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LAW ASSIGNMENT (GROUP 2)

Group Members: Sunil: 05 Pankaj:16 Abdul:38 Ankita: 51 Charmi: 66

Q.1)
A) Mr.Safe is a director of M/S Business Ltd. He approached M/S Housing Finance Co.Ltd. for the purpose of obtaining a loan of Rs.50 lacs to be used for construction of building his residential house. The loan was sanctioned subject to the condition that M/S Business Ltd. should provide the guarantee for repayment of loan installments by Mr.Safe. Advise Mr. Safe.

ANS. As per section 256 sub- section (2) in the Companies Act 1956, no company without obtaining the previous approval of the Central Government in that behalf shall directly or indirectly, make any loan or give any guarantee or provide any security in connection with a loan made by any other person or to any other person by director of any body corporate (except a private company who is not a subsidiary of a public company) or any body corporate, managing director, managing agent, secretaries and treasurers, or manager whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company. As in this case Mr Safe who is a director of M/S Business Ltd can get guarantee from M/S Business ltd provided, M/S Business ltd gets prior approval of the Central Government, or they shall, within six months from the commencement of this loan or such further time not exceeding six months as the Central Government may grant for that, purpose, either obtain the approval of the Central Government to the trans- action or enforce the repayment of the loan made, or in connection with which the guarantee was given or the security was provided, not withstanding any agreement to the contrary. Failing to which would be Mr Safe and M/S Business Ltd. shall be punishable either with fine which may extend to five thousand rupees or with simple imprisonment for a term which may extend to six months: Provided that where any such loan, or any loan in connection with which any such guarantee or security has been given or provided by the lending company, has been repaid in full, no punishment by way of imprisonment shall be imposed under this sub- section; and where the loan has been repaid in part, the maximum punishment which may be imposed under this sub- section by way of imprisonment shall be proportionately reduced. However as per section 295 if M/S Business ltd has some scheme where the house building loan proposed to be made is covered by the terms and are applicable to its officers/employees. Then M/S Business ltd. can grant Mr. Safe a loan which does not exceed 25 times the gross salary of Mr. Safe in the last six months and pegged against the interest rate to more than 4% of the RBI Bank rate without the approval of the Central Government.

B.i) State the type of resolutions required to remove a director of a Private Ltd Company. ANS. Section 152 of the Companies Act provides for the removal of a director of a public company by ordinary resolution, not withstanding anything in the companys memorandum or articles or in any agreement between the company and the director. The Companies Act, however, does not provide for the removal of a director of a private company. This is left to the companys articles. Article 69 of Table A provides that the company may by ordinary resolution remove any director before the expiration of his period of office, and may by ordinary resolution appoint any person in his stead. B.i) State the type of resolutions required to approve annual accounts and Balance Sheets. ANS. According to Sec. 215 of the Indian Companies Act 1956 Board Resolution should be passed to approve annual accounts and balance sheet, before which it needs to be signed by in case of banking company by a person specified in clause a or clause b of section 2 of section 29 of the banking companies act 1949. in case of any other company, by its manager or secretary, if any, and by not less than two directors of the company one of whom shall be a managing director where there is one.

Q.2)
A) Both Horizontal and vertical agreements under the Competition Act, 2002 are void per se. Comment. ANS. In Horizontal Agreements the parties to the agreement are enterprises at the same stage of the production chain engaged in similar trade of goods or provision of services competing in the same market. For e.g. agreements between producers or between wholesalers etc. Horizontal Anti-Competitive Agreements are entered into between rivals or competitors. In Vertical Agreements the parties to the agreements are non-competing enterprises at different stages of the production chain. For e.g. agreements essentially between manufacturers and suppliers i.e. between producers and wholesalers or between manufacturers and retailers etc. Vertical Anti-Competitive Agreements are entered into between parties having actual or potential relationship of purchasing or selling to each other. Horizontal Anti-Competitive Agreements are per se void whereas Vertical Anti-Competitive Agreements are not. Because Horizontal Anti-Competitive Agreements that determine prices or limit/control production or share market/sources of production by market allocation or result in bid rigging or collusive bidding are presumed to have an appreciable adverse effect on competition. And in case of Vertical Anti-Competitive Agreements are not presumed to have an appreciable adverse effect on competition and automatically prohibited. Whether a vertical agreement is anticompetitive or not is to be decided on a case by case basis considering the consequences of the agreement and whether they substantially restrict competition or not. B) The Balance Sheet and Profit & Loss Accounts are authenticated by the Finance Director before submission to the Auditors for their report thereon. Comment.
ANS. Yes, the Balance Sheet and Profit and Loss Accounts are authenticated by the Finance

Director and also it is signed by the Managing Director, Secretary and others with a remark For and on behalf of the Board of Directors under sec 215 of the companies Act, 1956. before submitting it to the Auditors for their report. The company and every officer of the company who is in default with the above provisions shall be punishable with the fine which may extend to Rs.500/-, if: a. Any copy of balance sheet and profit and loss account is issued, circulated or published, without being signed as required ; or b. Any copy of balance sheet is issued, circulated or published, without there being annexed or attached thereto, a copy each of the following :-

i) The profit and loss account; ii) Any accounts, reports or statements pertaining to subsidiary companies which are required to be attached to the balance sheet, iii) The auditors' report; and iv) The Report of the Board of Directors C) Bonus shares cannot be issued by a Private Limited Company. Comment. ANS. SEBI provisions are applicable to the listed companies only and not to the Private Company or Unlisted Public Company. The provision of bonus issue in the companies act, 1956 is provided under the section 81 Conditions for bonus issue. 92. Subject to the provisions of the Companies Act, 1956 or any other applicable law for the time being in force, a listed issuer may issue bonus shares to its members if: (a) it is authorised by its articles of association for issue of bonus shares, capitalisation of reserves, etc.: Provided that if there is no such provision in the articles of association, the issuer shall pass a resolution at its general body meeting making provisions in the articles of associations for capitalisation of reserve; (b) it has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it; (c) it has sufficient reason to believe that it has not defaulted in respect of the payment of statutory dues of the employees such as contribution to provident fund, gratuity and bonus; (d) the partly paid shares, if any outstanding on the date of allotment are made fully paid up

Q.3)
A) Whether a Company is bound to send a copy of the Balance Sheet and Profit and Loss Account to Debenture Holder? Will your answer be different if the said debenture holder is also a shareholder of that company?

ANS. U/S 219(Right of member to copies of balance sheet and auditors' report) of Indian companies Act, 1956 . A Company is not bound to send a copy of the Balance Sheet and Profit and Loss Account to Debenture Holder, as company is bound to send it to debenture trustee for debenture holders. If debenture holder is a share holder of company then he will get a copy of Balance Sheet and Profit and Loss Account, as company is bound to send Balance Sheet and Profit and Loss Account to members of the company and share holders are member of the company. B) The Maximum number of directorships which an individual director can hold includes his being an alternate director also. Comment. ANS. The Maximum number of directorships which an individual director can hold does not includes his being an alternate director. Under Section 276, Indian Companies Act, 1956 maximum no of Directorship which a director can hold is in maximum fifteen companies. An alternate director is a person who is appointed to attend a board meeting on behalf of the director of a company where the principal director would be otherwise unable to attend. According to Section 278(Exclusion of certain directorships for the purposes of sections 275, 276 and 277), Indian Companies Act, 1956, Alternate directorship held by person cannot be counted towards a maximum number of directorship which a person can hold. C) Tea Party Ltd., paid dividend for financial year 2007-08 by way of Ten grams of Darjeeling tea per equity share of Rs.10/- each. Advise whether it is correct according to company law provisions. ANS. According to section 205(3) of Indian companies Act, 1956 Dividend declared shall be payable only in cash. Cash includes cheques, warrants etc. That is why Tea party Ltd cannot pay Darjeeling tea as dividends to its equity shareholders as Darjeeling Tea is a Commodity not Cash. D) A body corporate cannot be a member of its holding company. Comment. ANS. A body corporate cannot be a member of its holding company , U/S 42(Membership of holding company) of Indian Companies Act, 1956 Except in the cases mentioned in this section, a body corporate cannot be a member of a company which is its holding company and any allotment or transfer of shares in a company to its subsidiary shall be void.

Nothing in this section shall apply i. Where the subsidiary is concerned as the legal representative of a deceased member of the holding company; or ii. Where the subsidiary is concerned as trustee, unless the holding company or a subsidiary thereof is beneficially interested under the trust and is not so interested only by way of security for the purposes of a transaction entered into by it in the ordinary course of a business which includes the lending of money.

Q.4)
A) The Articles of Association of a company states that a director shall not vote in respect of a contract in which he is interested. In a resolution put up for approval of the shareholders, can a director exercise his voting right in favour of a contract in which he is interested? ANS. When a Director exercises his voting right as a shareholder, he is free to vote in his interest like any other shareholder. Section 182 states that A public, or a private company which is a subsidiary of a public company, shall not prohibit any members from exercising his voting rights on the ground not being a ground set out under section 181 (Restriction on exercise of voting right of members who have not paid calls etc) . The Articles of Association of a company stating that a director shall not vote in respect of a contract in which he is interested (Having some exceptions) does not exclude a Director, holding share of the company and so being a shareholder, from voting as a member as it breaches Section 182 giving rights to all the members to exercise his vote. Section 187B provides restriction of the rights to the trustee as a member in any meeting of the company or any meeting of any class of members of a company. But the directors are not the trustee to the company and not for one another and so this Act does not apply to the voting of directors in shareholders resolution.

B) Annual Return is submitted to the Registrar of Companies within 30 days from the date of AGM. Comment. ANS. After the Annual Returns that have been laid before a company at an AGM, there shall be filed with the ROC within 30 days from the date on which annual returns were laid. In case, the AGM of the company for any year has not been held, there shall be filed with the ROC within 30 days from the latest day on or before which that meeting should not have been held in accordance with the provisions of the Act. If in AGM, a balance sheet which is laid as aforesaid, is not adopted or the meeting is adjourned before adopting balance sheet, a statement of fact and of reasons shall be annexed to the balance sheet and to the copies thereof required to be filed with the registrar.

In case of default, the company and every officer who is in default, shall be liable to the like punishment as is provided in 162 for a default in complying with the provision of sec 159, 160 or 161. C) If due to issue of Bonus shares on account of capitalization of reserves the authorized capital is exceeded, then alteration of capital clause of M/A is not necessary. Comment. ANS. Section 13(4)(a) states the amount of share capital with which the Company is registered and the mode of its division into shares of fixed value. The Capital clause of the M/A lays down the LIMIT, beyond which the Company cannot issue Shares without altering the M/A in accordance with the procedure under Section 94 of the Act. Bonus shares are issued by converting the reserves of the company into share capital which is capitalisation of reserves. The bonus shares should not lead to total share capital in excess of the authorized share capital. Otherwise, the authorized capital must be increased by amending the capital clause of the memorandum of association. Therefore, if Authorized Capital exceeds due to issue of Bonus share, then alteration to Memorandum of Association has to be done.

Q.5)
A) Board of Directors of a Public Limited Company having a share capital may issue Equity shares at a discount up to 15% - state the Rule Position. ANS. This statement is false. Board of Directors of a Public Ltd Company can issue Equity shares at a discount of up to 10 % after passing an ordinary resolution and sanctioned by the central government. Central government might allow a higher discount rate only under some special circumstances. B) At a General meeting of a Company, a matter was to be passed by a special resolution. Out of the forty members present, 20 voted in favor of the resolution, 5 voted against it and 5 votes were found invalid. The remaining 10 members abstained from voting. The chairman of the meeting declared the resolution as passed. With reference to the provisions of the Companies Act, 1956, examine the validity of the chairmans declaration. ANS. The chairmans declaration is Invalid. In order to pass a special resolution 75% of the members should be present and voting. In the above case out of the 40 members present 30 participated in the voting. So in order to pass the resolution 23 members should have voted in favor, which is not the case. Because only 20 members voted in favor of the resolution, it should not have been declared as passed by the chairman. C) Buy Back of Shares can be made out of the proceeds of an earlier issue of Debentures. Comment. ANS. This statement is true. Buy back of shares can be made out of the proceeds of an earlier issue of debentures provided they are of a different kind of securities which are being bought back. Also in order to buyback securities a company must satisfy some prerequisite conditions.

Q.6)
A) The Power of the Board of Directors to buy back share up to ten percent of the total paid up equity capital and free reserves of the Company can be delegated to a committee of directors. Comment. ANS. This statement is false. The buy back up to 10% of the paid up capital and free reserves has to be approved by a resolution at the meeting of the board of Directors. Thus it cannot be delegated to any committee of directors. B) Sharp & Co., Minute& Co., and Perfect & Co. were the external Auditors of Quality Ltd. A vacancy caused by the resignation of Minute & Co. as auditors of the Company was filled by the Board of directors (BOD)by appointing Accurate & Co. as auditors. A Shareholder of the Company has raised a written objection to such an appointment. Please advise the management suitably. ANS. The management was not right in appointing Accurate & Co. as auditors without the permission of the shareholders. The Companies Act clearly envisages that the appointment of the auditor, as a general rule, rest with the shareholders. The shareholders have to exercise this power in all cases , except in the case of filling casual vacancy or appointing the first auditors. This power cannot be given to the board of directors. Since this is the case of vacancy caused by resignation, an annual general meeting has to be convened to appoint Accurate & Co. as the new auditor.

C) Board of directors of EFG Ltd., has by passing a resolution at the Board Meeting availed loan from a bank by mortgaging the companys land and building. Comment. ANS. Section 292 (1) of companies act provides that the BOD shall exercise the power of borrowing moneys otherwise than on debentures by passing a resolution at the meetings of the board. Now this law is true only if the BoD has taken a loan in the ordinary course of business. If the loan was taken for the personal use of the directors then it results into loans given to directors which requires a prior permission from the central government.