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MODULE No: 1

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Q. 1: - (A) If you are asked to frame an Arti!es of Assoiation if a "ri#ate Limited
$om%any& '(at ten items you 'i!! re)uire to in!ude in it as t(e most
im%ortant ones*
Ans: - (A) For every Private Limited Company following 10 are the important articles
of association.
i) In every articles of association first clause must be interpretation clause i.e.,
it should eplain the various terminologies used in the articles.
ii) !econd clause is to be regulation regarding share capital, various types of
share capital, rights of shareholders, procedure of issuing share certificate,
variation of the rights etc.
iii) "et clause is about the right of lien of the company and its etent and
character.
i#) #rticle should contain calls on all shares and procedure of transfer of shares.
#) It should contain procedure for transmission and forfeiture of shares.
#i) It should contain various types of meeting and their proceedings and
procedure of voting and proies.
#ii) It should contain board of directors, their powers and their duties.
#iii) Procedure of distribution of dividends and reserves.
i+) Procedure accounts and capitalisation of profits.
+) Procedure of winding up of the company and indemnity.
(,) - $om%any Ltd. is a %u.!i !imited om%any (a#in/ its o.0et !auses !ike t(e
fo!!o'in/:
Main o.0et:
$
(a) Manufaturin/& .randin/& se!!in/& et.& i/arettes and ot(er to.ao
%roduts.
(.) "ur(asin/ a!! materia!s needed to manufature& .rand& %atent of t(e a.o#e
%roduts and a!! assets in!udin/ %!ants and ma(ineries needed.
Ani!!ary o.0ets:
(a) Enter into any ontrats& !ease a/reement et.& for t(e %ur%ose of t(e main
o.0ets.
(.) Manufature& sa!e and ot(er'ise dis%osa! of any .y-%roduts.
Ot(er o.0ets:
(a) Manufaturin/ onsuma.!e foodstuffs and se!!in/ t(e same.
(.) Doin/ any ot(er .usiness t(at t(e om%any deems it %rofita.!e and
.enefiia! to t(e om%any.
(i) Diretors of t(e ,oard of t(e said om%any ask for your ad#ie on t(e
%ro%osa! of startin/ 1ote! .usiness at ,an/a!ore. 2i#e a detai!ed ad#ie
to t(e om%any.
(ii) 3u%%ose any (an/e in t(e o.0et !ause is neessary& $an t(e om%any
(an/e and (o'*
(iii) 1o' an t(e om%any (an/e its name*
Ans: - (,) (i) %&' Company Ltd. can start hotel business in (angalore by ma)ing
alterations in the main ob*ect of the company because the food manufacturing is their
other ob*ect so if %&' Company Ltd. want to start a hotel business then it has ma)e
changes in the main ob*ect and the procedure is given below.
(ii) 4es, change in the ob*ect clause is necessary according to 3e. 15 (1) (d) a company
can by amending the ob*ect clause start any new or additional business.
6o!!o'in/ are t(e %roedure for amendin/ or a!terin/ t(e o.0et of t(e om%any.
+1, First the company has to call a board of meeting decide about the change and in that
meeting special resolution has to be passed for suitably altering the memorandum
of association.
-
+$, In this case %&' and Company is a public Ltd. Company so it has to send copies of
notice to al its shareholders with respect to the amendment.
+-, .hen it has to file the special resolution with eplanatory statement with concerned
registrar of companies.
+/, "ot less than 1 month before filing the petition publish a general notice at least
once daily newspaper.
+0, Forward promptly to the stoc) echange with which the company is enlisted -
copies of the general notice published in the newspaper.
+1, .hen a petition has to be filed before the CL( in form "o. 1 for confirming the
change as prescribed in the regulation 17 (1) 8 (9) of the CL( regulations 1221.
+3, .hen the copy of the petition has to serve to the concerned registrar of companies.
+4, 5n receipt of the CL('s order give notice of the receipt of order to the concerned
registrar of companies in form No. :1.
+2, 6ithin - months from the date of order7altered memorandum of association and
re8uisite fee has to be paid.
+10, Finally company has to ma)e necessary changes in every copy of the
memorandum of association, letters heads, vouchers, registers, office papers etc.
(y following these provisions 9r. %&' Company Ltd. can start the :otel (usiness in
(angalore.
(iii) #ccording to 3e. :1 of the Companies #ct, a company may by special resolution
and with the approval of the central ;overnment signified in writing change its name.
6o!!o'in/ are t(e %roedure for (an/in/ t(e name
i, First important point is the company has to obtain the assent of ;t( of the members
present at a general meeting summoned for the purpose <3e. 9<9 (1)& %ro#iso (#i)
read 'it( 3e. 95:=
ii, #fter deciding the change of name as above, apply to the central ;overnment for
approving the change in name.
iii, 9a)e an application to the central ;overnment in the form of a letter on a plain
paper giving all the relevant details. .here is no prescribed form for this.
iv, .he address of the application to the secretary department of company affaire,
!hastri (havan, 0
th
floor, %#' wing, =r. >a*endra Prasad >oad, "ew =elhi.
/
v, .hen the re8uisite application fee has to be paid by way of treasury challan or
demand draft.
vi, .hen a copy of the application along with copies of other documents attached to it
shall be send to the concerned registrar of the companies for information.
vii, 5n receipt of the approval from the central ;overnment carry on the registration
re8uirements of the company under 3e. 9<5 or 9<>.
Q. :: - Mr. Ani! Desai is en/a/ed in tradin/ ati#ities as a /roer. ?(e .usiness at
%resent is a so!e %ro%rietary onern. 1e 'ants to e+%and t(e .usiness .y
enterin/ into t(e food %roessin/ industry& for '(i( a minimum in#estment
of @s. :AA !ak(s as a%ita! is re)uired. 1is e+istin/ .usiness is 'ort( @s. :9
!ak(s. 1e may .e a.!e to in#est a tota! amount of @s. 1:A !ak(s %ro#ided t(e
.usiness is rum as a or%oration. ?(ere are a fe' ot(ers '(o are %re%ared to
.e assoiated in t(e ne' #enture of Ani! Desai. ,ut (e is a%%re(ensi#e. 1e
'ants to .e )uite sure t(at in s%ite of t(e assoiation of (is t'o friends and
fe' ot(ers in t(e a%ita!B t(e ontro! o#er t(e .usiness onern s(a!! a!'ays
remain 'it( (im.
(1) C(i( ty%e of om%any is suita.!e to a(ie#e t(e %ur%ose* E+%!ain (o'
t(is 'ou!d ensure Ani! DesaiDs %er%etua! ontro!.
(:) Assume t(at t(e om%any may re)uire anot(er EAA !ak(s in t(e near future
for its e+%ansion. ?(e %resent mem.ers of t(e om%any are not in a
%osition to make furt(er in#estments. ,ut& t(e mem.ers of t(e %u.!i and a
fe' ot(er friends of Ani! Desai 'i!! .e in!ined to take s(ares of t(e
om%any. C(at 'ou!d .e t(e de#ie to .e resorted to*
(a) Assumin/ t(at Mr. Ani! Desai is a/reea.!e to form a om%any ad#ie
(im as to t(e ste%s to .e taken for t(e %ur%ose.
(.) Assume t(at t(e om%any 'as formed 'it( an initia! mem.ers(i% is
si+ %ersons. Of t(ese& t'o %ersons 'ere minors at t(e time '(en t(ey
su.sri.ed to t(e onstitutiona! douments of t(e om%any& .ut t(ey
attained ma0ority 'it(in t(ree mont(s of inor%oration of t(e
om%any. One of t(e mem.ers %!eads t(at t(e om%any is not !e/a!!y
inor%orated. Ad#ise.
Ans: - (A) In this case the Private Limited Company is suitable to achieve the purpose,
because,
0
1, In private limited Company there is restriction of on transfer of its shares.
$, .he number of its members is limits to 00.
-, In private Company the articles prohibits invitation to the public to subscribe
for any shares is or debentures the Company
/, In private Company the issue of prospectus is not necessary.
0, In this Company the minimum number of directors is only $.
1, In private Company permission of the directors consults for signing the
memorandum of association.
3, For appointing the directors resolution is not necessary and there are not
re8uired to retire by rotation due to the above reason the private limited
Company is suitable for #nil =esai for having perpetual control.
(,) In this situation my advice to #nil =esai is, he should issue the shares to the
public but the allotment should not eceed the amount, which he has invested that
means he should issue shares for each subscribers below than 30 la)hs, which he
has invested in the present Company then only he can have the control over the
Company
($) Mr. Ani! Desai (as to take t(e fo!!o'in/ ste%s to form a $om%any.
i, First he has to ma)e plan or an idea for the promotion of the Company
ii, .hen he has to design the pro*ect outline.
iii, .hen he has to ma)e viability study and legal implications.
iv, .hen he has to assemble or search the promoters.
v, .hen apply for necessary license or permit to start the Company
vi, .hen he has to ma)e agreements for infrastructure.
vii, .hen in case necessary he has to ma)e pre incorporation contracts and
appoint the lawyer to face the legal conse8uences.
viii, .hen he has to prepare the documents li)e memorandum of association and
articles of association.
i, .hen he has to apply for registration according to 3e. EE (1)
, 5nes the registration is made and certificate of incorporation is given then,
+a, If his Company is private limited Company then he can start business
immediately.
+b, If his Company is public limited Company then,
1
+1, Invite the public to subscribe by issue of prospectus according to
3e. 17F (1) read with 3e. 99
+$, .hen arise minimum subscription mentioned in prospectus 3e.
17F A& read with 3e. <F
+-, .hen he has to allot shares to each subscriber.
+/, .here certificate to act, as a director has to be given.
+0, .hen he has to ma)e statutory declaration.
+1, #fter this the certificate to commence the business will be given
according to 3e. 17F then the public Company can commence
business.
(D) :ere the plea of one of the member is not valid. (ecause, in this case the Company
was formed with membership of 1 persons that means the certificate of incorporation
was already issued to the Company
(ecause the certificate of incorporation is considered as the conclusive proof of
the Company In Mossa 2u!am Arif Gs. I.ra(im 2u!am Arif HIL@ (1F1E) 7A $a! I
(%)= it was held that ones the certificate of incorporation as issued that cannot be
revo)ed. (ecause in this case $ of the subscribers of a company's memorandum were
infants.
!o according to the above principles in this case also even though out of 1, two
persons were minors then also the Company is treated as legally incorporated.
!o the plea of one of the member is not valid and it is not maintainable.
3
Q. E: I "re%are t(e memorandum of assoiation of a om%any !imited .y
/uarantee and (a#in/ a s(are a%ita!. ?(e o.0et of t(e om%any is to %romote
u!tura! ati#ities.
Ans: - Memorandum of a $om%any !imited .y /uarantee and (a#in/ a s(are
a%ita!.
i, .he name of the company is ?Indian Cultural Company Ltd@.
ii, .he resister office of the Company is situated in the state of Aarnata)a
iii, +a, .he main sub*ects is to be pursued by the Company on its incorporation
is ?to promote the cultural activities@
+b, .he ob*ects incidental or ancillary to the attainment of the above main
ob*ect are ?conducting cultural classes, competitions etc. and doing such
other things as are conductive to the attainment of the foregoing main
ob*ect@.
+c, .he other ob*ects for which the Company is established are ?running a
community hall for conducting cultural competitions and running a
publishing house and a publishing of periodicalB magaCinesB news papers
to various interests pertaining to the ob*ects of aforesaid@
+d, .he liability of the member is limited.
+e, Dvery member of the Company underta)es to contribute to the assets of
the Company is the event of being wind up while he is member or
within one year after he ceases to be a member, for payment of the
debits and liabilities of the Company contracted before he cease to be a
member and the costs, charges and epenses of winding up and for the
ad*ustments of the rights of the contributory among them selves, such
amount as may be re8uired not eceeding 00 >uopees.
6e, the several persons whose name and addresses are subscribed are
desirous of being formed into a company in pursuance of this memorandum of
4
association and we respectively agree to ta)e the number of shares in the capital of
the company set opposite our respective names.
Name& address& desri%tion and Num.er of s(ares taken .y ea(
ou%ation of su.sri.ers. 3u.sri.er.
1, #. (. of E E E E E E E E E E #ctorE E E E E E E E E E 100
$, C. =. of E E E E E E E E special wor)er E E E E E E $00
-, D. F. of E E E E E E E E ;overnment Dmployee E E E E E E 00
/, ;. :. of E E E E E E E E political leader E E E E E E 100
0, I. F. of E E E E E E E E E E merchant E E E E E E E E $00
1, P. G. of E E E E E E E E E E lawyer E E E E E E E E 00EEEE
.otal shares ta)en E E E 300
=ated the 10
th
day 9arch of $001
6itness to the above signatures
&, H of E E E E E E E E E E E E E E E E E E E E E E E E E E E E E E
2
Q. 7: - (a) @a0a ram 8 om%any is en/a/ed in t(e .usiness of money !endin/. Mr.
@a0aram& t(e %ro%rietor of t(e .usiness onern 'anted to on#ert it into a
%ri#ate !imited om%any. Ad#ise (im as to t(e %roedura! ste%s to .e taken to
a(ie#e t(is.
(.) C(at are t(e essentia! douments to .e fi!ed for re/istration of t(e om%any*
() ?(e memorandum of assoiation of t(e om%any %resented to t(e @e/istrar for
re/istration& ontain& inter a!ia& t(e fo!!o'in/ !auses:
(i) JA!! t(e diretors of t(e om%any s(a!! .e a%%ointed .y Mr. @a0aram& t(e
%romoterK*
(ii) J?(e Arti!es em.odied in ?a.!e A& of s(edu!e I of $om%anies At& 1F9<
s(a!! .e deemed to .e t(e Arti!es of t(e om%anyK.
?(e re/istrar o.0ets to t(e inor%oration of t(ese %ro#isions in t(e Memorandum.
Deide.
(d) Assume t(at t(e om%any no' 'ants to em.ark u%on t(e .usiness of
manufaturin/ onsumer dura.!es. Ad#ise t(e seretary as to t(e ste%s neessary
to a(ie#e t(is.
Ans: - In this case 9r. >a*a ram, the proprietor of the business concern wanted to
convert his business into private limited Company
An e+istin/ .usiness an .e on#erted into a om%any is any of t(e fo!!o'in/ 'ays:
1, (y outright saleI
$, (y ma)ing partners of the firm the only share holders of the newly incorporated
company
-, 9a)ing a new or eisting company become a partner of the firm, which will be
dissolved there after.
/, (y amalgamation under 3e. EF1 8 EF7 of the companies act, 1201
0, (y registration of eisting *oint stoc) company or eisting *oint family business
under 3e. 9<5 8 9<> of the companies act, 1201.
10
:ere 9r. >a*aram has to choose any one of the above ways for conversion of
his business in to Pvt. Ltd. Company. If 9r. >a*aram wants to convert his business into
company by out right of sale then the fo!!o'in/ %roedure must .e fo!!o'ed.
1, !elect a few suitable names not less than four.
$, #void names which resemble too closely or are the same as the names of any
other company already eisted <3e. :AJ
-, #pply to the >egistrar of Companies to ascertain which of the names selected
by you is available.
/, Pay the fee for the application for availability of name in cash to the >egistrar
of the Companies.
0, ;et the memorandum of association and articles of association drafted suitably
for a Pvt. Ltd. Company
1, ;et both the memorandum of association and articles of association stamped as
per the Indian stamp act.
3, ;et both the memorandum of association and articles of association signed by
at least $ subscribers each of whom will also write in his own hand, his father's
name, occupation, address and the number of shares subscribed for.
4, (oth the document will then be dated.
2, File all the documents before >egistrar of Companies within - months from the
date of availability of name.
10, Pay the registration fee by way of cash or == or treasury challan.
11, .hen the registrar will give the certificate in corporation by scrutinising all the
documents
1$, .he company can start business immediately after obtaining the certificate of
incorporation
(A) C(i!e on#ertin/ t(e .usiness in to "#t. Ltd. $om%any .y outri/(t of sa!e
fo!!o'in/ %oints must .e ke%t in mind.
1, .he proprietor of the eisting business and any other one or more individuals
are the subscribers to the company's memorandum of association H3e. 1:=
11
$, #dmit the other individual or individuals who will be subscribers to the
9emorandum of #ssociation of the newly incorporated company also as a
partner or partners of the firm to be converted there after.
-, Provided in your partnership deed, the transfer of all assets and liabilities of the
firm to one of the partners who will pay the difference to other partners.
(,) 6o!!o'in/ are t(e im%ortant douments for re/istration of t(e om%any.
1, =uly prepared stamped and signed copy of the memorandum of association and
articles of association (3e. E1)
$, Following forms are necessary for registration.
+a, Consent of the person to act as a director in form No. :F (3e. :<<)
+b, Knder ta)ing to ta)e and pay for 8ualification shares in form No. :F
H3e. :<< (1) (.) (iii)=
+c, "otice of the situation of the registered office of the company in form
No. 1> (3e. 17<)
+d, Particulars of directors, manager or secretary in form No. E: in duplicate
(3e. EAE)
+e, =eclaration in favour of one of the subscribers to the memorandum of
association or any other person authorising him to file the documents
and papers for registration and to ma)e necessary corrections.
-, #ny other agreement, if referred to in the memorandum of association or
articles of association.
/, #ny agreement which the company to be incorporated proposes to enter into
with any individual for appointment as its managing director or manager.
0, 5riginal copy of >egistrar of Companies letter intimating about the availability
of name.
($) +i, In this case the >egistrar of the Companies cannot ob*ect to the incorporation
of these provisions in the memorandum because all the directors can be appointed
by 9r. >a*aram the promoter. (ecause according to Art. <7 of .able #, first
directors of a company are generally appointed by being named in the articles or
the articles may provide that they are to be appointed by the subscribers of the
memorandum.
1$
In this case the memorandum itself contains %all the directors of the company
shall be appointed by 9r. >a*aram, the promoter' so the registrar cannot ob*ects to this
point.
+ii, In this case the >egistrar can ob*ect because the articles embodied in ?a.!e A&
of s(edu!e I of the companies #ct, 1201 shall not be deemed to be the articles of
association of the company.
.he articles provided in ?a.!e A are only model for articles of association of the
company limited by shares. .he terms used in this table are general terns not particular
to any )ind of companyI because every company has its own functioning so every
company must have their own articles of association.
(D) If the company wants to embar) upon the manufacturing consumer durables then it
has to change its ob*ect.
6o!!o'in/ are t(e ste%s neessary to (an/e t(e o.0ets of t(e om%any.
+1, First the company has to call a board of meeting decide about the change and in that
meeting special resolution has to be passed for suitably altering the memorandum
of association.
+$, In this case %&' and Company is a public Ltd. Company so it has to send copies of
notice to all its shareholders with respect to the amendment.
+-, .hen it has to file the special resolution with eplanatory statement with concerned
registrar of companies.
+/, "ot less than 1 mont( before filing the petition publish a general notice at least
one dai!y ne's%a%er.
+0, Forward promptly to the stoc) echange with which the company is enlisted -
copies of the general notice published in the newspaper.
1, .hen a petition has to be filed before the CL( in form No. 1 for confirming the
change as prescribed in the re/u!ation 17 (1) 8 (9) of the CL( regulations 1221.
3, .hen the copy of the petition has to serve to the concerned registrar of companies.
4, 5n receipt of the CL('s order give notice of the receipt of order to the concerned
registrar of companies in form No. :1.
2, 6ithin E mont(s from the date of order7altered memorandum of association and
re8uisite fee has to be paid.
1-
10, Finally company has to ma)e necessary changes in every copy of the memorandum
of association, letters heads, vouchers, registers, office papers etc.
Q. 9: I Mr. Laram 3in/( is t(e Lart(a of a Mitaks(ara 1indu 6ami!y& en/a/ed in
t(e traditiona! .usiness of dea!in/ in si!k and ot(er te+ti!e items. 1e (as four adu!t
sons and t(ree dau/(ters. ?(e four adu!t sons (a#e a!to/et(er 19 issues& (1A ma!es
and 9 fema!es& a!! minors). Cit( t(e im%!ied onsent of a!! (is sons& Mr. Laran
3in/( entered into an a/reement 'it( t(e Lart(a of anot(er 0oint fami!y& 'it( a
mem.ers(i% of 19 (7 ma!es and 11 fema!es& a!! adu!ts)& to arry on t(e .usiness
0oint!y as a %artners(i% firm.
(a) ?(e t'o Lart(as are %roseuted on t(e /round t(at t(e .usiness
or/anisation '(i( t(ey (a#e formed is !e/a!!y %ro(i.ited. Deide& statin/
t(e reasons.
(.) Assume t(at MAD $om%any "#t. Ltd.& 'it( a mem.ers(i% of EA& is arryin/
on t(e .usiness of tra#e! a/eny. M,D $om%any "#t. Ltd.& 'it( a
mem.ers(i% of :9 is a!so en/a/ed in t(e same .usiness. ?(e mana/ements
of .ot( t(e om%anies 'it( t(e unanimous onsent of a!! t(eir mem.ers
(a#e deided to mer/e t(e .usiness ati#ities of .ot( t(e om%anies. ?(e
!e/a! de#ie ontem%!ated is t(e formation of a t(ird om%any as a
%ri#ate om%any. Is it %ossi.!e* If so (o'* E+amine t(e !e/a! issues
in#o!#ed.
() As assoiation 'it( a mem.ers(i% of :9 is arryin/ on t(e .usiness of
/roers as uninor%orated .ody. Due to differenes amount t(e mem.ers&
some of t(em deided to 'it(dra' from t(e 0oint #enture. ?(ey (a#e
instituted a suit for disso!ution of t(e assoiation. Ot(ers o.0et. Deide.
(d) Assume t(at in situation () a.o#e& t(e assoiation (as .usiness dea!in/s
'it( MNs. M"D and $om%any Ltd. It (as instituted a suit a/ainst t(e
om%any (M"D 8 $om%any Ltd.) for rea!isation of t(e amount due from
t(em. M"D 8 $om%any Ltd. %!eads t(at t(e suit is not maintaina.!e.
Deide.
Ans: -
1/
(a) +1, In this case 9r. Aaram !ingh's family's consists of / adults son's and - daughter
and / adult cons have 10 minor issue that means 3 adult members and 10 minor
members.
+$, #nother *oint family has 10 adult members both the familiar entered into an
agreement to carry on the business *ointly as a partnership business.
+-, #ccording to 3e. 11 (E) it is an illegal association because, an association of
more than $0 persons carrying on business for gain is only permissible if it is a
:indu Foint family business. (ut in this case it is $ different *oint families and
the total number is $$ adults and 10 minor members.
+/, #ccording to this section an association would be illegal if the partnership of $
or more *oint families and also according to this section minor members of the
families shall be ecluded but the adult members of the families should not
eceed the limit prescribed in 3e. 11 (1) 8 (:).
(ut in this case total #dult members of partnership firm of $ :indu undivided
Family is ::. !o this firm will not get the benefit of 3e. 11 (E). !o it is an illegal
association and Aarthas of both the families can be prosecuted on the ground of illegal
association.
(.) In this case %#' Pvt. Ltd., company and %(' Pvt. Ltd., company can merge the
business activities of both the companies by forming a third company as a Pvt.
Company.
6o!!o'in/ are t(e %roedure for ama!/amation of .ot( t(e om%anies: -
+1, Chec) whether memorandum of association of both the companies contains the
power to amalgamate. If not first carry out the proceedings to alter the same
with the permission of CL(.
+$, Prepare the draft scheme of amalgamation and consider the same by convening
a board of meeting held after issuing notice to the directors of the Company as
per 3e. :><.
+-, #pply to the court for directions to convene the general meeting by way of
Fudge's summons supported by affidavit.
+/, !aid copy of the application made to the concerned court to the central
;overnment =epartment of Company affairs, "ew =elhi.
10
+0, !end a notice for the general meeting to every member with a statement sitting
fourth the terms of the compromise or arrangement and eplain its effect.
+1, :old the general meeting and pass the resolution approving the draft scheme of
amalgamation sub*ect to the confirmation of the :C to be passed by a ma*ority
in number representing ;t( in value of members.
+3, Forward promptly to the stoc) echange with which your Company is enlisted -
copies of the notice and a copy of the proceedings of the general Company.
+4, .he concerned :C will be moved *ointly with the transferee Company if the
registered offices of the $ companies are in the same state.
+2, Provide the concerned :C will all the material facts regarding the scheme.
+10, >eceipt of the concerned :C orderI file the certified copy there in form No. :1
with the concerned registrar of companies within -0 days after obtaining a copy
of the order after paying the re8uisite fee.
+11, # copy of every such order shall be anneed to every copy of the memorandum
of association of the Company issued after the certified copy of the order has
been filed as aforesaid.
#fter these procedures new Company comes in to eistence and then they have to
choose the name, prepare the memorandum of association and articles of association
of the Company as per the procedure.
($) In this case the association consists of members it is carrying on the business of
grocers as an unincorporated body. #ccording to 3e. 11 of the companies act, ?no
Company, association or partnership consisting of more than $0 persons shall be
formed for the purpose of carrying on any other business that has for its ob*ect the
ac8uisition of gain by the Company unless it is registered as a Company is called an
illegal association@.
In this case the association consist of $0 members and it is unincorporated so it
is an illegal association. !o the members of an illegal association cannot sue on a
contract made by it, so its members are individually liable for it. .here can be no cause
of action on the basis of an illegal association. In Lumars'ami $(ettiar 3. N. ? Gs.
M. 3. M $(innt(am.i $(ettiar HAI@ 1F91 Mad. :F1= it was held that the
conse8uences of the illegality of a partnership is that its members have no remedy
11
against each other for contribution or apportionment in respect of partnership dealing
and transactions.
!o in this case the suit filed by some of the members is not maintainable and
they are personally liable for the conse8uences occurred due to illegal association and
according to 3e. 11 (9) every person of an illegal association shall be punishable with
fine, which may etend to >s.10, 000B7
(D) In the above case +c, the association is an illegal association and in such situation
they cannot sue against 9B!. P L Company Ltd. for realisation of the amount due from
them.
In Oenni/s Gs. 1ammond H(1>>:) F Q,D ::9= it was held that an illegal association
couldn't sue to recover any debt or other property.
!o, in this case also the association of $0 members is an illegal association and
they have no right to sue for the recovery of the amount due from 9Bs. P L Company
Ltd. so the suit is not maintainable.
13
MODULE No: :
14
Q. 1: I 3ome of t(e %artners of a %artners(i% firm arryin/ on t(e .usiness of
%!yin/ .uses& formed a %ri#ate !imited om%any& '(i( t(ey ou!d do under
!a' e#en '(i!e t(e %artners(i% ontinued to .e runnin/ onern. ?(ese
%artners so!d to t(e om%any t(eir o'n .uses& '(i( 'ere .ein/ used .y t(e
firm .efore. ?(e seond set of %artners '(o onstituted t(e minority& sued t(e
first /rou% formin/ t(e om%any& for aounts and t(eir s(are of %rofits on
t(e /round t(at& in rea!ity t(e om%any 'as not a different entity from t(e
firm& and t(at t(e .usiness arried on .y it 'as t(e same as t(at of t(e firm.
Deide.
Ans: - 6A$?3 O6 ?1E $A3E: -
In this case some of the partners of a partnership firm carrying on the business
of plying buses, formed a Pvt. Ltd. company, which they could do under law even
while the partnership continued to be running concern. .hen these partners sold to the
company their own buses, which were being used by the firm before.
(ut the second set of partners who constituted the minority sued, that the 1
st
group harming the company for accounts and their shares of profits on the ground that
in reality the company was not a different entity from the firm and that the business
carried on by it was the same as that of the firm.
I33UE INGOLGED: -
6hether the company and the firm are one and the sameM
DI3$U33ION: -
12
In this case the firm and the company are not one and the same they are entirely
separate entities even though both were carried or controlled by the same person or
persons. (ecause,
In the landmar) *udgment of 3a!oman Gs. 3a!oman and $om%any for the first
time the eact meaning of the company was clearly elucidated in Dngland. In this case
it was observed that, ? the company is at law a different person all together from the
subscribes of the memorandumI and though it may be that after in corruption the
business is precisely the same as before, the same persons are managers and the same
hands receive the profits. .he company is not in law their agent are trustee, so in law
the company is a different person from the persons forming it.@
In India this principle is decided long before the !aloman's case. In @e Londa!i
?ea $om%any Ltd. H(1>><) IL@ 1E $a! 7E= it was held that ?the company was a
separate person a separate body all together from the shareholders and the transfer was
as much a conveyance, a transfer of the property, as if the share holders were totally
different@.
#ccording to the above principles I can say that the contention of the second set
of partners the company was not a different entity from the firm, is not valid and it is
not acceptable, because in the eyes of law company is a separate legal person and it has
right of ac8uiring holding, en*oying and disposing pf property.
!o, in this case company and the partnership firm are entirely different entities
even though both were carried by the same set off persons.

$0
Q. :: - A .usiness onern 'as on#erted into a om%any and a!! t(e s(ares of t(e
om%any 'ere (e!d .y t(e %ersons o'nin/ t(e .usiness onern. ?(ey so!d
ertain %remises to t(e ne' om%any. ?(e differene .et'een t(e se!!in/ %rie
and ost of t(e %ro%erty in t(eir (ands 'as assessed as t(eir inome. ?(ey
ontended t(at t(is ou!d not .e done& as t(ere 'as no ommeria! sa!e& .ut
on!y a transfer from se!f to se!f. Deide.
Ans: - 6A$?3 O6 ?1E $A3E: -
In this case a business concern was converted into a company and the persons
owning the business concern held all the shares of the company. .hey sold certain
premises to the new company. (ut the difference between the selling price and cost of
the property in their hands was assessed as their income.
:ere they contend that this assessment could not be done because there was no
commercial sale, but only a transfer from self to self.
I33UE INGOLGED: -
6hether the sale of certain premises is a commercial saleM
DI3$U33ION: -
In this case the contention of assesses is not valid. (ecause, the sale between the
company and the persons is a commercial sale, as the company and person are two
separate bodies even though the company is carried by the same assesses.
In 3a!oman Gs. 3a!oman and $om%any it was held that company is a different
person altogether from the subscribers shareholder and directors.
In @ Gs. MDonne! H(1F<<) 1 A!! E@ 1FE= the court observed, ? 6here the sole
responsible person in the company is the defendant himself it would not be right to say
that there were two persons or two minds@.
$1
In Maaura Gs. Nort(ern Assurane $om%any H(1F:9) A$ <1F 1L= it was
held by the :ouse of Lords that, on incorporation the company ac8uired a legal
personality distinct from its members.
!o the sale to the company is between the two separate persons i.e., natural
person and legal person. !o this sale is considered as commercial sale and the
difference between the selling price and cost of the property in their hands should be
assessed as their income even though the company is carried on by the same person, so
this sale is commercial sale.
Q. E: I A om%any 'as esta.!is(ed to arry on t(e trade of a %rodut mer(ant in
Cestern Austra!ia. It entered into s%eu!ati#e ontrats 'it( mer(ants in
$a!utta for %ur(ase of 0ute. ?(e memorandum ontained no e+%ress %o'er to
dea! in 0ute& .ut !ause 0 reads: M?o arry on any ot(er .usiness '(et(er
manufaturin/ or ot(er'iseD t(e %ur(ase of 0ute is intra #ires or u!tra #ires t(e
om%any. Deide.
Ans: - 6A$?3 O6 ?1E $A3E: -
In this case a company was established to carry on the trade of a ?product
merchant@ in western #ustralia and it entered into speculative contracts with merchants
in Calcutta for purchase of *ute. (ut the memorandum contained to epress power to
deal in *ute, but clause %* ' readsN ?to carry on any other business whether manufacturing
or otherwise@.
I33UE INGOLGED: -
6hither the purchase of *ute is intra vires or ultra vires the companyM
DI3$U33ION: -
In this case the purchase of *ute is intra vires. (ecause here the intention of
purchasing *ute is for the benefit of the company not as misuse of the company's money
even though there is no epress provisions relating to purchase of *ute. (ut in the
memorandum clause %* ' reads ? to carry on any other business whether manufacturing
or other wise@, means directors have power to carry out any other business for the
benefit of the company. :ere the directors went into contract for purchase of *ute for
$$
the benefit of the company. !o this is not ultra vires, because whether a transaction is
ultra vires or not is to see whether it is beneficial to the company or not. If it does not
benefit the company, then the transition becomes ultra vires however praise worthy the
ob*ect may be.
In Attorney 2enera! Gs. ?(e 2reat Estern @ai!'ay $om%any H(1>5F->A) A!!
E@ @e% E+t 179F= the :ouse of Lords observed that % the doctrine of ultra vires should
be maintained, but it ought to be reasonably under stood and applied and that what ever
may be fairly regarded as incidental to the ob*ects authorised ought not to be held as
ultra vires unless it is epressly prohibited'.
?(us a om%any may do an at& '(i( is:
+a, "ecessary for or
+b, Incidental to the attainment of its ob*ects or
+c, 6hich is other wise authorised by the act
!o in this case there is no epress prohibition regarding the purchase of *ute and
clause %* ' is also very much similar to the above principles laid down in Attorney
2enera! Gs. ?(e 2reat Estern @ai!'ay $om%any and the company's main ob*ect is
product merchant and the purchase of *ute is comes under the product, so the
company's act of purchasing *ute is not ultra vires but it is intra vires
$-
Q. 7: I ?(e memorandum of a om%any /a#e %o'er to t(e diretors to M.orro' or
raise or seure any sum or sums of money on t(e seurity of t(e %ro%erty of t(e
om%any .y t(e issue of de.entures& and so on& for t(e %ur%ose of om%anyDs
.usinessD. ?(ey .orro'ed <&:9A %ound and used t(e money to %ay of ertain
outstandin/ de.ts. ?(e %erson !endin/ money 'as una'are of t(e %ur%ose for
'(i( money 'as .ein/ .orro'ed. Deide '(et(er t(e !ender ou!d enfore
re%ayment of !oan e#en t(ou/( t(e %ur%ose of !oan 'as im%ro%er and u!tra #ires.
Ans: - 6A$?3 O6 ?1E $A3E: -
In this case the memorandum of a company gave power to the directors to
borrow or raise or secure any sum of money on the security of the property of the
company by the issue of debentures and so on for the purpose of company's business
according to this directors borrowed 1,$00 pound and used the money to pay of certain
outstanding debts but the person lending money was being borrowed.
I33UE INGOLGED: -
6hether the lender could enforce repayment of loan even though the purpose of
loan improper and ultra viresM
DI3$U33ION: -
4es, in this case the lender could enforce repayment of loan even though the
purpose of loan was improper and ultra vires because in the words of 3.$.3en ?while
person dealing with a company are assumed to have read the public document +viC7
memorandum and articles of association, of a company and to have ascertained that the
$/
proposed transaction is not inconsistent there with, he is not re8uire to do moreI they
need not en8uire into the regularity of internal proceedings and may assume that all this
being done regularly@, this principle called as ?Indoor 9anagement@ and this principle
is evolved in the case of @oya! ,ritis( ,ank Gs. ?ur)uand H(1>9<) 11F E@ >><=.
#ccording to this principle the person who want deal with the company should
)now whether there is any epress provision relating to the particular contract which he
is going to deal but nor beyond that.
In this case there is an epress provision for the borrowing of money according
to which they borrowed 1,$00 pound. In such a situation the lender should )now
whether there is any epress provision for borrowing of money or not and it is not the
lender's duty to see whether that money is used for the intra vires activities or ultra
vires acts. It is the duty of directors to use that amount for the benefit of the company
not for ultra vires actsI if they use that amount for ultra vires then they are personally
liable to the amount.
!o the lender can enforce re payment of loan even though that amount is used
for ultra vires acts. In every company third person has no right to interfere in the indoor
management because it purely confidential and only company management and share
holder has the right to interfere in the indoor management or in the internal activities.
!o in this case even though money is used for the repayment of debit. .he
lender has right to enforce the repayment of loan.
$0
Q. 9: I Diretors of a om%any .orro'ed money from a .ank on t(e seurity of a
mi!! situated in @an/oon. ?(e diretors (ad a!ready e+eeded t(e !imit (of an
amount e)ua! to (a!f t(e %aid-u% a%ita!) im%osed on t(eir %o'er to .orro' .y t(e
arti!es. ?(ere 'as a %ro#ision in t(e arti!es t(at& Mt(e om%any in a /enera!
meetin/ mi/(t .y a s%eia! #ote en!ar/e t(e diretors %o'er to .orro'D. ?(e .ank
sou/(t to enfore t(e seurity re!yin/ on t(is !ause& (o!din/ t(at t(ey 'ere
entit!ed to assume t(at Mt(e diretors %o'er to .orro' (ad .een so e+tendedD. ?(e
om%any resists t(e .anks !aim. Deide.
Ans: I 6A$?3 O6 ?1E $A3E: -
In this case the directors of the company7borrowed money from a ban) on the
security of a mill situated in >angoon. .he director had already eceeded the limit +of
an amount e8ual to half the paid of capital, imposed on their power to borrow by the
articles. (ut there was provision in the articles that, ? the company in a general meeting
might by the special vote enlarge the directors power to borrow@. :ere the ban) sought
to enforce the security relying on this case holding that they were entitled to assume
that the director's power to borrow had been so etended. (ut the company resists the
ban) claim.

I33UE3 INGOLGED: -
Can the company resist the ban)'s claimM
DI3$U33ION: -
$1
In this case the company cannot resist the ban)'s claim so it has to bear the loan
and the ban) has right to enforce security. (ecause the memorandum and articles of the
association are public documents, open to the public inspection. (ut the details of
internal procedure are not thus open to public inspection. :ence an outsider is
presumed )now the constitution of a company.
In this case the ban) can loo) into only whether the directors have power to
borrow the money or not and it is not ban)s duty to see whether they are in a limitation
or eceeded the limitation and also ban) can assume that the directors got the power to
borrow the money by a special vote in the general meeting. In the @oya! ,ritis( ,ank
Gs. ?ur)uand the court held that, ones it was found that the directors could borrow
sub*ect to a resolution, the plaintiff had the right to infer that the necessary resolution
must have been passed. 6hile delivering the *udgment Lord $am%.e!! $. O observed
that when ban) acted with good faith and shareholders not being pre*udiced. .he ban)
has bonafidely advanced their money for the use of company giving credit to the re
prescription of the directors that they had authority to eecute the bondI and the money
which they advanced and which they see) to recover must be ta)en to have been in the
business of the company and for the benefit of the share holders.
#ccording to doctrine indoor management and in Ma(ony Gs. East 1o!y ford
Minin/ $om%any H(1>59) L@ 5 1L ><F= it was held that any person dealing with the
company should read the memorandum and articles of association but not beyond that,
that means third person have no right to observe the internal procedure of the company.
!o according to all this principles I came to the conclusion that in this case even
though the directors had already eceeded the limit imposed on their power to borrow
by articles, ban) can assume that the director's power to borrow had been so etended.
!o the company is bound by the loan and it has to pay entire amount it can escape from
paying the debt. Dven though in general meeting their power had not been etended.
$3
MODULE No: - E
$4
Q.1: - Mr. A .ein/ t(e ma0ority s(are(o!der and diretor of a om%any 'ants to
se!! t(e so!e undertakin/ of t(e om%any at a %rie 'e!! .e!o' t(e rea! #a!ue of t(e
undertakin/. ?(e undertakin/ is %resent!y runnin/ at a !oss .ut is a%a.!e of
earnin/ (u/e %rofits under %ro%er mana/ement. Disuss '(et(er t(e minority
s(are(o!ders an a%%roa( t(e ourt under 3e. EF5 8 EF>.
Ans: I 6A$?3 O6 ?1E $A3E: -
9r. # being the ma*ority shareholder and director of a company wants to sell
the sole underta)ing of the company at a price well below the real value of the
underta)ing. .he underta)ing is presently running at a loss but is capable of earning
huge profits under proper management.
I33UE3 INGOLGED: -
6hether the minority shareholders can approach the court under 3e. -23 or
-24 of the companies #ct, 1201M
DI3$U33ION: -
4es& minority shareholders can approach the court under 3e. EF5 8 EF> of the
Companies #ct, 1201 and court can direct under 3e. EF> that underta)ing not to be
sold up to the specified period ecept on strength of special resolution, because in
Garkey Gs. ?.@.Motis(a'& held :igh Court held that the sale was not of an
underta)ing with a view to embar) of some other business, but a sale which was
tantamount to winding up of the company and also it was held that the company could
go into li8uidation if it wished to. (ut, for this a special resolution was necessary under
3etions 7EE (a) or 7>7 (1) (.) of the act. (ut in order to safeguard the interests of the
$2
company the court would be *ustified in directing that the underta)ing should not be
sold for specified unless the company by a special resolution resolved that it be sold.
!o, according to the *udgment of the Aerala :C. I can come to the conclusion
that the minority shareholders can approach the court under 3etion EF5 or EF> of the
Companies #ct, 1201 for not to sell the shares unless the company by a special
resolution can get the permission to sell the shares in the prescribed manner.
Q. :: - A %u.!i om%any doin/ for'ard ontrat .usiness amended its arti!es
under a statutory diretion so as to de%ri#e its non-tradin/ mem.ers of t(eir ri/(t
to #ote& to a!! meetin/s to e!et diretors and to reei#e di#idends. ?(e de%ri#ed
mem.ers (a!!en/e t(e ation as .ein/ Mo%%ressi#eD. Deide.
Ans: I 6A$?3 O6 ?1E $A3E: -
In this case a public company doing forward contract business amended its
articles under a statutory direction so as to deprive its non7trading members of their
right to vote, to call meetings to elect directors and to receive dividends.
I33UE3 INGOLGED: -
6hether the amendment of the article by the company is the deprivation of non7
trading
9embersM
DI3$U33ION: -
:ere the intention of the company is to forward the contract business, to do so
company has right to amend its articles of #ssociation, but the company in doing so
tem pled upon the valuable rights of such members by un*ust eercise of authority or
power and it amounted to oppression within the meaning of 3e. EF5& !o company
cannot ma)e such changes so that the rights of the minority members infringed or ta)en
away. (ecause in Mo(an!a! $(anduma!! 8 ot(ers Gs. "un0a. om%any Ltd.,
Pun*ab :C held that, right to cast vote, electing directors or collecting dividends are
proprietary right and the holder of shares may eercise this right in any manner he
pleases and this right has been effectively entrenched by the statute and it cannot be
-0
ta)en away by any alteration in the memorandum or articles or by palling of any
resolution in that behalf.
!o according to the Pun*ab :C decision I can say that the amendments of
articles are oppressive but even confiscatory, so the deprived members can challenge
the action of the company.
Q. E: - Of t(e t'o diretors of a om%any& one died and t(e ot(er su.mitted (is
resi/nation. ?(ere 'as no %ro#ision in t(e Arti!es re!atin/ to resi/nation .y a
diretor. ?(e om%any refused to ae%t t(e resi/nation. ?(e diretor seeks
your ad#ie.
Ans: I 6A$?3 O6 ?1E $A3E: -
In a company there were two directors one died and the other director submitted
his resignation. (ut there was no provision in the articles relating to resignation by a
director so, the company refused to accept the resignation.
M4 ADGI$E ?O ?1E DI@E$?O@3: -
#ccording to 3e. :9E 8 :97 of the Companies #ct of 1201, in the absence of
any provision in article of association a director who had submitted his resignation
would be deemed to have resigned from his office from the date of the submission of
his resignation. (ecause in 3.3.Laks(mana "i!!ai Gs. @e/istrar of $om%anies and
Anot(er it was held by the 9adras :C that if a director resigned after the death of
another director, co7option of another director before leaving the office is not condition
precedent so the director would be deemed to have resigned office from the date of the
submission of his resignation.
!o according to the above *udgment I can advice that, there is no mandatory
provision in the memorandum of articles prescribing any condition that the resignation
tendered by a director of a company or the board of directors. In the absence of any
provision either in the act or in the memorandum of articles, the director who had
-1
submitted his resignation would be deemed to have resigned from his office from the
date of the submission of his resignation, when his intention is une8uivocally epressed
either orally or by a letter.
!o the resignation of the director after the death of another director is valid. !o
the company has to accept the resignation of the director.
Q. 7: - Mr. A 'as a%%ointed as Mana/in/ Diretor of a om%any for a %eriod of 9
years at a mont(!y sa!ary of @s. 9AAAN- annua! inrement of @s. 9AAN- ommission
on %rofits P 1Q media! a!!o'ane& (ouse rent a!!o'ane et. t(e entra!
2o#ernment a%%ro#ed t(e a%%ointment .y reduin/ t(e term to : years 8 a!so
s!as(ed t(e sa!ary and ot(er emo!uments .ut fai!ed to /i#e any reasons for t(ese
(an/es. Disuss t(e #a!idity of t(is order.
Ans: I 6A$?3 O6 ?1E $A3E: -
In this case 9r. # was appointed as 9anaging =irector of a company for a
period of 0 years at a monthly salary of >s. 0000B7 annual increment of >s. 000B7
commission on profits O 1P medical allowance, house rent allowance etc. the central
;overnment approved the appointment by reduced the term to $ years L also slashed
the salary and other emoluments but failed to give any reasons for these changes.
I33UE3 INGOLGED: -
6hether the central ;overnment order is validM
DI3$U33ION: -
:ere the central ;overnment order is not valid and also illegal because the
;overnment of India has not formulated any statutory public policy it is the duty of
central ;overnment to decide that application in accordance with the provisions
contained in the companies act. If the guidelines are not in conformity with law they
are illegal, bad L void. It was necessary to consider first to the total amount of
managerial remuneration paid and there after decide as to whether the person was a fit
and proper person to be appointed as managing director and that the terms offered were
-$
fair and reasonable. It was also necessary to determine as to whether the remuneration
fied was in conformity with the provisions contained in 3e. EAF of the companies act.
(efore granting approval and at the time of deciding about the considerations it was
also necessary to consider the financial position of the company, remuneration and
commission of 9r. # and his professional 8ualification and several other factors which
are enumerated in the section.
(ut in this case central ;overnment without giving any reasons reduced the
terms and also slashed the salary and other emoluments, so it is the clear violation of
law, so this order of the central ;overnment is illegal and void.
Q. 9: - In t(is ase t(ere (as .een a suessi#e fa!! in t(e %rofit of a om%any o#er
t(e years. ?(e diretorDs re!ati#es (a#e .een a%%ointed to (i/( %osition and %aid
(i/( sa!aries. ?(e om%any (as formed : ot(er su.sidiaries& '(i( are .ein/
mana/ed .y t(e diretorDs re!ati#es. ?(e %arent om%any (as /i#en (u/e !oans to
t(ese su.sidiaries .ut no interest (as .een rea!ised on t(ese !oans. Disuss '(et(er
t(ese fats 'arrant an in#esti/ation in to t(e affairs of t(e om%any UNs :E5.
Ans: I 6A$?3 O6 ?1E $A3E: -
In this case there has been a successive fall in the profit of a company over the
years. .he director's relatives have been appointed to high position and paid high
salaries. .he company has formed $ other subsidiaries, which are being managed by the
director's relatives. .he parent company has given huge loans to these subsidiaries but
no interest has been realiCed on these loans.
I33UE3 INGOLGED: -
6hether these facts warrant an investigation in to the affairs of the company UNs :E5M
DI3$U33ION: -
#ccording to 3e. $-3 +b, of companies act. Company Law (oard may sue
moto appoint inspectors to investigate in to the affairs of the company or as) the
;overnment to act in the following three situations.
+i, Fraud, 5ppression or Illegality.
+ii, Fraud, 9isfeasance or misconduct.
+iii, In ade8uate information.
--
#nd also under 3es. :E7 8 :E9 the central ;overnment or the company law
board may appoint inspectors to investigate into the affairs of the company.
(ut these provisions are discretionary or permissive in nature i.e., there is no
compulsion on them to conduct such investigation and also these sections rely on the
?gathering of information@ if the information is prima facie proof to the clauses of 3e.
:E5 (.) then only a warrant of investigation is obtained from, court or company law
board or the central ;overnment

(ut in this case the allegations are not so strong that warrant of investigation
will be granted against the company, because in 3(are(o!der of MN3 De!(i 6!our
Mi!!s $om%any Ltd. Gs. De!(i 6!our Mi!!s $om%any Ltd.& it was held by the =elhi
:igh Court that, mismanagement, misconduct are not sufficient ground to order for the
investigation.
If we apply this principle to the present case we can say that,
1. .he fall in the profit or the relatives of the directors were appointed to high
position and paid high salaries are not a good grounds for the investigation,
because in every establishment getting profit for every year is not possible. In
one or two year if they suffer loss that is not a matter for investigation and there
are sufficient number of provisions of the act guarding the shareholders from
unauthorised appointment of employees who are relatives of directors.
$. #s regards to the huge loan to the subsidiary companies, but no interest has
been realised on these loans is not an illegal action under the companies act,
because the directors of the company has full right of investment in the
subsidiary company and in this case the subsidiary companies were not so far
matured in any profit and in fact causing any lass to the holding company.
!o on these grounds I came to the conclusion that the facts in this case were not
sufficient to warrant an investigation in to the affairs of the company UNs :E5.
-/
MODULE No: - 7
-0
Q. 1: - A %o!! 'as demanded .y a mem.er after #otin/ resu!ts 'ere announed.
?(e (airman ordered t(e %o!! to .e onduted and su.se)uent!y announed t(e
resu!ts of t(e %o!!. ?(e resu!ts are (a!!en/ed on t(e /round t(at t(e (airman (ad
im%ro%er!y re0eted ertain %ro+ies '(i( if ae%ted mi/(t (a#e /i#en a different
resu!t. ?(e (airman !aims (is deision is fina!. Deide
Ans: I 6A$?3 O6 ?1E $A3E: -
# poll was demanded by a member after voting results were announced. .he
chairman ordered the poll to be conducted and subse8uently announced the results of
the poll. .his results are challenged on the ground that the chairman had improperly
re*ected certain proies which if accepted might have given a different result.
I33UE3 INGOLGED: -
6hether the chairman's decision is finalM
DI3$U33ION: -
:ere the contentions of the plaintiff <that chairman had improperly re*ected
certain proies if accepted might have given a different resultJ must be proved by him
self. (ecause,
In Ma(a!iram 3ant(a!is Gs. 6ort 2!oster 0ute Manufaturin/
$om%any Ltd. and ot(ers it was held that prima7facie unless a case of bad faith is
-1
made the decision of the chairman to stand as prima7facie final until it can be found to
be wrong at the trial.
?In case of any dispute as to the admission or re*ection of any vote the chairman
shall determine the same and such determination made in good faith shall be final and
conclusive@.
!o in this case until the bad faith is proved the decision of the chairman is final.
If the chairman act in a bad faith then his decision is not valid. !o the contention raised
by the plaintiff, must be proved by them only. If they are not able to prove then the
chairman decision is final.
Q. :: - 3ome mem.ers of a om%any e+euted t'o instruments of %ro+y to #ote at
its A2M. A s(are(o!der (a!!en/ed t(e #a!idity of datin/ on one set of %ro+ies& and
a%%!ied for ertified o%y of t(e %ro+y instruments formin/ %art of t(e reord of
i#i! ourt in some ot(er %roeedin/. ?(e re/istrar ordered issue of t(e ertified
o%ies of t(e %ro+ies. ?(e om%any ontended t(at su( an order ad#erse!y
affeted its ri/(ts and so s(ou!d .e de!ared #oid. Deide
Ans: I 6A$?3 O6 ?1E $A3E: -
In a company some of the members eecuted two instruments of proy to vote
at its #;9. # shareholder challenged the validity of dating on one set of proies, and
applied for certified copy of the proy instruments forming part of the record of civil
court in some other proceedings. .he registrar ordered issue of the certified copies of
the proies.
I33UE3 INGOLGED: -
6hether the order of the registrar adversely affected the rights of the companyM
DI3$U33ION: -
:ere the company's contention of such an order adversely affected its rights is
not maintainable because, according to 3e. 15< of t(e $om%anies At& 1F9<& the
proies deposited with a company were open to inspection and there was no secrecy
either in the signatures or in the other particulars contained in the instrument of proy.
-3
#nd also in 3'adesi "o!yte+ Ltd. Gs. G.L.2oes and ot(ers& it was held by the
=elhi :C that, proy could be revo)ed at any time and certified copies of the proies
were vital documents for the disposal of the suit.
!o according to the above views of the =elhi high court I can say that the order
for issue of the certified copies was *ustified and no right of the company was adversely
affected and more over company should assist in the ascertaining and determining by
the court whether the election to the board of directors was legal and valid.
Q. E: - ?(e e+euti#e ommittee of t(e om%any !imited .y /uarantee %assed
ertain e!etion @u!es < () %ro#ided t(at a %ro+y a%%ointed t(rou/( an in
instrument. Ot(er t(an t(e %rinted instrument du!y dis%at(ed .y t(e om%any&
s(a!! not .e #a!id. @u!es 5 8 > dea!t 'it( !ost %ro+ies and re#oation of %ro+ies
res%eti#e!y and %ro#ided for issuane of fres( %ro+y forms .y t(e om%any.
3ome of t(e mem.ers sou/(t an in0untion a/ainst t(e om%any restrainin/ it
from enforin/ or im%!ementin/ t(ese ru!es on t(e /round t(at t(ey 'ent .eyond
t(e statute. Disuss t(e #a!idity of t(is ontention.
Ans: I 6A$?3 O6 ?1E $A3E: -
#n eecutive committee of the company Ltd. by guarantee passed certain
election @u!es < () provides that a proy appointed through an in instrument, other
than printed instrument duly dispatched by the company shall not be valid and @u!es 5
8 > dealt with lost proies and revocation of proies respectively and provided for
issuance of fresh proy forms by the company.
I33UE3 INGOLGED: -
6hether the >ules were beyond the statuteM
DI3$U33ION: -
4es& the contention of some of the members of the company is valid because the
@u!es < ()& 5 8 > of the company were not valid and they are beyond the statute.
(ecause, according to 3e. 15< (<) of the act the only proy which is re8uired for the
purposes of enabling a person to cast his vote is in the form set out in the s(edu!e I-
-4
to the #ct. !o @u!es < ()& 5 8 > of the impugned election rules of the company
purported to do eactly that which the statute did not re8uire or permit and the
members sought to do what the statute necessarily forbids. .he =elhi :C also up holds
this view in 2enera! $ommere Ltd Gs. A%%are! e+%ort %romotion ouni!.
.here fore the impugned rules were of no effect and the members of the
company were entitled to vote by proy, which were in accordance with the form
prescribed by s(edu!e I- of the companies #ct. !o the members were entitled for
in*unction to restrain the company.
Q. 7: I Des%ite a #a!id re)uisition .ein/ made t(e diretor of a om%any refuse to
a!! a meetin/. ?(e re)uisitionists t(emse!#es iru!ated a notie for t(e meetin/ to
.e (e!d on 1-1-1FF7 at t(e re/istered offie of t(e om%any. C(en t(e %eo%!e
on#ened for t(e meetin/ t(ey found t(at t(e diretors (ad !oked t(e %remises
and %re#ent t(e meetin/-takin/ %!ae. ?(e re)uisitionists t(en s(ifted t(e #enue of
t(e meetin/ to anot(er %!ae and %assed some reso!utions of remo#in/ t'o
diretors. ?(ese reso!utions 'ere (a!!en/ed on t(e /round t(at& t(e meetin/ 'as
in#a!id .eause it 'as not (e!d in t(e s%eified %!ae. Disuss.
Ans: I 6A$?3 O6 ?1E $A3E: -
In this case the directors of a company refuses to call the meeting despite of a
valid re8uisitions but the re8uisitionists themselves circulated a notice for the to be held
on 1717122/ at the registered office of the company. 6hen the people convened for the
meeting they found that the directors had loc)ed the premises and prevent the meeting7
ta)ing place. .he re8uisitionists then shifted the venue of the meeting to another place
and passed some resolutions of removing two directors.
I33UE3 INGOLGED: -
6hether the resolutions can be challenged on the ground that, the meeting was invalid
because it was not held in the specified placeM
DI3$U33ION: -
In this the resolutions can be challenged on the ground that, the meeting was
invalid because it was not held in the specified place.
-2
(ecause, according to @e/u!ation 99 of ?a.!e MAD of the Indian Companies #ct,
?.he Chairman may with the consent of any meeting at which a 8uorum is present +and
shall it so directed by the meeting,, ad*ourn the meeting from time to time and from
place to place@.
!o in this case the directors had loc)ed the meeting premises and deliberately
prevent the meeting7ta)ing place. !o it is clear that the directors had an intention of
preventing the meeting. !o they loc)ed the premises on 017017122/, then without any
re8uisitionists change the place of meeting and passes the resolutions. 5therwise they
would have conducted the meeting in the specified premises only. !o this would
reasonable presumed under 3e.117 of t(e E#idene At. !o the resolution can be
challenged only on the ground that meeting was not held in the specified place.
Q. 9: - - 8 4 'ere mem.ers of : ri#a! /rou%s of s(are(o!ders. 4 'as a%%ointed as
t(e diretor of t(e om%any in an e+traordinary /enera! re)uisitioned t(e
on#enin/ of t(e E2M& (o' t(e om%any issued a notie& and t(e minutes of t(e
meetin/ 'ere reorded in a .ook& '(i( 'as not a minute .ook. ?(ou/( t(e
notie on#enin/ t(e meetin/ 'as %ur%orted to t(e issued .y t(e $om%any& t(ere
'as no .oard meetin/ (e!d for onsiderin/ t(e re)uisition and no .oard-deision
to (o!d an E2M 'as taken. - 8 a fe' ot(ers (a!!en/ed t(e a%%ointment of 4 on
t(e /round t(at& t(e E2M '(ere t(e arti!es 'ere amended so as to %ro#ide for E
diretors on to t(e .oard& 'as i!!e/a! and (ene M4Ds e!etion 'as in#a!id 8
kee%in/ in t(e mind t(at t(e .ook in '(i( t(e minutes 'ere noted 'as not
a#ai!a.!e to .e %rodued .efore t(e ourt disuss t(e #a!idity of t(is %!ea.
Ans: I 6A$?3 O6 ?1E $A3E: -
In this case, & L H were members of $ rival groups of shareholders. H was
appointed as the director of the company in an etraordinary general re8uisitioned the
convening of the D;9, how the company issued a notice, and the minutes of the
meeting were recorded in a boo), which was not a minute boo). .hough the notice
convening the meeting was purported to the issued by the Company, there was no board
meeting held for considering the re8uisition and no board7decision to hold an D;9 was
ta)en.
I33UE3 INGOLGED: -
6hether the appointment of %H' is valid or invalidM
/0
DI3$U33ION: -
In this case the appointment of ?H' is not valid. (ecause, according to the facts,
the minutes of the meeting were stated to be recorded in a boo) which was not the
minute's boo) of the company. !o this was not pleaded before the court. .herefore the
statutory presumption under setion 1F9 of the Companies #ct was not available L
therefore, it had to be held that the meeting was not really held L that the resolution
purported to have been passed at the said meeting was illegal and void.
.herefore, the articles of #ssociation of the Company would be as they stood
prior to the alleged meeting and hence the petitioners were entitled to a declaration that
the resolution passed in the meeting were not binding on the first respondent company.
#nd the appointment of %H' as a director of the company in an D;9 is not valid.
(ecause, under 3e.15E of the #ct, with the regard to appointment of directors, there
should have been an eplanatory statement has been appended to the notice, which is
mandatory. .herefore, failure to appeal an eplanatory statement is not only defective
but also fatal and incurable defect.
.his view is upheld in D. ,a!asundaram Gs. Ne' ?(eatres $aruati ?a!kies
and a!so in 3(et Mo(an La! 2an%atram Gs. 3(ri 3aya0i Ou.i!ee $otton and Oute
Mi!!s Ltd.& H(1FF7) E7 $om%. $as. 555. (2u0)= and also in the above cases it was held
that, a minutes of general meeting should contain a fair summary of the proceedings of
D;9. 3e.1FE of the #ct, provides that every general meeting. If the presumption is
not available under 3e. 1FE, presumption under 3e. 1F9 is also not available.
!o, according to the above points and provisions of law, it can be held that the
appointment of %H' as a director of the company is not valid.
/1
MODULE No: - 9
/$
Q. 1: - A %etition under 3e. EF5 8 EF> of t(e om%anies at 'as fi!ed .y a mem.er
'(o 'as not atin/ in (is o'n ri/(t .ut at t(e re)uest of t(e transferee '(o 'as
not yet a re/istered s(are(o!der. ?(e res%ondents ontends t(at Je#ery mem.er
'(o ame .efore t(e ourt must (a#e t(e /rie#ane& eit(er t(at (e (as .een
o%%ressed or t(at t(e om%any is .ein/ onduted in a manner %re0udiia! to t(e
interests of t(e om%any and t(is /rie#ane must .e %ersona! /rie#ane of a
mem.er. It annot .e a #iarious /rie#ane& a /rie#ane of (is .enefiiaryK.
Ans: I 6A$?3 O6 ?1E $A3E: -
In this case a petition under 3e. EF5 8 EF> of the companies act was filed by a
member who was not acting in his own right but at the re8uest of the transferee who
was not yet a registered shareholder. (ut the Company contends ?every member who
came before the court must have the grievance, either that he has been oppressed or that
the company is being conducted in a manner pre*udicial to the interests of the company
and this grievance must be personal grievance of a member@.
I33UE3 INGOLGED: -
6hether the member of the company can file petition on the re8uest of
transferee who was not a member of the companyM
DI3$U33ION: -
Hes, the member of the company can file the petition against the company on
the re8uest of transferee. :ence the contention of the company is not valid because
/-
according to 3e. EF5 (:) of the companies act, 1201 the CL( has power to entertain
the matters that the company's affairs are being conducted in a manner oppressive to
any member or members that means there is no necessity of personal grievance to the
member, but if it is in the interest of public then also the company law board has power
to entertain the matter.
In this case, the petition was filed by the member of the company on the re8uest
of other person who is not a member that means it could be treated in the interest of the
public because, in 121- ?in t(e manner %re0udiia! to t(e %u.!i interest@ were
inserted in 3e. EF5 8 EF> in order that there is no personal pre*udice and grievance
any share holders is necessary. If the act of the company is pre*udicial to the interest of
the public then any person can file a petition before the CL(.
!o in this case even though there is no personal grievance to the member but the
act of the company is pre*udice to other person who is not the member can be treated as
public and the petition filed under 3e. EF5 8 EF> is valid. (ecause, if the re8uest of
the transferee who is not the member of the company has come interest in the company
even though he is not the member he can be treated as the ordinary person or public. !o
on his re8uest the case filed by the member is in the interest of the public so the petition
is valid.
//
Q. :: - A 1U6 %ur(ased a fe' s(ares of Gikers 3ystems Internationa! Ltd. ,ut
t(e om%any refused to re/ister in t(e name of 1indu Undi#ided 6ami!y
re%resented .y Larta& L. ?(e om%anyDs %!ea is t(at 1indu Undi#ided 6ami!y
is not a 0udiia! .ody and a !e/a! entity and t(e transfer deed e+euted .y in
fa#our of t(e 1indu Undi#ided 6ami!y re%resented .y it is not a #a!id transfer
deed .eause a om%any annot take notie of any trust on its re/ister of
mem.ers. $ritia!!y e+amine t(e ar/uments of t(e om%any and /i#e %ro%er
ad#ie to t(e ,OD of t(e om%any.
Ans: I 6A$?3 O6 ?1E $A3E: -
In this case a :indu Kndivided Family purchased a few shares of Qic)ers
!ystems International Ltd. but the company refused to register in the name of :indu
Kndivided Family represented by Aartha. :ere the company's plea is that :indu
Kndivided Family is not a *udicial body and legal entity and the transfer deed eecuted
by in favour of the :indu Kndivided Family represented by it is not a valid transfer
deed because a company cannot ta)e notice of any trust on its register of members.
$@I?I$AL E-AMINA?ION O6 ?1E A@2UEMEN?3 O6 ?1E $OM"AN4: -
:ere the arguments of the company are not valid. because, # :indu Kndivided
Family means the persons constituting the family and all such persons are owners of
the :indu Kndivided Family property. .he Aartha is one of the co7partners. .here is no
legal bar on a :KF investing its money in shares and securities and the companies act
does not prohibit membership by a :KF under 3e. 19E of the companies act, 1201.#
company cannot ta)e notice of any trust on its register of members. 6here shares are
/0
held in the name of the Aartha of a :KF it cannot be e8uated with trust property held
by trustee.
6or e+: - In respect of shares held by a minor there is nothing ob*ectionable if
the shares are registered in the name of the minor represented by his guardian.
!imilarly in the case of :KF the shares can be registered in the name of the Aartha of
the :KF. !o the transfer deed eecuted by in favour of the :KF represented by Aartha
is valid, because the :KF cannot be e8uated with trust property held by trustee.
.he CL( in Gikers 3ystems Internationa! Ltd. Gs. Ma(es( ". Les('ani
and up held this principle. A @ao H(1FF:) 5E $om% ases E15 ($L,)= and also further
held that, :KF is not a *uristic person for all purposes, although it is a person for
purpose of the Income .a #ct. Its Aartha represents :KF, but there is no legal bar on
:KF to invest its money in shares and securities and the company's act does not
prohibit membership of :KF.
!o in this case my advice to the (oard of =irectors of the company is that, they
can register the shares in the name of Aartha, as he represented by :KF because, as
regards shares belonging to a :KF held by the Aartha of the family having regard to
the position of the Aartha and to the peculiar character of the interest which accrues to
the coparceners in the *oint estate it is not possible to postulate separate legal and
beneficial interests in respect of such shares as between Aartha and the other members
of the family. :ence the Qic)ers !ystems International Ltd. can register the shares in
the name of Aartha as represented by :KF without any fear.
/1
Q. E: I ,. L. (o!din/s (") Ltd of $a!utta %ur(ased some s(ares of "rem $(and
Oute Mi!!s Ltd of $a!utta. 3(ares 'ere not )uoted or dea!t 'it( on reo/nised
stok e+(an/e. ?(is 'as an a/reement sa!e 'it( t(e #endor of t(e s(ares
'(i( %ro#ided t(at t(e %rie 'as to .e t(e fae #a!ue of @s. 1AA ea(& 9AQ of
'(i( 'as to .e %aid a/ainst t(e de!i#ery of .!ank transfer deed du!y si/ned
.y t(e #endor and t(e .a!ane 9AQ 'as to .e %aid 'it(in nine mont(s from
t(e date of a/reement. On t(e a%%!iation of ,. L. 1o!din/s (") Ltd& t(e "rem
$(and Oute Mi!!s Ltd refused to re/ister t(e s(ares. ,. L. 1o!din/s fi!es a suit
a/ainst t(e Oute Mi!!. 4ou are asked .y t(e "rem $(and Oute Mi!!s Ltd to
.rief for t(em ar/uin/ 0ustifiation of t(e ation .y t(e om%any.
A@2UEMEN?3 IN 6AGOU@ O6 "@EM $1AND OU?EMILL3 A3
6ALLOC3:
(1) In this case the Calcutta, where the present contract for the sale of shares was
entered into was a %notified area' HNo.3.O. :9<1 date Oune& :5. 1F<5= for the purpose
of 3e. 1E of the companies act, 1201.
#ccording to 3e. 1E& every contract in the notified area, which is entered into after the
date of notification other wise than between members of a recognised stoc) echange
in such a state or area or through or with such member shall be illegal.
In this case the shares were not 8uoted or dealt with on any recognised stoc)
echange that means it is the clear violation of 3e. 1E. !o the company has full right to
refuse, to register the shares primary on the ground that the transfer of these shares
were illegal as offending 3e. 1E of the act.
/3
(:) #ccording to 3e. 1< (1) central ;overnment can by notification declare that no
person in such state or area shall enter into any contract for the sale or purchase of any
security specified in the notification and under 3e. 1< (1) shall be illegal.
.he central ;overnment by notification No.3.O. :9<1 date Oune :5& 1F<F
declare that no person shall save with the permission of the central ;overnment enter
into any contract for the sale or purchase of securities other than spot delivery contracts
ecept as is permissible under the act, bye7laws and regulations of a recognised stoc)
echange.
(ut in this case the petitioner has not followed the rules mentioned in the
notification so it is clearly the violation of 3e. 1< of the act.
(E) #ccording to 3e. : (1) ?spot delivery contract should provide for the actual
delivery of securities and payment of the price there for on the same day as the date of
contract@.
(ut in this case, there was an agreement of sale which provided that ? the price
was to be the face value of >s.100 each, 00 P of which was to paid against the delivery
of blan) transfer deed duly signed by the seller and the balance 00 P was to be paid
within 2 months from the date of agreement@. .hat means it is not a spot delivery
contract, because balance 00 P was to be paid within 2 months so the eemption
afforded by 3e. 1> of the act, is not available to (. A. :olding +P, Ltd. Company.
+/, 3e. :E& 19 8 1< contains certain prohibitory clause and also penal provisions for
the violation thereof, so these prohibitions should be held to be mandatory and not
directory.
In Manna!a! L(etan Gs. Ledar Nat( Let(an H(1F55) 75 om% ase 1>9= it
was held that negative prohibitory and eclusive words are indicative that statute is
mandatory and the negative words are clearly prohibitions.
!o according to the above views in this case the contract entered between the (.
A. :olding Company and Prem Chand Fute Company is clearly illegal contract and the
transaction in the present case was in clear contravention of 3e. 1E 8 1< of the
companies act, 1201. !o, Prem Chand Fute 9ill Ltd. 6as entirely within its rights in
refusing to register the transfer on the ground that the transaction was illegal but
company can register only legal and valid transfer.
/4
Q. 7: - An Indian om%any %ro%oses to make a EU@O issue and seeks your ad#ie
for su//estion t(e ste%s to .e taken in onformity 'it( t(e %resent !e/a!
re)uirement. 2i#e !e/a! re)uirement. 2i#e your ad#ie.
Ans: - Introdution: -
Euro issue is a method of raising funds by an Indian Company our side India in
foreign currency.
?(ere are : instruments issued in an Euro issue: -
(1) 2!o.a! De%ositary @eei%t (2D@): - It is an instrument that is in the first
instance made in the form of %>eceipt' and which is based on under lying
ordinary +e8uity, shares of the issuer company.
(:) 6orei/n $urreny $on#erti.!e ,ond (6$$,): 7 It is a type of %bond',
which indicates that it is a debt instrument that involves repayment of the
principal and obligation to pay the interest.
"roedura! @e)uirements for EU@O Issue:
#ccording to the above introduction DK>5 issue can be raised by issuing ;>=s
and FCC(s. Following are the procedures for issue of ;>=s and FCC(sI
1) Aut(orisation .y t(e .oard of Diretors.
- .he issuer company should pass a board resolution for ta)ing a decision to float
;>=BFCC( in the global mar)et.
7 It is advisable to constitute a committee of directors L confer on it necessary
power for approving various matters. Li)e,
a, 5ffering memorandum.
b, Fiation of the issue price.
c, =eposit agreement
/2
d, !ubscription agreement
e, #llotment of shares in favour of the depository.
f, 5pening of account outside India and #pproval of ;reen !hoe option.
g, 9a)ing necessary application with the security and Dchange
Commission U3A or Lu+em.our/ !toc) Dchange.
h, .o sign and eecute any document that may be relate to the issue.
:) Aut(orisation .y t(e s(are (o!ders- .he shareholders must approve the proposal
by a special resolution passed at a general meeting as per 3e. >1 of the companies act.
7 #pprovals as per 3e. F7& 1< 8 E1 of the companies act should also be ta)en from the
shareholders.
E) A%%ro#a! .y t(e 2o#ernment: -
(a) Ministry of finane- .he Company has to ta)e the approval by the finance ministry
for issue siCe, terms of issue, payment of interest, conversion etc. #ppointment of
head 9anager =epository, Indian custodian and where listing of securities will be
made including trading provisions and settlement provisions.
(.) De%artment of om%any affairs a%%ro#a! is sou/(t: -
- Inter alia for, permission under 3e. >1 (E) (.) for issue of Duro7 convertible
bonds.
- #pproval to the effect that provisions relating to issue of prospectus are not
applicable
- Clarification as to non7 applicability of provisions 3e. 1A> of the companies act
for ;=>'sB DC('s issued.
() A%%ro#a! from t(e @,I is sou/(t for inter a!ia for: -
+i, #pproval under 3e. 1F (1) (d) of 6E@A to ma)e an international offering of
foreign investors through the ;=>, mechanism.
+ii, #pproval for the following
- .o ac8uire ;=>
- .o redeem FCC(
- .o pay interest on due dates
- .o convert FCC('s in to ;=>
- .o eport certificates
- .o appoint, lead manager, depositor and custodian an ;=>
- .o maintain register of ;=> holder
- .o open an account abroad
00
- .o payB remit dividends on shares
(d) Consent of the stoc) echange7 #pproval of stoc) echange is sought to the effect
- .hat the e8uity shares issued upon conversion of ;=>'s would be
listed and admitted to dealings on the echange.
- .hat the usual pre7listing re8uirements relating to purely
IndianBdomestic issue are not applicable.
#ccording to the above procedures an Indian company can ma)e DK>5 issue.
Q. 9: I $(ar!es is a diretor of "anorama De#e!o%ment and (as 0ust reei#ed a
!etter from "reston $ouni! informin/ (im t(at t(e om%any (as .een a'arded a
ontrat 'ort( @s. 1 mi!!ion to .ui!d t(e ne' "reston "o!yte(ni. 1e are!ess!y
!ea#es t(is !etter on (is desk. 6!orene& t(e offie !eaner& reads t(e !etter '(en s(e
is !eanin/ t(e offie t(at ni/(t& and informs (er (us.and Oak of t(e ontents of
t(e !etter. Oak deided to in#est @s. 9AA in t(e s(ares of "anorama De#e!o%ment.
C(en t(e ne's of t(e ontrat is announed& t(e s(ares of t(e om%any inreases
in #a!ue .y 9A %. Disuss if t(e 3E,I re/u!ations on Insider ?radin/ (a#e .een
#io!ated.
Ans: I 6A$?3 O6 ?1E $A3E: -
In this case Charles is a director of Panorama =evelopment and has *ust
received a letter from Preston Council informing him that the company has been
awarded a contract worth >s. 1 million to build the new Preston Polytechnic but he
carelessly leaves this letter on his des).
Florence, the office cleaner reads the letter when she is cleaning the office that
night and informs her husband Fac) of the contents of the letter. .hen Fac) decided to
invest >s. 000 in the shares of Panorama =evelopment. 6hen the news of the contract
is announced the shares of the company increases in value by 00 p.
DI3$U33ION: -
In this case it is clearly the violation of !D(I >egulations on Insider .radings,
because Maordin/ to seurities and e+(an/e .oard of India (Insider ?radin/)
@e/u!ations& 1FF:D, every employee of the company and the relatives of the employee
are treated as ?%erson is deemed to .e onneted %erson@ under the !ause : ((). #nd
01
also according to 3e. < (.) husband and wife of the employees are treated as the
relatives.
!o in this case Florence is an office cleaner and Fac) is her husband. !o they are
relative to each other and Florence is an employee of the company. !o the act of the
Florence and Fac) is clearly the violation of !D(I regulations on Insider .rading.
MODULE No: - < 8 5
0$
Q. 1: - A s(oo! is (ar/in/ an inter#ie' fee of @s. 9AN- in addition to re/istration
fee of @s. 1AN- and t(ere is no e#idene to s(o' t(at t(e sum so (ar/ed is
.ein/ s%ent on inter#ie'in/ t(e a%%!iants or t(at t(e s(oo! is inurrin/ any
e+%enditure for t(e %ur%ose of admittin/ students to L2 !ass. Is t(e
mani%u!ation of %ries of t(e ser#ies 0ustified ost of eduation*
Ans: I 6A$?3 O6 ?1E $A3E: -
In this case # school is charging an interview fee of >s. 00B7 in addition to
registration fee of >s. 10B7 and there is no evidence to show that the sum so charged is
being spent on interviewing the applicants or that the school is incurring any
ependiture for the purpose of admitting students to A; class.
I33UE3 INGOLGED: -
6hether the manipulation of prices of the services *ustified cost of educationM
DI3$U33ION: -
:ere, the charging of a fee of >s. 00B7 was manipulation of prices of the service
of imparting education so as to impose un*ustified costs on consumers because,
according to the facts of the case there is no evidence that the sum of >s. 00B7 charged
from each applicant as registration fee was spent for the interviewing the applicants,
that since the school was not incurring any ependiture for the purpose of admitting
students to the A; Class. .here was no *ustification to charge the fee.
!o the charging of >s. 00B7 is un*ustified and also this view is upheld in the
following case, Diretor- 2enera! (In#esti/ation and @e/istration) Gs. 3t. 6ranis&
0-
De-sa!es senior seondary s(oo! the 9>.P commission held that charging of
registration fee of >s. 00B7 each is imposing un*ustified cost on the parents attracting
the provisions of 3e. : (o) (ii) of the Mono%o!ies and @estriti#e ?rade "raties
At, 1F<F. !o charging of >s. 00B7 to each student as an interview fee is un*ustified and
illegal.
Q. :: I - a res%ondent om%any 'as makin/ and su%%!yin/ /ra%(ite e!etrodes&
anodes and ar.on %!ates. A notie 'as issued to t(em t(at t(ey 'ere in!udin/ in
ertain restriti#e trade %raties in res%et of /ra%(ite e!etrodes. Later it 'as
sou/(t to amend t(e referene .y res%ondent (-) om%any 'it( t(e ontention
t(at t(e ommission 'as inom%etent in as su( as t(e (airman (a#in/ retired&
t(e ommission 'as !eft 'it( on!y t'o mem.ers '(ere as t(e At re)uested t(at
t(ere s(ou!d .e t(ree mem.ers. Is t(e ontention is #a!id*
Ans: I 6A$?3 O6 ?1E $A3E: -
& a respondent company was ma)ing and supplying graphite electrodes, anodes
and carbon plates. # notice was issued to them that they were including in certain
restrictive trade practices in respect of graphite electrodes. Later it was sought to amend
the reference by respondent +&, company with the contention that the commission was
incompetent in as such as the chairman having retired, the commission was left with
only two members where as the #ct re8uested that there should be three members.
I33UE3 INGOLGED: -
6hether the commission can ma)e an order with only two membersM
DI3$U33ION: -
.he contention of the respondent +&, is not valid. (ecause according to 3e. <
(7) of the 9>.P #ct, no act or proceeding of the commission shall be invalid by reason
only of the eistence of any vacancy among its members or any defect in the
constitution thereof and also in ,en/a! %otteries Ltd. Gs. M@?" $ommission (1F59)
79 $om%as ($a!) <F5 it was held that, there is no merit in the contention that this
provision would come into operation only when the commission has more than three
members. !o the contention of the respondent +&, is not maintainable because
0/
according to the above *udgment and provisi2on of law, >etirement of chairman of
commission does not affect the powers of members constituting bench of commission.
In 2ra%(ite India Ltd. In-@e ase it was held that 3e. 1< (:) clearly provides
that the powers of the commission may be eercised or discharged from among the
members but there is nothing in this provision to suggest that it comes into force when
the commission has more than three members. !o from all these points I can say that
the contention of the respondent +&, is not valid.
Q. E: - $ommission %assed an e+%arte order a/ainst t(e %ro%rietor of an
undertakin/ .eause of (is fai!ure to attend on t(e suessi#e dates fi+ed for
(earin/ t(en (e a%%!ied for re#oation of t(e order on t(e /round t(at (is
ad#oate (ad not ommuniate to (im any orders and t(at (e ame to kno' of t(e
order on!y from a ne's item. Is t(e ontention sustaina.!e under t(e M@?" At*
Ans: I 6A$?3 O6 ?1E $A3E: -
In this case 9>.P commission passed an eparte order against the proprietor
of an underta)ing because of his failure to attend on the successive dates fied for
hearing then he applied for revocation of the order on the ground that his advocate had
not communicate to him any orders and that he came to )now of the order only from a
news item.
I33UE3 INGOLGED: -
6hether the contention of the proprietor is sustainable under the 9>.P #ctM
DI3$U33ION: -
In this case the advocate had not communicated to the proprietor is the
sufficient ground under Order F, @u!e 1E of $"$. !imilarly the eparte order must be
revo)ed and also the proceedings must be restored. (ecause, if the party was unaware
of the date of hearing and the unawareness was not due to any fault of his and he had
ta)en all the precautions necessary in this case of being made aware of the date, then
being unaware would be sufficient cause which would be sufficient cause which would
prevent a party from appearing in a court, then the court can revo)e the eparte order
and restore the proceedings.
00
.o substantiate this principle I support the case law i.e., @am/o%a!
Ma(es('ari and sons it was held by the 9>.PC that, on the failure of a party to
attend the hearing an eparte order has to be passed. (ut if the party is able to show that
he was prevented by sufficient cause from being present at the hearing the eparte order
has to be revo)ed and an opportunity has to be given to the party. #nd 3e. 1E (:) of the
9>.P #ct empowers the commission to revo)e or amend the order in the larger
interests of *ustice or to be more precise whether it was possible to read the provisions
of 3e. 191 of the CPC in that section. It is enough fro the purpose of the present case
to hold that the order passed by the commission can be revo)e in circumstances set out
in Order F& @u!e 1E of the CPC.
In @msetty Ma!!ia( Gs. Mitta La+minarasim(a it was held that, failure of the
counsel to inform the date of hearing to the party constituted sufficient cause for the
purpose of Order F& @u!e 1E.
!o according to the above points, I come to the conclusion that the eparte order
of the court must be revo)ed and the proceedings must be restored.
01
Q. 7: I - under takin/ 'ere %roduers of ?omato ket(u%. ?(ey 'ere marketin/
t(e same in .ott!es of 7AA 2ms .ut under t(e %ro#isions of standards of 'ei/(ts
and measures (%aked ommodities) @u!es& 1F55 it 'as not %ermissi.!e to se!!
tomato ket(u% in .ott!es of 7AA/ms. It ou!d .e so!d on!y on .ott!es of 9AA/ms. Is
t(e ation of - under takin/ is in t(e %ur#ie' of unfair trade %raties*
Ans: I 6A$?3 O6 ?1E $A3E: -
In this case & under ta)ing were producers of tomato )etchup. .hey were
mar)eting the same in bottles of /00;ms but under the provisions of standards of
weights and measures +pac)ed commodities, >ules, 1233 it was not permissible to sell
tomato )etchup in bottles of /00gms. It could be sold only on bottles of 000gms.
I33UE3 INGOLGED: -
C(et(er t(e marketin/ of 7AA2ms .ott!e is in t(e %ur#ie' of unfair trade
%raties*
DI3$U33ION: -
In this case the point posited was how pac)aging of tomato )etchup in
8uantities of /00gms, which of course was not permitted under the standards of weights
and measures +pac)aged commodities, rules, 1233, could be said to be violative of the
essential re8uirement necessary to prevent or reduce the ris) of in*ury to the person
using the goods, pac)aging of tomato )etchup in 8uantities of 000gms, -00gms or
$00gms but not in 8uantities of /00gms may have been determined on considerations
of convenience or epediency having regard to the buying capacity of an average
householder with average family but could it be said that non7permitting of pac)aging
in 8uantity if /00gms or reduce the ris) of in*ury to the person using the goods.
.his being so, if it is also an unfair trade practice an en8uiry pertaining thereto
can be instituted and certainly the & under ta)ing would be liable to be in*ected against
repeating such a trade practices in future but in Oanuary 15& 1F>< by ;aCette
notification, the central ;overnment amended item No. 1> in !auses (a) of t(e E
rd
03
schedule to the standards of weight measures +pac)aged commodities, rules, 1233, by
adding /00gms in between -00gms and 000gms.
!o according to the above notification I can say that now the pac)ages of /00
gms is not the unfair trade practice before this notification, but it is an unfair trade
practice after the notification and this view is upheld in Diretor /enera! of
in#esti/ation and re/istration Gs. 6ood s%eia!ties Ltd.
Q. 9: - A %um% set 'as so!d 'it( one-year 'arranty for satisfatory %erformane
and assurane of re%air or re%!aement in ase of defets arisin/ durin/ t(e
%eriod. ?(e %um% fai!ed 'it(in a fe' mont(s. ,ut t(e manufaturer did not
(onour t(e 'arranty. Does t(e ation tantamount to unfair trade %ratie*
Ans: I 6A$?3 O6 ?1E $A3E: -
In this case a pumpset was sold with one7year warranty for satisfactory
performance and assurance of repair or replacement in case of defects arising during
the period. .he pump failed within a few months. (ut the manufacturer did not honour
the warranty.
I33UE3 INGOLGED: -
6hether did not honoring the warranty is an unfair trade practiceM
DI3$U33ION: -
Hes, in this case the action of the manufacturer is an unfair trade practice,
because the warranty of the machine has to be honored but the manufacturer did not did
so. .herefore the manufacturer had indulged in an unfair trade practice by giving a
false warranty in respect of the pump set.
In 3mt. Oami!a L(atoon Gs. Oaymo en/ineerin/ $o& it was held that, if the
manufacturer had indulged in an unfair trade practice by giving a false warranty in
respect of pump set then it is liable for %ease and desitD order against manufacturer
and the purchaser is liable for the compensation.
#ccording to 3e. E< A (1) (#ii) 8 (#iii) of t(e M@?" At, this action of
manufacturer is an unfair labour practice, because it is the duty of the manufacturer to
04
repair or replace the pump set if the machine went out within the guarantee period, if
the manufacturer did not do so then that is an unfair trade practice.
.herefore in this case the action is unfair labour trade practice L the purchaser
is entitled to a total refund of the price paid by him with interest.
MODULE No: - >
02
Q. 1: - C(at do you mean .y 'indo' dressin/* $ritia!!y e+amine t(e !ia.i!ity of
an Auditor for fai!ure to diso#er t(e 'indo' dressin/.
Ans- %6indow =ressing' means showing companies position a bit sounder than what it
really is, that means it is permissible to show the companies position a bit sounder than
what it really is, in so far as it does not amount to material eaggeration or false hood.
It is the duty of the auditor to ehibits a true and correct view of the company's
affairs to the members of the company in his report he has to state whither or not they
have obtained all the information and eplanation they have re8uired, whether or not
the balance7sheet and the profit and loss account have been drawn7up according to the
re8uirements of the act.
Lia.i!ity of t(e auditor for fai!ure to diso#er t(e 'indo' dressin/: -
+1, If an auditor was failed to discover the window dressing then the auditor is liable
for negligence because it is the duty of the auditor to safe guard the assets of the
company. If he does not discover the window dressing then his report will mislead
the shareholders and members of the company.
+$, Companies always want to show their position higher than what they are it is due to
have good impression in the mar)et and in the interest of the shareholders. .hat's
why it is very important to auditor to eercise reasonable s)ill care and caution.
+-, Failure to discover the window dressing is also part of professional misconduct and
he is personally liable if he does not discover the window dressing.
It is very important to discover the window dressing because in the present
globalisation and due to huge competition among the companies, every company want
to sit at the top in the mar)et, to achieve this ob*ect companies show their position
10
higher than what they are and more and more people are putting reliance on the
auditor's report and ta)e the position of the company as certified by the auditor.
.he auditor's liability for failure to discover the window dressing is depending
upon the facts of the case it is not similar in every case.
Q. :: - Mr. Dasa/u%ta 6$A 'as a%%ointed as an Aryan ,ank Ltd to audit for t(e
years 1FFA& 1FF:. ?(e ,ank su.se)uent!y 'ent in to !i)uidation. ?(e Audit re%ort
(ad .een in t(e usua! form 'it( some s%eia! notes ontained t(erein. ?(e auditor
did not %ersona!!y #erify t(e as( in (and. One of t(e audit re%orts ontained
some information of omission& e./.& in t(e 1FF1-audit re%ort it 'as mentioned on
t(e remark t(at Ja!! t(e !oans and o#erdrafts of .ran(es are s(o'n in t(e
,a!ane 3(eet as fu!!y seured.K ,ut a note 'as s%eified in t(e desri%tion of t(e
asset MLoan or o#erdraftD s%eified t(at Jt(ese (a#e .een /ranted to ei/(t %arties
a/ainst t(e fi+ed de%osit reei%ts of de.tors.K ?(e auditor did not en)uire a.out
t(e identity of t(ese de.tors.
A fe' rimina! %roeedin/s (a#e .een .rou/(t a/ainst t(e Mana/in/
Diretor and ot(er Diretors for fa!sifiation of t(e .ooks of aounts of t(e .ank.
Mr. Das/u%ta 'as %rodued as one of t(e %roseution 'itnesses '(ere (e o.ser#ed
a/ainst some of t(e en)uires on t(ose audit re%orts t(at (e (ad dou.ts a.out some
of t(e !oans and o#erdrafts. 1e did not e+amine t(e identity of t(e %arties to '(om
t(e !oans 'ere /ranted and (e did not kno' t(at some of t(ose %arties 'ere non-
e+istent. Due to t(e enormity of as( in (and as s(o'n& (e did not #erify t(e same.
?(e de%uty seretary of t(e de%artment of eonomi affaires& 2o#ernment
of India fi!ed a forma! om%!aint to t(e institute of (arted aountant of India
a/ainst t(e auditor. ?(e disi%!inary ommittee e+amined t(e '(o!e affair and
found t(at:
(1) ?(e auditor fai!ed to #erify t(e as( in (andB
(:) ?(ou/( aordin/ to (im some !oans and o#erdrafts 'ere dou.tfu!
a.out reo#ery& (e did not s%eifia!!y mention t(enB and
(E) 1e did not e+amine t(e identity of t(e %arties to '(om !oans 'ere
/ranted and ade)uaies of t(e seurity t(ere on.
?(e institute referred t(e matter to t(e 1$. 2i#e your deision as t(e
"residin/ Oud/e.
11
Ans: - In this case as the presiding *udge of the :C, I partly agree with the findings of
the disciplinary committee, against the 9r.=asagupta FC#, auditor of the #ryan (an)
Ltd. who done the audit for the years, 1220, 21 L 2$.
+1, I agree with the first findings of the disciplinary committee because from the
fact it is clear that the auditor didn't personally verify the cash in hand, it is a
professional misconduct of the auditor. (ecause, it is the duty of the auditor to
personally verify the cash in hands, he should not simply agree what is written
in the balance sheet or he should not delegate his power to any other person
who is not an auditor.
+$, I agree with the second findings of the disciplinary committee, because in 1221
audit report he mentioned that ?all the loans and overdrafts of branches are
shown in the balance sheet as fully secured@ even though some loans and
overdrafts were doubted about recovery. (ecause according to 3e. ::5 H1-A= of
the companies act, 1201 auditor shall en8uire whether loans and advances made
by the company on the basis of security have been property secured and
whether the terms on which they have been made are not pre*udicial to the
interests of the company or its members. It is the duty of the auditor to see
whether all loan are recoverable or not and secured or not.
+-, I am not fully agree with the third finding because it is not possible to eamine
the identity of all the parties to whom loans and advances were granted but
auditor has to see whether all the loans were fully secured or not if he is not able
to find out whether loans and advances were fully secured or not then that i2s
the misfeasance on the part of the auditor.
In the facts it was stated by the auditor that due to the enormity of cash in
the hand he was not able to eamine the identity of all the parties to whom the loans
were granted is partly agreeable. (ecause 9= and other directors ma)es some
falsification of the boo)s of accounts of the (an). It important to verity trust worthy of
the document produced for inspection than the identity of the person.
(ut at least he should see whether all the loans are fully secured or not
there is no eemption on this point.
1$
!o finally I came to the conclusion that the auditor failed to do his duty
and he is liable for professional misconduct, negligence and misfeasance of his act.
Q. E: I Mrs. 3in/(ania& t(e %ro%rietor of ,.,. Coo!en Mi!!s !eased out t(e mi!! to
O.L. Coo!en manufaturers '(i( 'as ori/ina!!y a %artners(i% onern .ut
su.se)uent!y on#erted into a "ri#ate Limited $om%any. ?(e terms and
onditions of t(e !ease in!uded t(at Mrs. 3in/(ania 'as to /et a 95.:Q of t(e
net %rofit '(i( t(e !ease 'ou!d earn su.0et to t(e minimum rent of @s.
:9&AAAN- %er annum. ?(e .ooks of aounts of t(e om%any 'ere audited .y
MNs ".L. ?andon. Mrs. 3in/(ania fi!ed an a%%!iation to t(e 1$ a/ainst t(e
(artered aountant firm and t(e auditor of t(e om%any a!!e/in/ ne/!i/ene
on aount of t(e fo!!o'in/:
(1) "ayment of (i/(er sa!ary to t(e Mana/er:
A mana/er 'it( no te(nia! )ua!ifiation 'as a%%ointed and (e (ad some
re!ation 'it( one of t(e diretors. A #ery (i/( sa!ary of @s. 1&AA&AAAN- %er mont(
'as /i#en to (im and t(e auditor did not /i#e any omment on it:
(:) "ayment of e+essi#e remuneration to diretors:
?(e diretors .ot( of '(om 'ere t(e on!y mem.ers of t(e "ri#ate Ltd.
$om%any fi+ed #ery (i/( sittin/ (ar/es& a!!o'anes and entertainment e+%enses:
(E) 2ratuity 'as %aid to t(e 'ido' of t(e deeased aounts offier of t(e
om%any and t(e /ratuity amount as fi+ed .y t(e .oard of diretors 'as @s.
9&AA&AAN-B and
(7) A ontri.ution of @s. 9&AA&AAAN- 'as made .y t(e om%any to Ma(atma 2and(i
Memoria! 6und.
Aordin/ to Mrs. 3in/(ania& t(e auditor 'as ne/!i/ent in not %ointin/ out
t(ese e+essi#e e+%enditure so as to find out rea! %rofit of t(e om%any in '(i(
ase (er !ease rent 'ou!d (a#e .een mu( (i/(er. "re%are a !ist of ar/uments for
defendin/ t(e ase.
1-
LI3? O6 A@2UEMEN?3 IN6AGOU@ O6 $1A@?ED A$$OUN?AN?D3 6I@M:
-
In this case 9Bs. P. L. .andon has not committed any negligence because,
+1, .he contention of 9rs. !inghania against the auditor is wrong because, according
to 9rs. !inghania manager is paid with very high salary even though he has no
technical 8ualification and he had some relation with one of the =irector.
It is not the duty of auditor to see whether the manager was technically
8ualified or not, it is the duty of the company who appointed him as manager to see
his 8ualification and also auditor has no right to loo) in to the personal relationship
of manager with any of the =irector. :is duty is to se the account boo)s, loans, over
drafts etc.
If 9rs. !inghania wants to contest in this matter she has to file a case against
the directors of the company not against the auditor.
If the manager has paid 1la)h rupees as salary that is the left to the management
or (oard of directors to fi the salary of the manager in this matter the auditor can
only give suggestion but he has no authority to give any comment on it.
+$, If the directors fied very high sitting charges allowances and entertainment
allowances, that is left to the (oard of directors or company to fi the sitting
charges of directors or company. It is not at all related to the auditor becauseI
auditor is only a watchdog but not a blood hug. Dven though the auditor ma)es any
comment on the allowances of the directors how much it is use full because it is left
the company to fi the allowances of the directors.
+-, .he -
rd
contention of 9rs. !ighania is not valid. (ecause, the gratuity paid to the
wife of the deceased accountant officer is left to the company. =irectors of the
company has right to fi the amount it is no way concern to the auditor and also
usually gratuity is paid on the humanitarian ground. !o it cannot be commented. If
1/
9rs. !inghania wants to file a suit on this matter she has to file against the directors
of the company. (ecause they are the persons who fi the gratuity.
+/, It is left to the company to pay the contribution towards any charitable institutions.
It is depending upon the financial condition of the company. If the directors paid 0
la)h rupees, then it is not the offence. !o the auditor has no right to as) about the
contribution. !o the auditor is not negligent.
+0, .he final contention of the 9rs. !inghania regarding the auditors negligence in
pointing out the ecessive ependiture so as to find out the real profit of the
company in which case would have been much higher is not maintainable because
if she though that the ependiture is high then she has to file the case against the
company to reduce the ependiture. (ut here she files the case against the auditor is
not valid because auditor is not a competent person to as) remedy.
!o I re8uest to the hon'ble :C to dismiss the application of 9rs. !inghania with
cost.
10
Q. 7: I Mr. ,anar0ee audited t(e .ooks of aounts of Art(ur and 2reen Ltd. from
1F>A to 1FFA. O#er t(e %eriod 'ort(!ess de.t to t(e #a!ue of @s. 1&FA&AAAN-
aumu!ated. 3ome of t(e de.ts (ad .een outstandin/ for a num.er of years
and a .i/ %ro%ortion 'as atua!!y statute .arred and t(erefore s(ou!d (a#e
.een re/arded as irreo#era.!e. ?(e auditor ae%ted t(e fi/ures su%%!ied .y
t(e Mana/in/ Diretor and t(e .oard as to t(e amounts to .e 'ritten-off for
.ad and dou.tfu! de.ts ea( year. ?(e Mana/in/ Diretor (ad e+%!ained (is
reason for a!!o'in/ t(e o!d de.ts to remain on t(e .ooks .y sayin/ t(at in
money-!endin/ .usiness it did not matter (o' o!d t(e de.ts 'ere& .eause
%eo%!e 'ou!d ome .ak and %ay in order to .e a.!e to o.tain furt(er
ad#anes. In 1FFA t(e om%any 'ent into !i)uidation and t(e !i)uidator
%roeeded a/ainst t(e auditors and .oard of diretors on t(e /round of .rea(
of duty and misfeasane. Deide& /i#e reasons and ite t(e %reedent if any.
DI$I3ION: -
In this case the board of directors are held liable on the ground of breach of duty
and misfeasance but the auditor is not held liable for breach of duty or misfeasance
because,
+1, In this case 9r. (anar*ee audited the accounts of #rthur L ;reen Ltd. from 1240 to
1220 during that period worth less debt to the value of >s. 1,20,000B7 accumulated
and some of the debt is out standing for a number of years and a big proportion was
actually statute barred but regarding this matter 9r. (anar*ee submitted his report to
the managing director and board of directors as bad and doubtful debt each year
which show that he has done his duty. #fter wards it is left to the directors to ta)e
appropriate steps to recover the amount.
+$, In this case the reason given by the directors is not valid because the appropriate
measures has to be ta)en by the director after submission of the audit report for
recovery of old debt. .he eplanation of the managing director ?for allowing the
old debts to remain on the boo)s by saying that in money7lending business it did
11
not matter how old the debt were, because people would come bac) and pay in
order to be able to obtain further advance@ shows how negligent they are, because
now a days there are lot of money lending agencies if one person too) loan from
one agency in the net time he goes to the net agency and it is not true that people
would come bac) and pay in order to obtain further advance. (ecause no body
bother to pay the old debt sincerely as they get fresh loan in another agency.
!o in this case there is no negligence or misfeasance on the part of auditors
because submission of the audit report is only his duty and he has done his duty by
submitting the report every year and the recovery of the amount is the duty of the
managing director and board of directors. !o the 9= and board of directors were held
liable for breach of duty and misfeasance but not the auditor
13
Q. 9: - ?(e @e/istrar of $om%anies made an in)uiry a.out t(e affairs of @ura!
,ank of India Ltd and found t(e fo!!o'in/& .ased u%on '(i( (e made a
om%!aint a/ainst t(e auditor of t(e om%any t(at t(e auditor 'as /ui!ty of
%rofessiona! misondut:
(1) ?(e atua! as( in (and 'as far s(ort of t(e amount stated in t(e ,a!ane
3(eet. ?(e auditor admitted in t(e in)uiry t(at e#en t(ou/( (e ertified t(at
t(e as( and seurities (a#e .een #erified .y (im (e did not in fat do so. 1e
stated t(at (e #erified t(e as( in (and on se#era! dates& (e #isited t(e .ank
to audit& in ea( of t(e years& .ut t(ose dates 'ere !ater t(an t(e dates of t(e
,a!ane 3(eet onerned. 1e admitted t(at (e (ad not #erified t(e
intermediate transation .et'een t(e dates of t(e ,a!ane 3(eets and t(e
dates on '(i( (e atua!!y (eked t(e as(B
(:) ?(e money reei#ed from a%%!iants for s(ares 'ere not de%osited and ke%t
in a 3(edu!ed ,ank. ?(e auditor fai!ed to re%ort t(is to t(e s(are(o!ders.
?(is 'as admitted .efore t(e ourt in a ase fi!ed a/ainst t(e om%any on t(e
ontra#ention of re!e#ant %ro#isions of t(e om%anies at. Of ourse t(e
Mana/in/ Diretor e+%!ained t(at t(e 3(edu!ed .ank 'as (undred mi!es
a'ay and t(at it ou!d .e rea(ed on!y .y .ud and t(at 'it(in a 'eek t(e
ertifiate to ommene .usiness 'ou!d .e o.tainedB and
(E) Ima/inary de%osits 'ere reated in t(e ,ooks of Best Security Trust Ltd. One
of t(e s(are(o!ders& for t(e %ur(ase of s(ares of t(e .ank t(ou/( t(e
Mana/in/ Diretor admitted t(at as( 'as not atua!!y reei#ed from t(e
s(are a%%!iants. It 'as a!so not dis%uted t(at t(e .ank (ad on se#era!
oasions de.ited to t(e aounts of ertain %ersonsD !oans '(i( 'ere .o/us.
?(e auditor fai!ed to make %ro%er en)uiries re/ardin/ t(e finania! %osition
of Best Security Trust Ltd 'it( a #ie' to satisfy (imse!f as to its a%aity for
makin/ !ar/e in#estments and #erifyin/ '(et(er t(e fi+ed de%osit of t(e
om%any (e!d as seurity of t(e .ank 'ere 'ort( t(eir fae #a!ue and 'ere
suffiient to o#er t(eir !oans.
(a) Do you t(ink t(at t(e auditor is /ui!ty of %rofessiona! misondut*
(.) If so& e+%!ain '(y*
() C(at a%%ro%riate %unis(ment may .e im%osed u%on t(e auditor for
su( %rofessiona! misondut*
14
(d) Is t(e auditor a!so ne/!i/ent*
(e) C(o dea!s 'it( t(e )uestion of su( %rofessiona! misondut*
AN3CE@: -
(a) In this case the auditor is guilty if professional misconduct.
(.) In this case the misconduct of the auditor has to be proved because the gross
negligent or fail to report a material misstatement has to be proved in the :C because
this misconduct is mentioned in schedule II of the charted accounts act.
In this case the registrar of companies made an en8uiry and on the findings of
the registrar I came to the conclusion that the auditor of rural ban) of India Ltd. is
guilty of misconduct because,
+i, In the balance sheet the actual amount is too short than the actual cash in hand
but his eplanation during en8uiry was he verified the cash in hand on several dates,
he visited the ban) for audit in each years but those dates were later than the dates of
the balance sheet concerned. .his is not acceptable because the final report of the
balance sheet should be e8ual to the amount in the balance sheet and actual cash in
the hand.
+ii, .he auditor failed to report to the shareholders regarding the money received
from applicants for shares were not deposited and )ept in a scheduled ban). In this
case the eplanation of the 9= is not admit table.
+iii, Imaginary deposits were created in the boo)s of best security trust Ltd. but the
auditor failed to ma)e proper en8uiries regarding the financial position of that trust
these all findings shows that the auditor is guilty of professional misconduct.
() In this I agree with the council that there has been no conduct on the part of the
auditor, which involves moral turpitude. .here may be chances of suffering under a
wrong notion as to the duties of an auditor. Dven though the council has been Realous
in maintaining the highest standards of integrity and efficiency among the charted
accounts. (ut I cannot say that every member of the profession has become familiar
with the standard, which they have to maintain.
12
.a)ing these circumstances in to consideration, I thin) that it is sufficient to
give severe warning to the respondent that in future audits he should )eep in mind his
duties as an auditor and intimate him that any similar conduct on his part in the future
would entail grave and adverse conse8uences on him.
(d) 4es, in this case auditor is also negligent because,
+i, :e has not verified the cash on hand in the ban) on the date of the balance sheet
in each of the year.
+ii, :e failed to report to the shareholders regarding the money was not deposited
and not )ept in the scheduled ban).
+iii, #uditor has failed to ma)e proper en8uiries regarding the financial position of
best security trust Ltd. !o he is held guilty of gross negligence of his duties as
auditor of >ural (an) of India Ltd.
(e) .he charted accounts act of 12/2 has given power to the ouni! of (arted
aounts regarding the en8uiry or 8uestion any misconduct by the auditor.
30
MODULE No: - F
31
Q. 1: - Misfeasane %roeedin/s 'ere initiated a/ainst a Diretor of t(e om%any
under 3e. 97E of $om%anies At. ?(e onerned diretor died at an ear!y sta/e of
t(e misfeasane %roeedin/s. ?(e !i)uidator 'ants to %roeed a/ainst t(e !e/a!
re%resentati#es of t(e diretor on t(e same (ar/es deide.
Ans: I 6A$?3 O6 ?1E $A3E: -
In this case misfeasance proceedings were initiated against a =irector of the
company under 3e. 97E of Companies #ct. .he concerned director died at an early
stage of the misfeasance proceedings. (ut the li8uidator wants to proceed against the
legal representatives of the director on the same charge.
I33UE3 INGOLGED: -
6hether the li8uidator can proceed against the legal representatives of the
deceased directorM
DI3$U33ION: -
"o, because 3e. 97E of the Companies #ct attract the application of the maim
?actio personalis moritur cum persona@ <the personal action will not survive the death
of the wrong doerJ so, misfeasance proceedings cannot be continued against the legal
representatives of the deceased director.
!imilarly the reason is that the language of 3e. 97E or 97: indicates that what
is impeachable is the personal conduct of the director or other person who had been
responsible for causing loss to the company. !o the personal conduct can be defended
only by the person against whom the allegations are made, for he is the person who
possesses the facts and )now ledge about his action in the course of such management
and business of the company.
In $(amundi $(emia!s and 6erti!isers Ltd (in !i)uidation) Gs. M.$.
$(erian and ot(ers the Aarnata)a :C held that it would not be fair to continue the
misfeasance proceedings against the legal representatives of the deceased director,
especially when they had not been brought on record as such.
3$
.herefore, the action of the li8uidator to proceed against legal representatives
of the director on the same charges would not be *ust, fair and e8uitable to continue the
misfeasance proceedings against the legal representatives of the deceased director.
Q. :: I ?(e !i)uidator of a om%any in #o!untary 'indin/ u% did not deide or
determine t(e !aims of a reditor for 1A years %re0udiia!!y affetin/ t(e reditors
ri/(ts. ?(e reditors 'ant to (a#e t(e !i)uidator remo#ed and a ne' one
a%%ointed. Deide '(et(er t(e ourt (as t(e %o'er to remo#e a !i)uidator on
Ans: I 6A$?3 O6 ?1E $A3E: -
In this case the li8uidator of a company in voluntary winding up did not decide or
determine the claims of a creditor for 10 years pre*udicially affecting the creditors
rights but the creditors want to have the li8uidator removed and a new one appointed.
I33UE3 INGOLGED: -
6hether the court has the power to remove a li8uidator on this ground aloneM
DI3$U33ION: -
Hes, the court can order for the removal of the li8uidator because under 3e. 010
of the Companies #ct the court can order for removal of the li8uidator on good cause.
In Amaranat( Lris(nan La! and ot(ers Gs. 1industan forest $om%any
("#t.) Ltd the PL ( :C held, that the ob*ect of ordering voluntary li8uidation under
the supervision of the court is to ensure the protection of the interests of all persons
concerned, i.e., the company, the contributors and the creditors under 3e. 9:7 of the
Companies #ct, 1201, if the court is satisfied that the provisional li8uidator is not
acting in the interest of the company or its creditors then the court can order for the
removal of the provisional li8uidator and order that an official li8uidator be appointed
in his place.
Knder 3e. 919 of the act, the court can order the removal of the li8uidator on
some ?good cause@ being shown. In 3e. 9:7 the order of removal of the li8uidator
should only be passed on some good cause being shown viC., that the li8uidator has
failed to protect the interests of all persons concerned that is company's contributors
and the creditors.
!o according to the above *udgment I can say that in this case the li8uidator of
the company can be removed on the ground shown in the facts alone.
3-
Q. E: I A om%any 'as ordered to .e 'ound u% .y t(e ourt. ?(e offiia!
!i)uidator so!d t(e assets and in#ested t(e amount t(at (e reei#ed in a .ank&
'(ere it ontinued to earn interest. ?(ere 'as no ot(er e#idene of any .usiness
.ein/ arried out. ?(e !i)uidator 'ants to !aim t(e e+%enses inurred .y (im .y
'ay of sa!aries& !e/a! fees et. as J.usiness e+%enditureK. Disuss '(et(er su( a
!aim is maintaina.!e.
Ans: I 6A$?3 O6 ?1E $A3E: -
In this case a company was ordered to be wound up by the court. .he official
li8uidator sold the assets and invested the amount that he received in a ban), where it
continued to earn interest. .here was no other evidence of any business being carried
out. .he li8uidator wants to claim the epenses incurred by him by way of salaries,
legal fees etc. as ?business ependiture.@
I33UE3 INGOLGED: -
1. Can we say that there was no business being carried outM
$. Can the epenses of the li8uidator be deducted as ?Nbusiness ependiture@ in the
income form interestM
DI3$U33ION: -
Issue No. (1)7 6e cannot say that there was no business being carried out,
because in merely realising the assets of the appellant company in the course of its
winding up and ban)ing the proceeds in fied deposits, the li8uidator could not be
considered as having carried on any business of the company. !o the company could
not there fore, be said to have carried on any business to bring the interest income
within the meaning of 3e. :> of the Income .a #ct, 1211 and there fore the income
from interest was liable to be computed only under the head ?Income from other
sources.@ .his view is up held by the ;u*arat :C in Mor#i Meranti!e ,ank Ltd. Gs.
$ommissioner of Inome ta+ H(1F5<) 1A7 I?@ 9<> (2u0.)
3/
Issue No. (:)- .he epenses of the li8uidator cannot be deductible under 3e. 95
of the Income .a #ct, because there was no evidence to show that the epenses sought
to be deducted were to facilitate the earning of the interest. .he interest accrued sui
generis. .he interest was payable by the ban) whether it was claimed or not and
whether there was any establishment or not. .he epenses incurred by the li8uidator,
which were sought to be deducted, could not be said to have been incurred with the
ob*ect or for the purpose of earning the income and the epenses were not deductible
under 3e. 95 in computing the income form interest.
(ecause, in Gi0ay Laks(mi 3u/ar Mi!!s Ltd. Gs. $I? it is impliedly approved
by the court that the connection between the ependiture and the earning of income
need not be direct and it may be indirect. (ut the ependiture must have been incurred
for the purpose of that income and there should be some neus between the ependiture
and the earning of the income.
!o according to this *udgment I can say that the re8uirement under 3e. 95 (iii)
that the ependiture should have been incurred ?for the purpose of ma)ing or earning
the interest income.
!o if any ependiture was incurred li)e commission for collection or similar
ependiture, which may be considered as, spent solely for the purpose of earning that
income then the position may be different. (ut in this case the ependiture was incurred
not solely for the purpose of earning the income. !o, the income and the epenses were
not deductible.
30
Q. 7: I ,I6@ %assed an order de!arin/ industry MAD as a sik industry under 3e.
E (i) (o) of 3I$A and a%%ointed - 8 4 $or%oration as o%eratin/ a/eny for
rene'a! of t(e industry. ?(e o%eratin/ a/ent su.mitted a re%ort to t(e ,I6@
t(at .a s(eme of rene'a! under 3e. 15 of t(e at 'as under %re%aration. ,ut in
t(e mean '(i!e demand notie for sa!es ta+ dues of t(e om%any 'ere ser#ed on
om%any& 'arnin/ t(at is defau!t of %ayment oeri#e %roess of reo#ery 'ou!d
.e ado%ted and /arnis(ee notie under 3e. :E (1) of t(e M" 2enera! sa!es ta+ at&
1F9> 'ere ser#ed on #arious .anks %ro(i.itin/ t(em from makin/ any %ayments
to t(e om%any. Disuss '(et(er su( noties are .arred .y #irtue of 3e. ::(1) of
3I$A.
Ans: I 6A$?3 O6 ?1E $A3E: -
In this case an industry %#' was decided as a sic) industry by (IF> under 3e. E
(i) (o) of 3I$A and appointed & L H Corporation as operating agency for renewal of
the industry. .he operating agent submitted a report to the (IF> that .a scheme of
renewal under 3e. 15 of the act was under preparation. (ut in the mean while demand
notice for sales ta dues of the company were served on company, warning that is
default of payment coercive process of recovery would be adopted and garnishee notice
under 3e. :E (1) of the 9P ;eneral sales ta act, 1204 were served on various ban)s
prohibiting them from ma)ing any payments to the company.
I33UE3 INGOLGED: -
6hether such notice is barred by virtue of 3e. :: (1) of !IC#M
DI3$U33ION: -
In this case the fact is that a scheme of renewal of the company was under
preparation in terms of 3e. 15 of the !IC# was sufficient to attract the bar under 3e.
:: (1) of the act.
(ecause in @e!iane Ins%et Industries Ltd. Gs. $ommissioner of sa!es ta+
and ot(ers the 9P :C held that, renewal of the company in terms of 3e. 15 of !IC#
was sufficient to attract the bar under the 3e. :: (1) of the act.
31
!o in this case the notice under the 9P Land >evenue Code containing threat of
coercive action and under the 9P ;eneral !ales .a act to the ban)er were clearly
covered by the term ?proceeding for eecution distress or the li)e against any of the
properties of the company@ used in 3e. :: (1) of the act and it is sufficient to attract
the bar under 3e. :: (1) of the act.
33
Q. 9: - ?(e @,I fi!es an a%%!iation in t(e ourt for t(e 'indin/ u% of a om%any
in o o%erated out side India .ut '(i( (as arried on a su.stitutiona! %art of its
.usiness in India unti! sus%ension of its .usiness. ?(e om%any !aims t(at t(e
Indian ourts (a#e no 0urisdition to order 'indin/ u% of forei/n om%any.
Ans: I 6A$?3 O6 ?1E $A3E: -
In this case >(I files an application in the court for the winding up of a
company in co operated out side India but which has carried on a substitutional part of
its business in India until suspension of its business.
I33UE3 INGOLGED: -
6hether the Indian courts have *urisdiction to order for the winding up of foreign
companiesM
DI3$U33ION: -
Hes, because, according to the 3e. 9>7 of the companies act of 1201 the Indian
courts have *urisdiction to wind up a foreign companies incorporated out side India
which carries on or which has ceased to carry on business in India as unregistered
companies and also these section empowers the court to wind up a foreign company
when it cease to carry on business in India or it substratum is gone even where it is
dissolved in its country corporation.
(ecause this provision is made in the interest of members of the Indian public
dealing with a foreign company in cooperated out side India.
#nd in @,I Gs. ,$$I (o#er seas) Ltd. it was held by the (ombay :C that the
company court under the companies act, 1201 has *urisdiction to entertain proceedings
for winding up a ban)ing company which thought incorporated out side India has
carried on business on large scale in India until suspension of its business.
!o according to the above *udgment and provision of law I came to the
conclusion that Indian courts have *urisdiction to order for to winding up of the ban),
which is incorporated out side India.
34