A.
3. Confirmation that his number of directorships are within the prescribed limits as per Section 275.
4. Disclosure of shareholding in the company or its holding or subsidiary company.
5. List of Directorships where he should be regarded as interested u/Section 299.
6. List of Relatives as per Section 2(41).
Q.153. Detail procedure for conversion of Wholesome Entertainment Ltd. having 70 members (including 25 past and present employees) into a Pvt. Ltd. company.
Answer: [June 2006, 8x1 = 8]
Conversion of a public company into private company:
1. A special resolution passed by the company in the general meeting authorizing conversion and altering the AOA so as to include matters specified in Sec. 3(1)(iii).
2. Changing name of the company involves alteration in Name Clause of the MOA. As per Section 21 of the Companies Act, 1956, a special resolution is required to be passed and a prior approval from the Central Government is to be obtained.
3. Central Government approval under Section 31. Provision to Section 31(1) provides that no alteration shall be made in the AOA which has the effect of converting a public company, shall have effect unless such alteration has been approved by the Central Government.
4. Filing a printed copy of the AOA as altered with the ROC within 1 month from the date of receipt of approval of the Central Government.
Q.154. Write short notes on the following: [June 2007, 4x2 = 8]
Answer: [Dec. 2006, 4x2 = 8]
(i) Filing of Documents Electronically: Physical filing of documents is discontinued with effect from 15th September, 2006 and e-filing is made mandatory from that date. You can use ‘Prefill’ button to fill the static data automatically by quoting the CIN number, company details are automatically filled-in by using pre-fill function. Issuance of certificates and approvals will continue to remain on paper. Winding up procedures under the Companies Act, 1956 is not covered under e-filing.
(ii) Defunct Companies: Where the company has ceased to trade or completely stopped the business operations is called a Defunct Company. Under Section 560, the Registrar is empowered to strike off the name of the company from the Register on the ground of non-functioning.
Q.155. Set out the procedure for the appointment and fixation of remuneration of auditors of a listed company. [June 2007, 8x1 = 8]
Answer: [Dec. 2006, 8x1 = 8]
Appointment of an Auditor: Section 224 provides that every company (public & private) shall at each AGM appoint an auditor or auditors to hold office from the conclusion of that meeting until the conclusion of the next AGM. The auditors are appointed at the AGM by an ordinary resolution under the ordinary business and where the ordinary business requires special resolution only under Section 224A. Company shall obtain written consent from the Auditor to act as such and a certificate that the number of Auditorships is within the specified limits under Section 224(1B). The company has to intimate the auditor within 7 days from the date of appointment made and Auditors intimation to the ROC within 30 days in e-form No.23B.
Fixing Remuneration of Auditors:
1. Appointed by BOD – Fixed by BOD.
2. Appointed by Central Government – Fixed by Central Government.
3. Appointed by C&AG of India under Section 619 – Fixed by members at AGM.
4. In any other case other than above – Fixed by members at the AGM of the Co.
Q.156. In what respect Form No. 25C is required to be filed and in addition to the official of the company who else has to digitally sign it and the purpose thereof ? [June 2008, 4x1 = 4]
Answer:
Form No.25C: Appointment of M.D. or W.T.D. or Manager shall be intimated to the ROC by filing a return in the prescribed form e-form 25C within 90 days from the date of such appointment. The articles may give a power to the directors to appoint one of their members to be managing director. Unless there is a power given to the directors by the Articles to appoint a M.D., it is not competent for them to make such an appointment.
Q.157. Gomez, the chairman of a company, borrowed Rs.5 lakh from the State Bank of India, Patna under a promissory note. A suit was filed for the recovery of debts on the basis of the pronote executed by the chairman. The company refused to accept the liability on the plea that the chairman had borrowed funds without authorisation from the company. Will the company succeed ? Explain. [June 2007, 5x1 = 5]
Answer:
Restrictions on Powers of Board under Section 293: Following business can only be transacted by an ordinary resolution passed at the general meeting by the members:
1. Sell, lease or dispose of the whole, or part of the undertaking of the company (such resolution may specify the use, disposal or investment of the sale proceeds).
2. Remit or give time for the repayment of any debt due by a director (unless its an advance by bank to its director in the ordinary course of business).
3. Investment of the amount of compensation received by the company in respect of compulsory acquisition of an undertaking without which it cannot be carried on.
4. Borrowings exceeding the aggregate of the paid-up capital and its free reserves of the company (onus on the lender to prove that it advanced the loan in good faith and without knowledge that the limit imposed by that clause had been exceeded).
Note: Excluding temporary loans which are repayable on demand or within 6 months but does not include loans raised for financing expenditure of a capital nature.
5. Contribution to charity in a financial year exceeding Rs.50,000 or 5% of average net profit for preceding 3 financial years, whichever is greater.
Q.158. Draft a specimen notice for publication in newspapers for closure of register of members. [Dec. 2008, 4x1 = 4]
Answer:
Closure of Register of Members: Section 154 of the Companies Act, 1956 provides that:
154(1) A company may, after giving prior notice of not less than 7 days by advertisement in some newspaper circulating in the region in which the registered office of the company is situated, close the register of members for any period not exceeding 45 days in each year but not exceeding 30 days at any one time.
154(2) If any default is made complying with the provisions as provided in sub-section (1), the company and every officer of the company who is in default shall be punishable with a fine which may extend to Rs.5,000/- for every day during which the register is so closed.
Q.159. Explain the various aspects relating to —
(i) Preferential allotment of shares by a listed company. [June 2006, 10x1=10]
(ii) Rights issue of shares by an unlisted company. [June 2006, 6x1 = 6]
Answer:
(i) Procedure for Preferential Issue:
1. Board Meeting: Issue of shares under Section 81(1A) and agenda for calling a general meeting to pass a special resolution.
2. Intimation to Stock Exchange: Send within fax within 15 minutes from the conclusion of the Board meeting about the particulars of the Board Meeting.
3. In principal approval from Stock Exchange: For listing of proposed preferential issue.
4. General Meeting: Notice of GM together with explanatory statement under Section 173(2) should cover all the requisite matters set out in SEBI Guidelines. In case of listed company, 3 copies of the notice should be sent to stock exchange.
5. Auditor’s Report certifying that issue is in accordance with SEBI Guidelines and should be laid before and kept open for inspection of the shareholders at the meeting.
6. Pricing
7. In case of a listed company, send a copy of the proceedings of the general meeting to the stock exchange.
8. Dematerialisation: The entire shareholding of the promoters group is held the dematerialized form as on the reference date before a preferential issue of shares.
9. Allotment within 15 days of the passing of the resolution.
10. If allotment of instruments and dispatch of certificates is not completed within 15 days from the date of such resolution, a fresh consent of the shareholders shall be obtained and the relevant date referred to above will relate to the new resolution.
11. Valuation Report to be submitted to the Stock Exchange: In case of preferential allotment of shares to promoters, their relatives, associates and related entities, for consideration other than cash, valuation of the assets in consideration for which the shares are proposed to be issued shall be done by an independent qualified valuer and the valuation report shall be submitted to the exchanges on which shares of the issuer company are listed.
12. Return of Allotment.
13. Lock-in Period on shares allotted to promoters for 3 years from the date of allotment. However, not more than 20% of total capital of the company, including capital brought in by way of preferential issue shall be subject to such lock-in period.
14. The entire pre-preferential allotment shareholding of allottees shall be under lock-in from the relevant date upto a period of 6 months from the date of preferential allotment.
15. Disclosure in B/S
16. Preferential allotments to FIIs.
17. Filing of Form No.23.
18. File documents for listing of shares with the Stock Exchange.
(ii) Rights issue of shares by an unlisted company: Section 81 of the Companies Act, 1956 provides that, time after expiry of 2 years from the incorporation of a company or after the expiry of 1 year from the first allotment of shares, whichever is earlier, a company is proposed to increase the subscribed capital by allotment of further shares, such shares shall be offered to the existing holders of equity shares in proportion to the capital paid-up on their shares at the time of further issue. The shareholder must be informed of the number of shares he has opted to buy giving him atleast 15 days to decide. Unless the articles of the company otherwise provide, the directors must state in the notice of offer of rights shares, the fact that the shareholder has also the right to renounce the offer in whole or in part, in favour of some other persons. If a shareholder has neither renounced in favour of another person nor accepted the shares himself, the BOD may dispose of the shares so declined in such manner as it things would be most beneficial to the company.
Section 81(1A) deals with issue of shares to persons other than existing shareholders and provides that a company can issue further shares to persons other than existing shareholders in any manner whatsoever provided:
(a) Special resolution is passed by the company in general meeting, or
(b) Where no such special resolution is passed, if the votes cast in favour of the proposal contained in the resolution moved in that general meeting (including the casting vote, if any of the Chairman) and the Central Government is satisfied, on an application made by the BOD in this behalf, that the proposal is most beneficial to the company.
The restrictions contained in Section 81 of the Act regarding issue of further shares do not apply to:
1. a private company;
2. increase of the subscribed capital of public company caused by the exercise of an option attached on debentures issued or loans raised by the company to convert such debentures or loans into shares of the company (Section 81(3)).
Provided the terms containing such an option:
(a) have been approved by the Central Government before the issue of debentures or raising of loans is in conformity with the rules made by the Government; and
(b) have been approved by a special resolution passed in the general meeting before the issue of debentures or raising of loans in cases where the debentures have not issued to or loans raised from the Government or any institutions specified by the Government.
Q.160. Draft a specimen notice for ‘book closure’ of a company whose shares have been dematerialised. [Dec. 2007, 6x1 = 6]
Q. Draw up the agenda for the first Board meeting of a newly incorporated company. [June 2007, 8x1 = 8]
[Dec. 2006, 8x1 = 8]
Q. Outline the detailed procedure for formation of a public company and also to obtain certificate of commencement of business in the present scenario of e-filing. [Dec. 2007, 16x1=16]
Q. A company wishes to appoint a person, who is a relative of a director of the company, at a very senior position in the company. As a Company Secretary of that company, what steps would you take at the time of such appointment?
[June 2008, 5x1 = 5]
Q. Tejaswi has requested to the Company Secretary of Yogi Ltd. for supply of a list of shareholders along with their names, addresses and shareholdings on a floppy. State the procedure to be followed by the company in this regard.
[June 2006, 8x1 = 8]
Q. “No dividend can be recommended by the Board of directors of the company in case the company has incurred losses during the financial year for which dividend is to be recommended.” Comment. [June 2008, 4x1 = 4]
Q. Prosperous Ltd. had a bumper profit and an all-time high sales turnover for the year ended 31st December, 2005. The directors have decided to reward the shareholders with 35% dividend besides the liberal bonus, more so, since the company is in its 50th year of operations. Draft a report of the Board of directors making appropriate assumptions as to facts and figures.
[June 2006, 16x1=16]
Q. Draft the specimen resolutions along with requisite explanatory statement, wherever necessary, for transacting the following items of business indicating the kind of meeting at which each resolution is to be passed and the type of resolution required for.
(i) Calling a general meeting by the company.
(ii) Approving transfer of shares.
(iii) Shifting registered office within the same city.
(iv) Declaration of interim dividend.
(v) Sub-division of equity shares of Rs.10 each into face value of Re.1 each.
[Dec. 2007, 4x5 = 20]
Q. Name the secretarial standards issued by the Institute of Company Secretaries of India. [June 2008, 3x1 = 3]
(or) State the secretarial standards issued by the ICSI in respect of the following. Also draft specimen notices for the respective meetings:
(i) Notice of the Board meeting; and
(ii) Notice of the general meeting. [June 2007, 8x2 = 16]
[Dec. 2006, 8x2 = 16]
Q. Ajay sold his shares and executed a transfer deed in favour of Vijay. The documents were lodged for transfer with the company. However, before effecting and registering the transfer by the company, Ajay, the transferor passed away. What is the impact of the death of Ajay on the registration of transfer of shares in favour of Vijay, if the death of Ajay is – (i) intimated to the company before the registration; and (ii) intimated to the company after registration of the transfer of the shares in favour of Vijay ?
If Vijay dies before registration of the transfer of shares, what will be the consequences –– (i) if the death of Vijay is intimated to the company before registration of transfer; and (ii) if the death of Vijay is not intimated to the company before the registration of transfer ? [June 2008, 8x1 = 8]
Q. As a Company Secretary, how would you deal with the following situations:
(i) A Board meeting was convened on 25th May, 2006 for approval of the annual accounts for the year ended 31st December, 2005 and also to fix the date of annual general meeting. The CFO has, however, expressed his inability to table the accounts before 10th June, 2006. [June 2006, 6x1 = 6]
(ii) The attendance at an annual general meeting of a company is thin on account of torrential rains; but the quorum is, however, available. Both the Chairman and the Secretary are present. The agenda includes important businesses, viz., re-appointment of the managing director, issue of bonus shares and equity investment in a new venture. [June 2006, 5x1 = 5]
(iii) A shareholder, who has lost all his share certificates in a flood, approaches the company for issue of duplicate scripts. [June 2006, 5x1 = 5]
2 comments:
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Great Article ! Loved how you have explained everything in such breif.
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