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CS Executive Guideline Answers for Company Law

CS Executive Guideline Answers for Company Law

CS Executive Guideline Answers: This excellent blog gives you complete knowledge, improve your skills in preparing and answering for Company Laws in CS Executive.

This blog contains model answers for Company Laws given by expert faculty of CS Executive.

We hope that these CS Executive guideline answers will assist the students in preparing for the Institute’s examinations.

cs executive guideline answers company laws

cs executive guideline answers company laws

 

CS Executive Guideline Answers for Company Law Part-I

Question 1- Comment on the following

1(a) The Companies Act, 2013 does not provide statutory recognition to the doctrine of lifting of corporate Only judicial interpretations disregard the concept of separate personality.

Answer:  It is not correct to state that the Companies Act, 2013 does not provide statutory recognition to the doctrine of lifting of corporate veil and only judicial interpretation disregard the concept of separate personality.

The Companies Act, 2013 itself contains some provisions in Sections 7(7), 251(1) and 339 which lift the corporate veil to reach the real forces of action. Section 7(7) of Companies Act, 2013 deals with punishment for incorporation of company by furnishing false information; Section 251(1) of Companies Act, 2013 deals with liability for making fraudulent application for removal of name of company from the register of companies and Section 339 of Companies Act, 2013 deals with liability for fraudulent conduct of business during the course of winding up.

Ever since the decision in Salomon v. Salomon & Co. Ltd., normally Courts are reluctant or at least 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 personality of a company in the following situations:

  • Where the corporate veil has been used for commission of fraud or improper In such a situation, Courts have lifted the veil and looked at the realities of the situation.(Case Law :Jones vs. Lipman)
  • Where a corporate facade is really only an agency (Case Law: R.G. Films Ltd)
  • Where the conduct conflicts with public policy, courts lifted the corporate veil for protecting the public (Case Law: Connors Bros. v. Connors)
  • A company will be regarded as having enemy character, if the persons having de facto control of its affairs are resident in an enemy country or, wherever they may be, are acting under instructions from or on behalf of the enemy. (Case Law: Daimler Ltd. v. Continental Tyre & Rubber Co.)
  • Where it was found that the sole purpose for which the company was formed was to evade taxes the Court will ignore the concept of separate entity and make the individuals concerned liable to pay the taxes which they would have paid but for the formation of the (Case Law : Sir Dinshaw Maneckjee Petit, Vodafone case)
  • Avoidance of welfare legislation is as common as avoidance of taxation and the approach in considering problems arising out of such avoidance has necessarily to be the same and, therefore, where it was found that the sole purpose for the formation of the new company was to use it as a device to reduce the amount to be paid by way of bonus to workmen, the Supreme Court upheld the piercing of the veil to look at the real transaction.(Case Law: The Workmen Employed in Associated Rubber Industries Limited, Bhavnagar The Associated Rubber Industries Ltd., Bhavnagar and another)
  • Another instance of corporate veil arrived at by the Court arose in Kapila Hingorani State of Bihar.
  • Where it is found that a company has abused its corporate personality for an unjust and inequitable purpose, the court would not hesitate to lift the corporate veil. Further, the corporate veil could be lifted when acts of a corporation are allegedly opposed to justice, convenience and interests of revenue or workmen or are against public interest.

1(b) The provisions of the Companies Act, 2013 relating to compromises and arrangements are uniformally applicable to all companies

Answer: Section 230 to 240 covered under Chapter XV of the Companies Act, 2013 provides for the Compromise, Arrangements and Amalgamation of Companies. The said provisions are uniformly applicable to all companies except Section 233 which prescribes simplified procedure for merger or amalgamation of –

  • two or more small companies, or
  • between a holding company and its wholly-owned subsidiary company, or
  • such other class or classes of companies as may be prescribed.

Accordingly, sub-section (1) of Section 233 of Companies Act, 2013 states that notwithstanding the provisions of section 230 and section 232 of Companies Act, 2013, a scheme of merger or amalgamation may be entered into between two or more small companies or between a holding company and its wholly-owned subsidiary company or such other class or classes of companies as may be prescribed, subject to the following, namely:-

  • a notice of the proposed scheme inviting objections or suggestions, if any, from the Registrar and Official Liquidators where registered office of the respective companies are situated or persons affected by the scheme within thirty days is issued by the transferor company or companies and the transferee company;
  • the objections and suggestions received are considered by the companies in their respective general meetings and the scheme is approved by the respective members or class of members at a general meeting holding at least ninety per cent of the total number of shares;
  • each of the companies involved in the merger files a declaration of solvency, in the prescribed form, with the Registrar of the place where the registered office of the company is situated; and
  • the scheme is approved by majority representing nine-tenths in value of the creditors or class of creditors of respective companies indicated in a meeting convened by the company by giving a notice of twenty-one days along with the scheme to its creditors for the purpose or otherwise approved in writing.

1(c) An unregistered charge shall be void against the liquidator and other creditors of the company

Answer: According to Section 77 of the Companies Act, 2013, all types of charges created by a company are to be registered with the Registrar of Companies (ROC), Where they are non-compliant and are not filed with the Registrar of Companies for registration, the charge shall be void as against the liquidator and any other creditor of the company. In the case of ONGC Ltd v. Official Liquidators of Ambica Mills Co Ltd (2006), the ONGC had not been able to point out whether the so called charge, on the basis of which it was claiming preference as a secured creditor, was registered or not. It was held that in the light of this failure, ONCG could not be treated as a secured creditor in view of specific provisions of section 125 of Companies Act,1956 and the statutory requirement under the said section. This does not, however, mean that the charge is altogether void and the debt is not recoverable. So long as the company does not go into liquidation, the charge is good and may be enforced.

Void against the liquidator means that the liquidator, on winding up of the company, can ignore the charge for the purpose of ascertaining the priority of payment and can treat the concerned creditor as an unsecured creditor. The property will be treated as free of charge i.e. the creditor cannot sell the property to recover its dues.

Void against any other creditors of the company means that if any subsequent charge is created on the same property and the earlier charge is not registered, the earlier charge would have no consequence and the latter charge if registered would enjoy priority over the earlier charge. In other words, the latter charge holder can have the property sold in order to recover its money.

Thus, non-filing of particulars of a charge as required under Section 77 of the Companies Act, 2013 does not invalidate the charge against the company as a going concern. It is void only against the liquidator and the creditors at the time of liquidation. The company itself cannot have a cause of action arising out of non-registration.

1(d) Certain members of a company are allowed to offer for sale their shareholding in the company to the public, such offer document is deemed to be a prospectus issued by the company (5 marks each)

Answer: Section 28 of the Companies Act, 2013 permits certain members of a company, in consultation with Board of directors, to offer the whole or a part of their holdings of shares to the public. The document by which the offer of sale to the public is made shall, for all purposes, be deemed to be a prospectus issued by the company.

Since public offer is not same as offer for sale. Though many provisions relating to issue of prospectus does apply to such an offer, yet many provisions including requirement of minimum subscription does not apply to the same.

All laws and rules made hereunder as to the contents of the prospectus and as to liability in respect of misstatements in and omission from prospectus or otherwise relating to prospectus shall apply as if this offer document is a prospectus issued by the company.

The section provides that the members, whether individuals or bodies corporate or both, whose shares are proposed to be offered to the public, shall collectively authorize the company, whose share were offered for sale to the public, to take all actions in respect of offer of sale for and on their behalf and they shall reimburse the company all expenses incurred by it on this matter.

Rule 8 of The Companies (Prospectus and Allotment of Securities) Rules, 2014 in this context provide that the provisions of Part I of Chapter III namely “Prospectus and Allotment of Securities” and rules made there under shall be applicable to an offer of sale referred to in section 28 of Companies Act, 2013 except for the following, namely:-

  • the provisions relating to minimum subscription;
  • the provisions for minimum application value;
  • the provisions requiring any statement to be made by the Board of directors in respect of the utilization of money; and
  • any other provision or information which cannot be compiled or gathered by the offer or, with detailed justifications for not being able to comply with such provisions.

Further the rules provide that such offer document or prospectus issued under the section shall disclose the name of the entity bearing the cost of making the offer for sale along with reasons.

Question 2

2(a) While adopting accounts for the year, the Board of directors of Prima decided to consider the interim dividend @ 12% as final dividend and did not consider transfer of profit to reserves. Explain whether decisions of the Board were justified referring to relevant provisions. (3 marks)

Answer: Section 123 of the Companies Act, 2013 provides for the provisions relating to declaration of dividends.

Since interim dividend is also a dividend, companies should provide for depreciation under section 123 of the Companies Act, 2013 before declaration of interim dividend. However, the first proviso to the section 123(1) of the Companies Act, 2013 provides that a company may, before declaration of any dividend in any financial year, transfer such percentage of its profits for that financial year as it consider appropriate to the reserves of the company irrespective of the size of declared dividend i.e. company is not mandatorily required to transfer the profit to reserves, and it is only an option made available to the company to transfer such percentage of profit to reserves.

In the instant case, the Board has decided to pay interim dividend @12% of the paid up capital. Assuming the company has complied with the depreciation requirement and other applicable provisions, the interim or final dividend can be declared without transferring such percentage of its profits as it may consider appropriate to the reserve of the company.

Thus, from the facts and provisions, it may be concluded that Prima Ltd is under no violation of law by not transferring i.e. the company is free to transfer any amount of its profit to the reserves, without any compulsion or restriction before declaration of any dividend.

Section 123(3) of the Companies Act, 2013 provides that the Board of Directors of a company may declare interim dividend during any financial year or at any time during the period from closure of financial year till holding of the annual general meeting out of the surplus in the profit and loss account or out of profits of the financial year for which such interim dividend is sought to be declared or out of profits generated in the financial year till the quarter preceding the date of declaration of the interim dividend. The amount of dividend including interim dividend should be deposited in a separate bank account within five days from declaration of such dividend for compliance of section 123(4) of the Companies Act, 2013.

 

2(b) What are the ‘related party disclosures’ required to be made by listed entities as per SEBI Regulations ? (3 marks)

Answer: As per SEBI (LODR) Regulations, 2015, the Annual Report shall make certain Related Party Disclosures. Further as per Regulation 27(2) of SEBI (LODR) Regulations, 2015 details of all material transactions with related parties shall be disclosed along with the quarterly compliance report on corporate governance in the format as specified by the Board from time to time to the recognised stock exchange(s) within fifteen days from close of the quarter.

  • The listed entity shall make disclosures in compliance with the Accounting Standard on “Related Party Disclosures”.
  • The disclosure requirements shall be as follows:-

Disclosures of amounts at the year end and the maximum amount of loans/ advances/ investments outstanding during the year, in the books of accounts of:

  • Holding Company: –
    • Loans and advances in the nature of loans to subsidiaries by name and
    • Loans and advances in the nature of loans to associates by name and
    • Loans and advances in the nature of loans to firms/companies in which directors are interested by name and
  • Subsidiary : – Same disclosures as applicable to the parent company in the accounts of subsidiary
  • Holding Company : – Investments by the loanee in the shares of parent company and subsidiary company, when the company has made a loan or advance in the nature of loan

For the purpose of above disclosures directors’ interest shall have the same meaning as given in Section 184 of Companies Act, 2013.

Disclosures of transactions of the listed entity with any person or entity belonging to the promoter/promoter group which holds 10% or more shareholding in the listed entity, in the format prescribed in the relevant accounting standards for annual results. (Notified on 9th May, 2018, applicable in respect of Annual reports filed for the year ended March 31, 2019 and thereafter.)

 

2(c) Green Commercial , an unlisted company, has made a preferential offer of shares for consideration other than cash. A question has been raised by the accounts department as to the valuation of consideration at allotment and the manner of treatment of noncash consideration in books of account. As a practising company secretary advise the company with reference to the provisions of the Companies Act, 2013. (3 marks)

Answer: Pursuant to Section 62 read with rule 13(2) of Companies (Share Capital and Debentures) Rules 2014, where shares or other securities are to be allotted for consideration other than cash, the valuation of such consideration shall be done by a registered valuer who shall submit a valuation report to the company for justification of valuation.

Where the preferential offer of shares is made for a non-cash consideration, such non-cash consideration shall be treated in the following manner in the books of account of the company-

  • where the non-cash consideration takes the form of a depreciable or amortizable asset, it shall be carried to the balance sheet of the company in accordance with the accounting standards; or
  • where above clause is not applicable, it shall be expensed as provided in the accounting

The Practising Company Secretary can advised the Green Commercial Ltd. accordingly.

2(d) What types of companies can be formed in Singapore as per the Singapore Companies Act ? (3 marks)

Answer: As per Singapore Companies Act, 1967 any person may, whether alone or together with another person, by subscribing his name or their names to a constitution and complying with the requirements as to registration, form an incorporated company.

A company may be –

  • a company limited by shares;
  • a company limited by guarantee; or
  • an unlimited

No company, association or partnership consisting of more than 20 persons can be formed for the purpose of carrying on any business that has for its object the acquisition of gain by the company, association or partnership, or by the individual members thereof, unless it is registered as a company under the Singapore Companies Act, or is formed in pursuance of some other written law in Singapore or letters patent.

2(e) What are disqualifications for debenture trustees ? (3 marks)

Answer: The disqualifications for debenture trustees as referred in Rule 18 of the Companies (Share Capital & Debentures) Rules, 2014, are as under:

  • beneficially holds shares in the company;
  • is a promoter, director or key managerial personnel or any other officer or an employee of the company or its holding, subsidiary or associate company;
  • is beneficially entitled to moneys which are to be paid by the company otherwise than as remuneration payable to the debenture trustee;
  • is indebted to the company, or its subsidiary or its holding or associate company or a subsidiary of such holding company;
  • has furnished any guarantee in respect of the principal debts secured by the debentures or interest thereon;
  • has any pecuniary relationship with the company amounting to 2% or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;
  • is relative of any promoter or any person who is in the employment of the company, as a director, or as a key managerial Personnel.

OR (Alternate question to Q. No. 2)

Question 2A

2A(i) Who is a ‘Significant Beneficial Owner’ under the Companies Act, 2013 ? Is Significant Beneficial Owner required to file BEN-1 to the reporting company ?

Answer: In terms of Section 90 of the Companies Act, 2013 every individual, who acting alone or together, or through one or more persons or trust, including a trust and persons resident outside India holds beneficial interests, of not less than 25% or such other percentage as may be prescribed, in shares of a company or the right to exercise or the actual exercise of significant influence or control as per as Section 2(27) of Companies Act, 2013, over the reporting company is a significant beneficial owner.

Such an individual being the Significant beneficial Owner holding such beneficial interest is required to make a declaration to the reporting company specifying the nature of his interest & other particulars as required.

From commencement of the Companies (SBO) Amendment Rules, 2019, every SBO in a reporting company, is required to give the requisite declaration of his beneficial ownership in Form No. BEN-1 to the reporting company within 90 days from such commencement.

 

2A(ii) Can a contributory file a petition for winding up of the company ?

Answer: Section 272(1) of the Companies Act, 2013 provides that subject to the provisions of this section, a petition to the Tribunal for the winding up of a company shall be presented by, inter-alia, any contributory or contributories.

As per Section 272(2) of Companies Act, 2013, a contributory shall be entitled to present a petition for the winding up of a company, notwithstanding that he may be the holder of fully paid-up shares, or that the company may have no assets at all or may have no surplus assets left for distribution among the shareholders after the satisfaction of its liabilities, and shares in respect of which he is a contributory or some of them were either originally allotted to him or have been held by him, and registered in his name, for at least six months during the eighteen months immediately before the commencement of the winding up or have devolved on him through the death of a former holder.

 

2A(iii) IOL, a manufacturing company, issued partly convertible debentures with  6 crore few years back. The convertible option is only for 50% of the issue and debentures are redeemable in the current financial What is the quantum of Debenture Redemption Reserve (DDR) required to be created by the company now and how much should be deposited or invested by the company ?

Answer: Section 71(4) of Companies Act, 2013, read with Rule 18(7) of the Companies (Share Capital & Debentures) Rules, 2014 provides for creation of a Debenture Redemption Reserve (DRR) out of the profits of the company available for payment of dividend. The amount credited to such account shall not be utilised by the company except for the redemption of debentures.

The provisions for creation of DRR for manufacturing companies are 25% of the value of outstanding debentures issued through public issue as per present SEBI (Issue and Listing of Debt Securities) Regulations, 2008 and also 25% DRR is required in the case of privately placed debentures by listed companies. For unlisted companies issuing debentures on private placement basis, the DRR will be 25% of the value of outstanding debentures.

Every company required to create Debenture Redemption Reserve shall on or before the 30th day of April in each year, is required to invest or deposit a sum which shall not be less than 15% of the amount of debentures maturing during the current financial year ending 31st March of next year.

In case of partly convertible debentures, Debenture Redemption Reserve shall be created in respect of non- convertible portion of debenture issue in accordance with this rule.

Since, only 50% of the debentures are convertible, for the non-convertible part the DRR is required to be created. Hence, only for 3 crore worth of debentures DRR is required. Therefore, 25% of 3 crore is 75 lakhs to be created as DRR and 45 Lakhs (15%) deposited in the invested bank account or in securities, etc. during the current financial year.

 

2A(iv) ‘‘The Companies Act, 2013 attempts to maintain a balance between the rights of majority and minority ’’ Discuss.

Answer: In India, the Companies Act, 2013 attempts to maintain a balance between the rights of majority and minority shareholders by admitting in, the rule of the majority but limiting it at the same time by a number of well-defined minority rights, and thus protecting the minority shareholders as well.

The rule of Foss V. Harbottle establishes the rule of majority but it is not absolute but subject to certain exceptions and the minority shareholders are protected by

  • the common law; and
  • the provisions of the Companies Act,

Section 241 to Section 245 of Chapter XVI of the Companies Act, 2013 deals with the provisions relating to prevention of oppression and mismanagement of a company. Oppression and mismanagement of a company mean that the affairs of the company are being conducted in a manner that is oppressive and biased against the minority shareholders or any member or members of the company. To prevent the same, there are provisions for the prevention and mismanagement of a company

 

2A(v) Reels India is a wholly owned subsidiary of Wheels India Ltd. The auditor of Wheels India Ltd. has intimated the Board of directors that the company will not be required to prepare consolidated financial statements if provisions of section 129, Companies Act, 2013 are complied with. As a company secretary give your comments in this regard. (3 marks each)

 

Answer: The consolidation of financial statements of the company shall be made in accordance with the provisions of Schedule III of the Act and the applicable accounting standards:

Provided that in case of a company covered under sub-section (3) of section 129 of Companies Act, 2013 which is not required to prepare consolidated financial statements under the Accounting Standards, it shall be sufficient if the company complies with provisions on consolidated financial statements provided in Schedule III of the Act.

The contention of the Auditor is justifiable as Section 129 (3) provides for not preparing the consolidated financial statement if conditions are fulfilled. Which according to second proviso to rule 6 are as under:

Provided further that nothing in this rule shall apply in respect of preparation of consolidated financial statements by a company if it meets the following conditions:-

  • it is a wholly-owned subsidiary, or is a partially-owned subsidiary of another company and all its other members, including those not otherwise entitled to vote, having been intimated in writing and for which the proof of delivery of such intimation is available with the company, do not object to the company not presenting consolidated financial statements;
  • it is a company whose securities are not listed or are not in the process of listing on any stock exchange, whether in India or outside India; and
  • its ultimate or any intermediate holding company files consolidated financial statements with the Registrar which are in compliance with the applicable Accounting standards.

Question 3

3(a) The share capital of Raney is `30 crore. ‘Russel’ is appointed as the managing director of the company, the company wants to compensate him by issue of shares for supplying technical know-how without any cost. In this context, answer the following :

  • Whether the company is allowed to allot such shares ?
  • Is approval of shareholders required for issuing such shares ?
  • If found eligible to allot such shares, what will be the quantum (value) of shares that can be allotted ?
  • Can Russel sell such allotted shares in the market ?
  • Will the amount that he receives on sale of his shares be considered a part of his remuneration ? (1×5=5 marks each)

Answer:

  •  Yes, Section 54 of Companies Act, 2013 permits issue of sweat equity shares to employees or directors in recognition of their contribution for providing know- how as aforesaid. As the contribution made by employees/directors results in increased profits to the company for a number of years, sweat equity shares provide a new form of adequate return.
  • Yes, Rule 8(1) of Companies (Share capital and Debentures) Rules, 2014 states the special resolution shall be passed authorizing the issue of sweat equity shares and shall be valid for making the allotment within a period of not more than twelve months from the date of passing of the special
  • Rule 8(4) of Companies (Share capital and Debentures) Rules, 2014 states that the company shall not issue sweat equity shares for more than fifteen percent of the existing paid up equity share capital in a year or shares of the issue value of rupees five crore, whichever is higher, The issuance of sweat equity shares in the company shall not exceed twenty five percent, of the paid up equity capital of the company at any time. As the paid-up capital of the company is Rs.30 crore. Hence he can be allotted with 15% of existing equity i.e. (15% of 30 crore up to Rs. 4.5 Crore) value of shares or Rs. 5 crore whichever is higher.
  • Rule 8(5) of Companies (Share capital and Debentures) Rules, 2014 says that the sweat equity shares issued to directors or employees shall be locked/non- transferrable for a period of three years from the date of allotment and the fact that the share certificates are under lock-in and the period of expiry of lock-in shall be stamped in bold or mentioned in any other prominent manner on the share And hence the sweat equity shares allotted to Russel can be sold in the market only after the expiry of the lock-in period of three years from the date of allotment.
  • Yes, Rule 8(10) of Companies (Share capital and Debentures) Rules, 2014 states that the amount of sweat equity shares issued shall be treated as part of managerial remuneration for the purposes of sections 197 and 198 of the Act, if the following conditions are fulfilled namely-
    • the sweat equity shares are issued to any director or manager; and
    • they are issued for consideration other than cash, which does not take the form of an asset which can be carried to the balance sheet of the company in accordance with the applicable accounting standards.

 

3(b) Amitabh is a director in PQR Overseas Trading The company’s name has recently been struck off from the register of companies by the Registrar. He does not hold directorship in any other company. Therefore, Amitabh applied to the Registrar for cancellation of his DIN. However, the application was rejected by the Registrar. Is the rejection of application correct in your opinion ?(5 marks)

Answer: Rule 11 of Companies (Appointment and Qualification of Directors) Rules, 2014 allows cancellation or surrender or deactivation of DIN under the following cases-

  • If DIN is found to be duplicated in respect of the same person provided the data related to both the DIN shall be merged with the validly retained number;
  • If it is obtained in a wrongful manner or by fraudulent means
  • Death of the concerned individual
  • Concerned individual has been declared as a person of unsound mind by a competent court
  • Concerned individual has been adjudicated an insolvent
  • On application made in Form DIR-5 by the DIN holder to surrender DIN along with declaration that he has never been appointed as director in any company & said DIN has never been used for filing of any document with any

The issue raised in question is not covered in any of the above conditions. As Amitabh was appointed as a director using his DIN (and presumably filed e-forms using the DIN), such DIN shall not be deactivated and DIR-5 cannot be filed even though the name of the company has been struck off and he does not hold directorship in any other Company. Hence, the action of the Registrar is correct.

3(c) Ram Singh is a shareholder of Alexandra India The Board of directors of the company are of the view that the conduct of Ram Singh has been detrimental to the interest of the company. Further, the Board also noted that Ram Singh is director in a company which is a competitor company of Alexandra India Ltd. The Articles of Association of Alexandra India Ltd. permit expulsion of members.

The Board unanimously decided to expel Ram Singh from the company. Discuss the relevant provisions of Companies Act, 2013 in this regard. If Ram Singh files a case against the Board whether he will win the case ? (5 marks)

Answer: A controversy has arisen as to whether a public limited company had powers to insert an article in its Articles of Association relating to expulsion of a member by the Board of Directors of the company where the directors were of the view that the activities or conduct of such a member was detrimental to the interests of the company.

The Department of Company Affairs (now, Ministry of Corporate 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 reason being that such a provision will be against the provisions of the Companies Act relating to the rights of a member in a company, the powers of the Central Government as an appellate authority under Section 111 of the Act and the powers of the Court under Sections 107, 395 and 397 of the Companies Act, 1956.

These sections correspond to sections 38, 58, 48, 235 & 241 of the Companies Act, 2013 respectively having the same impact as earlier provisions.

Further, according to Section 6 of the Companies Act, 2013, the Act shall override the Memorandum and Articles of Association and any provisions contained in these documents repugnant to the provisions of the Companies Act, 2013 shall be void.

Therefore, any assumption of the powers by the Board of Directors to expel a member by alteration of Articles of Association shall be illegal and void.

The Supreme Court in the case of Bajaj Auto Ltd. v. N.K. Firodia [1971] 41 Com Cases 1 has laid down the law as to the conditions on the basis of which directors could refuse a person to be admitted as a member of the company. The principles laid down by the Supreme Court in this case, even though pertain to the refusal by a company to the admission of a person as a member of the company, are applicable even with greater force to a case of expulsion of an existing member. As, under Article 141 of the Constitution, the law declared by the Supreme Court is binding on all courts within the territory of India, any provision pertaining to the expulsion of a member by the management of a company which is against the law as laid down by the Supreme Court will be illegal and ultra vires. In the light of the aforesaid position, it is clarified that assumption by the Board of directors of a company of any power to expel a member by amending its articles of association is illegal and void.

If Ram Singh a files a suit against the company or the directors he will certainly win the case, as expulsion of a member is illegal and void as per the Companies Act 2013.

 

CS Executive Guideline Answers for Company Law Part-II

Question 4

4(a) Rajesh Gawda is a director of XYZ Ltd. having a paid up share capital of ` 11 crore. The company has granted a loan of ` 2 crore to Rajesh Gawda. The company has a borrowing of ` 15 crore from HDFC Bank. The company secretary informs the company that the loan to the director is in violation of the provisions of the Companies Act, 2013. Justify the claim of the company secretary.(5 marks)

Answer: According to section 185(1) of the Companies Act, 2013, no company shall, directly or indirectly, advance any loan, including any loan represented by a book debt to, or give any guarantee or provide any security in connection with any loan taken by,—

  • any director of company, or of a company which is its holding company or any partner or relative of any such director; or
  • any firm in which any such director or relative is a

Further, vide Exemption Notification dated 05th June, 2015, Section 185 of Companies Act, 2013 shall not apply to Private Company meeting the following conditions:

  • In whose share capital no other body corporate has invested any money;
  • If the borrowings of such company from banks or financial institutions or anybody corporate is less than twice of its paid up share capital or fifty Crore rupees, whichever is lower; and
  • Such a company has not defaulted in repayment of such borrowings subsisting at the time of making transactions under this

Now, considering that the Paid up Capital of the Company is 11 Crores and borrowing from HDFC Bank is Rs. 15 Crore, it can be seen that the amount of borrowings by the company from Banks (Rs. 15 Crores) is less than twice the amount of paid up capital (i.e. 2 X 11 Cr. = 22 Crores). So as per exemptions conditions available to private company borrowing from the bank is less than 2 times of Paid up Capital of the Company.

To avail exemption, the company need to fulfill all conditions as provided in the Exemption Notification. Hence, if all the above conditions are fulfilled, the loan to Rajesh Gowda is exempted under section 185 and the company is not in violations of the provisions of the Companies Act, 2013 and the claim of CS is not justified.

 

4(b) Last Annual General Meeting (AGM) of one of the top 100 listed companies was held on 25th May, 2018 pertaining to the FY 20017-18. The Board of directors of the company is planning to hold this year’s AGM at a possible later date due to technical issues in finalisation of accounts. Give your suggestions about the date before which the AGM should be held in reference to relevant provisions of the Companies Act, (5 marks)

Answer: Section 96 of the Companies Act, 2013 provides that every company, other than a one person company is required to hold an annual general meeting every year.

Secretarial Standards on General Meetings (SS-2) provides that the Board shall, every year, convene or authorize convening of a meeting of its members called the Annual General Meeting to transact items of ordinary business specifically required to be transacted at an annual general meeting as well as special business, if any. If the Board fails to convene its Annual General Meeting in any year, any Member of the company may approach the prescribed authority, which may then direct the calling of the Annual General Meeting of the company.

Following are the key provisions regarding the holding of an Annual General Meeting:

  1. Annual general meeting should be held once in each calendar
  2. First annual general meeting of the company should be held within 9 months from the closing of the first financial Hence it shall not be necessary for the company to hold any annual general meeting in the year of its incorporation.
  3. Subsequent annual general meeting of the company should be held within 6 months from the date of closing of the relevant financial
  4. The gap between two annual general meetings shall not exceed 15

Additionally for listed entities SEBI vide recent notification provided that the top 100 listed entities by market capitalization, determined as on March 31st of every financial year, shall hold their annual general meetings within a period of five months from the date of closing of the financial year. The top 100 listed entities shall provide one-way live webcast of the proceedings of the annual general meetings.

Explanation : The top 100 entities shall be determined on the basis of market capitalization, as at the end of the immediate previous financial year. (Notified on 9th May, 2018 effective from April 1, 2019)

Hence for the financial year 2018-19, the meeting should/ought to have been held within earlier of the two dates given below i.e.:

Before 31.8.2019 – within 5 months from the close of financial year 2018-19, OR Before 24.8.2019 – lapse of 15 months from date of last AGM

Hence, AGM ought to have been held before 24th August, 2019.

However, according to third proviso to section 96(1) of Companies Act, 2013, on an application from the company, the Registrar may, for any special reason, extend the time within which any annual general meeting, other than the first annual general meeting, shall be held, by a period of not exceeding three months. The company may apply to the Registrar for extension for holding AGM, justifying it as a special reason based on the facts of the case.

Accordingly, the company will be advised to hold its meeting on or before 24.08.2019 or such extended period, as may be permitted by the Registrar on an application by the company.

 

4(c) Moon Oil Exploration (MOEL) was incorporated on 1st June 2007 and the company made a considerable amount of profit in the past years :

Financial Year                      Net Profit `

2016 –17                                 25 Crore

2017–18                                  10 Crore

2018–19                                  12 Crore

  • In the current financial year 2019-20, the company wants to contribute to a political How much can it contribute ?
  • If MOEL had contributed to political parties earlier to the year 2017, how much could it have contributed at the maximum during those years ?
  • The Chairman of MOEL directed its account manager to pay a political party’s office an amount of `50 Lakh by cheque as part payment to the party,can he do so ?
  • The Board of directors authorised a payment to the National Defence Fund too but wanted to not show it in profit and loss Is it possible to do so ?
  • A sum of `2 lakh was spent by MOEL on an advertisement in a tract published by a political party ? How it is to be treated in the accounts of the company? (1×5=5 marks)

Answer: According to Section 182 of the Companies Act, 2013, a company, other than a government company and a Company which has been in existence for less than three financial years, may contribute any amount directly or indirectly to any political party.

The Finance Act, 2017 amended section 182 of the Companies Act, 2013, accordingly the limit on the maximum amount that can be contributed by a company to a political party has been removed. Hence a company now can contribute any percentage without any limit.

  • Further, prior to the amendment to Section 182 by the Finance Act, 2017, the limit of contribution to political parties was 7.5% of the average net profits during the three immediately preceding financial years.

Hence, earlier to 2017, it can have contributed only 7.5% of average net profits at the maximum.

  • As per Section 182(1) of the Companies Act, 2013 the contribution must be authorised by board in its meeting by resolution and such resolution shall be deemed to be the justification in law for making of such

As per Section 182(3A) of the Companies Act, 2013, further, contribution under this section shall not be made except by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account.

Accordingly, the chairman cannot direct the payment to be made unless he is duly authorised by a Board resolution passed at a meeting and the payment is to be made through account payee cheque/Bank Draft or through electronic clearing system only.

  • As per Section 183 of the Companies Act, 2013 the Board is authorised to contribute such amount as it thinks fit to the National Defence Fund or any other fund approved by the Government for the purpose of National

Further, the company is required to disclose in its profit and loss account the total amount or amounts contributed by it during the financial year.

Accordingly, it is not possible to avoid the disclosure in the Profit and loss account about the amount of the contribution made to the National Defence Fund.

  • If the expenditure incurred on advertisement in any publication souvenir, brochure, tract, pamphlet or the like is deemed as political contribution if such publication is by or on behalf of political party or if not, then for the advantage to such political party for a political

Hence, this amount to be treated as political contribution and shown in profit and loss account under the head political contribution.

 

4(d) JKJ has 10 directors on its Board. A Board meeting was convened on 19- 10-2019 in which two of the directors participated in-person and one director through video conferencing. Two directors were interested in the agenda and hence, did not participate in the meeting. The auditor claimed that the quorum was not present for the meeting to be valid. Do you agree with the auditor ? Justify your answer in reference to provisions of the Companies Act, 2013. (5 marks)

Answer: As per Section 174 of Companies Act, 2013 the quorum for Board Meeting Requirement is as under:

  • Quorum for Board Meeting is 1/3rd of its Total strength or two directors, whichever is higher
  • A Director participating through video conferencing/audio visual modes will also be counted for quorum
  • Any fraction of a member will be rounded off as one
  • “Total strength” shall not include directors whose places are vacant

In JKJ Board meeting held on 19.10.19, the quorum is:

Total Strength = 10*1/3 is = 3.33 So, it is rounded of to 4 Directors. Hence, Directors required for Quorum is 4 Directors.

Since two directors attended in person and one director through video conferencing there was an absence of quorum. The claim of the Auditor is correct.

Question 5

5(a) Jackson is a prospective candidate for the post of Managing Director of Tirubuvani Sugars Ltd. Unfortunately, his proposed appointment could not satisfy the conditions of Schedule V of the Companies Act, 2013. Discuss if any other option is available with the company to appoint him as the Managing Director of the (4 marks)

Answer: In terms of Section 196 and 201 of the Companies Act, 2013 in case the provisions of Schedule V of the Companies Act, 2013 are not fulfilled by company, w.r.t. appointment of a Managing Director, the terms and conditions of such appointment and remuneration payable be approved by the Board of Directors at a meeting which shall be subject to approval by a resolution at the next general meeting of the company and by the Central Government. Further an application seeking approval to the appointment of a managing director as aforesaid shall be made to the Central Government, in E-Form No. MR.2, within a period of ninety days from the date of such appointment.

As per Section 201 of Companies Act, 2013, before such application is made to the Central Government, there shall be issued by or on behalf of the company a general notice to the members indicating nature of application proposed to be made. The general notice shall be published in at least once in a newspaper in the principal language of the district in which, registered office of the Company is situated and at least once in English in an English newspaper circulating in that district.

The copies of the notices, together with a certificate by the company as to the due publication therefore, shall be attached to the application.

Therefore, Tirubuvani Sugars Limited will file an application seeking approval to the appointment of Jackson as Managing Director to the Central Government in e-Form No. MR-2.

5(b) A newly joined trainee of the secretarial department would like to know details of information to be entered in respect of resolution passed through postal ballot by the company. Advise (4 marks)

Answer: As per Section 110 of Companies Act, 2013 and Rule 22(10) of the Companies (Management and Administration) Rules, 2014, every company which is required to or which proposes to get any resolution passed through postal ballot should maintain a separate register for each postal ballot to record the assent or dissent received through postal ballot.

The scrutinizer shall maintain a register either manually or electronically to record their assent or dissent received, mentioning the particulars of name, address, folio number or client ID of the shareholder, number of shares held by them, nominal value of such shares, whether the shares have differential voting rights, if any, details of postal ballots which are received in defaced or mutilated form and postal ballot forms which are invalid.

Entries in the register should be made immediately after the opening of postal ballots. Separate folios should be maintained for each resolution passed through postal ballot. The register should be kept at the registered office of the company after the Scrutinizer has submitted his report.

The register, postal ballot forms and all other related records are not available for inspection.

All postal ballot forms should be authenticated by the Scrutinizer. Entries in the register should be authenticated by the Scrutinizer.

The register, postal ballot forms and all other related records should be kept in the safe custody of the Scrutinizer till the Chairman signs the Minutes Book in which the result of the voting by postal ballot is recorded.

The secretary of the company, managing director or whole-time director or the director so authorised and the Scrutinizer should make adequate arrangements for safe custody of the register and proof of dispatch of Notices and all envelopes received by post or by hand, until the Scrutinizer submits his report to the Chairman.

The Scrutinizer should return the postal ballot forms and any related documents or records to the designated person of the company for safekeeping until the resolution has been implemented.

The Scrutinizer’s report and office copies of the notices should be preserved in good order until the resolution has been implemented or for a period of 10 years, whichever is later.

 

5(c) ‘A’, a shareholder, appointed ‘X’ as his proxy for the general meeting of a The proxy forms were lodged 50 hours before the meeting. The Chairman of the meeting refused to accept the proxy stating that the proxies should be lodged at least 70 hours before the beginning of the meeting as per articles of the company. However, despite Chairman’s refusal proxy participated in the meeting. Meanwhile ‘A’ also rushed to attend the meeting and both ‘A’ and ‘X’ voted on a particular resolution of the meeting. On the basis of above facts, answer the following :

  • Can ‘X’ compel the Chairman to admit the proxy ?
  • Since both ‘A’ and ‘X’ voted, the Chairman invalidated both the Discuss whether the Chairman acted as per the provisions of the Companies Act, 2013. (2×2=4 marks)

Answer: Section 105(4) of Companies Act, 2013 specifies the time limit for deposit of proxy forms. The instrument appointing the proxy must be deposited with the company, 48 hours before the Any provision contained in the articles, requiring a longer period than 48 hours shall have effect as if a period of 48 hours had been specified.

Para 6.6.1 of SS-2 provides that proxies shall be deposited with the company either in person or through post not later than forty-eight hours before the commencement of the Meeting in relation to which they are deposited and a Proxy shall be accepted even on a holiday if the last date by which it could be accepted is a holiday.

Articles of the company cannot prescribe a longer than 48 hours for lodging the proxy forms. And so the refusal of the chairman is void. X can compel the chairman to accept the Proxy.

  • If after appointment of proxy, the member himself attends the meeting, it amounts to automatic revocation of proxy. But once the proxy has voted, it cannot be

Since Mr. A i.e. a member himself attended a meeting and voted on resolution, it will amount to revocation of proxy. Thus, any vote put by Mr. X i.e. proxy shall be invalid.

Chairman cannot invalidate both the votes. Vote of the shareholder has to be considered and of the proxy should be invalidated. Decision of the Chairman is void.

 

5(d) ABC & Associates is an audit firm with partners A, B and C. The firm’s tenure as statutory auditor in M has expired under Companies Act, 2013. M Ltd. is a listed company. XY & Co. another audit firm is appointed as auditor of M Ltd. for the subsequent year. B joins XY & Co. as partner, 4 months after it was appointed as statutory auditor of M Ltd. Comment with reference to the provisions of the Companies Act, 20l3. (4 marks)

Answer: Section 139(2) of the Companies Act, 2013 provides that as on date of appointment of Auditors, no audit firm having a common partner or partners to the other audit firm whose tenure has expired in a company immediately preceding the financial year shall be appointed as auditor of the same company for a period of five years.

Here M Ltd is a listed entity and thus rotational provisions are applicable. B is a partner in ABC & associates whose tenure as statutory auditor in M Ltd has expired. He joined XY &Co. as partner 4 months after XY & Co. was appointed as statutory auditor of M Ltd.

It may be noted that there should not be a common partner in firms as on date of appointment. In the given case, B has joined XY &Co. after 4 months of its appointment as statutory auditor of M Ltd. Thus, XY &Co. can continue as statutory auditor of M Ltd for the remaining term after B joined them as Partner.

 

5(e) A company passed a special resolution in its general meeting for grant of loan to another body corporate in excess of limits specified in section 186(2). However, one of the directors contended that prior approval of their financial institution is also required for such Explain whether the contention of the director is acceptable. (4 marks)

Answer: Section 186(5) of Companies Act, 2013 provides that no investment shall be made or loan or guarantee or security given by the company unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present at the meeting and the prior approval of the public financial institution concerned where any term loan is subsisting, is obtained.

However, the prior approval of Public Financial Institution (FI) shall not be required where the aggregate of loans and investments so far made, the amounts for which guarantee or security so far provided to or in all other bodies corporate, along with the investments, loans, guarantee or security proposed to be made or given does not exceed the limit of 60% of its paid-up share capital, free reserves and securities premium account or 100% of its free reserves and securities premium account, whichever is more and there is no default in repayment of loan installments or payment of interest thereon as per the terms and conditions of such loan to the public financial institution.

In the given case the Company is passing the special resolution under Section 186(2) of Companies Act, 2013, indicating thereby that the proposed loan together with the loans already given is already in excess of the limits given under Section 186 (2) of Companies Act, 2013.

Hence the contention of the director is correct as the company aggregate of loans and investments so far made, exceed the limit under Section 186(2) of Companies Act, 2013.

However, if the aggregate loans/ investments are well within the limits approval and the company is passing the Special Resolution either in terms of its Article of Association or voluntarily only due to some other commercial requirement other than Section 186(2) of Companies Act, 2013, then the prior approval from Financial Institution will not be required.

OR (Alternate question to Q. No. 5)

Question 5A

5A(i) Destinations Ltd. is a listed company with paid-up share capital of ` 40 crore, turnover ` 200 crore but having a loss of ` 10 crore for the year ended 31 March,2018.The woman director in the Board of the company resigned on 1 October, 2018. The last Board meeting was held on 25th September, 2018. The Board is likely to meet next on 15th January, 2019. Lalita, aged 30 years, has conveyed her interest to be associated with the company as a woman director. Discuss if any woman director is required to fill the vacancy and if so, when the appointed should be made as per the provisions of the Companies Act, 2013 ? (4 marks)

Answer: Second Proviso to section 149 of Companies Act, 2013 provides that such class or classes of companies as may be prescribed in Rule 3 of Companies (Appointment and Qualification of Directors) Rules, 2014, provides that the following class of companies shall appoint at least one woman director-

  • every listed company;
  • every other public company having:-
    • paid-up share capital of one hundred Crore rupees or more; or
    • turn over of three hundred Crore rupees or

However, any intermittent vacancy of a woman director shall be filled-up by the Board at the earliest but not later than immediate next Board meeting or three months from the date of such vacancy, whichever is later.

In the given case, as Destinations Ltd is a listed company hence, the company is required to appoint a woman director in its board irrespective of paid up capital, turnover and loss amounts.

The appointment of Ms. Lalita as woman director is to be made at the earliest but not later than immediate next board meeting i.e. 15th January, 2019 or 3 months from date of cause of vacancy i.e. 01st October, 2018; whichever is later, that means the appointment shall be made by 15th January, 2019.

 

5A(ii) Warner Ltd. is an Indian company with a net profit of ` 4, 7, 6 and 7 crores respectively in the last four Net profit for each of last four years included a dividend of ` 1 crore received from WB Ltd. which is an Indian company. Discuss whether Warner Ltd. is required to spend on CSR activities ? If yes, how much it should spend ? If no, state the reasons for it. (4 marks)

Answer: As per section 135 of the Companies Act 2013, the CSR provision is applicable to companies which fulfills any of the following criteria during the immediately preceding financial year:

  • Companies having net worth of rupees five hundred Crore or more, or
  • Companies having turnover of rupees one thousand Crore or more or
  • Companies having a net profit of rupees five Crore or more

Explanation to section 135 provides that for the purposes of this section “net profit” shall not include such sums as may be prescribed, and shall be calculated in accordance with the provisions of section 198.

The Section 198 of the Companies Act, 2013 read with CSR Rules have clarified the manner in which a company’s net profit will be computed to determine if it fits into the ‘spending’ norm. In order to determine the ‘net profit’, dividend income received from another Indian company (which are duly covered under and complying with the provisions of Section 135 of the Companies Act, 2013) or profits made by the company from its overseas branches have been excluded. Moreover, the 2% CSR is computed as 2% of the average net profits made by the company during the preceding three financial years.

Here, assuming that WB Ltd is duly covered under Section 135 of Companies Act, 2013 and is also complying with the said provisions, the dividend received by Warner Ltd from WB Ltd shall be deducted from the Net Profit of Warner Ltd so as to compute “net profit” & “average net profit” for the purpose of Section 135 of Companies Act, 2013.

Hence, based on above assumption, Warner Ltd’s net profit shall be considered as rupees 7 Crore minus 1 Crore (dividend from another Indian company) = rupees 6 Crore in the preceding financial year, thus making it liable to comply with Section 135. It will therefore be required to spend on CSR Activities

The CSR amount to be spent/created is 2% of Rupees 6 crores + 5 crores + 6 crores

= 17/3 = rupees 5.67 Crore (average profit of the preceding three years) i.e. 2% of Rs. 5.67 Crore being Rs. 11.33 Lakhs.

 

5A(iii) A group of shareholders holding 13% of the total paid-up share capital of Lala Investments Ltd. requested the Board of directors of the company to convene the Extraordinary General Meeting (EGM) by their letter dated 5th October, 201 9, to discuss the matters set out in their requisition to the The Board of directors did not act on their request until end of October 2019. As a practicing Company Secretary what would you suggest as to the further course of action and the procedure to be followed in this regard ? (4 marks)

Answer: Section 100(2)(a) of the Companies Act, 2013 provides that the Board shall, at the requisition made by in the case of a company having a share capital, such number of members who hold, on the date of the receipt of the requisition, not less than one-tenth of such of the paid-up share capital of the company as on that date carries the right of voting call an extraordinary general meeting of the company within twenty-one days from the date of receipt of a valid requisition.

The requisition made under section 100(2) shall set out the matters for the consideration of which the meeting is to be called and shall be signed by the requisitionists and sent to the registered office of the company.

If the Board does not, within twenty-one days from the date of receipt of a valid requisition in regard to any matter, proceed to call a meeting for the consideration of that matter on a day not later than forty-five days from the date of receipt of such requisition, the meeting may be called and held by the requisiteness themselves within a period of three months from the date of the requisition.

The meeting by the requisitionists shall be called and held in the same manner in which the meeting is called and held by the Board, Accordingly, the requisitionists members holding more than 10% of the paid-up share capital, may proceed to convene and hold the meeting themselves within 3 months from 5th October 2019, being the date of requisition.

Rule 17 of the Companies (Management and Administration) Rules, 2014 provides the following for Calling of Extraordinary general meeting by requistionists:

  • The members may requisition convening of an extraordinary general meeting in accordance with sub-section (4) of section 100, by providing such requisition in writing or through electronic mode at least clear twenty-one days prior to the proposed date of such extraordinary general
  • The notice shall specify the place, date, day and hour of the meeting and shall contain the business to be transacted at the

Explanation.– For the purposes of this sub-rule, it is here by clarified that requistionists should convene meeting at Registered office or in the same city or town where Registered office is situated and such meeting should be convened on any day except national holiday.

  • If the resolution is to be proposed as a special resolution, the notice shall be given as required by sub-section (2) of section
  • The notice shall be signed by all the requistionists or by a requistionists duly authorised in writing by all other requistionists on their behalf or by sending an electronic request attaching therewith a scanned copy of such duly signed requisition.
  • No explanatory statement as required under section 102 need be annexed to the notice of an extraordinary general meeting convened by the requistionists and the requistionists may disclose the reasons for the resolution(s) which they propose to move at the
  • The notice of the meeting shall be given to those members whose names appear in the Register of members of the company within three days on which the requistionists deposit with the Company a valid requisition for calling an extraordinary general
  • Where the meeting is not convened, the requistionists shall have a right to receive list of members together with their registered address and number of shares held and the company concerned is bound to give a list of members together with their registered address made as on twenty first day from the date of receipt of valid requisition together with such changes, if any, before the expiry of the forty-five days from the date of receipt of a valid
  • The notice of the meeting shall be given by speed post or registered post or through electronic Any accidental omission to give notice to, or the non-receipt of such notice by, any member shall not invalidate the proceedings of the meeting.

 

5A(iv) You are a company secretary in a company. The Board of Directors want to know the details that should be entered in the Register of Renewed and Duplicate share certificates and the period for which such register should be Clarify the Board in this regard. (4 marks)

Answer: As per Section 46 of the Companies Act, 2013 read with Rule 6 of Companies (Share Capital and Debentures) Rules, 2014, every company with a share capital should, from the date of its registration, maintain a register of renewed and duplicate certificates.

The word ‘renewed’ includes consolidation and sub-division of shares and issue of certificate in lieu thereof.

Particulars of every share certificate issued shall be recorded in a Register of Renewed and Duplicate Share Certificates. Such register shall be maintained in Form No. SH-2 indicating against the name(s) of the person(s) to whom the certificate is issued, the number and date of issue of the share certificate in lieu of which the new certificate is issued, and the necessary changes indicated in the Register of Members by suitable cross-references in the “Remarks” column. Such register shall be kept at the registered office of the company or at such other place where the Register of Members is kept.

The register shall be preserved permanently and shall be kept in the custody of the Company Secretary of the company or any other person authorized by the Board for the purpose. All entries made in the Register of Renewed and Duplicate Share Certificates shall be authenticated by the company secretary or such other person as may be authorized by the Board for purposes of sealing and signing the share certificate. The register is not open for inspection.

 

5A(v) RPK Ltd. is an unlisted company having ` 9 crore as paid up capital and ` 52 crore as long term The directors of the company would like to know from you the answers for the following questions:

  • Would the company be liable to constitute an audit committee ?
  • If the company is listed after a fresh issue of shares to the tune of ` 50 crore, in such a situation, would the company be liable to constitute Audit Committee?
  • What is the quorum for meetings and number of meetings to be held in a year by the audit committee ? (1+1+2=4 marks)

Answer: Section 177(1) of the Companies Act, 2013 read with Rule 6 of the Companies (Meetings of the Board and its Powers) Rules, 2014, provides that the Board of directors of following companies are required to constitute an Audit Committee of the Board-

    • Every listed Public companies;
    • All public companies with a paid up capital of 10 Crore rupees or more;
    • All public companies having turnover of 100 Crore rupees or more;
    • All public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding 50 Crore rupees or

Accordingly RPK Ltd. is liable to constitute the audit committee as its long term loan is more than the prescribed limit of Rs. 50 Crore.

  • Yes, the company is liable to constitute an audit committee as it will then become a listed
  • Para 2.2 of the Secretarial Standard-1 provides that Committee shall meet as often as necessary subject to the minimum number and frequency prescribed by any law or any authority or as stipulated by the Para 3.5 of the Secretarial Standard -1, unless otherwise stipulated in the Act or the Articles or under any other law, the Quorum for meeting of any Committee constituted by the Board shall be as specified by the Board. If no such Quorum is specified, the presence of all the members of any such Committee is necessary to form the Quorum.

Accordingly, RPK Ltd. In case of unlisted public companies, minimum number of meetings and quorum may be decide by the Board of Directors.

 

CS Executive Guideline Answers for Company Law Part-III

 Question 6

6(a) CS Rohan, a company secretary in practice availed loan against his personal investments from a bank. He issued two cheques towards repayment of the said loan as per terms of sanction of Both the cheques were returned by the bank with remarks ‘returned due to insufficient funds’. Comment on the facts given with reference to provisions of the Company Secretaries Act, 1980.

Answer: A Company Secretary is expected to maintain highest standards of integrity even in his personal affairs and any deviation from these standards even in his non-professional work would expose him to disciplinary action.

A member of the Institute is subject to disciplinary action under section 21 of the Company Secretaries Act, 1980 if he is found guilty of any professional or other misconduct.

As per Clause 2 of Part IV of the First schedule to the Company Secretaries Act, 1980, a member of the Institute whether in practice or not shall be deemed to be guilty of other misconduct if in the opinion of the council brings disrepute to the profession or the Institute as a result of his action whether or not related to the professional work.

The question whether a particular act or omission constitutes other misconduct should be based on facts and circumstances of each case.

Further, Part III of the Second Schedule to the Company Secretaries Act, 1980 provides that, a member of the Institute whether in practice or not shall be deemed to be guilty of other misconduct if he is held guilty by any civil or criminal court for an offence which is punishable with imprisonment for a term exceeding six months.

Under Negotiable Instruments Act, 1881 where any cheque drawn by a person for the discharge of any liability is returned by the bank unpaid either for insufficiency of funds or the cheque amount exceeds the arrangements made by the drawer of the cheque the drawer of the cheque shall be deemed to have committed an offence.

In the given case the cheque was dishonored with the remark insufficient funds. Therefore, CS Rohan may be liable for misconduct under Clause 2 of Part IV of the First Schedule of the Company Secretaries Act, 1980, if the Council is of the opinion that the offence under Negotiable Instruments Act, 1881 is due to negligence or willful act of CS Rohan.

 

6(b) A middle aged practicing company secretary (PCS) is considering to start a mega professional Name the professional bodies with which the PCS can have partnership as per the Company Secretaries Regulations, 1982.(5 marks each)

 

Answer: Mega Firm can be described as a Partnership firm with more than twenty-five partners. A firm which provides core professional service of a particular profession along with the allied and ancillary services with equal competence under one roof is a multidisciplinary firm. For example, company and corporate law is core for company secretaries, however, they can acquire expertise in any other area like direct-indirect taxation, labour laws, economic laws, finance, accounting, insurance, international business and IPRs and they may be in position to provide single window business solutions.

Regulation 168B of Company Secretaries Regulations, 1982, which has introduced the concept of multi-disciplinary firms or mega firms, determines the membership of professional body for partnership. Accordingly for the purposes of entering into partnership under clauses (4) and (5) of Part I of the First Schedule of the Company Secretaries Act, 1980, a person shall be a member of any of the following professional bodies, namely:-

  • The Institute of Chartered Accountants of India established under the Chartered Accountants Act, 1949 (No. 38 of 1949);
  • The Institute of Cost and Works Accountants of India established under the Cost and Works Accountants Act, 1959 (No.23 of 1959);
  • Bar Council of India established under the Advocates Act, 1961 (No. 25 of 1961);
  • The Institute of Engineers or Engineering from a University established by law or an institution recognized by law;
  • The Indian Institute of Architects established under the Architects Act, 1972 (No. 20 of 1972);
  • The Institute of Actuaries of India established, under the Actuaries Act, 2006 (No. 35 of 2006);
  • Professional bodies or institutions outside India whose qualifications relating to Company Secretary recognized by the Council under Sub-section (2) of Section 38 of the

Therefore, the middle aged Practicing Company Secretary, who is considering to start a mega professional firm can enter into partnership with the member(s) of any of the above professional bodies which will help him to cater to the bigger assignments and meet the needs of clients and assure timely and quality services to them.

 

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