Company Law Aug 21

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CS EXECUTIVE
COMPANY LAW
PART–A CASE LAWS
BY SHUBHAM ABAD.
• Mr. M holds all the shares (except one) in a private company engaged in timber and also a substantial creditor. He gets com
insured on his own name. In a fire all the timber get destroyed by fire and claims loss from insurance company. Is an insu
company be liable to Mr. M?
Ans.: A company being a legal person and entirely distinct from its members, is capable of owning, enjoying and disposing of prop
its own name. The company is the real person in which all its property is vested, and by which it is controlled, managed and dispo
No member can claim himself to be the owner of the company's property during its existence or in its winding-up. A member do
even have an insurable interest in the property of the company.
The facts of the given case are similar to Macaura v. Northern Assurance Co. Ltd., wherein it was held that a member does not eve
an insurable interest in the property of the company. Hence, Insurance Company is not liable to reimbursement of loss.
• NSZ Ltd. engaged in petroleum products and for last few years company is facing the problem of liquidity and is struggling
survival. Some difference arises between the workmen and management of NSZ Ltd. The workmen of the company prepared
cassettes showing their struggle against the company's management. Advice as a Company Secretary to the management
Ltd. whether company can claim damages against their workers?
Ans.: A company has a right to seek damages where a defamatory material published about it, affects its business. In TVS Emp
Federation v. TVS & Sons Ltd. (1996) 87 Com Cases 37, it was held that, where video cassettes were prepared by the workme
company showing their struggle against the company's management is not actionable unless it is shown that the cassette wo
defamatory. Thus, company cannot claim damages againsttheir workers.
• New Horizons Ltd. was formed as a joint venture by Thomson Press India Ltd. and Living Media India Ltd. and the company h
experience in publication business but the tender submitted by the New Horizons Ltd. was rejected on the ground that compa
nothing on record to show that it had the technical experience required to be possessed to qualify for tender. Comment.
Ans.:
The experience of a shareholder of a company can be regarded as experience of a company. The facts of the given case are similar
to New Horizons Ltd. v. Union of India (1995) 1 Comp. LJ 100 SC. In this case, the tender of the company, New Horizons Ltd., for
publication of telephone directory wras not accepted by the Tender Evaluation Committee on the ground that the company had
nothing on record to show that it had the technical experience required to be possessed to qualify for tender. On appeal the
rejection of tender was upheld by the Delhi High Court.
The judgment of the Delhi High Court was reversed by the Supreme Court which observed as under: "Once it is held that NHL
(New Horizons Ltd.) is a joint venture, as claimed by it in the tender, the experience of its various constituents namely, TPI
(Thomson Press India Ltd.), LMI (Living Media India Ltd.) and WML (World
Media Ltd.) as well as IIPL (Integrated Information Pvt. Ltd.) had to be taken into consideration, if the Tender Evaluation
Committee had adopted the approach of a prudent businessman."
Thus, depending upon circumstances of the case experience of shareholders can be treated as experience of company.
• Two companies are incorporated with the same set of shareholders. Are they same or distinct under the Companies Act,
2013? Discuss. CS (Inter) - June 2008 (4 Marks) Three companies incorporated with the same
set of shareholders are treated as same companies under the Companies Act, 2013. Comment. CS (Executive) - Dec 2017
(4 Marks)
Ans.: By registration a company becomes vested with corporate personality, which is independent and distinct from its members.
Even if two companies are incorporated with the same set of shareholders, they are distinct and cannot to be treated as same
company.
• The managing director and other directors of the company are not liable to be sued for the dues against the company.
Comment.CS(Executive)-June2011(5Marks)
Ans.: A company being a body corporate, can sue and be sued in its own name.
In an Abdul Haq v. Das Mai, an employee was not paid salary for several months. He filed suit against directors for the recovery of
the amount of salary. It was held that he will not succeed because the remedy lies against the company and not against the
directors or members of the company.
Points Partnership Company
Meaning Partnership is the relation between persons who A company means company formed and
have agreed to share the profits of a business registered under Companies Act, 2013. A
carried on by all or any of them acting for all. company may be private company or public
company.
Legal status A partnership firm has no separate existence A company is a separate legal entity distinct
apart from its members. from its member.
Governing Act Partnership is governed by Partnership Act, 1932. A company is governed by Companies Act, 2013.
Minimum Minimum two persons are required to form Minimum number of member required to form a
membership partnership. company are:
- For private company: 2
- For public company: 7
- For one person company: 1
Maximum A partnership with objects of acquisition for gains Maximum number of member are:
membership cannot be formed beyond 50 numbers of partners. - For private company: 200
[Section 464 read with Rule 10 of Companies - For public company: Unlimited
(Miscellaneous) Rules, 2014]
Points Partnership Company
Registration Registration of partnership is not compulsory but Registration of company is compulsory under
Partnership Act, 1932 had made it indirectly Companies Act, 2013.
essential to enjoy certain benefits.
Capital Minimum capital is not specified. Minimum capital for the private and public
companies will be as specified in rules.
[Prior to the Companies (Amendment) Act, 2015,
minimum paid up capital for private company
was ` 1,00,000 &for public company was `
5,00,000]
Points Company HUF
Meaning "Company" means a company formed The HUF can be defined as a family that
and registered under this Act or an consists of a common ancestor and all his
existing company as defined in lineal male descendants and their wives
Companies Act, 2013. and unmarried daughters.
Members A company consists of HUF consist of homogeneous members
heterogeneous since it consist of members of joint family
members. itself.
Membership In case of company limited by shares a A person becomes a member of HUF by
person can become member by virtue of birth.
acquiring shares.
Carrying of Affairs of company are managed by In HUF business the Karta has the sole
business Board of Directors. Members cannot authority to contracts, debts for the
take part into day to day business. purpose of business, other coparceners
cannot do so.
Registration Every company must be registered as No registration is compulsory for
per Companies Act, 2013. carrying on business for gain by HUF.
Capital Minimum capital for the private and There is no limit for carrying on HUF
public companies will be as specified in business.
rules.
[Prior to the Companies (Amendment)
Act, 2015, minimum paid up capital for
private company was ` 1,00,000 & for
public company was ` 5,00,000]
Audit Company has to get there accounts HUF business are required to get there
compulsorily audited as per accounts audited only if there turnover
Companies Act, 2013. exceeds limit prescribed under the
Income Tax Act, 1961.
• Bonus issue may be viewed as a 'right issue' except that money is paid by the company on behalf of the investing
shareholders from its reserves. Comment. CS (Executive) - Dec 2008 (5 Marks)
Ans.: In right issue the company gives right to existing shareholder to purchase the shares of the company. Thus,
shareholder gets the right to purchase further shares in company. In such case the amount is invested by the shareholder
form own funds.
When a company is prosperous and accumulates large distributable profits, it converts these accumulated profits into
capital and divides the capital among the existing members in proportion to their entitlements. Thus, in case of bonus
issue, reserves which belong to shareholder is paid/converted into equity shares. Hence, it is correct to say that bonus
issue may be viewed as a 'right issue' except that money is paid by the company on behalf of the investing shareholders
from its reserves.
• The Board of directors of Aakash Ltd., a listed company, at its meeting held on 1st April, 2015 announced a
proposal for issue of bonus shares to all equity shareholders of the company a` 1:1 ratio. On 1st May, 2015, the
directors at another meeting passed a resolution to reverse the proposal of bonus issue announced on 1st April,
2015. Discuss the validity of the proposal and the reversal. CS (Executive) - June 2012 (4 Marks)
Ans.: As per Rule 14 of the Companies (Shares & Debentures) Rule, 2014, the company which has once announced the
decision of its Board recommending a bonus issue, shall not subsequently withdraw the same.
Thus, a resolution passed by the director to reverse the bonus issue announced is not valid. The Board of directors of
Aakash Ltd. must issue bonus shares to the shareholder.
• What are the guidelines issued by the SEBI for issue of bonus shares? Do these guideline apply to bonus issue by
existing private or unlisted companies?
CS (Inter) - Dec 2001 (4 Marks), Dec 2003 (5 Marks)
Ans.: SEBI Guidelines for bonus issues are as follows:
A listed company proposing to issue bonus shares shall comply with the following.
(1) No company shall, pending conversion of Fully Convertible Debenture (FCDs)/Partly Convertible Debenture (PCDs), issue any
shares by way of bonus unless similar benefit is extended to the holders of such FCDs/PCDs, through reservation of shares in
proportion to such convertible part of FCDs or PCDs.
The shares so reserves may be issued at the time of conversion(s) of such debentures on the same terms on which the bonus
issues were made.
(1) The bonus issue shall be made out free reserves built out of the genuine profits or share premium collected in cash only.
(2) Revaluation reserves created by revaluation of fixed assets are hot capitalized.
(3) The declaration of bonus issue, in lieu of dividend, is not made.
(4) The bonus issue is not made unless the partly-paid shares, if any, existing are made fully paid-up.
(5) The company:
(a) has not defaulted in payment of interest or principal in respect of fixed deposits and debentures thereof and.
(b) has sufficient reason to believe that it has not defaulted in respect of the payment of statutory dues of theemployees such as contribution to
provident fund, gratuity, bonus, etc.
(1) A company which announces its bonus issue after the approval of the Board of Directors must implement the proposal within a period of 6
months from the date of such approval and shall not have the option of changingthe decision.
(2) The Articles of Association of the company shall contain a provision for capitalization of reserves, etc.
If there is no such provision in the Articles of Company shall pass a resolution at its general body meeting making provisions in the
Articles of Associations for capitalization.
(3) Consequent to the issue of bonus shares if the subscribed and paid-up capital exceeds the authorized share capital, a resolution shall be passed
by the company at its general body meeting for increasing the authorized capital.
(4) A certificate duly signed by the issuer company and countersigned by statutory auditors or Practicing Company Secretary to the effect that
above provisions are duly complied shall be forwarded to the SEBI.
• Referring to the provisions of Companies Act, 2013, state the conditions required to be fulfilled before a company
can issue bonus shares to the shareholders of the company.
CS (Inter) - June 2006 (4 Marks) CS (Executive) - June 2015 (4 Marks)
Ans.: Issue of bonus shares [Section 63]:
(1) A company may issue fully paid-up bonus shares to its members out of:
- Free reserves
- Securities premium
- Capital redemption reserve
However, revaluation reserve created by the revaluation of assets cannot be used for the bonus issue.
(1) A company shall comply with following additional condition for bonus shares:
♦ Bonus issue is authorized by its articles.

♦ Bonus issue is made on the recommendation of the Board and authorization from general meeting of the company.
♦ Company has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it.
♦ Company has not defaulted in payment of statutory dues of the employees like PF contribution, gratuity and bonus.
♦ Bonus issue can be made only on fully paid up shares.
♦ Company also has to comply with other prescribed conditions.
♦ The bonus shares shall not be issued in lieu of dividend.
The company which has once announced the decision of its Board recommending a bonus issue, shall not
subsequently withdraw the same. [Rule 14]
Points Letter of allotment Letter of renunciation
Meaning Letter of allotment is a letter by When a company issue right shares

which company communicates the it has to issue a letter stating that if
subscriber to the shares that the shareholder do want to subscribe
company has allotted some shares to the shares, he can renounce the
him. shares in favour of any other
person. Such letter is known as
letter of renunciation.
Applicability Letter of allotment is applicable in Letter of renunciation is applicable
all cases where shares are allotted to in case of right issue under Section
persons. 62 of the Companies Act, 2013.
Option Letter of allotment do not contain any Letter of renunciation contains an

option. option to renounce the shares in
favour of any other person.
Surrender Letter of allotment is required to be Letter of renunciation is not

surrendered to company for issue of required to be surrendered to
share certificate. company. Infact it is right to transfer
to subscribe the right shares of the
company.
Transfer of Shares can be transferred with the Shares cannot be transferred with
shares help of letter of allotment if share the help of letter of renunciation.
certificate do not exists. But right shares can be subscribed
by the persons in whose favour the
right has been renounced.
Point Bonus Shares Right Shares
Meaning Bonus shares are shares issued by a When Company issues further shares
company free of cost to its existing to existing shareholder in ratio of
shareholders on a pro rata basis out of their holding such issue is known as
free reserve. right issue.
Cash flow In case of bonus issue there is no cash In case of right issue there is cash
flow. inflow to the company.
Consideratio Company does not receive any Company receives consideration as

n consideration in case of bonus issue. shares are issued against cash.
Authorizatio Bonus issue is made on the In case of right issue authorization

n recommendation of the Board and from members through ordinary or
authorization from general meeting of special resolution is necessary.
the company.
Market value Issue of bonus shares does not affect Right issue of shares affects the
the market value of the company. market value of the company.
Section It is governed by Section 63 of the It is governed by Section 62 of the

Companies Act, 2013. Companies Act, 2013.
• You are the Company Secretary of Golden Securities Ltd. The Board of Directors wants to make a right
issue of shares to its existing shareholder in the ratio of 2 shares for every single shares held by the
shareholder. Prepare a note highlighting the steps involved in issue of rights shares. CS (Inter) - Dec 2006 (6
Marks) CS (Inter) - Dec 2011 (8 Marks)
• Ans.: The various steps involved for issue of rights share are enumerated below:
1. Check whether the rights issue is within the authorised share capital of the company. If not, steps should be
taken to increase the authorised share capital.
2. Notify the stock exchange concerned the date of Board Meeting at which the rights issue is proposed to be
considered at leas` 2 days in advance of the meeting.
3. Rights issue shall be kept open for at least 15 days and not more than 30 days.
4. Convene the Board meeting and place before it the proposal for rights issue.
5. The Board should decide on the following matters:
♦ Quantum of issue and the proportion of rights shares.
♦ Alteration of share capital, if necessary, and offering shares to persons other than existing holders of shares in
terms of Section 62 of the Companies Act, 2013.
♦ Fixation of record date.
Appointment of merchant bankers and underwriters
♦ Approval of draft letter of offer or authorisation of managing director/company secretary to finalise the letter
of offer in consultation with the managers to the issue, the stock exchange and SEBI.
1. Immediately after the Board Meeting notify the concerned Stock Exchanges about particulars of Board's
decision.
1. If it is proposed to offer shares to persons other than the shareholders of the company, a General Meeting has to be
convened and a resolution is to be passed for the purpose in terms of Section 62 of the Companies Act, 2013.
2. Forward 6 sets of letter of offer to concerned Stock Exchange.
3. Despatch letters of offer to shareholders by registered post.
4. Check that an advertisement giving date of completion of despatch of letter of offer has been released in at least an
English National Daily, one Hindi National Paper and a Regional Language Daily where registered office of the issuer
company is situated.
5. Check that the advertisement contains the list of centres where shareholders or persons entitled to rights may obtain
duplicate copies of composite application forms in case they do not receive original application form along with the
prescribed format on which application may be made.
6. The applications of shareholders who apply both on plain paper and also in a composite application form are liable to be
rejected.
7. Make arrangement with bankers for acceptance of share application forms.
8. Prepare a scheme of allotment in consultation with Stock Exchange.
9. Convene Board Meeting and make allotment of shares.
10. Make an application to the Stock Exchange where the company's shares are listed for permission of listing of new shares.
• A company increased its authorized capital from ` 7 Crore to ` 32 Crore by passing appropriate
resolution at general body meeting. But it did not file the notice in Form No. SH. 7 before the
ROC and also did not pay the requisite filing fee within the stipulated period or thereafter. Two
years later, the earlier resolutionwas rescinded and the share capital brought back to ` 7 Crore
as it originally stood. Is the company absolved from liability for failure to follow the procedure?
CS (Inter) - Dec 2000 (4 Marks)
Ans.: As per Section 64, when company increases authorized capital, the notice in Form SH-7 along
with the prescribed fee is required to be filed within 30 days of adopting the resolution.
The subsequent cancellation of the resolution to increase the share capital or adoption of the
resolution to reduce the share capital will not absolve the petitioners from their liability to file Form
SH-7. [Amison Foods Limited v. Registrar of Companies]
Points Share Stock
Nature Shares in physical form bear Stocks are the consolidated
distinct numbers. value of share capital.
Paid-up Shares may or may not be fully Stock is always fully paid-up.
value paid-up.
Nominal Shares have a nominal value. Stock does not have any
value nominal value.
Denominat All shares are of equal Denomination of stocks varies.
ion denomination.
Fractions It is not possible to transfer Stock is divisible into any
shares into fraction. amount required. Thus, it is
possible to transfer even into
fractions.
Existence A share comes into existence Stock comes into existence
before the stock and it is issued after conversion of shares into
initially. stock and on conversion of
shares into stock, the
provisions of the Act governing
the shares shall cease to apply
to the share capital as it is
converted into stock.
• MNO Private Ltd., a subsidiary of PQR Ltd. decides to give a loan of ` 4,00,000 to HR (Human Resources) Manager, who
is not a Key Managerial Personnel of MNO Private Ltd., drawing salary of ` 30,000 per month, to buy 500 partly paid-up
equity shares of ` 1,000 each in MNO Private Ltd. Examine the validity of Company's decision under the provisions of
the Companies Act, 2013.
Ans.: As per Section 67(2), a public company shall not give loan or any financial assistance to any person for the purpose of
purchase of its shares or of its holding company. However, Loan to bona fide employees (other than its directors or key
managerial personnel) can be given to enable them to purchase fully paid-up shares in the company or its holding company
to be held by them by way of beneficial ownership. Such loan cannot exceed 6 month's salary or wages of the employee.
Restrictions u/s 67 (2) are not applicable for private companies
As per Section 3(iv), a company which is a subsidiary of a company, not being a private company, shall be deemed to be
public company even where such subsidiary company continues to be a private company in its articles. This means, if private
company is subsidiary of public company then it will be treated as public company.
As per the facts given in case, MNO Private Ltd. is a subsidiary of PQR Ltd. and hence it will be treated as public company and
restriction mentioned u/s 67(2) are applicable to it.
Thus, MNO Private Ltd. can give loan to its employee for purchase of its shares to enable them to purchase shares in the
company or its holding company to be held by them by way of beneficial ownership. Such loan cannot exceed 6 month's
salary or wages of the employee. Salary of HR Manager is ` 30,000 p.m. and thus his 6 month's salary is
` 1,80,000. The company intends to give loan to buy 500 partly paid-up equity shares of ` 1,000 each. Thus total loan amount
is ` 5,00,000 (500 * 1,000).
As amount of loan is in excess of limit prescribed, hence, the decision of company is not valid.
• Following information is available from the audited balance sheet of Short Cut Ltd. as at 31st March, 2004:
Paid-up Share Capital ` 500 lakhs
Share Premium Account ` 100 lakh
General Reserves ` 800 lakh
Secured Loans ` 500 lakh
Unsecured Loans ` 400 lakh
The company plans to buy-back its shares. Compute the maximum limit up to which the company can buy-backits shares.
Ans.: To compute the maximum limit up to which the company can buy-back its shares, following provisions are required to
be complied with:
(1) The buy-back of equity shares in any financial year should not exceed 25% of its total paid-up equity capital in that financial
year. 500 lakhs × 25% = 125 lakhs]
(2) The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back is not morethan twice the
paid-up capital and its free reserves i.e. to say
Secured + Unsecured Debts/Paid - up Capital + Free Reserves < 2 Let the amount to be buyback
be 'x'.
500 + 400 = 2
500 + 400/ 500 -x + (100 + 800- x)
900/ 1,400 = 2x
900 = 2,800 - 4x
-1,900 = - 4x x
= 475 lakhs
No. of shares = 475/10 = 47.5 lakhs
Thus, maximum amount that can be brought back = ` 47.5 Lakhs.
• Distinguish between: 'Free Reserves' and 'Net Worth' under the provisions of Companies Act, 2013.
CS (Executive) - Dec 2017 (4 Marks)
Ans.: Section 68 and many other sections use the 'free reserve' in its provisions thus it is necessary to know the
meaning of the term 'free reserve'.
Free Reserve [Section 2(43)]: Free reserves means such reserves which, as per the latest audited balance sheet of a
company, are available for distribution as dividend.
However, following cannot be treated as free reserve -
(i) Any amount representing unrealized gains, notional gains or revaluation of assets, whether shown as a reserve or
otherwise, or
(ii) Any change in carrying amount of an asset or of a liability recognized in equity, including surplus in profit and loss
account on measurement of the asset or the liability at fair value, shall not be treated as free reserves.
Net Worth [Section 2(57)]: Net worth means the aggregate value of the paid-up share capital and all reserves created
out of the profits and securities premium account and debit or credit balance of profit and loss account, after
deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not
written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-
back of depreciation and amalgamation.
"Net worth" is wider term and “free reserve" is part of “net worth".
• Shortcut Ltd. has allotted shares to investors of the company without filing prospectus with the Registrar of
Companies, Mumbai. Explain the remedies available to the investor in this regard.
Ans.: In case an allotment has been made without delivering to the Registrar of Companies, a copy of the prospectus along
with other specified documents either before or on the date of its issue, the company and every
person who is knowingly a party to the issue of the prospectus shall be punishable with fine which shall not be less than `
50,000 but which may extend to ` 3,00,000 [Section 26 (9)]. The allotment, however, shall remain valid.
The allotment made in violation of provisions of Section 39 is irregular allotment, but not void allotment. [This is because
Section 39 (5) makes the provisions for penalty in case of default but does not provide that such allotment is void]
In some cases, if the provisions of the Companies Act, 2013 are not complied until the allotment is improper and the
company and officers who are in default can be penalized. However, the allotment remains valid, as Companies Act, 2013
does not provide for avoiding allotment in such cases. Such allotment is improper but not 'irregular'.
• Registrar of Companies can refuse registration of prospectus. Explain.
CS (Executive) - Dec 2009 (4 Marks), June 2010 (5 Marks)
Ans.: The Registrar shall not register a prospectus unless the requirements with respect to its registration of prospectus are
complied with and the prospectus is accompanied by the consent in writing of all the persons named in the prospectus.
[Section 26(7)]
Can company make variation in objects for which the prospectus was issued?
Ans.: Variation in terms of contract or objects in prospectus [Section 27]: A company shall not, at any time, vary the terms of a
contract referred to in the prospectus or objects for which the prospectus was issued, except subject to the approval of, or
except subject to an authority given by the company in general meeting by way of special resolution. Prescribed details shall
also be published in news paper one in English and one in vernacular language indicating clearly the justification for such
variation. Such special resolution has to be passed by postal ballot. The advertisement of notice of special resolution shall be in
Form PAS-1.
The company shall not use any amount raised by it through prospectus for buying, trading or otherwise dealing in equity shares
of any other listed company.
Exist option to dissenting shareholders: The dissenting shareholders, who have not agreed to the proposal to vary the terms of
contracts or objects in the prospectus, shall be given an exit offer by promoters or controlling shareholders at such exit price
and in such manner and conditions as may be specified by the SEBI.
Ans.: Offer of sale of shares by certain members of company [Section 28]: Where certain members of a company in consultation with the
Board of Directors can offer whole or part of their holding of shares to the public. They may do so in accordance with such procedure as may
be prescribed.
Any document by which the offer of sale to the public is made shall, for all purposes, be deemed to be a prospectus and all laws and rules as to
the contents of the prospectus and as to liability in respect of mis-statements in and omission from prospectus or otherwise relating to
prospectus shall apply as if this is a prospectus issued by the company.
The members, whether individuals or bodies corporate or both, whose shares are proposed to be offered to the public, shall collectively
authorize the company, whose shares are offered for sale to the public, to take all actions
in respect of offer of sale for and on their behalf and they shall reimburse the company all expenses incurred by iton this matter.
An existing shareholder can sale his shares in stock exchange. However, sometimes, large shareholders may intend to sale their shares in such
case provisions of Section 28 are applicable. Such sale of shares by existing large shareholder may be by any of the following method:
(a) Disinvestment by one of the promoters
(b) Disinvestment by Government of shares held by it in a public listed company.
• Write a short note on: Shelf Prospectus CS (Inter) - Dec 2006 (2 Marks), June 2007 (3 Marks) CS (Executive) - June 2014 (5
Marks) Write a short note on: Information Memorandum CS (Inter) - Dec 2006 (2 Marks)
Ans.: Sometimes, securities are issued in stages over a period of time. In such case filing of prospectus each time will be
expensive and hence provision of self prospectus has been introduced.
Thus, suppose if the company wants to issue securities in one year time span in stages, such company has to file self
prospectus at the time of first issue and at the time of second and subsequent issue within period of one year they have file
only information memorandum and need not to file prospectus again. Thus, information memorandum indicates the changes
that have occurred between two issues of securities.
Shelf Prospectus [Section 31]: Shelf prospectus means a prospectus in respect of which the securities are issued for
subscription over a certain period without the issue of a further prospectus.
(1) Any classes of companies, as the SEBI may provide by regulations, may file a shelf prospectus with the ROC at the stage of the
first offer of securities which shall indicate a period of 1 year as the validity period of such prospectus.
(2) The period of 1 year shall commence from the date of opening of the first offer of securities.
(3) In respect of a second or subsequent offer of securities issued during the period of 1 year, no further prospectus is required to
be issued.
(4) A company filing a shelf prospectus shall be required to file an information memorandum between the first offer of securities
or the previous offer of securities and the succeeding offer of securities. An information memorandum shall contain all
material facts relating to new charges created, changes in the financial position of the company that have occurred between
two issues.If a company or any other person has received applications for the allotment of securities along with advance
payments of subscription before the making of any change, the company or other person shall intimate the changes to
applicants and if they express a desire to withdraw their application, the company or other person shall refund all the monies
received as subscription within 15 days.
Points Red-herring Prospectus Abridged prospectus
Meaning Red-herring prospectus means a Abridged prospectus means a
prospectus which does not include memorandum containing such
complete particulars of the quantum salient features of a prospectus as
or price of the securities offered. may be specified by the SEBI by
making regulations in this behalf.
Section It is governed by Section 32 of the It is governed by Section 33 of the
Companies Act, 2013. Companies Act, 2013.
Applicability Provisions of red herring prospectus Provisions of abridged
are applicable to all companies prospectus are
except those are covered under applicable to all companies.
shelf prospectus. The provision is
mainly applicable for book building.
,
Filing A company proposing to issue a red Abridged prospectus is not
herring prospectus shall file it with required to be filed with ROC.
the ROC at leas` 3 days prior to the
opening of the subscription list and
the offer.
Scope A red herring prospectus shall No form of application for the
carry the same obligations as are purchase of any of the securities of
applicable to a prospectus and any a company shall be issued unless
variation between the red herring such form is accompanied by an
prospectus and a prospectus shall abridged prospectus.
be highlighted as variations in the
prospectus.
• A deceitful prospectus was issued by the directors on behalf of company. Pavan received
a copy of it, but did not take any shares in the company. The allotment of shares to
applicants was completed. Several months later, Pavan bought shares from stock market.
He proceeded with suit against the directors of the issue of deceitful prospectus. Will he
succeed?
Ans.: The right to claim compensation for any loss or damage sustained by reason of any
untrue statement in a prospectus is available only to a person who has "subscribed" for shares
or debentures on the faith of the prospectus containing untrue statement.
The word "subscribed" denotes that the shares were acquired directly from the company by
allotment. A subsequent purchaser of shares in the open market has no remedy against the
company or the directors or promoters.
Mr. X has purchased the shares form the stock exchange and he has not acquired shares directly
from the company; hence he cannot claims damages from the company for the loss suffered
on the ground the prospectus issued by the company contained a false statement.
• On receipt of 85% of the minimum subscription stated in the prospectus, Little Stars Ltd. allotted 200 shares to Ranjit and
the money was deposited in a scheduled bank. Later on, it was revealed that 40% of the amount withdrawn was for
acquisition of fixed assets for the company. Ranjit, knowing these facts, refused to accept the allotment contending that
the allotment was irregular under the provisions of the Companies Act, 2013. As an expert on company law advise Ranjit.
Ans.: As per Section 39, no allotment of any securities of a company offered to the public for subscription shall bemade unless -
(i) The amount stated in the prospectus as the minimum amount has been subscribed and
(ii) The sums payable on application for the amount so stated have been paid to and received by the companyby cheque or
other instrument.
As per SEBIICDR Regulation, the minimum subscription for public company issuing shares to public is 90%.
Minimum subscription received must be 90% of the public issue. If the subscription is less than 90%, shares cannot be allotted
and application money received must be refunded as stated below:
(a) Non-underwritten issue: Within 15 days from the date of closure of the issue.
(b) Underwritten Issue: Within 70 days from the date of closure of the issue if underwriters fail to make up shortfallwithin 60 days of
the closure of issue.
If application money is not refunded within the period stated above, interest is payable for the delay. Thus, allotment of
shares to Ranjit is void and he can refuse to accept the shares.
• What is a share certificate? Also state the provisions relating to issue of share certificate.
Ans.: A share certificate is a certificate issued to the members by the company under its common seal, if any, specifying the number of shares held by him and
the amount paid on each share.
Issue of share certificate [Section 46(1)]: A share certificate has to be issued under the common seal, if any, of the company or signed by 2 directors or by a
director and the Company Secretary, specifying the shares held by any person which shall be prima facie evidence of the title of the person to such shares.
The certificate is the only documentary evidence of title in the possession of the shareholder. But it is not a warranty of title by the company issuing it.
Certificate of shares [Rule 5]:
(1)
Where a company issues any share capital, share certificates shall be issued -
(a) in pursuance of a resolution passed by the Board and
(b) on surrender to the company of the letter of allotment or fractional coupons of requisite value (except incase of issues against letters of acceptance or
of renunciation, or in cases of issue of bonus shares)
However, if the letter of allotment is lost or destroyed, the Board may impose reasonable terms to seek supportingevidence and indemnity and the payment of
out-of-pocket expenses in investigating evidence.
(1) Every certificate of share or shares shall be in Form SH-1 or as near thereto as possible and shall specify the names of the persons in whose favour the
certificate is issued, the shares to which it relates and the amount paid- up thereon.
(2) Every share certificate shall be issued under the common seal, if any, of the company, which shall be affixedin the presence of, and signed by-
(a) Two directors (one of whom should be person other than managing director or whole time director) dulyauthorized by the Board of Directors and
(b) The Company Secretary or any person authorized by the Board for the purpose
However, if company does not have a common seal, the share certificate shall be signed by two directors or by a director or the Company Secretary, whenever
the company has appointed a Company Secretary.
In case of a OPC, every share certificate shall be issued under the seal, if any, of the company, which shall be affixed in the presence of and signed by one
director or a person authorized by the Board of Directors and the Company Secretary or any other person authorized by the Board. If OPC does not have
common seal, the share certificate shall be signed by the persons in the presence of whom the seal is required to be affixed.
Explanation: A director shall be deemed to have signed the share certificate if his signature is printed as a facsimile signature by means of any machine,
equipment or other mechanical means such as engraving in metal or lithography, or digitally signed, but not by means of a rubber stamp. The director shall be
personally responsible for permitting the affixation of his signature and the safe custody of any machine, equipment or other material used for the purpose.
The particulars of every share certificate issued shall be entered in the Register of Members.
• The authorized signatory of a company issued a share certificate in favour of X, which apparently complied
with the company's article as it 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 share certificate be binding upon the company?
Ans.: According to Rule 5 of the Companies (Share Capital & Debentures) Rules, 2014, every share certificate
shall be issued under the common seal, if any, of the company, which shall be affixed in the presence of, and
signed by-
(a) Two directors (one of whom should be person other than managing director or whole time director) duly
authorized by the Board of Directors and
(b) The Company Secretary or any person authorized by the Board for the purpose
However, if company does not have a common seal, the share certificate shall be signed by two directors or by a
director or the Company Secretary, if any.
If the signatures of directors are forged then share certificate will not be binding upon the company because
forgery is nullity at law. Thus, if forged the signatures of the directors appears on share certificate it will not be
binding upon the company
• What are the provisions relating to maintenance of share certificate forms and related booksand
documents under the Companies (Share Capital & Debentures) Rules, 2014?
Ans.: Maintenance of share certificate forms and related books and documents [Rule 7]:
(1) All blank forms to be used for issue of share certificates shall be printed and the printing shall be done only
on the authority of a resolution of the Board.
The blank form shall be consecutively machine numbered and the forms and the blocks, engravings,
facsimiles and hues relating to the printing of forms shall be kept in the custody of the Company Secretary or
such other person as authorized by the Board.
(1) The following persons shall be responsible for the maintenance, preservation and safe custody of all books
and documents relating to the issue of share certificates, including the blank forms of share certificates
namely:
(a) The committee of the Board, if so authorized by the Board or where the company has a Company
Secretary, the Company Secretary or
(b) Where the company has no Company Secretary, a Director specifically authorized by the Board for such
purpose.
(2) All books shall be preserved in good order not less than 30 years and in case of disputed cases, shall be
preserved permanently, and all certificates surrendered to a company shall immediately be defaced by
stamping or printing the word 'CANCELLED' in bold letters and may be destroyed after the expiry of 3 years
from the date on which they are surrendered, under the authority of a resolution of the Board and in the
presence of a person duly appointed by the Board in this behalf.
• Write a short note on: Time of issue of certificate of securities
Ans.: Time limit for issuance of share certificates [Section 56(4)]: Every company must deliver the
certificates of all securities allotted, transferred or transmitted:
(a) Within a period of 2 months from the date of incorporation, in the case of subscribers to the
memorandum.
(b) Within a period of 2 months from the date of allotment, in the case of any allotment of any of its
shares.
(c) Within a period of 1 month from the date of receipt by the company of the instrument of transfer
or the intimation of transmission
(d) Within a period of 6 months from the date of allotment in the case of any allotment of debenture.
However, where the securities are dealt with in a depository, the company shall intimate the details
of allotment of securities to depository immediately on allotment of such securities.
• Write a short note on: Split Certificate

Ans.: A split certificate means a separate certificate claimed by a shareholder for a portion of his
holding. The advantages of a split certificate are that the shareholder may benefit in case of a transfer
by way of sale or mortgage in small lots and the right to multiply the certificates into as many shares
held by the shareholder.
• Dinesh, one of the joint holders of shares of a company, sent a requisition to the company to split the shares equally
amongst him and the other joint holders, by issuing fresh share certificates. State whether the company is bound to
comply with this requisition. CS (Inter) - Dec 2007 (4 Marks)
Ans.: Where the shares of the company are held in joint names and one of these joint holders makes a request to the
company to split the shares among the joint holders, the company shall not be bound to do so unless the transfer deed duly
executed jointly by the all the joint holders duly stamped and executed are lodged with the company together with relevant
share certificates in terms of Section 56 of the Companies Act, 2013.
• Anant buys 20 shares of a public company from Basant through a stock broker. Anant receives the share certificate and
the blank transfer deed countersigned by Basant but does not lodge the transfer deed for registration. Examine the
legal effect of unregistered transfer between the transferor and the transferee.
CS (Inter) - Dec 2007 (4 Marks)
Ans.: There is binding contract and the title of the transferee is complete and he became equitable beneficial owner of the
shares even though the transfer has not been lodged with the company. However, it was held that the transferee becomes
the member of a company only when the transfer of shares is registered by the company. Pending registration, the transferor
is trustee of the shares for the transferee and the transferor continues to be the holder of the shares until his name is struck
off the register of member and the name of the transferee entered in his place. [Hardoon v. Belilios]
• Write a short note on: Transfer of Share Warrants
Layman is a holder of a share warrant in Ontime Fliers Ltd., a public limited company. Unfortunately, Layman is unaware
of any of the formalities to be complied with for transferring the said share warrant. Advise him about the formalities to
be completed in this regard. CS (Executive) - June 2010 (4 Marks)
Ans.: A share warrant is transferable by mere delivery of the warrants without execution of any written instrument of transfer
being registered by the company. The bearer of a share warrant is not a member of the company unless otherwise so provided
in the articles of the company.
• Write a short note on: Loss of Transfer Deed
Sudesh sent an envelope to Nova Technology Ltd. on 6th June 2015. The envelope contained a duly executed
transfer deed along with relevant share certificate. On an enquiry, it was learnt that the envelope has not been
delivered to the company and the same may have been lost in postal transit. Sudesh seeks your advice as a
Company Secretary, as to how to obtain a duplicate share certificate from the company in lieu of the lost one.
CS (Inter) - June 2004 (6 Marks)
Ans.: It is sometimes found that the transfer documents sent to companies are lost in transit or otherwise. In such a
case, the company may receive a request from the transferee by way of an application carrying adequate stamp duty.
The procedure in above case is as under:
(1) An application in writing should be made by the transferee, which should bear required stamp duty for an
instrument of transfer.
(2) The board of directors of the company should be satisfied that the instrument of transfer signed by the transferor
and by the transferee has been lost. The proof may be in the form of an affidavit from the transferor or the
transferee and supported by the purchase or sale note of the broker and the registration receipt issued by the postal
authorities.
(3) In addition, the company can take an indemnity to safeguard its position.
After getting all the above stated condition complied with, the company may issue a duplicate share certificate from
the company in lieu of the lost one.
• An employee of a company purchased certain shares of his company through a member of a stock exchange and
lodged with the company an application for transfer of shares in his (employee's) name. The company refused to
execute the transfer on the suspicion that the employee, if admitted as a member of the company, will create
nuisance in general meetings and seek access to the records of the company. Decide giving reasons:
(/) Whether the company's contention shall be tenable and
(ii) What is the remedy available to the employee in the given case?
CS (Executive) - June 2015 (4 Marks)
Ans.: As per Section 58 (4), a public company may on sufficient cause, refuse, to register the transfer of securities within a
period of 30 days from the date of receipt of instrument of transfer. In such a case the public company may send an
intimation of the refusal.
However, in Shri Nirmal Kumar v. Jaipur Metal and Electrical Limited it was held that refusal to register share transfer on
suspicion that the employee if admitted as a member will attend general meetings of the company and may create nuisance
by raising irrelevant issues and also obtain access to the records to the company as a shareholder is not a valid reason.
Thus, the company's contention is not tenable.
Remedy: If a public company without sufficient cause refuses to register the transfer of securities within 30 days from the
date of receipt of instrument of transfer, the transferee may, within 60 days of such refusal or where no intimation has
been received from the company, within 90 days of the delivery of the instrument of transfer appeal to the Tribunal.
• Write a short note on: Forged Transfer A forged transfer is nullity. Comment.
Ans.: It may happen that a forged instrument of transfer is presented to the company for registration. In order to avoid the
consequences which will follow a forged transfer, companies normally write to the transferor about the lodgment of the
transfer instrument so that he can object if he wishes.
The company informs him that, if no objection is made by him before a day specified in the notice, it would
register the transfer. The consequences of a forged transfer are detailed hereunder:
(1) A forged transfer is a nullity and, therefore, the original owner of the shares continues to be the shareholder
and the company is bound to restore his name on the register of members. A forged document never has
any legal effect. It can never move ownership from one person to another, however, genuine it may appear.
Thus, a forged instrument of transfer leaves the ownership of the shares exactly where it always was in the
so-called transferor.
(2) It follows that if a company registers a forged transfer, the true owner can apply so as to be replaced on the
register and his name will be restored. But, the company does not incur any liability in damages by putting
the name on the register.
(3) However, if the company issues a share certificate to the transferee and he sells the shares to an innocent
purchaser, the company is liable to compensate such a purchaser, if it refuses to register him as a member,
or if his name has to be removed on the application of the true owner.
(4) If the company is put to loss by reason of the forged transfer, as it may have paid damages to an innocent
purchaser, it may recover the same independently from the person who lodged the forged transfer.
• Arun buys 300 shares of a company from Barun on the faith of a share certificate issued by the company. Arun submits to
the company a transfer deed, duly executed, along with Barun's share certificate for transferring the shares in his name.
The company discovers that the certificate in the name of Barun has been fraudulently obtained and refuses to register
the transfer. Is Arun entitled to get the shares transferred in his name? CS (Inter) - June 2001 (6 Marks), June 2005 (6
Marks)
Smart, a registered shareholder of Dowitt Ltd. left his share certificate with his broker. A forged transfer deed in favour of
Ramesh, accompanied by these share certificates were lodged with the company for registration. The Company Secretary, who had certain
doubts, wrote to Smart informing him of the proposed transfer and in the absence of a reply within the stipulated time, registered Ramesh
as a shareholder by endorsing the share certificate. Subsequently, Ramesh sold the said shares to John and John's name was placed in the
register of shareholder. Later on, Smart discovered that forgery has taken place. What remedy does Smart have? Advice Smart. CS
(Inter) - June 2002 (6 Marks), Dec 2002 (5 Marks) * 1 2 3
Ans.:
(1) A forged transfer is a nullity and, therefore, the original owner of the shares continues to be the shareholder and the company
is bound to restore his name on the register of members. A forged document never has any legal effect. It can never move
ownership from one person to another, however, genuine it may appear. Thus, a forged instrument of transfer leaves the
ownership of the shares exactly where it always was in the so-called transferor.
(2) However, if the company issues a share certificate to the transferee and he sells the shares to an innocent purchaser, the
company is liable to compensate such a purchaser, if it refuses to register him as a member, or if his name has to be removed
on the application of the true owner.
(3) If the company is put to loss by reason of the forged transfer, as it may have paid damages to an innocent purchaser, it may
recover the same independently from the person who lodged the forged transfer.
As per the facts given in the case, since there is forged transfer in the name of Barun, company can refuse to transfer the shares in favour of
Arun who is innocent purchaser. The company is liable to compensate a purchaser
i.e. Arun, if it refuses to register him as a member and any such compensation or damages paid to Arun can be removed by the
company from Barun.
Points Dematerialization Rematerialization Points Depository Custodian
Meaning Dematerialization is A Custodian is a person
Meaning Dematerialization is Rematerialization is the the process by who carries on the
the process by which process of converting which physical business of providing
physical certificates securities held in electronic certificates of an custodial services to the
of an investor are investor are client.
form in a d emat account
converted to an converted to an
equivalent number back in physical certificate equivalent number
of securities in form. of securities in
electronic form. electronic form.
Transfer of Depository can Custodian cannot
ownership legally transfer transfer legally
Sequence Firstly, share in In rematerialization beneficial ownership.
physical form are electronic shares are again ownership.
dematerialized, so converted in to physical Regulation Depositories are Custodian are governed
it's primary.
shares, so it's secondary. governed by the by the SEBI (Custodian
SEBI (Depositories & of Securities)
Participants) Regulations, 1996
Form Investor use Investor use Regulations, 1996.
Dematerialization Rematerialization Request Points Depository Custodian
Request Form (DRF) Form (RRF)
Net wroth Depository must Custodian must have a
Stamp duty When shares are When shares are have a net worth of net worth of a minimum
held in rematerialized, further a minimum of ` 100 of ` 50 Crores.
dematerialized, transfer of shares attracts Crores.
further transfer of Numbers There are only two There are many
stamp duty.
shares does not depositories registered custodians registered
attract stamp duty. with SEBI. with the SEBI.
• Write a short note on: Rematerialization of securities
Ans.: Rematerialization is conversion of electronic securities into physical certificates of such securities. This can be done
in the following manner:
(1) Beneficial owner sends request to DP.
(2) DP intimates Depository (NSDL or CDSL) of such request electronically.
(3) Depository confirms rematerialization request to the company's Share Transfer Agents.
(4) Share Transfer Agent updates accounts, prints certificates and confirms the Depository.
(5) Depository updates accounts and downloads the details to the DP.
(6) Share Transfer Agent dispatches certificates to holder thereof.
(7) The DP also sends intimation about rematerialization to its client.
• Write a short note on: Pledging of securities in dematerialized form CS (Inter) - Dec 2005 (5 Marks), June 2006 (4
Marks)
Ans.: Securities held in demat mode can be pledged. A Beneficial Owner (BO) can, not only pledge his demat securities,
but, may also be able to obtain higher loan amounts, with lower rate of interest. Moreover, procedure for pledging
securities in demat form is very convenient, both, for the pledgor and the pledgee.
Procedure for pledging securities:
♦ The pledgor and the pledgee must have BO accounts with CDSL. These accounts can be with the same DP orwith
different DPs.
♦ The pledgor has to fill up the Pledge Request Form (PRF) in duplicate available with his DP.
♦ On receipt of the PRF, the pledgor's DP shall verify that the securities can be pledged.
♦ The DP then sets up a pledge request in the depository system and a unique Pledge Sequence No. (PSN) will be
generated. The PSN number should be recorded on the PRF.
• Write a short note on: Modes of acquiring membership CS (Inter) - June 2007 (3 Marks)
Ans.: As per Section 2(55),
a person may acquire the membership of a company:
(1) By subscribing to the MOA (deemed membership) or
(2) By agreeing in writing to become a member:
♦ By making an application for allotment of shares or

♦ By executing an instrument of transfer of shares or
♦ By consenting to the transfer of share of a deceased member in his name or
♦ By acquiescence or estoppel.
(1) Every person holding equity share capital of the company and whose name is entered as beneficial owner in the records
of the depository shall be deemed to be the member of the concerned company.
The person desirous of becoming a member of a company must have the legal capacity of entering into an agreement in
accordance with the provisions of the Indian Contract Act, 1872. Section 11 of the said Act lays down that, every person is
competent to contract who:
(a) Is of the age of majority according to the law to which he is subject.
(b) Is of sound mind.
(c) Is not disqualified from contracting by any law to which he is subject.
• The name of Akhil is found entered in the register of member of a company. But Akhil contends that he is not a member of
the company. The company maintains that Akhil has orally agreed to become a member and, hence, his name was entered
in the register of members. Is the contention of Akhil valid?
CS (Inter) - June 2001 (5 Marks), June 2007 (5 Marks)
Ans.: Contention of Akhil is valid. As per Section 2(55), a person may acquire the membership of a company by agreeing in
writing to become a member. Oral agreement is not valid.
• RSP Ltd., allotted 500 fully paid-up shares of ` 100 each to Z, a minor, in response to his application without knowing that
he was a minor and entered his name in the Register of Members. Later on, the company came to know of this fact. The
company cancelled the allotment and struck-off his name from the Register of Members and also forfeited his entire share
money. He filed a suit against the action of the company. Decide whether Z would be given any relief by the Court under
the provisions of the Companies Act, 2013.
Ans.: A minor being incompetent to contract, cannot be member of a company. It is true that the Companies Act, 2013
prescribes no qualification for membership but membership entails an agreement and this agreement can be enforced in the
Court. Therefore, the contractual capacity as envisaged by the Indian Contract Act, 1872 should be taken into consideration. It
has been held in Mohri Bibi v. Dharmadas Ghose (1930) that since a minor has no contractual capacity, the agreement with a
minor is void. Therefore, a minor or a lunatic cannot enter into an agreement to become a member of a company.
In the case Palaniappa v. Official Liquidator AIR 1942, it was observed that if the directors allot share to a minor in response to his
application, without knowing that he was a minor and enter his name in the Register of Members, the company can eschew the
allotment and strike the name of the minor off the Register of Members. But the company must refund the entire money to the
minor, which it obtained in relation to the shares allotted.
On the basis of above decision the contention of Z is not valid. The company is empowered to cancel the allotment and strike the
name of Z off the Register of Member. But the decision of the company to forfeit the entire share money of Z is wrong. The
company must refund the money to the Z.
• Mohan applied for 4,000 shares in a company but no allotment was made to him. Subsequently 4,000 shares were
transferred to him without his request and his name was entered in the register of members. Mohan knew it but took
no steps for rectification of the register of members. Subsequently, the company went into liquidation and he was
held liable as a contributory. Now Mohan wants to apply the Court for rectification of register of members. Can he do
so? Explain.
Ans.: When a person knows that his name is included in the register of shareholders and he stands by and allows his name
to remain, he is holding out to the public that he is a shareholder and thereby he loses his right to have his name
removed". [Re. M.F.R.D. Cruz, A.I.R. 1939 Madras 803]
Thus, Mohan's application will be refused by the Court.
• X had applied for the allotment of 1,000 shares in a company. No allotment of shares was made tohim by the
company. Later on, without any further application from X, the company transferred 1,000 partly- paid shares to him
and placed his name in the Register of Members. X, knowing that his name was placed in the Register of Members,
took no steps to get his name removed from the Register of members. The company later on made final call. X refuses
to pay for this call. Referring to the provisions of the Companies Act, 2013, examine whether his (X's) refusal to pay
for the call is tenable and whether he can escape himself from the liability as a member of the company.
Ans.: According to Section 95, the register of member is a prima facie evidence of the truth of its contents. The contents of
the register of members are of decisive importance in determining as to who were the shareholders of the company at a
crucial time. Accordingly, if a person's name, to his knowledge, is entered in the register, he shall be deemed to be a
member. In the given case X knows that his name is included in the register of shareholders and stands by and allows his
name to remain, he is holding out to the public that he is shareholder and thereby he will be liable as shareholder.
• A finance company lent a certain sum of money to Modern Garments Ltd., a company manufacturing garments, at an
agreed rate of interest, to be repaid as per the schedule attached to loan agreement. The borrowing company made
payments of the firs` 3 instalments contained in the schedule and
thereafter could not make any payment due to its working capital problem. The lending company sent registered letters
demanding the payments. It is contended by the borrowing company that the lending company agreed in a meeting to
accept shares of the borrowing company in settlement of unpaid balance of the loan and accrued interest. Thereupon
the borrowing company allotted shares to the lending company and share certificate to that company register post. The
lending company seeks to get register of member of Modern Garments Ltd. rectified and contends that it never applied
for any shares in the borrowing company and it was just unilateral allotment. Will the lending company succeed?CS
(Inter) - Dec 2002 (5 Marks)
Ans.: The facts of the given case are similar to Indglobal Investment & Finance Ltd. v. Rajasthan Breweries Ltd.,
where in it was held that there was not written application for allotment of shares. Section 2 (55) stipulates that a
person to become member should agree in writing for allotment of shares. Non-compliance with provisions of law is a
sufficient cause to order rectification of register of members.
Thus, in above case, the borrowing company was directed to rectify the register of members by cancelling the shares
allotted and effect reduction of shares capital to that extent.
• Balance sheet of Duck Ltd. shows a paid-up capital of ` 5 Crore and free reserve of ` 2 Crore. Due to heavy financial requirements of the
company, it plans to apply for a loan of ` 8 Crore with XYZ Bank Ltd. advice the company on the formalities to be fulfilled. Also advise on
the alternative course of action, if any. CS (Executive) - Dec 2013.(4 Marks)
Ans.: As per Section 180(1) (c), the Board of directors of a company cannot borrow a sum which together with the monies already borrowed
exceeds the aggregate of the paid-up share capital of the company and its free reserves apart from temporary loans obtained from the
company's bankers in the ordinary course of business unless they have received the prior sanction of the company by a special resolution in
general meeting.
As per the facts given in case, total paid-up capital and its free reserves of the Duck Ltd. is ` 7 Crores and company intend to apply for loan of ` 8
Crores which exceeds the aggregate of the paid-up share capital of the company and its free reserves; hence sanction by a special
resolution in general meeting is necessary.
Alternatively, the Duck Ltd. can take loan up to ` 7 Crore by passing board resolution and complying with the provisions of its article and
approval of shareholder by way of special resolution will not be necessary.
Ans.: Where a company borrows without the authority conferred on it by the articles it is an ultra vires borrowing. Any act which is ultra vires
the company is void. In such a case the contract is void and the lender cannot sue the company for the return of the loan. The securities given
for such ultra vires borrowing are also void and inoperative.
Ultra vires borrowings cannot even be ratified by a resolution passed by the company in general meeting. However, equity assists the lender
where the common law fails to do so. If the lender has parted with his money to the company under an ultra vires borrowing, he has, in
equity, the following remedies:
(1) Injunction & Recovery: Under the equitable doctrine of restitution he can obtain an injunction provided he can trace and identify the
money lent, and any property which the company has bought with it. Even if the monies
advanced by the lender cannot be traced, the lender can claim repayment if it can be proved that the company has been benefited
thereby.
(2) Subrogation: Where the money of an ultra vires borrowing has been used to pay off lawful debts of the company, he would be
subrogated to the position of the creditor paid off and to that extent would have the rightto recover his loan from the company.
(3) Suit against directors: In case of ultra vires borrowing, the lender may be able to sue the directors for breach of warranty of authority,
especially if the directors deliberately misrepresented their authority.
• Gomez, the Chairman of a company, borrowed ` 5 lakh from the State Bank of India, Patna under a
promissory note. A suit was filed for the recovery of debts on the basis of the pro-note executed by the
chairman. The company refused to accept the liability on the plea that the Chairman had borrowed
funds without authorization from the company. Will the company succeed? Explain. CS (Inter) - June
2007 (5 Marks)
Ans.: The facts of the given case are similar to Krishnan Kumar Rohatgi & Others v. State Bank of India &
Others
(1980) 50 Com Cases 722. In this case the company borrowed an amount of ` 5 lakhs from the Bank under
a
Promissory Note. The repayment was guaranteed by a person by executing a guarantee in favour of the
company. The company used to make payments towards loan and the promissory note used to be renewed
from time to time. In the suit for recovery, the company contended that the pro-note was executed by the
Chairman without there being a resolution of the Board of directors authorizing the Chairman to execute
the pro- note. Rejecting these contentions the High Court held that in cases where the directors borrow
funds without their having authorization from the company and if the money has been used for the benefit
of the company, the company cannot repudiate its liability to repay. Under the general principles of law,
when an agent borrows money for a principal without the authority of the principal but the principal takes
the benefit of the money so borrowed or when the money so borrowed has gone into the coffers of the
principal, the law implies a promise to be paid by the principal.
Thus, company will be held liable to repay the amount because the company, being principle had taken
benefit ofthe amount borrowed.
• Alok, the Managing Director of Yellow Ltd., borrowed a large sum of money and misappropriated the same. Later, when
the lender demanded his money, the company refused to repay, contending that the money borrowed by Managing
Director was misappropriated by him and the company is not liable for repayment. Decide, giving reasons, whether the
lender would succeed in recovering the money from the company. CS (Executive) - June 2015 (4 Marks)
Ans.: The facts of given case are similar to V.K.R.S.T Firm v. Oriental Investment Trust Ltd., AIR 1944 Mad 532 wherein it was
held that under the authority of the company, its managing director borrowed large sums of money and misappropriated it.
The company was held liable stating that where the borrowing is within the powers of the company, the lender will not be
prejudiced simply because its officer have applied the loan to unauthorized activities provided the lender had no knowledge of
the intended misuse. Thus, lender would succeed in recovering the money from the company.
• Ajay Ltd. borrowed ` 100 Crore from Prem, without the authority conferred on it by the articles of association. Later, the
money borrowed by Ajay Ltd. was used by its Board of directors to pay off lawful debts of the company. In this scenario,
Prem, the lender seeks your advice for recovery of his money. Advise him.
Ans.: In T.R. Pratt. (Bom) Ltd. v. E.D. Sassoon and Co. Ltd., (1936) 6 Com Cases 90, it was held that if the directors borrowed
money from the plaintiff beyond their powers the company cannot repudiate its liability on the ground that the agent had no
authority from the company to borrow. The money having been borrowed and used for the benefit of the principal either in
paying its debts or for its legitimate business, the company cannot repudiate its liability on the ground that the agent had no
authority from the company to borrow.
It was also held that under the general principle of law when an agent borrows money for a principal without the authority of
the principal, but if the principal takes benefit of the money so borrowed or when the money so borrowed have gone into the
coffers of the principal, the law implies a promise to repay.
Thus, Prem can recover the money borrowed by the directors of Ajay Ltd. without any authority as money has been used to pay
off lawful debts of the company.
Points Debentures Shares
Status Debenture holders are the creditors of the Shareholders are the owners of the company.
company.
Voting rights Debenture holders have no voting rights. Shareholders have voting rights.
Rate of income Debenture interest is paid at a pre-determined Dividend on equity shares is paid at a
fixed rate. variable rate.
Treatment Interest on debentures is the charge against Dividends are appropriation of profits.
against profit profits.
Types There are different kinds of debentures, such There are only two kinds of shares - equity
as Secured/Unsecured, shares and preference shares.
Redeemable/Irredeemable, Registered /
Bearer, Convertible / N on-convertible, etc.
Balance sheet In the company's balance sheet, debentures are In the company's balance sheet, shares are
presentation shown under head "Non-Current Liabilities". shown under head "Shareholders Funds".
Conversion Debentures can be converted into shares as Shares cannot be converted into debentures
per the terms of issue of debenture. in any circumstances.
Forfeiture Debentures cannot be forfeited for non- Shares can be forfeited for non-payment of
payment of call moneys. allotment and call moneys.
Liquidation At the time of liquidation, debenture holders At the time of liquidation shareholders are
are paid-off before the shareholders. paid at last, after paying debenture holders,
creditors, etc.
• Define the term 'Deposit' as per Companies (Acceptance of Deposits) Rules, 2014.
Ans.: Deposit [Section 2(31)]: Deposit includes any receipt of money by way of deposit or loan or in any other formby a
company, but does not include such categories of amount as may be prescribed in consultation with the RBI.
Inclusive definition of the word "Deposit" under Rule 2(l)(c) is as under:
Deposit [Rule 2(l)(c)]: Deposit includes any receipt of money by way of deposit or loan or in any other form, by a company,
but does not include:
Any amount received from the Central or State Government, or any amount received from any other source whose repayment is
guaranteed by the Central or State Government or any amount received from a local authority, or any amount received from a
statutory authority constituted under an Act of parliament or a state legislature.
Any amount received from foreign Governments, foreign/international banks, multilateral financial institutions (including, but
not limited to, International Finance Corporation, Asian Development Bank, Commonwealth Development Corporation and
International Bank for Industrial and Financial Reconstruction), foreign government owned development financial institutions,
foreign export credit agencies, foreign collaborators, foreign bodies corporate and foreign citizens, foreign authorities or
persons resident outside India subject to the provisions of FEMA Act, 1999 and rules and regulations made thereunder.
Any amount received as a loan or facility from any banking company or from the SBI or any of its subsidiary banks or from a
banking institution notified by the Central Government.
Any amount received as a loan or financial Assistance from Public Financial Institutions notified by the Central Government in this
behalf in consultation with the RBI, regional financial institutions, Insurance Companies, Scheduled Banks as defined in the RBI
Act, 1934.
Any amount received against issue of commercial paper or any other instrument issued in accordance with the guidelines or
notification issued by the RBI.
Any amount received by a company from any other company.
Any amount received and held pursuant to an offer made in accordance with the provisions of the Act towards subscription to
any securities, including share application money or advance towards allotment of securities pending allotment, so long as
such amount is appropriated only against the amount due on allotment of the securities applied for. If the securities for which
application money or advance for such securities was received cannot be allotted within 60 days from the date of receipt of
the application money or advance for such securities and such application money or advance is not refunded to the
subscribers within 15 days from the date of completion of 60 days, such amount shall be treated as a deposit under these
rules. For the purpose of this rule any adjustment of the amount for any other purpose will not be treated as refund.
Any amount received from a person who, at the time of the receipt of the amount, was a director of the company or relative of
director of company or relative of director of private company. The director from whom money is received, furnishes to the
company at the time of giving the money, a declaration in writing to the effect that the amount is not being given out of funds
acquired by him by borrowing or accepting loans or deposits fromothers.
Any amount raised by the issue of bonds or debentures secured by a first charge or a charge ranking pari passu with the first
charge on any assets referred to in Schedule III of the Act excluding intangible assets of the company or bonds/debentures
compulsorily convertible into shares of the company within 10 years. If such bonds or debentures are secured by the charge
of any assets referred to in Schedule III of the Act excluding intangible assets, the amount of such bonds or debentures shall
not exceed the market value of such assets as assessed by a registered valuer.
Any amount received from an employee not exceeding his annual salary, under a contract of employment with the company in
the nature of non-interest bearing security deposit.
Any non-interest bearing amount received or held in trust.
Any amount received in the course of or for the purposes of the business of the company:
As an advance for the supply of goods or provision of services provided that such advance is appropriated against supply of
goods or provision of services within a period of 365 days from acceptance of such advance. In case of any advance which is
subject matter of any legal proceedings before any court of law, the said time limit of 365 days shall not apply.
As advance, accounted for in any manner whatsoever, received in connection with consideration for property under an
agreement or arrangement, provided that such advance is adjusted against the property in accordance with the terms of
agreement or arrangement.
As security deposit for the performance of the contract for supply of goods or provision of services.
As advance received under long term projects or for supply of capital goods except those covered under item
(b) above. If the amount received under (a), (b) & (c) above becomes refundable (with or without interest) because the company
accepting the money does not have necessary permission or approval to deal in the goods or properties or services for which
the money is taken, the amount received shall be deemed to be a Deposit under these rules.
As an advance towards consideration for providing future services in the form of a warranty or maintenance contract as per
written agreement or arrangement, if the period for providing such services does not exceed the period prevalent as per
common business practice or 5 years, from the date of acceptance of such service whichever is less.
As an advance received and as allowed by any sectoral regulator or in accordance with directions of Central or State
Government.
As an advance for subscription towards publication, whether in print or in electronic to be adjusted against receipt of such
publications
Explanation: For the purpose of this sub-clause the amount shall be deemed to be deposits on the expiry of 15 days from the
date they become due for refund.
Any amount brought in by the promoters of the company by way of unsecured loan in pursuance of the stipulation of any
lending financial institution or a bank subject to fulfilment of the following conditions:
The loan is brought in pursuance of the stipulation imposed by the lending institutions on the promoters to contribute such
finance and
The loan is provided by the promoters themselves or by their relatives or by both and
The exemption under this sub-clause shall be available only till the loans of financial institution or bank are repaid and not
thereafter.
Any amount accepted by a Nidhi Company in accordance with the rules made under Section 406 of the Act.
Explanation: For the purposes of this clause, any amount —
(a) Received by the company, whether in the form of installments or otherwise, from a person with promise or offer to give
returns, in cash or in kind, on completion of the period specified in the promise or offer, or earlier, accounted for in any manner
whatsoever, or
(,b) Any additional contributions, over and above the amount under item (a) above, made by the company as part of such
promise or offer,
shall be considered as deposits unless specifically excluded under this clause.
Any amount raised by issue of non-convertible debenture not constituting a charge on the assets of the company and listed on a
recognized stock exchange as per applicable regulations made by Securities and ExchangeBoard of India.
Any amount received by way of subscription in respect of a chit under the Chit Fund Act.
Any amount received by the company under any collective investment scheme in compliance with regulations framed by the SEBI.
An amount of ` 25 lakh or more received by a start-up company, by way of a convertible note (convertible into equity shares or
repayable within a period not exceeding 5 years from the date of issue) in a single tranche, from a person.
Explanation:
"Start-up company" means a private company incorporated under the Companies Act, 2013 or Companies Act, 1956 and
recognized as such by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry.
"Convertible note" means an instrument evidencing receipt of money initially as a debt, which is repayable at the option of the
holder, or which is convertible into such number of equity shares of the start-up company upon occurrence of specified events
and as per the other terms and conditions agreed to and indicated in the instrument.
Any amount received by a company from Alternate Investment Funds, Domestic Venture Capital Funds and Mutual Funds
registered with the SEBI in accordance with regulations made by it.
• XYZ Ltd. realized on 3rd June, 2016 that particulars of a charge created on 11th September, 2015 in favour of a
bank were not filed with the ROC for registration. What procedure should the company follow to get the
charge registered with the ROC? Would the procedure be different if the charge was created on 1st August,
2015 instead of 11th September, 2015. Explain with reference to the relevant provisions of the Companies
Act, 2013.
Ans.: As per Section 77, every charge which requires registration must be registered within 30 days of its creation.
However, as per Rule 3 of the Companies (Registration of Charges) Rules, 2014, the Registrar may on an application
by the company allow registration of charge within 300 days of creation or modification of charge on payment of
additional fee.
As per Section 87 read with Rule 12, if company fails to register the charge even within this period of 300 days, it
may seek extension of from the Central Government. The application for condonation of delay shall be filed with
the Central Government in Form CHG-8 along with the fee. The order passed by the Central Government shall be
required to be filed with the Registrar in Form INC-28 along with the prescribed fees.
In given case XYZ Ltd. created charge on 11.9.2015, so it should have been get charge registered within 30 days that
is on or before 11.10.2015; beyond this date but up to 300 days from the date of creation of charge i.e. on or before
8.7.2016, charge can be registered on payment of additional fees.
If the charge was created on 5.8.2015 instead of 11.9.2015 then up to 3.6.2016,300 days expires and as per Section
87 the company may seek extension from the Central Government. The application for condonation of delay shall
be filed with the Central Government in Form CHG-8 along with the fee. The order passed by the Central
Government shall be required to be filed with the Registrar in Form INC-28 along with the prescribed fees.
• Rose Ltd. raised a loan from a State Financial Institution by creating hypothecation of book debts and also
future debts of the company. Incidentally, the charge was not registered with the Registrar of Companies
concerned. State financial institution demanded a certificate of registration of charge for the amount of loan so
granted by it. The directors of the company replied to the State Financial Institution that the charge need not be
registered for hypothecation of book debts. Is the action of the directors valid? Give reasons. CS (Executive) - Dec
2014 (4 Marks)
Ans.: Charge [Section 2(16)]: Charge means an interest or lien created on the property or assets of a company or any
of its undertakings or both as security and includes a mortgage. Thus, raising a loan from a State Financial Institution
by creating hypothecation of book debts and also future debts of the company amount to charge within the meaning
of Section 2(16) and such charge must be registered as per Section 77 in Form CHG-1.
Thus, contention of directors of Rose Ltd. is incorrect and not acceptable. If Rose Ltd. fails to register the charge, State
Financial Institution can get it registered as per Section 78.
• A company created a charge on its assets in favour of Laxmi Bank Ltd. on 1st October, 2019. This charge was filed
with the ROC on 10th October, 2019. The ROC issued certificate of registration of charge on 15th October, 2019. The
same company also created charge on the same assets in favour of Saraswati Bank Ltd. on 9th October, 2019 and filed
the charge with the ROC on 10th October, 2019. The ROC issued certificate of registration of charge on 12th October,
2019. Which bank will have priority in recovering its dues by disposing the assets?
Ans.: For given case following two principal should be noted:
- A registered charge has priority over un-registered charge and When charge is registered it becomes effective from the
date of creation of charge and not from the date of registration.
Since, charge in favour of Saraswati Bank Ltd. was registered first on 12.10.2019 it gets priority and is effective from the
date of creation i.e. 9.10.2019. However, charge in favour of Laxmi Bank Ltd. was registered on 15.10.2019 and it become
effective from the date of creation i.e. 1.10.2019. Considering above views, it can be said that Laxmi Bank Ltd. will have
priority in recovering its dues by disposing the assets.
• XYZ Limited has office building in London. The company has been granted a term loan of ` 15 Crore from a Bank. The
company wants to mortgage office building of London.
Examining the provisions of the Companies Act, 2013, answer the following:
(i) Whether the company can mortgage the above office building?
(ii) Whether a charge can be created for property situated outside India?

Ans.: As per Section 179(3), the board of directors of company can exercise borrowing power. Thus, XYZ Ltd. can
mortgage its office building in London and can avail borrowings.
As per Section 77, every company creating a charge shall register the particulars of charge signed by the company and its
charge holder together with the instruments creating charge.
Any charge created within or outside India on property or assets or any of the company's undertakings whether tangible
or otherwise, situated in or outside India shall be registered.
Hence, all types of charges are required to be registered under the Companies Act, 2013 whether created within or
outside India.
Points Mortgage Charge
Meaning A mortgage is the transfer of an Although in a charge, the property
interest in specific immovable is made a security for the payment
property for the purpose of securing of the loan, yet the transaction does
payment of money advanced. not amount to mortgage.
Transferof In mortgage there is transfer of In charge there is no transfer of any
interest interest in the property. interest in the property.
Created A mortgage can only be created by A charge may be created by act of
act of parties. parties or by, operation of law.
Registration A mortgage deed must be registered A charge need not be made in
and attested by two witnesses. writing, and if reduced to writing, it
need not be attested or registered.
Foreclosure In certain types of mortgage the The charge-holder cannot foreclose
mortgagee can foreclose the though he can get the property sold
mortgaged property. as in a simple mortgage.
Points Mortgage Charge
Personal In a mortgage, there can be security In a charge the remedy of the
liability as well as personal liability. charge-holder is against the
property only.
From CHG-1 Registration of charge creating or modifying for other than Debentures.
From CHG-2 Issue of certificate of registration of charge by ROC.
From CHG-3 Issue of certificate of registration of modification of charge by ROC.
From CHG-4 Intimation to ROC for satisfaction of charge.
From CHG-5 Certificate of registration of satisfaction of charge.
From CHG-6 Notice of appointment or cessation of a receiver by company to ROC.
From CHG-7 Register of charges to be kept by company.
From CHG-8 The application for condonation of delay to the Central Government.
From CHG-9 Registration of charge creating or modifying for debentures including

rectification.
From CHG-10 The application to ROC for delay in registration of charges beyond 30 days
from the date of creation of charges but up to 300 days.
From CHG-28 The order passed by the Central Government for condonation of delay to be
filed with ROC.
• The Board of Directors of ABC Ltd. proposes to declare dividend at the rate of 20% to the equity shareholders,
despite the fact that the company has defaulted in repayment of public deposits accepted before the
commencement of Companies Act, 2013. Comment.
• Ans.: Section 123(6) specifically provides that a company which fails to comply with the provisions of Section 73
(Prohibition of acceptance of deposits from public) and Section 74 (Repayment of deposits, etc., accepted before the
commencement of this Act) shall not, so long as such failure continues, declare any dividend on its equity shares.
In the given instance, the Board of Directors of ABC Ltd. proposes to declare dividend at the rate of 20% to the equity
shareholders; in spite of the fact that the company has defaulted in repayment of public deposits accepted before the
commencement of the Companies Act, 2013. So, according to the above provision, declaration of dividend by the ABC
Ltd. is not valid.
• Board of Directors of AVB Ltd. wants to declare dividend ` 15 lakhs out of capital profits for the year ended
31st March, 2017, without making a provisions for depreciation.
Referring to the provisions of the Companies Act, 2013, you being the Secretary of the Company advise the
board whether it can go ahead with its proposal? CS (Executive) - June 2017 (4 Marks)
Ans.: Dividend cannot be paid out of capital, even if the AOA authorize such payment.
As per Fourth Proviso to Section 128(1), no company shall declare dividend unless carried over previous losses
and depreciation not provided in previous years are set off against profit of the company for the current year.
Keeping in view above provisions, AVB Ltd. cannot declare dividend out of capital. It can declare dividend of
currentprofit or out of profits for any previous financial years after providing for depreciation.
• WL Ltd. is facing loss in business during the current financial year 2015-2016. In the immediate preceding 3
financial years, the company had declared dividend at the rate of 8%, 10% & 12% respectively. To maintain the
goodwill of the company, the Board of Directors has decided to declare 12% interim dividend for the current
financial year. Examine the applicable provisions of the Companies Act, 2013 and state whether the Board of
Directors can do so?
• Ans.: According to Section 123(3) in case the company has incurred loss during the current financial year up to the
end of quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be
declared at a rate higher than the average dividends declared by the company during the immediately preceding three
financial years.
In the immediate preceding three financial years, the company declared dividend at the rate of 8%, 10% & 12%. As
per the abovementioned provision, such interim dividend shall not be declared at a rate higher than the average
dividends declared by the company during the immediately preceding three financial years [i.e.
8+10+12=30/3=10%]. Therefore, decision of Board of Directors to declare 12% of the interim dividend for the current
financial year is not tenable.
Points Interim Dividend Final Dividend
Meaning Dividend which is paid in the middle of the year is Dividend which is recommended by the board of
known as interim dividend. directors and approved by the shareholders in
AGM is known as final dividend.
Shareholder's Interim dividend can be declared by the board of Final dividend is recommended by the board of
approval directors and it does not required approval of the directors and must be approved by the
shareholder. shareholders.
Decreasein rate Since interim dividend does not require approval The shareholders cannot increase the rate of
of shareholders, rate of interim dividend cannot dividend than the one recommended by the
be decreased. Board. The shareholders may, however, declare
the payment of dividend on equity shares at a
rate lower than the one recommended by the
directors in their report.
Sources A company may declare interim dividend during A company can pay final dividend form the
any financial year out of the surplus in the profit following sources:
and loss account and out of profits of the financial - out of current profits
year in which such interim dividend is sought to - out of profits of previous financial years
be declared.
- out of money provided by the Central or
State Government
Restriction in In case the company has incurred loss during If due to inadequacy or absence of profits in any
case of loss the current financial year up to the end of the financial year, any company proposes to declare
quarter immediately preceding the date of final dividend out of the accumulated profits
declaration of interim dividend, such interim earned by it in previous years and transferred
dividend shall not be declared at a rate higher by the company to the reserves, such
than the average dividends declared by the declaration of dividend shall be made as per the
company during the immediately preceding 3 Companies (Declaration & Payment of Dividend)
financial years. Rules, 2014.
• Dividend once declared becomes debt. Comment. CS (Inter) - Dec 2004 (4 Marks) Can decision to pay interim
dividend be revoked? CS (Inter) - June 2002 (2 Marks)
The board of directors of a company in a meeting held on 30th April, 2015 declared interim dividend. In another meeting
held on 18th May 2015, the board of directors revoked the interim dividend declared without assigning any reason. Advise
the company in the matter. CS (Executive) - Dec 2013 (8 Marks), Dec 2014 (4 Marks)
Ans.: A dividend when declared becomes a debt and a shareholder is entitled to sue for recovery of the same after expiry of
the period of 30 days prescribed u/s 207. A dividend when proposed does not become a debt but only becomes debt when
declared. Revocation of declared dividend: A dividend including interim dividend once declared becomes a debt and cannot
be revoked, except with the consent of the shareholders. But where a dividend has been illegally declared, the directors will
be justified in revoking the declared dividend. If an illegally declared dividend is paid then the directors shall be responsible,
liable and accountable to the company personally.
As per Section 2 (35), "dividend includes any interim dividend." Hence, interim dividend also cannot be revoked.
• In Evergreen Ltd., the Board of directors declared an interim dividend but could not distribute the dividend due to
objections of audit committee that the accounts considered by the Board were false; and true financial results were
inflated by not incorporating outstanding liabilities and over-valuation of inventories. A shareholder filed a suit for
non-payment of dividend. One of the directors contended that he never attended the Board meeting where the issue
relating to payment of interim dividend was declared on the basis of false accounts. Discuss about the validity of
contention of the director. CS (Executive) - Dec 2014 (4 Marks)
Ans.: As per Section 124(1), a company has to pay dividend within 30 days of declaration of dividend. Failure to pay or post
dividend warrant within 30 days constitutes an offence and directors of the company are liable to punishment as provided
under Section 127.A dividend including interim dividend once declared becomes a debt and cannot be revoked, except with
the consent of the shareholders. But where a dividend has been illegally declared, the directors will be justified in revoking
the declared dividend.
• The Board of Directors of American Express Ltd. declared interim dividend third time during the financial year 2015-
2016. After declaration, the Board of Directors decided to revoke third interim dividend as they noticed that company's
financial position did not permit payment of such interim dividend. The Board of Directors seek your advice in this
matter. Please advise the Board as a company secretary. Will your advice be different in case it was a regular dividend
instead of interim dividend?
Ans.: A dividend including interim dividend once declared becomes a debt and cannot be revoked, except with the consent of
the shareholders. But where a dividend has been illegally declared, the directors will be justified in revoking the declared
dividend. If an illegally declared dividend is paid then the directors shall be responsible, liable and accountable to the company
personally.
As per Section 2(35), "dividend includes any interim dividend." Hence, both final dividend and interim dividend once declared
cannot be revoked.
Thus, board of directors of American Express Ltd. cannot revoke interim dividend even though company's financial position did
not permit payment of such interim dividend.
• Brave Ltd. is listed at Bombay Stock Exchange and has a net worth of over ` 600 Crore. The company
has constituted a corporate social responsibility (CSR) committee with Jay and Vijay as its members.
Both Jay and Vijay are directors of the company, Jay being an independent director.
Explaining the provisions of the Companies Act, 2013 relating to 'corporate social responsibility',
examine whether the company has complied with the provisions of the Act in this regard.
Ans.: As per Section 135, every company fulfilling following criteria shall constitute a Corporate Social
Responsibility (CSR) Committee of the Board consisting of 3 or more directors, out of which at least one
director shall be an independent director -
• Referring to the provisions of the Companies Act, 2013 relating to 'Corporate Social Responsibility' (CSR), answer the
following:
(i) Which activities would not qualify as CSR?
(ii)Whether the average net profit criteria for CSR is before tax or after tax? CS (Executive) - Dec 2016 (4 Marks)
Ans.: Activities that would not qualify as CSR: Following are some of the activities that cannot be constitute CSR activity:
♦ CSR projects or programs or activities that benefit only the employees of the company and their families.
♦ One-off events such as marathons/awards/charitable contribution/advertisement/sponsorships of TV programmes etc.
♦ Expenses incurred by companies for the fulfilment of any other Act/Statute of regulations (such as Labour Laws, Land
Acquisition Act, 2013, Apprentice Act, 1961 etc.)
♦ Contribution of any amount directly or indirectly to any political party.
♦ Activities undertaken by the company in pursuance of its normal course of business.
♦ Project or programmes or activities undertaken outside India.
(i) Average net profit criteria for CSR: Computation of net profit for Section 135 is as per Section 198 of the Companies Act,
2013 which is primarily Profit Before Tax (PBT).
• CIF Techno-systems Private Ltd. is proposed to be incorporated in Bhubaneshwar, Orissa under the Companies Act,
2013. The company will be a holding company of CIF Holding Private Ltd., already incorporated in Brazil under the
Company Law of Brazil. The company in Brazil follows financial year 1st January to 31st December of a calendar year.
Referring to the provisions of the Companies Act, 2013, state whether the financial year of CIF Techno-system can also
be 1st January to 31st December, in order to make it easier to prepare consolidated financial statements.
Ans.: As per Section 2(41), financial year, in relation to any company or body corporate, means the period ending on the 31st
day of March every year, and where it has been incorporated on or after the 1st day of January of a year, the period ending
on the 31st day of March of the following year, in respect whereof financial statement of the company or body corporate is
made up.
However, on an application made by a company or body corporate, which is a holding company or a subsidiary or associate
company of a company incorporated outside India and is required to follow a different financial year for consolidation of its
accounts outside India, the Tribunal may, if it is satisfied, allow any period as its financial year, whether or not that period is a
year.
Keeping in view of above provisions, CIF Techno-system Private Ltd. a subsidiary of CIF Holding Private Ltd. can adopt its
financial year as 1st January to 31st December but only after obtaining approval of Tribunal.
• Board of directors of KM Ltd. proposes to transfer 11.33% of the net profits of the company for the
financial year 2016-2017 to general reserves. Examining the provisions of the Companies Act, 2013
advise the Board whether it can go ahead with its proposal. CS (Executive) - Dec 2016 (4 Marks)
Ans.: Transfer to reserve [First proviso to Section 128(1)]: A company may, before the declaration of any
dividend in any financial year, transfer such percentage of its profits for that financial year as it may
consider appropriate tothe reserves of the company.
Thus, board of directors of KM Ltd. may transfer 11.33% of the net profit to general reserve.
• Vir is a director in DJA Ltd. (the company). The company holds 75% shares of MRN Ltd. Vir wants to inspect the books of
MRN Ltd. Examining the provisions of the Companies Act, 2013 advise whether Vir, the director of DJA Ltd. can be
allowed to inspect the books of MRN Ltd. CS (Executive) - June 2015 (4 Marks)
Ans.: As per Section 128(3), the inspection in respect of any subsidiary of the company shall be done only by the person
authorized in this behalf by a resolution of the Board of Directors of holding company.
Thus, Vir can inspect the books of account of MRN Ltd. (subsidiary of DJA Ltd.) if he is authorized by the resolution of the Board
of Directors of DJA Ltd.
• Suresh, a member of Ruchi Ltd., wants to inspect the register of deposits maintained by the company as required under
the provisions of the Companies Act, 2013. The company refused to provide the register for inspection without assigning
any reason. Referring to the provisions of the Act, examine the validity of the company's refusal. What shall be your
answer if the same Register is demanded by the statutory auditors of the company for inspection and for their audit? CS
(Executive) - Dec 2016 (4 Marks)
• Ans.: A member of the company is not entitled to inspect the books of account of the company.Register of deposit is part of
the books of account and hence are not normally open for inspection by members of the company. Hence, Suresh a member
of company cannot inspect the Register of deposit and company can refuse to inspection of the register without giving any
reason.The auditor enjoys the right of accessibility to books and records because he has to mention in his report whether, proper books and
records are maintained. Thus, company cannot refuse inspection of Register of deposit to statutory auditor.
• XYZ Ltd. was registered in the year 2014 under Companies Act, 2013. There are allegations that the 3 directors who
manage the affairs of the company are siphoning the funds of the company. The company has not declared any
dividends on the ground that company is incurring losses. Mr. A, who controls 51% of the share capital of the company
sends a notice to the management that he will inspect the books of account to verify the allegations. Examine the right
of Mr. A to carry out the inspection. State the persons who have the right to carry out the inspection under the
Companies Act, 2013.
Ans.: As per provisions of the Companies Act, 2013 only following persons are entitled to inspect the books of account:
- Director of the company [Section 128(3)]
- Registrar of Company [Section 206]
- Authorized officer of the Central Government [Section 206]
- Officers of Serious Fraud Investigation Office (SFIO) [Section 212]
Thus, member of the company is not entitled to inspect the books of account.
Regulation 89 of. the Table F makes the following provisions for inspection of books of account by the members:
(i) The Board shall from time to time determine whether and to what extent and at what times and places and under what
conditions or regulations, the accounts and books of the company, or any of them, shall be open to the inspection of
members not being directors.
(ii) No member shall have any right of inspecting any account or book or document of the company except as conferred by law
or authorised by the Board or by the company in general meeting.
In the given case, Mr. A has not been authorized to inspect the books of account by the Board or by the members in the
general meeting. Thus, Mr. A.shall not have any right to inspect the books of account even if he holds 51 % capital of the
company.
• Peculiar Ltd., an unlisted company, did not prepare its financial statements for the year ended 31st March, 2017 in
conformity with some of the mandatory accounting standards. With reference to the provisions of the Companies
Act, 2013, state the responsibilities of the directors and statutory auditors of the company inthis regard. CS
(Executive) - Dec 2016 (4 Marks)
Ans.: As per Section 129(1), the financial statements shall comply with the accounting standards notified under Section
133. The items contained in financial statements shall be in accordance with the applicable accounting standards.
As per Section 129(5), where the financial statements of a company do not comply with the accounting standards
referred, the company shall disclose in its financial statements, the deviation from the accounting standards, the reasons
for such deviation and the financial effects, if any, arising out of such deviation.
As per Section 134(5), the Directors Responsibility Statement referred shall state in Board's Report that in the
preparation of the annual accounts, the applicable accounting standards had been followed along with proper
explanation relating to material departures.
As per Section 143(9), every auditor shall comply with the Auditing Standards. Duty to comply with accounting standards
in on company and its directors and not on auditor of the company. Auditor has to comply only with Auditing Standards
only.
Points Cost Audit Statutory Audit
To whom it applies Covers only select specified industries. Product wise Compulsory for all companies incorporated under the
coverage and not the whole company. Companies Act, 2013.
How applies The Central Government may, by order, in respect of certain Automatic application of provisions for all registered
class of companies engaged in the production of prescribed companies as per Section 139 of Companies Act,
goods or services direct that particulars relating to the 2013.
utilization of material or labour or to other items of cost as
may be prescribed shall also be included in the books of
account kept by that class of companies.
By whom Cost Audit is done by Cost Accountant. Statutory Audit is done by Chartered
Accountant.
Appointment of The Cost Auditor is appointed by the Board of directors. Statutory Auditor is appointed by the members in
auditor AGM.
To Whom Audit The cost audit report shall be submitted by the Cost Accountant Audit report is submitted to the members in the
report is submitted to the Board of Directors of the company. A company shall AGM.
within 30 days from the date of receipt of a copy of the cost
audit report furnish the Central Government such report along
with full information and explanation on every reservation or
qualification contained therein.
Base of report The report is on efficiency and propriety. The report is on true & fair view of the state of
affairs and the profit and loss.
Emphasis is on The emphasis is on adequacy or otherwise of the cost accounting The emphasis is on verification & authenticity of
system. transactions.
Points Cost Audit Statutoiy Audit
Form of audit Every cost auditor, who conducts an audit of the cost records There is no specific format provided for statutory
report of a company, shall submit the cost audit report along with his audit under the Companies Act, 2013.
or its reservations or qualifications or observations or
suggestions, if any, in Form CRA-3
IMPORTANT
case laws
BY CS SHUBHAM ABAD
❖ The Board of directors of Nav Avtar Ltd. passed a resolution for issue of rights shares. However,
certain shareholders of the company raised an objection as to whether the company needed additional
capital. Discuss the validity of the counter-move taken by the shareholders and resolution passed by
the Board. CS (Executive) - June 2012 (4 Marks)
Ans.:
Provision-As per Section 179, the Board of Directors of a company shall be entitled to exercise all such
powers, and to do all such acts and things, as the company is authorized to exercise and do. However, in
exercising such power or doing such act or thing, the Board shall be subject to the provisions contained in
Companies Act, 2013, or in the memorandum or articles or in any regulations made by the company in general
meeting.
Facts-Board of directors of nav avtar ltd. Passed a resolution for issue of rights shares however certain
shareholders raised an objection as to whether company wants to raised additional capital
Conclusion-Thus, the Board shall not exercise any power or do any act or thing which is to be exercised or
done by the company in general meeting.
The directors shall exercise their powers bona fide and in interest of the company. The directors while
exercising their powers do not act as agents for the majority or even all the members and so the members
cannot by resolution passed by a majority or even unanimously supercede the director's powers, or instruct
them how they shall exercise their powers.
❖ One of the objects clause of the Memorandum of Association of Info Company Ltd. conferred upon
the company power to sell its undertaking to another company with identical objects. Company's
Articles also conferred upon the directors whereby power was conferred upon them to sell or
otherwise deal with the property of the company. At an EOGM of the company, members passed an
ordinary resolution for the sale of its assets on certain terms and authorized the directors to carry
out the sale.
Directors refused to comply with the wishes of the members where upon it was contended on behalf of
the members that they were the principals and directors being their agents, were bound to give effect
to their (members) decisions.
(i) Whether the contention of members against the non-compliance of member's decision by the
directors is tenable?
(if) Whether it is possible for the members usurp the powers which by the Articles are vested in the
directors by passing a resolution in the general meeting?CA (Final) - Nov 2015 (4 Marks)
Ans.:
Provision-Except where express provisions are made that the powers of a company in respect of any matter
are to be exercised by the company in general meeting, in all other cases the Board is entitled to exercise all
its powers.
The directors acting together are the authority for conducting the affairs of the company. They are
authorized to do what the company is authorized to do, unless barred by restrictions on their powers by the
provisions of the Companies Act, 2013, the MOA or AOA of the company [Section 179],
The directors while exercising their powers do not act as agents for the majority or even all the members and
so the members cannot by resolution passed by a majority or even unanimously supercede the director's
powers, or instruct them how they shall exercise their powers. This sovereignty of the directors within the
limits of the powers conferred on them by the articles, and within limit laid down by the Act.
Some of its powers may, according to its articles, be exercised by directors, certain other powers may be
reserved for the shareholders in general meeting. The powers of management are vested in the directors.
They and they alone can exercise these powers. The only way in which the general body of the shareholders
can control the exercise of the powers vested by the articles, in the directors, is by altering the articles, or if
opportunity arises under the articles, by refusing to re-elect the directors whose action they disapprove. They
cannot themselves usurp the powers which by the articles are vested in the directors any more than the
directors can usurp the powers vested by the articles in the general body of shareholders.
Facts- objects clause of the Memorandum of Association of Info Company Ltd. conferred power to sell its
undertaking to another company with identical objects. Company's Articles also conferred upon the directors.
At an EOGM of the company, members passed an ordinary resolution for the sale of its assets on certain
terms and authorized the directors to carry out the sale. Directors refused to comply with the wishes of the
members
Conclusion-In view of above answer to given problem is as follows:
(i) The contention of members against the non-compliance of member's decision by the directors is not
tenable.(if) It not is possible for the members usurp the powers which by the Articles are vested in the
directors by passing a resolution in the general meeting.
❖ The last three years Balance Sheet of RBS Ltd., contains the following information and figures:
Particulars As at 31.3.2013 ? As at 31.3.2014 ? As at 31.3.2015 ?
Paid up Capital 50,00,000 50,00,000 75,00,000
General Reserve 45,00,000 50,00,000 60,00,000
Debenture Redemption Reserve 15,00,000 20,00,000 25,00,000
Secured Loans 10,00,000 15,00,000 30,00,000
Net Profit for the year 12,50,000 19,00,000 34,50,000
In the ensuring Board Meeting scheduled to be held on 5th November, 2015, among other items of
agenda, following item is also appearing:
"To decide about borrowing from financial institutions on long-term basis."
Based on above information, you are required to find out as per the provisions of the Companies Act,
2013, the amount up to which the Board can borrow from financial institutions without seeking the
approval in general meeting.
Ans.:
Provision-As per Section 180(1) (c), the board of directors of a public company shall not borrow money
without the consent of company by a special resolution, where the money to be borrowed, together with
the money already borrowed by the company exceeds aggregate of its paid-up share capital and free
reserves. However, temporary loan obtained from company's banker in the ordinary course of business shall
not be considered as borrowings.
For the purpose of calculation of limit, paid up capital and free reserve of latest audited balance sheet of a
company has to be taken. Debenture Redemption Reserve is not for free distribution of dividend and is
therefore not considered as free reserve.
Facts-RBS ltd wants to borrow funds from financial institution.the details of their balance sheet is given above
Conclusion- As per the data given in problem, the paid up capital and free reserve is ` 1,35,00,000. The
company has already borrowed ` 30,00,000. Thus, company can borrow further ` 1,05,00,000 without requiring
any consent form shareholder. However, if fresh borrowing exceeds ` 1,05,00,000 the consent of shareholders
of the company by a special resolution will be required.
❖ State with reference to the provisions of the Companies Act, 2013 whether following companies
can make donations to the political parties and if so conditions to be complied in this regard:
(i) ABC Ltd., a government company registered in 2020 wants to donate a sum of ` 10,00,000.
(ii) EFG Ltd. a public company registered in 2016 wishes to contribute a sum of ` 5,00,000.
(iii)RST Ltd., a company incorporated in year 2019, decides to contribute a sum of ` 3 lakhs.
ANS Provision- As per section 182 of companies act 2013, a company other than government company or
company which has not completed 3 years of incorporation cannot contribute towards political
contribution.
A company which has completed 3 years of incorporation can donate any amount towards political parties
Facts- in above question certain situation has been given as to whether the mentioned company can
donate sum of money toward political parties
Conclusion- Keeping in view of provisions of the Section 182 of the Companies Act, 2013 answers to given
problem is as follows:
(i) ABC Ltd. is a government company and it is prohibited from making any political contribution.
(ii) EFG Ltd. is a public company registered in 2016 and has been in existence for more than 3 years;
hence it can make political contribution .
(iii)RST Ltd. is incorporated in year 2019 and has not been existence for a period of 3 financial years.
Thus, it cannot make any political contribution.
❖ The board of directors of LM Ltd. propose to donate ` 3,00,000 to a school established exclusively
for the benefit of children of employees and also donate ` 50,000 to a political party during the
financial year ending 31st March, 2010. The average net profits determined in accordance with the
provisions of Section 198 during the 3 immediately preceding financial years is ` 40,00,000. Examine
with reference to the provisions of the Companies Act, 2013 whether the proposed donations are
within the power of the board of directors of company. CA (Final) - Nov 2009 (4 Marks)
Ans.:
Provision-As per Section 181, the Board of Directors of a company may contribute to bona fide charitable
and other funds. However, if contribution to charitable and other funds exceeds 5% of its average net profits
for the 3 immediately preceding financial years, prior permission of the company in general meeting shall be
required.
As per section 182 of companies act 2013, a company other than government company or company which has
not completed 3 years of incorporation cannot contribute towards political contribution.
A company which has completed 3 years of incorporation can donate any amount towards political parties
Facts-
The board of directors of LM Ltd. propose to donate ` 3,00,000 to a school established exclusively for the
benefit of children of employees and also donate ` 50,000 to a political party during the financial year ending
31st March, 2010.
Conclusion-Donating the amount to the school run exclusively for the benefit of employee does not amount to
charitable contribution. It will be treated as 'welfare expenses', which will induce the employee to increase
their efforts.
In the given case, the school is established exclusively for the benefit of the children of the employees of
the company and hence the restriction u/s 181 is not applicable and the board is empowered to make the
proposed donation.
Donation to political parties: It is presumed that LM Ltd. is not a government company and it has been in
existence for more than 3 years. The proposed donation to a political party is only ` 50,000 . Hence, the
board of directors is empowered to make a donation by passing a resolution at a board meeting. The
company is also required to make proper disclosure in the profit and loss account. [Section 182]
❖ Net profits of PQR Ltd. during the following years as disclosed in the statement of profit and loss
are as under:
Financial year ended Net profits (` in Crore)
31st March, 2013 10
31st March, 2014 12
31st March, 2015 08
The Board of directors of the company at its meeting decides to contribute to a charitable organization,
for charitable purposes, a sum of ` 3 Crore out of the net profits of the financial year ended 31st
March, 2015. This contribution has been made
by the Board without seeking approval of shareholders in general meeting.
In the light of the provisions of the Companies Act, 2013, examine the validity of the contribution made
by the company. What shall be your answer in case the Board decides to contribute ` 1 Crore only?
Ans.:
Provision- Company to contribute to charitable funds [Section 181]: The Board of Directors of a company
may contribute to bona fide charitable and other funds. However, if contribution to charitable and other
funds exceeds 5% of its average net profits for the 3 immediately preceding financial years, prior permission
of the company in general meeting shall be required.
Facts- The Board of directors of the company at its meeting decides to contribute to a charitable
organization, for charitable purposes, a sum of ` 3 Crore out of the net profits of the financial year ended
31st March, 2015.This contribution has been made by the Board without seeking approval of shareholders in
general meeting.
Conclusion- 1) As per the facts given in case, the board of directors of PQR Ltd. desires to contribute ` 3
Crore to a charitable organization, which is more than 5% of its average net profits for the 3 immediately
preceding financial years, hence prior permission of the company in general meeting shall be required.
2) If the board of directors of PQR Ltd. desires to contribute ` 1 Crore to a charitable organization, answer
will be still same that is to say prior permission of the company in general meeting shall be required as ` 1
Crore is more than 5% of its average net profits of the 3 immediately preceding financial years.
❖ Charjee Biotech Private Ltd. is a two year old company. The Board of Directors of the company wants
to contribute 2.8% of its average net profits of the last years to the Prime Minister's National Relief
Fund. Referring to the provisions of the Companies Act, 2013, advise the board.
Ans.:
Provision- Power of Board and other persons to make contributions to national defence fund, etc.
[Section 183]: The Board of Directors of any company or any person or authority exercising the powers of the
Board of Directors of a company, or of the company in general meeting, may, contribute such amount as it
thinks fit to the National Defence Fund or any other Fund approved by the Central Government for the purpose
of national defence.
Board can contribute amount under this section by passing resolution at board meeting or passing circular
resolution.
No limit on contribution: There is a limit on the amount that a company may contribute under this section.
Disclosure of contribution: Every company shall disclose in its profits and loss account the total amount
contributed by it to National Defence Fund or any other Fund approved by the Central Government.
Facts-(now you have understood how to write facts so further you are required to write facts on your own)
Conclusion-as per the above provision charjee biotech private limited can contribute towards national defence
funds without any restriction.
❖ Examining the provisions of the Companies Act, 2013, relating to the constitution of a 'Nomination and
Remuneration Committee' and 'Stakeholders Relationship Committee', answer the following:
(i) Is it mandatory for a listed company to constitute such committees? Also state whether it is
mandatory for a non-listed public company having paid-up share capital of ` 5 Crore to constitute such
committees?
(ii) What shall be the composition of the committees in case the company is required to constitute such
committees? CS (Executive) - Dec 2015 (4 Marks)
Ans.: Keeping in view above provisions of Section 178 of the Companies Act, 2013, answer to given problem is as
follows:
(i) It is mandatory for a listed company to constitute such committees. In case of a non-listed public company
having paid-up share capital of 5 Crore it is not necessary to constitute such committees.
(ii) Nomination & Remuneration Committee shall consist of 3 or more non-executive directors out of which not
less than one-half shall be independent directors.
Stakeholders Relationship Committee shall consist of a chairperson who shall be a non-executive director and
such other members as may be decided by the Board.
❖ During the year 2019, A Ltd. held four meetings of Board on 2nd January, 2019,10th May 2019,
16th October, 2019, and 31st December, 2019. Examine whether he was in accordance with the
provisions of the Companies Act, 2013.
CS (Final) - June 1995 (5 Marks)
Ans.:
Provision- As per Section 173(1), every company shall hold a minimum 4 meetings of its Board of Directors
every year. The gap between two board meetings should not be more than 120 days.
Facts-
Conclusion- As per facts given in case, gap between various meetings are shown below:
2nd January, 2019 to 10th May 2019 127 days
10th May 2019 to 16th October, 2019 158 days
16th October, 2019, to 31st December, 2019 75 days
Thus, from the above calculation, it is clear that company has contravened provisions of Section 173(1) for the
meetings held on 10th May 2019 & 16th October, 2019'
❖ Following are the dates of Board Meetings held by the Jolly Ltd. during the year 2019:
First Meeting - 15.1.2019
Second Meeting - 25.4.2019
Third Meeting - 31.7.2019
Fourth Meeting - 21.10.2019
However, in fourth meeting was adjourned due to want of quorum and held on 10.11.2019. Do you think that company
has contravened provisions of Section 173(1) of the Companies Act, 2013?
Ans.:
Provision- As per Section 173(1), every company shall hold a minimum 4 meetings of its Board of Directors every year. The
gap between two board meetings should not be more than 120 days.
FaCts-
Conclusion-
As per facts given in case, gap between various meetings are shown below:
15.1.2019 to 25.4.2019 100 days
25.4.2019 to 31.7.2019 97 days
31.7.2019 to 21.10.2019 92 days
In case of fourth meeting date of original meeting will be taken and not the date of adjourned meeting. This is so because
adjourned meeting is mere continuance of original meeting.
Since Jolly Ltd. has held all the four Board Meeting during the calendar year 2019 and the gap between any two meetings is
not more than 120 days, it has not complied with Section 173(1).
❖ The Board of directors of a company met thrice in the year 2015 and the fourth meeting was not
held for want of quorum. As a Company Secretary, examine the provisions of the Companies Act,
2013 and decide with reasons whether the company has complied with the requirements of meetings
to be held in a calendar year or violated the requirements thereof? CS (Executive) - Dec 2013 (4
Marks)
Ans.:
Provision-As per Section 173(1), every company shall hold a minimum 4 meetings of its Board of Directors
every year. The gap between two board meetings should not be more than 120 days.
Facts-
Conclusion-
If the gap between 1st & 2nd, 2nd & 3rd meeting is not more than 120 days then there is no default of
Section 173(1).
In case of 4th meeting, it is stated in problem that, meeting was not held at all due to want of quorum and
hence there is default of Section 173(1).
❖ XYZ Ltd. has 6 directors on its Board of Directors. Out of 6 directors, 5 are foreigners and they
reside in America. The company wants to convene its Board meeting in Mumbai but all the 5 directors
are pre-occupied and are not in a position to travel to India. Advice the company regarding conduct of
such a Board meeting as per provisions of the Companies Act, 2013 and relevant Rules. Will the same
Rules or provisions be applicable in case the company wants to approve annual financial statements in
the Board meeting? CS (Executive) - Dec 2017 (4 Marks)
Ans.:
Provision-As per Section 173(2), the participation of directors in a meeting of the Board may be either in
person (personally present) or through video conferencing or other audio visual means.
The system of video conferencing or other audio visual means must be capable of recording and recognizing the
participation of the directors and of recording and storing the proceedings of such meetings along with date
and time.
As per Rule 4 of the Companies (Meetings of Board and its Powers) Rules, 2014 following matters shall not
be dealt with in a meeting through video conferencing or other audio visual means:
(i) The approval of the annual financial statements
(ii) The approval of the Board's report
(iii) The approval of the prospectus
(iv)The Audit Committee Meetings for consideration of accounts and
(v) The approval of the matter relating to amalgamation, merger, demerger, acquisition and takeover.
The company should also comply with the Rule 3 of the Companies (Meetings of Board and its Powers)
Rules, 2014.
Facts-
Conclusion-
Thus, XYZ Ltd. can hold the meeting of its directors through video conferencing or other audio visual means.
However, it cannot pass motion relating to approval of the annual financial statements in such meeting.
❖ Star Gen Ltd. held a meeting of its Board of directors on 31st October, 2019 at its registered
office. Though the company has 12 directors on its board, only 5 directors were present at the
commencement of meeting. Thereafter, even while the meeting was in progress, 2 more directors left
the meeting and remaining directors carried on the proceedings of the meeting. Discuss the validity of
decisions, if any, taken by the remaining 3 directors.CS (Executive) - Dec 2012 (4 Marks)
Ans.:
Provision-Quorum for meetings of Board [Section 174(1)]: The quorum for a meeting of the Board of Directors of a
company shall be higher of the following two:
- l/3rd of its total strength or (fraction rounded up to next)
- Two directors .
The article of the company may provide for higher quorum.
Presence of quorum throughout the meeting: In the case of a board meeting, the meeting cannot transact any business,
unless a quorum is present at the time of transacting the business. It is not enough that a quorum was present at the
commencement of the business.
The quorum of the board is required at every stage of the meeting and unless a quorum is present at every such stage, the
business transacted is void.
Facts-
Conclusion-
As per facts given in case required quorum is present at the commencement of meeting but` 2 left during the meeting hence
quorum is below required number and hence for subsequent business transacted without required quorum are void.
❖ In a meeting of the Board, only 3 directors were present out of the total of 11 directors. None of the
3 directors was interested in any of the items of the agenda. Examine the validity of the meeting.
Ans.:
Provision- As per Section 174(1), the quorum for a meeting of the Board of Directors of a company shall be
higher of the following two:
- l/3rd of its total strength or (fraction rounded up to next)
- Two directors
Facts-
Conclusion-
As there are total 11 directors, l/3rd of the 11 comes to 4 (3.67 rounded up to next). Thus, at leas` 4 directors
must be present at the board meeting. However, only 3 directors are present and hence meeting cannot be held
due want of quorum.
❖ Out of 9 directors in Rooftop Ltd., 5 are Indian nationals, 3 are foreign residents and one is a
person of Indian origin. The articles of the company stipulate that quorum for a Board meeting shall
be 5 directors of which at least one director shall be a foreign resident. Referring to the provisions
of the Companies Act, 2013, examine the validity of the above provision in the articles.
Ans.:
Provision- As per Section 174(1), the quorum for a meeting of the Board of Directors of a company shall be
higher of the following two:
- 1/3rd of its total strength or (fraction rounded up to next)
- Two directors
The article of the company may provide for higher quorum.
Stricter provisions should be followed: The Articles may provide for a higher quorum than what is prescribed under the
law. Where the Quorum requirement provided in the Articles is higher than one-third of the total strength, the company
shall conform to such higher requirement.
The company may provide by its Articles higher number but not a lower number or proportion to constitute a valid quorum.
Further, the Articles may provide for the presence of the Foreign Director at all Meetings. Such provision
should be adhered to.
Facts-
Conclusion- Thus, provisions contained in article of Rooftop Ltd. is valid and as per the provisions of the
Companies Act, 2013.
❖ Board of directors of Ash Ltd. having its registered office at New Delhi decides to hold its next
meeting at New York, USA since all the directors of the company are going to attend a sales
exhibition to be held at New York. Examining the provisions of the Companies Act, 2013, advise the
Board about the validity of its decision to hold the Board meeting at New York. CS (Executive) -
June 2016 ( Marks)
Ans.:
Provision- As per Section 96(2), an annual general meeting can be called during business hours, that is,
between 9 a.m. and 6 p.m. on any day that is not a National Holiday.
There is no similar provision for holding board meeting. Thus, the meetings of the board of directors may be
held at any place even at aboard convenient to the directors; outside the business hours and even on a national
holiday unless the articles provide otherwise.
Facts-
Conclusion-Thus, board of directors of Ash Ltd. can held board meeting outside India
❖ The board of directors of Vedic Ltd. desirous of transacting certain matters through video
conferencing, seek your advice on the matters which cannot be dealt with through video
conferencing. Advice the Board.

Ans.:
Provision- Manner of participation in Board Meetings [Section 173(2)]: The participation of directors in
a meeting of the Board may be either in person (personally present) or through video conferencing or other
audio visual means.
The system of video conferencing or other audio visual means must be capable of recording and recognizing
the participation of the directors and of recording and storing the proceedings of such meetings along with
date and time.
As per Rule 4 of the Companies (Meetings of Board and its Powers) Rules, 2014 following matters shall
not be dealt with in a meeting through video conferencing or other audio visual means:
❖ XYZ Ltd. has 6 directors on its Board of Directors. Out of 6 directors, 5 are foreigners and they
reside in America. The company wants to convene its Board meeting in Mumbai but all the 5 directors
are pre-occupied and are not in a position to travel to India. Advice the company regarding conduct of
such a Board meeting as per provisions of the Companies Act, 2013 and relevant Rules. Will the same
Rules or provisions be applicable in case the company wants to approve annual financial statements in
the Board meeting? CS (Executive) - Dec 2017 (4 Marks)
Ans.:
Provision-As per Section 173(2), the participation of directors in a meeting of the Board may be either in
person (personally present) or through video conferencing or other audio visual means.
The system of video conferencing or other audio visual means must be capable of recording and recognizing the
participation of the directors and of recording and storing the proceedings of such meetings along with date
and time.
As per Rule 4 of the Companies (Meetings of Board and its Powers) Rules, 2014 following matters shall not
be dealt with in a meeting through video conferencing or other audio visual means:
The company should also comply with the Rule 3 of the Companies (Meetings of Board and its Powers) Rules,
2014.
Facts-
Conclusion-Thus, XYZ Ltd. can hold the meeting of its directors through video conferencing or other audio
visual means. However, if cannot pass motion relating to approval of the annual financial statements in such
meeting.
❖ PQR Ltd. is an unlisted company and has 400 shareholders in all. The shareholders of the company
propose voting by electronic mode. Chairman of the company rej ected the shareholders' proposal.
Explaining the provisions of the Companies Act, 2013, examine the validity of rejection of the
shareholders' proposal by the Chairman.
Ans.:
Provision-As per Rule 20 of the Companies (Management & Administration) Rule, 2014, every listed
company or a company having not less than 1,000 members, shall provide to its members facility to vote on
resolutions by electronic means.
Facts-
Conclusion-In given case PQR Ltd. (an unlisted company) has only 400 shareholders. Thus, it not mandatory for
the PQR Ltd. to conduct voting by electronic voting system.
❖ Prudent Ltd. is paying remuneration to its non-executive directors in the form of commission at the
rate of 1% of the net profits of the company distributed equally among all the non-executive
directors. The company is providing depreciation as per Schedule II to the Companies Act, 2013. The
company seeks your advice in respect of following:
(i) Whether is it necessary to make adjustment in respect of depreciation for the purpose of arriving at the net
profit of the company to determine the quantum of remuneration payable to its nonexecutive directors?
(ii) Is it possible to pay remuneration to non-executive director besides sitting fees in the event of loss in a financial
year? CS (Inter) - Dec 2004 (5 Marks)
Ans.:
Provision-(l) "Net Profit" for the purpose of managerial remuneration has to be calculated as per Section 198 of the
Companies Act, 2013. As per said Section 198, depreciation is required to be deducted for calculation of net profit for the
purpose of managerial remuneration.
(ii) As per Section 197(1), except with the approval of the company in general meeting the remuneration payable to part-
time director (non-executive director) shall not exceed -
(a) 1% of the net profits, if there is a managing or whole-time director or manager
(b) 3% of the net profits in any other case.
Conclusion- 1)Thus, it is necessary for the Prudent Ltd. to make adjustment in respect of depreciation for the purpose of
arriving at the net profit of the company to determine the quantum of remuneration payable to its non-executive directors
2)Thus, in the event of loss, remuneration to non-executive directors can be paid only after obtaining approval of
shareholder in general meeting.
❖ Abhay is director in two companies - Goodluck India Ltd. and Lucky Winners India Ltd. Abhay
attended Board meetings of these two companies on 22nd August, 2015 in the same building 'Welcome
House' a` 2 p.m. and 4 p.m. respectively.
(i) Can Abhay draw travelling allowance from both the companies?
(ii) Is he entitled to receive sitting fees fully from both the companies?
Ans.:
Provision-As per Section 197(5), a director may receive remuneration by way of fee for attending meetings
of the Board or Committee or for any other purpose whatsoever as may be decided by the Board.
Where the article contain a provision identical with Article 61 (ii) of Table F, the directors may be paid
travelling, hotel or other expenses incurred by them in attending meetings of the board or any committee
thereof or general meetings of the company or in connection with the business of the company.
Facts-
Conclusion-
In view of above:
- Abhay can draw travelling allowance from one of the company only or from both the companies provided
amount does not exceed the expenses actually incurred.
- Abhay is entitled to sitting fee fully from both the companies.
❖ An article of association of a company has put a cap of ` 30,000 on sitting fee. There is a proposal to
increase the sitting fee from present amount of ` 30,000 to ` 75,000. Advise the company.
Ans.:
Provision- As per Section 197(5), a director may receive remuneration by way of fee for attending meetings
of the Board or Committee or for any other purpose whatsoever as may be decided by the Board.
Companies will have discretion to pay such amount by way of sitting fee as may be considered appropriate within
ceiling of Rule 4 of the Companies (Appointment & Remuneration of Managerial Personnel) Rules, 2014.
As per Rule 4, amount of sitting fee shall not exceed ` 1,00,000 per meeting.
Facts-
Conclusion-In given case since the article of the company has put a cap of ` 30,000, so article will be required
to be altered by passing special resolution.
❖ Mrs. Beautiful, aged 40 years, is the Managing Director of Beauty Care Products Ltd. She has
received contribution to superannuation fund and leave encashment during her tenure with the company
during the financial year ending 31st March, 2017. The Manager (Accounts) of the company is not
very confident, if these perquisites are to be included in the computation of ceiling on remuneration
specified in the Companies Act, 2013. Referring to the provisions of the Act, advice the Manager
(Accounts).
Ans.: As per Section IV of the Schedule V to the Companies Act, 2013, a managerial person shall be eligible
for the following perquisites which shall not be included in the computation of the ceiling on remuneration
specified in Section II and Section III:
(a) Contribution to provident fund, superannuation fund or annuity fund to the extent these either singly or
put together are not taxable under the Income Tax Act, 1961;
(b) Gratuity payable at a rate not exceeding half a month's salary for each completed year of service; and
(c) Encashment of leave at the end of the tenure.
Keeping in view of above provisions, 'contribution to superannuation fund' and 'leave encashment' received by
Mrs. Beautiful should not be included in the computation of ceiling on remuneration specified in the Companies
Act, 2013
❖ Mohan, who was appointed as additional director at the board meeting held on 15th June 2014
continues to be in his office on the ground that the AGM for the financial year 2013-2014 was not
held as required under the Act. Whether continuance of Mohan in the office is valid? Will your
answer be different if Mohan was also managing director for a period of five years with effect from
1st June 2014 at the same board meeting?
Ans.: As per Section 161(1), an additional director holds office up to the date of the next AGM or the last
date on which the AGM should have been held, whichever is earlier. Thus, Mohan would vacate the office of
director on the last day on which AGM ought to have been held.
Only director can be appointed as managing director. Since, Mohan vacates the office of director, the office
of managing director is also vacated irrespective of the fact that he was appointed as managing director for a
period of 5 years.
❖ Write a short note on: Appointment of person other than retiring director
X, who is not shareholder of company, sent a notice to the company of his candidature for the office of
director in the place of a retiring director at the ensuing annual general meeting of the company. The
same company received another notice from Y, a member, holding only one share signifying his intention to
propose the candidature of Z for the office of director in the place of retiring director. As a secretary
of the company, how will you deal with these notices? Can any member present at the meeting proposes
the aforesaid proposals for the consideration of the meeting? CS (Inter) - June 2000
Ans.: Right of persons other than retiring directors to stand for directorship [Section 160]: A person who
is not a retiring director shall be eligible for appointment to the office of a director at any general meeting.
Such person or some member intending to propose him as a director has to give a notice in writing at least 14
days before the meeting. A sum of X 1 lakh shall be deposited along with notice.
However, requirement of deposit of amount of` 1 lakh shall not apply in case of appointment of an independent
director or director recommended by the Nomination & Remuneration Committee.
Amount deposited will be refunded to such person or to the member, if the person proposed gets elected as a
director or gets more than 25% of total valid votes cast either on show of hands or on poll on such resolution.
Duty of the company to inform members: On receipt of notice as stated above, the company shall inform its
members about the candidature of the person proposed as a director in prescribed manner.
❖ A Public limited company has 10 directors as under.
Non-retiring directors 2
Directors liable to retire by rotation 4
Additional directors 4
State the number of directors retiring by rotation at the next annual general meeting and the number of
directors vacating office.CS (Inter) - June 2001 (4 Marks) 1
Ans.: As per Section 152(6) (a), unless the articles provide for the retirement of all directors at every
AGM, not less than 2/3rd of the total number of directors of a public company, shall retire by rotation. While
calculating 2/3rd any fraction is to be rounded off to next higher number.
As per Section 152(6) (c), at every subsequent AGM, l/3rd of rotational directors shall retire at every AGM. While
calculating l/3rd it has to be rounded up to nearest to l/3rd.
Of the 10 directors mentioned in problem 2 directors are non-retiring directors and are not liable to retire by rotation. The
position in regard to remaining director is as under:
(1) Four directors appointed as additional directors shall vacate the office at the AGM because additional directors hold
office till the next AGM or the last date on which the annual general meeting should have been held, whichever is earlier.
[Section 161]
(2) Of the 4 rotational directors l/3rd i.e. 4 x 1/3 = 1.33 j.e. 1 (rounded up to nearest) director will retire. Director who was
longest in office will retire. If all the four directors were appointed on same date then the decision shall be made by
mutual consent or by draw of lots.
Hence, total number of directors vacating the office is 5.
❖ Newly incorporated Abhay Ltd. has not mentioned names of first directors of the company in the
Articles of Association. Referring to the provisions of the Companies Act, 2013, advise the Board of
Directors regarding the appointment of first directors of the company. What would be your answer in
case the company is a One Person Company? Also state whether provisions of the Act are applicable to
a Private Ltd. Company. CS (Executive) - June 2017 (4 Marks)
Ans.: As per Section 152(1), where no provision is made in the articles of a company for the appointment of
the first director, the subscribers to the memorandum who are individuals shall be deemed to be the first
directors of the company until the directors are duly appointed.
In case of OPC an individual being member shall be deemed to be its first director until the director or
directors are duly appointed by the member as per provisions of this section.
Thus, subscribers of Abhay Ltd. who are individuals shall be deemed to be the first directors of the company
until the directors are duly appointed in general meeting.
Section 152(1) applies to all companies, whether public or private.
❖ Mr. Solid, a young professional of 29 years, has stayed in India for 150 days in the previous financial
year. He does not hold any shares in Happy Retails Ltd., which is a quoted (listed) company. Small
shareholders have decided amongst themselves that he is proposed to be appointed as small
shareholders director who shall not be liable to retire by rotation and his tenure shall be for 5 years
from the date of joining the office of director. Examining the provisions of the Companies Act, 2013,
state whether Mr. Solid can be so appointed as small shareholders director. CS (Executive) - June
2017 (4 Marks)
Ans.: As per Section 151, small Shareholder means a shareholder holding shares of nominal value of ` 20,000
or less or such other sum as may be prescribed.
A listed company may have one director elected by small shareholders in prescribed manner and with prescribed
terms and conditions.
As per Rule 7 of the Companies (Appointment & Qualification) Rules, 2014, the appointment of small
shareholders director shall be subject to the provisions of Section 152 except that -
(a) He shall not be liable to retire by rotation.
(b) His tenure shall not exceed a period of 3 consecutive years.
(c) On the expiry of the tenure, small shareholder director shall not be eligible for re-appointment.
Keeping in view of above provisions, Mr. Solid can be appointed as small shareholder director for 3 years and not
for 5 years.
❖ The Board of Directors of ABC Ltd., an unlisted company having a paid-up capital of ` 6 Crores
consisting of equity share capital of ` 5 Crores and preference share capital of ` 1 Crore and also
1,100 small shareholders holding equity shares seeks your advice on the following:
(i) It is necessary for the company to appoint a director to represent the 'Small Shareholders'?
(ii) In case the company decides to appoint such a director. The procedure to be followed by the company
for such appointment and the period for which such appointment can be made.
Advise explaining the relevant provisions of the Companies Act, 2013 and the Rules.
CA (Final) - May 2004 (6 Marks)
Ans.:
(i) The provisions of Section 151 read with Rule 7 of the Companies (Appointment & Qualification) Rules, 2014
relating to appointment of small shareholder director is applicable only to listed company. Thus, ABC Ltd. being
an unlisted company need not appoint small shareholder director.
(ii) However, even unlisted company by making provision in its article can appoint small shareholder director. (As
there is no prohibition under the Companies Act, 2013 that unlisted company should not appoint small
shareholder director)
The small shareholder director will be appointed by the small shareholder in accordance with the provisions of
the Article of such unlisted company.
❖ Divine Industries (Pvt.) Ltd. has a turnover of ` 350 Crore during the financial year 2016-2017. The
bankers of the company have advised the company to compulsorily appoint a woman director in the
company as required under the Companies Act, 2013. Referring to the provisions of the Act, examine
the validity of the banker's advice. What would be your answer in case the company in question is a
public limited company?CS (Executive) - Dec 2016 (4 Marks)
Ans.: As per Rule 3 of the Companies (Appointment & Qualification of Directors) Rule, 2014, the following
class of companies shall appoint at leas` 1 woman director-
(i) Every listed company
(ii) Every other public company having -
(iii) Paid-up share capital of ` 100 Crore or more or
(iv) Turnover of ` 300 Crore or more.
It is clarified that the paid-up share capital or turnover, as on the last date of latest audited financial
statements shall be taken into account.
Considering above provisions private limited companies are not required to appoint woman director irrespective
of its turnover. Thus, advice given by bankers to Divine Industries (Pvt.) Ltd. is not as per law.
If Divine Industries is public company then it has to appoint woman director.
❖ The Board of Directors of MNP Ltd. appointed Neha as a women director in the board meeting held on
10th September, 2014. The said appointment was made to fill the vacancy of the woman director,
which had occurred as a result of resignation of Sheela on 30th June, 2014. Will your answer differ if
the board meeting of the company was held on 8th November, 2014?
Ans.: As per Rule 3 of the Companies (Appointment & Qualification of Directors) Rule, 2014 any
intermittent vacancy of a woman director shall be filled up by the Board at the earliest but not later than
immediate next Board meeting or three months from the date of such vacancy, whichever is later.
As per the above provisions, the appointment of Neha is valid. The vacancy of a woman director of MNP Ltd.
which arose on 30th June 2014, due to the resignation of Ms. Sheela, should be filled up latest by 29th
September 2014 or the day of the next board meeting, whichever is later. Since, Neha was appointed in the
next board meeting after the vacancy arose, i.e. on 10th September 2014, her appointment is valid.
The answer will remain the same, even if MNP Ltd. appoints Neha in the board meeting held on 8th November
2014, provided the said meeting is the first meeting of the Board after 30th June 2014 i.e. after the
resignation of Sheela.
❖ Mr. Ramanthan is a Director of Fraudulent Ltd., Honest Ltd. and Regular Ltd. For the financial year
ended on 31.3.2014 two irregularities were discovered against fraudulent Ltd. For the financial year
ended on 31.3.2014 Fraudulent Ltd. did not file its annual accounts for the year ended 31.3.2014 and
failed to pay interest on loans taken from a financial institution for the las` 3 years.
On 1.6.2015 Mr. Ramanthan is proposed to be appointed as additional director of Goodwill Ltd., which
company has sought a declaration from Mr. Ramanthan and he also submitted the declaration stating that
the disqualification specified in Section 164 of the Companies Act, 2013 is not attracted in his case.
Decide under the provisions of the Companies Act, 2013:
(i) Whether the declaration submitted by Mr. Ramanthan to Goodwill Ltd. is in order?
(ii) Whether Mr. Ramanthan can continue as a Director in Honest Ltd. and Regular Ltd.?
Ans.: The given problem is discussed as under:
(i) As per Section 164(2), a person who is or has been a director of a company shall not be eligible to be re-
appointed as a director of that company or appointed in other company for a period of 5 years which has not
filed financial statements or annual returns for any continuous period of 3 financial years. As per the facts given
in case, failure to file annual accounts has not been for 3 continues years and therefore Mr. Ramanthan is not
disqualified for his directorship and can be appointed as director in Goodwill Ltd.
The declaration submitted by Mr. Ramanthan to Goodwill Ltd. is in order and valid.
Failure to pay interest on loans taken from a financial institution is not covered in Section 164, since defaults
specified in 164 covers default of repayment of 'public deposit', 'interest on public deposit' and 'non-filing of
annual accounts or annual returns' and not non-payment of 'loan' or 'interest on loan' obtained from financial
institution.
(ii) Since Mr. Ramanthan is not disqualified under Section 164, he is not required to vacate his office of
directorship in any company as per Section 167(l)(a).
❖ Nalin is a director of ABC Ltd. which has failed to repay matured deposit from 1st April, 2014 onwards
and the default continues. But ABC Ltd. is regular in filing annual accounts and annual returns. Nalin is
also director of PQR Ltd. and XYZ Ltd.
Answer the following question with reference to the relevant provisions of the Companies Act, 2013:
(i) Whether Nalin is disqualified and if so, whether he is required to vacate his office of director in PQR
Ltd. and of ABC Ltd. by resignation on 1st March 2015? CA (Final) - May 2002 (6 Marks)
Ans.: XYZ Ltd.?
(ii) Is it possible for the board of director of DEF Ltd. to appoint Nalin as an additional director at the
board meeting to be held on 15th May 2015? Would your answer be different if Nalin ceased to be
director As per Section 164(2), a person who is or has been a director of a company shall not be eligible to be
re-appointed as a director of that company or appointed in other company for a period of 5 years which has
failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date
or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for 1 year
or more.
In the given case ABC Ltd. has failed to repay its deposits on the due date i.e. 1.4.2014 and such default
continues for more than 1 year i.e. beyond 31.3.2015. Therefore -
- Nalin shall not be eligible to appointed as director in any other company after 31.3.2015 for a period of 5
years. Thus, DEF Ltd. cannot appoint Nalin as an additional director on 15.5.2015.
- As per Section 167(l)(a), due disqualification under Section 164, Nairn's office of director in ABC Ltd, PQR
Ltd. & XYZ Ltd. shall become vacant on the expiry of 31.3.2015.
If Nalin had ceased to be director of ABC Ltd. by resignation on 1.3.2015, he would have escaped the
disqualification specified in Section 164(2) and thus, DEF Ltd. could appoint Nalin as an additional director on
15.5.2015.
❖ State with reference to the relevant provisions of the Companies Act, 2013 whether the following
persons can be appointed as a director of a public company:
(i) Mr. A, who has huge personal liabilities far in excess of his assets and properties, has applied to the
Court for adjudicating him as an insolvent and such application is pending.
(ii) Mr. B, who was caught red-handed in a shop lifting case 2 years ago, was convicted by a Court and
sentenced to imprisonment for a period of 8 weeks.
(iii)Mr. C, former bank executive, was convicted by a Cour` 8 years ago for embezzlement of funds and
sentenced to imprisonment for a period of 1 year.
(iv)Mr. D is a director of DLT Ltd., which has not filed its annual returns pertaining to the annual general
meetings held in the calendar years 2014, 2015 and 2016. CA (Final) - May 2004 (8 Marks)
Ans.: The given problem is discussed as under:
(i) As per Section 164(1) (iii), if any person has applied to be adjudicated as an insolvent and his application is
pending, he is disqualified to be appointed as director. Since, Mr. A has himself applied to the Court for
adjudicating himself as an insolvent, he is disqualified to be appointed as director, even if his application is
pending.
(ii) As per Section 164(1) (iv), if any person has been convicted by a Court of any offence, whether involving
moral turpitude or otherwise, and sentenced to imprisonment for 6 months or more, he is disqualified to be
appointed as director. In the present case Mr. B was caught red-handed in a shop lifting case and was sentenced
to imprisonment for a period of 8 weeks i.e. less than 6 months, he is not disqualified and can be appointed as
director.
director.
(iii)As per Section 164(l)(iv), if any person has been convicted by a Court of any offence, whether involving
moral turpitude or otherwise, and sentenced to imprisonment for 6 months or more, he is disqualified to be
appointed as director for nex` 5 years from the date of expiry of the sentence. Since, more than 5 years has
been elapsed form the date of expiry of the sentence, Mr. C can be appointed as a director.
(iv)As per Section 164(2); a person who is or has been a director of a company shall not be eligible to be re-
appointed as a director of that company or appointed in other company for a period of 5 years which has not
filed financial statements or annual returns for any continuous period of 3 financial years. Since, Mr. D has not
filed annual returns for continuous period of 3 financial years; he is disqualified to be appointed as director for
nex` 5 years.
❖ The minutes of 24th Annual General Meeting of Poly Bank Ltd. are to be signed by the chairman.
However, the chairman of Poly Bank Ltd. met with an acciden` 2 days after the AGM was held.
Minutes of AGM are, therefore, pending for signatures. Advise the company secretary of Poly Bank
Ltd. about the procedure for signing of minutes in such a case as if the chairman has become
permanently in capable of signing. Will your answer be different if chairman suffers only minor injury
and gets back to his office in one week?CS (Executive) - Dec 2017 (4 Marks)
Ans.: Rule 25 of the Companies (Administration & Management) Rules, 2014 contains the following provisions
with regards to signing of minutes of meetings.
Each page of every such book shall be initialled or signed and the last page of the record of proceedings of each
meeting or each report in such books shall be dated and signed by:
♦ In the case of minutes of proceedings of a meeting of the Board or of a committee thereof, by the chairman
of the said meeting or the chairman of the next succeeding meeting;
♦ In the case of minutes of proceedings of a general meeting, by the chairman of the same meeting within the
aforesaid period of 30 days or in the event of the death or inability of that chairman within that period, by a
director duly authorized by the Board for the purpose;
♦ In case of every resolution passed by postal ballot, by the chairman of the Board within the aforesaid period
of 30 days or in the event of there being no chairman of the Board or the death or inability of that chairman
within that period, by a director duly authorized by the Board for the purpose.
The Chairman of the Poly Bank Ltd. met with acciden` 2 days after the AGM and become permanently in capable
of signing.
Thus as per above provisions, in such case minutes of the AGM will be signed by the director duly authorized by
the Board for the purpose.
However, if the Chairman of the Poly Bank Ltd. suffers only minor injury and gets back to office in one week
the minutes of the AGM has to be signed by the Chairman of the AGM within the period of 30 days from the
date of AGM
❖ A company has 120 members. It sends notice of general meeting to all of them. 20
members did not attend the meeting. Out of remaining 100 members who were present, 20
members abstained from voting. Advice the company, how many members should vote in
favour of a resolution, if it has to be passed as a special resolution? CS (Executive) - Dec
2017 (4 Marks)
Ans.: As per Section 114, a resolution shall be a special resolution when:
(a) The intention to propose the resolution as a special resolution has been duly specified in the notice calling
the general meeting or other intimation given to the members of the resolution.
(b) The notice required under the Act has been duly given and
(c) The votes cast in favour of the resolution, are required to be not less than 3 times the number of the votes,
if any, cast against the resolution.
As per the facts given in case, a company has total 120 members. 20 members did not attend the meeting. Out
of reaming 100 members, 20 members abstained from voting.
Total number of members voting is 80. Thus, in order to pass special resolution company needs 60 or more votes
in favour of resolution.
❖ For a special resolution in a company general meeting, 9 voted in favour, 2 against and 4 abstained.
The chairman declared the resolution as passed. Is it a valid resolution?
CS (Inter) - June 2001 (4 Marks), Dec 2007 (4 Marks)
Ans.: As per Section 114, while passing a special resolution, the votes cast in favour of the resolution should
be at leas` 3 times of the vote cast against the resolution.
Thus, in terms of the requisite majority, votes cast in favour have to be compared with votes cast against the
resolution. Accordingly, in the given problem, the votes cast in favour (9) being more than 3 times of the votes
cast against (2), the resolution is validly passed as special resolution.
❖ At a General meeting of a company, a matter was to be passed by a special resolution. Out of 40
members present, 20 voted in favour of the resolution, 5 voted against it and 5 votes were found
invalid. The remaining 10 members abstained from voting. The Chairman of the meeting declared the
resolution as passed. CS (Executive) - Dec 2016 (4 Marks)
Ans.: As per Section 114, while passing a special resolution, the votes cast in favour of the resolution should
be at leas` 3 times of the vote cast against the resolution.
Thus, in terms of the requisite majority, votes cast in favour have to be compared with votes cast against the
resolution. Accordingly, in the given problem, the votes cast in favour (20) being more than 3 times of the
votes cast against (5), the decision of the Chairman is in order
] Robert, a member of MLM Ltd. submitted his proxy to the company before the scheduled time of the
Annual General Meeting. The Articles of the company provided that proxy can be submitted to the
company 70 hours before the scheduled time of the meeting. The chairman of the company rejects the
proxy on the ground that it is in violation of the Articles. Referring to the provisions of the Companies
Act, examine the validity of the chairman's decision to reject the proxy.
Ans.: As per Section 105, the instrument appointing the proxy must be deposited with the company, 48
hours before the meeting. Any provision contained in the articles, requiring a longer period than 48 hours shall
have effect as if a period of 48 hours had been specified.
As per facts given in case, the Article of MLM Ltd. provided in its article that proxy can be submitted to the
company 70 hours before the scheduled time of the meeting. Such provision is not valid.
As per Section 105 all the proxy form presented before 48 hours of the meeting are valid and must be
accepted by the company. Thus, Chairman's decision to reject the proxy form on the ground that it is not
submitted before 70 hours before the scheduled time of the meeting is not valid.
❖ A was appointed as proxy by B to attend an AGM of XYZ Ltd. Later, B lodged another proxy
appointing C to attend the same AGM. A & C both intend to attend the AGM. Decide.
Abhijeet is a shareholder of Kutumb Ltd. on receipt of notice of an AGM to be held on 28th September
2014, Abhijeet issued a proxy in favour of Baljeet on 25th September 2014. Abhijeet again issued
another proxy in favour of Charanjeet on 26th September 2014. Both Baljeet and Charanjeet attended
the meeting on 28th September 2014. Decide who is entitled to vote on a poll. CS (Inter) - Dec 2005
(4 Marks)
Ans.: Every member of a company having share capital has a right to appoint a proxy to attend and vote at a
general meeting on his behalf. A member can appoint one or more proxies to vote in respect of the different
shares held by him or he may appoint one or more proxies in the alternative, so that if the first named proxy
fails to vote, the second one may do so, and so on.
When one person appoints two or more proxies, following rule will apply:
♦ Where two proxy instruments have been lodged in respect of same shares before the expiry of the time
for lodging the proxies, the second in time will be entertained.
♦ Where one is lodged before and other after the expiry of the time for lodging proxy, the former will be
accepted.
In present case, both the proxies were lodged in time, the second proxy i.e. C will be entertained.
❖ The Articles of Association of X Ltd. require the personal presence of 7 members to constitute quorum of
general meetings. The following persons were present in the extra ordinary general meeting to consider the
appointment of Managing Director:
- A, the representative of Governor of Madhya Pradesh.
- B & C, shareholders of preference shares
- D, representing Y Ltd. & Z Ltd.
- E, F, G & H as proxies of shareholders
Can it be said that the quorum was present in the meeting?
Ans.: For the purpose of quorum, only those members are counted who are entitled to vote on resolution proposed to be
passed in the meeting.
Only members present in person and not by proxy are to be counted.
As per Sections 112 & 113, representative of President or Governor and representative of company are deemed to be a member present
in person and counted for the purpose of quorum.
Where two or more companies which are members of another company, appoint a single person as their representative then each such
company will be counted as quorum at a meeting of the latter company.
As per Section 47(2), preference shareholders have voting rights only in respect of resolutions which directly affect the rights attached
to his preference shares.
In view of the above there are only three members are personally present.
'A' will be included for the purpose of quorum. B & C have to be excluded for the purpose of quorum because they represent the preference
shares and since the agenda being the appointment of Managing Director, their rights cannot be said to be directly affected and therefore,
they shall not have voting rights. D will have two votes for the purpose of quorum as he represents two companies Y Ltd. and Z Ltd. E, F, G
and H are not to be included as they are not members but representing as proxies for the members.
❖ Innovative Energies Limited has 2,505 members as on the date of the company's extraordinary general
meeting. The Executive Director, Mr. Avinash has asked you, the Secretary of the Company, what is
the required quorum for the meeting. Referring to the provisions of the Companies Act, 2013, inform
the Executive Director, Mr. Avinash, the quorum that must be present for holding the Extra-Ordinary
General Meeting of the company. State whether the required quorum must be present throughout the
meeting. CS (Executive) - June 2017 (4 Marks)
Ans.: Quorum refers to the minimum number of members required to constitute a valid meeting.
As per Section 103, in case of public companies, unless the articles of the company provide for a larger number, following
shall be the quorum for a meeting of the company -
♦ 5 members personally present if the number of members as on the date of meeting is not more than
1,000
♦ 15 members personally present if the number of members as on the date of meeting is more than 1,000 but up to 5,000
♦ 30 members personally present if the number of members as on the date of the meeting exceeds 5,000.
Innovative Energies Limited has 2,505 members. Thus, in its extra-ordinary general meeting 15 members must be present
personally in order constitute valid quorum.
Companies Act, 2013 is silent about the situation when quorum is available at the beginning of meeting but
quorum is reduced in the middle of the meeting.
In Hartely Baird In re (1955) Ch 143, it was held that it is sufficient if the quorum is present at the beginning
of the meeting and it not necessary that quorum should present throughout the meeting.
❖ XYZ Ltd. a public company dealing in cosmetic products having 4,750 members has scheduled its 25th
annual general meeting on 18th July 2015 at 11 a.m. On the appointed at 11.35 a.m. only 17 persons
are present out of which 3 persons are proxies. Comment.
Ans.: As per Section 103, quorum is required to be present within 30 minutes from the time appointed for
holding a meeting of the company.
In case of public company, if number of members as on the date of meeting is more than 1,000 but up to 5,000,
then 15 members personally present or higher number stated in Article will be the quorum.
As per facts stated in problem, only 14 members are personally present even after half-an-hour from the time
appointed for holding a meeting, hence meeting will be adjourned.
In case of an adjournment of meeting, the company shall give not less than 3 days notice to the members either
individually or by publishing an advertisement in the newspapers one in English and one in vernacular language
which is in circulation at the place where the registered office of the company is situated.
❖ Articles of association of a company reserved the powers for calling the annual general meeting. The
Managing Director of the company, without reference to the Board, called an annual general meeting.
Is the annual general meeting validly called? If not, what should be done to make it valid? Discuss with
reference to case law, if any.CS (Executive) - June 2009 (5 Marks)
Pioneers Ltd. convened a Board meeting on 1st September, 2013. During the course of meeting, the date
of next AGM was discussed but no decision was taken. However, the Company Secretary issued the notice
for AGM without any specific authorization from the Board of directors. Decide the validity of notice of
AGM.
CS (Executive) - June 2013 (4 Marks), Dec 2014 (5 Marks)
Ans.: The annual general meeting of a company can be called by a proper authority i.e. board of directors in
case of company. However, the board of director can delegate the authority to call general meeting to the
company secretary. In such case meeting called by company secretary as per the direction of the board will be
valid meeting.
However, it was held that, where a secretary or other officer issued notice calling a general meeting but he had
no power to do so under the AO A of the company, the notices were null & void and meeting held pursuant
thereto was also null & void. [Al-Amin Seatrans Ltd. v. Owners and Party Interested in Vessel M.V. 'Loyal Bird'
(1996) 1 Comp. LJ 258 (Cal.)]
❖ 40 out of 100 members of a company submitted a requisition for holding of an extraordinary general
meeting in order to remove the managing director from the office. On the failure of the company to
call the meeting, the requisitionists themselves called the meeting at the registered office of the
company. On the appointed date, they could not hold the meeting at the registered office, as it was
kept under lock and key by the managing director himself. The members held the meeting elsewhere
and adopted a resolution removing the managing director from office. Is the resolution valid? Give
reason. '
Ans.: Section 100 contains provisions regarding holding of EGM. It provides that if directors fail to call a
properly requisitioned meeting, the requisitionists as represent not less than l/10th of the total voting rights
may call a meeting to be held on a date fixed within 3 months of the date of the requisition.
Where a meeting is called by the requisitionists and the registered office is not made available to them, it was
held that the meeting may be held anywhere else. Further, resolutions properly passed at such a meeting, are
binding on the company. [R. Chettiar v. M. Chettiar]
Thus, in the given case, since all the above mentioned provisions are duly complied with. Hence, the meeting with
the resolution removing the managing director shall be valid.
❖ There are seven shareholders in a private limited company having registered office in Chennai. Six
shareholders are French nationals and belong to the same family holding an aggregate of 95% voting
rights. These shareholders are unable to come down to Chennai and wish to hold the company's annual
general meeting in Paris. Advise whether the meeting can be held in Paris.
Ans.: As per Section 96(2), an AGM can be held at the registered office of the company or at some other
place Within the city, town or village in which the registered office of the company is situate.
The Central Government is empowered to exempt any company from these provisions, subject to such conditions
as it may impose.
Thus, private company can held AGM outside India if it applies to the Central Government for relaxation of
provisions of Section 96 of the Companies Act, 2013.
❖ Accounting year of Devdatta Ltd. ends on 30th June, 2014. It is required to hold an AGM by 31st
December, 2014. Due to some reason, the AGM could not be held in December, 2014. On an
application, the ROC granted permission to hold the meeting in February, 2015. The AGM was duly held
in February, 2015. Has the company complied with the requirements of holding AGM every year? Will it
amount to contravention of the provisions of Section 96?
CS (Inter) - Dec 2004 (5 Marks), June 2007 (5 Marks) CS (Executive) - Dec 2011 (4 Marks)
Ans.: As per Section 96, every company, other than OPC is required to hold an AGM every year. The AGM
should be held on the earliest of the following dates:
(1) 15 months frdm date of the last AGM
(2) The last day of the calendar year
(3) 6 months from the close of the financial year.
In the event of any difficulty in holding an AGM the ROC may grant an extension of time for any special reason
by 3 months. In such situation if company doesn't hold AGM in particular year, it will not be treated that
company has contravened Section 96.
Thus, due to extension granted by ROC, if Devdatta Ltd. do not hold meeting in calendar year 2014, it will not
amount to contravention of Section 96.
❖ Every Company must hold annual general meeting in every calendar year.
CS (Inter) - Dec 2000 (8 Marks), Dec 2006 (5 Marks) CS (Executive) - June 2014 (5 Marks)
❖ The gap between two AGM can never exceed 15 months.
Ans.: Annual general meeting (AGM) is an important annual event where members get an opportunity to
discuss the activities of the company.
Annual General Meeting [Section 96(1)]: Every company, other than OPC is required to hold an AGM
every year. Following are the key provisions regarding the holding of an AGM:
Holding of AGM:
1. Annual general meeting should be held once every year.
2. First AGM of the company should be held within 9 months from the closing of the first financial year.
Hence, it shall not be necessary for the company to hold any AGM in the year of its incorporation.
3. Subsequent AGM should be held within 6 months from the closing of the financial year.
4. The gap between two AGM should not exceed 15 months.
❖ Mr. Sunil Goyal, a director of XYZ Limited wants to go on foreign trip. He wants to assign his office
to the Vice President of the company. Mr. Sunil Goyal seeks your advice whether he can do so.
Referring to the provisions of the Companies Act, 2013 advise him in the matter.
Ans.: As per Section 166(6), a director of a company shall not assign his office and any assignment so made
shall be void. Thus, Mr. Sunil Goyal, a director of XYZ Ltd. cannot assign his office to Vice President of the
company.
❖ A whole-time director of a company made an invention during the course of his employment with the
company. He patented the invention in his own name and appropriated the benefits to himself. Can he
do so? Cite case law, if any.CS (Executive) - June 2009 (5 Marks)
Ans.: The directors are liable to the company for all personal profits or gain made by them taking advantage of
their position as directors.
A director was held liable when a director patented and exploited in his own name an invention made during the
course of his employment with the company. [Cranleigh Precision Engineering Ltd. v. Bryan, (1964) All ER 289]
❖ Barkha Ltd. has 4 directors on its Board. A Board meeting was convened which was attended by only 2
directors, where Rekha was appointed as an additional director. Rekha is related to both the directors.
Referring to the provisions of the Companies Act, 2013, examine the validity of the appointment.
Ans.: The appointment as an additional director of a person who is related to a director has been held not to
violate the requirement of Section 184 because such appointment does not constitute any "contract or
arrangement" of the company with the sitting director [Shailesh Harilal Shah v. Matushree Textiles Ltd., (1994)
2 Comp LJ 291 at 301: AIR 1994 Bom 20],
The director in question was not accordingly disentitled from participation and voting at a meeting of the Board.
❖ Director of ABC Ltd. are not holding any shares in MDJ Ltd. Similarly directors of MDJ Ltd. are not
holding any shares in ABC Ltd. But, wife of director 'A' of ABC Ltd. holds 40% paid up capital of MDJ
Ltd. Board of directors of ABC Ltd. entered into a contract with MDJ Ltd for purchase of goods and
director 'A' did not disclose his indirect interest in MDJ Ltd. Examine whether 'A' has violated any
provisions of the Companies Act, 2013 and also the validity of the contract.
CA (Final) - Nov 1996 (4 Marks)
Ans.: As per Section 184 (2), every director shall disclose the nature of his concern or interest at the
meeting of the Board and shall not participate in meeting in which is directly or indirectly, concerned or
interested in a contract or arrangement or proposed contract or arrangement.
As per fact's given in case, ‘A’ is required to disclose his interest since he is indirectly interested in a contract,
as his wife hold 40% paid up capital of MDJ Ltd.
Consequences of failure to disclose his interest are as follows:
(1) ‘A’ shall vacate the office of director [Section 167]
(2) The contract shall be voidable at the option of ABC Ltd. [Section 184(3)]
(3) He shall be punishable -
- with imprisonment for a term which may extend to 1 year or
- with fine which shall not be less than ` 50,000 but which may extend to ` 1,00,000 or
- with both. [Section 184(4)]
❖ X Ltd. entered into contract with M Ltd. for purchase of raw material of ` 2,50,000 at the
prevailing market price. The director of X Ltd., Mr. B, was holding shares of the value of 1% of the
paid up capital of M Ltd. Another director of X Ltd., Mr. C was holding 1.5% paid up capital of M
Ltd. Mr. B has already given general notice to X Ltd. that he was interested in M Ltd. Comment.
Ans.: As per Section 184(2), every director of a company who is in any way, whether directly or indirectly,
concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or
to be entered into with a body corporate in which director or director with any other director, holds more
than 2% shareholding of that body corporate shall disclose the nature of his concern or interest at the
meeting of the Board in which the contract or arrangement is discussed and shall not participate in such
meeting.
In the present case, the aggregate shareholding of Mr. B and Mr. C is more than 2% of the paid up share
capital of M Ltd. and thus Section 184(2) is attracted. Hence, Mr. B and Mr. C both are required to disclose
the nature of their interest i.e. their shareholding in M Ltd. in the Board meeting of X Ltd. in which the
contract or arrangement between X Ltd. and M Ltd. is first discussed.
The general notice given by Mr. B in terms of Section 184(1) is sufficient as requirement of Section 184(2)
are independent of Section 184(1). Thus by non disclosure both Mr. B and Mr. C has contravened Section
184(2).
Consequences of failure to disclose his interest are as follows:
(1) Both Mr. B and Mr. C shall vacate the office of director [Section 167]
(2) The contract shall be voidable at the option of X Ltd. [Section 184(3)]
(3) Both Mr. B and Mr. C shall be punishable -
- with imprisonment for a term which may extend to 1 year or
- with fine which shall not be less than ` 50,000 but which may extend to ` 1,00,000 or
- with both. [Section 184(4)]
❖ Mr. G, a Director of Sam Ltd. was interested in a contract to be entered into by the company. The
Articles of Association of Sam Ltd. contained a clause, which prohibited the directors from voting on
the resolution in respect of any contract in which he is interested. The matter in respect of the said
contract was put up for approval of the shareholders in a general meeting. The general meeting was attended by
Mr. G and he also voted on the resolution. Mr. G, claims that he has a right to vote on the resolution in the
general meeting.
Ans.: When a director exercises his voting right as a shareholder, he is free to vote in his own best interests like any other
shareholder. An article in the articles of association prohibiting a director from voting on a resolution in respect of a contract
in which he is interested does not debar him from voting thereon as a shareholder in a general meeting. [East Pant Du United
Lead Mining Co. Ltd. v. Merry Weather (13 WR 216)]
A shareholder may vote as he pleases even when his interests are different from or opposed to those of the
company. Shareholders are not trustees for the company or for one another. The restriction in the article pertaining to voting
applies only to the board meetings and not to the general meetings.
In view of the above legal pronouncements, there cannot be any restriction on the voting right of a director in a general
meeting where he is voting as a shareholder. Hence, the contention of Mr. G is correct.

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FOR SUMMARY BOOK OF CLAW, SLAW, EBCL KINDLY MSG/CALL ON -7972982563

♦ Bonus issue is authorized by its articles.

Meaning Letter of allotment is a letter by When a company issue right shares

Option Letter of allotment do not contain any Letter of renunciation contains an

Surrender Letter of allotment is required to be Letter of renunciation is not

Consideratio Company does not receive any Company receives consideration as

Authorizatio Bonus issue is made on the In case of right issue authorization

Section It is governed by Section 63 of the It is governed by Section 62 of the

• Write a short note on: Split Certificate

(2) DP intimates Depository (NSDL or CDSL) of such request electronically.

(6) Share Transfer Agent dispatches certificates to holder thereof.

(7) The DP also sends intimation about rematerialization to its client.

(2) By agreeing in writing to become a member:

♦ By making an application for allotment of shares or

CS (Executive) - June 2017 (4 Marks)

From CHG-2 Issue of certificate of registration of charge by ROC.

From CHG-3 Issue of certificate of registration of modification of charge by ROC.

From CHG-4 Intimation to ROC for satisfaction of charge.

From CHG-5 Certificate of registration of satisfaction of charge.

From CHG-6 Notice of appointment or cessation of a receiver by company to ROC.

From CHG-7 Register of charges to be kept by company.

From CHG-9 Registration of charge creating or modifying for debentures including

CS (Executive) - June 2015 (4 Marks)

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