CS Executive Guideline Answers for Setting up Business Entities and Closure

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cs executive guideline answers setting up business entities & closure

CS Executive Guideline Answers for Setting up Business Entities and Closure PART A

Question 1

1(a) Bindu Mediatech Private is having paid-up capital of ` 40 lakh, its Securities Premium Account is ` 30 lakh and its free reserves are ` 30 lakh. The company has accepted `95 lakh as loans from its members and term loan from a scheduled bank to the extent of `75 lakh. State whether the company can accept loans/deposits from its members. Is there any maximum limit upto which the company can accept as loan/deposit from its members ? Discuss the applicability of exemptions to the Private Ltd. Company from some of the provisions of Section 73 of the Companies Act, 2013. (Assume the Company has not made any defaults in loan repayments). (5 marks)

Answer 1(a): The Company has accepted a term loan from a scheduled bank of Rs.75 lakhs.

However, under Rule 2(1)(c) of Companies (Acceptance of Deposits) Rules, 2014, it is an exempted deposit.

MCA has provided certain exemptions to private limited companies for accepting loans/deposits from its members. Accordingly, clause (a) to (e) of Sub-section 2 of Section 73 of the Companies Act, 2013 shall not apply to the following private companies:

• which accept money not exceeding 100 % of the paid-up capital and free reserves and securities premium.
• start-up company for 5 years from its incorporation.
• a private company which fulfils the following conditions:
  • which is not an associate or a subsidiary of any other company,
  • if the borrowings of such a company is less than twice of its paid-up share capital or rupees fifty crores, whichever is less; and
  • such company has not defaulted in repayment of such borrowings subsisting at the time of accepting of deposits.

Provided that the company referred to in clause (i), (ii) or (iii) above shall file the details of monies accepted to the registrar in such manner as may be specified.

In this case, Bindu Mediatech Private Limited, is having a paid-up share capital of Rs.40 lakh, Free Reserves of Rs.30 lakh and share premium of Rs.30 lakh. Hence, the company can accept loans upto Rs.100 lakh. Since the company has already accepted Rs.95 lakh as loans from its members it can further accept Rs.5 lakh from its members as loan/deposits.

1(b) An unlisted Public Ltd. Company is having 220 members, 5 directors and is having public deposits of ` 5 crores and shareholders deposits of ` 3 crores (paid-up capital is `1 crore and free reserves `1 crore and Bank Loan ` 2 crores) is proposing to convert it into a Private Company. Mention conditions to be satisfied before conversion of the Company into Private Ltd. Also list out important procedures to be complied for such conversion. (5 marks)

Answer 1(b): Pre-conditions to be examined for conversion of a public company into a private company are as under:

• members to be reduced below 200 (presently 220)
• public deposits to be repaid in full (presently 5 crores)
• shareholders deposits/loan should not exceed 100% of paid-up capital and free reserves and share premium (presently 3 crores) subject to fulfilment of all conditions provided in MCA notification dated 13th June,2017.

In this case, the company has a paid up capital of Rs.1crore and free reserves of Rs.1 crore i.e total of Rs.2 crore which is the maximum limit of exempted deposit from shareholder for private limited company. Hence, Rs.1 crore needs to be repaid to shareholders before conversion.

According to section 13 and 14 of the Companies Act, 2013 read with rule 33 and rule 41 of the Companies (Incorporation) Rules, 2014, a public company can be converted into the private company only after obtaining its shareholders’ approval by way of passing a special resolution in general meeting.

Apart from this, the other important procedures to be complied are:

•  Calling of Board meeting
• General meeting
• Advertisement in newspaper
• Filing of copy of special resolution with the ROC
• Filing of application for conversion with RD
• Order of RD approving the conversion
• Filing of order of RD with ROC
• Certificate from ROC

Applicable provisions

1. Section 13: For alteration in Memorandum of Association of the Company
2. Section 14: For alteration in Article of Association of the company.
3. Rule 41 of Companies (Incorporation) Rules, 2014 (inserted by Companies (Incorporation) Fourth Amendment, Rules 2018 on 18.12.2018): Approval of Regional Director for conversion of Public Companies into Private companies.

1(c) TP Private Company registered under the Companies Act, 2013 with paid up capital of `35 lakh and turnover of `2.5 crore. Explain the meaning of ‘Small Company’ and examine the following in accordance with the provision of the Companies Act, 2013 :

•  Whether the TP Limited can avail the status of ‘Small Company’ ?
• Will your answer be different if the turnover of the company is `1 crore ? (5 marks)

Answer 1(c): Section 2(85) of the Companies Act, 2013 defines a ‘small company’ as a company, other than a public company, –

• paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than ten crore rupees; and
• turnover of which as per profit and loss account for the immediately preceding financial year does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than one hundred crore rupees:

Provided that nothing in this clause shall apply to –

• a holding company or a subsidiary company;
• a company registered under section 8; or
• a company or body corporate governed by any Special

Hence, in order to avail the status of a ‘small company’, a company has to fulfill both conditions (i) and (ii) above.

• In the given case, TP Pvt. Ltd. is a registered company under the Companies Act, 2013 with a paid-up capital of 35 lakh and turnover of Rs.2.5 crore. As per the provision it only meets one criteria i.e. share capital does not exceed fifty lakh rupees and does not meet the second criteria. Hence, TP Pvt. Ltd. cannot avail the status of small company.
• If the turnover of the company is Rs.1 crore then TP Pvt. Ltd. can avail the status of small company as both the conditions will be fulfilled.

1(d) Axar is in plant research and he has invented a process for extracting bio-fuel from certain plants, now he is proposing to commercialize his invention by promoting a One Person Company (OPC). But he proposes his name and his wife name as directors of the Company. As a Company Secretary clarify Axar on number of shareholders and directors OPC can have. Also brief him the provisions on Board, Annual General Meeting, signing of Financial statements, Board’s Report and Annual (5 marks)

Answer 1(d): According to Section 2(62) of the Companies Act, 2013, ‘One Person Company’ means a company which has only one person as a member. A natural person who is an Indian citizen and resident in India shall be eligible to incorporate a One Person Company (OPC).

As per section 149(1) of the Companies Act, 2013, One Person Company may have more than one director on its Board. But an OPC should have only one member. Hence, Axar may incorporate an OPC and he and his wife may be the directors of the company.

As per section 173(5) of the Companies Act, 2013, it is required to hold at least one meeting of the Board of Directors in each half of a calendar year and the gap between the two meetings should not be less than ninety days. For an OPC having only one director, the provisions of section 173 (Meetings of the Board) and section 174 (Quorum for meeting of Board) of the Companies Act, 2013 will not apply.

As per section 96(1) of the Companies Act, 2013, OPC need not hold annual general meeting. As per section 92(1) of the Companies Act, 2013, the annual return shall be signed by the Company Secretary, or where there is no Company Secretary, by the director of company.

As per section 134(1) of the Companies Act, 2013, financial statement and Board’s Report can be signed only by one director.

Question 2

2(a) ‘Alteration of Capital Clause in Memorandum of Association is a precondition to restructuring the Capital structure of the Company’ — Elaborate the statement mentioning relevant provisions of the Companies Act, 2013 on types of alterations of Capital clause (4 marks)

Answer 2(a): Section 61(1) of the Companies Act, 2013 provides for, the types of alteration of capital clause in the general meeting of a company limited by shares through alteration of its memorandum in the following ways :

• increase its authorised share capital by such amount as it thinks expedient;
• consolidate and divide all or any of its share capital into shares of a larger amount than its existing shares:

Provided that no consolidation and division which results in changes in the voting percentage of shareholders shall take effect unless it is approved by the Tribunal on an application made in the prescribed manner;

• convert all or any of its fully paid-up shares into stock, and reconvert that stock into fully paid-up shares of any denomination;
• sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the memorandum, so, however, that in the sub-division the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in the case of the share from which the reduced share is derived;

• cancel shares which, at the date of the passing of the resolution in that behalf, have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so

All the above alterations do not require the confirmation by the Tribunal except that alteration relating to consolidation and division which results in changes in the voting percentage of shareholders shall not take effect unless it is approved by the Tribunal on an application made in the prescribed manner.

These alterations are, however, required to be notified and a copy of the resolution should be filed with the Registrar within 30 days of the passing of the resolution along with an altered memorandum. [Section 64(1)]

Hence, according to section 61(1) of the Companies Act, 2013, alteration of memorandum of association is a precursor to the change in capital structure of the company.

2(b) Aryan & Aarav, an LLP having turnover of `45 lakh and contribution of the partners exeeding `30 lakh in Y. 2018-19 is seeking your advice in the following matters:

• Is dividend distribution tax applicable on LLP ?
• Is LLP subjected to audit ? State the reason?
• Is LLP eligible to raise loan from ABC , a foreign bank ?
• State Offences & Penalties for non-filing of financial statements under the LLP Act, 2008(4 marks)

Answer 2(b):

• For the purpose of income tax, LLP is treated at par with A LLP is not subject to Dividend Distribution Tax (DDT).
• The accounts of LLP shall be audited in accordance with Rule 24 of the Limited Liability Partnership Rules, 2009. The audit is required only in those cases where the turnover exceeds Rs.40 lakh and where the contribution exceeds Rs.25 Hence, in the given case since, both the criteria has been fulfilled, it requires to conduct audit.
• Limitation in External Commercial Borrowings (ECB): LLP’s are not allowed to raise ECB. Hence, it cannot avail commercial loans from its foreign partners, FII’s, foreign banks and any financial institution located outside India. Hence, Aryan & Aarav LLP cannot raise loan from ABC , a foreign bank.
• Offences and penalties : Limited Liability Partnership Act, 2008 provides that for non-compliance on procedural matters such as delay in filing e-forms, one has to pay default fees for every day for which the default continuous. Such default fees would be payable at the rate of rupee one hundred per day after the expiry of the date of filing up to a period of three hundred The offence can result in either (i) through payment of fine or (ii) through payment of fine as well as imprisonment of the offender.

2(c) ‘Joint Ventures can be extremely valuable and chances of their failure can be reduced to a great extent, if strategically formed’ — Comment on important strategies of joint venture. (4 marks)

Answer 2(c): Joint ventures can be very effective for growth and success of a business. Their chances for failure can be reduced to a great extent if the following strategies are formed:

• Joint Venture Partner should never be weak or untrustworthy partner, as it would definitely lead to failure of the joint venture. On the other hand, JV with strong and trustworthy partner would generate enormous benefits for both the partners and Joint Venture entity.
• Development of Strong Joint Venture Relationship : Partners must strive to develop joint venture relationships that are easy to maintain, financially profitable, intellectually rewarding, and long-lasting. After a necessary period of negotiation and implementation, the Joint Venture relationship should grow well and quickly and painlessly.
• Equal Contribution : Joint Venture Partners must make sure that all the partners have equal contribution in the Joint Venture entity in terms of skills, intellectual resources, marketing resources, capital, and so on. Unbalanced or unequal contributions are never healthy for the success of a Joint Venture entity.
• Written Agreement : The agreement between two or more parties always be written and must clearly define all the terms, relates to rights and responsibilities of each The language of the agreement must be simple and there should be no ambiguity, also there should be no clashing of interest.
• Well defined business model : The firms in a JV must clearly define the nature of the new venture including the proposition to the customer, the channels and relationship management, the value chain, the structure and roles, investments, income, costs and payments, success factors and the timetable for A well-defined business model provides a base for the legal and financial frameworks.
• Establishment of Exit Routes : JV Partners much establish clear protocols in the beginning itself for amending or unwinding the relation if it fails to meet the expectations or in case there arises any dispute.

2(d) ‘Asset Reconstruction Companies are created to manage and recover Non- Performing Assets’ — Comment referring the functions and benefits of Asset Reconstruction companies (4 marks)

Answer 2(d): As per RBI Notification No. DNBS.2/CGM (CSM)-2003, dated April 23, 2003, Asset Reconstruction Company (ARC) performs the following functions:

• Acquisition of financial assets
• Change or takeover of management / sale or lease of business of the borrower
• Rescheduling of debt
• Enforcement of security interest
• Settlement of dues payable by the borrower

Benefits of incorporating an ARC are as under:

• Banks can focus better on managing the core business including providing new business opportunities for the ARC.
• Restoration of depositor and investor confidence by ensuring the lender’s financial health.
• It will help in building industry expertise in loan resolution and restructuring management besides serving as a catalyst for important legal reforms in bankruptcy procedures and loan collection.
• ARCs play an important role in developing capital markets through secondary asset instruments

2(e) Pawan incorporated a Private Company in the year 2016 for carrying on the business of supplying freshly chopped vegetables to various food chains in and around New Delhi NCR. He wants his entity to be recognised as a start-up. Advise the process to be followed by him for recognition of his company as a start-up.       (4 marks)

Answer 2(e): The recognition of the startups in India is regulated vide notification G.S.R. 127(E) issued by the Department for Promotion of Industry and Internal Trade (DPIIT) dated 19th February, 2019. The entity shall be considered as a Startup:

• Upto a period of ten years from the date of incorporation/ registration, if it is incorporated as a private limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2008) in India.
• Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded one hundred crore rupees.
• Entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.

The process of recognition of an eligible entity as startup shall be as under:

• A Startup shall make an online application over the mobile app or portal set-up by the DPIIT.
• The application shall be accompanied by — (a) a copy of Certificate of Incorporation or Registration, as the case may be, and (b) a write-up about the nature of business highlighting how it is working towards innovation, development or improvement of products or processes or services, or its scalability in terms of employment generation or wealth Creation.

The DPIIT may, after calling for such documents or information and making such enquires, as it may deem fit, — (a) recognise the eligible entity as Startup; or (b) reject the application by providing reasons.

OR (Alternate question to Q. No. 2)

Question 2A

2A(i) Prathik has studied about mass farming and is keen in uniting farmers in various states by forming a Multi State Co-operative Society. Brief Prathik on the documentary requirements for formation of Multi State Co-operative Society and the Authority with whom the application needs to be filled.

Answer 2A(i): An application in Form-1 (under sub-rule (1) of rule 3 of the Multi-State Cooperative Societies Rules, 2002) should be filed with the Central Registrar of Cooperative Societies, New Delhi along with the following enclosures:

1. A certificate from the bank stating credit balance there in favour of the proposed multi-state co-operative society.
2. A scheme explaining how the proposed multi-state co-operative society has reasonable prospects of becoming a viable unit.
3. Four copies of bye-laws in original.
4. Proposed area of operation for registration shall initially be permitted for two contagious States only.
5. List of at least 50 members from each The list has to be submitted in the format annexed with the Multi-State Cooperative Societies Act, 2002 (MSCS Act, 2002) along with the copies of ID proofs of the members duly attested by Chief Promoter.
6. Certified copies of the resolutions passed by the proposed society along with the certified copy of the resolution of the promoters which shall specify the name and address of one of the applicant(s) to whom the Central Registrar may address correspondence under the rules before registration and dispatch or hand over of registration documents.
7. Contact number and e-mail address of the Chief Promoter or Society on cover page.

For societies having objects related to thrift and credit and for multi-purpose societies following additional documents are required to be submitted along with documents mentioned above:

1. No Objection Certificate from the Registrar of Cooperative Societies of the States/ UT where the area of operation of the society is proposed to be confined.
2. A certificate to the effect that the credentials of the Chief Promoter/Promoters have been verified by the Registrar of Co-operative Societies of the State where the head office is proposed to be located.

All documents to be submitted in original with the signatures of the Chief Promoter/ Promoters on each page.

2A(ii) “Concept of self help group” is the most exciting discovery in the context of Microfinance. Explain the terms and features of microfinance.

Answer 2A(ii): NABARD has defined microfinance as “provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban and urban areas provided to customers to meet their financial needs; with only qualification that (1) transactions value is small and (2) customers are poor.”

• Microfinance provides financial services to those whose income is small and unstable. These people are in need of credit facilities for several reasons, some of which are listed below:
  • their needs are small and arise
  • the institutional providers of finance, namely, the banks demand collateral security which they cannot
  • most of the time, they are in urgent need of funds to meet their consumption demands, for example, to meet expenses related to education, illness, funerals, weddings for which it is difficult to obtain institution
  • For purpose of investment in income generating
• Concept of Self Help Groups (SHGs) is the most exciting discovery in the context of The Indian microfinance scene is dominated by SHGs and their linkage with banks. This has helped in empowerment of women and eradication of poverty among people with low income.
• Microfinance provides a greater menu of options whereby the small loan can be garnered not just from the external sources but also through self-mobilization, by way of saving and sale of
• The biggest flexibility in the case of microfinance is the lack of any physical collateral, even in case of loan from the bank.

2A(iii) Your Company proposes to enter into Joint Venture outside India and the Management of the Company wants to know from you various methods/modes available for funding the joint venture.

Answer 2A(iii): Investment (or financial commitment) in an overseas Joint venture (JV) / Wholly Owned Subsidiary (WOS) may be funded out of one or more of the following sources:

• drawal of foreign exchange from an AD bank in India;
• capitalization of exports;
• swap of shares;
• proceeds of External Commercial Borrowings (ECBs) / Foreign Currency Convertible Bonds (FCCBs);
• in exchange of ADRs/GDRs issued in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993, and the guidelines issued there under from time to time by the Government of India;
• balances held in EEFC account of the Indian Party and
• proceeds of foreign currency funds raised through ADR / GDR

In respect of (vi) and (vii) above, the limit of financial commitment vis-à-vis the net worth will not apply.

However, all investments (or financial commitment) made in the financial sector will be subject to compliance with Regulation 7 of the Master Direction – Direct investment by resident in Joint venture (JV) / Wholly Owned Subsidiary (WOS) abroad irrespective of the method of funding.

2A(iv) Individual or minority members cannot bring a suit except when it is intended for enforcement of personal rights of members or to prevent the company from doing any ultravires or illegal act, fraud or oppression and mismanagement. Discuss with the help of decided case laws the distinction between ultravires or illegal acts and personal rights

Answer 2A(iv): There are basically two types of rights that are enjoyed by the members of the company. One is the personal right and the other is the corporate right.

In the landmark case of C.L Joseph v. Jos and Anr the Kerela High Court observed that:

There are two kinds of rights for a member of a company, on the individual membership rights and the other the corporate membership right. So far as the corporate membership rights are concerned a shareholder can assert those rights only in conformity with the decision of the majority of the shareholders. An individual membership is a right to maintain himself in full membership with all the rights and privileges appertaining to that status. The right implies that the individual shareholder can insist on the strict observance of the legal rules, statutory provision and provisions in the memorandum and articles cannot be waived by the majority shareholders.

In certain circumstances an individual member may bring an action to remedy a wrong done to his company or to compel his company to conduct its affair in accordance with the constitution and the rules of law governing it, even though no wrong has been done to him personally, even though the majority of his fellow members do not wish the action to be brought.

It should be carefully noted that the rule in Foss v. Hartbottle to cases when corporate membership is involved provided that the case is not of an exception of the rule derived in the above case or for example if the acts are done ultra vires.

Also section 241 of the companies Act, 2013 says that any member of a company who complains that the affairs of the company have been or are being conducted in a manner prejudicial to public interest or in a manner prejudicial or oppressive to him or any other member or members or in a manner prejudicial to the interests of the company can apply to the tribunal for relief.

Hence, the law allows intervention by the individual member in case of wrong done to him personally or any act done by the company that is illegal or ultra wires.

2A(v) X, an employee of BG Ltd., is aggrieved by the decision of shifting of the registered office of the Company from the state of Uttar Pradesh to He has filed a Public Interest Litigation (PIL) regarding the same, considering that the business of the company will be severely affected by the said decision of shifting of registered office. In the light of decided case laws, examine the strength of argument raised in the PIL. (4 marks each)

Answer 2A(v): The Public Interest Litigation (PIL) of X, an employee of BG Ltd. regarding shifting of registered office is not tenable.

The facts are similar to the case of Bharat Commerce and Industries Ltd., Re, (1973) 43 Com Cases 162 (Cal.), where it was held that employees’ union, which was a registered body and which represented quite a number of the employees at the registered office of the company, would have the legal standing to appear before the court and oppose the application on the ground that their interests are likely to be prejudicially affected if the resolution for shifting the registered office of the company from one State to another is confirmed by the court. However, it was held that the employees’ union cannot oppose on the ground that there would be loss of revenue or unemployment in the State or that the meeting at which the special resolution was passed was itself not valid.

So long as interest of none of the employee at the registered office is prejudiced by retrenchment or otherwise, the argument of X is not tenable.

CS Executive Guideline Answers for Setting up Business Entities and Closure PART B

Question 3

3(a) Aravind has recently completed Telecommunications engineering and he is keen in starting his own venture for Telecommunication support services. He has heard about OSP License and approached you to get more information on it. Brief him, on the purpose, authority authorised to issue such license, documents necessary for making application and compliance after registration.

Answer 3(a): OSP Registration

According to the New Telecom Policy (NTP) 1999, service providers in India involved in providing services like tele-banking, tele-medicine, tele-education, tele-trading, e- commerce, call center, network operation center and other IT Enabled Services, using telecom resources are termed as “Other Service Providers” (OSP). These OSP’s are required to obtain an OSP Registration from the Department of Telecommunication (DoT).

If Aravind is keen on starting his own venture for telecommunication support services, he has to know about the OSP License procedures which are as follows:

To obtain an OSP Registration in India, it is mandatory for the entity to be a Private Limited Company. Therefore, entrepreneurs having plans for starting a call center or BPO or e-commerce or other IT Enabled Services must incorporate a Private Limited Company.

The following are the documents necessary for OSP Registration in addition to the application in the prescribed format:

• Certificate of Incorporation of Private Limited Company
• Memorandum of Association (MOA) and Articles of Association (AOA)
• Board Resolution or Power of Attorney authorizing the authorized signatory
• Name of business and activities proposed
• List of directors
• Present shareholding

The above documents must be certified with seal by a Company Secretary, or director of the company or statutory auditor or public notary.

The compliances after registration are:

• OSPs are required to submit an “Annual Return” to the DOT mentioning the activities undertaken and the present status of the The annual return for OSP License renewal must be submitted within 6 months of completion of financial year.
• Maintaining compliance with the terms and conditions prescribed by the DOT for OSP.

3(b) State the circumstances under which an employee is not liable for Compensation under Employees Compensation Act,1923.

Answer 3(b): Circumstances where an employee is not liable for compensation under the Employees Compensation Act, 1923:

• In respect of any injury which does not result in the total or partial disablement of the workman for a period exceeding three days.
• In respect of any injury, not resulting in death or permanent total disablement caused by an accident which is directly attributable to –
  • The workman having been at the time thereof under the influence of drink or drugs; or
  • Wilful disobedience of the workman to an order expressly given, or to a rule expressly framed, for the purpose of securing the safety of workman; or
  • Wilful removal or disregard by the workman of any safety guard or other device which he knew to have been provided for the purpose of securing the safety of workman.

3(c) Saravan is carrying out building contract works for industrial and commercial customers. He engages 25 workers on regular basis, wants to know about the applicability of Contract Labour (Regulation and Abolition) Act, 1970 to him and licensing requirement if any for his Also brief him the details regarding the Registers to be maintained by Principal Employer and the contractor.

Answer 3(c): Applicability of Contract Labour (Regulation and Abolition) Act, 1970

Every establishment in which 20 or more workmen are employed or were employed on any day of the preceding 12 months as contract labor.

Every contractor who employs or who employed on any day of the preceding twelve months 20 or more workmen.

Licensing of Contractor

• Engaging 20 or more than 20 workers and on deposit of required fee in Form
• Valid for specified

Registers of Contractors to be maintained by,

Principle Employer

• To maintain a register of contractor in respect of every establishment in Form XII.

Contractor

• To maintain register of workers for each registered establishment in Form
• To issue an Employment card to each worker in Form XIV
• To issue service certificate to every workman on his termination in Form

3(d) Bhaskar is presently running a business of He has planned to promote an Infrastructure Finance Company along with his friends. He seeks your advice to know whether it is a Non-Banking Finance Company requiring Reserve Bank of India’s registration and criteria to be satisfied by such Company. Also clarify on how Net owned Fund is calculated.  (5 marks each)

Answer 3 (d): Infrastructure Finance Company

Yes, the proposed Infrastructure Finance Company is a non-banking finance company that:

• deploys at least 75 percent of its total assets in infrastructure loans
• has a minimum net owned funds of 300 crore
• maintains a minimum credit rating of ‘A’ or equivalent
• and has a capital to risk assets ratio (CRAR) of 15% It requires registration with the Reserve Bank of India

Net Owned Fund Formula

The net owned fund would be calculated based on the last audited balance sheet of the company. Net owned fund will consist of paid-up equity capital, free reserves, balance in share premium account and capital reserve representing surplus arising out of sale proceeds of assets but not reserve created by revaluation of assets. From the aggregate of items it will be deducted, accumulated loss balance and book value of intangible assets, if any, to arrive at owned funds. Further, investment in shares of other NBFCs and in shares, debentures of subsidiaries and group companies in excess of 10% of the owned funds mentioned above will be deducted to arrive at the Net Owned Fund.

In terms of section 45-IA of the Reserve Bank of India Act, 1934, a non-banking financial company can commence or carry on business of a non-banking financial institution only after obtaining a certificate of registration from the Reserve Bank of India.

Question 4

4(a) A factory has 100 male employees and 50 female Factory Manager is keen to know whether the factory has to provide following welfare to the workers employed as per Factories Act :

• First aid appliances
• Canteens
• Creches (3 marks)

Answer 4(a): Factories Act, 1948 provides for the following welfare to the workers:

• First-aid appliances – one first-aid box not less than one for every 150 workers
• Canteens when there are 250 or more workers
• Crèches when there are 30 or more women In the given case,
• Since a total of 150 workers are employed in the factory, it has to provide first aid
• The canteen facility need not be provided, as it applies to factories employing more than 250
• Since the factory has 50 female workers, it has to provide for crèche

4(b) Harpreet is doing Masters Degree and he is studying about environmental legislations. He is enquiring about ‘Green Tribunal’. Brief him about Green Tribunal and its objectives. (3 marks)

Answer 4(b): The National Green Tribunal (NGT), 2010 was established keeping in mind The Rio Conference of 1992 and based on the international environment principles of ‘polluter pays principle’ and ‘sustainable development’.

This legislation was established to deal with environment related disputes, a speedy disposal of these cases and giving relief and compensation for damages to persons and property and for matters connected or incidental thereto

NGT was established for the effective and expeditious disposal of cases relating to environmental protection and conservation of forests and other natural resources including enforcement of any legal right relating to environment and giving relief and compensation for damages to persons and property and for matters connected therewith or incidental thereto.

Objectives of NGT

• The effective and speedy disposal of the cases relating to environment protection and conservation of forests and other natural All the previous pending cases will also be heard by the Tribunal.
• It aims at enforcing all the legal rights relating to the environment
• It also accounts for providing compensation and relief to effected people for damage of property

4(c) Tony Singh is a popular stage performer and M/s Pon Sun Studios, Chandigarh is having all the rights, titles and interests in the personality of the artist along with the A company started selling miniature toys of Tony Singh to encash his popularity. In the light of statutory provision, examine the remedy available against company for infringing Tony Singh’s right to publicity. (3 marks)

Answer 4(c): Tony Singh,being the lawful owner of the trade mark, M/s Pon Sun Studies can institute a civil suit seeking a restraint on infringement of the trade mark.

The facts are similar to the decided case Daler Mehndi Entertainment v. Baby Gift House & org. In that case, court held that passing off would occur when the mark is being used to create confusion in the minds of the consumer that results in the damage or loss of business for the person or company who are the lawful owner of the trademark.

4(d) Public Liability Insurance intends to provide protection to the general public against any unforseen industrial Elucidate. (3 marks)

Answer 4(d): Public Liability Insurance Act, 1991 provide the compensation for damages to victims of an accident of handling any hazardous substance or, to save the owner of production/ storage of hazardous substance from hefty penalties. This is done by providing compulsory insurance for third party liability.

The owner shall buy one or more insurance policies before he/she starts handling any hazardous substance. When any accident comes to the knowledge of the Collector, then he/she shall verify the occurrence of accident and order for relief as he/she deems fit.

4(e) Prabhat is proposing to start a new business wants to know from you the mandatory annual compliances for an LLP and a partnership firm. (3 marks)

Answer 4(e): Mandatory annual compliances for LLP

Annual returns are filed in Form 11. This form is a summary of the management of affairs of the LLP, such as number of partners and their names. Form 11 needs to be filed with the Registrar within 60 days of the closure of the financial year. Hence this Annual Return should be filed on or before 30th May every year by the LLP.

In case the annual turnover of the LLP crosses Rs.5 crore or the capital contribution from Partners exceeds Rs.50 lakh, the Annual return should be accompanied by a Certificate from Practicing Company Secretary

All LLPs are required to maintain their books of accounts in Double Entry System. They also need to prepare a Statement of Solvency (Accounts) every year ending on 31st March. For this purpose, LLP Form 8 should be filed with the Registrar of Companies on or before 30th October every year.

It should be noted that LLPs whose annual turnover exceeds Rs.40 lakh or whose contribution exceeds Rs.25 lakh are required to get their accounts audited by a qualified Chartered Accountant mandatorily.

Maintenance of book of account is mandatory for LLP, irrespective of annual turnover.

In partnership there is no requirement for filing Annual Return. There is no requirement for certificate from company secretary.

OR (Alternate question to Q. No. 4)

Question 4A

4A(i) One of the objectives of the Design Rules, 2001 is to enable protection of newly created designs applying to an article manufactured by a particular industrial process ? (3 marks)

Answer 4A(i): A design registration protects the aesthetic aspect of a product. Registration confers protection on the features of shape, configuration, pattern, ornament or composition of lines or colours as applied to an article of manufacture. Since manufacturing has to be achieved through one or more industrial process the object of rules provides for the particular objective.

Functional or technical features of articles are not protected under the Design Act, 2000. An ‘article’ includes, among other things, any substance – artificial or partly artificial and partly natural – and any part of an article which is capable of being manufactured and sold independently.

4A(ii) Preerna has taken some books from Library and she wants to reproduce “Verbatim” some pages from the book of her Ph.D. thesis. She would like to know from you whether she will be violating any Copyright protection in doing so. Also brief her exceptions available to protect the interest of the users under Copyright (3 marks)

Answer 4(A)(ii): Verbatim reproduction of pages of the book for the Ph.D. thesis is not protected under the fair use doctrine of the Copyright Act, 1957. The case of Fateh Singh Mehta v. OP Singhal decided by the Rajasthan High Court deals with similar set of facts whereby research thesis submitted by the respondent was copied verbatim to large extent by the appellant for preparing his Ph.D. thesis. It was held to be infringement on part of the appellant.

In order to protect the interests of users, some exemptions have been prescribed in respect of specific uses of works enjoying copyright. It includes:

• for the purpose of research or private study,
• for criticism or review,
• for reporting current events,
• in connection with judicial proceeding,
• for the purpose of education and religious ceremonies

Section 52 of the Copyright Act, 1957 provides for various other purposes which will constitute fair use of copyrighted material.

4A(iii)Sukrit is running small fabrication unit with 5 He is planning for expansion and it may require addition of 10-15 employees. He is planning to register his business under Employees State Insurance (ESI) and extend the benefit to all his employees. He is keen in knowing from you the benefits available to him as an employer in extending the ESI facilities to his employees. (3 marks)

Answer 4(A)(iii): Benefits for employers in extending the ESI facilities to employees

• Employers are absolved of all their liabilities of providing medical benefits to their employees and their family members or dependents in kind or in the form of fixed cash
• Employers are granted exemption pertaining to the applicability of Maternity Benefit Act, 1961, Employees Compensation Act, 1923, etc. in respect of employees covered under the ESIC Scheme. This results in employers possessing a productive and well-secured workforce, at their disposal which is an essential ingredient for better productivity of an organization.
• Employers are absolved of any responsibility in times of physical distress of their employees or workers such as employment injury, sickness or physical disablement thereby resulting in loss of wages since the responsibility of paying cash benefits shifts from the employer to the ESIC Corporation in respect of insured employees.
• Any amount or sum paid by way of contribution under the Employees’ State Insurance Act, 1948 is deducted in computing ‘Income’ under the Income Tax Act,1961.

4A(iv) What are the circumstances under which RBI may cancel the license granted to a banking company regulated under the Banking Regulation Act, (3 marks)

Answer 4(A)(iv): The Reserve Bank of India may cancel a license granted to a banking company under section 22(4) of the Banking Regulation Act, 1949 –

• if the company ceases to carry on banking business in India; or
• if the company at any time fails to comply with any of the conditions imposed upon it under sub-section (1) of section 22; or
• if at any time, any of the conditions referred to in sub-section 3(15) and sub- section (3A) is not

Provided that before cancelling a license under clause (ii) or clause (iii) of this sub- section on the ground that the banking company has failed to comply with or has failed to fulfill any of the conditions referred to therein, the Reserve Bank of India, unless it is of opinion that the delay will be prejudicial to the interests of the company’s depositors or the public, shall grant to the company on such terms as it may specify, an opportunity of taking the necessary steps for complying with or fulfilling such condition.

4A(v) TPS Pvt. Ltd. incorporated on 1st August, 2017 having its registered office at Saket, New Delhi. Management of the Company kept some of the statutory records in the other branch of the Company in Janakpuri, New Delhi. Explain whether Company is eligible to keep its statutory records at place other than its registered office under the Companies Act, (3 marks)

Answer 4(A)(v): Unless otherwise notified, it is assumed that statutory records are kept at the registered office address of the company. If it is inconvenient to make certain records available for inspection at the registered office, you may keep some or all of them at the other nearby premises under the jurisdiction of the company. It must be notified, if any statutory records are kept at any other place other than the registered office of the company.

Further, one must notify if they move any records, and the company is expected to confirm their location whenever you file an annual confirmation statement.

Hence, in this case TPS Pvt. Ltd. is eligible to keep its statutory record in their branch at Janakpuri, New Delhi.

CS Executive Guideline Answers for Setting up Business Entities and Closure PART C

Question 5

5(a) ABC , has initiated insolvency proceedings against RS Ltd., for recovery of debt of `2.86 crore. ABC Ltd. intends to appoint Rahul, one of the employees of its statutory auditors, M/s ASA & Associates, Chartered Accountants, as its resolution professional. In the light of the statutory provisions, examine whether Rahul can be appointed as a resolution professional. (3 marks)

Answer 5(a): Rahul being one of the employees of statutory auditors of the debtor company is not independent of the debtor and as such his appointment as Resolution Professional is not valid.

As per IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, an insolvency professional shall be eligible to be appointed as a resolution professional if he, and all partners and directors of the insolvency professional entity of which he is a partner or director, are independent of the corporate debtor.

5(b) Describe the procedure mentioned under Section 53 of Insolvency and Bankruptcy Code (IBC), 2016 for distribution of assets in case of  liquidation(3 marks)

Answer 5(b): Section 53 of the Insolvency and Bankruptcy Code, 2016 provides for the manner of distribution of assets in case of liquidation and order of priority of distribution. This order of providing is known as the ‘waterfall Arrangement’. Each category of persons comes in priority after the previous one. It is pertinent to note that this order of priority is notwithstanding anything which is contained in any other Central or State law.

5(c) Preetha has recently become Director of a She wants to know about ‘active’ and ‘inactive’ status shown in MCA website. Explain the concept of ‘Inactive Company’ to her referring the relevant provisions of the Company Law and also brief her under what circumstances a company can make application for obtaining ‘dormant’ status. (3 marks)

Answer 5(c): ‘Inactive company’ means a company which,

• has not been carrying on any business or operation, or
• has not made any significant accounting transaction during the last two financial years, or
• has not filed financial statements and annual returns during the last two financial

‘Dormant company’ is formed and registered for a future project to hold an asset or intellectual property and has no significant accounting transaction. Such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company.

5(d) National Company Law Tribunal (NCLT) has passed order for Commencement of Corporate Insolvency Resolution Process (CIRP) of Dora Travels , one of its director has approached you to know the effects of “Moratorium” upon the commencement of CIRP. (3 marks)

Answer 5(d): On commencement of the CIRP, the adjudicating authority passes an order declaring moratorium for prohibiting all of the following by virtue of section 14 of the Insolvency and Bankruptcy Code, 2016:

• Institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority
• Transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein
• Any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under SARFAESI Act,
• The recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor

The order of moratorium shall have effect from the date of order till the completion of CIRP or date of approval of resolution plan or order of liquidation as the case may be.

5(e) Mithali sports LLP has been struck off by Registrar of Companies. One of its unsecured creditors has approached you to know his eligibility in making application for revival of struck off LLP. Also brief with the procedures for the revival of struck off (3 marks)

Answer 5(e): Unlike procedure for revival of a company enumerated in section 252 (1) and (3) of the Companies Act, 2013, there is no corresponding provision for the revival of LLPs in the Limited Liability Partnership Act, 2008.

Therefore, in the case of strike-off of LLPs the ultimate remedy for revival is to file the Writ Petition before the High Court of appropriate jurisdiction.

However, in the recent matter of Lawns Hospitality LLP, the NCLT Chennai Bench has allowed revival of the stuck off LLP on the same parallel lines as that of companies under section 252(3) of the Companies Act, 2013.

Question 6

6(a) Yogendra is an allottee of a flat in a real estate project promoted by the company, but he has not been delivered flat as per He has approached you to know, whether he can make application under Insolvency and Bankruptcy Code, 2016 and in what status he can make application. Also brief the timelines for Corporate Insolvency Resolution Process.

Answer: Yogendra, allottee of the flat can be treated as financial creditor.

As per amendments made to the definition of ‘financial debt’ under section 5(8) of the Insolvency and Bankruptcy Code, 2016, ‘financial debt’ means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing.

Explanation: for the purpose of sub-clause (f) of section 5(8), any amount raised from an allottee under real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and the expressions, ‘allottee’ and ‘real estate project’ shall have the meanings respectively assigned to them in clauses (d) and (zb) of Section 2 of Real Estate (Regulation and Development) Act, 2016.

Timeline for completion of CIRP increased to an overall limit of 330 days by the Insolvency and Bankruptcy Code (Amendment) Act, 2019 w.e.f. 5th August, 2019. Prior to the Amendment, the Code required that the CIRP should be concluded within a maximum period of 180 days (with a maximum one-time extension of 90 days) from the insolvency commencement date.

6(b) Yuvan Infra is continuously making losses and the Directors of the Company are planning to voluntarily wind up the Company. As a Company Secretary advise on conditions and also advise them briefly on procedures for voluntary liquidation. (5 marks each)

Answer: Section 59(3) of the Insolvency & Bankruptcy Code prescribes following conditions for voluntary liquidation.

1. A declaration by majority of the directors of the company (in an affidavit) stating that they have made a full inquiry into the affairs of the company and formed an opinion that either the company has no debt or it will be able to pay its debts in full from the proceeds of assets to be sold in the voluntary
2. Company is not being liquidated to defraud any person

Brief procedure of voluntary liquidation of a corporate person under IBC includes:

1. Submission of declaration that the company will be able to pay its dues and is not being liquidated to defraud any person to ROC
2. Passing special resolution for approving the proposal of voluntary liquidation and appointment of liquidator
3. Public announcement inviting claims of all stakeholders
4. Intimation to the ROC and the Board about the approval
5. Preparation of preliminary report about the capital structure, estimates of assets and liabilities, proposed plan of action
6. Verification of claims
7. Opening of a bank account in the name of the corporate person followed by the words ‘in voluntary liquidation’ in a scheduled bank
8. Sale of assets, recovery of monies due to corporate person, realization of uncalled capital or unpaid capital contribution
9. Distribution of the proceeds from realisation
10. Submission of final report by the liquidator to the corporate person, ROC and the Board and application to the National Company Law Tribunal (NCLT)
11. Submission of NCLT order regarding the dissolution.

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