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Raghu Ram Chittibommala

Advocate, High Court of A.P. G-2, Jyothi Residency, Narayanareddy


Colony, Nizampet, Hyderabad :: Cell NO: Presently +13315519504

JAAVALI Associates

RAGHU RAM CHITTIBOMMALA


HYDERABAD, ANDHRA PR ADESH, INDIA
Advocate, Executive Member, High Court of A.P.
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 Problems-Solutions in Company matters
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WEDNESDAY, MAY 28, 2 008


Problems-Solutions in Company matters
PRACTICAL PROBLEMS
Problem-1. A and B were only two members of a private limited company. Both
of them have been killed in a bomb blast. Does this company cease to exist?
Explain. [B.COM. (H), D.U., 1993, 1996]
Ans. A company is an artificial person. It exists only in contemplation of law
and is distinct from the members constituting it. Being distinct from the
members, the death, insolvency or retirement of its members leaves the
company unaffected. Members may come and go but the company can go
forever. It continues even if all its human members are dead. Even where
during the war all the members of a private company, while in general meeting
were killed by a bomb, the company survived. Not even a hydrogen bomb could
have destroyed it. [K/9 Meat Suppliers (Guildford) Ltd., Re (1996) 1 W.L.R.
1112]. The shares will be registered in the name of the nominees or legal
successors.
Thus, the company does not cease to exist.

Common Seal- A company being an artificial person is not bestowed with a


body of natural being. Therefore, it has to work through its directors, officers
and other employees. But, it can be held bound by only those documents which
bear its signatures. Common seal is the official signature of a company.

Problem-2 . A public limited company has only seven shareholders, all the
shares being paid up in full. All the shares of one such shareholder are sold by
the Court in an auction and purchased by another shareholder. The company
continues to carry on its business, thereafter. Discuss the liabilities of the
shareholders of the company.

Ans. The Problem in question relates to reduction of membership below the


statutory minimum. Section 12 of the Companies Act requires a public
company to have a minimum of seven members. If at any time the membership
of a public company falls below seven and it continues its business for more
than six months, then according to Section 45 of the Companies Act, 1956 every
such member who was aware of this fact, would be individually (personally)
liable for all debts contracted after six months.

Thus, in the above Problem, the remaining six members shall incur personal
liability for the debts contracted by the company :

(i) If they continued to carry on the business of the company with that reduced
membership (ie., 6) beyond six month period;

(ii) Only those members who knew of this fact of reduced membership shall be
liable, for instance, one of the members who was abroad and thus not aware of
those developments, shall not be liable;

(iii) The liability shall extend only to the debts contracted after six months
from the date of auction of that member's shares.
Problem-3. The number of members in a public company got reduced to six on
10th Sept., 2006. The company incurs trade debts on 11th Sept., 2006, 2nd
February, 2007 and 17th March, 2007. How far are the remaining six members
liable for the debts?

Ans. Six members shall be personally liable only for the debt incurred on 17th
March, 2007. In respect of the earlier two debts company alone shall be liable.
** For law on the subject, please see Answer to above Problem.

Problem-4. Directors of a public limited company accepted a bill of exchange


on behalf o the company. But the word 'limited' was omitted from the name of
the company at the time of acceptance. Who can be held liable for the payment
of the bill?

Ans. According to Section 147 of the Companies Act, 1956, where an officer of a
company signs on behalf of the company any contract, bill of exchange, hundi,
promissory note cheque or order for money, such person shall be personally
liable to the holder if the name of the company is either not mentioned, or is
not properly mentioned. Thus, where on a cheque, the name of a company was
stated as 'LR agencies limited' whereas the real name of the company was 'L&R
Agencies Ltd.' the signatory directors were held personally liable (Hendon v.
Adelman 1973, New Delhi LR 637).
However, personal liability, as aforesaid, will not be attracted where there is
an accidental omission of the word 'limited' - Dermatine Co. v. Ashworth
[1905] 21 T.L.R. 510. In this case a bill of exchange was accepted on behalf of a
limited company but the size of the paper was shorter than the company's seal.
As a result, the word 'limited' did not appear on the instrument. Held, the
directors who accepted the bill of exchange were not personally liable because
the omission was neither deliberate nor of negligent origin. It was an obvious
error of most trifling kind and the mischief aimed at by the Act, did not exist
here. Thus, if the omission is not deliberate or the result of negligence on the
part of the Directors, they shall not be held liable.
Problem-5 . Two joint Hindu families carry on together a business as joint
owners. The first family consists of 3 brothers and their respective sons, being
12 in number. The second family consists of the father, 4 major sons and 2
minor sons. Is the business illegal?
Ans. Where two joint families combine to carry on business as joint owners or
in partnership, all major persons shall be counted as members. Minors are,
however, to be excluded. An association comprising of more than 20 members
is an illegal association if engaged in business other than banking. Since in the
given Problem, it is not indicated that they are engaged in banking business, it
may be assumed that they are not and thus since the total persons in the two
joint families come to 22 including 2 minors, Le., only 20 major persons,
business is not illegal.

Problem-6 . In a private limited company, it is discovered that there are, in


fact, 54 members. C an enquiry, it is ascertained that 6 of such members have
been employees of the company in a recent past and that they acquired their
shares while they were still employees of the con Is it necessary to convert the
company into a public limited company?

Ans. As per Section 3(l)(j), a company to be registered as a private company


must restrict its membership to 50 only. However, in counting this number of
50 members, employee members and ex-employee members (ie., those who
become members while in the employment of the company but now having
ceased to be in the employment still continue to retain membership) are to be
excluded. Thus, in the given case, the company shall continue to be a private
company. There is no need for conversion.

Problem-7. The paid-up share capital of XYZ (Private) Company Ltd. is Rs. 20
lakhs consisting of 2,00,000 equity shares of Rs. 10 each fully paid-up. ABC
(Private) Ltd. and its subsidiary DBF (Private) Ltd. are holding 60,000 and
50,000 shares respectively in XYZ (Private) Co. Ltd.
Examine with reference to the provisions of the Companies Act, 1956, whether
XYZ (Pvt.) Co. Ltd. is a subsidiary of ABC (Pvt.) Ltd. Would your answer be
different if DBF (P.) Ltd. is holding 1,10,000 shares in XYZ (Pvt.) Co. Ltd. and
no shares are held by ABC (Pvt.) Ltd. in XYZ (Pvt.) Co. Ltd. ?

Ans. Section - 4 of the Companies Act, 1956, inter alia, provides that a company
shall be deemed to be the holding of another where it holds more than half in
nominal value of the equity share capital of the other. But, in this regard,
shares held or power exercisable by a subsidiary shall be treated as held or
exercisable by the said company. Thus, the shares held or power exercisable by
a subsidiary shall be treated as 'held' or 'exercisable' by the holding company.
Thus, in the given case XYZ (Pvt.) Ltd. shall be deemed to be the subsidiary of
ABC (Pvt.) Ltd.

The second situation is rather simpler inasmuch as under Section 4(l)(c), a


company which is a subsidiary of a subsidiary shall also be deemed to be the
subsidiary of the holding company. Accordingly, XYZ (Pvt.) Ltd. shall be, or the
basis of majority shareholding criterion, the subsidiary of DEF (Pvt.) Ltd. and
DBF (Pvt.) Ltd. being subsidiary of ABC (Pvt.) Ltd.; XYZ (Pvt.) Ltd. shall also be
subsidiary of ABC (Pvt.) Ltd.

Problem-8. Few friends purchased a property. Later on they promoted a


company and sold this property to the company at huge profit. Can the
company recover this profit from the promoters? [B. COM. (H) D.U. 1999]

Ans. Promoters are allowed to make profits and accordingly remunerate


themselves provided they make a due disclosure of the same. Thus, the only
prohibition is to make secret profits [See Gluckstein v. Barnes]. Thus, in the
given case, company shall be entitled to recover the profit made by the
promoters if they failed to disclose the same to an independent Board of
Directors or alternatively to whole body of shareholders including future
shareholders, Le., through prospec¬tus.

Problem.-9 All the seven signatures on a Memorandum of Association were


forged by a person and a certificate of incorporation was duly obtained. Is the
certificate of incorporation valid ? Explain. [BCOM. (H) D,U. 1992, 1995].

Ans. Yes; [See Section 35.]

Problem-10. A company was formed on the basis of a Certificate of


Incorporation obtained by threatening the Registrar of Companies. Is the
company legally formed?

Ans. Yes; [See Section 35.] [B. COM. (H)D.U. 1997].

Problem-11. A, a furniture dealer, entered into a contract with the company for
the furnishing the offices of the company. The company went into liquidation
before it could obtain certificate of commencement of business. Can A prove in
the winding-up for the price of the furnishing supplied to the company?

Ans. No. All contracts after incorporation but before certificate to commence
business is reed' are Provisional. In other words, they shall, on certificate to
commence business being recei\ become enforceable against/by the company
and shall become void if the same is not recei* Since the company has gone into
liquidation, the question of certificate to commence busin being issued does
not arise.

Problem-12. Advise 'Asiatic Government Security Life Insurance Co. Ltd.'


whether it can seek, injunction against 'The New Asiatic Insurance Co. Ltd.'
which was subsequently formed restarting it from having in its name the word
'Asiatic' on the ground that it has caused confusions can deceive the public.

Ans. The Act permits the promoters of a company to choose any suitable name
for the company provided the name chosen is not undesirable. A name may be
considered undesirable where it is too similar to the name of an already exist
by company. In the present, problem since the two companies are in insurance
business, it may Is to a natural inference on the part of the public that the two
are inler-related because of thewu 'Asiatic'which is quite an imaginary word
and does not mean anything. Mere addition of the wo? 'New' is not likely to give
an impression that the two companies are different. Therefore, on asJ by
Asiatic Government Security Life Insurance Co. Ltd. Court is likely to advise
the New Asian Insurance Co. Ltd., to change its name and remove the word
'Asialic' therefrom.
Problem-13. M/s India Computers Ltd. was registered as a Public Company on
1st July, 2005 info State of Maharashtra. Another company by name M/s All
India Computers Ltd, was registered! Delhi on 15th July, 2005. The promoters
of ‘India Computers Ltd.’ have failed to persuade the Management of All India
Computers Ltd. to change the company's name, as it closely resembles with the
name of the first registered company.

Advise the Management of India Computers Ltd. about the remedies available
to them under! provisions of the Companies Act, 1956.

Ans. If through inadvertence or otherwise, a company on its first registration


or on its registration by a new name has been registered with a name which, in
the opinion of the Central GovernmeiH is identical with or too closely
resembles the name of an existing company, the company ma] change its name
by passing an ordinary resolution and by obtaining the approval of the Centra
Government in writing [Sec. 22]. Again, the company may change its name by
following the aforesaid procedure, where an application has been made by a
registered proprietor of a trade mark and, in the opinion of the Central
Government, the name is identical with or too nearl resembles a registered
trade mark of such proprietor under the Trade Marks Act, 1999. Thus, in the
given case M/s India Computers Ltd- should approach the Central
Government, am seek directions to be given to M/s All India Computers Ltd. to
change its name by following the procedure as aforesaid. The application for
the purpose must be made within 1 year ol the date of registration of M/s Al!
India Computers Ltd. Period of 12 months is a statutory limitation to the right
of a company to .seek change of name of the other company registered with a
too similar name [Sidhvi Constructions (India) (P.) Ltd. v. Registrar of
Companies (1997)].

Problem-14. ABC (Pvt.) Ltd. was incorporated on 10th June, 2003. A similar
company with identical name and same objects was also incorporated on 10th
June, 2004. ABC (Pvt.) Ltd. came to know about this and filed a petition on
10th January 2005. Explain the remedies available to the first company.
Ans. If a company is inadvertently registered with a name which, in the opinion
of the Central Government, is identical with or too nearly resembles, the name
by which a company in existence has been previously registered, the company
registered later;
[See under name clause.]

(a) may, by ordinary resolution and with previous approval of the Central
Government, signified in writing, change its name,.

(b) shall, if the Central Government so directs within twelve months of its
registration, change its name by ordinary resolution within a period of three
months from the date of such direction or such longer period as the Central
Government may allow.

In the given case, ABC (Pvt.) Ltd. can complain to the Central Government or
can make a representation (o the Regional Director under section 22 of the
Companies Act, 1956 to issue suitable directions to the company incorporated
on 10th June, 1997 for change of its name by passing an ordinary resolution.
In the instant ease, the company filed a petition on 10-1-2005 within 12 months
of date of registration of second company and so cognizance shall be taken of
the complaint. ABC Ltd. may also file a suit for injunction or other appropriate
relief. The facts of the given case arc similar to KGK Compressors Ltd. v.
K.E.Ltd. AIR 1986 Del. 181

Problem-15:. XY Ltd. has its registered office in Bihar. For better


administrative control, the company plans to shift its registered office from
Bihar to Delhi. The Bihar Government opposes such shifting on the ground
that such transfer will cause revenue loss to the Slate. Discuss the validity of
such opposition with reference to the case law on the subject.

Ans. LOSS OF REVENUE OR EMPLOYMENT OF STATE, WHETHER


RELEVANT CONSIDERATION - In Orient Paper Mills Ltd. v. State (1957), it was
observed that a State whose interests are affected by the change of the
registered office to a different Stale has a locus standi to oppose shift of the
registered office of a company. Accordingly, the Orissa High Court declined to
confirm change of registered office from Orissa to West Bengal, in teralia, on
the ground that in a Federal constitution every State has the right to protect its
revenue and, therefore, the interest of the State must be taken into account.
But, Minerva Mills Ltd..Govt, of Maha.rashlra[1915], Justice Ray of the Bombay
High Court held that the Company Law Board (now Central Government)*
cannot refuse confirmation of the shifting of the registered office on the
ground that the change would cause loss of revenue to a State or would have
adverse effects on the general economy of the State. The question of loss of
revenue to one State would have to be considered in the prospects of total
revenues for the Republic of India and no parochial consider¬ations should be
allowed to turn the scale in regard to change of registered office from one State
to another within India.
Similar view was expressed in Rank Film Distributors of India Ltd. \. Registrar
of Companies, West Bengal (1969), A Division Bench of the Calcutta High Court
observed that State has no statutory right under section 17 to oppose the
shifting of the registered office from one State to another.
It was further held that the argument that employment or sales tax or income-
tax revenue of the State will be affected by transfer of registered office, is not
tenable.
Articles contain a restrictive clause on shifting of registered office from one
State to another.
Company Law Board has held mJindal Vijaynagar Steel Ltd., In re [2005] 63
SCL 7 that existence of restrictive clause in respect of inter-State change of
registered office in the Articles is against the spirit of section 17 of the Act. This
clause was included in the Articles as a result of a joint venture agreement of
the company with KS1IDC, a Karnataka Government Industrial Development
Corporation and it was held that this clause in the Articles cannot be forced by
the company.

A printed or a typewritten copy of the special resolution both under section 146
and section 17, should be sent to the Registrar of Companies within 30 days of
its passing.

A certified copy of the Company Law Board (now Central Government's)*


order should be filed within three months thereof with the Registrar of
Companies of each State la., old and the new. If it is not filed within the
prescribed time, then the alteration shall, at the expiry of such period, become
void and inoperative.

A notice of the new location of the registered office must be given to the
Registrar of the State to which the of ficehas been shifted, within thirty days
after the change of the office (section 146).

A company is in a position to shift its registered office from one State to


another for certain purposes only. These are discussed in the following
paragraphs (under 'Alter¬ation of objects'- the grounds being common).

Problem-16. The Management of Ambitious Properties Ltd. has decided to take


up the business of food processing activity because of the downward trend in
real estate, business. There is no provision in the object clause of the
Memorandum of Association to enable the company to carry on such business.
State with reasons whether its object clause can be amended. State briefly the
procedure to be adopted for change in the object clause.

Ans. The given case falls under Section n(i)(d), viz, to carry on some business
which under existing circumstances may be conveniently or advantageously be
combined with the business of the company. Thus, the company can amend its
object clause to take up the business of food • processing.

Problem-17. The object clause of the Memorandum of a company empowers it


to'carry on distillery business and any other business that is allied to it. The
company wants to alter its Memorandum so as to include the cinema business
in its objects clause. Advise the company.

Ans. Section 17(1) of the Act permits alteration of memorandum to carry on


some business which under existing circumstances may conveniently or
advantageously be combined with the business of the company. Thus, Section
17(1) does not prohibit a company to diversify in areas other than those
specified in the Memorandum. But, the business sought to be added must be
such which can conveniently or advantageously be combined with the business
of the Company. The High Court in Distilling Industries Ltd. v. Registrar of
Companies [1963J 83 Comp. Cas. 811 (Punj.). [The facts of the given problem
are based on this case] held that the cinema business could not be either
conveniently or advantageously combined with the distillery business and,
therefore, disallowed change of objects. Accordingly, alteration shall not be
allowed.
5.4-3e. TO RESTRICT OR ABANDON ANY OF THE OBJECTS SPECIFIED IN
THE MEMORAN¬DUM [SECTION 17(1 )(e)] - Even for deleting any portion of
the object clause, the procedure laid down in Section 17 has to be followed.
Can shift of objects from 'other objects' to 'main objects' be permitted under
section 17?
The Company Law Board which was faced with the aforesaid issue in the case
of Mafatlal Consultancy Services (India) Ltd., In re [1995] answered it in the
negative. Since the Amendment Act of 1996 though no approval of Company
Law Board (now Central Government**) is necessary, the aforesaid case being
the precedent, the same shall not be allowed,

TO SELL OR DISPOSE OF THE WHOLE OR ANY PART OF THE


UNDERTAKING [SEC. - Where a company wishes to adopt a cut-back or
retrenchment strategy, i.e.,
1. A company, in which the directors hold majority of the shares, altered its
Articles so ve power to directors to require any shareholder, who competed
with the company's to transfer his shares, at their full value, to any nominee of
the directors. S had some the company, and he was in competition with the
company. Is S bound by the alteration? ..power of the members to effect
alteration in the Articles by passing special resolution is inasmuch as the
alteration must be bona fide and in the interest of the company. In the «e,
alteration requires taking over the shares of only those who competed with
company's (i Therefore, empowering the directors to takeover shares of such
members seems to be peral interest of the company as a whole and hence shall
be valid. S shall be held bound toration. [see Side Bottom v. Kershaw Lease &
Co. (1920)]

Problem-18 Thc Articles of a company provided that the shares of a member


who became bankrupt would be offered for sale to other shareholders at a
certain price. Is the provision binding on the shareholders?

Ans: The facts of the given Problem are based on the decided case oiBordand
Trustee \. Steel Bros. |4Co. Ltd., in which case, the provisions in the Articles
were held to be binding on the members. |The learned judge observed that
"Shares having been purchased on these terms and conditions, lit is impossible
to say that those terms and conditions are not to be observed". Thus, since
Articles '""stitute a binding contract between the company and its members,
the shareholders shall be \ bound by the stated provisions in the Articles.

Problem-19. A limited Company is formed with its Articles stating that one Mr,
Srivastava sh the solicitor for the company, and that he shall not be removed
except on the groui misconduct. Can the company remove Mr. Srivastava from
the position even though he guilty of misconduct?

Ans. As between outsiders and the company, Articles do not give any right to
outsiders again company, even though their names might have been mentioned
in the Articles. An outsider c take advantage of the Articles to found a claim
thereon against the company. Thus, in the case, the company shall succeed in
removing Mr. Srivastava as the solicitor of the con without incurring any
obligations. The facts given arc based on the decided case of Eleyv.Pt
Government Security Life Assurance Co. in which similar decision was
pronounced.
Problem-20 -Company 'A' lends money to Company 'B' on a mortgage of its
assets and the procedure laid down in the articles was not complied with and
the directors of the two companies were the same. Is the mortgage binding
upon Company B?
Ans. Protection under the rule of Indoor Management is not available to
anyone who is aware of the irregularity. In the given case, directors of the two
companies being the same, they shall be deemed to have knowledge of the non-
compliance of the prescribed procedure. Thus, mortgage shall not be binding
on Company B.
**. NO KNOWLEDGE OF ARTICLES - Again, the rule cannot be invoked in
favour of a person who did not consult the memorandum and articles and thus
did not rely on them.
In Rama Corpartition v. Proved Tin & General Investment Co. [1952], Twas a
director in the investment company. He, purporting to act on behalf of the
company, entered into a contract with the Rama Corporation and took a
cheque from the latter. The articles of the company did provide that the
directors could delegate their powers to one of them. But Rama Corporation
people had never read the articles. Later, it was found that the directors of the
company did not delegate their powers to T. plaintiff relied on the rule of
indoor management. Held, they could not, because they even did not know that
power could be delegated.

Problem-21. The plaintiffs contracted with a director of the defendant company


and gave him a cheque under the contract. The director could have been
authorised under the company's articles, but was not in fact so authorised. The
plaintiffs had not seen the Articles. The director misappropriated the cheque
and the plaintiffs sued the company, Is the company liable?

Ans. The Problem relates to the protection that the outsider may claim against
lack of authority on the part of the officers of the company. The rule commonly
known as the Doctrine of Indoor Management, was first laid down in the case
of The Royal British Bank v. Turquand However, it has been held that the rule
of indoor management cannot be invoked in favour of a person who had no
knowledge of the Articles of the company. It is because, in such a case the
person cannot assume that the power (of which he has no knowledge) has been
rightly exercised. In Rama Corporation v. Proved Tin and General Investment
Co., on which the Problem in question is based, it was held that the plaintiffs
could not rely on the rule of indoor management because they did not know the
existence of the power to authorise the director.

Thus, in the present case, company shall not be held liable by the act of the
director who has transacted beyond the scope of his authority. A principal can
be held liable for the frauds of his agent only to the extent they are committed
within the scope of the authority conferred upon him.

Problem-22. The authorized signatory of a company issued a share certificate


in favour of X, which apparently complied with the company's articles as it was
purported to be signed by two directors and the secretary and it had the
company's common seal affixed to it. In fact, the secretary had forged the
signatures of the directors and affixed the seal without any authority. Will the)
certificate be binding upon the company?

Ans. In the case of Ruben v. Great Fingall Consolidated Ltd. (1906), the
secretary of the company! issued a share certificate in favour of Ruben, which
apparently complied with the company's | articles, as it was purported to be
signed by two directors and the secretary and it had company's common seal
affixed to it. In fact, the secretary had forged the signatures of the] directors
and affixed the seal without any authority.
It was held that the certificate was not binding upon the company. Lord
Lorcburn held: "It is quite] true that persons dealing with limited liability
companies are not bound to inquire into their indoor] management but this
doctrine which is well established, applied to irregularities which otherwise]
might affect genuine transactions. It cannot apply to a forgery."
NEGLIGENCE- The 'doctrine of indoor management

Problem-23. X Co. Ltd., intended to buy a rubber estate in Peru. Its prospectus
contained extracts from an experts report giving the number of rubber trees in
the estate. The report was inaccurate. Will any shareholder buying the shares
of the company on the basis of the above representation have any remedy
against the company? Can the persons authorising the issue of the prospectus]
escape from their liability?

Ans. In the event of any mis-statement in a prospectus, the allottees have


certain remedies against I the company as well as those responsible for the
issue of the prospectus. Thus, in the present case, the allottee shall have the
right to claim compensation from the company for any loss that he might have
sustained in terms of the value of shares. But, his claim against those
responsible for issue of prospectus shall not succeed since they made the
statement on the basis of the report of an expert whom they believed to be
competent. Section 62(2) provides that in such circumstances, | one shall not
incur liability. However, expert can be proceeded against.

Problem-24. A prospectus issued by a company contained a promise of


subscription of a substantial amount by some persons so as to induce the
public to subscribe. The plaintiff who was allotted 10 shares alleged material
misrepresentation. Decide?

Ans. The Companies Act charges the company as well as every officer who may
be guilty of '• inducing the members of the public to subscribe for its shares or
debentures by including material misrepresentations as to a matter of fact. In
such cases not only the party defrauded shall have a right to return the shares
and claim his money back but damages can also be claimed. Besides these civil
remedies, Section 63 imposes criminal liability on every person who
authorises the issue' of such a prospectus. Liability under this Section may be
imprisonment up to 2 years or fine up to Rs. 5,000 or both. Further, Section 68
imposes a penalty on every person responsible for inducing public to subscribe
for the shares or debentures of a company by making false statements. Under
Section 68, the liability may be punishment with imprisonment for a term up
to 5 years or willi fine up to Rs. 10,000 or with both. In the present case,
representation that substantial amounts were promised to be subscribed by
some persons may be taken to induce the public if this happens to be untrue.
Thus, those responsible for making such a statement shall be held liable for the
above listed consequences,

Problem-25. A purchased from B 1000 shares of a company on the basis of a


prospectus containing wrong statement. What remedies are available to A
against the company?
[B.COM (II) D.U. 2000].
Ans. A shall have no remedy against the company; there being no privity of
contract between A I and the company. The reliefs in terms of right of
rescission and claim for damages are available i only to the parties to the
contract. The concept of 'stranger to the contract' is not recognized. 'A1 in this
case having purchased shares from 'B' and not from the company cannot have
any remedies against the company; company not being a party to the contract.
Problem-26 Amar subscribed shares issued by FasUrak Ltd. The prospectus of
Fasttrak Lid. included a statement which was misleading in the form and
content. On the faith of the prospectus believing it to be a true. Amar
subscribed for shares and sustained loss. Can Amar sue for compensation of
loss? If so, who will be sued for such loss?
Ans. Yes; Amar can sue for compensation of luss: Section 62 of the Companies
Act provides that an allottee is entitled to claim compensation from directors,
promoters and any other persons who authorised the issue of a prospectus, for
damages sustained by reason of any untrue statement in it.
However, he will have to prove that (i) misrepresentation was of material fact;
(ii) he acted on misrepresentation; and (t'i'0 has suffered damages in
consequences.

The following persons are liable to pay compensation for loss or damage
sustained by reason of untrue statement included in a prospectus:
(i) every person who is a director of a company at the time of issue of
prospectus;
(ii) every person who has authorised himself to be named in the prospectus
and is so named cither as a director, or as having agreed to become a director
either immediately or after an interval of time;

(iii) every person who is a promoter of the company; and (iv) every person who
has authorised the issue of the prospectus.

However, where a person named in the prospectus has given a consent in the
manner required for the issue of prospectus, shall not, by reason of having
given such consent, be liable as a person who has authorised the issue of
prospectus except in respect of untrue statement, if any, purporting to be made
by him as an expert.
Mr. Amar having sustained loss because of having believed the facts given in
the prospectus issued by Fasttrak Ltd. to be true, can sue for four categories of
persons mentioned above lor compensation of his loss. Apart from above, he
may sue the company for damages for deceit.

Problem 27. All statements in a prospectus issued by a public limited company


were literally true, but it failed to disclose that the dividends stated in it as paid
were not paid out of the realized profits. The statement that the company had
paid dividend for a number of years was true. But the fact that company had
incurred losses for all these years was not disclosed in tbe prospectus. An
allottee of shares wanted to avoid the contract on the ground that the
prospectus did not disclose this fact, which in his opinion, was very material.
Will he succeed? Give reasons.
[B.Com (H) D.U. 2007]. [HINTS: REX V. KYLSANT, SEE PARA 7.9.1

Problem-28 The capital of 'X' Ltd. is Rs. 50 lakhs, consisting of Equity Share
Capital of Rs. 40 lakhs anil Redeemable Preference Share Capital of Rs. 10
lakhs. The preference share capital is to be redeemed before 31st August 2007.
The company is running in losses and its accumulated losses aggregated to Rs.
15 lakhs. The company wants to borrow Rs. 20 lakhs from financial institutions
lo improve its working and also to redeem the preference share capital.
Advise.

Ans. According to Section 80, redemption of preference share capital is


permitted unly out of (i) profits of company, or (it) out of a fresh issue of
shares made for the purposes of redemption. Thus, borrowing from financial
institutions for redemption of preference shares shall not be permis¬sible. The
amount may, however, be raised for improving its working. The limits to
deposits do not apply to borrowing from financial institutions since the same is
excluded from the expression 'deposit' as per Rule 2(b)(ii) of the Companies
Acceptance of Deposits Rules, 1975.

Problem-29. ABC Company Limited at a general meeting of members of the


company pass an ordinary resolution to buy-back 30% of its Equity Share
Capital. The Articles of the Company empower the company for buy-back of
shares. The company further decides that the payment for buy-back be made
out of the proceeds of the company's earlier issue of equity shares. Explaining
the provisions of the Companies Act, 1956, and stating the sources through
which the buy-back of the companies own shares be executed. Examine. (i)
Whether company's proposal is in order?
(») Would your answer be still the same in case the company instead of 30%
decide to buy-back only 20% of its Equity Share Capital?

Ans. The Companies (Amendment) Act, 1999 has permitted companies to buy-
back their own shares but subject to certain limitations and compliances.
Sections 77A, 77AA and 77B contain the necessary provisions in this regard.
Besides other requirements, in case of buy-back of equity shares, buy-back
beyond 25% of the paid-up equity capital in a financial year is not allowed.
Again, buy-back cannot be effected out of the proceeds of an earlier issue of the
same kind of shares/ security. Moreover, special resolution of shareholders is
required to be passed. Thus, the buy-back effected by the company is not valid
on the following counts:
(i) Instead of special resolution, ordinary resolution has been passed.
(ii) Buy-back of 30% of equity share capital exceeds the maximum permissible
buy-back, viz. 25%.
(iii) Buy-back could not have been effected from the proceeds of an earlier
issue of equity shares.
Sources of Buy-back
Please see discussion in the aforesaid para.
'Substituted for 24 months by the Companies (Amendment) Act, 2001

Problem-30 A, the secretary of a company issues a certificate in favour of B by forging the


signatures of two directors. He also affixes the seal of the company on the certificate without
authority. Can B hold the company liable for the shares covered by the share certificate?
Give reasons [B. COM. (H) D.U. 1998J

Ans. No - see Rubben v. Great Fingall Consolidated Co. [1906] under para 8.17-

Problem-31 DJA Company Ltd. is holding 40% of total equity shares in MR Company Ltd.
The Board of Directors of MR Company Ltd. (incorporated on 1.1.1998) decided to raise the
paid-up equity share capital by issuing further shares and also decided not to offer any
shares to DJA Company Ltd. on the ground that it was already holding a high percentage of
shares in MR Company Ltd. Articles of Association of MR Company Ltd. provides that the
new shares be offered to the existing shareholders of the company. On 1.3.2001 new shares
were offered to all the shareholders excepting DJA Company Ltd. Referring to the
provisions of the Companies Act, 1956, examine the validity of decisions of Board of
Directors of MR Company Ltd. of not offering any further shares to DJA Company Ltd.
Ans, In view of Section 81, decision of the Board of Directors of MR Company Ltd. is not
valid. (For details see aforesaid discussion on Rights Issue)

Problem-32 "Sunrise Ltd." is authorised by its articles to accept the whole or any part of the
amoun of remaining unpaid calls from any member although no part of that amount has
been called 1 'X', a shareholder of the Sunrise Ltd., deposits in advance the remaining
amount due on his shara without any calls made by "Sunrise Ltd."
Referring to the provisions of the Companies Act, 1956, decide the rights and liabilities of
Mr.) which will arise on the payment of calls made in advance.

Ans. Section 92 of the Act provides that the directors may, if authorised by the Articles, alia
shareholders to pay the whole or a part of the amount remaining unpaid on any shares held!
them, although no part of that amount has been called up. On the amount so received the
compa may pay interest at such a rate as may be agreed upon between the Board and the
members payaj this sum in advance. In this regard, Regulation 18 of Table A provides as
follows:
"18. The Board may. if it thinks fit, receive from any member willing to advance the sum, all
or in] of the money, uncalled and unpaid upon any shares held by him; and (b) upon all or
in part of the moneys so advanced, may (until the sum would, but for such advance, become
presently payable) pay interest at such rate exceeding, unless the company in general
meeting shall otherwise direct; 6% per annum, as may be agreed upon between the Board
and the member paying the sum in advance."

According to Section 92(2) a member of a limited liability company having share capital
shall not be entitled to any voting rights in respect of the moneys so paid in advance by him
until the same becomes payable.

However, Section 93 provides that dividends may be paid on advance calls, if so authorised
by the Articles.

1. Discuss the law relating to forfeiture of shares.


2. Explain the requirements of valid forfeiture of shares.
3. State the circumstances under which shares can be forfeited. Discuss the procedures in
forfeiture of shares by a company which has adopted Table A of Schedule I to Companies
Act, 1956 as its Articles of Association.
4. When and how shares may be forfeited? What is the legal effect of
forfeiture?
5. State the conditions to be satisfied before a company may forfeit the shares.
Whatisl effect of such forfeiture? [B. COM. (H) D.U. 1994,20

Surrender of shares
Surrender of shares means voluntary return of shares by the shareholder to
the company for cancellation. There is no provision for surrender of shares
either in I Companies Act or in Table A. In Bellerby v. Rowland & Marwood
Steamship Co. [1902], it was observed that a company cannot accept a
surrender of its shares, "asev^ surrender of shares, whether fully paid-up or
not involves a reduction of capital wh is unlawful... forfeiture is a statutory
exception and is the only exception". However,! articles of some companies
may allow surrender of shares as a short cut to thelfl procedure of forfeiture,
where their forfeiture is otherwise justified - Trevor

Problem-33 .Ram Lalis a shareholder of a company holding 100 shares. Ram


Lal dies leaving Mohail as his legal representative. Mohan is not a member of
the company. Till then, the shares do nut vestj in him and, therefore, he has no
right to transfer the same. [B. COM. (H) D.U. 20(
Ans. No; Transfer is not valid. Mohan can effect a valid transfer only after the
succession in I favour is duly registered with the company. Till then, the shares
do not vest in him and, therefore,! he has no right to transfer the same.
Problem-34 . (a) State whether the following persons can be counted for the
purpose of quo.. a general meeting of a public company: (0 a person
representing three member companies; (ijj the joint owners of shares arc
present at the meeting.
(&) State also whether it is possible for a single member to constitute a meeting
of a comp
Ans. («}((). To be counted as three members personally present. (n) To be
counted as one member personally present.
(/>) yes. (z) under Section 167 [AGM convened or directed to be convened by
Central Govern (ii) under Section 186 [EGM at the direction of Tribunal]; (Hi)
in case of class meetings

Problem-35: Prosperity Limited Issued a notice for holding of its Annual


General Me on November 7, 2006. The notice was posted to the members on
October 16, 2006. Some me of the company allege that the company had not
complied with the provisions of the Co Act with regard to the period of notice
and as such the meeting was not validly called. (i) Whether the meeting has
been validly called? (ii) If there is a shortfall in the number of days by which
the notice falls short of the statij requirement, state and explain by how many
days docs the notice fall short of the stati requirement?
(ii) Can the shortfall, if any, be condoned? [B.COM (H) D.U.',

Ans. The Companies Act, 1956 charges the company as well as every officer
who may be j, inducing the members of the public to subscribe for its shares or
debentures by including ma misrepresentations as to a matter of fact. Tn such
cases not only the parly defrauded shall I a right to return the shares and claim
his money back but damages can also be claimed. Ba these civil remedies,
Section 63 imposes criminal liability on every person who authorises thei of
such a prospectus. Liability under this Section may be imprisonment up to 2
years or fin to Rs. 5,000 or both. Further, Section 68 imposes a penally on
every person responsible for indu, public to subscribe for the shares or
debentures of a company by making false statements. Under Section 68, the
liability may be punishment with imprisonment for a term up to 5 years or with
fine up to Rs. 10,000 or with both.
In the present case, representation that substantial amounts were promised to
be subscribed by some persons may be taken to induce the public if this
happens to be untrue. Thus, those responsible for making such a statement
shall be held liable for the above listed consequences.

Problem-36 : A company served a notice of a general meeting upon its


members. The notice stated that a resolution to increase the share capital of
the company would be considered at such i meeting. A shareholder complains
that the amount of the proposed increase was not specified in the notice. Is the
notice valid?

Ans. Section 173 of the Companies Act, 1956 requires a company to annex an
explanatory statement to every notice for a meeting of company, at which some
'special business' is to be transacted. This explanatory statement is to bring to
the notice of the members all materials facts related to each item of special
business. Section 173 further specifies that all business in case of any meeting
other than the annual general meeting is regarded as special business. Thus,
the objection of the shareholder is valid since the details on the item to be
considered arc lacking. The information about the amount is a material fact
with reference to the proposed increase of share capital. The notice is,
therefore, not a valid notice under Section 173 of the Companies Act, 1956.

Problem-37:. A general meeting was properly convened and was subsequently


adjourned by the Chairman for want of quorum. No fresh notice is given for
the adjourned meeting which is held subsequently. State whether the
adjourned meeting is valid?

Ans. According to the Section 174 of the Companies Act, 1956, if within half an
hour from the time appointed for holding a meeting of the company, quorum is
not present, the meeting, shall stand adjourned lo the same day in the next
week, at the same time and place unless the directors determine otherwise. No
fresh notice is, therefore, required to hold the adjourned meeting. Besides, no
quorum is necessary in the adjourned meeting. Thus, the adjourned meeting in
question is valid.
Problem-38. The secretary of a company while sending out to members of the
company notices of a special resolution to be proposed at the Annual General
Meeting inadvertently omitted to send notice to one member. The resolution
was passed at the meeting. Discuss whether the resolution is valid or not?

Ans. Section 172(3) of the Companies Act requires that proper notice must be
served on all the persons entitled to receive such notice. Deliberate omission to
give notice even to a single member entitled to notice, shall invalidate the
proceedings of the meeting.

But, it provides that an accidental omission to give notice lo a member or if the


member does not receive the notice, the meeting cannot be held invalid. Thus,
in the present case, the resolution shall be a valid one and binding since the
omission is stated to be inadvertent (ie., unintentional).

Problem-39: Mr. M, a member, appointed Mr. P as his proxy for the annual
general meeting of a company in the form as set out in Schedule IX to the
Companies Act, 1956. The company did not permit Mr. P to attend the meeting
on the ground that the special requirements for the instrument in the articles
have not been fulfilled.

Ans. As per Section 176(5), the appointment of proxy must be made by a


written instrument signed by the appointer or his duly authorised attorney.
Further, sub-section of the Section 176 provides that an instrument appointing
a proxy, if in any of the forms set out in Schedule IX, shall not be questioned on
the ground that it fails lo comply with any special requirement specified for
.such instrument by the Articles.

Problem-40: AGM of a public company was scheduled to be held on 15.12.2001.


Mr. X, a shareholder, issued two proxies in respect of the shares held by him in
favour of Mr. A and Mr. B. The proxy in favour of B was lodged on 12.12.2001
and the one in favour of Mr, A was lodged on 15.12.2001. the company rejected
the proxy in favour of Mr. B as the proxy in favour of Mr. B was dated 12.12,001
and that in favour of Mr. A was 'dated 13.12.2001. Is the rejection by the
company in order?

Ans. In case more than one proxies have been appointed by a member in
respect of the same meeting, one which is later in time shall prevail and the
earlier one shall be deemed to have been revoked. Thus, in the normal course,
the proxy in favour of Mr. A. being later in time, should he upheld as valid. But
as per Section 176, a proxy should be deposited 48 hours before the time of the
meeting. In this case, the proxies should have, therefore, been deposited on or
before 13.12.2001 (the date of the meeting being 15.12.2001). But Mr. A
deposited the proxy on 15.12.2001. Therefore, proxy in favour of Mr. A has
become invalid. Thus, rejecting the proxy in favour of Mr. B is unsustainable.
Proxy in favour of Mr. B is valid since it is deposited in time.

Problem-41 'A' appoints 'B' as proxy. Just before the meeting 'A' comes to
attend the meeting. Explain the position of proxy appointed by 'A'. [B.COM (H)
D.U. 2007],

Ans. Subject to articles, proxy may be revoked unless made irrevocable for
valuable consider¬ation. If the shareholder, after appointing a proxy himself
attends the meeting, he can vote in person, the proxy stands revoked - Cousins
v. International Brick Co, Ltd. [1931] 2 Ch. 90. ite at the meeting without
revoking, death of the shareholder revokes

Problem-42: A Company has 100members.lt sends notice of the general


meeting to all of them.2li members do not attend the meeting. Out of 80
members who are present 20 abstain from voting,] How many members
should vote in favour of a resolution if it is to be passed as a Special]
Resolution?

Ans. As per Section 189(2), for a valid special resolution, votes cast in favour
must at least be 3 times' (he votes cast against the resolution, if any. Those who
abstain are not to be counted. Thus, 3/4tli of 60, ie., at least 45 members must
vote in favour of the resolution.

Problem-43 : Diyas Limited issued a notice for holding of its Annual General
Meeting on 7thj November, 2006. The notice was posted to the members on 16-
10-2006. Some members of the! company allege that the company had not
complied with the provisions of the Companies Act with I regard to the period
of notice and as such the meeting was not validly called. Decide …
(i) Whether the meeting has been validly called?
(ii) If there is a shortfall in the number of days by which the notice falls short of
the statutory requirement, state and explain by how many days does the notice
fall short of the statutory requirement?

(iii) Can the shortfall, if any, be condoned?

Ans. (j) 21 days' clear notice of an AGM must be given [section 171]. In case of
notice by post. Section 53(2) provides that the notice shall be deemed to have
been received on expiry of 48 hrs. from the time of its posting. Besides, for
working out clear 21 days, the day of the notice and the day of the meeting shall
be excluded. Accordingly, 21 clear days' notice has not been served (only 19
clear days' notice is served) and the meeting is, therefore, not validly convened,

Problem-44 . The Annual General Meeting of XYZ Ltd., for the financial year
ending 31 -3-2005 was held on 27-9-2005. But since the accounts had not been
audited, it was adjourned and finally held on 31-3-2006 at which the audited
balance-sheet was adopted. The annual general meeting for the previous year
had been held on 29-6-2004.
Decide whether the holding of the annual general meeting on 31-3-2006 for the
year ending 31-3-2005 is valid.

Ans. The facts of the Problem have been based on the case of Bejay Kumar
Karnaniv. Asstt Registrar of Companies [1985] wherein it was held that even
adjourned annual general meeting of a company, inter alia, must be held
within 15 months of the previous meeting. The meeting of 31-3-2006 is,
therefore, not valid.

Problem-45 One general meeting was called by a company in December, 2005.


This meeting was adjourned to March 2006 and then held. Subsequent meeting
was held in February, 2007. Is the company liable for any irregularity?

Ans. Section 166 of the Companies Act, 1956 requires a company to hold its
annual general meeting every calendar year. So there should be one meeting
per year and as many meetings as there are years. Thus, in the above case the
meeting held in March 2005 is actually the meeting of December 2006. Since,
next meeting is held only in February 2007, the meeting of 2006 has been
missed. Under these circumstances, unless permission of the Registrar was
obtained for extension of lime which may be granted upto a period of 3 months
under certain special circumstances, the company shall be proceeded against.
In fact, the facts of the given Problem are based upon the decided case of Shree
Meenukshi Mills Co. Lid. v. Assistant Registrar of Joint Stock Companies in
which case similar decision was given.

Problem-46: 40 out of 100 members of a company submitted a requisition for


holding of i extraordinary general meeting in order to remove managing
director from office. On the failu of the company to call the meeting, the
requisitionists themselves called the meeting at I registered office of the
company. On the appointed day, they could not hold the meeting at I registered
office, as it was kept under lock and key by Ihc managing director himself. The
memb held the meeting elsewhere and adopted resolution removing the
managing director from offic Is the resolution valid?

Ans. Section 169 of the Companies Act contains provisions regarding holding of
extraordin general meetings. It provides that if directors fail to call a properly
requisitioned meeting, I requisitionist? or such of the requisitionists as
represent not less than l/10th of the total votip rights of all ihe members (or a
majority of them) may call a meeting to be held on a date fixed with 3 months
of the date of the requisition.
Where a meeting is called by the requisitionists and the registered office is not
made available! them, it was decided in R. Chettiarv. M. Chettiar that the
meeting may be held anywhere I
Further, resolutions properly passed at such a meeting, arc binding on the
company.

Thus, in the given case, since all the ahovemcntioned provisions are duly
complied with, resolution removing the managing director shall be valid.

Problem-47: 2-M/s ABC Ltd. is a big sized public company managed by a Board
of Directors consistin of 12 Directors including one Managing Director and two
Joint Managing Directors. Four direct! «present the financial institutions,
which together hold more than 50% of the equity capital of the company. The
Board of Directors took certain decisions which are opposed by the directors
representing the financial institutions as they felt that the decisions were not
in the interests of the company. The financial institutions, therefore, sought to
remove the Directors under section 284 of the Companies Act and served a
requisition under section 169 of the Companies Act for extraordinary general
meeting. The financial institutions refused to give any reasons for the removal
of the directors. The company refused to convene the meeting on various
grounds including that the requisition is not accompanied by a proper
explanatory statement. Discuss. [B.COM (H) D.U. 2000]

Ans. The contention of the company is not valid. The facts of the Problem are
based on the case t&UC\.Escorts Ltd. [1986]. In this case, it was held that ever)'
shareholder of a company including an institutional shareholder has the right,
subject to the provisions of the statute, to call an . extraordinary general
meeting in accordance with the provisions of the Act, He cannot be restrained
from calling a meeting and he is not bound to disclose the reasons for the
resolution proposed to be moved at the meeting.
Regarding explanatory statement, the Court held that it was a duty cast on the
management to disclose, in an explanatory note, all material facts relating to
the resolution coming up before the general meeting to enable the
shareholders to form a judgment on the business before them. Section 173(2)
does not require the shareholders calling a meeting to disclose the reasons for
the resolution which they propose to move at the meeting.

Class meetings [Sections 106 and 107]


11.13 Section 106 provides that where the share capital of a company is divided
into different classes of shares, the rights attached to the shares of any class
may be varied with the consent in writing of the holders of not less than three-
fourths of the issued shares of that class or with the sanction of a special
resolution passed at a separate meeting of the holders of the issued shares of
that class—
(a) if provision with respect to such variation is contained in the memorandum
or articles of the company; or

(b] in the absence of any such provision in the memorandum or articles, if such
variation is not prohibited by the terms of issue of the shares of that class.

Problem-48 State the legal position in the following circumstances :


The articles of association of a company provide for minimum share
qualification. Mr X who, appointed as a director of the company failed to
obtain qualification shares within the specific time limit,

Ans. Following effects shall follow.


1. He shall be liable to fine upto Rs. 50 for every day until he stops acting as
such {Section27}

2. He shall be liable to a further penalty under section 283(2A) upto Rs. 500 for
each
day functions as a director. It appears that the penal provisions of sections 272
and 283(2A), cumulatively apply.

3. He automatically vacates the office under section 283(1 }(a).

Problem-49 Mohan, a director of XYZ Ltd., died in an air crash. It has been
decided to appoint Murari in his place. Will the company be required to call
extraordinary general meeting to approve the latter's appointment as a
director? When appointed, how long Murari would remain in office?

Ans. The vacancy being a casual vacancy can be filled by the Board of directors
at its meeting under section 262. It may also be filled in a general meeting.
Thus, there is no need to call an EGM for the purpose.
Murari's tenure will be the period for which Mohan, if he had not died would
have continued.

Problem-50 Mr. X who was appointed as a Director at the last annual general
meeting resigned. The Board filled up the casual vacancy by appointing Mr. Y.
But within a few days of his becoming Director, Y died. The Board wishes to fill
up the casual vacancy by appointing Mr. Z in place of Mr. Y in the next Board
meeting. State the legal position.

Ans, Section 262 provides that in the case of a public company or a private
company which is a subsidiary of a public company, if the office of any director
appointed by the company in general meeting is vacated before the expiry of
his term of office in the normal course, the resulting casual vacancy may,
subject to any regulations in the Articles of the company, be filled by the Board
of Directors at a meeting of the Board.
It would thus be noted that Board of Directors is empowered to fill a casual
vacancy only in respect of a director appointed by the company in general
meeting. If a casual vacancy arises in the office of a director appointed in the
casual vacancy under Section 262, there is no casual vacancy within the
meaning of Section 262 and cannot be filled up by the Board of Directors.
Consequently, Board should not be empowered to appoint Mr. 2 in place of Mr.
Y. However, the Depart merit of Company Affairs has opined that the vacancy
may be filled by the Board as a casual vacancy. Certain commentary writers do
not subscribe to this view and suggest that vacancy should be filled not as a
casual vacancy but by appointing the person as an additional director so that
he ceases to hold office by the next AGM.

Problem-51: In Parween Woodcraft Co. Ltd., Mr. James was named in the list
of first directors. He, however, died before he could assume office. How can
the Problem regarding the appointment of a director be solved in this case?

Ans. The vacancy in question is not a casual vacancy under Section 262 and
cannot, therefore, be filled by the Board of Directors. Accordingly, it will be
necessary for the subscribers to the Memorandum (who will then be only mem
bers) to convene a meeting for the appointment of the director. To the extent to
which the Articles do not make any other provision in this behalf subscribers
who would be entitled to requisition a meeting may call the meeting. A meeting
is not necessary if all the subscribers concur in the appointment.
In the present case, representation that substantial amounts were promised to
be subscribed by some persons may be taken to induce the public if this
happens to be untrue. Thus, those responsible for making such a statement
shall be held liable for the above listed consequences.

Problem-52:. X, an employee of ABC Ltd., was appointed as an alternate


director. In the meantime, the original director returned and wanted to attend
the Board meeting. Advise.

Ans. In terms of Section 313 of the Act, an Alternate Director can act on behalf
of the Original Director during the latter's absence for a period of not less than
three months from the State in which the meetings of the company are
ordinarily held.

Alternate director has to vacate office when the Original Director returns to the
State in which meetings of the Board are ordinarily held. Thus, the original
director only can attend the Board meeting. Even if the alternate director so
desires, he cannot attend the Board meeting. Assignment of office by a director
[Section 312]
13.10 Section 312 prohibits assignment of his office by a director. The Section
applies to all companies. Section reads:

"Any assignment of his office made after the commencement of this Act by any
director of a company shall be void."

Problem-53: 'X' was appointed as Managing Director for life by the Articles of
Association of a private company incorporated on 1st June, 1970. The articles
also empowered 'X' to appoint a successor. 'X' appointed, by will, 'G' to succeed
him after his death. Answer the following: Can 'G' succeed 'X' as Managing
Director after the death of 'X' ?

Ans. 'G' can succeed 'X'. Appointing a successor under a power conferred
under the Articles is not considered as 'assignment of office' which is
prohibited under section 312 [Oriental Metal Pressing v.Bhasker Kashmath
Thakoor[l96\] 31 Comp. Cas. 143 (SC)]

Problem-54 Articles of Association (AoA) of XY7, Ltd. provide for 10 as the


maximum strength of the Board of Directors. Present strength of the Board is 8
directors. On 1st January, 2005 company by passing a special resolution alters
its AoA raising the maximum permissible strength of the Board from 10 to 15.
On 1st February, 2005, company proposes to raise the present strength of the
Board from 8 to 13. Company has been advised to only pass an ordinary
resolution. Is it in order?

Ans. No; company cannot be allowed to circumvent the provisions of Section


259 by phasing out the increase in the aforesaid manner. Approval of the
Central Government shall be necessary. The only case where Central
Government's approval is not necessary for raising the strength of tfie Board
beyond 12 is where Articles, as originally registered, provide for a number
beyond 12 and increase is within the number prescribed.
Problem-55 The maximum number of Directors of each of the following
Companies as per their Articles of Association is 11.
"(i) ABS Company Ltd.
(ii) DSP Trading Private Ltd.
(iii) Traders Association (a Company registered under Section 25 of the
Co.anies Act, 1956)
(i'v) Hindustan Paper Ltd. (A Government Company registered under Section
617 of the Companies Act, 1956)
The Board of Directors of the Company wants to increase the number of
Directors to 15.
State with reference to the provisions of the Companies Act, 1956, whether the
Directors can do so?
Ans. The Problem is based on Section 259 of the Companies Act, 1956. As per
Section 259, a company can increase the strength of its Board beyond the
maximum number prescribed by the Articles by passing special resolution at a
general body meeting of its members and if the increase is beyond 12, approval
of the Central Government shall also be necessary. However, a private
company which is not subsidiary of a public company, a Section 25 company
and government companies need not obtain the approval of the Central
Government, Thus, in case (r), the company being a public company and not
falling under any of the aforesaid exemptions, it shall require special
resolution and approval of the Central Government. Cases (w). («0 and (»$ fell
under exemption from the Central Government's approval. These companies
shall, therefore, be able to increase the strength of the Board to 15 by passing
special resolution only.

Problem-56 Mr. PMC is Director in 14 Public Limited Companies as on 30th


July, 2006. He continues to be so till Septem ber 24,2006. The following
companies appointed Mr. PMC as a Director at their respective Annual General
Meetings held on dates mentioned against their names. (i) PQR Ltd. (AGM held
on 29th September, 2006)
(ii) BCD Private Ltd. (AGM held on 25th September, 2006)
(iii) City Traders Association (A company registered under Section 25 of the
Companies Act, 1956 - AGM held on 26th September, 2006)

(iV) TSP Ltd. (AGM held on 25th September, 2006)


You are required to state with reference to the relevant provisions of the
Companies Act, 1956 the options available to Mr. PMC in respect of accepting
or not accepting the appointment of Director of the above companies.

Ans. As per Sec. 277(2), where a person already holding the office of director in
14 companies or less is appointed, after the commencement of the Companies
(Amendment) Act, 2000 as a director of other companies, making the total
number of his directorships more than 15, he shall choose the directorships
which he wishes to continue to hold or to accept, so, however, that the total
number of the directorships, old and new, held by him shall not exceed 15.
None of the new appointments of director shall take effect until suHi choice is
made; and all. the new appointments shall become void if the choice is not
made within 15 days of the day on which the last of them was made.
However, as per Section 278, directorships in certain companies shall not be
included for the purposes of Section 277. These, inter alia, include directorship
in private company and Section 25 company. Accordingly, on 25th September,
2006 appointment in TSP Ltd- alone shall be added to the directorship of Mr.
PMC thus raising his total directorships to 15. Thus, the case shall be covered
under Section 277(1) and not under Section 277(2). As per Section 277(1), he
should make a choice of 15 companies within 15 days, in the present case, from
29th September, 2006.

Problem -57. After serious disagreement and difference of opinion among the
shareholders of tig company in the last annual general meeting, some of the
directors took the steps as noted belt) Discuss the validity and effect of the
following:
(z) Mr. John, the managing director sends his notice of resignation. (if) Mr.
Paul, an ordinary director verbally resigns and not in writing. (iit) Mr. David,
another ordinary director, had sent his resignation, but withdrew it before L.
Board meeting was held for accepting his resignation.

Ans. (/) Mr. John, the managing director cannot resign merely by giving a
notice. In his case a formal acceptance of resignation by the company is
essential so as to make it complete and effective. Th' is because he occupies two
positions or possesses two capacities, viz., one that of a director, an the other
that of manager or officer of the company in the sense of a whole- time
employee. An employee cannot give up office at his pleasure simply by giving
notice. The notice or the letter of resignation is required to be approved or
accepted by the company and the officer concerned. has to be relieved of his
duties and responsibilities attached to the office which he has resigned from.
(Achutha Pal vs. Registrar of Companies (1956) 36 Comp. Cas. 598). (if) A
director can resign from his office in the manner laid down in the Articles of
the company. Where Articles do not contain any provision in this regard, a
director may still resign ai anytime by giving a reasonable notice to the
company, In Latchford Premier Cinema vs. Ennion it was held thai a verbal
notice accepted at a meeting is sufficient, even if the articles provide for
resignation in writing.
Thus, verbal resignation cannot be held valid unless accepted at a meeting of
the Board/ Shareholders.

Even written notice of resignation to be valid must be addressed to the


company and not to any third party.
(iii) Once a director has given a notice of resignation, he cannot withdraw it
except with the consent of the company properly considered by the directors. It
makes no difference that the withdrawal is sought before the Board's meeting.
However, where articles provide that a director may resign only if the Board
consents, the resignation shall not be effective until the Board's consent is
given and the resignation may be withdrawn in the meantime.

Problem -58. The Board of Directors of a public company in the private sector
having made an average net profit of Rs. 1 crore during the last three financial
years propose to donate during the current year the following amounts :
(j) Rs. 1,00,000 to a school run exclusively for the benefit of employees,
(«) Rs. 40,000 to a general charitable fund, and
(ill) Rs. 4,00,000 to a political party.
Advice the Board of Directors about the powers in respect of the above
explaining the relevant provisions of the Companies Act.

Ans. (i) Since the donation relates to a purpose connected with the welfare of
the employees, Board of directors are empowered to donate any amount under
section 293(l)(e).
(ii) The amount of donation being less than Rs. 50,000, the same shall be in
order and not require the approval of shareholders.
(iii) Board of Directors is empowered to contribute to a political party upto 5%
of its average net profits for the last three financial years. Accordingly,
donation to a political party, in the given case being, less than Rs. 5 lakhs (5%
of Rs. 1 crore), it shall be in order under section 293A.

Problem-59 A public limited company intends to contribute: (i) to a charitable


fund not related to compant's business; and (11) for political purpose.

Ans, See above answer


Problem-60 The Board of Directors of M/s ABC Motors Ltd. made the following
appointments at its meeting held on 1st January, 2006 :
(i) Mr. X, a Director of its subsidiary company, namely, M/s ABC Forgings Ltd.,
was appointed as Purchase Manager on a consolidated salary of Rs. 11,000 per
month with effect from 1st January, 2006.
(ii) Mr. Y was appointed as the Sales Manager on a consolidated salary of Rs.
11,000 per month with effect from 1st January, 2006. Answer the following
explaining the relevant provisions of the Companies Act:
• (t) Does the appointment of Mr. X require the approval of the members in a
general meeting of any company? Will your answer be different if M/s ABC
Motors Ltd. is the subsidiary of M/s ABC Forgings Ltd.? (it) Mr. P, a relative of
Mr. Y was appointed as a Director of M/s ABC Motors Ltd. on 1st
January, 2007. Does it affect the continuation of Mr. Y as the Sales Manager?
Ans. (i) Yes, the appointment of Mr. X is hit by section 314(1) and therefore
shall require the approval of general meeting by way of special resolution.
However, it will not require the aforesaid approval if M/s ABC Motors Ltd. is
the subsidiary of M/s ABC Forgings Ltd. Section 314(1) does not prohibit a
Director of a subsidiary company from holding an office or place of profit in its
holding company.
(») Section 314(1) does not apply since at the time of appointment of 'Y' as the
sales manager, his relative 'P' was not the director of the company, [Section
314(1A)]

Problem. State whether the restrictions under Section 314 of the Companies
Act, 1956 would apply if a relative of the director of a private company is
appointed as managing director of the company,
Ans. Section 314 applies to both public as well as private companies. However,
the instant case is covered under the exceptions contained in Section 314(1) as
regards the position of the managing director is concerned.
In other words the requirement of a special resolution is not applicable in the
instant case. Problem 3. Mr. X is a director of a private Co. Mr. A, who is the
husband of Mr. X's grand-daughter, is appointed as a Genera! Manager of the
Co. on a remuneration of Rs. 8,000 per month, without the approval of the
general body of the company.
(0 Is the appointment valid?
(«) Does it make any difference if the remuneration is Rs. 10,000 per month?
Ans. Section 314( 1). Limits have been raised under this section by notification
dated 5.2.2003. special resolution shall be required only if the remuneration
payable is more Rs. 10,000 and special resolution as well as approval of the
Central Government shall be C8 if the remuneration exceeds Rs. 50,000,

Problem. XYZ Machineries Ltd. having a paid up share capital of Rs, 80 lakhs
proposes! into contract with the following parties for the supply of certain
components for a perio years with effect from 1st January, 1995 :
(i) ABC Forgings Private Limited where 'X', a director of XYZ Machineries Lin
interested as a director and member.
(it) DBF Casting Limited, where 'Y', a director of XYZ Machineries Limited, is
interest member holding 25 per cent of the paid up share capital. I State briefly
the legal requirements to be complied with under the Companies Act to give! to
the above proposals. Will the agreements continue to be valid after the paid up
share cff XYZ Machineries Ltd. is increased to Rs. 4 crores in December 1995
by further issue of!
Ans. ', ,
(i) Under section 297, it will require a resolution of the Board of Directors to be
passed] meeting.
In the event of capital of XYZ Ltd. being increased to Rs. 4 crores, previous
approvals Central Government shall also be required under section 297.
Approval of the Ci Government is required where the paid up share capital of
the company is Rs. 1 end more. But, applicability of the section is to be
determined at the time of entering infa contract. If no permission under this
section is required at the time of entering inlij contract, subsequent
permission is not necessary even though there may be a chs circumstances
which would require permission to be taken for a fresh contract. Thus, it
appears that, where contracts entered into by companies when their paid up<
was less than Rs. 1 crore, and raised upwards subsequently [as in the given
case], app of the Central Government would not be necessary until the expiry
of the contract,
Also under section 299, 'X' must disclose his interest to the Board and not
participates said meeting/deliberations.
Section 297 does not cover cases of public limited companies. Tbus, the
aforesaid appr shall not be necessary.

Problem 1. A company sold one of its flats to one of the directors and received
50% of the price in cash and agreed to receive the balance in instalments.
Wpuld you consider this as a loan granted to director attracting the provisions
of Section 295?
OR
M/s. International Carrier Ltd. purchased a flat in Mumbai to give residential
accommodation to Shri Ravi Mehta, the Managing Director. At the time of
purchase of flat, the Managing Director was given an option to buy the flat
during the course of his employment. The Managing Director exercised his
option and paid the company half of the purchase price and requested for lime
to pay the balance amount in three year half-yearly instalments at 10% interest
per annum. Examine whether the arrangement would amount to a loan to the
Managing Director and if so, whether the loan was in order.
Ans. The facts of the Problem are based on the case Dr. Fredie Ardeshir Mehta
vs. Union of India [1991] 70 Comp. Cas. 210 (Bom.). In this case the Bombay
High Court held that when a company gives official accommodation in the
matter of payment of debt to one of its directors, it is not, and does not amount
to, a loan and company cannot be prosecuted for contravention of provisions
of Section 295. The Court held that Section 295(1) prohibits a company from,
directly or indirectly, making any loan to its directors without the previous
approval of the Central Government in that behalf. However, the Court said
that the essential requirement of a loan is the advance of money (or some
article) upon the understanding that it shall be returned; it may or may not
carry interest. The debt here arose not out of an advance but out of the sale of
the flat by the company to the managing director. The company gave time to
the managing director to pay a part of the purchase price. The managing
director was thus given official accommodation by the company in the matter
of payment of the debt. Such official accommodation was not and did not
amount to a loan. When Section 295 refers to an indirect loan to a director,
what it means is that the company shall not give, a loan to a director through
agency of one or more intermediaries. The word 'indirectly' in the I Section
cannot be read as converting what is not a loan into a loan. Thus, there was no)
contravention of Section 295.

Problem 2. Following transactions are made by a public company. You are


required to examine! the same whether these transactions can be termed as
Loans to Directors requiring the approval] of the Central Government as
required under Section 295 of the Companies Act, 1956:
(i) A salary advance of Rs.5,000 to an employee, who is the wife of the
managing director of] the company.
(if) Loan to its 100% (one hundred per cent) subsidiary company. Ans.
(0 According to Section 394 of the Companies Act, 1956, a company cannot
give, without! obtaining prior approval of the Central Government any loan
(directly or indirectly) to, inter] alia, any relative of a director. 'Wife' is a
relative under Section 6 of the Companies Act, 1956, j However, where wife of a
director is also an employee of the company then in Electronic Components
Ltd v. Asstt. Registrar of Companies (1987) 61 Comp. Cas. 8 (Mad) I the Madras
High Court held that in the absence of any evidence that there has been)
circumvention of the Section by disguising the loan to the wife of a director,
who is also an j employee, as salary advance, the same may not be admitted as
contravention of Section 295.;
(a) The restrictions of Section 295 are not applicable to a holding company in
respect of any loan given by it to its subsidiary or any security or guarantee
provided by it for any 1 given to its subsidiary. Thus, loan to a 100% subsidiary
shall not require any approval of the Central Government.

315

Problem 1. The Board of Directors of a public company met on three times in


the previous year, the fourth meeting though called could not be held for want
of quorum on two occasions successively. Discuss whether any provisions of
the Companies Act has been contravened.
Ans, As per Section 285 of the Companies Act, 1956, a company must hold a
meeting of its Board of Directors at least once in every 3 calendar months and
there should be at least 4 meetings of the Board every year. But, Section 288(2)
provides that where a meeting is called but could not be held for want of
quorum, there is no contravention of Section 285. Thus, as per the facts in the
above case, there has been no contravention of any provisions of the
Companies Act, 1956.

330
Problem 1. X, Y and Z, directors of a company were the major shareholders of
the company. X was the chairman of the company. At a meeting of the Board of
Directors, it was decided to increase the share capital. Y and Z did not have the
money to take up additional shares and feared thai in consequence, X would
corner all shares and become predominant in the company. So a general
meeting was called and it was resolved that the present members alone should
not benefit from the prosperity of the company, but others also should share,
and a special resolution was passed that the new shares may be offered to
about a dozen persons who were not members of the company.
X rushed to the Court, complaining of oppression, saying that Y and Z wanted
to throw him out as director and chairman of the company ;ind they had
passed a special resolution to bring about a change in the management.
(i) Define what amounts to oppression.'
{«) Discuss fully the chances, if any, of X succeeding in the proceeding. Ana.
The person claiming oppression has to prove on the part of majority:
- lack of probity
- unfair conduct
- prejudice to him in the exercise of legal and proprietary rights as a
shareholder - rsktmti Prasad Jaw v. Kalinga Tubes Lid. (1965); Needle
Industries (India) Ltd. v. Needle Industries Newey (India) Holdings Ltd.
[1981]].
The facts in the case do not point to the conduct of majority falling under any of
the aforesaid grounds. Seeking change of management does not, prima facie,
amount to oppression. Accord¬ingly, X would not succeed.

Problem 1. XYZ Company Limited ceased to operate its business in the field of
its activities for 14 months. The company did not do any business as stated in
its objects clause of memorandum of association. Instead, it became a holding
company by forming two subsidiary companies, viz., ABC Company Limited
and KJD Limited. These companies are engaged in the pursuit of objects for
which XYZ Company Limited was incorporated. Some members of XYZ
Company Limited want to move the Court for winding-up of the company on
the ground that the company had suspended its business for a whole year.
Advise the members.
Ans. Section 433(c); the company having suspended its business for more than
a year. Hence, prima fade, ground for winding-up. However, in Easter
Telegraph Co. Ltd., In re [1947], it was held that where a company ceases to do
any business but becomes a holding company of subsidiaries engaged in
pursuit of the business, which it was previously doing, it cannot be said that the
company has suspended its business, for the whole year, so as to justify an
order for its winding-up.
The members of XYZ Co. Ltd. should, therefore, not move the Court for
winding-up of the company.
Problem 2. Company was incorporated for the purpose of manufacturing
machine tools, implements, etc. It spent a substantial part of its subscribed
capital on fixed assets. It borrowed a sum of Rs. 30 lakhs from a bank for
providing working capital. As the company was unable to pay back this loan
otherwise, the stock-in trade, plant and machinery and all the fixed assets of
company were sold out in execution of a decree obtained by the bank, leaving
no surplus for the
company.
Would it be just and equitable to wind-up the company in the circumstances?
Ans. In a ease where the subject-matter (substratum) of the company has gone
or the objects for which the company was incorporated have substantially
failed, it was held In re Kaithal General Mills Co, Ltd, [1951] that it shall be just
and equitable to wind-up the company. The substratum of the company is
deemed to have gone in such a case.
Thus, the company in question may be wound-up on just and equitable
grounds since its substratum is gone.
Problem 3. Y Estates Ltd. was incorporated with the object of developing land
for residential houses as well as purchase and sale of flats. It had, therefore,
purchased 5 acres of land near the airport at Calcutta. But Government
acquired the same for defence purposes. The company would not replace the
land as the prices of land of other places were prohibitive.
What will be the decision of the court in the following cases: (0 The company
suspends its business for a whole year?
(if) The company fails to resume its operations (business) for 5 years and the
prospects seemed gloomy?
Ans. (i) The court may refuse to grant winding-up order. Suspension uf
business for a whole year is a ground under section 433(c) seeking winding-up
by the court but the power of the Court in this regard is discretionary. The
Court shall refuse winding-up on this ground if the intention of the company
not to resume its business is absent. Thus, in the given case, winding-up order
shall not be issued. Similar decision was given under similar circumstances in
the case of Murlidhurv. Bengal Steamship Co. Ltd. [192QJ.
(ii) Where the company fails to resume its operations for 5 years and prospects
also seem gloomy, the Court may order the winding-up of the company [Kupu
Bharati Lid. v. Registrar uf Companies [1969]].
Problem 4, The Official Liquidator of a public company in liquidation
instituted misfeasance proceedings against the Managing Director of the
Company. During the pendency of the proceedings, the Managing Director
passed away.
What is meant by misfeasance? Can the legal representatives of the Managing
Director be impleaded and the proceedings continued against him?
Ans, The facts of the case in question are similar to the case of Official
Liquidator v. Panhasarthi Sinha[\ 983], wherein it was held that misfeasance
proceedings initiated under section 543, against a director of a company in
winding-up can be continued on his death against his heirs and legal
representatives for the purpose of determining and declaring the loss or
damage caused to the company. The expression 'misfeasance' means grave
breach of duty or abuse of power usually associated with taking undue benefit
or advantage at the cost of the company.
Problem 5. R and W formed a private limited company in which they were the
only directors and shareholders having equal voting rights. Differences arose
between them. They were not even on speaking terms. One of them
shareholders filed a winding-up petition. Will he succeed in getting a winding-
up order?
Ans. Facts similar to the case of re Yenidje Tobacco Co, [I916J. The company
was ordered to be wound-up because of dead lock in management. Such a
ground will fall under just and equitable.
Problem 6, The Balance Sheet of an investment company J Ltd. as on 31st
March, 1980, disclosed an accumulated loss of Rs. 3 lakhs against the paid-up
capital of Rs. 28,000 and that whereas its tangible assets were worth Rs. 6
lakhs, its liabilities amounted to Rs. 8 lakhs. The Registrar of Companies filed a
petition for winding-up of the company on the ground that the company was
unable to pay its debts. The Managing Director had stated that the paid-up
capital of the company had been increased and the business of the company
was also increasing every year, with the result that the company was making
profits and all the creditors, whose claims had matured, had been paid-ofl.
Decide, giving reasons whether the Registrar's petition for winding-up of the
company is tenable.
Ans. Registrar is allowed to make a petition for winding-up of a company, inter
alia, where it is felt to be just and equitable that the company be wound-up.
Where the business of the company cannot be carried on except at a loss, it has
been held to be a just and equitable ground for winding-up the company.
However, merely the fact that the company has made losses, and is even likely
to make further losses will not fall within the aforesaid ground and the Court
shall not be justified in making a winding-up order [Re Shah Steamship
Navigation Co, [1901]]. Based on the above and the given facts, the Registrar's
petition shall not be tenable.
Problem 7.There are only two members of a company and both of them are not
on speaking terms. Can the company be wound-up on this ground?
Ans. Yes, company can be wound-up on just and equitable ground under
section 433. In Re Yenidje Tobacco Co. Ltd. [1916], on which the given Problem
is based there were only two shareholders who were also the directors of the
company and had become so hostile to each other that neither of them would
speak to the other except through the Secretary. Held that there was a
complete deadlock and consequently the company was ordered to be wound-
up.

---------------
Posted by RAGHU RAM CHITTIBOMMALA at 8:54 PM
5 comments:

sunehri said...
hey this matter is very useful thanks Mr.Raghu for providing us with this
June 7, 2008 at 12:47 AM

Ram said...
hi sir ,
this is raghu,sir you kept alot of information about company law and it's
related cases and it is very usefull to students like me.
thank you
raghu
email:-raghuramnetha@gmail.com
July 10, 2008 at 1:54 AM

krishakumar yadhavan said...


Wonderful blog & good post.Its really helpful for me, awaiting for more
new post. Keep Blogging!

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January 10, 2013 at 9:01 PM

AB ACS said...
Hai, Sir, Really A lot of thanks. This is totally very useful for CS Executive
Students. Its very helful to me. lot of Thanks Sir,
Thank you.
BY
Abirami
February 20, 2013 at 12:44 PM

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