3 .

0 R
AW I L E
L MP
CE S
UR
SO

O
RE
CAI

C
A LL I
FOR
TI ON S
L U WARD
S O 2 ON
P 202
E S TO MA
Y
ON 021
&
C 2
W ) DE
L (NE
FINA
CA

MAIN HIGHLIGHTS
✅ Full Coverage of ICAI Study Mat
✅ Chapterwise & Attempt Wise Questions
✅ Includes New Illustrations
✅ All Past Papers
✅ All MTPs & RTPs (inc. Nov 2021 RTP)
✅ Includes Integrated Case Scenarios
CA RAVI AGARWAL For other userful resources Join our Telegram Channel
www.caraviagarwal.com
https: //t.me/caraviagarwaloriginal
+91-8334866117
 CA FINAL LAW (NEW)
COMPILER 3.0

CHAPTER

01 Appointment and Qualifications of Directors 01

CHAPTER

02 Appointment and remuneration of Managerial Personnel 53

CHAPTER

03 Meetings of Board and its Powers 85

CHAPTER

04 Inspection, inquiry and Investigation 135

CHAPTER

05 Compromises, Arrangements and Amalgamations 159

CHAPTER

06 Prevention of Oppression and Mismanagement 181

CHAPTER

07 Winding Up 203

CHAPTER

08 Companies incorporated outside India 220

CHAPTER

09 Miscellaneous Provisions 243

CHAPTER

10 Compounding of offences, Adjudication, Special Courts 265

CHAPTER

11 National Company Law Tribunal and Appellate Tribunal 286

CHAPTER Corporate Secretarial Practice

12 Drafting of Notices, Resolutions, Minutes and Reports 294

CHAPTER
The Securities Exchange Board of India Act, 1992 and SEBI (Listing
13 Obligations and Disclosure Requirement) Regulations, 2015 311

CHAPTER

14 The Foreign Exchange Management Act, 1999 347

 CA FINAL LAW (NEW)
COMPILER 3.0

CHAPTER

15 The Prevention of Money Laundering Act, 2002 374

CHAPTER

16 The Foreign Contribution Regulation Act, 2010 405

CHAPTER

17 The Arbitration and Conciliation Act, 1996 423

CHAPTER

18 The Insolvency and Bankruptcy Code, 2016 440

CHAPTER

# STATUTORY UPDATE FOR DECEMBER 2021 EXAMINATION 484

FOR MCQs & CASE SCENARIO

BASED QUESTIONS REFER AUDIT
ONE STOP MCQ COMPILATION BY
CA RAVI AGARWAL
Get your copy now...!
Whatsapp 8334866117
or visit www.caraviagarwal.com

DISCLAIMER
This work of compilation done by CA Ravi Agarwal and Team
is solely for fulfilling the motive of benefitting the students.
ALL THE QUESTIONS AND THEIR ANSWERS ARE TAKEN
FROM MATERIAL ISSUED BY THE INSTITUTE OF
CHARTERED ACCOUNTANTS OF INDIA (ICAI) AND WE DO
NOT CLAIM ANY COPYRIGHTS OR ANY SORT OF RIGHTS
OVER THE CONTENT IN THIS MATERIAL.
 CA FINAL LAW (NEW)
COMPILER 3.0

NOTE FOR STUDENTS

All the questions and its Answers are taken from the latest
material available on Institute Website as on JULY 2021. Any
further updates / amendments / changes in syllabus or provisions
or concepts are to be incorporated by the students timely as
issued by ICAI. We will try our level best to cover
up such changes in the future version of this material, but it is
advisable for the students to do it on their own to save time.

We welcome your feedback in the form or suggestions or

reporting of errors if any in this file. If you wish to communicate
with us then please mail us visit www.caraviagarwal.com and use
the Contact Us section and fill up the form for the same.
 CA FINAL LAW (NEW)
COMPILER 3.0

Star Performers of CA Ravi Agarwal’s Mentoring Program

CA BIshal Timsina (AIR 1) CA Shruti PS (AIR 9) CA Pratima Garg (AIR42) CA Monika Aggarwal (AIR44)

JOIN THE MENTORING PROGRAM BY CA RAVI AGARWAL TO

CRACK YOUR CA EXAMS IN ONE ATTEMPT

JOIN CA RAVI AGARWAL’s ORIGINAL TELEGRAM CHANNEL.

GET ACCESS TO FREE NOTES, RESOURCES, DAILY MOTIVATION

AND LATEST UPDATES.

https://t.me/caraviagarwaloriginal

SUBSCRIBE TO “MISSION CA WITH CA RAVI AGARWAL”

YOUTUBE CHANNEL FOR MOTIVATIONAL VIDEOS AND LATEST
UPDATES REGARDING CA COURSE.

DON’T MISS A VIDEO ANYMORE. SUBSCRIBE NOW AND HIT THE

BELL ICON TO GET NOTIFICATIONS ON LATEST VIDEOS.

https://www.youtube.com/channel/UCjY29w0YPP3nlKoeb43mY-A
 1 Appointment and Qualification of Directors

ATTEMPTS
MAY NOV MAY NOV NOV JAN JULY NOV
COVERAGE
2018 2018 2019 2019 2020 2021 2021 2021

STUDY Q.- 31, 38 to 53

MAT

Q-32,
PAST Q-20, Q-24, NO
Q-16, 17 33, 34, Q-59 ------
EXAMS 21, 27 25, 26 QUES
35

Q-1, 5,
Q-12, 6, 7, 8, Q-2, 36, Q-56,
MTP Q-18, 19 Q-55 ------
13, 14 9, 10, 37 57, 58
28, 29

Q-2, 3,
RTP Q-15 Q-22, 23 Q-11, 31 Q-54, 55 Q-60 Q-61, 62
4, 30

Multiple Choice Questions

Page No. 1
1.MTP Mar 2019

Srishakti Homecare Limited, incorporated on 30th October, 2018, has ten subscribers to the
Memorandum out of which two are private limited companies and remaining individuals. However,
there is no mention in any of the documents as to who shall be the first directors. Advise the
company regarding the appointment of first directors who shall manage the affairs of the company.

(a) All the subscribers to the Memorandum shall be deemed to be the first directors.
(b) The two private limited companies being subscribers to the Memorandum shall decide as to
who shall be the first directors.
(c) All the individual subscribers to the Memorandum shall be deemed to be the first directors.
(d) As the company requires minimum three directors, the eight individual subscribers shall
choose two from among themselves and one shall be chosen by the two private limited
companies from among themselves.

Answer: Option C

2.May 2019 RTP, (MTP-NOV 2019)

All the three directors of Cygnus Wires Limited generally remain out of India for developing
connections and securing business opportunities on behalf of the company. However, the company
must strictly follow the legal requirement that at least one of its directors must stay for the specified
statutory period in India. To reckon as ‘resident director’ for the financial year 2018-19, advise the
company as to which period spent in India shall count towards statutory period.

(a) Period spent in India during the previous financial year 2017-18.
(b) Total of fifty percent each of the period spent in India during the financial year 2016- 17 and
2017-18.
(c) Period spent in India during the financial year 2018-19.
(d) Total of fifty percent each of the period spent in India during the financial year 2017 - 18 and
2018-19.
Answer: Option C

3.May 2019 RTP

Mr. Roop was appointed as an Additional Director of XYZ Limited in July, 2018. Immediately after his
appointment, on behalf of the Company he entered into an agreement with NY Private Limited for
supplies of raw material. In the ensuing meeting, he was regularized as a Director. He signed Contract
with Laxmi vendors. At the end of the December 2018, management came to know that his
appointment was not valid as he was disqualified to act as a Director of any Company. He signed one
more agreement in January 2019 with Saraswati vendors. In such scenario, what will be the status of
contract/agreements he signed on behalf of XYZ Limited?

(a) All agreement/ contracts will become invalid;

(b) All agreement/ contracts will be valid;
Page No. 2
(c) All agreement/ contracts before December 2018 will be valid;
(d) All agreement/ contracts before December 2018 will be invalid.
Answer : Option C

4.RTP May 2019

Mr. Nagar a director, decided to resign from MGT Private Limited due to preoccupation. He sent his
resignation letter dated 12th June, 2018 to the Company stating that he will resign w.e.f. 15th June,
2018. Due to non receipt of any communication from the Company he dropped a mail on 17th June,
2018, to confirm whether Company has received his letter. Finally Company received his letter on 25th
June, 2018. In this case, from which date his resignation will be effective?

(a) 12th June, 2018

(b) 15th June, 2018

(c) 17th June, 2018

(d) 25th June, 2018

Answer: Option D

5.MTP April 2019

Mr. Jigar is a director of PQR Ltd., which had accepted deposits from public. The Financial position of
PQR Ltd. declined which resulted in failure to repay the deposits. It became due for payment on
10th April, 2017 and such repayment has not been made till 5th May, 2018. Another company JKL Ltd.
wants to appoint the said Mr. Jigar as its director at its annual general meeting to be held on 6 th
August, 2018. State the correct statement as to the appointment of Mr. Jigar as a director of JKL Ltd.

a) Mr. Jigar can be appointed in JKL Ltd. as it is other than the defaulted company
b) Mr. Jigar cannot be appointed at all in JKL Ltd. or any other company.
c) Mr. Jigar will not be eligible to be appointed as a director of JKL Ltd. on the scheduled AGM but
may be after expiry of five years from the date of default.
d) Mr. Jigar will not be appointed as a director of JKL Ltd. before 6 months from the date of
default.
Answer: Option C

6.MTP Apr 2019

Diksha, a professional architect, had been approached by Newage Builders Limited – a

companyformed by her distant relatives but with whom she has good rapports – to accept the
directorship in the company. However, she could not immediately agree to take the post of director,
for she did not possess Director Identification Number (DIN). Accordingly, she applied for the DIN but
her application was found to be incomplete and she received an e-mail on 3rd January, 2019 which
directed her to rectify the defects by resubmitting the application. Advise Diksha regarding the latest
date by which she must resubmit the application after fully rectifying it.
Page No. 3
(a) Latest by 10th January, 2019.

(b) Latest by 16th January, 2019.

(c) Latest by 18th January, 2019

(d) Latest by 23rd January, 2019.

Answer: Option C

7.MTP Apr 2019

Bnorth Motors and Spares Limited, a listed company, has 4500 small shareholders but till date there
is no director who can represent them. Accordingly, some of such shareholders have approached the
company for appointment of their director on the Board. By choosing the correct option, advise as to
minimum how many small shareholders must group together so that they succeed in their objective.

(a) Minimum one thousand small shareholders must group together for getting appointed their
director on the Board.
(b) Minimum nine hundred small shareholders must group together for getting appointed their
director on the Board.
(c) Minimum four hundred and fifty small shareholders must group together for getting appointed
their director on the Board.
(d) Minimum two hundred and twenty-five small shareholders must group together for getting
appointed their director on the Board.
Answer: C

8.April 2019 MTP

Rati holds 2,500 equity shares of Rs. 10 each (Rs. 5 paid up) in Uranus Glass Limited which is listed
on National Stock Exchange as well as Bombay Stock Exchange. In the same company her mother
Rachna holds 2,000 equity shares on which Rs. 7 have been paid up. Her brother Ruchir has also been
allotted 3,000 equity shares by the Uranus but till date, similar to Rati, he has paid only Rs. 5 as
application and allotment money. All the three claim to be small shareholders and want to participate
in the process of appointing small shareholders’ directors. Advise them whether they could be
categorized as small shareholders.

a) Only Rati is small shareholder and therefore, she can participate in the process of appointing small
shareholders’ directors.
b) Only Rachna is small shareholder and therefore, she can participate in the process of appointing
small shareholders’ directors..
c) Only Ruchir is small shareholder and therefore, he can participate in the
process of appointing small shareholders’ directors.

d) All the three are small shareholders and therefore, they can participate in the process of appointing
small shareholders’ directors.
Answer: C

Page No. 4
9.MTP Apr 2019

Mr. Raman is a managing director of SLR Ltd. He was proposed to be appointed as director in the same
company. Mr. Raman got better opportunity and joined the other company “Alternate Ltd.”. He left
the office of managing director of SLR Limited. State the correct legal position as to holding of offices of
Mr. Raman in the companies-

a) he will hold directorship both in SLR Ltd and Alternate Ltd.

b) He cannot hold office in Alternate Ltd. being employed as managing director in SLR Ltd.
c) He will validly hold all the designated offices in both SLR and Alternative Ltd.
d) He can hold directorship only in Alternate Ltd.
Answer: Option D

10.MTP Apr 2019

State which is not a valid situation for the vacation of the office of director amongst the given:

(i) When the directors absents himself from 3 consecutive meetings of Board of Directors held
during a period of 12 months
(ii) Director entering into a contract in which he is uninterested
(iii) Order disqualifying him as Director has been made by Court or NCLT
(iv) If he is convicted by a Court of any offence, whether involving moral turpitude or otherwise, and
sentenced to imprisonment for not less than 6 months.
(a) (i) & (ii)
(b) (ii) &(iii)
(c) (iii) &(iv)
(d) (i) &(iv)
Answer: Option a

11.Nov 2019 RTP

Sunila Interior Decorators and Furnishers Limited which has not accessed the primary market so far, is
required to appoint whole-time Key Managerial Personnel (KMPs) in view of the fact that it has
surpassed the threshold limit which necessitates such appointment. Out of the three whole-time
KMPs which it is obligated to keep on roll, it has already appointed a Managing Director (MD) and a
Company Secretary. From the given options, choose the third KMP which needs to be appointed by the
company under the given circumstances.

(a) Chief Executive Officer (CEO)

(b) Chief Financial Officer (CFO)
(c) Whole-time Director (WTD)
(d) Chief Manager (CM)

Page No. 5
Answer: (b)

Descriptive Questions

12.March 2018

XYZ Limited is an unlisted public company having a paid-up capital of twenty crore rupees as on 31st
March, 2017 and a turnover of one hundred fifty crore rupees during the year ended 31st March,
2017. The total number of directors is thirteen.

State the following answers:

(i) Minimum number of directors appointed as Independent Director in XYZ Limited.
(ii) What will be the consequences where XYZ Ltd. ceases to fulfill any of the required conditions
with respect to appointment of Independent directors for three continuous years?
If suppose XYZ Ltd. (Unlisted public company) is a dormant company, what shall be the law related to
the appointment of Independent director?

Answer:

According to Rule 4(1) of the Companies (Appointment and Qualification of Directors) Rules, 2014,
the following class or classes of companies shall have at least 2 directors as independent directors:

(1) the Public Companies having paid up share capital of 10 crore rupees or more; or

(2) the Public Companies having turnover of 100 crore rupees or more; or
(3) the Public Companies which have, in aggregate, outstanding loans, debentures and deposits,
exceeding 50 crore rupees.
In the present case, XYZ Limited is an unlisted public company having a paid-up capital of
Rs. 20 crores as on 31st March, 2017 and a turnover of Rs. 150 crores during the year ended 31st
March, 2017. Thus, as per the Companies (Appointment and Qualification of Directors) Rules, 2014, XYZ
Limited shall have at least 2 directors as independent directors.
Where a company ceases to fulfil any of 3 conditions for three consecutive years, it shall not be
required to comply with these provisions (i.e., related to appointment of Independent directors) until
such time as it meets any of such conditions.

(ii) As per Rule 4(2) of the Companies (Appointment and Qualification of Directors) Rules, 2014 the
following classes of unlisted public company are not covered under Rule 4(1), namely:-.
(a) a joint venture;

(b) a wholly owned subsidiary; and

(c) a dormant company as defined under section 455 of the Act.
Accordingly, XYZ, a dormant company does not require to fulfill the conditions stated in Rule 4(1) for
appointment of Independent Directors.

Page No. 6
13.March 2018

Mr. fortune is holding directorship in the following types of companies:

(i) 4 Public companies

(ii) 10 private companies
(iii) 2 companies registered under section 8 of the Companies Act, 2013.
Mr. Fortune further received offer from 7 public companies, 6 private companies and 2 companies
registered under section 8 of the Companies Act, 2013. He wants to take up maximum permissible
directorship.
His order of preference is as follows:
(1) Public companies
(2) Private companies (not being holding or subsidiary of any public company) and
(3) Companies registered under section 8 of the Companies Act, 2013
Decide the number of companies in which Mr. Fortune can hold the directorship.

Answer:

Section 165 of the Companies Act, 2013 provides for the maximum permissible number of directorships
that a person can hold. According to this section:

No person, after the commencement of this Act, shall hold office as director, including any alternate
directorship, in more than 20 companies at the same time. [Section 165(1)]
Provided that out of the limit of 20, the maximum number of public companies in which a person can
be appointed as a director shall not exceed 10. [Proviso to section 165(1)]
However, the limit of directorship of 20 companies shall not include the directorship in a dormant
company; as also in a section 8 company.
Private companies that is either holding or subsidiary company of a public company shall be included in
reckoning the limit of public companies in which a person can be appointed as a director.

The MCA vide Notification No. 466(E) dated 5th June, 2015, has clarified that section 165(1) of the
Companies Act, 2013, shall not apply to section 8 companies.
Based on the above provisions, Mr. Fortune can hold the directorship as follows:
(i) 6 Public companies. Since the maximum number of public companies in which one can be a director
is 10 only.
(ii) No more private company. Since his total holding has already reached the maximum permissible 20
companies (All inclusive of public and private companies)
(iii) 2 more companies registered under section 8 of the companies Act, 2013. Since there is no
restriction on the number of directorship, a person can hold in the companies registered under
section 8 of the Companies Act, 2013.

14.March 2018

Page No. 7
Mr. Ram have been appointed as a director in X Ltd. due to his holding of an office as Managing
Director (MD) in its holding company, ABC Limited. In due course of time, Mr. Ram was offered by HXL
Limited to join the company as a managerial personnel on very good package. He was offered the said
position on the term that he has to resign from the ABC Ltd. Mr. Ram served a notice in writing to the
company by mail and through post to his registered office on 1.02.2018. His notice of resignation
specified the date 15.02 2018 as the last date in the ABC Ltd. However, due to pressure of HXL Ltd., he
joined the company on 13.02.2018.

Analyse, Integrate and apply in terms of the Companies Act, 2013, the legal position of Mr. Ram in
the given situations-

(a) Holding of directorship of Mr. Ram in X Ltd. after ceasing to hold office as MD in ABC Ltd.
(b) Joining of HXL Ltd on 13. 02.2018.

Answer:

According to section 167(1)(h) of the Companies Act, 2013, the office of a director shall become vacant
in case he, having been appointed a director by virtue of his holding any office or other employment in
the holding, subsidiary or associate company, ceases to hold such office or other employment in that
company. If a person, functions as a director even when he knows that the office of director held by him
has become vacant on account of any of the disqualifications specified in sub-section (1), he shall be
punishable with imprisonment for a term which may extend to one year or with fine which shall not be
less than Rs. 1,00,000 but which may extend to Rs. 5,00,000, or with both. [Section 167(2)]

 As per section 168 a director may resign from his office by giving a notice in writing to the
company.
 The Board shall on receipt of such notice take note of the same and intimate Registrar
 The Company shall within 30 Days from the date of receipt of notice of resignation from director,
intimate the registrar in FORM DIR 12 and post the information on its website, if any.
 Board shall place the fact of such resignation in the report of Director in the immediate following
General Meeting by the Company.
 Besides, Director also forward his resignation to registrar within 30 days of his resignation in FORM
DIR – 11.
 The resignation of a director shall take effect from the date on which the notice is received by the
company or the date, if any, specified by the director in the notice, whichever is later.
As per the given facts, the legal position of Mr. Ram in the given situations will be as follows:
Holding of directorship of Mr. Ram in X Ltd. is invalid in the light of section 167(1)(h) of the Companies
Act, 2013. As per the facts, Mr. Ram was appointed as director in X Ltd. due to holding of office in its
holding company, ABC Ltd. According to the above provisions, office of director in X Ltd. shall become
vacant due to cease of its holding of his office or employment in ABC Ltd. So holding of directorship in X
Ltd. by Mr. Ram is invalid and he is liable to vacate.

Even if, Mr. Ram functions as a director knowing that the office of director held by him has become
vacant on account of the above provision, he shall be punishable with imprisonment for a term which
may extend to one year or with fine which shall not be less than Rs. 1,00,000 but which may extend to Rs.
Page No. 8
5,00,000, or with both. [Section 167(2)]
According to Section 168 of the Companies Act, 2013, Resignation shall effect from the date on which
the notice is received by the company or the date, if any, specified by the director in the notice,
whichever is later, i.e., 15.02.2018. So joining of HXL Ltd. during the notice period i.e. on 13.02.2018, is
not valid.

As per section 172 of the Companies Act, 2013, if a company contravenes in compliance to the said
provision, the company and every officer of the company who is in default shall be punishable with fine
which shall not be less than fifty thousand rupees but which may extend to five lakh rupees.

15.RTP May 2018

a. The composition of the Board of Directors of a listed company as on 31-03-2017 comprised of (i)
Mr. A, Director, (ii) Mr. B, Director (iii) Mr. C, Director (iv) Mr.· D, Director, (v) Mrs. E, Independent
Director, (vi) Mr. F, Independent Director and (vii) Mr. G, Independent Director.

You are required to examine with reference to the provisions of the Companies Act, 2013 the
vacations of the offices of Mr. D & Mrs. E and discuss the course of action that can be taken up by the
Company in this regasrd?
b. Discuss the legal position in the given situations with reference to the provisions of the Companies
Act, 2013:

(a) Mr. Arthav, a director resigns after giving due notice to the company and he forwards a copy of
resignation in e-form DIR-11 to the Registrar of Companies (RoC) within the prescribed time.
Besides, the company fails to intimate about the resignation of Mr. Arthav to RoC.
(b) The Board of Directors of Superwood Limited decides to appoint on its Board, Mr. Ramakant as a
nominee director upon the request of a bank which has extended a long term financial assistance
to the company. The Articles of Association of the company do not confer upon the Board any
such power. Also, there is no formal agreement between the company and the bank for any such
nomination.
Answer:

1. (i) The provision of the Companies Act, 2013 governing the appointment of Women Director
and Independent Directors are as under:
(a) The second proviso to section 149(1) of the Companies Act, 2013 provides that such class
or classes of companies as may be prescribed, shall have atleast one women director. Rule
3 of Companies (Appointment and Qualification of Directors) Rules, 2014 provides that the
following class of companies shall appoint at least one women director –
(1) every listed company;
(2) every other public company having-
 paid-up share capital of one hundred crore rupees or more; or
 turnover of three hundred crore rupees or more:
It further provides that any intermittent vacancy of a women director shall be filled-up by
Page No. 9
 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.

In this case the Company is a listed and under the provisions of the Companies Act, 2013,
it is required to have at least 1 Women Director in its Board.

(b) The provision of section 149(4) provides that every listed company shall have at least
1/3rd of the total number of Directors as Independent Directors.
As per the facts stated in the question, composition of board of directors of listed company
as on 31-3-2017 comprised of total 7 directors. Out of which 4 were directors and 3 were
independent directors. Later Mr. D (Director) and Mrs. E (Independent Director) vacated
their offices of director on 15 -4-2017.

So accordingly, listed company as stated above, shall have at least one women director and one-third
of the total number of directors as independent directors in the Board. However, on 15-4-2017, total
number of directors left were 5 due to vacation of Mr. D and Mrs. E. Further, Rule 3 of the Companies
(Appointment and Qualification of Directors) Rules, 2014, provides that if there is an intermittent
vacancy of a women director, it 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 requirement of the above sections, there is compliance of section 149(4) as 1/3rd of the total
number of directors comprises of (1/3x5) 1.6 rounded off as 2, which complies with the minimum
requirement of 2 independent directors in the board, however, pertaining to women director, Board
have to fill up the intermittent vacancy at the earliest but not later than immediate next board meeting
or three months from the date of such vacancy whichever is later.

(ii) (a) Resignation of Director (Section 168 of the Companies Act, 2013)
A director may resign from his office by giving a notice in writing to the company. The Board shall on
receipt of such notice take note of the same. The company shall within 30 days from the date of receipt of
notice of resignation from a director, intimate the Registrar in Form DIR -12 and post the information on
its website, if any.
Such director shall also forward a copy of his resignation along with detailed reasons for the resignation
to the Registrar within 30 days from the date of resignation in Form DIR-11 along with the prescribed fee.
The resignation of a director shall take effect from the date on which the notice is received by the
company or the date, if any, specified by the director in the notice, whichever is later. In the present case,
Mr. Arthav, a director resigns after giving due notice to the company and he forwards a copy of
resignation in e-form DIR-11 to the RoC within the prescribed time.
If the company fails to intimate about the resignation of Mr. Arthav to RoC, even then the resignation of
Mr. Arthav shall take effect from the date on which the notice is received by the company or the date, if
any, specified by Mr. Arthav in the notice, whichever is later.
(b) According to section 161 (3) of the Companies Act, 2013, subject to the articles of a company, the
Board may appoint any person as a director nominated by any institution in pursuance of the

Page No. 10
 provisions of any law for the time being in force or of any agreement or by the Central
Government or the State Government by virtue of its shareholding in a Government company.
The Articles of Association of Superwood Limited do not confer upon the Board of Directors any
such power. Hence, the Board cannot appoint Mr. Ramakant as a nominee director even on the
request of a bank which has extended a long term financial assistance to the company.

16.May 2018

Mr. Bond and Mr. James were appointed as Directors of Jamesbond Ltd. at the AGM held on 30th
September, 2017 by a single resolution. State the relevant provisions of the Companies Act, 2013 and
identify is it possible to appoint the above Directors by a single resolution?

Answer:

According to Section 162 of the Companies Act, 2013, at a general meeting of a Company, a motion
for the appointment of two or more persons as Directors of the Company by a single resolution shall not
be moved unless a proposal to move such a motion has first been agreed to at the meeting without any
vote being cast against it.
A resolution moved in contravention of above shall be void, whether or not any objectio n was taken
when it was moved.
A motion for approving a person for appointment, or for nominating a person for appointment as a
director, shall be treated as a motion for his appointment.
In the instant case, it is not possible to appoint Mr. Bond and Mr. James as Directors of James Bond Ltd.
by a single resolution.

17.May 2018

CTC Limited is an unlisted public company having a paid up capital of Rs. 100 crores as on 31st March,
2017. The company made a turnover of Rs. 300 crores for the financial year ended 31st March, 2017.
The Articles of Association of the company provides for payment of sitting fee to Directors for each
Board Meeting/Committee thereof subject to a maximum of Rs. 40,000 per meeting.

The Board of Directors is comprised of Independent Directors and Women Directors also. The
Company is having 7 directors in its Audit Committee. Shri PKV, working as Financial Advisor of the
company, was designated as Chief Financial Officer from 1st April, 2015. He retired from service on
superannuation on 31st March, 2016, He is in receipt of monthly pension of Rs. 80,000 from the
company. It is proposed to appoint Shri PKV as Independent Director of the Company. The Board of
Directors proposes to fix sitting fee of Rs. 50,000 per meeting to Independent Director andRs.
30,000 per meeting to Woman Director, taking into consideration their experience and qualification.

In the light of the provisions of the Companies Act, 2013, advise the Board of Directors in the following
matters :

(1) Appointment of Mr. PKV as Independent Director.

Page No. 11
(2) Fixing sitting fee of Rs. 50,000 to Independent Director and Rs. 30,000 to Woman Director.
(3) Minimum number of Independent Directors.
(4) Maximum sitting fee to a Director.

Assuming CTC Ltd. is a Government Company, what will be your advise in the matter of appointment
of Mr. PKV as Independent Director.

Answer:

1) Appointment of Mr. PKV as an Independent Director

According to Section 149(6)(e)(i) of the Companies Act, 2013, an Independent Director shall be a person
who, neither himself nor any of his relatives holds or has held the position of a Key Managerial
Personnel (KMP) or is or has been an employee of the Company or its Holding, Subsidiary or Associate
Company in any of the 3 financial years immediately preceding the financial year in which he is
proposed to be appointed.
In the instant case, the Company, CTC Limited is proposing to appoint Mr. PKV as an Independent
Director who was working as Financial Advisor in the Company and then was designated as Chief
Financial Officer for the financial year 2015 -2016. Since, he was an employee and also a Key Managerial
Personnel in one of the 3 financial years immediately preceding the financial year in which he is
proposed to be appointed, Mr. PKV shall not be appointed as an Independent Director in CTC Limited.

(2) Fixing sitting fee to Independent Director and Women Director

As per Section 197(5) of the Companies Act, 2013 along with the Companies (Appointment and
Remuneration of Managerial personnel) Rules, 2014 , a Company may pay a sitting fee to a Director for
attending meetings of the Board or Committees thereof, such sum as may be decided by the Board of
Directors thereof which shall not exceed one lakh rupees per meeting of the Board or Committee
thereof.
However, for Independent Directors and Women Directors, the sitting fee shall not be less than the
sitting fee payable to other directors.
In the instant case, the Articles of Association of the Company provides for payment of sitting fee to
Directors of Rs. 40,000.
Hence, the sitting fee of Rs. 50,000 can be paid to the Independent Director but the sitting fee payable
to Woman Director shall not be less than Rs. 40,000. So, the amount of Sitting fee payable to Woman
Director has to be increased from Rs. 30,000 (as proposed) to minimum Rs.40,000.

3) Minimum number of Independent Directors

According to the Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014, the
following class or classes of Companies shall have at least 2 directors as Independent Directors:

(1) The Public Companies having paid up share capital of 10 crore rupees or
more; or
Page No. 12
 (2) the Public Companies having turnover of 100 crore rupees or more; or
(3) the Public Companies which have, in aggregate, outstanding loans,
debentures and deposits, exceeding 50 crore rupees.

However, in case a Company covered as under the above Rule is required to appoint a higher number
of Independent Directors due to composition of its Audit Committee, such higher number of
Independent Directors shall be applicable to it.
As per Section 177(2) of the Companies Act, 2013, the Audit Committee shall consist of a minimum of
three directors with Independent Directors forming a majority.
In the instant case, CTC Limited shall appoint at least 2 directors as Independent Directors as it is
covered under Rule 4 of the above Rules since the Company is having a paid up capital of Rs. 100 crores
and a turnover of Rs. 300 crores for the financial year ended 31st March, 2017. But since the Company is
having an Audit Committee having 7 directors, therefore 4 directors out of 7 must be Independent
directors (4 is forming majority).

(4) Maximum sitting fee to a Director

As per Section 197(5) of the Companies Act, 2013 along with the Companies (Appointment and
Remuneration of Managerial personnel) Rules, 2014 , a Company may pay a sitting fee to a Director for
attending meetings of the Board or Committees thereof, such sum as may be decided by the Board of
Directors thereof which shall not exceed one lakh rupees per meeting of the Board or Committee
thereof. Accordingly, the maximum sitting fee payable to a Director shall not exceed one lakh rupees.

(5) Appointment of Mr. PKV if CTC Ltd is a government company

If CTC Ltd. is a Government Company, then also Mr. PKV shall not be appointed as an Independent
Director in CTC Limited because, he was an employee and also a Key Managerial Personnel in one of the
3 financial years immediately preceding the financial year in which he is proposed to be appointed

18.Aug 2018

Mr. Single, a director of XYZ Ltd. goes Singapore, for a period of 6 months. Board appoints Mr.
Replacement, in his place as an alternate director. Mr. Replacement was also holding directorship in
XYZ Ltd. Identify the nature of appointment of Mr. Replacement in XYZ Ltd as an alternate director.

Answer:

According to Section 161(2) of the Companies Act, 2013, the Board of Directors of a company may, if so
authorised by its articles or by a resolution passed by the company in general meeting, appoint a
person, not being a person holding any alternate directorship for any other director in the company, or
holding directorship in the same company, to act as an alternate director for a director during his
absence for a period of not less than three months from India.
In the given question, Board appoints Mr. Replacement, in the place of Mr. Single as an alternate
director. Mr. Replacement was also holding directorship in XYZ Ltd.
Page No. 13
So, as the per above provision, Mr. Replacement shall not be appointed as an alternate director due to
his holding of directorship in the same company in which he is appointed as an alternate director. So
his appointment is invalid.

19.Aug 2018

ABC Ltd. is a listed company having 50,00,000 equity shares of Rs. 100 each as its paid up capital. Of
the total shareholders of the company there are 20000 shareholders who are holding shares of
nominal value of not more than Rs. 20000 each. A group of shareholders who had applied for these
shares at the time of issue of such shares by the company by issuing prospectus and been allotted
these shares, wants to appoint a small shareholder’s director to safeguard their interest and to get a
proper representation in the company. A total number of 1500 such small shareholders decided to
propose Mr. X as their candidate for this post. In the light of the Companies Act, 2013 on the basis of
the facts provided, determine the following situations—

(1) What procedure should be followed by group of shareholders to have Mr. X, a small shareholder
director in the Board of Directors of the company?
(2) What are the provisions related to his (Mr. X) status as an independent director and what
exceptions are available to him in relation to his appointment as a director?
Answer:

As per the provisions given in Section 151 of the Companies Act, 2013, a listed company may have one
director elected by such small shareholders in such manner and on such terms and conditions as
prescribed in Rule 7 of the Companies (Appointment and Qualification of directors) Rules, 2014. “Small
Shareholders” means a shareholder holding shares of nominal value of not more than Rs. 20000/- or
such other sum as may be prescribed.

(1) The Companies (Appointment and Qualification of directors) Rules, 2014 provides for the
procedure for appointment of Small shareholders’ director according to which:
(A) A listed company, may upon notice of not less than
(a) one thousand small shareholders; or
(b) one-tenth of the total number of such shareholders,
Whichever is lower; have a small shareholders director elected by the small shareholder.
However, a listed company may opt suomoto, to have a director representing small
shareholders and in such case the provisions stated in point (B) shall not apply for appointment
of such director.
(B) The small shareholders intending to propose a person as a candidate for the post of small
shareholder’s director shall leave a notice of their intention with the company at least
fourteen days before the meeting under their signature specifying the name, address, shares
held and folio number of the person whose name is being proposed for the post of director and
of the small shareholders who are proposing such person for the office of director.
However, if the person being proposed does not hold any shares in the company, the details of

Page No. 14
 shares held and folio number need not be specified in the notice.
(C) The notice shall be accompanied by a statement signed by the person whose name is being
proposed for the post of small shareholder’s director stating-
(a) his Director Identification Number;
(b) that he is not disqualified to become a director under the Act; and
(c) his consent to act as a director of the company.
(d) A person shall not be appointed as small shareholder’s director of a company, if he is not
eligible for appointment as a director as per the provisions of the Companies Act, 2013. In
compliance with the said provisions Mr. X can be appointed as the small shareholder by the
group of shareholders in Board of Directors of ABC Ltd.
(2) Such small shareholders’ director shall be considered as an independent director if he fulfills all the
conditions/pre requisite to become an independent director as mentioned in Section 149(6) and
gives a declaration of his independence in accordance with the provisions of section 149(7) of the
Companies Act, 2013.
The appointment of small shareholder’s director i.e. Mr. X shall be as per the provisions of
Companies Act, 2013, except that—
(a) such director shall not be liable to retire by rotation;
(b) such director’s tenure as small shareholder’s director shall not exceed a period of three
consecutive years; and
(c) on the expiry of the tenure, such director shall not be eligible for re-appointment.

20.Nov 2018

ABC Limited is an unlisted public Company having a paid up equity share capital of Rs. 20 Crores and a
turnover of Rs. 150 Crores as on 31st March, 2018. The total number of Directors on the Board is 13.

Referring to the provisions of the Companies Act, 2013 answer the following:

(i) The minimum number of Independent Directors that the Company should appoint.
(ii) How many Independent Directors are to be appointed in case ABC Limited is a listed Company?

Answer:

According to Section 149(4) of the Companies Act, 2013, every listed public company shall have at least
one-third of the total number of directors as independent directors.
Any fraction contained in such one-third numbers shall be rounded off as one
According to the Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014, the
following class or classes of companies shall have at least 2 directors as independent directors:

(1) the Public Companies having paid up share capital of 10 crore

rupees or more; or
(2) the Public Companies having turnover of 100 crore rupees or more;
or

Page No. 15
 (3) the Public Companies which have, in aggregate, outstanding
loans, debentures and deposits, exceeding 50 crore rupees.

(i) As the paid up share capital of ABC Limited is Rs. 20 Crore and turnover is Rs. 150 crore, the company
shall have at least 2 directors as independent directors.
(ii) In case ABC Limited is a listed company, it shall have at least 5
(iii) directors as independent director (1/3rd of the total number of directors: 1/3rd of 13 is 4.33
rounded off as 5).

21. Nov 2018

VGP Ltd. is a listed public Company with a paid up capital of Rs. 100 crores as on 31st March,
2018. Mrs. Jasmine, who was one of the promoters of PDS Ltd. (a Joint Venture Company of VGP
Ltd.), was appointed as Woman Director on the Board of VGP Ltd. VGP Ltd. has the following proposals

(1) To remove Mr. Z, an Independent Director who was re-appointed for a second term.
(2) To appoint Mr. N, a nominee Director in the Board as an Independent Director.
(3) To appoint Mrs. Jasmine as 'an Independent-cum-Woman Director.
With reference to the relevant provisions of the Companies Act, 2013, examine:

(i) The validity the above proposals and the appointment of Woman Director already made.
(ii) Whether Mr. N, can be appointed as an Independent Director of PDS Ltd.?
Is an Independent Director entitled for stock option?

Answer:

(a) As per the stated facts, VGP Ltd., a listed public company with a paid up capital of 100 crore
appointed Mrs. Jasmine (Promoter of PDS Ltd., a joint venture of VGP Ltd.) as woman director on
the Board of VGP Ltd. VGP Ltd. made the following proposals:
(1) Removal of Mr. Z, an Independent Director(ID) who was re-appointed for a second term.
(2) Appointment of Mr. N, a nominee director in the Board as an Independent Director.
(3) Appointment of Mrs. Jasmine as an Independent- cum-woman Director

Following are the answers in the light of the above given facts under the Companies Act, 2013-
With respect to this part of the question, Proposal no. (1) will be valid only on the compliance of the
proviso given under section 169(1). According to the said proviso an independent director re-appointed
for second term under section 149(10) shall be removed by the company only by passing a special
resolution and after giving him a reasonable opportunity of being heard.

Page No. 16
W.r.t. proposal nos. (2), it will be invalid as per section 149(6). As per the stated section, in relation to a
company, an independent director means a director other than a managing director or a whole-time
director or a nominee director.
W.r.t. proposal nos. (3), it will be valid as per requirement of section 149(6) read with Rule 3 of the
Companies (Appointment and Qualification of Directors) Rules, 2014. Person so appointed as ID, is or was
not a promoter of the company or its holding, subsidiary or associate company. Since here, Mrs.
Jasmine is a promoter of PDS Ltd. which is joint venture co. of VGP Ltd. So, out of the purview of the
above disqualification and is in compliance with Rule 3, so she is eligible to be appointed as Independent
–cum- Woman director in VGP Ltd.
Alternate Answer:
As per Section 2 (6) of the Act, associate company includes a joint venture company, therefore Mrs.
Jasmine, a promoter of an associate company cannot be appointed as independent director.
(i) As per Notification G.S.R. 839(E) dated 5th July, 2017, an unlisted public company which is a joint
venture, a wholly owned subsidiary or a dormant company will not be required to appoint
Independent Directors. So, Mr. N cannot be appointed as an Independent Director of PDS Ltd.
(ii) As per section 149(9), notwithstanding anything contained in any other provision of this Act, but
subject to the provisions of sections 197 and 198, an independent director shall not be entitled to
any stock option.

22.RTP Nov 2018:

The Promoters of M/s Frontline Limited, a listed public company propose to have the strength of the
Board of Directors as eleven. They also propose to make the Managing Director and Whole Time
directors as directors not liable to retire by rotation. Advise on the following matters as per the
provisions of the Companies Act, 2013:

(a) Maximum number of persons, who can be appointed as directors

not liable to retire by rotation.
(b) How many of the remaining directors will have to retire by rotation every year at the Annual
General Meeting (AGM)?

For the purpose of increasing the strength, certain nominations were received to nominate
candidates for contesting elections. One of the nominations was rejected by the directors as it
was received after sending the notice of AGM and that too after the working hours of the last day
on which nomination should have been received.
(c) Can the Board of Directors increase the strength of companies' directors to 18 from 11 by
appointing additional directors through passing single resolution?
Answer:

According to Section 152(6) of the Companies Act, 2013, unless the articles provide for the retirement
of all directors at every annual general meeting, not less than two-thirds of the total number of
directors of a public company shall be persons whose period of office is liable to determination by
retirement of directors by rotation

Directors liable to retire by rotation: 11 * 2/3 =7.3 or 8

Page No. 17
So, maximum number of persons, who can be appointed as directors not liable to retire by rotation: 11-
8 = 3.
(a)According to Section 152(6)( c) of the Companies Act, 2013, 1/3rd of such of the Directors for the
time being as are liable to retire by rotation, or their number is neither three nor a multiple of three,
then, the number nearest to the 1/3 rd shall retire from office. Therefor the Directors liable to retire by
rotation are 11*2/3 i.e.7.3 or 8.

No. of directors to retire at AGM: 8 * 1/3 i.e.2.67. Hence nearest to 1/3 rd is 3.

(b)According to Section 160 of the Companies Act, 2013, a person who is not a retiring director in terms
of Section 152 shall, subject to the provisions of this Act, be eligible for appointment to the office of a
director at any general meeting, if he has, not less than 14 days before the meeting, left at the
registered office of the company, a notice in writing under his hand signifying his candidature as a
director.

In the instant case, one nomination was rejected by the directors as it was received after sending the
notice of AGM and that too after the working hours of the last day on which nomination should have
been received i.e. 14th day. Hence, the contention of the directors are valid.
(C) According to Section 149(1) of the Companies Act, 2013, if the company wants to appoint more than
15 directors, it can do so after passing a special resolution. Hence, the Board of directors of Frontline
Limited, before increasing the strength of directors from 11 to 18 by appointing additional directors,
have to pass a special resolution.

But, these appointments cannot be done through single resolution. Each director shall be appointed by a
separate resolution unless the meeting first agreed that the appointment shall be made by a single
resolution and no vote has been cast against such agreement. A resolution moved in contravention of this
provision shall be void, whether or not objection thereto was raised at the time it was so moved. [Section
162 of the Act].

23.RTP Nov 2018:

M/s. Bosch and Lawrence Limited, an unlisted company has a paid up equity share capital of Rs. 11
crores as on 31st March, 2013. Mr. Robert was appointed as an Independent Director at the Annual
General Meeting of the company held on 29 -09- 2015 for a period of one year. Again, he was
appointed in the subsequent Annual General Meeting held on 28-09-2016 for a period of two years as
his second consecutive term. Examine under the provisions of the Companies Act, 2013 whether he can
be again appointed in the Annual General Meeting to be held in September 2018 for another period of
2 years to complete his total term of 5 years?

Answer:
As per Section 149(10) of the Companies Act 2013, an Independent Director shall hold office for a term
up to five consecutive years on the Board of a company. He shall be eligible for re-appointment on
passing of a special resolution by the company and disclosure of such appointment in the Board's
report. As per section 149(11) no independent director shall hold office for more than two consecutive
terms. However, such independent director shall be eligible for appointment after the expiration of

Page No. 18
three years of ceasing to be an independent director.The Ministry of Corporate Affairs in its General
Circular 14/2014 dated June 09, 2014 clarified that section 149 (10) of the Act provides for a term of “up
to five consecutive years" for an independent director. As such while appointment of an independent
director for a term of less than five years would be permissible, appointment of any term (whether for
five years or less) is to be treated as one term under section 149(10) of the Act. Further under section 149
(11) of the Act, no person hold office of independent director for more than ‘two consecutive terms’.
Such a person shall have to demit office after the consecutive terms even if the total number years of his
appointment in such two consecutive terms is less than 10 years.Therefore Mr. Robert cannot be
appointed as an Independent Director at the AGM proposed to be held in 2018. In such case the person
completing ‘consecutive terms of less than 10 years' shall be eligible for appointment only after the
expiry of the requisite cooling-off period of three years.

24.May 2019

Two (2) out of Ten (10) directors on the board of XYZ Limited have retired by rotation at an Annual
General Meeting. These two (2) vacancies or place of retiring directors is not filled up and the meeting
has also not expressly resolved ‘not to fill the vacancy’. Since the AGM could not complete its
business, it is adjourned to a later date. Neither place of retiring directors could be filled up at this
adjourned meeting nor did the meeting expressly resolve 'not to fill the vacancy'.

Analyse & apply relevant provisions of the Companies Act, 2013 and decide:

 Whether in such a situation the retiring directors shall be deemed to have been reappointed at the
adjourned meeting?
 What will be your answer in case at the adjourned meeting, the resolutions for reappointment of
these directors were lost?
 Whether such directors can continue in case the directors do not call the Annual General Meeting?
Answer

In accordance with the provision of the Companies Act, 2013, as contained in section 152(7)(a) which
provides that if at the annual general meeting at which a director retires and the vacancy is not so filled
up and the meeting has not expressly resolved not to fill the vacancy, the meeting shall stand
adjourned to same day in the next week, at the same time and place, or if that day is a national holiday,
till the next succeeding day which is not a holiday, at the same time and place.

Section 152(7)(b) further provides that if at the adjourned meeting also, the place of the retiring is not
filled up and that meeting also has not expressly resolved not to fill the vacancy, the retiring director
shall be deemed to have been re-appointed at the adjourned meeting, unless at the adjourned meeting or
at the previous meeting a resolution for the reappointment of such directors was put and lost or he has
given a notice in writing addressed to the company and the Board of Directors expressing his desire not
to be re- elected or he is disqualified.
Therefore, in the given circumstances answer to the questions as asked shall be:
 In the first case, applying the above provisions, the retiring directors shall be deemed to have been

Page No. 19
 re-appointed.
 In the second case, where the resolutions for the reappointment of the retiring directors were lost,
the retiring directors shall not be deemed to have been re- appointed.
 Section 152(6)(c) states that 1/3rd of the rotational directors shall retire at every AGM. They retire at
the AGM and at its conclusion. Hence, they will retire as soon as the AGM is held. Further, as per
section 96 (dealing with annual General Meeting) of the Companies Act, 2013, every company other
than a One Person Company shall in each year hold an Annual General Meeting. Hence, it is
necessary for the company to hold the AGM, whereby these directors will be liable to retire by
rotation.
Further Section 97 states that, if any default is made in holding the annual general meeting of a company
under section 96, the Tribunal may, on the application of any member of the company, call, or direct the
calling of, an annual general meeting of the company. Such general Meeting shall be deemed to be an
annual general meeting of the company under this Act.

25. May 2019

M/s Bright Motors (P) Limited at the Annual General Meeting (AGM) held on 30.09.2016 appointed Mr.
Anmol as a Non-Executive Director on the board of the company for a period of three years. On 2nd
October, 2017 Mr. Anmol suffered a severe heart failure and expired. The board of directors of the
company on 16th October, 2017 appointed Mr. Prateek to fill the casual vacancy so created. The
appointment of Mr. Prateek was made for a term of three years by the board. Subsequently at the AGM
held on 29-09-2018 Mr. Prateek's appointment was not proposed or approved as the board was of the view
that it is not required. But the CFO of the company is of the opinion that the board of directors have
contravened the provisions of the Companies Act, 2013 in respect of non-approval of the appointment of
Mr. Prateek and his office tenure. Decide.

Answer:
According to section 161(4) of the Companies Act, 2013, if the office of any director appointed by the
company in general meeting is vacated before his term of office expires in the normal course, the
resulting casual vacancy may, in default of and subject to any regulations in the articles of the company,
be filled by the Board of Directors at a meeting of the Board which shall be subsequently approved by
members in the immediate next general meeting.

Provided that any person so appointed shall hold office only up to the date up to which the director in
whose place he is appointed would have held office if it had not been vacated.
In the given question, the casual vacancy caused due to death of Mr. Anmol (who was appointed by the
company in AGM held on 30.9.2016, for a period of 3 years) is filled by the Board of Directors by
appointing Mr. Prateek for a period of three years. However, the appointment of Mr. Prateek for a period
of three years is in contravention of above stated provisions as he can hold office only up to the date up to
which Mr. Anmol would have held office if it had not been vacated.
Further, as per the provisions of the Act, the appointment of Mr. Prateek ought to be approved by
members in the immediate next general meeting. However, the appointment of Mr. Prateek was not
even proposed or approved in the AGM held on 29.9.2018. Hence, the appointment of Mr. Prateek is in
contravention of the provisions of the Companies Act, 2013.Therefore, the opinion of CFO is correct.

Page No. 20
26. May 2019

Mr. Dhruv is a Director of M/s. LT Limited and XT Limited respectively. M/s. LT Limited did not file its
financial statements for the year ended 31st March, 2016, 2017 & 2018 respectively with the Registrar
of Companies (ROC) as mandated under the Companies Act, 2013. M/s. LT Limited also did not pay
interest on loans taken from a public financial institution from 1st April, 2017 and also failed to repay
matured deposits taken from public on due dates from 1st April, 2017 onwards.

Answer the legality of the following in the light of the relevant provision of the Companies Act, 2013 :

(i) Whether Mr. Dhruv is disqualified under Companies Act, 2013 and if so, whether he can continue
as a Director in M/s LT Limited? Further can he also seek reappointment when he retires by
rotation at the AGM of M/s. XT limited scheduled to be held in September, 2019?
(ii) Mr. Dhruv is proposed to be appointed as an Additional Director of M/s. MN Limited in June
2019. Is he eligible to be appointed as an Additional Director in M/s. MN Limited? Decide.
Answer:

According to section 164(2) of the Companies Act, 2013, no person who is or has been a director of a
company which—

(a) has not filed financial statements or annual returns for any continuous period of three financial
years; or
(b) 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 one year or more, shall be eligible to be re-appointed as a director of that
company or appointed in other company for a period of five years from the date on which the said
company fails to do so.
Provided that where a person is appointed as a director of a company which is in default of clause (a) or
clause (b), he shall not incur the disqualification for a period of six months from the date of his
appointment.

Also, according to section 167(1)(a), the office of a director shall become vacant in case he incurs any of
the disqualifications specified in section 164;
Provided that where he incurs disqualification under sub-section (2) of section 164, the office of the
director shall become vacant in all the companies, other than the company which is in default under that
sub-section.
Thus, in the light of the said provisions of the Act and the facts of the question:
(i) Yes, Mr. Dhruv is disqualified under the Companies Act, 2013, as M/s LT Limited did not file
financial statements for a period of three years. Also, the M/s LT Limited
(j) has defaulted in the repayment of matured deposits taken from public since 1st April, 2017 (i.e.
the default has continued for more than one year).
Mr. Dhruv can continue as a director in M/s LT Limited as proviso to section 167(1)(a) provides that where
the director incurs disqualification under section 164(2), the office of the director shall become vacant in

Page No. 21
all the companies, other than the company which is in default under that sub-section. Whereas he has to
vacate the office of director in M/s XT Limited.
Mr. Dhruv cannot be reappointed (in the AGM to be held in September 2019) as director in M/s. XT
Limited.
(ii) Mr. Dhruv cannot be appointed as an Additional Director (in the AGM to be held in June 2019) of M/s
MN Limited because as per section 164(2), he is not eligible to be appointed in other company for a
period of five years from the date of such default.

27.Nov 2018

The Board of Directors of M/s. Diya Steels and Aluminium Limited, a listed Company having a paid
up equity share capital of Rs. 15 crore and preference share capital of Rs. 1 crore and 1100 small
shareholders holding equity shares, seeks your advice on the following:

(i) Is it mandatory for the Company to appoint a Director to represent Small Shareholders?
(ii) If the Company decides to appoint such a Director, the procedure to be followed by the Company
for such appointment and the tenure for which such appointment can be made.
(iii) Whether such a Director be considered as an Independent Director?
(iv) When does a person appointed as a small shareholders Director vacate his office?

Advise suitably in the light of the provisions of the Companies Act, 2013 and the rules framed
thereunder.

Answer:

(i) According to section 151 of the Companies Act, 2013, a listed company may have one director
elected by such small shareholders in such manner and with such terms and conditions as may
be prescribed.
So, it is not mandatory for the company to appoint a director to represent small shareholders.

(ii) Procedure for appointment: The Board of Directors of M/s Diya Steels and Aluminium Limited is advised that:
The Companies (Appointment and Qualification of directors) Rules, 2014 provides for the
procedure for appointment of Small shareholders’ director according to which:

(1) A listed company, may upon notice of not less than

(a) one thousand small shareholders; or
(b) one- tenth of the total number of such shareholders,
whichever is lower, have a small shareholders’ director elected by the small
shareholders.
However, a listed company may opt to have a director representing small shareholders suomotu
and in such a case the provisions of sub-rule (2), given below, shall not apply for appointment of
such director.

Page No. 22
 (2) The small shareholders intending to propose a person as a candidate for the post of small
shareholders’ director shall leave a notice of their intention with the company at least
fourteen days before the meeting under their signature specifying the name, address, shares
held and folio number of the person whose name is being proposed for the post of director
and of the small shareholders who are proposing such person for the office of director.
However, if the person being proposed does not hold any shares in the company, the details of
shares held and folio number need not be specified in the notice.

(3) The notice shall be accompanied by a statement signed by the person whose name is being
proposed for the post of small shareholders’ director stating-
(a) his Director Identification Number;
(b) that he is not disqualified to become a director under the Act; and
(c) his consent to act as a director of the company.

Tenure: A small shareholders’ director shall not, for a period of three years from the date on which
he ceases to hold office as a small shareholders’ director in a company, be appointed in or be
associated with such company in any other capacity, either directly or indirectly.

(iii) Small shareholder director as Independent Director: Such director shall be considered as an
independent director subject to, his being eligible under sub- section (6) of section 149 and his
giving a declaration of his independence in accordance with sub-section (7) of section 149 of the Act.

(iv) Vacation of office by small shareholder director: A person appointed as small shareholders’
director shall vacate the office if -
(a) the director incurs any of the disqualifications specified in section 164;
(b) the office of the director becomes vacant in pursuance of section 167;
(c) the director ceases to meet the criteria of independence as provided in sub- section (6) of
section 149.

28.MTP Mar 2019

State the legal positions as to the valid appointment of the directors in the given situations in the
light of the Companies Act, 2013-

i. Shiksham Ltd. was formed for prompting the girls education with 15 directors in its Board. Due
to expansion of its objective at large scale, the company increased the strength of its directors to
20 without passing SR.
ii. Mr. Kabir was appointed as an alternate director on behalf of Mr. Robert, as Mr. Robert goes
abroad and comes back to India temporarily and leaves country again.
iii. PQR Ltd., who failed to file a financial statement in previous financial year 2017- 2018, appointed

Page No. 23
 Mr. Khurana as a director in July 2018.
Answer

i. As per section 149(1) of the Companies Act, 2013, every public company must have at least three directors.
A private limited company should have minimum two directors. A one person company (OPC) will have
minimum one director. Maximum directors can be 15. Maximum number of directors can be increased beyond
15 by passing a special resolution.
However, MCA vide Notification dated 5-6-2015 issued under section 462 of Companies Act, 2013,
the upper limit of 15 directors is not applicable to section 8 (licensed i.e. non-profit) companies.
Therefore, increase in the strength of directors to 20 in the Shiksham Ltd. without passing SR is
valid.
ii. As per section 161(2) of the Companies Act, 2013, the alternate director will vacate his office as
soon as the foreign director comes to India. Thus, return of Original director (Mr. Robert)to India
would serve. However, if Mr. Robert goes abroad and comes back to India temporarily and leaves
country again, thus, becoming unable to transact business, alternate director (Mr. Kabir) would
continue for such temporary period.
iii. As per section 164(2) of Companies Act, 2013, PQR Ltd. is a defaulted company as it failed to filed
financial statement in the financial year 2017-2018 . If a company is a defaulting company, any
person appointed as director immediately, as per the amendment w.e.f. 7.5.2018, will not be
disqualified for first six months after joining i.e., from date of his appointment. Hence the
appointment of Mr. Khurana as a director is valid upto January 2019.

29.MTP April 2019

On the ground of the conviction for an offence dealing with related party transaction, Mr. Gap was
disqualified to hold the directorship in XYZ Ltd. His vacancy was filled up by Mr. Samarth by the Board
as a director on 3rd April, 2018 which was subsequently approved by the members in the immediate
next general meeting. Unfortunately Mr. Samarth expired on 15th May, 2018 after working about 40
days as a director. The

Board now wishes to fill up the said vacancy by appointing Mr. Able in the forthcoming meeting of the
Board. Advise the Board on the validity of the following appointments as per the provisions under the
Companies Act, 2013.

(i) Holding of Mr. Samarth in place of Mr. Gap

(ii) Appointment of Mr. Able in place of Mr. Samarth
Answer

Section 161(4) of the Companies Act, 2013 provides that if the office of any director appointed by the
company in general meeting is vacated before his term of office expires in the normal course, the
resulting casual vacancy may, in default of and subject to any regulations in the articles of the company,
be filled by the Board of Directors at a meeting of the Board which shall be subsequently approved by
members in the immediate next general meeting.

Page No. 24
Any person so appointed shall hold office only up to the date up to which the director in whose place he
is appointed would have held office if it had not been vacated.
(i) In view of the above provisions, in the given case, the appointment of Mr. Samarth in place of the
disqualified director Mr. Gap was in order. In normal course, Mr. Samarth could have held his office
as director up to the date to which Mr. Gap would have held the same.
(ii) As per facts, Mr. Samarth expired on 15th May, 2018 and again a vacancy has arisen in the office of
director owing to death of Mr. Samarth who was appointed by the board and approved
by members to fill up the casual vacancy resulting from disqualification of Mr. Gap. Vacancy arising on
the Board due to vacation of office by the director appointed to fill a casual vacancy in the first place,
does not create another casual vacancy as section 161 (4) clearly mentions that such vacancy is created
by the vacation of office by any director appointed by the company in general meeting. Hence, the
Board cannot fill in the vacancy arising from the death of Mr. Samarth. So cannot appoint Mr. Able in
the office of Mr. Samarth.
The Board may however appoint Mr. Able as an additional director under section 161 (1) of the
Companies Act, 2013 provided the articles of association authorises the board to do so, in which case
Mr. Able will hold the office up to the date of the next annual general meeting or the last date on which
the annual general meeting should have been held, whichever is earlier.

30.RTP May 2019

Rudraksh Ltd., a public company, was incorporated for supply of solar panels for the emerging project
of government for construction of highways. However, the said project did not turn up for two years
due to some legal implications. During the said period, no any significant accounting transaction was
made and so the company did not file financial statements and annual returns during the last two
financial years. In the meantime, the Board proposed for Mr. Ram & Mr. Rahim to be appointed as an
Independent Directors for their independent and expertise knowledge and experience for better
working and improvement of financial position of the company.

Evaluate in the light of the given facts, the following legal position:
(i) Comment upon the accountability for non- filing of financial statements and annual returns for
last two financial years of the Rudraksh Ltd.
(ii) Nature of the proposal for an appointment of Mr. Ram & Mr. Rahim in the Rudraksh Ltd. for
improvement of the company.
Answer

(i) As per the stated facts, Rudraksh Ltd. is an inactive company as per the provision given under
the Companies Act, 2013. According to the section 455 of the Companies Act, 2013, where a
company is formed and registered under this Act for a future project or to hold an asset or
intellectual property and has no significant accounting transaction, such a company or an inactive
company (which has not been carrying on any business or operation, or has not made any
significant accounting transaction during the last two financial years, or has not filed financial
statements and annual returns during the last two financial years;) may make an application to
the Registrar for obtaining the status of a dormant company. Since in the given case, Rudraksh
Page No. 25
 Ltd. has not filed financial statements or annual returns for 2 financial years consecutively, the
Registrar shall issue a notice to that effect and enter the name in the register maintained for
dormant companies.
(ii) As per section 149(6) read with Rule 4 of the Companies (Appointment and Qualification of
Directors) Rules, 2014, the public companies of prescribed class shall require to appoint minimum
2 Independent directors. However, vide Notification number G.S.R. 839(E) dated 5th July, 2017,
an amendment was issued through the Companies (Appointment and Qualification of Directors)
Amendment Rules, 2017 inter-alia amending rule 4 of the Companies (Appointment and
Qualification of Directors) Rules, 2014. It is provided that an unlisted public company which is a
joint venture, a wholly owned subsidiary or a dormant company will not be required to appoint
Independent Directors. So, the proposal for appointment of Independent Director (Mr. Ram & Mr.
Rahim) is not necessitated.

31.(RTP NOV 2019)

Broadway Infrastructure Limited entered into a contract with Royal forgings, in which wife of Mr.
Patrick, a director of the company is a partner. The contract is for supply of certain components by the
firm for a period of three years with effect from 1 st September , 2018 on credit basis. Explain the
requirements under the Companies Act, 2013, which should have been complied with by Broadway
Infrastructure Limited before entering into contract with Royal forgings.

What would be your answer in case Royal forgings is a private Limited company in which wife of Mr.
Patrick is holding shares?
Answer

The contract for supply of components entered into between Broadway Infrastructure Limited and Royal
forgings, a partnership firm (in which wife of Mr. Patrick, a director of the company is a partner)
attracts Section 184,188 and 189 of the Companies Act, 2013.

As per Section 188, company cannot enter into contract with firm for supply or purchase of goods or
material where director of company or his relative is partner of firm without approval of Board of
directors at board meeting. As per Section 184, interested directors must disclose his interest at board
meeting at which said business is to be discussed. Interested directors should not take part in the
discussion or voting at board meeting. If he does vote, his vote shall not be counted. In case of Private
limited Company interested director can participate in the board meeting after disclosure of interest.
As per Section 189, prescribed particulars of the contract must be entered into the Register of Contract in
which directors are interested in Form MBP-4. Every entry made in Register should be authenticated by
Company Secretary of company or any other person authorized by Board. After each entry in the register,
it shall be placed before the next board meeting and shall be signed by all the directors present thereat.
Based upon discussion of the above provisions:

If the value of the contract or transaction is exceeded than limit specified, prior approval of shareholders
is required to be obtained. Question does not suggest value of transaction. Assuming that it is within
limits specified under the Act, consent of shareholders is not required.
Page No. 26
If Royal forgings is a private limited company: The provision of Section 188 are applicable to it. As the
directors wife (i.e Patrick’s wife) is member of Royal forgings private limited.

Section 184 is not applicable as Mr. Patrick, director of Broadway Infrastructure Limited is neither
director nor holding any shares in Royal Forgings Private Limited. Shares held by Mr. Patrick's wife are
not to be considered. Hence the provisions of Section 184 are not attracted.

32.Nov 2019

You are the CFO and in-charge of legal compliances of large multi-national company in India. The
Board of Directors of the Company are broad based and comprise of competent directors who are
Indian as well as Foreign Nationals. Mr. “X”, who is a Director (Business Development) on the Board is
very often on business tour abroad. He approached you and wants to know from you the regulatory
provisions of the Companies Act, 2013 relating to appointment of Alternate Directors. Analyse the
following situations and advise suitably, Mr. X referring to the provisions of the Companies Act,
2013.

(a) To how many directors can a person be appointed as an alternate director and how many votes
does he have in one Board Meeting.
(b) If the original director joins the Board Meeting through video conferencing without returning to
India, then, can the alternate director appointed in his place attend the same board meeting? If
yes, whose presence and vote will be counted?
(c) In case of private company, where an alternate director is appointed in place of a non-executive
director whose term is indefinite, then, what will be the tenure of such alternate director,
provide the original director does not return to India for a longer period say 3-4 years?
Can an Executive Director/Whole Time Director/Managing Director appoint alternate directors?

Answer

According to Section 161(2) of the Companies Act, 2013, the Board of Directors of a company may, if so
authorised by its articles or by a resolution passed by the company in general meeting, appoint a
person, not being a person holding any alternate directorship for any other director in the company o r
holding directorship in the same company, to act as an alternate director for a director during his
absence for a period of not less than three months from India.

According to section 165, no person shall hold office as a director, including any alternate directorship,
in more than twenty companies at the same time. However, the maximum number of public
companies in which a person can be appointed as a director shall not exceed ten.

Hence, in the instant case, a person can be appointed as an alternate director for only one director in
the same company but maximum twenty different companies.
An alternate director will have only one vote as he can hold alternate directorship for one director only in
the same company.
(a) The office of alternate director is separate from the attendance of the original director in the Board

Page No. 27
 Meeting and as per section 161(2) of the Companies Act, 2013, an alternate director is appointed to
hold the office of original director during his absence from India. Accordingly, as far as attendance
in Board Meeting by the original director is concerned, an alternate director may continue to hold
office even if the original director joins the meeting by video conferencing, but the original director
will be deemed to have joined only as a invitee and the attendance of the alternate director shall be
counted for the purpose of the Board Meeting. This is specific only with respect to matters which
shall not be dealt with through video conferencing. In such matters where video conferencing is
allowed, voting of original director will be counted.
(b) According to second proviso to section 161(2), an alternate director shall not hold office for a
period longer than that permissible to the director in whose place he has been appointed and shall
vacate the office if and when the director in whose place he has been appointed returns to India.
Third proviso says that if the term of office of the original director is determined before he so returns
to India, any provision for the automatic re-appointment of retiring directors in default of another
appointment shall apply to the original, and not to the alternate director.
Hence, in the instant case, the alternate director shall hold office till the time original director returns
to India, even if the period is as long as 3-4 years.
(c) As per section 161(2), the Board of Directors of a company may, if so authorised by its articles or by
a resolution passed by the company in general meeting, appoint a person, not being a person
holding any alternate directorship for any other director in the company or holding directorship in
the same company, to act as an alternate director for a director during his absence for a period of
not less than three months from India.

From the above provision, it is clear that an alternate director can be appointed for any director. Hence,
an alternate director can be appointed for Executive director/ Whole time Directors / Managing Director
however, not by them but by the board of directors.

33.Nov 2019

Mr. 'K' is a small shareholder director in M/s KGP Tyres Limited from 1st April 2018 and in M/s VSR
Cotton Mills Limited from 1st April 2019, in compliance with the relevant provisions of the Companies
Act, 2013. M/s KGP Tyres Limited has not paid interest on the public deposits due from 1st July 2018.
In the light of the information given above, examine the following under the provisions of the
Companies Act, 2013.

(i) Whether the office of Mr. 'K', small shareholder director, shall become vacant in M/s KGP Tyres
Limited and M/s VSR Cotton Mills Limited?
(ii) If yes, state the period from which the office of the directorship shall become vacant.
Answer

According to Rule - 7, Companies (Appointment and Qualification of Directors) Rules, 2014, a person
shall not be appointed as small shareholders' director of a company, if the person is not eligible for
appointment in terms of section 164.

Page No. 28
Also, a person appointed as small shareholders' director shall vacate the office if the director incurs any of
the disqualifications specified in section 164.
According to Section 167(1)(a), the office of a director shall become vacant in case he incurs any of the
disqualification specified in section 164. Provided that when he incurs disqualification under section
164(2), the office of the director shall become vacant in all companies, other than the company which is
in default under that sub section [inserted by Companies (Amendment) Act, 2017 w.e.f. 07-05-2018]
According to proviso of section 164(2) of the Companies Act, 2013, where a person is appointed as a
director of a company which is in default of clause (a) or clause (b), he shall not incur the disqualification
for a period of six months from the date of his appointment.

In the instant case, M/s KGP Tyres Limited has not paid interest on the public deposits due from 1 st July,
2018 and disqualification under section 164(2)(b) of the Companies
Act, 2013 occurs on a person who is or has been a director of a company which has
failed to repay the deposits accepted by it or pay interest thereon and such failure to pay or redeem
continues for one year or more. Accordingly, following are the answers:
(i) Yes, the office of Mr. K shall become vacant in M/s VSR Cotton Mills Limited as he has become
disqualified under section 164(2)(b) from 1st July 2019 but not in M/s KGP Tyres Limited.

(ii) Mr. K’s office of the directorship shall become vacant from 1 st July, 2019.

34.Nov 2019

Mr. 'R' holds directorship in 10 Public Companies and 11 Private Companies as on 31.05.2019. One of
the above Private Company is a dormant Company. Apart from the dormant Company, on 30.06.2019 a
Private Company (in which Mr. R is holding directorship) has become a subsidiary of a Public Company.

In the light of the provisions of the Companies Act, 2013 examine and decide:

(i) The validity of holding directorship of Mr. 'R' with reference to number of directorship as on 31
05.2019 and as on 30.06.2019.
(ii) Whether a Company has power to specify any lesser number of Companies in which a director of the
Company may act as a director?
Answer

(i) According to Section 165 of the Companies Act, 2013,no person shall hold office as a director,
including any alternate directorship, in more than twenty companies at the same time. Whereas
that the maximum number of public companies in which a person can be appointed as a director
shall not exceed ten.
For reckoning the limit of public companies in which a person can be appointed as director,
directorship in private companies that are either holding or subsidiary company of a public company
shall be included.

Page No. 29
 For reckoning the limit of directorships of twenty companies, the directorship in a dormant company
shall not be included.
In the instant case, holding of directorship of Mr. R as on 31.05.2019 is valid as he is holding
directorship in 10 public companies and in 11 private companies out of which one company is
dormant company. So, maximum directorship he is holding in 20 companies.
Holding of directorship of Mr. R as on 30.06.2019 is not valid, as on 30.06.2019 a private company
(in which Mr. R is holding directorship) has become a subsidiary of a public company. Accordingly,
it means that this private company shall deemed to be included in the limit of public companies
and thereby increasing the number of public companies in which he is holding directorship to 11
and making it invalid.
(ii) According to section 165(2), Subject to the provisions of sub-section (1), the members of a company
may, by special resolution, specify any lesser number of companies in which a director of the
company may act as directors.

35.Nov 2019

Mr. Thangavel is a Director in 7 Companies with a DIN (Director Identification Number) allotted to
him. Again, another DIN was inadvertently allotted to him which was never used for filing any
document with any Authority. He desires to surrender the second DIN and keep all his directorship
with the first DIN. Advise him the procedure to be followed under the provisions of the Companies
Act, 2013 and the Rules made thereunder for surrendering the second DIN inadvertently obtained by
him.

Answer

According to Rule 11 of the Companies (Appointment and Qualification of Directors) Rules, 2014:

The Central Government or Regional Director (Northern Region), Noida or any officer authorised by
the Regional Director may, upon being satisfied on verification of particulars or documentary proof
attached with the application received along with fee as specified from any person, cancel or deactivate
the DIN in case on an application made

in Form DIR-5 by the DIN holder to surrender his DIN along with declaration that the said DIN has never
been used for filing of any document with any authority, the Central Government may deactivate such
DIN.

Provided that before deactivation of any DIN in such case, the Central Government shall verify e-records.

36.MTP NOV 2019

Eternal Ltd., a wholly owned government company consisting of 10 directors in its Board with the
subsidiary company, Evergreen Ltd., having 9 directors in its board. Referring to the provisions of the
Companies Act, 2013, examine the following situations:

Page No. 30
(i) Number of directors liable to retire by rotation in Eternal Ltd.at an AGM.
(ii) Number of directors liable to retire in Evergreen Ltd.

(iii) What will be the legal situation in case Eternal Ltd. is a listed Government Company?
Answer

Section 152(6) of the Companies Act, 2013 specifies the legal provision as to the retirement of directors
by rotation of public company . According to the said provision, out of retiring directors, 1/3 rd of
directors must retire every year. However, as per amendment to the Companies Act, 2013, by MCA vide
Notification No. 463(E) on 13/6/17, the government companies are exempted from the applicability of
Section 152(6) and 152 (7) of the Act. Accordingly, a Government company, which is not a listed
company, in which not less than fifty-one per cent of paid up of share capital is held by the Central
Government, or by any State Government or Governments or by the Central Government and one or
more State Governments; and a subsidiary of a Government company, referred above, the provision as to
retirement by rotation is not applicable.

Following are the answers in the light of the stated provisions:

(i) Since Eternal Ltd. is a wholly owned Government Company (other than listed company), so section
152(6) in given circumstances is not applicable. None of the directors of Eternal Ltd. will be retired
by rotation under section 152(6).
(ii) Since Evergreen Ltd. is a subsidiary company of Eternal Ltd. so retirement by rotation is also not
applicable here. None of the directors of Evergreen Ltd. will be retired by rotation under section
152(6).
(iii) In case Eternal Ltd. is a listed Government Company, then section 152(6) will be applicable
presuming that a company has not committed a default in filing its financial statements under
Section 137 or Annual Return under Section 92 with the Registrar. According to it, the Eternal Ltd will
be treated as a
(iv) public company, with 10 directors in its Board, 3 can be non-retiring
(v) and out of 7 retiring directors, 2 must retire every year.

37.MTP Nov 2019

One of the Objects Clauses of the Memorandum of Association of Info Company Limited 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 Extraordinary General Meeting 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.

Examining the provisions of the Companies Act, 2013, answer the following:
Whether the contention of members against the non-compliance of members’ decision by the

Page No. 31
directors is tenable?
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?

ANSWER

Powers of Board: In accordance with the provisions of the Companies Act, 2013, as contained under
Section 179(1), 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:

Provided that in exercising such power or doing such act or thing, the Board shall be subject to the
provisions contained in that behalf in this Act, or in the memorandum or articles, or in any regulations
not inconsistent therewith and duly made there under including regulations m ade by the company in
general meeting.
Provided further that the Board shall not exercise any power or do any act or thing which is directed or
required, whether under this Act or by the members or articles of the company or otherwise to be
exercised or done by the company in general meeting.
Section 180(1) of the Companies Act, 2013, provides that the powers of the Board of Directors of a
company which can be exercised only with the consent of the company
by passing of a special resolution. Clause (a) of Section 180(1) defines one such power as the power to
sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the
company or where the company owns more than one undertaking of the whole or substantially the
whole or any of such undertakings.
Therefore, the sale of the undertaking of a company can be made by the Board of Directors only with
the consent of members of the company accorded vide a special resolution.
Even if the power is given to the Board by the memorandum and articles of the company, the sale of
the undertaking must be approved by the shareholders in general meeting by passing a special
resolution.
Therefore, the correct procedure to be followed is for the Board to approve the sale of the undertaking
clearly specifying the terms of such sale and then convene a general meeting of members to have the
proposal approved by a special resolution.
In the given case, the procedure followed is completely incorrect and violative of the provisions of the
Act. The shareholders cannot on their own make out a proposal of sale and pass an ordinary resolution to
implement it through the directors.
The contention of the shareholders is incorrect in the first place as it is not within their authority to
approve a proposal independently of the Board of Directors. It is for the Board to approve a proposal of
sale of the undertaking and then get the members to approve it by a special resolution. Accordingly the
contention of the members that they were the principals and directors being their agents were bound to
give effect to the decisions of the members, is not correct.
Further, in exercising their powers the directors do not act as agent for the majority of members or even
all the members. The members therefore, cannot by resolution passed by a majority or even
Page No. 32
unanimously supersede the powers of directors or instruct them how they shall exercise their powers.
The shareholders have, however, the power to alter the Articles of Association of the company in the
manner they like subject to the provisions of the Companies Act, 2013.

Study Material

38. In addition to a listed company, which other company is required to appoint a woman director-

(a) a company having paid–up share capital of Rs. one hundred crore
(b) a company having turnover of Rs. three hundred crore
(c) a company meeting both the parameters mentioned at (a) and (b)
(d) a company meeting any one of the parameters i.e. either (a) or (b)

Answer: d) Hint: Second proviso to section 149(1) of the Companies Act, 2013 along with Rule 3 of the
Companies (Appointment and Qualification of Directors) Rules, 2014

39. An independent director who has tendered resignation from the Board shall be replaced by a new
independent director within ---------------------------------------- from the date of such resignation.

(a) one month

(b) two months
(c) three months
(d) four months
Answer: c) Hint: Section 149(4) of the Companies Act, 2013 along with Rule 4 of the Companies
(Appointment and Qualification of Directors) Rules, 2014

40. A shareholder holding shares of nominal value of not more than ------------ is a small shareholder.

(a) Rs. 5,000

(b) Rs.10,000
(c) Rs.15,000
(d) Rs. 20,000
Answer:d) Hint: Section 151 of the Companies Act, 2013

41. A person appointed as a director is required to give his written consent in Form DIR-2 -----------------------
to the company.

a) on or before his appointment as director

b) within 10 days of his appointment as director
c) within 20 days of his appointment as director
Page No. 33
d) None of the above

Answer: a) Hint: Section 152(5) of the Companies Act, 2013 along with Rule 8 of the Companies
(Appointment and Qualification of Directors) Rules, 2014

42. In case the articles of a public company do not provide for the retirement of all directors at every annual
general meeting, not less than ------------------------------------------------ of the total number of directors shall be
liable to retire by rotation.

(a) one-third

(b) within 10 days of his appointment as director

(c) within 20 days of his appointment as director

(d) None of the above

Answer: b) Hint: Section 152(6) of the Companies Act, 2013

43. An independent director shall hold office for a term up to ------------- on the Board of a company.

a) three consecutive years

b) four consecutive years
c) five consecutive years
d) None of the above

Answer: c) Hint: Section 149(10) & 149(11) of the Companies Act, 2013

44. Every company is required to furnish Director Identification Numbers of all its directors to the Registrar
within of the receipt of intimation regarding DIN from the directors.

(a) ten days

(b) fifteen days
(c) twenty days
(d) thirty days

Answer:b) Hint: Section 157 of the Companies Act, 2013

45. The amount of Rs. 1,00,000 deposited by a proposed director (other than a retiring director) shall be
refunded to him if he gets more than -------------------------------------------- of the total valid votes cast either on
show of hands or on poll.

(a) 10%
(b) 15%
(c) 25%
Page No. 34
(d) None of the above

Answer: c) Hint: Section 160 of the Companies Act, 2013

46. An additional director appointed by the Board of Directors shall continue to hold the office up to the
due date of the next ------------------

a) Board meeting
b) Annual general meeting
c) Extra-ordinary general meeting
d) None of the above
Answer: b) Hint: Section 161(1) of the Companies Act, 2013

47. A person is permitted to hold office as director (including any alternate directorship) in maximum
twenty companies of which maximum number of public companies in which he can be appointed as
director shall not exceed

(a) Five
(b) Eight
(c) Ten

(d) Twelve
Answer: c) Hint: Section 165 of the Companies Act, 2013

48. The Articles of Association of Rajasthan Toys Private Limited provide that the maximum number of
Directors in the company shall not exceed 10. Presently, the company has 8 directors. Its Board of Directors
desires to increase the number of directors from 8 to 16. Advise whether under the provisions of the
Companies Act, 2013, the Board can do so.

Answer:

Under Section 149 (1) of the Companies Act, 2013 every company shall have a Board of Directors consisting of
individuals as directors and shall have a minimum number of 3 directors in the case of a public company, 2
directors in the case of a private company, and one director in the case of a One Person Company. The
maximum number of directors shall be 15.

The First Proviso to Section 149 (1) states that a company may appoint more than 15 directors after passing a
special resolution.
From the provisions of section 149 (1) as above, though the minimum number of directors may vary
depending on whether the company is a public, private or a one person company, the maximum number of
directors is same for all types of companies i.e. 15 directors.

Page No. 35
In the given case since the number of directors is proposed to be increased from 8 to 16, the company will be
required to comply with the following provisions:
(i) Alter its Articles of Association as per the provisions of Section 14 of the Act by passing a special
resolution, so as to increase the number of directors in the Articles from 10 to 16;
(ii) Also take approval for increasing the maximum number of directors from 8 to 16 by means of a special
resolution passed by the members at a duly convened general meeting.
49. ADJ Limited has 10 directors on its board. Two of the directors have retired by rotation at an Annual
General Meeting. The place of retiring directors is not so filled up and the meeting has also not expressly
resolved 'not to fill the vacancy'. Since the AGM could not complete its business, it is adjourned till the same
day in the next week, at the same time and place. At this adjourned meeting also the place of retiring
directors could not be filled up, and the meeting has also not expressly resolved 'not to fill the vacancy'.

Referring to the provisions of the Companies Act, 2013, decide:

(i) Whether in such a situation the retiring directors shall be deemed to have been re-appointed at the
adjourned meeting?
(ii) What will be your answer in case at the adjourned meeting, the resolutions for re-appointment of
these directors were lost?
(iii) Whether such directors can continue in case the directors do not call the Annual General Meeting?

Answer

Retiring director – When to be deemed director?

In accordance with the provision of the Companies Act, 2013, as contained in section 152(7)(a) which provides
that if at the annual general meeting at which a director retires and the vacancy is not so filled up and the
meeting has not expressly resolved not to fill the vacancy, the meeting shall stand adjourned to same day in
the next week, at the same time and place, or if that day is a national holiday, till the next succeeding day
which is not a holiday, at the same time and place.
Section 152(7)(b) further provides that if at the adjourned meeting also, the place of the retiring is not filled up
and that meeting also has not expressly resolved not to fill the vacancy, the retiring director shall be deemed
to have been re-appointed at the adjourned meeting, unless at the adjourned meeting or at the previous
meeting a resolution for the re-appointment of such director was put and lost or he has given a notice in
writing addressed to the company or the Board of Directors expressing his desire not to be re-elected or he is
disqualified.
Therefore, in the given circumstances answers to the asked questions shall be as under:
i. In the first case, applying the above provisions, the retiring directors shall be deemed
to have been re-appointed.
ii. In the second case, where the resolutions for the reappointment of the retiring directors were lost, the
retiring directors shall not be deemed to have been re-appointed.
iii. Section 152(6)(c) states that 1/3rd of the rotational directors shall retire at every AGM. Accordingly,

Page No. 36
 the directors will retire as soon as the AGM is held on its due date. Further, as per Section 96 (dealing
with Annual General Meeting), every company other than a One Person Company is required to hold
an Annual General Meeting in each year. Hence, it is necessary for the company to hold the AGM,
where the directors liable to retire by rotation shall retire. In case AGM is not held till the last date on
which it should have been held, the term of retiring directors ends on this last date and it can not be
extended till the new date when the AGM shall be held. As the calling of the AGM is the duty and
responsibility of the directors, they by omitting to call the AGM on its due date cannot take advantage
of their own fault and by that means cannot extend their own continuance in the office for any period
of their choice and as long as the holding of the next AGM does not take place.

50. Prince Ltd. desires to appoint an additional director on its Board of directors. The Articles of the
company confer upon the Board to exercise the power to appoint such a director. As such M is appointed as
an additional director. In the light of the provisions of the Companies Act, 2013, examine:

(i) Whether M can continue as director if the annual general meeting of the company is not held within
the stipulated period and is adjourned to a later date?
(ii) Can the power of appointing additional director be exercised at the Annual General Meeting by the
members?
(iii) As the Company Secretary of the company what checks would you make after M is appointed as an
additional director?
Answer:

Section 161(1) of the Companies Act, 2013 provides that the articles of association of a company may confer
on its Board of Directors the power to appoint any person, other than a person who fails to get appointed as a
director at the general meeting, as an additional director at any time and such director will hold office upto
the date of the next annual general meeting or the last date on which such annual general meeting should
have been held, whichever is earlier.

(i) M cannot continue as director till the adjourned annual general meeting, since he can hold the office of
directorship only up to the
(ii) date of the next annual general meeting or the last date on which the annual general meeting should
have been held, whichever is earlier. Such an additional director shall vacate his office latest on the date
on which the annual general meeting should have been held under Section 96 of the Companies Act,
2013. He cannot continue in the office on the ground that the meeting was not held or it could not be
called within the time prescribed.
(iii) The power to appoint additional directors vests with the Board of Directors and not with the members
of the company. The only condition is that the Board must be conferred such power by the articles of
the company
(iv) As a Company Secretary, I would put the following checks in place in respect of M’s appointment as an
additional director:
(a) He must have got the Directors Identification Number (DIN).

Page No. 37
 (b) He must furnish the DIN and a declaration that he is not disqualified to become a director under
the Companies Act, 2013.
(c) He must give his written consent in Form DIR-2 on or before his appointment as director and
such consent stands filed with the Registrar within 30 days of his appointment.
(d) His appointment is made by the Board of Directors.
His name is entered in the statutory records as required under the Companies Act, 2013

51. The Board of directors of XYZ Ltd. filled up a casual vacancy caused by the death of Mr. P by appointing
Mr. C as a director on 3rd April, 2019 which was subsequently approved by the members in the immediate
next general meeting. Unfortunately Mr. C expired on 15th May, 2019 after working about 40 days as a
director. The Board now wishes to fill up the casual vacancy by appointing Mrs. C in the forthcoming
meeting of the Board. Advise the Board in this regard keeping in view the provisions of the Companies Act,
2013.

Answer:

Section 161(4) of the Companies Act, 2013 provides that if the office of any director appointed by the
company in general meeting is vacated before his term of office expires in the normal course, the resulting
casual vacancy may, in default of and subject to any regulations in the articles of the company, be filled by the
Board of Directors at a meeting of the Board which shall be subsequently approved by members in the
immediate next general meeting.

Further, any person so appointed shall hold office only up to the date up to which the director in whose place
he is appointed would have held office if it had not been vacated.

In view of the above provisions, in the given case, the appointment of Mr. C in place of the deceased director
Mr. P was in order. In normal course, Mr. C could have held his office as director up to the date to which Mr. P
would have held the same.

However, Mr. C expired on 15th May, 2018 and again a vacancy has arisen in the office of director owing to
death of Mr. C who was appointed by the board and approved by members to fill up the casual vacancy
resulting from P’s demise. Vacancy arising on the Board due to vacation of office by the director appointed to
fill a casual vacancy in the first place, does not create another casual vacancy as section 161 (4) clearly
mentions that such vacancy is created by the vacation of office by any director appointed by the company in
general meeting. Hence, the Board cannot fill the vacancy arising from the death of Mr. C who was appointed
to fill a casual vacancy.

The Board may however appoint Mrs. C as an additional director under section 161 (1) of the Companies Act,
2013 provided the articles of association authorise the board to do so, in which case Mrs. C will hold the office
up to the date of the next annual general meeting or the last date on which the annual general meeting
should have been held, whichever is earlier.

52. Mr. John is a director of MNC Ltd., which had accepted deposits from public. The financial position of
MNC Ltd. took a southward turn and became bad to worse and ultimately, it failed to repay the deposits
which fell due for payment on 10th April, 2018 and such repayment has not been made till 5th May, 2019.
Page No. 38
Another company JKL Ltd. wants to appoint the said Mr. John as its director at its annual general meeting to
be held on 6th May, 2019. You are required to state with reference to the provisions of the Companies Act,
2013 whether Mr. John can be appointed as a director of JKL Ltd.

Answer

Section 164 (2) (b) of the Companies Act, 2013 states that where a person is or has been a director of a
company which has failed to repay its deposit on due date and such failure continues for one year or more,
then such person shall not be eligible to be appointed as a director of any other company for a period of five
years from the date on which such company, in which he is a director, failed to repay its deposits.
In the instant case, MNC Ltd., has failed to repay its deposit on due dates and the default continues for more
than one year. Hence, Mr. John will not be eligible to be appointed as a director of JKL Ltd

53. XYZ Limited is an unlisted public company having a paid-up share capital of twenty crore rupees as on
31st March, 2019 and a turnover of one hundred fifty crore rupees during the year ended 31st March, 2019.
The total number of directors is thirteen.

Referring to the provisions of the Companies Act, 2013 answer the following:

(i) State the minimum number of independent directors that the company should appoint.
(ii) How many independent directors are to be appointed in case XYZ Limited is a listed company?
Answer:

(i) According to Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014, the
following class or classes of companies shall have at least 2 directors as independent directors:

the Public Companies having paid up share capital of 10 crore rupees or more; or
the Public Companies having turnover of 100 crore rupees or more; or
the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding 50
crore rupees.
In the present case, XYZ Limited is an unlisted public company having a paid-up capital of Rs.20 crores as on
31st March, 2019 and a turnover of Rs.150 crores during the year ended 31st March, 2019. Accordingly, as
per Rule 4 it must have at least 2 directors as independent directors.
(ii) According to Section 149(4) of the Companies Act, 2013, every listed public company shall have at least
one-third of the total number of directors as independent directors. The Explanation to Section 149(4)
specifies that any fraction contained in such one- third numbers shall be rounded off as one.
In the present case, XYZ Limited is a listed company and the total number of directors is 13. Hence, in this
case, XYZ Limited must have at least 5 directors (1/3 of 13 is 4.33 rounded as 5) as independent directors.
Explanation to Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 clarifies that
for the purpose of this Rule the paid up sharecapital or turnover or outstanding loans, debentures and
deposits, as the case may be, as existing on the last date of latest audited financial statements shall be taken
into account.

Page No. 39
In the present case, it is mentioned that paid up capital of XYZ Limited is Rs.20 crore as on 31st March, 2019
and turnover is Rs.150 crore during the year ended 31st March, 2019. It is, therefore, assumed that 31st
March, 2019 is the last date of latest audited financial statements.
54.RTP Nov’2020

The Board of Directors of the Universal Ltd. which is an MNC comprised of directors who were Indian as
well as of Foreign Nationals. Mr. “X”, who is a Director on the Board is very often on business tour abroad.
He approached you being legal expert of the company to know from you the regulatory provisions of the
Companies Act, 2013 relating to appointment of Alternate Directors.

Examine the following situations and advise suitably, Mr. X referring to the provisions of the Companies
Act, 2013.
(a) Number of directors for which a person can be appointed as an alternate director.
(b) Where an alternate director is appointed in place of a director whose term is indefinite, then, what will
be the tenure of such alternate director?
(c) Can an Executive Director/Whole Time Director/Managing Director appoint alternate directors?

Answer

(a) According to Section 161(2) of the Companies Act, 2013, the Board of Directors of a company may,
if so authorised by its articles or by a resolution passed by the company in general meeting, appoint
a person, not being a person holding any alternate directorship for any other director in the
company or holding directorship in the same company, to act as an alternate director for a director
during his absence for a period of not less than three months from India.

According to section 165, no person shall hold office as a director, including any alternate
directorship, in more than twenty companies at the same time. However, the maximum number of
public companies in which a person can be appointed as a director shall not exceed ten.
Hence, in the instant case, a person can be appointed as an alternate director for only one director
in the same company but maximum twenty different companies.

(b) According to second proviso to section 161(2), an alternate director shall not hold office for a period
longer than that permissible to the director in whose place he has been appointed and shall vacate
the office if and when the director in whose place he has been appointed returns to India.
Third proviso says that if the term of office of the original director is determined before he so returns
to India, any provision for the automatic re-appointment of retiring directors in default of another
appointment shall apply to the original, and not to the alternate director.
Hence, in the instant case, the alternate director shall hold office till the time original director returns
to India.

(c) As per section 161(2), the Board of Directors of a company may, if so authorised by its articles or by
a resolution passed by the company in general meeting, appoint a person, not being a person holding
any alternate directorship for any other director in the company or holding directorship in the same
Page No. 40
 company, to act as an alternate director for a director during his absence for a period of not less than
three months from India
From the above provision, it is clear that an alternate director can be appointed for any director by
the board of directors and not by an Executive Director/Whole Time Director/Managing Director for
themselves

55. Examine the following situations in the light of the relevant provision of the Companies Act, 2013:
(mtp-NOV 2020) (8 Marks)

(1) The Board of Director of ABC Ltd. declared interim dividend for the current financial year 2020-2021.
The proposal of dividend declaration was accepted at the meeting and dividend was declared.
However, due to some reasons, the company failed to pay the dividend to the shareholders within
prescribed period. Mr. futuristic, a director on the board of this company, had offer of appointment in
other company PQR Ltd. He wishes to take up the post in the appointed company. Discuss on the
appointment of Mr. Futuristic in PQR Ltd.

(2) Mr. Talented was a director in a holding company and also in its subsidiary company. He was
drawing his managerial remuneration from both the companies in his capacity as a director. It was
brought to the attention of the company that he cannot draw remuneration from both the companies
because of virtue of relationship as a holding and subsidiary company. Discuss on the legality of
drawing managerial remuneration by Mr. Talented from both the companies.

ANSWER

(1) Section 164 talks about the disqualifications of directors under the Companies Act, 2013. In specific,
sub-section (2)(b) of the said section, no person who is or has been a director of a company which has
failed to pay any dividend declared and such failure continues for one year or more, 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
from the date on which the defaulted company fails to do so.
Mr. futuristic, a director on the board of ABC Ltd., had offer of appointment in other company PQR Ltd.
He wishes to take up the post in the other company. In view of above stated provision, since Mr. futuristic
was a director in a company which failed to pay dividend even after 1 year of declaration and so was a
defaulted company. Therefore, he cannot be appointed in PQR Ltd.

(2) Any director who is in receipt of any commission from the company and who is managing or Whole
time director of the company shall not be disqualified from receiving any remuneration of commission
from any holding or subsidiary company of such company subject to its disclosure by the company in the
Board’s report as per section 197(14) of the Companies Act. However subject to the provisions of sections
I to IV of schedule V of the Companies Act, 2013, a managerial person shall draw remuneration from
one/both companies, provided that the total remuneration drawn from the companies does not exceed
the higher maximum limit admissible from any one of the companies of which he is managerial person.
Accordingly, Mr. Talented is advised to check that it does not exceed the higher maximum limit admissible
in any of the companies i.e. either holding or subsidiary.

Page No. 41
56. (A) The Petitioners were directors in NPP Limited. Due to default in NPP Limited under section
164(2)(a) of the Companies Act, 2013 on the account of non-filing of financial statements for
continuous period of three financial years, the said Petitioners were disqualified to be as director in one
or the other companies.
They came for the legal counselling against their holding of disqualifications as directors in order to
challenge before the Tribunal. Following were the position of the petitioners: One of the petitioner, Mr.
X, was also holding directorship in GPS Ltd. and CDM Ltd. Whereas the petitioner, Mr. Y was appointed
one month before in NPP Ltd.. Whereas Petitioner, Mr. Z, was within a year of commission of default,
offered directorship by RSM Ltd.

Advise, in the light of the given facts, the following legal issues:

(a) On the validity of attracting of disqualification of Petitioners in NPP Ltd. and vacation of their
directorship.

(b) What will be consequences of default caused in NPP Ltd. on the holding of Mr. X’s directorship in
GPS Ltd. and CDM Ltd.

(c) On the validity of offered directorship to Mr. Z by RSM Ltd.

(d) Legal position of Mr. Y who was appointed one month before, in NPP Ltd. (8 Marks) (mtp-II- july
2021)

ANSWER

As per the section 164 (2) of the Companies Act, 2013, no person who is or has been a director of a
company which—

(a) has not filed financial statements or annual returns for any continuous period of three financial years;
or

(b) 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 one year or more,
-shall be eligible to be re-appointed as a director of that company or appointed in other company for a
period of five years from the date on which the said company fails to do so.

Provided that where a person is appointed as a director of a company which is in default of clause (a) or
clause (b), he shall not incur the disqualification for a period of six months from the date of his
appointment. Further section 167 (1) of the Companies Act, 2013 states that the office of a director shall
become vacant in case he incurs any of the disqualifications specified in section 164. Provided that where
he incurs disqualification under sub-section (2) of section 164, the office of the director shall become
vacant in all the companies, other than the company which is in default.

Accordingly following are the answers to the questions:

Page No. 42
(a) In the given case, the petitioners have incurred disqualification under sub-section (2) of section 164,
and falling under section 167, whereby the office of the directors shall become vacant in all the
companies, except in the defaulted company. The petitioners, being disqualified under section 164(2)
have to vacate the directorship in all the other companies except in NPP Ltd.

(b) On the basis of the section 167(1), Mr. X has to vacate directorship in GPS Ltd. and CDM Ltd.

(c) Offer of directorship to Mr. Z by RSM Ltd. was within a year of commission of default, so it’s not valid.
As per section 164(2), disqualified director shall not be eligible to be appointed in other company for a
period of five years from the date on which the said company committed the default.

(d) Petitioner, Mr. Y was appointed one month before in NPP Ltd. which is in default, he shall not incur
the disqualification for a period of six months from the date of his appointment as he is freshly appointed.

57. (A) GSTL Ltd., a listed company, has total number of 20 directors on its board. Following is the
composition given as under:
6 directors are independent directors as per the provisions of the Companies Act, 2013,
3 directors are nominee directors appointed by State Bank of India (the financial institution from whom
GSTL has taken financial assistance) and
2 directors are nominee directors appointed by Finance Limited to represent its interest (a financial
institution with whom the company has long-term lease agreement of land).
Advise Board of Director as to computation of total number of directors who are rotational directors
and total number of directors who are liable to retire by rotation. (8 Marks) (mtp-II- july 2021)

ANSWER

As per Section 152(6) of the Companies Act, 2013, unless the articles provide for the retirement of all
directors at every annual general meeting, not less than two-thirds of the total number of directors of a
public company shall be persons whose period of office is liable to determination by retirement of
directors by rotation; and save as otherwise expressly provided in this Act, be appointed by the company
in general meeting.
The remaining directors in the case of any such company shall, in default of, and subject to any
regulations in the articles of the company, also be appointed by the company in general meeting.
Explanation— For the purposes of this sub-section, “total number of directors” shall not include
independent directors, whether appointed under this Act or any other law for the time being in force, on
the Board of a company.
Any person appointed as a nominee director being nominated by any institution in pursuance of the
provisions of any law or any agreement (financial institution that has been created by the Act of
Parliament) cannot be considered as a director liable to retire by rotation.
In the above question, Total number of Directors = 20 – 6 (Independent Directors) – 3 (Nominee
Directors appointed by State Bank of India) = 11
The nominee directors appointed by Finance Limited to represent its interest (a financial institution with
whom the company has long-term lease agreement of land) are not deducted from total number of
directors because Finance Limited is not the financial institution set up under the Act of Parliament.
Total number of directors who are rotational directors = 11*2/3 = 7.33= 8 (not less than 2/3rd)
Total number of directors to retire by rotation = 8*1/3 = 2.6=3 (nearest to 1/3rd)

Page No. 43
Therefore, the total number of directors who are rotational directors and total number of directors who
are liable to retire by rotation are 8 and 3 respectively.

58. (a) Mr. Ramakant, the non-independent director of Superb Industries Limited (SIL) is planning to go
abroad for 4 months for resolving of some family issues related to her daughter. The Board of Directors
of SIL proposed to appoint Mr. Subh as an alternate director in the company in place of Mr. Ramakant.

Following were the legal issues in the given situation:

(1) Mr. Subh does not satisfy the eligibility criteria to become Independent Director of SIL as given
under section 149(6) of the Companies Act, 2013.

(2) Mr. Ramakant returned to India within 2 months before the scheduled arrival.

(3) Mr. Subh (in addition to Mr. Ramakant), to be included in the "total number of directors" used for
calculating rotational directors under sec 152(6).

Examine in the given scenario, the aforementioned legal issues in the light of the Companies Act, 2013.
(8 Marks) (mtp-I- july 2021)

ANSWER

As per Section 161(2) of the Companies Act, 2013, the Board of Directors of a company may, if so
authorised by its articles or by a resolution passed by the company in general meeting, appoint a person,
not being a person holding any alternate directorship for any other director in the company, to act as an
alternate director for a director during his absence for a period of not less than three months from India.
Provided that no person shall be appointed as an alternate director for an independent director unless he
is qualified to be appointed as an independent director under the provisions of this Act.
Provided further that an alternate director shall not hold office for a period longer than that permissible
to the director in whose place he has been appointed and shall vacate the office if and when the director
in whose place he has been appointed returns to India.
Provided also that if the term of office of the original director is determined before he so returns to India,
any provision for the automatic re-appointment of retiring directors in default of another appointment
shall apply to the original, and not to the alternate director.
In the above question, Mr. Ramakant was going abroad for personal cause of family issue related his
daughter, does not effect on the appointment of alternate director. Even if Mr. Subh does not satisfy the
eligibility criteria to become Independent Director of SIL, it does not affect on his appointment as
Alternate Director because Mr. Ramakant, the original director is also not an Independent Director. Since
Mr. Ramakant has returned to India within 2 months before his scheduled arrival, Mr. Subh shall vacate
the office on return of Mr. Ramakant (Original Director) to India.
Therefore, Mr. Subh can be appointed as alternate director of SIL and he shall vacate his office on
returning of Mr. Ramakant to India. The alternate director, Mr. Subh, shall not be included in the “total
number of directors” for the purpose of section 152(6), as alternate director is holding alternate
directorship in place of the original director. Further as per the above provisos given under section 161(2),
it is clearly stated that if the term of office of the original director is determined before he so returns to
India, any provision for the automatic re-appointment of retiring directors in default of another
appointment shall apply to the original, and not to the alternate director. For this very purpose, Mr. Subh,

Page No. 44
will not be included in the “total number of directors” as rotational director under section 152(6) of the
Companies Act, 2013.

59. (a) Excel Limited is a listed Company with a turnover of Rs. 60 Crore in the FY 2016-2017. The
Company appoints Ms. R as the women director on 1st March, 2017. Ms. R is already a director in
twelve companies including ten public companies. Also, Ms. R is a Chartered Accountant in practice.
Further, also, Ms. R, is a Director in Supreme Ltd. where she is acting in a professional capacity. Since
lots of proposal for the holding of directorship in various companies are lined up before Ms. R, so in
order to retain her, the Remuneration and Nomination Committee proposed to enhance the
remuneration of Ms. R from 4 Lakh per month to 6 Lakh per month. However, Supreme Limited was
running in losses in the last 2 years.

Evaluate in the light of the given facts, the following with reference to the provisions of the Companies
Act, 2013:
(i) The validity of appointment of Ms. R in Excel Limited.
(ii) Analyse the proposition of enhancement of remuneration of Ms. R in Supreme Ltd.
(4 Marks) (past exam nov 2020)

OR
Evaluate the following cases of appointment of Director(s), with reference to the relevant provisions of
the Companies Act, 2013: (past exam nov 2020)

(i) Ms. Nisha was appointed a director of LMN Limited on 10th October, 2020 in place of Ms. Rachna,
who resigned from her office on 31st May, 2020 six months before expiry of term of her office. LMN
Limited had its Board meeting on 31st July 2020. Whether appointment of Ms. Nisha is valid?

(ii) The Board of Directors of a Company appointed Mr. Sarvesh as an additional director on 30th July,
2020. Mr. Sarvesh continued to hold his office till 15th October, 2020. The Company had its annual
general meeting on 15th October, 2020 which should have held on 30th September, 2020, Whether Mr.
Sarvesh can hold office till 15th October, 2020?

(b) Eighty-two shareholders of Perish Limited, a listed Company holding shares of nominal value of Rs.
19,000 each proposed Mr. Babulal as a Director on the Board. The paid-up share capital of Perish
Limited is Rs. 6.2 Crore (6,20,000 equity shares of Rs. 100 each). The Company has 800 such
shareholders, who are holding shares of nominal value of Rs. 19,000 or less. Examine with reference to
relevant provisions of the Companies Act 2013, whether Mr. Babulal can be appointed as a Director of
Perish Limited? (4 Marks) (past exam nov 2020)

Answer

(a) (i) According to Section 165 (1), a person shall not hold office as director, including any alternate
directorship, in more than 20 companies at the same time.
Further, out of the above limit of 20 companies, the maximum number of public companies in which a
person can be appointed as a director shall not exceed 10.
In the instant case, since the directorship held by Ms. R is already 10 in public companies, so her
appointment in Excel Limited is not valid.

Page No. 45
(ii) As per SECTION II OF PART II OF SCHEDULE V, Where in any financial year during the currency of
tenure of a managerial person, a company has no profits or its profits are inadequate, it may pay
remuneration to the managerial person not exceeding the limits under (A) and (B) provided in it.
In case of a managerial person who is functioning in a professional capacity, remuneration as per item (A)
may be paid, if such managerial person possesses graduate level qualification with expertise and
specialised knowledge in the field in which the company operates.
Applicable conditions for payment of remuneration: The limits specified under items (A) and (B)
specified in the mentioned Schedule shall apply, if payment of remuneration is approved by a resolution
passed by the Board and, in the case of a company covered under Section 178 (1), also by the Nomination
and Remuneration Committee.
Since Ms. R is a Chartered Accountant in practice and acting in a professional capacity in Supreme Ltd. So,
here as per the above provision, proposal to enhance the remuneration can be done by resolution passed
by the Board. Hence the said proposal of enhancement of remuneration of Ms. R by Nomination and
Remuneration Committee in Supreme Ltd. which is a listed company is valid. Moreover, it also does not
require approval of the Central Government.

Note: As the question talk about the proposal of enhancement of remuneration by Nomination and
Remuneration Committee, this may lead to the understanding that Supreme Ltd. is a listed company in
the said question.

OR

(a) (i) As per Rule 3 of the Companies (Appointment and Qualification of Directors) Rules, 2014 along with
Second proviso to section 149(1), 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.
In the instant case, Ms. Rachna has resigned on 31st May 2020 and the immediate board meeting of LMN
Ltd. was held on 31stJuly, 2020. Ms. Nisha was appointed on 10th October 2020. The intermittent
vacancy of women director shall be filled by 31stJuly, 2020 (immediate Board meeting) or by 1st
September, 2020 (three months from the date of vacancy of Ms. Rachna) whichever is later.
Hence, appointment of Ms. Nisha is not valid.

(ii) As per section 161(1) of the Companies Act, 2013, Additional director shall hold office up to the date
of the next annual general meeting or the last date on which the annual general meeting should have
been held, whichever is earlier.
In the instant case, Mr. Sarvesh, the additional director shall hold office upto next AGM i.e. 30th October
2020 or the last date on which the AGM should have been held i.e. 30th September, whichever is earlier.
But Mr. Sarvesh continued to hold office till 15th October, 2020 which is not valid. He should hold office
till 30th September, 2020.

(b) According to Section 151 of the Companies Act, 2013 and Rule 7 of the Companies(Appointment and
Qualification of Directors) Rules, 2014, a listed company may, upon notice of not less than:

(a) one thousand small shareholders; or

(b) one- tenth of the total number of such shareholders,
Whichever is lower, have a small shareholders’ director elected by the small shareholders.

Page No. 46
The term “small shareholders” means a shareholder holding shares of nominal value of not more than Rs.
20,000 or such other sum as may be prescribed.
In the instant case, Perish Ltd. has 800 small shareholders out of which 82 small shareholders proposed
Mr. Babulal as a director on the Board. Thus, it fulfills the requirement of one-tenth of the total number
of such shareholders (800*1/10: 80). Hence, Mr. Babulal can be appointed as a director of Perish Ltd.

60. (RTP JULY 2021)

Dharma Ltd. in the light of prospective developments in the infrastructure of company decided to have
borrowing on long term basis from financial Institutions. In the Board Meeting held on 15th September,
2020, following proposal of borrowing 2,00,00,000 from Financial institutions on long-term basis was
also presented for consideration. As per the given information, in the light of relevant provisions of the
Companies Act, 2013, examine the eligibility of the amount up to which the Board can borrow from
Financial institution and the state on the validity of the said proposal.

Following were the Balance Sheets of last three years of Dharma Ltd., containing following facts and
figure of financial information :

Particulars As at 31.03.2018 As at 31.03.2019 As at 31.03.2020

Rs. Rs. Rs.
Paid up capital 60,00,000 60,00,000 85,00,000
General Reserve 50,00,000 52,50,000 60,00,000
Credit Balance in Profit 6,00,000 8,50,000 20,00,000
& Loss Account
Securities Premium 3,00,000 3,00,000 3,00,000
Secured Loans 20,00,000 25,00,000 40,00,000
ANSWER

Borrowing from Financial Institutions: As per Section 180(1)(c) of the Companies Act, 2013, the Board of
Directors of a company, without obtaining the approval of shareholders in a general meeting, can borrow
money including moneys already borrowed up to an amount which does not exceed the aggregate of paid
up capital of the company, free reserves and securities premium. Such borrowing shall not include
temporary loans obtained from the company’s bankers in the ordinary course of business. Here, free
reserves do not include the reserves set apart for specific purpose.
Since the decision to borrow is taken in a meeting held on 15th September, 2020, the figures relevant for
his purpose are the figures as per the Balance Sheet as at 31.03.2020. According to the above provisions,
the eligibility of Board of Directors of Dharma Ltd.to borrow up to an amount is calculated as follows:

Page No. 47
Dharma Ltd. is entitled to borrow Rs.1,28,00,000 through board of directors. As in the given case proposal
of borrowing was Rs, 2,00, 00, 000 which is more than eligibility to borrow, therefore, Dharma Ltd, have
to seek approval of shareholders in general meeting. As the proposal of borrowing Rs. 2,00,00,000 from
Financial institutions on long-term basis was presented for consideration in Board Meeting without
approval of shareholders in general meeting, therefore said proposal is invalid

61. (RTP NOV 2021)

Sukesh Web Developers Ltd. (for short SWD) is a public company, incorporated in December, 2018.
Sukesh is the Managing Director of the company. The company is engaged in the business of developing
Websites, Mobile App, providing of On-line Platform for conducting Business Meetings, Class Room
Teachings and providing of pre-filled educational Tablets as per syllabus prescribed by the respective
Central / State Boards, of Classes 6th to 12th.

At the time of incorporation, the company was formed by 7 members, who were actually classmates
when they all were doing B.Tech (Electronics) from IIT, Mumbai. Initially they contributed the capital
from their own resources and the paid up capital at the time of incorporation was Rs. 50 crore. Among
the 7 members, 3 members occupied the position of director in the company. In addition to this, 2
other persons were also appointed as Independent Directors. One is a Professor (Finance) in IIM,
Ahmedabad and another is an Advocate on Record at Supreme Court.

The popularity and user friendly features of On-Line Products, increased the demand, and the turnover
of the company dramatically increased from Rs. 100 crore in March 2019 to Rs. 350 crore by the end of
March 2020.

The Company Secretary in full time employment of the company, apprised the Board that, company
should now appoint at least one woman director on the Board. The Board agreed and the name of
Sudha (the wife of Sukesh) was proposed and approved in the General Meeting of the company. Sudha
was appointed as woman director in the Board of the Company with effect from 10th April, 2020.

Now, the Board of SWD consists of the following persons

Page No. 48
 S. No. Name Designation Group
1. Sukesh Managing Director Promoter
2. Rahul Director Promoter
3. Parmeshwar Director Promoter
4. Kamal Independent Director Professor (Finance)
5. Damodar Independent Director Advocate on Record at Supreme Court
6. Sudha Woman Director Wife of MD

During this pandemic situation, Rahul, one of the member and director in the company passed away
due to Corona in March 2021. Rahul was the key person in procuring new business relations and was
having good connections with various schools, in which the company’s pre-loaded educational Tablets
were being supplied. It was a great set-back to the company.

However, the company went on doing business inspite of the fact that the minimum requirement of
members in SWD reduced from 7 to 6. The Company Secretary apprised to the Board that Arundhati
(the wife of deceased Rahul) has applied for transmission of shares in her name, which were held in the
name of Rahul. The Board accepted the transmission request, and the Board Secretariat of the
company entered the name of Arundhati as member of the company. Now again the minimum
requirement of seven members of this public company fulfilled.
During the Financial Year 2020-21 the five meetings of the Board of Directors were held, but Sudha,
being a woman director, never ever attended any meeting of the Board of Directors due to her shy
nature and always sought leave of absence of the Board. The Company Secretary apprised in the Board
Meeting held in April 2021, about the vacation of the post of woman director on account of continuous
absence of Sudha in the Board Meetings held during the FY 2020-21 and requested the Board to again
propose for the appointment of new woman director and also other director (in replacement of the
demise of Rahul, Ex-Director). The Board accepted the recommendation of the Company Secretary and
was advised to move ahead to complete the legal formalities.
Based on the above scenario, answer the following questions in the light of the Companies Act, 2013:

1. State the legal position w.r.t. appointment of woman director in the Board by the SWD:
(a) It is not required to appoint any woman director, since the company is not a listed entity.
(b) It is not required to appoint woman director, since the paid-up capital of the company is only Rs. 50
crore, which is below the threshold limit of Rs. 100 crore.
(c) It is required to appoint at least one woman director, since the turnover of the company has crossed
Rs. 300 crore, which is actually Rs. 350 crore as on 31st March, 2020.
(d) If both the conditions i.e. paid-up capital of Rs. 100 crore or more; and turnover of Rs. 300 crore or
more, are fulfilled, then SWD is required to have at least one woman director.

ANSWER- c

2. The company is not a listed entity, even then it has appointed two Independent Directors. Why?
(a) By appointing independent director(s), the company is benefitted of their expertise and wisdom.
(b) The company was required to appoint independent directors since its paid-up capital is Rs. 50 crore,
(at the time of incorporation) which is above the threshold limit of Rs. 10 crore.

Page No. 49
(c) Appointing of Advocate on Records at Supreme Court as Independent director is beneficial to
address the legal issues.
(d) The company was used to get the financial advice, hence it appointed a Financial Professional as an
Independent Director.

ANSWER- b

3. In the above case, Sudha (the wife of Sukesh, Managing Director) was appointed to fill up the
vacancy of woman director. Whether appointment of relative of Managing Director to fill up the
vacancy of woman director is permissible?
(a) Sudha is the wife of MD, and hence cannot be considered to be appointed as woman director. So
her appointment is not valid.
(b) There is no prohibition/ restriction in the Companies Act, 2013 to appoint any woman to fill up the
vacancy of woman director even she is a relative of any of the director.
(c) Woman director should be chosen only from the Databank maintained by the Indian Institute of
Company Affairs (IICA), New Delhi.
(d) Sudha should immediately break the relationship with her husband, who is MD in the company, if
she want to continue as woman director, in order to maintain the independent status.

ANSWER- b

4. Sudha being a woman director did not attended any meeting during FY 2020-21. However she always
sought leave of absence of the Board. Sudha argued that when leave of absence have been sought, she
may continue to be on Board by holding the Office of Woman Director. What is your opinion?
(a) No, a woman director is given a special treatment under the Law, so the post of woman director
shall not be treated as vacant.
(b) Since in the given she has sought leave of absence of the Board, so the office of woman director
shall not be treated as vacant.
(c) The office of a director shall become vacant in case he absents himself from all the meetings of the
Board of Directors held during a period of 12 months with or without seeking leave of absence of the
Board.
(d) In option (c) above, words used are ‘he’ and ‘himself’, which are used for a male person, so the
intention of the law makers are very clear and the office of woman director cannot be treated as
vacant. If the intention of the law maker would have been to include a woman director, the words in
the above sentence [Option C] should have been used as ‘she’ and ‘herself’.

ANSWER- c

62. (RTP NOV 2021)

ABC Ltd. is incorporated in December, 2010 under the Companies Act, 1956. For the year ended on 31st
March, 2020 and 31st March, 2021, the financial and other relevant information of the company were
as under:

Page No. 50
The Company Secretary apprised the Board, of requirement of appointment of Independent Director
(ID). Few candidates were shortlisted, out of which 2 candidate were nominated and got approval of
the shareholders in the General Meeting. The appointment of both the IDs were approved for a tenure
of one year only.
Enumerate in the given situation, the following issues in the light of the Companies Act, 2013:
(A) Whether ABC Ltd. was required to appoint Independent Director (ID) based on the information as
on 31st March, 2020.
(B) In the given case, the tenure of the appointment of both the IDs is for one year only. Comment upon
the validity of the term of appointment of the Independent Directors.

ANSWER

(A) As per Section 149 read with the Rule 4(1)(iii) of the Companies (Appointment and Qualifications of
Directors) Rules, 2014, which provides that the following class or classes of companies shall have at least
two directors as independent directors –
(i) the Public Companies having paid-up share capital of ten crore rupees or more; or
(ii) the Public Companies having turnover of one hundred crore rupees or more; or
(iii) “the Public Companies which have, in aggregate, outstanding loans, debentures and deposits,
exceeding fifty crore rupees”.

Here, the words used in the law is ‘exceeding 50 crore rupees’, whereas the banks borrowings in the given
case is only Rs. 50 crore and not exceeding Rs. 50 crore. Hence, no need to appoint ID on the basis of
information as on 31st March, 2020.
Further, the words used in the said Rule is ‘Outstanding Loans’ and not the ‘Sanctioned limit’. The limit is
Rs. 60 crore, but the outstanding loans is only Rs. 50 crore.
Therefore, in line with the stated legal provision, there is no need to appoint Independent Directors as on
31/3/2020.

(B) According to Section 149(10) read as ‘Subject to the provisions of section 152, an independent
director shall hold office for a term up to five consecutive years on the Board of a company, and shall be
eligible for re-appointment on passing of a special resolution by the company and disclosure of such
appointment in the Board's report.
Page No. 51
Further, Vide MCA General Circular No. 14/ 2014 dated 9th June, 2014, under Para (iii) Section 149(10),
it has been clarified that section 149(10) of the Act provides for a term of “upto five consecutive years”
for an ID. As such while appointment of an ID for a term of less than five years would be permissible,
appointment for any term (whether for five years or less) is to be treated as a one term under section
149(10). Therefore, the tenure of the appointment of both the IDs for one year only, will be considered
as valid.

Page No. 52
 2 Appointment & Remuneration of Managerial Personnel

ATTEMPTS
MAY NOV MAY NOV NOV JAN JULY NOV
COVERAGE
2018 2018 2019 2019 2020 2021 2021 2021

STUDY Q.- 11 to 27
MAT

PAST NO NO NO
Q-4, 6 Q-29 Q-30 ------
EXAMS QUES QUES QUES

NO
MTP Q-3, 5 Q-6, 7 Q-8 Q-32 Q-31 -----
QUES

NO NO NO
RTP Q-1, 2 Q-28 Q-10 Q-9, 25
QUES QUES QUES

Page No. 53
1.RTP May 2018

There are Four Directors in Shine Paper Ltd. Mr. Madhav being the director in station, has been
authorized to draw and endorse Cheque or other negotiable instruments on account of the company
and also to direct registration of transfer of shares and signing the share certificates etc. Evaluate
whether he will be treated as managing director of the company? Also recommend the procedure of
appointment

Answer

Managing Director [Section 2(54)]: Section 2(54) of the Companies Act, 2013 defines a “Managing
Director” as a director who is entrusted with substantial powers of management of the affairs of the
company by:

a) virtue of articles of a company, or

b) an agreement with the company, or

c) a resolution passed in its general meeting, or by its Board of Directors, and includes a director
occupying the position of the managing director, by whatever name called.

Explanation to Section 2 (54) clarifies that substantial powers of the management shall not be deemed to
include the power to do such administrative acts of a routine nature when so authorised by the Board
such as:
(i) the power to affix the common seal of the company to any document or
(ii) to draw and endorse any cheque on the account of the company in any bank or (iii) to draw and
endorse any negotiable instrument or
(iv) to sign any certificate of share or
(v) to direct registration of transfer of any share.
In the instant case, Mr. Madhav, a director in Shine Paper Limited has been authorized to draw and
endorse cheque or other negotiable instruments on account of the company and also to direct
registration of transfer of shares and signing the share certificates etc.

Hence, according to explanation to section 2(54), Mr. Madhav will not be treated as managing director of
the company as he is authorized to do administrative acts of a routine nature.

Procedure of appointment of a managing director [Section 196(4)]

Approval by Board and Shareholders: Subject to the provisions of section 197 and Schedule V, a
managing director shall be appointed, and the terms and conditions of such appointment and
remuneration payable be approved by the Board of Directors at a meeting. The terms and conditions
and remuneration

(i) approved by Board of Directors at a meeting and

Page No. 54
(ii) approval of shareholders by a resolution at the next general meeting of the company.
Approval By central Government: In case Such appointment is at variance to the conditions specified in
Part 1 of Schedule V, the appointment shall be approved by the central government

Inclusion of Certain Disclosures in Notice: The notice convening Board or general meeting for
considering such appointment shall include the terms and conditions of such appointment,
remuneration payable and such other matters including interest, of a director or directors in such
appointments, if any.

Filing Return : A return in the prescribed form (Form No. MR.1) along with the prescribed fee shall be
filed with the Registrar within sixty days of such appointment.

2.RTP May 2018

Excel limited is a listed company with a turnover of Rs. 60 crores in the FY 2016-2017. The company
appoints Ms. R as the women director on 1 st March 2017. Ms. R is already a director in twelve
companies including ten public companies. Also, Ms. R is chartered accountant in practice.
Further, also, Ms. R, is a director in Supreme Ltd. where he is acting in a professional capacity. Since
lots of proposal for the holding of directorship in various companies are lined up before the Ms. R, so
in order to retain him, Remuneration and nomination committee proposed to enhance the
remuneration of Ms. R from 4 Lac per month to 6 Lac per month. However, Supreme Limited was
running in losses for last 2 years.
Evaluate in the light of the given facts, the following situations with reference to the provisions of the
Companies Act, 2013-
(1) The validity of an appointment of Ms. R in Excel Limited.
(2) Analysis the proposition of enhancement of the remuneration of Ms. R in Supreme Ltd.
Answer:

Number of directorships: As per section 165(1) of the Companies Act, 2013, no person shall hold
office as director, including any alternate directorship, in more than 20 companies at the same time.
Out of the limit of 20, the maximum number of public companies in which a person can be appointed as a
director shall not exceed 10. [Proviso to section 165(1)]
It may be noted that the limit of Public Companies(10) shall include directorship in private companies that
are either holding or subsidiary company of a public company.
However the limit of directorships of 20 Companies shall not include the directorship in a dormant
company:; as also in a section 8 Company.
Private companies that is either holding or subsidiary company of a public company shall be included in
reckoning the limit of public companies in which a person can be appointed as a director.
In the instant case, Ms. R was appointed as a women director on 1st March, 2017 in Excel Limited. She
was already holding directorship in twelve companies including ten public companies.
As Ms. R was already a director in ten public companies, her appointment in Excel Limited is not valid as
it will lead to her directorship in 11 public companies.

Page No. 55
In this case, either she can choose between the companies in which she wishes to continue to hold the
office of director or resign her office as director i n the other remaining companies to maintain the limit
of holding of directorship.
Remuneration : In the given case, since, the company has suffered losses in Schedule V]
The total remuneration that supreme Limited is intending to pay to Ms. R is 72 lakhs per the last two
years, the company will pay remuneration to its directors in accordance with the provisions of Schedule V
to the Companies Act, 2013.
In case of a managerial person who is functioning in a professional capacity, no approval of Central
Government is required, if such managerial person is not having any interest in the capital of the
company or its holding company or any of its subsidiaries directly or indirectly or through any other
statutory structures and not having any, direct or indirect interest or related to the directors or
promoters of the company or its holding company or any of its subsidiaries at any time during the last
two years before or on or after the date of appointment and possesses graduate level qualification with
expertise and specialised knowledge in the field in which the company operates. [Item B of Section II of
annum, from the current remuneration of 48 lakhs per annum. Since Ms. R is working in professional
capacity and the remuneration has been proposed by the remuneration Committee, no approval of
Central Government is required. Also, the case shall be in compliant of Schedule V, Central Government
approval will not be required even when there is increase in remuneration payable.

3.Aug 2018 Qn no 4(a) 8 Marks:

Mr. Xavier, a Director of Mac Ltd., was appointed on 1st April, 2017. One of the terms of
appointment was that if the company had no profits in a particular year, he will be paid remuneration
in accordance with Schedule V. For the financial year ended 31 st March, 2018, the company suffered
heavy losses. The company was not in a position to pay any remuneration but he was paid Rs. 60 lacs
for the year, as paid to other directors. The effective capital of the company is Rs.100 crores.

Besides, Mr. Young was appointed as Managing Director in the Company. He was appointed for the
term of 5 years with effect from 1.4.2014 on a salary of Rs. 12 lakh per annum. The Board of Directors
of the company on coming to know of certain questionable transactions, terminated the services of
the Mr. Young from 1.3.2018. Mr. Young termed his removal as illegal and claimed compensation
from the company.
Integrating the given facts in terms of the relevant provisions of the Companies Act, 2013, Examine the
following situations:
(i) Validity of the payment of remuneration to Mr. Xavier.
(ii) Compensation paid, if any, to Mr. Young.

Answer:

(i) Under Section II of Part II of Schedule V to the Companies Act, 2013, the remuneration payable to
a managerial personnel is linked to the effective capital of the company. Where in any financial year
during the currency of tenure of a managerial person, a company has no profits or its profits are
inadequate, it may, without Central

Page No. 56
Government approval, pay remuneration to the managerial person not exceeding Rs. 120 Lakh in the
year in case the effective capital of the company is Rs. 100 crore to 250 crore. The limit will be doubled
if approved by the members by special resolution and further if the appointment is for a part of the
financial year the remuneration will be pro-rated.

From the foregoing provisions contained in schedule V to the Companies Act, 2013 the payment of Rs.
60 Lac in the year as remuneration to Mr. Xavier is valid in case he accepts it, as under the said
schedule he is entitled to a remuneration of Rs. 120 Lakh in the year.
(ii) According to Section 202 of the Companies Act, 2013, compensation can be paid only to a Managing,
Whole-time Director or Manager. Amount of compensation cannot exceed the remuneration which he
would have earned if he would have been in the office for the unexpired term of his office or for 3 years
whichever is shorter. No compensation shall be paid, if the director has been found guilty of fraud or
breach of trust or gross negligence in the conduct of the affairs of the company.
In light of the above provisions of law, the company is not liable to pay any compensation to Mr. Young,
if he has been found guilty of fraud or breach of trust or gross negligence in the conduct of affairs of the
company. But, it is not proper on the part of the company to withhold the payment of compensation on
the basic of mere allegations. The compensation payable by the company to Mr. Young would be Rs. 13
Lacs calculated at the rate of Rs. 12 Lacs per annum for unexpired term of 13 months.

4.Nov 2018 Qn no 4(a) 8 Marks:

Mr. Gopi is the Managing Director of LGB Limited. The Company wants to vacate the post of
Managing Director on March 31, 2018 and appoint Mr. Lakshmikant in place of Mr. Gopi due to
hands on experience and better track records. The tenure of appointment of Mr. Gopi is upto 30th
June, 2022 with the condition that he will get compensation in case of early vacation of his office due
to the Company's requirements. Mr. Gopi was drawing following remuneration during the last five
financial years:

Financial Year Remuneration(Rs. in Lakhs)

2013-14 30
2014-15 35
2015-16 40
2016-17 45
2017-18 50

Mr. Gopi approaches you to know the amount of compensation he will be eligible to get from LGB
Limited, as per the provisions' of the Companies Act, 2013. Advise.

What will be your answer if a person is only an ordinary director but neither the Managing Director nor
a whole time director nor a manager of the Company?

Answer:

Page No. 57
Section 202 of the Companies Act, 2013 provides the provisions for compensation for loss of office of
managing or whole-time director or manager as under:

(i) A company may make payment to a managing or whole-time director or manager, but not to any
other director, by way of compensation for loss of office, or as consideration for retirement from
office or in connection with such loss or retirement.
(ii) The compensation payable to such managing director or whole-time director or manager shall not
exceed the remuneration he would have earned if he would have been in office for the remainder of
his term or three years, whichever is shorter, calculated on the basis of the average remuneration
earned by him during a period of three years immediately preceding the date on which he ceased
to hold such office, or where he held the office of less than three years, then for such shorter
period.
In the light of the provisions as stated above, the following will be taken into consideration while
calculating the amount of compensation to be paid to Mr. Gopi:
Average remuneration earned by Mr. Gopi during a period of 3 years (i.e. 2015-16, 2016-17 and 2017-18)
immediately preceding the date on which he ceased to hold office: [(40+45+50)/3] = Rs. 45 Lakhs.
Remainder time period left to be served in office has Mr. Gopi not been removed, 1st April, 2018 to
30th June, 2022, 4 years.

Thus, Mr. Gopi will be paid compensation for Maximum 3 years.

Amount of Compensation: The maximum amount of compensation that Mr. Gopi will be eligible to get
from LGB Limited is Rs.45 lakhs for 3 years = Rs. 135 lakhs.
In case of an ordinary director: Further, if a person is only an ordinary director but neither the Managing
Director nor a whole time director nor a manager of the company, he shall not be eligible to get
compensation for loss of office, or as consideration for retirement from office or in connection with
such loss or retirement.

5.Oct 2018

Best Limited, with a paid up capital of Rs. 400 crore proposes to pay the following remuneration :

(i) Commission @ 5% of net profit to Mr. X, Managing Director;

(ii) Directors under than Mr. X are proposed to be paid monthly remuneration of Rs. 60,000/- and
also commission @ 1% of net profit of the Company, subject to the condition that overall
remuneration payable to each of them shall not exceed 2% of net profit of the Company. The
commission is to be distributed equally amongst all the Directors.
(iii) The Company also proposes to pay suitable additional remuneration to Mr. Careful, a Director
for professional services rendered as Lawyer whenever such services are utilized.
Answer:

Section 197 of the companies provides a way to pay managerial remuneration in case of company’s
having adequate profits. As per the section, the total managerial remuneration payable by a public
company, to its directors, including managing director and whole-time director, and its manager in

Page No. 58
respect of any financial year shall not exceed eleven per cent. of the net profits of that company for
that financial year computed in the manner laid down in section 198 of the Companies Act, 2013.

In case where there is any one managing director; or whole-time director or manager shall not exceed
five per cent. of the net profits of the company and there is more than one such director remuneration
shall not exceed ten per cent. of the net profits to all such directors and manager taken together.
Moreover, any remuneration for services rendered by any such director which are of a professional
nature shall not be included in the managerial remuneration. Further, a director may receive
remuneration by way of a fee for each meeting of the board, or a committee thereof attended by him.
As per the facts given in the questions, following are the answers :
(i) Commission at the rate of 5% P.A to Mr. X its Managing Director can be paid as per the provisions
of the Companies Act, 2013.
(ii) To other directors a monthly fixed remuneration of Rs. 60,000 along with a commission of 1% on
net profits of the company with a limit that maximum remuneration per director shall not exceed
2% of net profits. This remuneration can be paid if this remuneration along with th e remuneration
paid above does not exceed the maximum limit of managerial remuneration of 11% under the Act.
(iii) Additional remuneration paid to Mr. Careful for professional services rendered by him. This
remuneration can be paid by the company as it is outside the purview of managerial remuneration.
Here as per the fact, it is assumed that the company is earning profits and hence is paying remuneration
to its managerial personnel under section 197 of the Act.

6.Nov 2018, RTP Nov-2018:

The Article of Association of a listed company have fixed payment of sitting fee for each meeting of
Directors subject to maximum of Rs. 30,000. In view of the increased responsibilities of independent
directors of listed companies, the company proposes to increases the sitting fee to Rs. 45,000 per
meeting. Advise the company about the requirement under the Companies Act, 2013 to give effect to
the proposal.

Answer:

Section 197(5) of the Companies Act, 2013 provides that a director may receive remuneration by way of
fee for attending the Board / Committee meetings or for any other purpose as may be decided by the
Board, provided that the amount of such fees shall not exceed the amount as may be prescribed. The
Central Government through rules prescribed that the amount of sitting fees payable to a director
attending meetings of the Board or committees thereof may be decided by the Board of Directors or
the Remuneration Committee thereof which shall not exceed the sum ofRs. 1 lac per meeting of the
Board or committee thereof. Further, the Board may decide different sitting fee payable to independent
and non-dependent directors other than whole-time directors.
From the above, it is clear that fee to independent directors can be increased from Rs. 30000 to Rs. 45000
per meeting by passing a resolution in board meeting and altering the Articles of Association by passing
special resolution.

Page No. 59
7.MTP Apr 2019

The International Technologies Limited, a listed company, being managed by a

Managing Director proposes to pay the following managerial remuneration:

(i) Commission at the rate of five percent of the net profits to its Managing Director, Mr. Kunal.
(ii) The directors other than the Managing Director are proposed to be paid monthly remuneration of
Rs.50,000 and also commission at the rate of one percent of net profits of the company subject to
the condition that overall remuneration payable to ordinary directors including monthly
remuneration payable to each of them shall not exceed two percent of the net profits of the
company. The commission is to be distributed equally among all the directors.
(iii) The company also proposes to pay suitable additional remuneration to Mr. Bhim, a director, for
professional services rendered as legal counsel, whenever such services are utilized.

You are required to examine with reference to the provisions of the Companies Act, 2013 the validity
of the above proposals.

Answer

International Technologies Limited, a listed company, being managed by a Managing Director proposes
to pay the following managerial remuneration:

(i) Commission at the rate of 5% of the net profits to its Managing Director,
Mr. Kunal: Part(i) of the second proviso to section 197(1), provides that except with the approval of the
company in general meeting by a special resolution, the remuneration payable to any one managing
director; or whole time director or manager shall not exceed 5 % of the net profits of the company and
if there is more than one such director then remuneration shall not exceed 10 % of the net profits to all
such directors and manager taken together.
In the present case, since the International Technologies Limited is being managed by a Managing
Director, the commission at the rate of 5% of the net profit to Mr. Kunal, the Managing Director is
allowed and no approval of company in general meeting is required.
(ii) The directors other than the Managing Director are proposed to be paid monthly remuneration of
Rs. 50,000 and also commission at the rate of 1 % of net profits of the company subject to the
condition that overall remuneration payable to ordinary directors including monthly remuneration
payable to each of them shall not exceed 2 % of the net profits of the company: Part (ii) of the second
proviso to section 197(1) provides that except with the approval of the company in general meeting by a
special resolution, the remuneration payable to directors who are neither managing directors nor whole
time directors shall not exceed-

(A) 1% of the net profits of the company, if there is a managing or whole time director or manager;
(B) 3% of the net profits in any other case.
In the present case, the maximum remuneration allowed for directors other than managing or whole
time director is 1% of the net profits of the company because the company is having a managing director
also. Hence, if the company wants to fix their remuneration at not more than 2% of the net profits of
the company, the approval of the company in general meeting is required by a special resolution.

Page No. 60
(iii) The company also proposes to pay suitable additional remuneration to Mr. Bhim, a director, for
professional services rendered as legal counsel, whenever such services are utilized:
(1) According to section 197(4), the remuneration payable to the directors of a company, including any
managing or whole-time director or manager, shall be determined, in accordance with and subject
to the provisions of this section, either
(i) by the articles of the company, or
(ii) by a resolution or,
(iii) if the articles so require, by a special resolution, passed by the company in general meeting, and
(2) the remuneration payable to a director determined aforesaid shall be inclusive of the remuneration
payable to him for the services rendered by him in any other capacity.
(3) Any remuneration for services rendered by any such director in
other capacity shall not be so included if—
(i) the services rendered are of a professional nature; and
(ii) in the opinion of the Nomination and Remuneration Committee, if the company is covered under
section 178(1), or the Board of Directors in other cases, the director possesses the requisite
qualification for the practice of the profession.
Hence, in the present case, the additional remuneration to Mr. Bhim, a director for professional
services rendered as legal counsel will not be included in the maximum managerial remuneration and is
allowed but opinion of Nomination and Remuneration Committee is to be obtained.
Also, the International Technologies Limited (a listed company) shall disclose in the Board’s report, the
ratio of the remuneration of each director to the median employee’s remuneration and such other
details as may be prescribed under the Companies (Appointment and Remuneration of Managerial
personnel) Rules, 2014.

8.MTP Nov 2019

Shining star limited, a listed company, deals in sole business of trading of Aluminum foils and sheets.
Due to economic slowdown and less domestic consumption company was running into the losses. Mr
Chander, an eminent professional with vast experience in cost management, was appointed on the
Board of company as whole time director. He enjoyed his 75th birthday on the same date of his
appointment i.e 18.07.2019.

Following relevant extracts from latest audited financial statements (as on 31 March 2019), were;
1. Authorised Share capital is INRs 390 crores, out of which paid up share capital was INRs 215 crores;
company was in process of FPO, hence had balance of INRs 15 crores in share application money
account.
2. Balance of reserve and surplus was INRs 170 crores, out of which INRs 150 crores was general
reserve and INRs 20 crores was on accounts of revaluation reserve.
3. Outstanding amount for long term loans was INRs 200 crores

Page No. 61
4. Company had investment of INRs 40 crores at book value; due to economic slowdown same is
not liquid investment
5. Accumulated losses were of INRs 10 crores.
In the light of the stated facts, evaluate the given situations in terms of the relevant provisions
of the Companies Act, 2013-
(i) As to the validity of appointment of Mr. Chander, as managerial person in office of whole time
director in Shining Star Limited.
(ii) Compute the Effective capital of Shining Star Limited for payment of managerial
remuneration.
Since Shining Star was running in loss, state the maximum amount of remuneration to be paid
on yearly basis to each managerial person.
Answer
(i) As per section 196(3) of the Companies Act, 2013,no company shall appoint or continue the
employment of any person as managing director, whole-time director or manager who is below the age
of twenty-one years or has attained the age of seventy years, unless that appointment of a person who
has attained the age of seventy years may be made by passing a special resolution in which case the
explanatory statement annexed to the notice for such motion shall indicate the justification for
appointing such person.
Where no such special resolution is passed but votes cast in favour of the motion exceed the votes, if any,
cast against the motion and the Central Government is satisfied, on an application made by the Board,
that such appointment is most beneficial to the company, the appointment of the person who has
attained the age of seventy years may be made.
Therefore, appointment of Mr. Chander in the shining Ltd. being of 75 years, is valid in compliance to
above legal provisions.

(ii) As per section II of Part II of Schedule V to the Companies Act 2013- "effective capital" means the
aggregate of the paid-up share capital (excluding share application money or advances against shares);
amount, if any, for the time being standing to the credit of share premium account; reserves and surplus
(excluding revaluation reserve); long-term loans and deposits repayable after one year (excluding working
capital loans, overdrafts, interest due on loans unless funded, bank guarantee, etc., and other short-term
arrangements) as reduced by the aggregate of any investments (except in case of investment by an
investment companywhose principal business is acquisition of shares, stock, debentures or other
securities), accumulated losses and preliminary expenses not written off.

According to the particulars given:

Particulars Amounts
(in Crores)
Paid up share capital (Excluding share application money) INRs 200
(215-15)
General Reserve (Excluding Revaluation Reserve) (170-20) INRs 150

Page No. 62
 Long term loans INRs 200
Less: Investments (40) and Accumulated losses (10) (INRs 50)
Effective Capital INRs 500

(iii) As per Section II of Part II of Schedule V to the Companies Act 2013, in case of no or inadequate
profits, if effective capital of company is INR 250 crore or more then, yearly remuneration per person
payable shall not exceed by INR 120 lakh plus 0.01% of the effective capital in excess of INR 250 crore.

The maximum remuneration that may be paid to each managerial person will be [120 lakh+ (0.01% x 250
cr)] = 122.5 lakh.
Provided that the remuneration in excess of above limits may be paid if the resolution passed by the
shareholders is a special resolution.

9.RTP May 2020

Aster limited (a listed company) deals in business of trading of raw materials to the manufacturer of
the garments. The company was running in losses for past two years. The Board of the company
appointed Mr. C with good experience in cost management to overcome the said situation, as whole
time director. He was of 70 years on the date of his appointment i.e. 18.12.2019.

Following were the relevant extracts from latest audited financial statements (as on 31st March,
2019);
(a) Authorised Share capital is Rs. 390 crore, out of which paid up share capital was Rs. 215 crore;
company was in process of FPO, hence had balance of Rs. 15 crore in share application money
account.
(b) Balance of reserve and surplus was Rs. 170 crore, out of which Rs. 150 crore was general reserve
and Rs. 20 crore was on accounts of revaluation reserve.
(c) Outstanding amount for long term loans was Rs. 200 crore
(d) Company had investment of Rs. 40 crore at book value; due to economic slowdown same is not
liquid investment
(e) Accumulated losses were of Rs. 10 crore.

In the light of the given facts and figures, evaluate the given situations in terms of the relevant
provisions of the Companies Act, 2013-
(i) Validity of appointment of Mr. C, as managerial person in office of whole time director in Aster
Limited.
(ii) Compute the Effective Capital of Aster Limited for payment of Managerial Remuneration.
(iii) Since Aster Ltd. was running in losses, state the maximum amount of remuneration to be paid
on yearly basis to each Managerial Person.
Answer

(i) As per section 196(3) of the Companies Act, 2013, no company shall appoint or continue the
employment of any person as managing director, whole-time director or manager who is below the

Page No. 63
 age of twenty-one years or has attained the age of seventy years, unless that appointment of a
person who has attained the age of seventy years may be made by passing a special resolution(SR)
with explanatory statement annexed to the notice for such an appointment of person.

Where no such special resolution is passed but votes cast in favour of the motion exceed the votes,
if any, cast against the motion and the Central Government is satisfied, on an application made by
the Board, that such appointment is most beneficial to the company, the appointment of the
person who has attained the age of seventy years may be made.
Therefore, appointment of Mr. C as whole time director in the Aster Ltd. being of 70 years, is valid in
compliance to above legal provisions.
(ii) As per section II of Part II of Schedule V to the Companies Act
2013, "effective capital" means the aggregate of the paid-up share
(iii) capital (excluding share application money or advances against shares); amount, if any, for the time
being standing to the credit of share premium account; reserves and surplus (excluding revaluation
reserve); long-term loans and deposits repayable after one year (excluding working capital loans,
overdrafts, interest due on loans unless funded, bank guarantee, etc., and other short-term
arrangements) as reduced by the aggregate of any investments (except in case of investment by an
investment company
(iv) whose principal business is acquisition of shares, stock, debentures or other securities),
accumulated losses and preliminary expenses not written off.
According to the particulars given:

Particulars Amounts (in

Crore)
Paid up share capital (Excluding share application Rs.200
money) (215-15)
General Reserve (Excluding Revaluation Reserve) (170- Rs.150
20)
Long term loans Rs.200
Less; Investments (40) and Accumulated losses (10) Rs.50
Effective Capital Rs.500
(v) As per Section II of Part II of Schedule V to the Companies Act 2013,in case of no or inadequate
profits, if effective capital of company is Rs. 250 crore or more then, yearly remuneration per
person payable shall not exceed by Rs. 120 lakh plus 0.01% of the effective capital in excess of Rs.
250 crore.
The maximum remuneration that may be paid to each managerial person will be [120 lakh+ (0.01% x
250 cr)] = 122.5 lakh.
Provided that the remuneration in excess of above limits may be paid if the resolution passed by the
shareholders is a special resolution.

10.RTP May 2019

Page No. 64
Mr. X, a Director of Sunrise Limited, was appointed on 1 st April, 2016, one of the terms of
appointment was that in the absence of adequacy of profits or if the company had no profits in a
particular year, he will be paid remuneration in accordance with Schedule V. The company suffered
heavy losses during the financial year ended 31st March, 2018. The company was not in a position to
pay any remuneration, but he was paid Rs. 50 Lakhs for the year, as paid to other directors. The
effective capital of the company is Rs. 150 crores. Referring to provisions of the Companies Act, 2013,
examine the validity of the above payment of remuneration to Mr. X.

Answer

Under Section II of Part II of Schedule V to the Companies Act, 2013, the remuneration payable to
managerial personnel is linked to the effective capital of the company. According to section 197(3) of the
Companies Act, 2013, where in any financial year during the currency of tenure of a managerial person, a
company has no profits or its profits are inadequate, it may, pay remuneration to the managerial person
not exceeding Rs. 120 Lakh in the year in case the effective capital of the company is between Rs.100
crore to Rs. 250 crore. However, the remuneration in excess of Rs. 120 Lakhs may be paid if the
resolution passed by the shareholders is a special resolution.

From the foregoing provisions contained in schedule V to the Companies Act, 2013 the payment of Rs. 50
Lakh in the year as remuneration to Mr. X is valid in case he accepts it, as under the said schedule he is
entitled to a remuneration of Rs. 120 Lakh in the year and his terms of appointment provide for payment
of the remuneration as per schedule V.

Study Material
11. The appointment of a whole-time company secretary is mandatory when the paid-up share capital
of a company is Rs. --.

(a) Two crores

(b) Three crores
(c) Five crores
(d) Ten crores
Answer: c) Hint: Section 203 of the Companies Act, 2013 along with Rule 8A of the Companies
(Appointment and Remuneration of Managerial Personnel) Rules, 2014

12. A whole-time key managerial personnel of a company can hold office in another company if the
other company is:

a) its holding company

b) its subsidiary company
c) its associate company
d) a small company

Page No. 65
Answer :b) Hint: Section 203(3) of the Companies Act, 2013

13. Board of Directors of Centra Tech Limited desires to appoint Nipun, aged 22 years as the
Managing Director of the company. Nipun is currently a director and the son of Ramesh, the
immediate Managing Director who expired in a car accident. State whether Nipun can be appointed
as Managing Director.

a) Yes; since he is above the age of 21 years

b) No; since he has not attained the age of 25 years
c) Since he has not attained the age of 25 years, permission of Registrar of Companies is to be
obtained for his appointment as MD
d) Since he has not attained the age of 25 years, permission of Central Government is to be obtained
for his appointment as MD
Answer: a) Hint: Section 196(3) of the Companies Act, 2013

14. Maximum sitting fees per meeting that can be paid to a director of a company shall not exceed Rs.
------------------

(a) 1,00,000
(b) 2,00,000
(c) 2,50,000
(d) 3,00,000
Answer: a) Hint: Section 197(5) of the Companies Act, 2013 along with Rule 4 of the Companies
(Appointment and Remuneration of Managerial Personnel) Rules, 2014

15. In addition to a listed company which other public company is required to have whole-time key
managerial personnel?

a) which has paid-up share capital of Rs. 2 crores

b) which has paid-up share capital of Rs. 3 crores
c) which has paid-up share capital of Rs. 4 crores
d) which has paid-up share capital of Rs. 10 crores
Answer: d) Hint: Section 197(5) of the Companies Act, 2013 along with Rule 4 of the Companies
(Appointment and Remuneration of Managerial Personnel) Rules, 2014

16. Is it permissible for whole-time key managerial personnel of a company to hold the office of
director in any company?

a) Yes; but with the permission of his Board of Directors

b) Yes; but with the permission of shareholders accorded by passing an ordinary resolution
Page No. 66
c) Yes; but with the permission of shareholders accorded by passing a special resolution
d) Yes; but with the permission of shareholders accorded by passing an ordinary resolution which is
further ratified by the concerned Registrar of Companies
Answer: a) Hint: proviso to section 203(3) of the Companies Act, 2013

17. Total managerial remuneration payable by a public company to its directors (including MD, WTD
and manager) in any financial year shall not exceed ------------------------------- of its net profits for that
financial year.

a) Five percent
b) Seven percent
c) Ten percent
d) None of the above
Answer: d) Hint: Section 197(1) of the Companies Act, 2013

18.Due to non-compliance of certain requirements under the Companies Act, 2013 not amounting to
fraud, a company was required to re-state its financial statements for the financial year 2016-17
during the current year. After the financial statements were re-stated it was found that the
Managing Director (MD) of that period, who is now retired, was paid excess remuneration to the
extent of Rs. 5,00,000. State whether such excess amount is recoverable.

a) Nothing can be recovered from the ex-MD

b) Excess amount shall be recovered irrespective of whether at present he is MD or not
c) Only 50% of excess amount is recoverable because no fraud is involved
d) Only 25% of excess amount is recoverable because no fraud is involved
Answer: b) Hint: Section 199 of the Companies Act, 2013

19. The five directors of a non-listed public company are being paid Rs. 40,000 each as sitting fees for
every meeting. The two independent directors of this company shall also be paid not less than
each as sitting fees per meeting.

(a) 40,000
(b) 25% of Rs. 40,000
(c) 50% of Rs. 40,000
(d) 75% of Rs. 40,000

Answer: (a) Hint: Proviso to Rule 4 of the Companies (Appointment and Remuneration of Managerial
Personnel) Rules, 2014

20. A Whole-time director can be appointed or re-appointed for a term not exceeding ------------------
at a time.
Page No. 67
(a) Two years
(b) Three years
(c) Five years
(d) Seven years

Answer: c) Hint: Section 196(2) of the Companies Act, 2013

21. Advise Super Specialties Ltd. in respect of the following proposals under consideration of its
Board of Directors:
(i) Appointment of Managing Director who is above the age of 70 years;
(ii) Payment of commission of 4% of the net profits per annum to the directors of the company;
(iii) Payment of remuneration of Rs. 40,000 per month to the whole-time director of the company
which is running in loss and having an effective capital of Rs. 95.00 lacs.
Answer:

Under the proviso to section 196 (3) of the Companies Act, 2013, a person who has attained the age of
seventy years may be employed as managing director, whole-time director or manager by the approval
of the members by a special resolution passed by the company in the general meeting and the
explanatory statement annexed to the notice for such motion shall indicate the justification for
appointing such person.

However, where no such special resolution is passed but votes cast in favour of the motion exceed the
votes, if any, cast against the motion and the Central Government is satisfied, on an application made
by the Board, that such appointment is most beneficial to the company, the appointment of the person
who has attained the age of seventy years may be made.

In the given situation, Super Specialties Ltd. can employ a person who is above the age of 70 years as its
Managing Director, if the above-mentioned legal procedure is followed. Thus, the appointment can be
regularised by passing a special resolution and if that is not done but the votes cast in favour of the
motion exceed the votes, if any, cast against the motion, the approval of Central Government is
required to be obtained.

(ii) Under section 197 (1) the limit of total managerial remuneration payable by a public company, to its
directors, including managing director and whole-time director, and its manager in respect of any
financial year shall not exceed eleven per cent of the net profits of that company for that financial year
computed in the manner laid down in section 198. Further, the third proviso to section 197 (1) provides
that except with the approval of the company in general meeting by a special resolution, the
remuneration payable to directors who are neither managing directors nor whole-time directors shall
not exceed one per cent. of the net profits of the company, if there is a managing or whole-time
director or manager; or three per cent of the net profits in any other case.

Therefore, in the given case, the commission of 4% is beyond the limit specified, and the same should

Page No. 68
be approved by the members by passing a special resolution.
(iii) If, in any financial year, a company has no profits or its profits are inadequate, the company shall
not pay to its directors, including managing or whole time director or manager, any remuneration
exclusive of any fees payable to directors except in accordance with the provisions of Schedule V.
Section II of Part II of schedule V provides that where in any financial year during the currency of tenure
of a managerial person, a company has no profits or its profits are inadequate, it may pay remuneration
to the managerial person not exceeding Rs. 60 lacs for the year if the effective capital of the company is
negative or up toRs. 5 crores.

In the given situation, the proposed remuneration of Rs. 40,000 per month (i.e.4,80,000 per annum)
can be paid to the whole-time director of the company which is running in loss because the
remuneration is less than permissible Rs. 60 lacs

22. Mr. X, a Director of MJV Ltd., was appointed as Managing Director on 1st April, 2015. One of the
terms of appointment was that in the absence of adequacy of profits or if the company had no profits
in a particular year, he will be paid remuneration in accordance with Schedule V. For the financial
year ended 31st March, 2017, the company suffered heavy losses. The company was not in a position
to pay any remuneration but he was paid Rs. 50 lacs for the year. The effective capital of the
company is Rs.150 crores. Referring to the provisions of Companies Act, 2013, as contained in
Schedule V, examine the validity of the above payment of remuneration to Mr. X.

Answer:

Under Section II of Part II of Schedule V to the Companies Act, 2013, the remuneration payable to
managerial personnel is linked to the effective capital of the company. Schedule V states that where
in any financial year during the currency of tenure of a managerial person, a company has no profits or
its profits are inadequate, it may pay remuneration to the managerial person not exceeding Rs. 120
Lakhs in the year in case the effective capital of the company is between Rs. 100 crores and 250 crores.
However, the remuneration in excess of 120 Lakhs may be paid if the resolution passed by the
shareholders is a special resolution.

From the foregoing provisions as contained in Schedule V, the payment of Rs. 50 lacs in the year of loss
as remuneration to Mr. X is less than Rs. 120 lacs which is otherwise permissible when the effective
capital of the company is between Rs. 100 crores and 250 crores. Thus, payment of Rs. 50 lacs being
made to Mr. X is within the prescribed limit and can be validly made to him.

23. Mr. Doubtful was appointed as Managing Director of Carefree Industries Ltd. for a period of five
years with effect from 1.4.2016 on a salary of Rs. 12 lakhs per annum with other perquisites. The
Board of Directors of the company came to know about certain questionable transactions entered
into by Mr. Doubtful and therefore, terminated his services as Managing Director from 1.3.2019. Mr.
Doubtful termed his removal as illegal and claimed compensation from the company. Meanwhile
the company paid a sum of Rs. 5 lakhs on ad hoc basis to Mr. Doubtful pending settlement of his
dues. Discuss whether:

(i) The company is bound to pay compensation to Mr. Doubtful and, if so, how much.

Page No. 69
(ii) The company can recover the amount of Rs. 5 lakhs paid on the ground that Mr. Doubtful is not
entitled to any compensation, because he is guided by corrupt practices.
Answer: According to Section 202 of the Companies Act, 2013, compensation can be paid only to a
Managing Director, Whole-time Director or Manager. Amount of compensation cannot exceed the
remuneration which he would have earned if he would have been in the office for the unexpired term
of his office or for 3 years whichever is shorter. No compensation shall be paid, if the director has been
found guilty of fraud or breach of trust or gross negligence in the conduct of the affairs of the
company.

In light of the above provisions of law, the company is not liable to pay any compensation to Mr.
Doubtful, if he has been found guilty of fraud or breach of trust or gross negligence in the conduct of
affairs of the company. But, it is not proper on the part of the company to withhold the payment of
compensation on the basis of mere allegations. The compensation payable by the company to Mr.
Doubtful would be Rs. 25 Lacs calculated at the rate of Rs. 12 Lacs per annum for unexpired term of 25
months.
Regarding ad-hoc payment of Rs. 5 Lacs, it will not be possible for the company to recover the amount
from Mr. Doubtful in view of the decision in case of Bell vs. Lever Bros. (1932) AC 161 where it was
observed that a director was not legally bound to disclose any breach of his fiduciary obligations so as
to give the company an opportunity to dismiss him. In that case the Managing Director was initially
removed by paying him compensation and later on it was discovered that he had been guilty of
breaches of duty and corrupt practices and that he could have been removed without compensation

24. International Technologies Limited, a listed company, being managed by a Managing Director
proposes to pay the following managerial remuneration:

(i) Commission at the rate of five percent of the net profits to its Managing Director, Mr. Kamal.

(ii) The directors other than the Managing Director are proposed to be paid monthly remuneration of
Rs. 50,000 and also commission at the rate of one percent of net profits of the company subject to
the condition that overall remuneration payable to ordinary directors including monthly
remuneration payable to each of them shall not exceed two percent of the net profits of the
company. The commission is to be distributed equally among all the directors.
(iii) The company also proposes to pay suitable additional remuneration to Mr. Bhatt, a director, for
professional services rendered as software engineer, whenever such services are utilized.
You are required to examine with reference to the provisions of the Companies Act, 2013 the validity
of the above proposals. (MTP-MAY 2019)

Answer:

International Technologies Limited, a listed company, being managed by a Managing Director proposes
to pay the following managerial remuneration:

(i) Commission at the rate of 5% of the net profits to its Managing Director, Mr. Kamal: Part (i) of
the Second Proviso to Section 197(1), provides that except with the approval of the company in

Page No. 70
 general meeting by a special resolution, the remuneration payable to any one managing director
or whole time director or manager shall not exceed 5% of the net profits of the company and if
there is more than one such director then remuneration shall not exceed 10% of the net profits
to all such directors and manager taken together.
In the present case, since the International Technologies Limited is being managed by a
Managing Director, the commission at the rate of 5% of the net profit to Mr. Kamal, the
Managing Director is allowed and no approval of company in general meeting is required.

(ii) The directors other than the Managing Director are proposed to be paid monthly remuneration
of Rs. 50,000 and also commission at the rate of 1 % of net profits of the company subject to the
condition that overall remuneration payable to ordinary directors including monthly
remuneration payable to each of them shall not exceed 2% of the net profits of the company:
Part (ii) of the Second Proviso to Section 197(1) provides that except with the approval of the
company in general meeting by a special resolution, the remuneration payable to directors who
are neither managing directors nor whole time directors shall not exceed-
(A) 1% of the net profits of the company, if there is a managing or whole-time director or
manager;
(B) 3% of the net profits in any other case.
In the present case, the maximum remuneration allowed to directors other than managing
or whole-time director is 1% of the net profits of the company because the company is
managed by a managing director. Hence, if the company wants to fix directors’
remuneration at not more than 2% of the net profits of the company, the approval of the
company in general meeting is required by passing a special resolution.
(iii) The company also proposes to pay suitable additional remuneration to Mr. Bhatt, a director, for
professional services to be rendered by him as software engineer, whenever such services are
utilized by the company:
(1) According to section 197(4), the remuneration payable to the directors of a company,
including any managing or whole-time director or manager, shall be determined, in
accordance with and subject to the provisions of this section, either
(i) by the articles of the company, or
(ii) by a resolution or,
(iii) if the articles so require, by a special resolution, passed by the company in general
meeting, and
(2) the remuneration payable to a director determined aforesaid shall be inclusive of the
remuneration payable to him for the services rendered by him in any other capacity.
(3) Any remuneration for services rendered by any such director in other capacity shall not be
so included if—

Page No. 71
 (i) the services rendered are of a professional nature; and
(ii) in the opinion of the Nomination and Remuneration Committee, if the company is
covered under sub-section (1) of section 178, or the Board of Directors in other
cases, the director possesses the requisite qualification for the practice of the
profession.
Hence, in the present case, the additional remuneration payable to Mr. Bhatt, a director,
for professional services rendered by him as software engineer will not be included in the
maximum managerial remuneration. Accordingly, such additional remuneration shall be
allowed but opinion of Nomination and Remuneration Committee needs to be obtained.
(4) Also, the International Technologies Limited (a listed company) shall disclose in the
Board’s report, the ratio of the remuneration of each director to the median employee’s
remuneration and such other details as are prescribed under Rule 5 of the Companies
(Appointment and Remuneration of Managerial personnel) Rules, 2014.

25.(RTP NOV 2020)

International Technologies Limited, a listed company, being managed by a Managing Director

proposes to pay the following managerial remuneration:

(i) Commission at the rate of five percent of the net profits to its Managing Director, Mr. Kamal.
(ii) The directors other than the Managing Director are proposed to be paid monthly remuneration
of Rs. 50,000 and also commission at the rate of one percent of net profits of the company
subject to the condition that overall remuneration payable to ordinary directors including
monthly remuneration payable to each of them shall not exceed two percent of the net profits
of the company. The commission is to be distributed equally among all the directors.
You are required to examine with reference to the provisions of the Companies Act, 2013 the validity
of the above proposals.

Answer

International Technologies Limited, a listed company, being managed by a Managing Director proposes
to pay the following managerial remuneration:

(i) Commission at the rate of 5% of the net profits to its Managing Director, Mr. Kamal: Part (i) of the
Second Proviso to Section 197(1), provides that except with the approval of the company in general
meeting by a special resolution, the remuneration payable to any one managing director or whole
time director or manager shall not exceed 5% of the net profits of the company and if there is more
than one such director then remuneration shall not exceed 10% of the net profits to all such
directors and manager taken together.
In the present case, since the International Technologies Limited is being managed by a Managing
Director, the commission at the rate of 5% of the net profit to Mr. Kamal, the Managing Director is
allowed and no approval of company in general meeting is required.

Page No. 72
(ii) The directors other than the Managing Director are proposed to be paid monthly remuneration of
Rs. 50,000 and also commission at the rate of 1 % of net profits of the company subject to the
condition that overall remuneration payable to ordinary directors including monthly remuneration
payable to each of them shall not exceed 2
% of the net profits of the company. Part (ii) of the Second Proviso to Section 197(1) provides that
except with the approval of the company in general meeting by a special resolution, the
remuneration payable to directors who are neither manag ing directors nor whole time directors
shall not exceed-
(A) 1% of the net profits of the company, if there is a managing or whole -time director or
manager;
(B) 3% of the net profits in any other case.
In the present case, the maximum remuneration allowed to directors other than managing or
whole-time director is 1% of the net profits of the company because the company is managed by a
managing director. Hence, if the company wants to fix directors’ remuneration at not more than
2% of the net profits of the company, the approval of the company in general meeting is required
by passing a special resolution.

26. The following particulars are extracted from the statement of profit and loss of Surya Cement
Limited for the year ended 31st March 2020:

Sr. no Particulars Amount

1) Gross Profit 60,00,000
2) Profit on sale of building (Cost Rs. 10,00,000 and 5,00,000
written down value Rs 6,00,000)
3) Salaries & wages 2,50,000
4) Sundry Repairs to Fixed Assets 1,00,000
5) Subsidy from the government 3,00,000
6) Compensation for breach of contract 1,00,000
7) Depreciation 1,40,000
8) Loss on sale of investments 2,00,000
9) Interest on unsecured loans 50,000
10) Interest on debentures issued by the company 1,00,000
11) Repair Expenses to fixed assets (Capital in nature) 2,00,000
12) Net Profit 13,00,000
You are required to calculate the overall managerial remuneration payable under section 197 of the
Companies Act, 2013 subject to the provisions under Schedule V

ANSWER:

The managerial remuneration shall be computed in accordance with the provisions laid down in section
198 of the Companies Act 2013

Particulars Amount
Net profit 13,00,000
Less: Capital profits on sale of building (Note 1) 1,00,000

Page No. 73
 Salaries & Wages (Note 2) -
Sundry repairs to fixed Assets (Note 2) -
Subsidy from the government (Note 3) -
Compensation from breach of contract (Note 2) -
Depreciation (Note 2) -
Loss on Sale of Investments (Note 4) -
Interest on unsecured loans (Note 2) -
Interest on debentures (Note 2) -
Add: Repair expenses to fixed assets (Capital in 2,00,000
Nature) (Note 5)
Net profits as per section 198 14,00,000

Therefore, the overall maximum managerial remuneration shall be 11% of the Net profits computed in
accordance with section 198 i.e. 11% x 14,00,000 = Rs. 1,54,000. It is assumed that the net profit given in
the question is arrived after giving effect to all the line items given therein.

Notes:
1) As per section 198(3), credit shall not be given for profits from the sale of any immovable property or
fixed assets of a capital nature comprised in the undertaking or any of the undertakings of the company,
unless the business of the company consists, whether wholly or partly, of buying and selling any such
property or assets; provided that where the amount for which any fixed asset is sold exceeds the written-
down value thereof, credit shall be given for so much of the excess as is not higher
than the difference between the original cost of that fixed asset and its written- down value.
Accordingly, the calculation of capital profit is computed as under:
Profit = Selling Price – Written down value
5,00,000 = Selling Price – 6,00,000. Therefore, Selling Price = 11,00,000. Capital profit = 11,00,000 –
10,00,000 (original cost) = 1,00,000
2) According to section 198 (4), the following sums shall be deducted:
a) All the usual working charges – salaries and wages are considered as usual working charges
b) expenses on repairs, whether to immovable or to movable property, provided the repairs are not of a
capital nature
c) any compensation or damages to be paid in virtue of any legal liability including a liability arising from a
breach of contract
d) interest on debentures issued by the company
e) interest on unsecured loans and advances
f) depreciation to the extent specified in section 123

Since all of the above charges are already deducted while arriving at net profit, no effect will be given.
3) According to section 198 (1), credit shall be given for bounties and subsidies received from any
government, or any public authority constituted or authorised in this behalf, by any government, unless
and except in so far as the Central Government otherwise directs.
4) According to section 198(5), Loss of a capital nature including loss on sale of the undertaking or any of
the undertakings of the company or any part thereof shall not be deducted. In the given question, in the

Page No. 74
absence of the specific information about the nature of investments, the said investments are considered
as current investments and revenue in nature and accordingly no effect is given as it is already deducted
while arriving at net profit.
5) According to section 198(4), expenses on repairs, whether to immovable or to movable property is
deducted only for repairs which are not capital in nature. Accordingly, we have added back to the net
profit.

27. You are provided with the relevant extract of the financials of Tribhuke Company Limited for the
financial year ended as on 31st March 2020 as below:

Sr. No Particulars Amount

1 Authorised Share Capital 10,00,00,00,000
2 Issued and Paid up Share Capital 5,00,00,000
3 Share Premium Account 25,00,000
4 Reserves and Surplus (Amount of Rs. 35,00,000
25,00,000 is included as Revaluation Reserve)
5 Term loan repayable after 1 year 12,00,000
6 Current Borrowings (Cash Credit Loan from 20,00,000
Banks)
7 Non-Current Investments 10,00,000
8 Accumulated Losses 5,00,000
9 Preliminary expenses not written off 3,00,000
The company has three managerial persons in its board of directors – Mr. A – Managing Director, Mr. B
– Whole Time Director and Mr. C – Director. According to their terms of appointment, in case the
company has no or inadequate profits, the managerial remuneration payable to them shall be in
accordance with Schedule V. You are required to compute the total managerial remuneration payable
considering the provisions of Schedule V.

ANSWER:

Section II of Part II of Schedule V states the provisions applicable for the payment of managerial
remuneration in case where the company has no profits or its profits are inadequate. In such a case,
managerial remuneration is payable on the basis of the effective capital as on the last date of the financial
year for which the remuneration is payable.

Accordingly, to compute the total managerial remuneration payable, we should first calculate the
effective capital.

Particulars Amount
Issued and Paid up Capital 5,00,00,000
Add: Share Premium Account 25,00,000
Add: Reserves and surplus 10,00,000
excluding revaluation reserve

Page No. 75
 Add: Term Loan repayable after 1 12,00,000
year (excluding working capital
loans)
Less: Non-Current Investments 10,00,000
Less: Accumulated Losses 5,00,000
Less: Preliminary Expenses 3,00,000
Effective Capital 5,29,00,000

Explanation 1 to Section II of Part II of Schedule V states effective capital means the aggregate of the paid-
up share capital (excluding share application money or advances against shares); amount, if any, for the
time being standing to the credit of share premium account; reserves and surplus (excluding revaluation
reserve); long-term loans and deposits repayable after one year (excluding working capital loans, over
drafts, interest due on loans unless funded, bank guarantee, etc., and other short-term arrangements) as
reduced by the aggregate of any investments (except in case of investment by an investment company
whose principal business is acquisition of shares, stock, debentures or other securities), accumulated
losses and preliminary expenses not written off.
Section II of Part II of Schedule V states that where the effective capital is 5 crores and above but less than
100 crores, the remuneration payable shall not exceed Rs. 84 lakhs. Accordingly, the total managerial
remuneration payable by the Companies to three managerial personnel for the year ended 31st March
2020 shall not exceed Rs. 252 lakhs (Rs. 84 lakhs x 3 managerial personnel).

28. (RTP-NOV 2018)

Mr. AMIT is the Managing Director of ANJ Limited, which is a non-government public company. The
directors of CHH Limited decided to appoint Mr. AMIT as the Managing Director of the company, even
though Mr. AMIT decided not to vacate his place of office of Managing Director of ANJ Limited. A notice
for a Board meeting specifying a resolution containing the proposal of appointment of Mr. AMIT was
served to all the eligible directors of CHH Limited. Out of eight directors of the company, six directors
attended the meeting and out of them four directors gave consent to the resolution, one director voted
against the said appointment and another director abstained from voting. The Board of Directors seek
your opinion whether Mr. AMIT can be appointed as the Managing Director, of the company in this
situation. Referring to the applicable provisions of the Companies Act, 2013, advise them

ANSWER

Appointment of Key Managerial Personnel

As per Section 203(3) of the Companies Act, 2013, a whole-time key managerial personnel shall not hold
office in more than one company except in its subsidiary company at the same time. However, the above
sub-Section (3), shall not disentitle a key managerial personnel from being a director of any company with
the permission of the Board.
Provided also that a company may appoint or employ a person as its managing director, if he is the
managing director or manager of one, and of not more than one, other company and such appointment
or employment is made or approved by a resolution passed at a meeting of the Board with the consent of
all the directors present at the meeting and of which meeting, and of the resolution to be moved thereat,
specific notice has been given to all the directors then in India.

Page No. 76
In the given case, unanimous consensus of all the directors present at the meeting was lacking. Hence,
Mr. Amit cannot be appointed as a Managing Director of CHH Limited.

29. (past exam nov 2020)

(a) You are a young women Chartered Accountant from India, having graduated from a top notch
business school in India and later on became a Certified Public Accountant (CPA) from USA. You have a
special acumen for providing scratch to end business advisory and regulatory related solutions. Your
client, M/s New Tech Software Solutions Limited (NTSSL) is a listed entity engaged in developing
customised software packages for two and three wheeler automobile manufacturers in India and
abroad. The Company follows strict corporate governance norms in letter and spirit and has the
following composition of Board of Directors:

NAME DESIGNATION/CATEGORY
Mr. X CEO and Managing Director
Mr. Y Non-Independent and Non-
Executive Director
Mr. A, Mr. B, Mr. C and Mr. D Independent Directors
Mrs. E Independent Women Director

During the financial year 2019-2020, the Company made the following remuneration to its Directors:

Name Amount (in Rs.)

Mr. X-CEO & MD Monthly remuneration of Rs.
50,000 + Commission of
Rs.1,50,000 calculated as a
percentage of net profits
Mr. Y Commission at the rate of 1 % of
the net profit

(i) Mr. Y was paid a fee of Rs. 1,00,000 for the services rendered by him, as a graduate civil engineer for
valuing the assets of the Company. Though he is not a Registered Valuer, he carried out the valuation
on the assumption that, valuation can be done by a person having such qualifications and experience
for registered valuers.

(ii) Payment of Rs. 5,00,000 insurance premium towards Directors and Officers Liability Policy to protect
the Company against any negligence on the part of Mr. X, the Managing Director. A claim of Rs.
1,00,000 was lodged with the Insurance Company as a result of guilty of negligence of Mr. X.
With the above information, the said Company approached you seeking certain clarifications. Clearly
explaining the relevant provisions of the Companies Act, 2013 and the Rules made there under, provide
your professional advise to the following questions as raised by the Company:

(i) Whether the payments made to Mr. X and Mr. Y forms part of an overall maximum managerial
remuneration?

Page No. 77
(ii) Whether payment of insurance premium towards Directors and Officers Liability Policy form part of
remuneration of Mr. X?

(iii) Who is the approving/recommending authority for the payments made to Mr. Y?
(8 Marks)

ANSWER
(a) (i) As per section 197(1) of the Companies Act, 2013, the total managerial remuneration payable by a
public company, to its Directors, including Managing Director and Whole-Time Director, and its Manager
in respect of any financial year shall not exceed eleven per cent. of the net profits of that company for
that financial year.
Whereas section 197(6), states that a Director or Manager may be paid remuneration by way of a
monthly payment; or at a specified percentage of the net profits of the company; or partly by one way
and partly by the other.
Further section 197(4), states that the remuneration payable to the directors of a company, including any
Managing or Whole-Time Director or Manager, shall be determined, in accordance with and subject to
the provisions of this section, either by the articles of the company, or by a resolution or, if the articles so
require, by a special resolution, passed by the company in general meeting and the remuneration payable
to a director determined aforesaid shall be inclusive of the remuneration payable to him for the services
rendered by him in any other capacity:

Provided that any remuneration for services rendered by any such director in other capacity shall not be
so included if — (a) the services rendered are of a professional nature; and (b) in the opinion of the
Nomination and Remuneration Committee, if the company is covered under section 178(1), or the Board
of Directors in other cases, the director possesses the requisite qualification for the practice of the
profession.

Accordingly, as per the provision, payment made to Mr. X comprising of monthly remuneration of Rs.
50,000 and commission Rs. 1,50,000 and the payment of the premium amount of Rs. 5,00,000 on account
of guilty of negligence of Mr. X, will form the part of the overall maximum managerial remuneration.
Whereas payment made to Mr. Y comprising of commission at the rate of 1% of the net profit will form
part of the overall maximum managerial remuneration.
Further, fee of Rs. 1,00,000 rendered to him for valuing the asset of the company is the service not given
in professional capacity as he does not possess the requisite qualification for practice of respective
profession as per Rule 3(2) of the Companies (Registered Valuers and Valuation) Rules, 2017. This
payment of fees in light of section 197(4) will also form the part of the overall maximum managerial
remuneration.

(ii) As per Section 197(13),where any insurance is taken by a company on behalf of its Managing Director,
Whole-Time Director, Manager, Chief Executive Officer, Chief Financial Officer or Company Secretary for
indemnifying any of them against any liability in respect of any negligence, default, misfeasance, breach
of duty or breach of trust for which they may be guilty in relation to the company, the premium paid on
such insurance shall not be treated as part of the remuneration payable to any such personnel:
Provided that if such person is proved to be guilty, the premium paid on such insurance shall be treated
as part of the remuneration.

Page No. 78
In the given case claim of Rs. 1,00,000 was lodged with the Insurance company as a result of guilty of
negligence of Mr. X. Therefore payment of the insurance premium of Rs. 5,00,000 shall be treated as part
of the remuneration of Mr. X.

(iii) According to section 197(1) of the Companies Act, 2013 remuneration payable to Mr. Y who is neither
Managing Director nor Whole time director, shall not be exceeding 1% of the net profits of the company,
as there is Mr. X (a Managing Director). Here in the given case, payment of Rs. 1,00,000 over 1% may
require the approval of the company in general meeting by passing a Special Resolution. Since NTSSL is a
listed company, so Nomination and Remuneration Committee will recommend for payment of
commission and Rs. 1,00,000 for valuation purposes for approval of Board.

30. You are a leading Chartered Accountant advising corporates covering various aspects inter alia on
Corporate and Economic Laws, Corporate Tax and related matters with excellent articulation skills and
is a much sought after professional on the Board of many reputed Companies. Recently, you have been
approached by Dash Board Ltd., a loss making company seeking your advice on the validity of the
appointment of Mr. 'X', a turnaround specialist, as the Whole Time Director of the Company w.e.f.
01.01.2020 on which date he would be above 70 years of age. You were further informed that at the
extra-ordinary general meeting of the Company held on 15.03.2020, the shareholders have not passed
a special resolution with regard to the appointment of Mr. 'X' but the votes cast in favour of the motion
exceeded the votes cast against the motion. The Company has provided you the following inputs
extracted from the latest audited Balance Sheet as at 31st March, 2020.

S. No. Amount
(Rs. In Crores)
1. Authorized Equity Share Capital 1,560
2. Paid Up Equity Share Capital 860
3. Share Application Money Account (Company is in process of Issue 60
(FPO)) Follow on Public
4. Reserves and Surplus (including General Reserve - 600 & Revaluation 680
Reserve - 80)
5. Long Term Borrowings 800
6. Investments 160
7. Accumulated Losses 40

On the basis of the above facts and figures, Dash Board Ltd. seeks your advice in respect of the
following under the provisions of the Companies Act, 2013. (past exam jan 2021)

(i) Validity of the appointment of Mr. 'X' as Whole Time Director.

(ii) Compute the effective capital for payment of managerial remuneration.

(iii) As the Company is running in losses, state the maximum amount of remuneration that can be paid
on yearly basis to each Managerial person other than a managerial personnel functioning in a
professional capacity.
(iv) How is the remuneration payable to a Whole Time Director determined ? (8 Marks)

Page No. 79
Answer

(i) As per section 196(3) of the Companies Act, 2013, no company shall appoint or continue the
employment of any person as Managing Director, Whole-Time Director or Manager who is below the age
of 21 years or has attained the age of 70 years. However, where a person has attained the age of seventy
years, he may still be appointed to such office if a special resolution is passed in this respect. In such a
case, the explanatory statement annexed to the notice for such motion shall indicate the justification for
appointing such person.
Further, where no such special resolution is passed but votes cast in favour of the motion exceed the
votes, if any, cast against the motion and the Central Government is satisfied, on an application made by
the Board, that such appointment is most beneficial to the company, the appointment of the person who
has attained the age of seventy years may be made.
In the given question, the appointment of Mr. X is not valid as special resolution was not passed.
However, it could have been regularized (since the votes cast in favour exceeded votes cast against the
motion of appointment of Mr. X as Whole Time Director) by seeking approval of the Central Government,
which, if satisfied, can accord such approval.

(ii) As per Explanation 1 to Section II of Part II of Schedule V “effective capital” means the aggregate of the
paid-up share capital (excluding share application money or advances against shares); amount, if any, for
the time being standing to the credit of share premium account; reserves and surplus (excluding
revaluation reserve); long-term loans and deposits repayable after one year (excluding working capital
loans, over drafts, interest due on loans unless funded, bank guarantee, etc., and other short-term
arrangements) as reduced by the aggregate of any investments (except in case of investment by an
investment company whose principal business is acquisition of shares, stock, debentures or other
securities), accumulated losses and preliminary expenses not written off.
The effective capital shall be calculated as on the last date of the financial year preceding the financial
year in which the appointment of the managerial person is made.
Calculation of Effective Capital:

Particulars Amount
(Rs. in crores)
Paid up Capital (excluding share 860
application money)
Add: Reserves and surplus 600
excluding revaluation reserve
Add: Long term borrowings 800
Less: Investments 160
Less: Accumulated Losses 40
Effective Capital 2,060

(iii) Section II of Part II of Schedule V states that where the effective capital is Rs. 250 crore and above, the
remuneration payable shall not exceed Rs. 120 lakh plus 0.01% of the effective capital in excess of Rs. 250
crore (i.e., 1.20 cr. + 0.181 cr. = 1.381 crore). Accordingly, the total managerial remuneration payable by
Dash Limited to each Managerial person other than a managerial personnel functioning in a professional
capacity shall be paid Rs. 1.381 crore remuneration. Provided that the remuneration in excess of the
above limits may be paid if the resolution passed by the shareholders is a special resolution. Further, it

Page No. 80
has been clarified by an explanation that if the managerial personnel is employed for a period less than
one year, the remuneration payable to him shall be pro-rated.

(iv) In terms of section 197(4) of the Companies Act, 2013, the remuneration payable to the directors of a
company including any Managing or Whole Time Director or Manager, shall be determined in accordance
of this section, either:
(i) By the articles of the company
(ii) By a resolution or
(iii) If the articles so require by special resolution, passed by the company in general meeting.

31. Mr. Ram and Mr. Mohan were appointed as the Whole-Time Director and Managing Director
respectively in Gopi Industries Limited (GIL). Raja Limited, a holding company of GIL, was willing to
appoint Mr. Ram as its Whole-Time Director and Mr. Mohan as Managing Director. Enumerate the legal
provision as regards the holding of office by KMPs and decide on the eligibility of Mr. Ram and Mr.
Mohan in Raja Limited as its managerial personnel in terms of the Companies Act, 2013. What if the
office of Mr. Ram is vacated due to his sudden resignation given on 1st September 2020 in GIL?
(6 Marks) (mtp-I- july 2021)

ANSWER

As per Section 203(3) of the Companies Act, 2013, a Whole-Time Key Managerial Personnel shall not hold
office in more than one company except in its subsidiary company at the same time.
Provided that nothing contained in this sub-section shall disentitle a Key Managerial Personnel from being
a director of any company with the permission of the Board.
Provided also that a company may appoint or employ a person as its managing director, if he is the
managing director or manager of one, and of not more than one, other company and such appointment
or employment is made or approved by a resolution passed at a meeting of the Board with the consent of
all the directors present at the meeting and of which meeting, and of the resolution to be moved thereat,
specific notice has been given to all the directors then in India.
In the above question, Mr. Ram cannot be appointed as Whole-Time Director in Raja Ltd because Raja Ltd.
is not the subsidiary company of GIL. Mr. Mohan can be appointed as Managing Director in Raja Ltd. if all
the conditions specified in section 203(3) are complied with.
Therefore, Mr. Ram cannot be appointed as Whole-time Director in Raja Ltd. whereas Mr. Mohan can be
appointed as Managing Director in Raja Ltd. with the unanimous resolution being passed at the Board
Meeting.
Where, if the office of Mr. Ram is vacated on 1st September 2020, the resulting vacancy shall be filled-up
by the Board at a meeting of the Board within a period of six months from the date of such vacancy i.e.
latest by 31st March, 2021.

(ii) Earth Developers Private Limited, a Bengaluru based company is regular in filing its annual return as
well as financial statements, is having four directors but so far, no Managing Director has been
appointed. Due to the manifold increase in the construction work undertaken by the company in the
last two years, it is urgently felt that a Managing Director needs to be appointed. Accordingly, Mr.
Pranav is appointed as MD by the Board of Directors at its meeting specifying the terms and conditions
including monthly remuneration payable to him. Enumerate on the requirement and validity of an

Page No. 81
appointment of Mr. Pranav in the given scenario in the context of relevant law? (4 Marks) (mtp-I- july
2021)

(ii) The given problem deals with the Companies Act, 2013 to be read in light of notification No. 464 (E),
dated 05-06-2015 w.r.t. section 196(4), where by a private company is exempted from the application of
said section. Section 196 (4) requires that the terms and conditions of appointment of a Managing
Director and the remuneration payable to him shall be approved by the Board of Directors at a meeting
which shall be subject to approval by a resolution at the next General Meeting of the company and by the
Central Government in case such appointment is at variance to the conditions specified in Part I of the
Schedule V. Therefore, there is no requirement regarding the approval of appointment of Mr. Pranav as
MD in the Earth Developers Private Limited, at the immediate next General Meeting of the shareholders.
Therefore his appointment as MD in Earth Developers Private Ltd., is valid.

32. Integrated Case Scenario 1 (10 Marks) (mtp-NOV 2020)

Mr. Shyam was removed from A Ltd. by the Board in which he was serving as a managing director, a
whole-time key managerial personnel, with the condition that he will get compensation for his early
vacation of office. The office of Mr. Shyam was vacated on 31.05.2020 and his original tenure of
appointment with A Ltd. was upto 31.12.2022.
The remuneration drawn by Mr. Shyam since the date of his joining the office is as follows:

F.Y. Remuneration (Rs. in lakhs)

2018-19 55
2019-20 62
2020-21 (upto 31-05-2020) 13

The data collected from the balance sheet of A Ltd. as on 31.03.2020 is as follows:

Particulars (Rs. in lakhs)

Paid-up Share Capital 1000
Share Application Money 200
General Reserve 500
Revaluation Reserve 250
Securities Premium Account 300
Long term loan 400
Funded Interest Term Loan 100
(Payable after 1 year)
Working capital loan 200
Mutual Fund Investments 350
Miscellaneous Expenditure 50
not written off
Mr. Tushar was appointed as the new managing director of A Ltd. on 1.08.2020 as a replacement of Mr.
Shyam. The company decided to pay remuneration to Mr. Tushar as per Section 197(4) of the
Companies Act, 2013. It was also decided to pay him following additional perquisites/ remuneration for
F.Y. 2020-21:

Particulars (Rs. in lakhs)

Page No. 82
 Dearness allowance 7
House Rent Allowance 5
Contribution to annuity 6
fund
Reimbursement of direct 4
taxes
Additional Remuneration 2
per month*
Sitting fees payable for a 1
board meeting #

*Remuneration for service to be provided by him in capacity of Consultant. Also he possesses requisite
qualification for the same as opined by the Nomination and Remuneration Committee.
# Mr. Tushar had attended 4 board meetings till 31.03.2021.
One of the members of A Ltd., Mr. Jay wanted to inspect contract of service entered into by A Ltd. with
Mr. Tushar but Mr. Jay was denied to have such inspection on the grounds that the contract with Mr.
Tushar was not in writing.
Based on the above case scenario, answer the following questions:

1. The maximum amount of compensation to which Mr. Shyam is entitled for premature termination of
his office shall be -
(a) Rs. 1.1194 crores
(b) Rs. 1.51125 crores
(c) Rs. 1.80 crores
(d) Rs. 1.55 crores
ANSWER- d

2. The ‘effective capital’ of A Ltd. shall be -

(a) Rs. 18 crores
(b) Rs. 21 crores
(c) Rs. 19 crores
(d) Rs. 16 crores

ANSWER- c
3. The maximum amount that can be paid to Mr. Tushar as per the provisions of Companies Act, 2013
for F.Y. 2020-21 shall be -

(a) Rs. 118 lakhs

(b) Rs. 104 lakhs

Page No. 83
(c) Rs. 80 lakhs

(d) Rs. 86 lakhs

ANSWER- d
4. For removal of Mr. Shyam, which type of resolution was required to be passed and what was the last
date till which Mr. Tushar should have been appointed, in case he was not appointed on 1.08.2020?
(a) Special Resolution and 30.11.2020 respectively
(a) Board Resolution and 30.11.2020 respectively
(b) Ordinary Resolution and 30.11.2020 respectively
(c) Board Resolution and 31.08.2020 respectively
ANSWER- b
5. Whether company’s contention for denying inspection to Mr. Jay was correct and if not, what are the
consequences of the same?
(a) Not correct, as contract of service with a managing director should have been made in writing and
kept at registered office of the company. A Ltd. liable to pay Rs. 25,000 and every officer in default
liable to pay Rs. 5,000 for each default, as a penalty.
(b) Partially correct, the member has no right to inspect copy of contract of service entered into with
managing director but the company has defaulted in not making the contract in writing and
accordingly liable to pay Rs. 25,000 and every officer in default liable to pay Rs. 5,000 for each default,
as a penalty.
(c) Not correct, if contract of service is not in writing then a written memorandum should have been
prepared depicting terms of contract of service with Mr. Tushar and kept at registered office of the
company. A Ltd. liable to pay Rs. 25,000 and every officer in default liable to pay Rs. 5,000 for each
default, as a penalty.
(d) Correct, if contract is not in writing then member cannot ask for inspection of the same and
accordingly there are no consequences on the company for such denial.

ANSWER-c

Page No. 84
 3 Meeting of Board and its powers

ATTEMPTS
MAY NOV MAY NOV NOV JAN JULY NOV
COVERAGE
2018 2018 2019 2019 2020 2021 2021 2021

STUDY Q.- 21 to 58
MAT

PAST NO
Q-6, 7, 8 Q-18, 19 Q-20 Q-59 Q-60,61, Q-6, 7, 8
EXAMS QUES

Q-10, Q-1,3, 4, NO
MTP Q-5 Q-64 Q-63 ------
11, 16 QUES

NO
RTP Q-9 Q-14, 15 Q-17 Q-2 Q-12, 16 Q-65
QUES

Page No. 85
Multiple Choice Questions

1.MTP Mar 2019 QN no 11

Sona Sweets Private Limited was incorporated on 5th November, 2018 with an authorised capital of
Rs.10.00 lacs. Advise regarding the latest date by which the first meeting of the Board of Directors is
required to take place.

(a) Latest by 15th November, 2018.

(b) Latest by 20th November, 2018.

(c) Latest by 5th December, 2018.

(d) Latest by 20th December, 2018.

Answer: Option C

2.RTP Nov 2019 Qn no 6

Beauti Fashion Garments Limited has three independent directors besides eight others of its own.
Due to the urgency of transacting certain important business, a Board Meeting was called by giving a
shorter notice than the legally required. However, none of the independent directors was present at
the Meeting to deliberate upon the motion related to that business. Despite absence of all the
independent directors, a board resolution was passed for operationalizing the business by the directors
personally present at that Meeting who were much more than the required quorum. Advise, whether
the resolution passed at the Board Meeting called at a shorter notice was valid.
(a) The resolution so passed is valid, for it was passed at the Board Meeting where the required
quorum was present.
(b) To be valid the resolution so passed needs to be circulated to all the directors and further, it is
required to be ratified by all the three independent directors.
(c) To be valid the resolution so passed needs to be circulated to all the directors and further, it is
required to be ratified by at least two independent directors.
(d) To be valid the resolution so passed needs to be circulated to all the directors and further, it is
required to be ratified by at least one independent director.
Answer:(d)

3.MTP Mar 2019 Qn no 6

Jupiter Shopping Mall Limited was incorporated on 3rd December, 2016. As on 31st March 2018, it
had free reserves of Rs. 50.00 lacs and its Securities Premium Account showed a balance of Rs. 7.50
lacs. One of its directors Raha has a leaning towards a particular political party in which his other
family members are actively involved. Raha convinced the other two directors of the company i.e.
Promila and Rana to contribute a sum of Rs. 10.00 lacs to this political party. Accordingly, the Board
of Directors held a meeting on 16th December, 2018 and passed a resolution to contribute the

Page No. 86
decided amount. Advise the company as to how much amount they can contribute to a political
party in the FY 2018-19.

(a) The company cannot contribute any amount to a political party in the FY 2018 -19.
(b) The company can contribute maximum Rs. 2.50 lacs in the FY 2018-19.
(c) The company can contribute maximum Rs. 3.75 lacs in the FY 2018-19.
(d) The company can contribute maximum Rs. 5.00 lacs in the FY 2018-19.
Answer: Option e

4.April 2019

Ruby Diamonds Limited is required to establish ‘Vigil Mechanism’ though it is neither a listed company
nor a company which has accepted deposits from the public. Name the third criterion because of
which it is necessitated that the company needs to create ‘Vigil Mechanism’

a) As per the last audited statements, the subscribed capital of the company is in excess of Rs. 50
crores.
b) As per the last audited statements, the paid up capital of the company is in excess of Rs. 50 crores
c) As per the last audited statements, the turnover of the company is in excess of Rs. 50 crores
d) None of the above answer
Answer: Option D

Descriptive Questions

5.March 2018 Qn no 4(a) 8 Marks:

One of the Objects Clauses of the Memorandum of Association of Info Company Limited 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 Extraordinary General Meeting 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.

Examining the provisions of the Companies Act, 2013, answer the following:
Whether the contention of members against the non-compliance of members’ decision by the directors
is tenable?
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?

Answer:

Page No. 87
Powers of Board: In accordance with the provisions of the Companies Act, 2013, as contained under
Section 179(1), 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.

Provided that, in exercising such power or doing such act or thing, the Board shall be subject to the
provisions contained in that behalf in this Act, or in the memorandum or articles, or in any regulations
not inconsistent therewith and duly made there under including regulations made by the company in
general meeting.
Provided further that the Board shall not exercise any power or do any act or thing which is directed or
required, whether under this Act or by the members or articles of the company or otherwise to be
exercised or done by the company in general meeting.
Section 180 (1) of the Companies Act, 2013, provides that the powers of the Board of Directors of a
company which can be exercised only with the consent of the company by a special resolution. Clause
(a) of Section 180 (1) defines one such power as the power to sell, lease or otherwise dispose of the
whole or substantially the whole of the undertaking of the company or where the company owns more
than one undertaking of the whole or substantially the whole or any of such undertakings.
Therefore, the sale of the undertaking of a company can be made by the Board of Directors only with
the consent of members of the company accorded vide a special resolution.
Even if the power is given to the Board by the memorandum and articles of the company, the sale of
the undertaking must be approved by the shareholders in general meeting by passing a special
resolution.
Therefore, the correct procedure to be followed is for the Board to approve the sale o f the undertaking
clearly specifying the terms of such sale and then convene a general meeting of members to have the
proposal approved by a special resolution.
In the given case, the procedure followed is completely incorrect and violative of the provisions of the
Act. The shareholders cannot on their own make out a proposal of sale and pass an ordinary resolution to
implement it through the directors.
The contention of the shareholders is incorrect in the first place as it is not within their authority to
approve a proposal independently of the Board of Directors. It is for the Board to approve a proposal of
sale of the undertaking and then get the members to approve it by a special resolution. Accordingly,
the contention of the members that they were the principals and directors being their agents were
bound to give effect to the decisions of the members is not correct.
Further, in exercising their powers the directors do not act as agent for the majority of members or
even all the members. The members therefore, cannot by resolution passed by a majority or even
unanimously supersede the powers of directors or instruct them how they shall exercise their powers.
The shareholders have, however, the power to alter the Articles of Association of the company in the
manner they like subject to the provisions of the Companies Act, 2013.

6.May 2018

When does a Director required to disclose his / her interest to the Company as per Section 184 of
the Companies Act, 2013? What are the consequences of non- disclosure?

Page No. 88
Answer:

According to Section 184(1) of the Companies Act, 2013 every Director shall disclose his concern or
interest in any Company or companies or bodies corporate, firms, or other association of individuals
which shall include the shareholding, in such manner as may be prescribed in Rule 9 of the
companies(Meetings of Board and its Powers):
When to Make general disclosure of Interest: Every director shall disclose his interest
(a) At the First meeting of the Board in which he participates as a director, and
(b) Thereafter, at the first meeting of the Board in every financial year, or
(c) Whenever there is any change in the disclosures already made, then at the first Board meeting
held after such change.

Consequences of non-disclosure [Section 184(3) and 184(4)]:

(a) Voidable at the option of company: A contract or arrangement entered into by the company
without disclosing or with participation by a director who is concerned or interested in any way,
directly or indirectly, in the contract or arrangement, shall be voidable at the option of the
company.
(b) Penalty: If a director of the company contravenes the provisions of section 184, such director
shall be punishable
 with imprisonment for a term which may extend to one year or
 with fine which may extend to one lakh rupees,
 or with both.

7.May 2018

The register of contracts or arrangement under Section 189 of the Companies Act, 2013 is
maintained at the Registered office of Fortune Ltd. under the custody of the Company Secretary. The
AGM was held in different place but in the same town where the registered office is situated. Mr.
Semar, a shareholder of the company and Mr. Raj, proxy of a shareholder insisted for producing the
said register at the commencement of the AGM for inspection. The Company Secretary refused to
produce the register stating that being the statutory register it has to be maintained at the registered
office only. Examine whether Mr. Semar and Mr. Raj will succeed in their attempt under the provisions
of the Companies Act, 2013?

Also identify the particulars to be disclosed to the members of a company to pass a resolution
approving any payment by way of compensation for loss of office of a director as per the provisions
of Section 191 of the Companies Act, 2013 read with Rule 17 of the Companies (Meetings of Board
and its Powers) Rules, 2014.

Answer:

(a) Place of maintenance of Register of Contracts or Arrangements:

Page No. 89
 As per Section 189 of the Companies Act, 2013, every Company shall keep one or more registers
giving separately the particulars of all contracts or arrangements related to disclosure of interest by
director as per Section 184(2) or related
party transactions given under Section 188.
The register shall be kept at the registered office of the Company and it shall be-
 open for inspection at such office during business hours and extracts may be taken therefrom,
and

 copies thereof as may be required by any member of the company shall be furnished by the
company
The register to be kept under this Section shall also be produced at the commencement of every
annual general meeting of the Company and shall remain open and accessible during the
continuance of the meeting to any person having the right to attend the meeting. Thus even a
proxy has right to inspect the register

As per law, register shall be produced at the commencement of every annual general meeting of the
Company and shall remain open and accessible during the meeting to any person having the right to
attend the meeting.
Hence, Mr. Semar and Mr. Raj, being a shareholder and proxy of a shareholder, have a right to
inspect the register of contract and arrangements during the meeting.

Payment by way of compensation for loss of office to Director

As per the Rule 17 of the Companies (Meetings of Board and its Powers) Rules, 2014, no director of a
company shall receive any payment by way of compensation in connection with any event mentioned
in 191(1) unless the following particulars are disclosed to the members of the company and they pass a
resolution at a general meeting approving the payment of such amount -
(a) name of the director;
(b) amount proposed to be paid;

(c) event due to which compensation become payable;

(d) date of Board meeting recommending such payment;
(e) basis for the amount determined;
(f) reason or justification for the payment;
(g) manner of payment - whether payable in cash or otherwise and how;
(h) sources of payment; and

(i) any other relevant particulars as the Board may think fit.

Page No. 90
8.May 2018

Queen Construction Company Ltd. acquired 60 % of the equity paid up share capital of ABC Ltd.
Queen Construction Ltd. has planned to expand its operation for which additional fund is required.
The Board of Directors decided to avail additional exposure ofRs. 10 crore from the Bank.

The following data is furnished as on 30th June, 2017.

Rs. In crores
Authorised Equity Share Capital 25
Issued and Subscribed Equity Share Capital 22
Paid up Equity Share Capital 20
Capital Reserve 2
Revaluation Reserve 1
General Reserve 3
Open cash credit Limit (for working Capital requirement) with 5
the Bank repayable in 3 months
Loan obtained under the Hire Purchase agreement for acquiring 1
vehicles.
Long term Borrowing from Banks and other parties 15
ABC Ltd. approached Queen Construction Ltd. to grant a loan of Rs. 25 Lakhs and stand as guarantor
for repayment of loan Rs. 10 Lakhs to be sanctioned by a Bank.

The two loans (25 Lakhs plus 10 Lakhs) will be utilized by ABC Ltd. for its principal business activities.

You being the Financial Advisor of the company, advise the Board of Directors about the procedure to
be followed to avail additional exposure of Rs. 10 Crore from the Bank. Also evaluate whether the
loan guarantee given by Queen construction Ltd. to ABC Ltd. is valid according to Section 185 of the
Companies Act, 2013.

Answer:

Borrowing by the Company (Section 180 of the Companies Act, 2013)

As per Section 180(1)(c) of the Companies Act, 2013, the Board of Directors of a Company, without
obtaining the approval of shareholders in a general meeting through a special resolution, can borrow
the funds including funds already borrowed upto an amount which does not exceed the aggregate of
paid up capital of the company and its free reserves and Securities premium . Such borrowing shall not
include temporary loans obtained from the company's bankers in the ordinary course of business. Here
Free reserves shall not include the reserves set apart for specific purpose.
According to the above provisions, the Board of Directors of Queen Construction Ltd. can borrow, without
obtaining approval of the shareholders in a general meeting, upto an amount calculated as follows:

Page No. 91
 Particulars Rs. In Crores
Paid up Equity Share Capital (A) 20
General Reserve (being free reserve) (B) 3
Capital Reserve (Not a free reserve) -
Revaluation Reserve (Not a free reserve) -
Aggregate of paid up capital and free reserve (A)+(B) 23
Total borrowing power of the Board of Directors of the 23
company, i.e ., 100% of the aggregate of paid up capital and
free reserves (C)
Less: Amount already borrowed as Long term loan (D) 16
Amount upto which the Board of Directors can further 7
borrow without the approval of shareholders in a general
meeting. (C) – (D)

In the present case, the Directors of Queen Construction Limited by a resolution passed at its meeting
decide to borrow an additional sum of Rs. 10 Crores from the bank. Hence, the borrowing will be
beyond the powers of the Board of directors.
Thus, the Management of Queen Construction Limited., should take steps to convene the general
meeting and pass a special resolution by the members in the meeting as stated in Section 180(1)(c) of
the Companies Act, 2013. Then, the borrowing will be valid and binding on the company and its
members.
According to Section 185 of the Companies Act, 2013, no Company shall, directly or indirectly, advance
any loan, including any loan represented by a book debt, to any of its directors or to any other person in
whom the director is interested or give any guarantee or provide any security in connection with any
loan taken by him or such other person.
However, the above sub-section shall not apply to any guarantee given or security provided by a holding
company in respect of loan made by any bank or financial institution to its subsidiary Company. [Section
185(1)(c)]. It is also provided that the loans made under this clause are utilized by the subsidiary company
for its principal business activities.
In the instant case, Queen Construction Ltd. acquired 60% of the equity paid up share capital of ABC Ltd.
Hence, ABC Ltd. is a subsidiary company of Queen Construction Ltd. [as per Section 2(87)]
Hence, as per Section 185(1)(c), granting of loan of Rs. 25 Lakhs by Queen Construction Ltd to ABC Ltd is
not valid but providing of guarantee for repayment of loan of Rs. 10 lakhs to be sanctioned by bank is
valid.

9.RTP May 2018 Qn no 3

Examine the following aspect related to convening of board meeting with reference to the provisions
of the Companies Act, 2013:

(i) The Chairman of Greenhouse Limited convened a board meeting and two weeks' notice was
served on all directors of the company. Two of the independent directors on the board objected
on the grounds that no proper agenda for the meeting was circulated.

Page No. 92
(ii) Purple Florence Limited proposes to hold its board meeting at a shorter notice through video
conferencing.
Answer:

(i) According to section 173 (3) of the Companies Act, 2013, a meeting of the Board shall be called by
giving not less than 7 days’ notice in writing to every director at his address registered with the
company and such notice shall be sent by hand delivery or by post or by electronic means.

According to the question, two of the independent directors on the Board has objected on the grounds
that no proper agenda for the meeting was circulated.
The Companies Act, 2013 does not specifically provide for sending agenda along with the notice of the
meeting. However, generally as a good secretarial practice, the notice is accompanied with the agenda
of the meeting. Thus, the contention of the independent directors objecting on the grounds that no
agenda for the meeting was circulated, does not hold good.
Further, the Chairman of Greenhouse Limited has convened the Board meeting by serving a two weeks’
notice (i.e. more than 7 days). Hence, the meeting shall be valid.
(ii) According to section 173 of the Companies Act, 2013,
(a) The directors can participate in a meeting of the Board either in person or through video
conferencing or other audio visual means, as may be prescribed, which are capable of recording
and recognising the participation of the directors and of recording and storing the proceedings of
such meetings along with date and time. Further, Central Government may provide for matters
which cannot be dealt in a meeting through video conferencing or other audio visual means.
(b) A meeting of the Board shall be called by giving not less than 7 days’ notice in writing to every
director at his address registered with the company.
Provided that a meeting of the Board may be called at shorter notice to transact urgent business subject
to the condition that at least one independent director, if any, shall be present at the meeting. Further,
in case the independent directors are not present at such a meeting of the Board, decisions taken at
such a meeting shall be circulated to all the directors and shall be final only on ratification thereof by at
least one independent director, if any.
Hence, Purple Florence Limited can hold a board meeting at a shorter notice through video conferencing,
for transacting urgent business subject to the condition that at least one independent director, if any,
shall be present at the meeting. Further, if the independent directors are absent from the meeting of the
Board, decision taken at such a meeting shall be circulated to all the directors and shall be final only on
ratification thereof by at least one independent director, if any.

10.Aug 2018 Qn no 1(a) 8 Marks:

XYZ, Public Ltd. with the turnover of Rs. 500 crore entered into a contract of purchasing of raw
material from a private company. XYZ Ltd. appointed Mr. Khurana, a director of the company, to act
in this deal of transaction. Mr. Khurana is also a member of that private company. He settled the said
transaction into 60 crore and entered into the contract. After few transactions made under the
contract, XYZ Ltd. finds degradation in the quality of the product supplied. In the Board Meeting, this
contract was challenged considering it as a related party transaction and in contravention to section
188(1). During this period, Mr. Khurana was appointed as a director in newly setup, PQR Ltd.
Page No. 93
In the light of the given facts, examine the following situations as per the Companies Act, 2013.
 What is the legal position of the contract entered between XYZ Ltd through Mr. Khurana, and
the private company?
 Is there any contravention of section 188 (1)? if yes, then the liability of the wrong deor.
Comment upon the appointment of Mr. Khurana as a director in PQR Ltd.

Answer:

As per the given facts, Mr. Khurana, a director of XYZ Ltd., was also a member of a private company with
which he entered into contract for the purchase of the raw material. In terms of section 2(76) of the
Companies Act, 2013, XYZ Ltd. is a related party to a such private company. However , as per section
188(1) of the Act, no company shall enter into any contract or arrangement with a related party with
respect to the transaction related to the sale, purchase or supply of any goods or materials or made
through an appointment of any agent for purchase or sale of goods, materials, services or property,
except with the consent of the Board of Directors given by a resolution at a meeting of the Board and
subject to such conditions as given in rule 15 of the Companies (Meetings of Board and its Powers) Rules,
2014 .

However, no contract or arrangement, in the case of a company having a paid-up share capital of not
less than such amount, or transactions not exceeding such sums, as prescribed in Rule 15(3) of the
Companies (Meetings of Board and its Powers) Rules, 2014 , shall be entered into except with the prior
approval of the company by a resolution. [First proviso to section 188(1)]
A company shall not enter into transaction/s related sale, purchase or supply of any goods or materials,
directly or through appointment of agent, where the transaction or transactions to be entered into is
amounting to 10% or more of the turnover of the company or rupees 100 crore, whichever is lower,
except with the prior approval of the company by a resolution.
Since in the given case, XYZ, Public Ltd. has turnover of Rs. 500 crore, here the transaction is amounting
to more than 10% of the turnover i.e., 500 cr x10/100 = 50 cr, but without seeking prior approval of the
company by a resolution.
So, in terms of the above provision, this contract is of voidable nature at the option of the Board, or as the
case may of the shareholders according to section 188(3) of the Companies Act, 2013.
In case of contravention of Section 188(1): Where any contract or arrangement is entered into by a
director or any other employee, without obtaining the consent of the Board or approval by a resolution
in the general meeting as required under section 188(1), and if it is not ratified by the Board or, as the
case may be, by the shareholders at a meeting within 3 months from the date on which such contract or
arrangement was entered into. Further, if the contract or arrangement is with a related party to any
director, or is authorised by any other director, the directors concerned shall indemnify the company
against any loss incurred by it.

Company may proceed to recover loss in contravention of the provisions of this section: Section 188
(4) provides that it shall be open to the company to proceed against a director or any other employee
who had entered into such contract or arrangement in contravention of the provisions of this section
for recovery of any loss sustained by it as a result of such contract or arrangement.

Penalty: Any director or any other employee of a company, who had entered into or authorised the

Page No. 94
contract or arrangement in violation of the provisions of this section shall be punishable with fine which
shall not be less than 25,000 rupees but which may extend to 5 lakh rupees.
Appointment of Director under Section 164: A person shall not be eligible for appointment as a
director of a company, where he has been convicted of the offence of dealing with related party
transactions under section 188 at any time during the last preceding 5 years;

In the given instance, Mr. Khurana was not convicted, only levied with the penalty, against the offence
dealt with related party transactions under section 188, so he eligible and can be appointed as a
director in the PQR Ltd.

11.Oct 2018 Qn no 1(a) 8 Marks:

Srajan Ltd., a company incorporated in July 2015. The Board of Directors of Srajan Ltd., proposed to
donate Rs. 2,00,000 to a school established exclusively for the benefit of the employees of the
company. Besides, also proposed to donate Rs.1 lac to a political party during the financial year
ending March 31, 2018. The net profit during the financial year 2017 -2018, was Rs.35,00,000.

Evaluate the given below situations in the light of the stated facts under the relevant provisions of
the Companies Act, 2013-
 Whether the proposed political donation made by the Srajan Ltd., are within the powers of the
Board of Directors of the company
 Whether the contribution by Srajan Ltd. to school established for the benefit of an employee is
charitable contribution.
Answer:

Political Contribution: As per section 182, a company, other than a Government company and a
company which has been in existence for less than three financial years, may contribute any amount
directly or indirectly to any political party:

Provided that no such contribution shall be made by a company unless a resolution authorising the
making of such contribution is passed at a meeting of the Board of Directors and such resolution shall,
subject to the other provisions of this section, be deemed to be justification in law for the making of the
contribution authorised by it.
Every company shall disclose in its profit and loss account the total amount contributed by it under this
section during the financial year to which the account relates.
In the given case BoD of Srajan Ltd. proposed political contribution of 1 Lac for the financial year 2017-
2018. As per the above provision, any amount can be contributed by Srajan Ltd. through the resolution
passed at a meeting of the Board of Directors authorising the making of such contribution. Such
resolution shall, subject to the other provisions of this section, be deemed to be justification in law for
the making of the contribution authorised by it. So, the political contribution proposed is well within the
powers of the Board. Such a proposal shall be passed at a meeting through the resolution authorising
such contribution and full disclosure of the name of political party and amount contributed shall be
made in the profit and loss account.
Charitable Contribution: As per the facts, the Board of Directors of Srajan Ltd., proposed to donate Rs.
2,00,000 to a school established exclusively for the benefit of the employees of the company. As per
Page No. 95
section 181 of the Companies Act, 2013, the Board of Directors of a company may contribute to bona
fide charitable and other funds. A contribution by a company is said to be charitable contribution if it is
made without any object of availing any benefit for the company or for its employees and such
contribution does not have any direct relation with the business of the company.

Since, here the contribution proposed is for the school which is exclusively for the benefit of the
employees' children. Therefore, it cannot be considered as charitable within the meaning of section
181.

12.Oct 2018 Qn no 4(a) 8 Marks:

XYZ, Ltd. with the turnover of Rs. 500 crore entered into a contract of purchasing of raw material
from a private company. XYZ Ltd. appointed Mr. Khurana, a director of the company, to act in this
deal of transaction. Mr. Khurana is also a member of that private company. He settled the said
transaction into 60 crore and entered into the contract. After few transactions made under the
contract, XYZ Ltd. finds degradation in the quality of the product supplied. In the Board Meeting, this
contract was challenged considering it as a related party transaction and in contravention to section
188(1). During this period, Mr. Khurana was appointed as a director in newly setup, PQR Ltd.

In the light of the given facts, examine the following situations as per the Companies Act, 2013.
(i) What is the legal position of the contract entered between XYZ Ltd through Mr. Khurana, and the
private company?
(ii) Is there any contravention of section 188 (1)? if yes, then the liability of the wrong doer.
Comment upon the appointment of Mr. Khurana as a director in PQR Ltd.

Answer:

As per the given facts, Mr. Khurana, a director of XYZ Ltd., was also a member of a private company with
which he entered into contract for the purchase of the raw material. In terms of section 2(76) of the
Companies Act, 2013, XYZ Ltd. is a related party to a such private company. However , as per section
188(1) of the Act, no company shall enter into any contract or arrangement with a related party with
respect to the transaction related to the sale, purchase or supply of any goods or materials or made
through an appointment of any agent for purchase or sale of goods, materials, services or property,
except with the consent of the Board of Directors given by a resolution at a meeting of the Board and
subject to such conditions as given in rule 15 of the Companies (Meetings of Board and its Powers)
Rules, 2014 .

However, no contract or arrangement, in the case of a company having a paid-up share capital of not
less than such amount, or transactions not exceeding such sums, as prescribed in Rule 15(3) of the
Companies (Meetings of Board and its Powers) Rules, 2014 , shall be entered into except with the prior
approval of the company by a resolution. [First proviso to section 188(1)]
A company shall not enter into transaction/s related sale, purchase or supply of any goods or materials,
directly or through appointment of agent, where the transaction or transactions to be entered into is
amounting to 10% or more of the turnover of the company or rupees 100 crore, whichever is lower,
except with the prior approval of the company by a resolution.

Since in the given case, XYZ, Public Ltd. has turnover of Rs. 500 crore, here the transaction is
Page No. 96
amounting to more than 10% of the turnover i.e., 500 cr x 10/100 = 50 cr, but without seeking prior
approval of the company by a resolution.
So, in terms of the above provision, this contract is of voidable nature at the option of the Board, or as the
case may of the shareholders according to section 188(3) of the Companies Act, 2013.
In case of contravention of Section 188(1): Where any contract or arrangement is entered into by a
director or any other employee, without obtaining the consent of the Board or approval by a resolution
in the general meeting as required under section 186(1), and if it is not ratified by the Board or, as the
case may be, by the shareholders at a meeting within 3 months from the date on which such contract or
arrangement was entered into. Further, if the contract or arrangement is with a related party to any
director, or is authorised by any other director, the directors concerned shall indemnify the company
against any loss incurred by it.
Company may proceed to recover loss in contravention of the provisions of this section: Section 188
(4) provides that it shall be open to the company to proceed against a director or any other employee
who had entered into such contract or arrangement in contravention of the provisions of this section
for recovery of any loss sustained by it as a result of such contract or arrangement.

Penalty: Any director or any other employee of a company, who had entered into or authorised the
contract or arrangement in violation of the provisions of this section shall be punishable with fine which
shall not be less than 25,000 rupees but which may extend to 5 lakh rupees.
Appointment of Director under Section 164: A person shall not be eligible for appointment as a
director of a company, where he has been convicted of the offence of dealing with related party
transactions under section 188 at any time during the last preceding 5 years;

In the given instance, he was not convicted, only levied with the penalty, against the offence dealt with
related party transactions under section 188, so he eligible and can be appointed as a director in the PQR
Ltd.
13.Oct 2018 Qn no 6(a) 4 Marks:

Examine with reference to the provisions of the Companies Act, 2013 whether notice of a Board
Meeting is required to be sent to the following persons:

(a) An interested Direct

(b) A director who has gone abroad less than 3 months.
Answer:

Notice of Board meeting

Section 173(3) of the Companies Act, 2013 makes it mandatory for every director to be given proper
notice of every board meeting. It is immaterial whether a director is interested or not.
(a) An Interested Director: Notice must be given to a director even though he is precluded from voting
at the meeting on the business to be transacted.
(b) A director who has gone abroad: A director who has gone abroad is still a director. Therefore, he is
entitled to receive notice of board meetings during his stay abroad.
The Companies Act, 2013. allows delivery of notice of meeting by electronic means also. This is important
because the Companies Act, 2013 permits a director to participate in a meeting by video conferencing or

Page No. 97
any other audio visual means.

14.RTP Nov-2018:
M/s. Multiplex Builders Limited is contemplating to enter into a joint venture agreement with
another construction company for the development of landed properties located at Delhi. Since it is
not possible to convene the Board Meeting immediately, as the directors are at different place in
connection with various works, the Managing Director seeks your advice on the following matters:

(a) Whether the resolution pertaining to the joint venture agreement is required to be passed at the
Board Meeting convened for this purpose or whether it can be passed by means of a circular
resolution?

(b) What are the resolutions that are required to be passed only at the meetings of the Board of
Directors?
(c) The steps that are required to be taken to pass the Board resolution by circulation.
Advise the Managing Director in the light of the provisions of the Companies Act, 2013.
Answer:
The directors of the company act together as a body and generally at the meeting of the Board duly
convened, unless special powers are delegated to an individual director or the managing director.
Where it is not possible to hold board meetings because the directors are busy elsewhere or the time
for convening such a meeting is short, it is possible that the required resolution can be passed by way
of circular resolution as provided in section 175 of the Companies Act 2013.

However, under section 179 of the Companies Act 2013, certain powers can be exercised by the Board of
directors by means of a resolution passed at meeting convened for this purpose.
They are:
(i) to make calls on shareholders in respect of money unpaid on their shares
(ii) to authorize buy back of securities under section 68
(iii) to issue securities, including debentures, whether in or outside India

(iv) to borrow monies

Note: By way of Explanation II, it is clarified that in respect of dealings between a company and its
bankers, the excerise of the power by the company specified in clause (d) above shall mean the
arrangement made by the company with its bankers for Borrowing of Money by way of Overdraft or cash
credit or otherwise. This doesnot refer to actual Day-to –day operation of overdraft, cash credit or other
accounts by means of which the arrangement so made is actually relieved of.

(v) to invest the funds of the company

(vi) to grant loans or give guarantee or provide security in respect of loans
(vii) to approve financial statements and the Board's report
(viii) to diversify the business of the company
(ix) to approve amalgamation, merger or reconstruction
Page No. 98
(x) to take over a company or acquire a controlling or substantial stake in another company.
(xi) Any other matter as prescribed in Rule 8 of the Companies (Meetings of the Board and its Powers)
Rules, 2014. These matters, also to be excersied only by means of resoultions passed at the
meetings of the board are:
1. To make political contributions
2. To appoint or remove Key Managerial Personnel
3. To appoint internal auditors and secretarial auditor.
In view of the above, the Managing Director can go ahead and complete the joint venture agreement
after obtaining the approval of the board by passing a circular resolution.
For this purpose, the proposed resolution has to be circulated in draft along wit h the other necessary
papers, if any, to all the directors in India at their usual residential addresses.
The resolution will become valid if the same is approved by majority of the directors and who are
entitled to vote on the resolution. There after the resolution as passed by way of circulation will be
entered in the minutes book of the Board of Directors and is enough compliance of the provisions of
Companies Act, 2013 in this regard.
15.RTP Nov-2018:
ASK Housing Finance Limited are prepared to give housing loans to the employees of M/s NEWS
Pharmacy Limited subject to the condition that the loans are guaranteed by M/s. NEWS Pharmacy
Limited. M/s NEWS Pharmacy Limited is not a listed company and the company will be exceeding the
limits prescribed under the Companies Act, 2013 by providing the guarantees. Advise the company
about this legal requirement under the Companies Act, 2013 to give effect to the above proposal.
What would be your advice if the company was required to provide security instead of guarantee?
Answer:
As per Section 186(2) of the Companies Act, 2013, no company shall directly or indirectly

(a) give any loan to any person or other body corporate;

(b) give any guarantee or provide security in connection with a loan to any other body corporate or
person; and
(c) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate,
exceeding sixty per cent. of its paid-up share capital, free reserves and securities premium account or
one hundred per cent. of its free reserves and securities premium account, whichever is more, except
with the prior approval by means of a special resolution passed at a general meeting.
However, explanation provided in Section 186(2) of the Companies Act, 2013 states that for the purposes
of this sub-Section, the word “person” does not include any individual who is in the employment of the
Company.
As per the given facts, ASK Housing Finance Company Limited was prepared to give housing loans to the
employees of M/s NEWS Pharmacy Limited on the condition that such loans are guaranteed by the M/s
NEWS Pharmacy Limited exceeding the limits prescribed in the Companies Act, 2013.

Here, the loans are to be guaranteed by M/s. News Pharmacy Limited for its employees which falls within
the purview of the explanations which includes guarantees given for the employees. So, Section 186(2)

Page No. 99
shall not be applicable to it. Hence, it can give the guarantee without any condition on the limits imposed
in the Section 186(2). Hence, there are no legal requirements to be fulfilled under the Companies Act,
2013 to give effect to the above proposal.
Answer will remain the same, even if the company provides security instead of guarantee as the
provisions of the Section 186(2) are applicable for providing security also.
16.MTP Mar 2019

The last three years’ Balance Sheet of PTL Ltd., contains the following information and figures:

As at 31.03.2016 As at 31.03.2017 As at 31.03.2018

Rs. Rs. Rs.

Paid up capital 50,00,000 50,00,000 75,00,000

General Reserve 40,00,000 42,50,000 50,00,000
Credit Balance in 5,00,000 7,50,000 10,00,000
Profit & Loss Account
Debenture Redemption Reserve 15,00,000 20,00,000 25,00,000
Securities Premium 2,00,000 2,00,000 2,00,000
Secured Loans 10,00,000 15,00,000 30,00,000
On going through other records of the Company, the following is also determined:

Net Profit for the year (as calculated in 12,50,00 19,00,00 34,50,00
accordance with the provisions of the 0 0 0
Companies Act, 2013)

In the ensuing Board Meeting scheduled to be held on 5th November, 2018, among other items of
agenda, following items are also appearing:
(i) To decide about borrowing from Financial institutions on long-term basis.
(ii) To decide about contributions to be made to Charitable funds.

Based on above information, you are required to find out as per the provisions of the Companies Act,
2013, the amount upto which the Board can borrow from Financial institution and the amount upto
which the Board of Directors can contribute to Charitable funds during the financial year 2018 - 19
without seeking the approval in general meeting .

Answer

Borrowing from Financial Institutions: As per Section 180(1)(c) of the Companies Act, 2013, the
Board of Directors of a company, without obtaining the approval of shareholders in a general meeting,
can borrow money including moneys already borrowed upto an amount which does not exceed the
aggregate of paid up capital of the company, free reserves and securities premium. Such borrowing shall
not include temporary loans obtained from the company’s bankers in ordinary course of business. Here,
free reserves do not include the reserves set apart for specific purpose.

Page No. 100

Since the decision to borrow is to be taken in a meeting to be held on 5th November, 2018, the figures
relevant for this purpose are the figures as per the Balance Sheet as at 31.03.2018. According to the
above provisions, the Board of Directors of PTL Ltd. can borrow, without obtaining approval of the
shareholders in a general meeting, upto an amount calculated as follows:

Particulars Rs.
Paid up Capital 75,00,000
General Reserve (being free reserve) 50,00,000
Credit Balance in Profit & Loss Account (to be treated as free 10,00,000
reserve)
Debenture Redemption Reserve (This reserve is not to be ----
considered since it is kept apart for specific purpose of
debenture redemption)
Securities Premium 2,00,000
Aggregate of paid up capital, free reserve and securities 137,00,000
premium
Total borrowing power of the Board of Directors of the
company, i.e, 100% of the aggregate of paid up capital, free 137,00,000
reserves and securities premium
Less: Amount already borrowed as secured loans 30,00,000
Amount upto which the Board of Directors can further borrow
without the approval of shareholders in a general meeting. 107,00,000

Contribution to Charitable Funds: As per Section 181 of the Companies Act, 2013, the Board of
Directors of a company without obtaining the approval of shareholders in a general meeting, can make
contributions to genuine charitable and other funds upto an amount which, in a financial year, does not
exceed five per cent of its average net profits during the three financial years immediately preceding, the
financial year.
According to the above provisions, the Board of Directors of the PTL Ltd. can make contributions to
charitable funds, without obtaining approval of the shareholders in a general meeting, upto an amount
calculated as follows:
Net Profit for the year (as calculated in accordance with the provisions of the Companies Act, 2013):

Particulars Rs.
For the financial year ended 31.3.2016 12,50,000
For the financial year ended 31.3.2017 19,00,000
For the financial year ended 31.3.2018 34,50,000
TOTAL 66,00,000
Average of net profits during three preceding financial years 22,00,000
Five per cent thereof 1,10,000

Page No. 101

17.RTP May 2019

The Board of Directors of IBC Consultants Limited, registered in Maharashtra, proposes to hold the next
board meeting in the month of May, 2019.They seek your advice in respect of the following matters:

(i) Can the board meeting be held in Delhi through video conferencing, when all the directors of the
company reside at Maharashtra.
(ii)
Is it necessary that the notice of the board meeting should specify the nature of business to be
transacted?
Answer

(i) There is no provision in the Companies Act, 2013 under which the board meetings must be held at
any particular place. Therefore, there is no difficulty in holding the board meeting at Delhi even if all
the directors of the company reside at Maharashtra and the registered office is situated at
Maharashtra provided that the requirements regarding the holding of a valid board meeting and the
other provisions relating to the signing of register of contracts, taking roll calls, etc. are complied
with.
(ii) Section 173 (3) of the Companies Act, 2013 provides for the giving of notice of every board meeting
of not less than seven days to every director of the company. There is no provision in the Act laying
down the contents of the notice. Hence, it may be construed that notice may be interpreted as
intimation of the meeting and does not necessarily include the sending of the Agenda of the
meeting. However, considering the importance of Board Meetings and the responsibilities placed
on the directors for decisions taken at the meetings, it is inevitable for them to be properly prepared
and informed about the items to be discussed at the Board Meetings.
In view of the above and as a matter of good secretarial practice, the Agenda, setting out the
business to be transacted at the Meeting, and Notes on Agenda should be given to the Directors at
least seven days before the date of the board meeting, unless the Articles prescribe a longer period.
Usually, the articles of a company make it mandatory to do so in almost all cases.
As the board meeting is being conducted through video conferencing, Rule 3 (3) (b) of the
Companies (Meetings of Board and its Powers) Rules, 2014 requires that the notice of the meeting
shall inform the directors regarding the option available to them to participate through video
conferencing mode or other audio-visual means, and shall provide all the necessary information to
enable the directors to participate through video conferencing mode or other audio-visual means.
18.May 2019

M/s Tristar Ltd. (an unlisted public limited company) with the annual turnover of Rs. 700 crores
entered into a contract of purchasing of raw material from M/s. PTC Pvt. Ltd. during the year 2018. M/s
Tristar Ltd. appointed Mr. Sudhir, a Director of the Company, to act in this deal of transaction on
behalf of the company. Mr. Sudhir is also one of the member of M/s PTC Pvt. Ltd. Mr. Sudhir settled the
said transaction of purchase for Rs. 85 crores and entered into the contract. After a few transactions
executed under the contract, the Board of M/s Tristar Ltd. finds degradation in the quality of the raw
material supplied. Further, in a board meeting this contract was challenged considering it as a related
party transaction and in contravention to section 188 (1) of the Companies Act, 2013 read with rules

Page No. 102

framed thereunder. During the period Mr. Sudhir was appointed as director in a newly incorporated
company M/s Raaga Limited.

In the light of the given facts, examine the following situations as per the Companies Act, 2013.

(i) What is the legal position of the contract entered between M/s Tristar Ltd. through its director Mr.
Sudhir, and M/s. PTC Pvt. Ltd.?
(ii) Is there any contravention of section 188 (1)? If yes, then state the liability of the wrongdoer.
(iii) Comment upon the appointment of Mr. Sudhir as a Director in M/s Raaga Limited.
Answer

As per the given facts, Mr. Sudhir, a director of M/s Tristar Ltd., was also a member of M/s PTC private
Ltd. with which he entered into contract for the purchase of the raw material. In terms of section 2(76)
of the Companies Act, 2013, M/s Tristar Ltd. is a related party to M/s PTC private Ltd..

Also, as per section 188(1) of the Act, no company shall enter into any contract or arrangement with a
related party with respect to the transaction related to the sale, purchase or supply of any goods or
materials or made through an appointment of any agent for purchase or sale of goods, materials,
services or property, except with the consent of the Board of Directors given by a resolution at a meeting
of the Board and subject to such conditions as given in rule 15 of the Companies (Meetings of Board and
its Powers) Rules, 2014 .
However, no contract or arrangement, in the case of a company having a paid-up share capital of not
less than such amount, or transactions not exceeding such sums, as prescribed in Rule 15(3) of the
Companies (Meetings of Board and its Powers) Rules, 2014, shall be entered into except with the prior
approval of the company by a resolution. [First proviso to section 188(1)]
A company shall not enter into transaction/s related to sale, purchase or supply of any goods or
materials, directly or through appointment of agent, where the transaction or transactions to be entered
into is amounting to 10% or more of the turnover of the company or rupees 100 crore, whichever is
lower, except with the prior approval of the company by a resolution.
Since in the given case, M/s Tristar Ltd. has turnover of Rs. 700 crore. The transaction of purchase settled
by Mr. Sudhir, is Rs. 85 crore which is more than 10% of the turnover (i.e., 700 crore x10/100= 70 crore).
Neither M/sTristar Ltd. had taken prior approval of the company by a resolution, nor it was ratified by
the shareholders at a meeting within three months from the date on which such contract or arrangement
was entered into. [Section 188(3)]
(i) So, in terms of the above provision, this contract is of voidable nature at the option of the
shareholders according to section 188(3) of the Companies Act, 2013.
(ii) Contravention of Section 188(1): Yes, as per the answer given under Part (i), there is a contravention
of section 188(1).

Following is the liability of the Sudhir, Director of M/s Tristar Ltd: Section 188(3) specifies, if the
contract or arrangement is with a related party to any director, or is authorised by any other director,
the directors concerned shall indemnify the company against any loss incurred by it.

Therefore, M/s Tristar Ltd, may proceed to recover loss. Section 188 (4) provides that it shall be open to

Page No. 103

the company to proceed against a director or any other employee who had entered into such contract
or arrangement in contravention of the provisions of this section for recovery of any loss sustained by
it as a result of such contract or arrangement.
Penalty: Any director or any other employee of a company, who had entered into or authorised the
contract or arrangement in violation of the provisions of this section shall be punishable with fine which
shall not be less than 25,000 rupees but which may extend to 5 lakh rupees.
Appointment of Director in M/s Raaga Ltd.: As per section 164(1)(g) of the Companies Act,2013, a
person shall not be eligible for appointment as a director of a company, where he has been convicted of
the offence of dealing with related party transactions under section 188 at any time during the last
preceding 5 years;

In the given instance, Mr. Sudhir was not convicted rather only the contract was challenged in the board
meeting considering it as a related party transaction which is in contravention to section 188(1) and may
attract penalty in terms of Section 188(5) against the offence dealt with related party transaction
hence Mr. Sudhir remains eligible to be appointed as a director of M/s Raaga Ltd.
19.May 2019 Qn no 6(a)(ii) 4 Marks:

The following information is provided in respect of M/s Fortune Limited under three different case
scenarios on the borrowing powers of the Board of Directors of the company. Mr. Murli, the CFO
seeks your advice with explanations as to the nature of resolution which needs to be passed under
each of the case scenarios as per the provisions of section 180(1) (c) of the Companies Act, 2013.
Detailed workings should form part of your answer.

Particulars Case I Case ll Case III

(Rs. in Crores) (Rs. in Crores) (Rs. in Crores)
Equity Share Capital (Paid- up) 150 150 150
Preference Share Capital (Paid-up) 50 50 50
Securities Premium Account 50 50 50
Free Reserves 20 20 20
Total: 270 270 270
Working Capital Loan (repayable on 50 50 50
demand-Existing) from Sigma Capital
Limited
Cash Credit Limit from a scheduled bank 120 120 120
(repayable on demand-Existing)
6 months loan for purchase of Plant & 30 40 130
Machinery from scheduled bank
(proposed)
24 months loan for purchase of Plant & 10 20 150
Machinery from scheduled bank
(proposed)
Total 210 230 450

Answer:
Page No. 104
According to section 180(1)(c) of the Companies Act, 2013, the Board of Directors of a company shall
exercise the following powers only with the consent of the company by a special resolution,
namely:—
(c) to borrow money, where the money to be borrowed, together with the money already borrowed by
the company will exceed aggregate of its paid-up share capital, free reserves and securities premium,
apart from temporary loans obtained from the company’s bankers in the ordinary course of business:
Explanation—For the purposes of this clause, the expression “temporary loans” means loans repayable
on demand or within six months from the date of the loan such as short- term, cash credit arrangements,
the discounting of bills and the issue of other short-term loans of a seasonal character, but does not
include loans raised for the purpose of financial expenditure of a capital nature.

Particulars Case I Case II Case III

(Rs. In (Rs. (Rs. In
crores) In crores)
crores)
Total amount of Paid up share capital, 270 270 270
free reserves and securities premium
Hence, Total amount that the company
can borrow without passing Special
Resolution
270 270 270
Amount (A)
(a) Existing Working Capital Loan 50 50 50
(Repayable on demand) from Sigma
Capital Limited since it is not a
banker
30 40 130
(b) Total amount of Loan that Company
needs is:
(i) 6 months loan for purchase of 10 20 150
Plant & Machinery 40 60 280
(ii) 24 months loan for purchase if 90 110 330
Plant & Machinery
Amount (B)
Is Amount (A)> Amount (B), then SR SR not to SR not to SR to be
need not be passed be passed be passed passed

Working Notes:

1. Paid up share capital includes both equity share capital and Preference share capital
2. ‘Cash credit limit from scheduled bank’ are temporary loans as they are repayable on
demand.

Page No. 105

 3. ‘6 months loan for purchase of Plant & Machinery’ is not treated as a temporary loan as
temporary loans does not include loans raised for the purpose of financial expenditure of a
capital nature.

20.Nov 2019 Qn no 1(b) 6 Marks

The Articles of Association of M/s. DEF Limited (Non-Government Company) restricts the Company to
contribute to National Defence Fund in any financial year for a sum not exceeding Rs. 5 lakhs. The
Articles is silent about contribution to bonafide Charitable Fund and to a Political Party. The Company
earned net profit during the last five financial years as under:

Financial Year Net Profit (Rs. in Lakhs)

2018-19 45
2017-18 25
2016-17 20
2015-16 15
2014-15 10
The Board of Directors proposes to contribute in July 2019 for the first time during the financial year
2019-20:

(i) Rs. 7 Lakhs to National Defence Fund

(ii) Rs. 3 Lakhs to a bonafide Charitable Fund
(iii) Rs. 5 Lakh to a Political Party

The Company Seeks your advice on the following matters in respect of each of the above proposals
under the provisions of the Companies Act, 2013.

(i) The appropriate approving authority:

(ii) The quantum of contribution that can be made;
(iii) The mode of payment of such contribution

Answer

(i) Appropriate approving authority

(a) In case of National Defence Fund: As per section 183(1), 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.
(b) In case of Bonafide Charitable Fund: As per section 181(1), the Board of Directors of a company
may contribute to bona fide charitable and other funds. However, prior permission of the
company in general meeting shall be required for such contribution in case any amount the
aggregate of which, in any financial year, exceed five per cent of its average net profits for the

Page No. 106

 three immediately preceding financial years.
(c)
In case of Political Party: As per section 182(1), a company may contribute any amount directly or
indirectly to any political party. However, no such contribution shall be made by a company
unless a resolution authorising the making of such contribution is passed at a meeting of the
Board of Directors and such resolution shall, subject to the other provisions of this section, be
deemed to be justification in law for the making of the contribution authorised by it.
Quantum of contribution

 In case of National Defence Fund: As per 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, notwithstanding anything contained in sections 180, 181 and
182 or any other provision of this Act or in the memorandum, articles or any other instrument
relating to the company, 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.
Hence, the company can contribute Rs. 7 Lakhs to National Defence Fund inspite of restriction by the
company to contribute in any financial year for a sum not exceeding Rs. 5 lakhs as the Section 183
prevails over Articles of the company and there is no limit on such contribution.
 Bonafide Charitable Fund: According to section 181, the Board of Directors of a company may
contribute to bona fide charitable and other funds. However, prior permission of the company in
general meeting shall be required for such contribution in case any amount the aggregate of which,
in any financial year, exceed five per cent of its average net profits for the three immediately
preceding financial years.
Average Net profit: Rs.30 Lakhs [(45+25+20)/3] 5% of average net profit: Rs.1.5 Lakhs
Since, the amount of contribution exceeds five per cent of its average net profits for the three
immediately preceding financial years, hence it requires prior permission of the company in general
meeting for contributing Rs. 3 Lakhs to a bonafide Charitable Fund.
 Political party: Section 182 specifies that a company other than a Government company and a
company which has been in existence for less than three financial years, may contribute any
amount directly or indirectly to any political party.
Hence, the company can contribute Rs.5 Lakhs to a political party.

Mode of payment of such contribution:

 National Defence fund: No mode of payment is provided under section 183.

 Bonafide Charitable Fund: No mode of payment is provided under section 181.
 Political Party: According to Section 182(3A), notwithstanding anything contained in sub-section
(1), the contribution under this section shall not be made except by an account payee cheque
drawn on a bank or an account payee bank draft or use of electronic clearing system through a
bank account. However, a company may make contribution through any instrument, issued
pursuant to any scheme notified under any law for the time being in force, for contribution to the
political parties.

Study Material

Page No. 107

 21. The Board of Directors of Infotech Consultants Limited, registered in Kolkata, proposes to hold
the next board meeting in the month of May, 2019.They seek, your advice in respect of the following
matters:
(i) Can the board meeting be held in Chennai through video conferencing, when all the directors
of the company reside at Kolkata?
(ii) Is it necessary that the notice of the board meeting should specify the nature of business to be
transacted?
Answer

(i) No provision in the Companies Act, 2013 requires that the board meetings must be held at a
particular place. Accordingly, there is no difficulty in holding the current board meeting at
Chennai through video conferencing even if all the directors of the company reside at Kolkata
and the registered office is also situated at Kolkata. However, it is to be seen that the legal
requirements as prescribed by Section 173 (2) and Rule 3 of the of the Companies (Meetings of
Board and its Powers) Rules, 2014 are meticulously followed.
(ii) Section 173 (3) of the Companies Act, 2013 provides for the giving of notice of every board
meeting of not less than seven days to every director of the
company. There is no provision in the Act laying down the contents of the notice. Hence, it
may be construed that notice may be interpreted as intimation of the meeting and may not
necessarily include Agenda of the meeting. However, considering the importance of board
meetings and the responsibilities placed on the directors for decisions taken at the meetings, it
is inevitable for them to be properly prepared and informed about the items to be discussed at
the board meetings.
In view of the above and as a matter of good secretarial practice, the Agenda, setting out the
business to be transacted at the Meeting, and Notes on Agenda should be given to the
Directors at least seven days before the date of the board meeting, unless the Articles
prescribe a longer period. Usually, the articles of a company make it mandatory to do so in
almost all cases.
As the board meeting is being conducted through video conferencing, Rule 3 (3) (b) of the Companies
(Meetings of Board and its Powers) Rules, 2014 requires that the notice of the meeting shall inform
the directors regarding the option available to them to participate through video conferencing mode
or other audio-visual means, and shall provide all the necessary information to enable the directors
to participate through video conferencing mode or other audio-visual means.

22. XYZ Ltd. is a foreign collaborator in ABC Ltd. incorporated in India under the Companies Act, 2013.
The foreign collaborator holds 49% of the shareholding. The Board meetings of ABC Ltd are usually held
in India and sometimes meetings of the Board are called at a very short notice for which there is a
provision in the Articles of Association that during such situations, notices of the meetings of the Board
can be sent by e-mail. State in this connection whether such a provision in the Articles of Association
of ABC Ltd. is valid.
Page No. 108
Answer: In terms of the proviso to section 173(3) of the Companies Act, 2013 a meeting of the Board
may be called at shorter notice to transact urgent business subject to the condition that at least one
independent director, if any, shall be present at the meeting. No exception is made for any class or
classes of companies.
Further, under section 173(3) a meeting of the Board shall be called by giving not less than seven days’
notice in writing to every director at his address registered with the company and such notice shall be
sent by hand delivery or by post or by electronic means.
If we examine the above provision, it is amply clear that the notice is allowed to be sent, inter-alia, by
electronic means also. Hence, the sending of notice by e-mail is a permissible mode of delivery and can
be resorted to without any hinderance. In case Articles contain such a provision, there is no illegality
involved even if there is a foreign collaborator in the company.
Therefore, in the given case the shorter notice by e-mail is legally permitted. It is to be noted that there
should be the presence of quorum and at least one independent director at the meeting. The provision
of the Articles in this regard is not so relevant since the position is quite clear in the Act itself.
23. Discuss the following situations with respect to the quorum.
(a) There are 9 directors in a company and out of which 2 offices of the
directors have fallen vacant.
(b) There are total 15 directors in a company and during discussion on a particular item, 13 of the
directors happen to be ‘interested’ within the meaning of section 184(2) of the Companies Act,
2013.
Answer:

(a) According to section 174(1) of the Companies Act, 2013, quorum is one third of the total strength of
Board (any fraction contained in the said one third being rounded of as one) or two directors whichever
is higher. The total strength is to be derived after deducting the number of directors whose offices are
vacant. Therefore, where total number of directors is 9 and 2 offices of the directors have fallen
vacant, the total strength comes to seven. In this case 1/3 of 7 = 2 1/3 directors which will be rounded
off as 3 which is higher than 2. Therefore, 3 directors would constitute the quorum for the Board
meetings.
(b) Under section 174(3) of the Companies Act, 2013, if at any time the number of the interested
directors exceeds or is equal to two thirds of the total strength of the Board of Directors, the number of
the directors who are non-interested but present at the meeting, not being less than two shall
constitute the quorum.
In the given situation, there are total 15 directors and the Board meeting commences with all of them.
During the meeting, an item comes up for discussion in respect of which 13 directors happen to be
‘interested directors’. In spite of the fact that the interested directors are more than two-thirds,
minimum two non-interested directors who are present at the meeting shall constitute the quorum and
they can validly transact that particular item of business in view of Section 174 (3).
24. A meeting of the Board of ‘No Holiday Ltd’ was held on a holiday on account of Ganesh Chaturthi.
Page No. 109
However due to lack of quorum, the proceedings of the meeting could not be held and therefore the
Chairman of the meeting with the consent of the majority decided that the Board meeting be
adjourned to next week on the same day. However, the date fixed for the adjourned meeting
happened to be a Sunday. Whether the adjourned meeting of the Board can be held on a Sunday.
Answer
When a board meeting is adjourned due to lack of quorum, then under section 174(4) the adjourned
meeting can be held on the same day at the same time and place in the next week or if that day is a
national holiday, till the next succeeding day, which is not a national holiday, at the same time and
place, unless the Articles provide otherwise.
Since Section 174(4) specifies exclusion of only a national holiday, any original/adjourned/committee
meetings can be held on Sundays and other holidays. In view of this provision, the adjourned meeting
of the Board of ‘No Holiday Ltd’ can be held on Sunday without involvement of any illegality.
25. The Board of Directors of Stepping Stones Publications Ltd. resolved to borrow a sum of 15 crores
from a nationalized bank at a Board meeting held on 15.1.2019. One of the directors, who opposed
the said borrowing as not in the interest of the company has raised an issue that the said borrowing
is outside the borrowing powers of the Board. The Company seeks your advice and the following data
is given for your information:
(i) Share Capital Rs. 5 crores
(ii) Reserves and Surplus Rs. 5 crores
(iii) Secured Loans Rs. 15 crores
Unsecured Loans Rs. 5 crores Advise the management of the company
Answer

According to the provisions of Section 180(1)(c) of the Companies Act, 2013, the powers of the Board
are not uncontrolled and there are restrictions on the borrowing powers to be exercised by the Board
of Directors.
According to the said section, the borrowings should not exceed the aggregate of the paid-up share
capital, free reserves and securities premium.
While calculating the limit, the temporary loans obtained by the company from its bankers in the
ordinary course of business will be excluded. However, from the figures available in the present case,
the proposed borrowing of Rs. 15 crore will exceed the limit calculated as per the given information.
Thus, the proposed borrowings are beyond the powers of the Board of directors.
In view of the above position, the management of Stepping Stone Publications Ltd., should take steps
to pass a special resolution authorising to borrow the proposed amount of Rs. 15.00 crores, so that the
requirement of Section 180(1)(c) is satisfied.
Only thereafter, the proposed borrowing can be availed of.

26. The Board of Directors of Very Well Ltd., is contributing every year to a charitable organization a
sum of Rs. 60, 000. In a particular year, the company suffered losses and the directors are

Page No. 110

contemplating to contribute the said amount in spite of the losses. In this connection, stat e whether
the directors can do so?

Answer

Under section 181 of the Companies Act, 2013, the Board of Directors of a company is authorized to
contribute to bona fide charitable and other funds. However, in case the aggregate amount of such
contribution in any financial year exceeds five per cent. of its average net profits for the three
immediately preceding financial years, prior permission of the company in general meeting shall be
required.
The section does not make it mandatory for the company to have a profit for making a charitable
contribution in any financial year. As the amount of donation is restricted to the average of immediately
previous 3 years’ profits, it is possible for a company suffering a loss to make contribution provided it is
made to a bona fide charitable fund and the average of the three immediately preceding financial years’
profits (including current losses) is positive.
In the present case, even though the company has incurred a loss it can contribute to the charitable fund
only if it is a bona fide charitable fund and the amount is up to 5% of the average of the immediately
preceding three years’ profits (including current losses).
In case the contribution exceeds the limit, the prior approval of the members must be taken at a general
meeting of the company.

27. The Board of Directors of LM Ltd., incorporated in April, 2017, proposes to donate Rs. 50,000 to a
political party for the F.Y. 2019-20. The average net profits determined in accordance with the
provisions of the Companies Act, 2013 during the two immediately preceding financial years are Rs.
20,00,000. Advise, whether the proposed donation is within the powers of Board of Directors of the
company?
Answer:
As per section 182(1) of the Companies Act, 2013 any company may contribute any amount directly or
indirectly to any political party except a government company and a company which has been in
existence for less than three financial years.
In the given case, LM Ltd. happens to be a company which has been in existence for less than three
financial years. Hence, it is not permitted to donate any amount to the concerned political party for the
F.Y. 2019-20.
28. Sea Hawk Cycles Limited is a company incorporated four years ago. It has earned profits amounting
to Rs. 5 lakhs, Rs. 8 lakhs and Rs. 11 lakhs respectively during the last three financial years. The Board of
Directors of the company proposes to donate a sum of Rs. 50,000 to a political party. Whether the
proposed donation is within the powers of Board of Directors of the company.
Answer
According to section 182(1) of the Companies Act, 2013, a company except a Government Company and a
company which has been in existence for not less than three financial years, can make political
Page No. 111
contributions, directly or indirectly, to any political party. Further, the contribution shall be made by a
company only after passing a resolution at a meeting of the Board of Directors authorizing such
contribution.
In view of the above provisions, Sea Hawk Cycles Limited can contribute the said amount of Rs. 50,000 to
the concerned political party. However, it needs to pass a board resolution authorising making of such
contribution at a meeting of the Board of Directors

29. Y Ltd. entered into a contract with Z Ltd. which has a paid-up capital of Rs. 50 lakhs. One of the
directors of Y Ltd. is holding equity shares of the nominal value of Rs. 50,000 in Z Ltd. but he did not
disclose his interest at the appropriate Board meeting. Is the concerned director liable for punishment
for such non-disclosure?

Answer

As per section 184 (2) of the Companies Act, 2013 the disclosure of interest by directors is not required
in any contract or arrangement between two companies where any of the directors of one company or
two or more of them together holds or hold not more than 2% of the paid-up share capital in the other
company. In the present case, the holding of the director of Y Ltd. in Z Ltd. is only 1% [ i.e.
(50,000/50,00,000)*100 = 1%] which is much less than 2%. Therefore, he is not liable for any punishment
if he does not disclose his interest regarding holding of equity shares in Z Ltd.

30. Mr. Mohan was appointed as director at the Annual General Meeting of a company held on 30th
September, 2018 and he functioned in the capacity as director from then onwards. Subsequently,
during the mid of August, 2019, it was noticed that there were certain irregularities in his appointment
and therefore, on 31st August, 2019, his appointment was declared invalid. However, Mr. Mohan
continued to act as director even after 31st August, 2019. Whether the subsequent acts done by him as
director are valid and binding on the company?
Answer:
According to Section 176 of the Companies Act, 2013, any act done by a person as a director shall be
deemed to be valid, notwithstanding that it may afterwards be discovered that his appointment was
invalid by reason of any defect or disqualification or had terminated by virtue of any provision contained
in this Act or in the articles of the company.

The Proviso to Section 176, however, states that nothing in this section shall be deemed to give validity to
acts done by a director after his appointment has been noticed by the company to be invalid or to have
terminated. In view of the above provisions of Section 176, the acts done by Mr. Mohan till the date of
noticing irregularity in his appointment shall be deemed as valid and binding on the company.
Any act done by him after the date on which irregularity in his appointment was noticed by the company
shall be invalid. Accordingly, acts done by Mr. Mohan after 31st August, 2019 shall be invalid and not
binding upon the company.

Page No. 112

31. The provision regarding conducting of four Board meetings every year is not applicable to:

(a) One Person Company (OPC), small company and dormant company
(b) One Person Company (OPC), dormant company and associate company
(c) Small company and dormant company
(d) One Person Company (OPC) and small company
Answer: (a) Hint: Section 173(5) of the Companies Act, 2013

32. One of the matters which cannot be dealt with in a board meeting conducted through electronic
mode is:

(a) Making political contributions

(b) Approval of the Board’s report
(c) Appointing a Key Managerial Personnel
(d) None of the above
Answer: b) Hint: Section 173(2) of the Companies Act, 2013 along with Rule 3 of the Companies
(Meetings of Board and its powers) Rules, 2014

33. A Board resolution cannot be passed by circulation when at least ----------- of the total members
require it to be decided at a meeting of the Board.

(a) 1/2
(b) 1/3
(c) 1/4
(d) 1/5
Answer: b) Hint: Proviso to section 175(1) of the Companies Act, 2013

34. A Board meeting needs to be called by at least --------- days’ notice in writing sent to all the
directors at their addresses registered with the company.

a) 7
b) 5
c) 3
d) None of the above
Answer: a) Hint: Section 173(3) of the Companies Act, 2013

35. CK Limited was incorporated on 25th June, 2018. When can it make political contributions?

a) After one year from the date of its incorporation.

b) After two years from the date of its incorporation
Page No. 113
c) After three years from the date of its incorporation.
d) After five years from the date of its incorporation.
Answer: c) Hint: Section 182 of the Companies Act, 2013

36. A company having minimum turnover of Rs. ----------- crores is required to constitute a Nomination
and Remuneration Committee.

a) 25
b) 50
c) 100
d) 200
Answer: Hint: Section 178(1) of the Companies Act, 2013

37. Where at any time the number of interested directors exceeds or is equal to of the total
strength of the Board of Directors, the quorum shall be the number of non-interested directors who are
present at the meeting and not less than two.

(a) 1/2
(b) 2/3
(c) 1/3
(d) None of the above
Answer: b) Hint: Section 174(3) of the Companies Act, 2013

38. In case of a company where minimum ------------------ per cent members (in number) are relatives of
promoters or are related parties, they are not precluded from voting on a resolution for approving any
related party transaction.

(a) 80
(b) 85
(c) 90
(d) 95
Answer: c) Hint: Section 188 of the Companies Act, 2013
39. Under normal circumstances, a company is not permitted to make investment through more than
layer(s) of investment companies.

a) One
b) Two
c) Three

Page No. 114

d) Four
Answer: b) Hint: Section 186 of the Companies Act, 2013

40. The Board of Directors can exercise its powers by means of resolution, passed at a meeting only and
by no other means, to transact which of the following businesses:

a) Authorising buy back of securities

b) Taking note of the disclosures of director’s interest and shareholding
c) Reviewing or changing the terms and conditions of public deposits
d) None of the above
Answer: a) Hint: Section 186 of the Companies Act, 2013

41. Out of the total strength of six directors of SQ Ltd, five are attending a Board meeting to consider
the investment of funds of the company. The resolution relating to investment shall be taken as passed
in which of the following cases:

a) When all the five directors attending the meeting consent to it

b) When any four directors out of five consent to it
c) When any three directors out of five consent to it
d) Investment proposal must be consented to by the total strength of directors (six directors in this
case)
Answer: a) Hint: Section 186(5) of the Companies Act, 2013

42. In case of a Board meeting which is conducted through the means of video conferencing, the draft
minutes shall be circulated among all the directors within days of the meeting either in writing or in
electronic mode as may be decided by the Board.

(a) 5
(b) 10
(c) 15
(d) 20
Answer: c) Hint: Rule 3 of the Companies (Meetings of Board and its powers) Rules, 2014

43. Audit Committee may make omnibus approval for:

a) Making of investment in other companies

b) Related party transactions proposed to be entered into by the company
c) Transferring of non-functional undertaking
d) All of the above

Page No. 115

Answer: b) Hint: Section 177(4) of the Companies Act, 2013

44. In case a company enters into a transaction with a related party in the ordinary course of business
on an arm’s length basis, which authority specifically needs to approve such transaction:

a) Board of Directors
b) Company by passing an ordinary resolution
c) Company by passing a special resolution
d) None of the above
Answer: d) Hint: Fourth proviso to section 188(1) of the Companies Act, 2013

45. Which of the following points is not related to omnibus approval to be made by an Audit
Committee:

a) Audit Committee shall consider repetitiveness of the transactions (in past or in future);
b) The indicative base price or current contracted price and the formula for variation in the price,
c) Omnibus approval shall be valid for a period not exceeding two financial years and shall require
fresh approval after the expiry of such financial year.
d) Omnibus approval shall not be made for transactions in respect of selling or disposing of the
undertaking of the company
Answer: c) Hint: Rule 6A of the Companies (Meetings of Board and its powers) Rules, 2014

46. In case of transfer of whole of its undertaking by a company, no compensation is payable to the
directors for loss of office if:

a) the company has failed to appoint additional director

b) the company has failed to pay dividend on preference shares
c) the company has failed to appoint all the directors as prescribed by its articles
d) None of the above
Answer: b) Hint: Rule 17 of the Companies (Meetings of Board and its powers) Rules, 2014

47.

(i) What is the procedure to be followed, when a board meeting is adjourned for want of quorum?

(ii) How is a resolution by circulation passed by the Board or its Committee.

Answer:

(i) Section 174(4) of the Companies Act, 2013 provides that, if a Board meeting could not be held for
want of quorum, then, unless the articles otherwise provide, the meeting shall automatically stand
adjourned to the same day in the next week, at the same time and place, or if that day is a

Page No. 116

 national holiday, till the next succeeding day which is not a national holiday, at the same time and
place.
(ii) The Companies Act, 2013 permits a decision of the Board of Directors to be taken by means of a
resolution by circulation. Board’s approvals can be taken in two ways - one, by a resolution passed
at a Board Meeting and the other, by means of a resolution passed by circulation.
In terms of Section 175(1) of the Companies Act, 2013 no resolution shall be deemed to have been
duly passed by the Board or by a committee thereof by circulation, unless the following provisions
have been complied with:
(1) the resolution has been circulated in draft, together with the necessary papers, if any,
(2) the draft resolution has been circulated to all the directors, or members of the committee, as
the case may be;
(3) the Draft resolution has been sent at their addresses registered with the company in India;
(4) such delivery has been made by hand or by post or by courier, or through prescribed electronic
means;
Rule 5 of the Companies (Meetings of Board and its Powers) Rules, 2014 provides that a resolution
in draft form may be circulated to the directors together with the necessary papers for seeking their
approval, by electronic means which may include E-mail or fax.

(5) such resolution has been approved by a majority of the directors or members, who are
entitled to vote on the resolution
(6) However, if at least 1/3rd of the total number of directors of the company for the time being
require that any resolution under circulation must be decided at a meeting, the Chairperson
shall put the resolution to be decided at a meeting of the Board (instead of being decided by
circulation).
(7) A resolution that has been passed by circulation shall have to be necessarily noted in the next
meeting of Board or the Committee, as the case may be, and made part of the minutes of such
meeting.
48. Mr. P and Mr. Q who are the directors of C-Tech Limited informed the company about their inability
to attend the Board meeting because the notice thereof was not served on them. Discuss whether
there is any default on the part of C-Tech Limited and the consequences thereof.

Answer:

Under section 173(3) of the Companies Act, 2013 a meeting of the Board shall be called by giving not less
than seven days’ notice in writing to every director at his address registered with the company and such
notice shall be sent by hand delivery or by post or by electronic means.

Section 173(4) further provides that every officer of the company whose duty is to give notice under this
section and who fails to do so shall be liable to a penalty of Rs. 25,000.
In the given case, as no notice was served on Mr. P and Mr. Q who are the directors of C- Tech Limited,

Page No. 117

every officer responsible for such default in serving notice shall be punishable with fine of Rs. 25,000 as
required by Section 173 (4).
Neither the Companies Act, 2013 nor the Companies (Meetings of the Board and its Powers) Rules, 2014
lay down any specific provision regarding the validity of a resolution passed by the Board of Directors in
case notice was not served to all the directors. We shall have to go by the provisions of the Companies
Act, 2013 which clearly provide for the notice to be sent to every director. The Supreme Court, in case of
Parmeshwari Prasad vs. Union of India (1974) has held that the resolutions passed in the board meeting
shall not be valid, since notice to all the Directors was not given in writing. Hence, even though the
directors concerned knew about the Board meeting, the meeting shall not be valid and resolutions passed
thereat also shall not be valid.
49. A director goes abroad for a period of more than 3 months and an alternate director has been
appointed in his place under Section 161(2). During the period of absence of the original director, a
board meeting was called. In this connection, with reference to the provisions of the Companies Act,
2013, advise who should be given the notice of Board meeting i.e. the “original director” or the
“alternate director”?

Answer:

According to Section 161(2) of the Companies Act, 2013, the Board of Directors of a company may, if so
authorised by its articles or by a resolution passed by the company in general meeting, appoint a
person, not being a person holding any alternate directorship for any other director in the company or
holding directorship in the same company, to act as an alternate director for a director during his
absence for a period of not less than three months from India.

According to Section 173(3), a meeting of the Board may be called by giving at least 7 days’ notice in
writing to every director at his address registered with the company and such notice shall be sent by
hand delivery or by post or by electronic means.
There is no legal precedence whether the notice of the meeting is to be sent to the original director or
the alternate director. But as a matter of prudence such notice may be served to both the alternate
director as well as the original director who is for the time being outside India

50. Examine with reference to the provisions of the Companies Act, 2013 whether notice of a Board
Meeting is required to be sent to the following persons:

(i) An interested Director;

(ii) A Director who has expressed his inability to attend a particular Board Meeting;
(iii) A Director who has gone abroad (for less than 3 months).
Answer:
Notice of Board meeting
(i) Interested director: Section 173(3) of the Companies Act, 2013 makes it mandatory that every
director needs to be given proper notice of every board meeting. It is immaterial whether a
director is interested or not. In case of an interested director, notice must be given to him even
Page No. 118
 though in terms of Section 184 (2) he is precluded from participation i.e. engaging himself in
discussion or voting at the meeting on the business in which he is interested.
(ii) A Director who has expressed his inability to attend a particular Board Meeting: In terms of section
173(3) even if a director states that he will not be able to attend the next Board meeting, notice
must be given to that director also.
(iii) A director who has gone abroad: A director who has gone abroad is still a director. Therefore, he is
entitled to receive notice of board meetings during his stay abroad. The Companies Act, 2013,
allows delivery of notice of meeting by electronic means also i.e. through e-mail. This factor carries
weight because the Companies Act, 2013 permits a director to participate in a meeting by video
conferencing or any other audio- visual means also, in addition to physical presence
51. Out of the powers exercisable by the Board under Section 179 of the Companies Act, 2013, the
Board of MN Limited wants to delegate the power to borrow monies otherwise than on debentures
to the Managing Director. Advise whether such a delegation is possible? Would your answer be
different, if the delegation is made to the manager or any other principal officer including a branch
officer of the company?

Answer:

Under section 179(3) of the Companies Act, 2013, the Board of Directors of a company shall exercise the
following powers on behalf of the company by means of resolutions passed at meetings of the Board:

(a) To make calls on shareholders in respect of money unpaid on their shares;

(b) To authorise buy-back of securities under section 68;
(c) To issue securities, including debentures, whether in or outside India;
(d) To borrow monies;
(e) To invest the funds of the company;
(f) To grant loans or give guarantee or provide security in respect of loans;
(g) To approve financial statement and the Board’s report;
(h) To diversify the business of the company;
(a) To approve amalgamation, merger or reconstruction;
(b) To take over a company or acquire a controlling or substantial stake in another company;
(c) Any other matter which may be prescribed.
Provided that the Board may, by a resolution passed at a meeting, delegate to any Committee of
Directors, the Managing Director, the manager or any other principal officer of the company or in the
case of a branch office of the company, the principal officer of the branch office, the powers specified in
clauses (d) to (f) on such conditions as it may specify.
In respect of a company covered under Section 8 of the Companies Act, 2013, which has not committed a
default in filing its financial statements under Section 137 or Annual Return under Section 92 with the

Page No. 119

Registrar, the matters referred to in clauses (d), (e), and (f) of Section 179 (3) may be decided by the
Board by circulation instead of at a meeting. This modification is permitted by Notification No. GSR 466
(E), dated 5thJune, 2015 as amended by Notification No. GSR 584 (E), dated 13thJune, 2017.
From the foregoing provisions, it is clear that the Board of MN Limited shall be perfectly in order if it
delegates the power to borrow monies under clause (d) of Section 173 (3) to the Managing Director or to
the manager or any other principal officer.
52. Advise the Board of Director of Spectra Papers Ltd. regarding validity and extent of its powers,
under the provisions of the Companies Act, 2013 in relation to the following matters:

(i) Buy-back, for the first time, the shares of the Company up to 10% of the paid-up equity share
capital without passing a special resolution.
(ii) Delegation of power to the Managing Director so that he can invest surplus funds of the company
in the shares of some other companies.
Answer:

According to clause (b) of Section 179(3), The Board of Directors of a company shall exercise the power to
authorize buy-back of securities under section 68, on behalf of the company by means of resolutions
passed at meetings of the Board.

According to Section 68(2), no company shall purchase its own shares or other specified securities,
unless—
(a) the buy-back is authorised by its articles;
(b) a special resolution has been passed at a general meeting of the company authorizing the buy-back:
However, nothing contained in this clause shall apply to a case where—
(1) the buy-back is, 10% or less of the total paid-up equity capital and free reserves of the company;
and
(2) such buy-back has been authorised by the Board by means of a resolution passed at its meeting,
From the foregoing provisions, it is clear that in case a company, for the first time, resorts to buy-back of
its own shares, when the buy-back is limited to 10% of its paid- up share capital, a special resolution will
not be required if such buy-back has been authorised by the Board by means of a resolution passed at its
meeting. Thus, the Board of Director of Spectra Papers Ltd. is empowered to buy-back the shares because
the buy-back is limited to 10% of the paid-up share capital, by means of a resolution passed at the Board
meeting.
(ii) According to clause (e) of Section 179(3), the Board of Directors of a company shall exercise the power
to invest the funds of the company, on behalf of the company by means of resolutions passed at the
meetings of the Board.
The Board may, under the Proviso to Section 179(3), delegate the power to invest the funds of the
company through a board resolution passed at a duly convened Board Meeting. However, the investment
in shares of other companies will also be governed by a specific provision contained in Section 186(5),

Page No. 120

according which no investment shall be made or loan or guarantee or security given by the company
unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all the
directors present at the meeting and the prior approval of the public financial institution concerned
where any term loan is subsisting, is obtained.
Thus, a unanimous resolution of the Board is required. Further, Section 186 does not provide for
delegation. Hence, the proposed delegation of power to the Managing Director to invest surplus funds of
the company in the shares of some other companies, is not in order.
53. An Audit Committee of a listed company constituted under Section 177 of the Companies Act, 2013,
submitted its report containing the recommendations in respect of certain matters to the Board. The
Board, however, did not accept the recommendations. In the light of the situation, analyze whether:

(a) The Board is empowered not to accept the recommendations of the Audit Committee.
(b) If so, what alternative course of action, would the Board resort to?
Answer:

(a) According to Section 177(8) of the Companies Act, 2013, the Board’s Report shall, under the
provisions of Section 134 (3) which is laid before the general meeting where the financial statements of
the company are placed before the members, disclose the

composition of the Audit Committee and where the Board has not accepted any recommendations of the
Audit Committee, the same shall also be disclosed along with the reasons therefor.

Hence, the Board is empowered not to accept the recommendations of the Audit Committee but only
under genuine circumstances and supported by legitimate reasons for non-acceptance.

(b) If the Board does not accept the recommendations of the Audit Committee, it shall disclose the same
in its report under section 134 (3) which is placed before the general meeting of the company

54. MNC Ltd., a company, whose paid up capital was Rs. 8.00 Crores, has issued right shares in the ratio
of 1:1. The said company is listed with Mumbai Stock Exchange. Whether the company is required to
appoint any Audit Committee and if yes, draft a suitable Board Resolution to appoint an Audit
committee covering the aspects as provided in the Companies Act, 2013.

Answer:

Under section 177(1) of the Companies Act, 2013 the Board of Directors of every listed public company
and such other class or classes of companies, as may be prescribed, shall constitute an Audit
Committee. Therefore, MNC Ltd being a listed company will be bound to constitute an audit committee
under the Act.

Further under section 177(2) the Audit Committee shall consist of a minimum of three directors with
independent directors forming a majority.
Further, majority of the members of Audit Committee including its Chairperson shall be persons with
ability to read and understand the financial statement.

Page No. 121

The draft Board Resolution for the constitution of an Audit Committee may be as follows:
“Resolved that pursuant to the provision contained in section 177 of the Companies Act 2013 and the
applicable clause of Listing Agreement with the Mumbai Stock Exchange, an Audit Committee of the
Company be and is hereby constituted with effect from the conclusion of this meeting, with members
as under:
1. Mr. A -- An Independent Director.
2. Mr. B -- An Independent Director
3. Mr. C – An Independent Director
4. Mr. D -- An Independent Director
5. Mr. FE -- Financial Executive
6. Mr. MD -- Managing Director
Further resolved that the Chairman of the Committee, who shall be an Independent Director, be
elected by the committee members from amongst themselves.
Further resolved that the quorum for a meeting of the Audit Committee shall be the chairman of the
Audit Committee and 2 other members (other than the Managing Director),.
Further resolved that the terms of reference of the Audit Committee shall be in accordance with the
provisions of section 177(4) of the Companies Act, 2013.
Further resolved that the Audit committee shall conduct discussions with the auditors periodically
about internal control system, the scope of audit including the observations of the auditors.
Further resolved that the Audit Committee shall review the quarterly and annual financial statements
and submit the same to the Board with its recommendations, if any.
Further resolved that the recommendations made by the Audit Committee on any matter relating to
financial management including the audit report shall be binding on the Board. However, where such
recommendations are not accepted by the Board, the reasons for the same shall be recorded in the
minutes of the Board meeting and communicated to the shareholders.
Further resolved that the Company Secretary of the Company shall be the Secretary to the Audit
Committee.
Further resolved that the Chairman of the Audit Committee shall attend the annual general meeting of
the Company to provide any clarifications on matters relating to audit as may be required by the
members of the company.
Further resolved that the Board’s Report/Annual Report to the members of the Company shall include
the particulars of the constitution of the Audit Committee and the details of the non- acceptance of any
recommendations of the Audit Committee with reasons therefor.”
55. Following data relates to Prince Company Limited:

Authorised Capital (Equity Shares) Rs. 100 crores

Page No. 122

Paid – up Share Capital Rs. 40 crores

General Reserves Rs. 20 crores

Debenture Redemption Reserve Rs. 10 crores

Provision for Taxation Rs. 5 crores

Securities premium Rs. 2 crores

Loan (Long Term) Rs. 10 crores

Short Term Creditors Rs. 3 crores

Board of Directors of the company by a resolution passed at its meeting decided to borrow an
additional sum of Rs. 90 crores from the company’s Bankers. Being the company’s financial advisor, you
are required to advise the Board of Directors regarding the procedure to be followed in this respect
under the Companies Act, 2013.

Answer:

(i) Borrowing from Financial Institutions: As per Section 180(1)(c) of the Companies Act, 2013, the
Board of Directors of a company, without obtaining the approval of shareholders in a general meeting,
can borrow money including moneys already borrowed up to an amount which does not exceed the
aggregate of paid up capital of the company, free reserves and securities premium. Such borrowing
shall not include temporary loans obtained from the company’s bankers in the ordinary course of
business. Here, free reserves do not include the reserves set apart for specific purpose.

Since the decision to borrow is to be taken in a meeting to be held on 5th September, 2019, the figures
relevant for this purpose are the figures as per the Balance Sheet as at 31.03.2019. According to the
above provisions, the Board of Directors of PTL Ltd. can borrow, without obtaining approval of the
shareholders in a general meeting, up to an amount calculated as follows:

Particulars Rs.
Paid up Capital 75,00,000
General Reserve (being free reserve) 50,00,000
Credit Balance in Profit & Loss Account (to be treated as 10,00,000
free reserve)
Debenture Redemption Reserve (This reserve is not to be ----
considered since it is kept apart for specific purpose of
debenture redemption)
Securities Premium 2,00,000
Aggregate of paid-up capital, free reserves and securities 137,00,000
premium

Page No. 123

 Total borrowing power of the Board of Directors of the
company, i.e, 100% of the aggregate of paid-up capital, 137,00,000
free reserves and securities premium
Less: Amount already borrowed as secured loans 30,00,000
Amount up to which the Board of Directors can further
borrow without the approval of shareholders in a 107,00,000
general meeting.
(ii) Contribution to Charitable Funds: As per Section 181 of the Companies Act, 2013, the Board of
Directors of a company without obtaining the approval of shareholders in a general meeting, can make
contributions to genuine charitable and other funds up to an amount which, in a financial year, does
not exceed five per cent of its average net profits during the three financial years immediately
preceding, the financial year.
According to the above provisions, the Board of Directors of the PTL Ltd. can make contributions to
charitable funds, without obtaining approval of the shareholders in a general meeting, up to an amount
calculated as follows:
Net Profit for the year (as calculated in accordance with the provisions of the Companies Act, 2013):

Particulars Rs.
For the financial year ended 31.3.2017 12,50,000
For the financial year ended 31.3.2018 19,00,000
For the financial year ended 31.3.2019 34,50,000
TOTAL 66,00,000
Average of net profits during three preceding financial 22,00,000
years
Five per cent thereof 1,10,000
Hence, the maximum amount that can be donated by the Board of Directors of PTL Ltd to a genuine
charitable fund during the financial year 2019 -20 will be limited to 1,10,000; and the said donation shall
not require seeking of approval from the shareholders at a general meeting.

57. One of the Objects Clauses of the Memorandum of Association of Info Company Limited 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 Extraordinary General Meeting 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 whereupon 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.

Examining the provisions of the Companies Act, 2013, answer the following:

Page No. 124

Whether the contention of members against the non-compliance of members’ decision by the directors
is tenable?

Whether it is possible for the members to usurp the powers which by the Articles are vested in the
directors by passing a resolution in the general meeting?

Answer:

Powers of Board: In accordance with the provisions of the Companies Act, 2013, as contained under
Section 179(1), 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:

Provided that in exercising such power or doing such act or thing, the Board shall be subject to the
provisions contained in that behalf in this Act, or in the memorandum or articles, or in any regulations
not inconsistent therewith and duly made thereunder including regulations made by the company in
general meeting.
Provided further that the Board shall not exercise any power or do any act or thing which is directed or
required, whether under this Act or by the members or articles of the company or otherwise to be
exercised or done by the company in general meeting.
Section 180 (1) of the Companies Act, 2013, specifies the powers which the Board of Directors of a
company shall exercise only with the consent of the company by a special resolution. Clause (a) of
Section 180 (1) defines one such power as the power to sell, lease or otherwise dispose of the whole or
substantially the whole of the undertaking of the company or where the company owns more than one
undertaking of the whole or substantially the whole or any of such undertakings.
Therefore, the sale of the undertaking of a company can be made by the Board of Directors only with
the consent of members of the company accorded by passing a special resolution.
Even if the power is given to the Board by the memorandum and articles of the company, the sale of
the undertaking must be approved by the shareholders in general meeting by passing a special
resolution.
58. (i) R Ltd. wants to constitute an Audit Committee. Draft a board resolution covering the following
matters [compliance with Companies Act, 2013 to be ensured].

(1) Members of the Audit Committee

(2) Chairman of the Audit Committee
(3) Any 2 functions of the said Committee
(ii) What would be the minimum likely turnover or capital of this company?
(iii) What is the role of the Audit Committee vis-a-vis the statutory auditor when the company wishes
to engage them to perform certain engagements which are not restricted under Section 144?
Answer:

(i) Audit Committee – Board’s Resolution:

Page No. 125

“Resolved that pursuant to Section 177 of the Companies Act, 2013, an Audit Committee consisting of
the following Directors be and is hereby constituted.
1. Mr Independent Director
2. Mr Independent Director
3. Mr Independent Director
4. Mr Independent Director
5. Mr Managing Director.
6. Mr Chief Financial Officer”
“Further resolved that the Chairman of the Audit Committee shall be elected by its members from
amongst themselves and shall be an independent director”.
“Further resolved that the quorum for a meeting of the Audit committee shall be three directors (other
than the Managing Director), out of which at least two must be independent directors”.
“Resolved further that the Audit Committee shall perform all the functions as laid down in section
177(4) of the Companies Act, 2013 including but not limited to:

a. make the recommendation for appointment, remuneration and terms of appointment of the
auditors of the company;
b. review and monitor the independence and performance of auditors of the company and the
effectiveness of the audit process”.
“Further resolved that the Audit Committee shall review the quarterly and annual financial statements
and submit the same to the Board with its recommendations if any”.
(ii) Rule 6 of the Companies (Meetings of Board and its Powers) Rules, 2014 states that every listed
public company and a company covered under Rule 4 of Companies (Appointment and
Qualification of Directors) Rules, 2014 shall constitute an Audit Committee. Rule 4 has prescribed
the following classes of companies to constitute an Audit Committee:
(a) public companies having a paid-up share capital of 10 crore rupees or more;
(b) public companies having turnover of 100 crore rupees or more;
(c) public companies which have, in aggregate, outstanding loans, debentures and deposits,
exceeding 50 crore rupees.
Hence, in the given case, the likely turnover of R Ltd. shall be Rs. 100 crore or more or
capital shall be Rs. 10 crore or more.
(iii) According to section 177(5), the Audit Committee is empowered to:
(1) call for the comments of the auditors about:
(A) internal control systems,
(B) the scope of audit, including the observations of the auditors,

Page No. 126

 (C) review of financial statement before their submission to the Board,
discuss any related issues with the internal and statutory auditors and the management of the
company.

59. You are the CFO and in-charge of compliances of a listed entity. The Company is professionally
managed and has earned a niche in the market for its robust management practices. Mr. Edward, an
eminent American business man, currently living in Germany, joined the Company as an Executive
Director. On assuming his mantle, he being a foreign director residing abroad, approached you to
specifically understand the relevant provisions of the Companies Act, 2013 relating to participation of
directors in Board Meetings conducted through Video Conferencing in respect of the following matters:

(i) What shall be the venue of Board Meeting through video conference?

(ii) How the statutory registers placed at the scheduled venue of the meeting shall deemed to have
been signed by the directors participating through electronic mode?

(iii) Whether meetings can be convened through audio/teleconferencing i.e. without video facility?
You are required to provide correct legal-position to the above queries after examining and evaluating
the provisions of the Companies Act, 2013. (6 Marks) (Past exam nov 2020)

Answer

(i) As per Sub-rule (6) of Rule 3 of the Companies (Meetings of Board and its Powers) Rules 2014, with
respect to every meeting conducted through video conferencing or other audio visual means authorised
under these rules, the scheduled venue of the meeting as set forth in the notice convening the meeting,
shall be deemed to be the place of the said meeting and all recordings of the proceedings at the meeting
shall be deemed to be made at such place.

(ii) Sub-rule (7) of Rule 3 of the Companies (Meetings of Board and its Powers) Rules 2014, provides that
the statutory registers which are required to be placed in the Board Meeting as per the provisions of the
Act, shall be placed at the scheduled venue of the meeting and where such registers are required to be
signed by the directors, the same shall be deemed to have been signed by the directors participating
through electronic mode, if they have given their consent to this effect, it is so recorded in the minutes of
the meeting.

(iii) According to section 173(2) of the Companies Act, 2013, the participation of directors in a meeting of
the Board may be either in person or through video conferencing or other audio visual means, as may be
prescribed, which are capable of recording and recognising the participation of the directors and of
recording and storing the proceedings of such meetings along with date and time. Accordingly, meeting
can be convened through audio visual means capable of recording and recognising the participation of
the directors but not through audio teleconferencing i.e, without video facility.

60. Apex Ltd. is an unlisted Public Company and having 10 Directors on its Board. At a duly convened
meeting of the Board of Directors of the Company held on 14th August, 2020, it was proposed to
approve entering into contracts or arrangements with 'E Limited' and 'Q and Associates', a partnership
firm. Mr. Y and his spouse hold 2 and 1 shareholding respectively in E Limited. Mrs. Z, spouse of Mr. Z is
a partner in Q and Associates. Mr. Y and Mr. Z are the Directors of Apex Limited. The board meeting
Page No. 127
was attended by five directors including Mr. Y and Mr. Z. All the directors participated in the
discussions and voted in favor of the resolution except Mr. Y. The contracts were approved. However,
Mr. Y and Mr. Z disclosed their respective interests in the contracts. The earlier Board Meeting was held
on 25th May, 2020. In the light of the provisions of the Companies Act, 2013 (the Act), examine the
following:

(i) Whether the Board Meeting that was held and the transactions therewith are within the provisions
of the Act?

(ii) Under what circumstances any arrangement entered into by the Company in violation of Section
192 of the Companies Act, 2013 dealing with non-cash transactions involving directors shall not be held
voidable? (6 Marks) .

(past exam jan 2021)

ANSWER

(i) According to section 173 of the Companies Act, 2013, every company shall hold minimum of 4
meetings every year but the gap between two consecutive board meetings shall not be more than 120
days.

In the given question earlier Board Meeting was held on 25th May, 2020. The next board meeting was
held on 14th August, 2020. Thus, this provision has been complied as the gap between two meetings is
less than 120 days.
As per section 174 of the Companies Act, 2013, the quorum for a Board Meeting shall be 1/3rd of its total
strength or two directors whichever is higher. Where at any time, the number of interested director
exceeds or is equal to 2/3 of the total strength, the quorum shall be the number of directors who are
present and not interested directors.
According to section 184 of the Companies Act, 2013, every director shall disclose his concern or interest
in any company or companies or bodies corporate, firms, or other association of individuals which shall
include the shareholding, in the manner prescribed in Rule 9 of the Companies (Meetings of Board and its
Powers) Rules, 2014.
The section further provides that, a director of a company shall make a specific disclosure of interest
whenever he, in any way, whether directly or indirectly, is concerned or interested in a contract or
arrangement or proposed contract or arrangement entered into or to be entered into:

(a) with a body corporate in which such director or such director in association with any other director
holds more than two per cent shareholding of that body corporate; or

(b) with a body corporate in which such director is a Promoter, Manager, Chief Executive Officer; or

(c) with a firm or other entity in which, such director is a partner, owner or member.

According to Section 184 (5) (b), the provisions of Section 184 regarding disclosure by interested director
shall not apply to any contract or arrangement entered into or to be entered into between two
companies where any of the directors of the either company or two or more of them together holds or
hold not more than 2% of the paid-up share capital in the other company.

Page No. 128

As in the given case, Mr. Y holds 2% shareholding (his wife shareholding shall not be included) in E
Limited. Since, his shareholding is not more than 2%, therefore, provisions of disclosure of interest shall
not apply to him.
Similarly, the provisions related to disclosure of interest are not applicable on Mr. Z (as his wife is a
partner in Q and Associates and he disclosed his indirect interest).

As per the question five directors including Mr. Y and Mr. Z (all uninterested) attended the board meeting
which is more than 1/3rd of the strength. Thus this provision has been complied.
Therefore, the meeting convened on 14-08-2020 is valid.

The provisions of section 184 of the Companies Act, 2013 are also complied with, and so the transactions
of the meeting held on 14th August, 2020 are in order. However, in terms of section 188 of the
Companies Act, 2013, no contract or arrangement, in case of a company having paid up share capital of
not less than such amount or transactions not exceeding such sums, as may be prescribed shall be
entered into except with the prior approval of the company by a resolution.

(ii) Where any arrangement entered into by the company in violation of the section 192(3) of the
Companies Act, 2013 dealing with non cash transactions involving directors, shall not be voidable:

(a) If the restitution of any money or other consideration which is subject matter of the arrangement is no
longer possible and the company has indemnified by any other person for any loss or damage caused to it
or

(b) If any rights are acquired bonafide for value and without notice of the contravention of the provisions
of this section by any other person.

61. Mrs. Anjana is a director of Unique Ltd., a professionally managed, profit making, dividend paying
Company. The said company is having sufficient liquid funds and are remaining idle as of now. With a
view to deploy the idle funds, the Company proposes to provide either loans or invest in the shares of
other companies or both. Considering this the Board of Directors delegate the powers to the Managing
Director to invest upto 15 of the paid-up capital without passing a special resolution.
In the light of Companies Act, 2013 analyze whether the action of board is correct?
(past exam jan 2021)

ANSWER

As per section 186(2) of the Companies Act, 2013, no company shall directly or indirectly—

(a) give any loan to any person or other body corporate;

(b) give any guarantee or provide security in connection with a loan to any other body
corporate or person; and

(c) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate,

Page No. 129

exceeding sixty per cent. of its paid-up share capital, free reserves and securities premium account or one
hundred per cent. of its free reserves and securities premium account, whichever is more.

According to section 186(5) of the Companies Act, 2013, no investment shall be made or loan or
guarantee or security given by the company unless the resolution sanctioning it is passed at a meeting of
the board with the consent of all the directors present at the meeting and the prior approval of the public
financial institution concerned where term loan is subsisting, is obtained.

Thus, a unanimous resolution of the board is required. The section 186 does not provide for delegation.
Hence, the proposed delegation of power to the managing director to invest surplus funds of the
company in the shares of some other companies is not correct.

Section 167 of the Companies Act, 2013 contains provisions detailing out as to when the office of a
director shall become vacant. As soon as, any such event occurs, the director is required to demit the
office of director of the company. According to Section 167 (1), the office of a director shall become
vacant in case where he absents himself from all the meetings of the Board of Directors held during a
period of 12 months with or without seeking leave of absence of the Board.

In the light of the stated provision:

(1) Ms. Jai Shvitha is required to vacate the office of director in PQR Limited. The proposal of Board of
PQR Limited to waive the event of absence or condone her absence from attending
meeting is not permissible.

(2) Ms. Jai Shvitha desires to keep the directorship in PQR Limited is also not tenable. However, the board
is advised to co-opt her as an additional director in the subsequent board meeting as there is no
prohibition in the Act for such co-option and reappointment.

62. There are 7 directors in BUI Limited. A resolution (relating to opening of a branch office of the
company in a place outside the state where the registered office is situated) in draft together with
necessary papers were circulated among the directors seeking their approval by circulation. Four
directors from among total seven directors approved the proposal. Three directors, who did not
approve the proposal, opposed the validity of the proposal on the following grounds:

(i) That the resolution was circulated bye-mail and not by hand delivery or post or courier as per the
provisions of sub-section (1) of Section 175 of the Companies Act, 2013; and

(ii) Secondly, that more than l/3rd of the number of directors now require that the resolution must be
decided at a meeting of the Board of Directors and not by circulation.
Referring to and analyzing the relevant provisions of the Companies Act, 2013 and Rules made there
under, decide, whether the contention of the three directors is tenable.
(4 Marks) (past exam jan 2021)

Answer

As per section 175 of the Companies Act, 2013, no resolution shall be deemed to have been duly passed
by the Board or by a committee thereof by circulation, unless the resolution has been circulated in draft,

Page No. 130

together with the necessary papers, if any, to all the directors, or members of the committee, as the case
may be, at their addresses registered with the company in India by hand delivery or by post or by courier,
or through such electronic means as may be prescribed and has been approved by a majority of the
directors or members, who are entitled to vote on the resolution.
Rule 5 of the Companies (Meetings of Board and its Powers) Rules, 2014, provides that a resolution in
draft form may be circulated to the directors together with the necessary papers for seeking their
approval, by electronic means which may include e-mail or fax.
Provided that, not less than one-third of the total number of directors of the company for the time being
require, that any resolution under circulation must be decided at a meeting of the Board.

In light of the stated provision, following are answers to the proposals on the basis of given ground-

(i) Contention of three directors with respect to opposing of resolution passed by email, is not valid in
terms of stated Rule 5.

(ii) Contention of three directors with respect to that resolution must be decided at a meeting of Board of
Directors and not by circulation is not valid as per proviso to section 175(1). The claim to decide the
matter in the board meeting after it has been approved is not valid. The proviso stated above requires
that they should have insisted before the resolution has been passed that the resolution should be
decided at a meeting of the board.

63. Mr. Rajat, a Manging Director of XYZ Ltd. a listed company, authorised by Mr. Giri, the director in
the Board of the Company, to enter into contact with Mr. Kushal, a brother in law of Mr. Giri for supply
of furniture’s during the setup of new branch in the city. Mr. Rajat enquires with Mr. Giri for seeking
approval of the Board. Mr. Giri said that there is no need for such approval however we may get it
ratified by the Board in the meeting.

Examine the given situations in the light of the relevant provisions of the Companies Act, 2013 and
answer the following: (mtp-II- july 2021)

(i) Validity of the said contract entered by the Mr. Rajat with Mr. Kushal for supply of furniture’s for
setup of new office.

(ii) Consequences in case of non –compliance for seeking of approval by the Board. (6 Marks)

ANSWER
As per section 188 (3) of the Companies Act, 2013, where any contract or arrangement is entered into by
a director or any other employee, without obtaining the consent of the Board or approval by a resolution
in the general meeting and if it is not ratified by the Board or, as the case may be, by the shareholders at a
meeting within three months from the date on which such contract or arrangement was entered into,
such contract or arrangement shall be voidable at the option of the Board or, as the case may be, of the
shareholders and if the contract or arrangement is with a related party to any director, or is authorised by
any other director, the directors concerned shall indemnify the company against any loss incurred by it.

As per the facts, Mr. Rajat, a Manging director, was authorised by Mr. Giri, the director in the Board of the
XYZ Ltd., to enter into contract with Mr. Kushal, a brother in law of Mr. Giri for supply of furniture’s during
the setup of new branch in the city. Mr. Rajat enquires with Mr. Giri for seeking approval of the Board as
Page No. 131
per the requirement of the law and Mr. Giri stated that there is no need for such approval however we
may get it ratified by the Board in the meeting.

As per the requirement of the provision in the given case, contract entered into by a Mr. Rajat, on being
authorised by Mr. Giri with Mr. Kushal, who is his relative without obtaining the consent of the Board, and
is required to be ratified by the Board within the three months from the date on which such contract was
entered into.

(i) Therefore, the said contract entered by the Mr. Rajat with Mr. Kushal for supply of furniture’s for setup
of new office can be said to valid if same has been ratified by the Board within the 3 months from the
date on which such contract made.

(ii) In case of non-compliance of the above requirement, such a contract shall be voidable at the option of
the Board and if the contract is with a related party to any director, or is authorised by any other director,
the directors concerned shall indemnify the company against any loss incurred by it.

It shall be open to the company to proceed against a director concerned (i.e., against Mr. Giri and Mr.
Rajat) who had entered into such contract in contravention of the provisions of this section for recovery
of any loss sustained by it as a result of such contract.
Such concerned directors of a company, who had entered into or authorised the contract or arrangement
in violation of the provisions of this section shall be liable to a penalty of twenty-five lakh rupees as XYZ
Ltd , is a listed company.

64. Decide in the light of the Companies Act, 2013, on the following proposals of loans for consideration
before the Honesty Ltd. (6 Marks) (mtp-NOV 2020)
1) Loan to its director, Mr. A for construction of residential house as a personal loan.
2) Loan to Mr. B, its whole time Director.
3) Loan to X Ltd. in the ordinary course of business and the rate prescribed is not less than bank rate
prescribed by the reserve bank.
ANSWER

Section 185 of the Companies Act, 2013 contains provisions which impose restrictions on the loans, etc.
being given to directors, etc. According to the provision:
As per sub-section (1), a company is not permitted to advance any loan, or to give any guarantee or
provide any security in connection with any loan taken by,—
(a) any director of company, or of a company which is its holding company or any partner or relative of
any such director; or
(b) any firm in which any such director or relative is a partner.
Further sub-section (3) states that above provision shall not apply:
(a) where any loan is given to a managing or whole-time director—
(i) as a part of the conditions of service extended by the company to all its employees; or
(ii) pursuant to any such scheme which is approved by the members by a special resolution.
(b) where a company in the ordinary course of its business:
-provides loans or gives guarantees or securities for the due repayment of any loan; and
-in respect of such loans an interest is charged at a rate not less than the rate of prevailing yield of one
year, three years, five years or ten years Government security closest to the tenor of the loan.
Page No. 132
Accordingly, following are the answers to the stated problems:
(1) In the first case it would violate the section 185(1) of the Companies Act, 2013. Honesty Ltd. is not
permitted, to advance any loan, or to give any guarantee or provide any security in connection with any
loan taken by Mr. A (director) of the company.
(2) In the second case, as per section 185(3), restrictions imposed in section185(1), will not apply to giving
of loan to Mr. B , the whole time director if its given as a part of the conditions of service extended by the
company to all its employees.
(3) In third case , if it is loan given to a company in the ordinary Course of business for due repayment of
any loan and lending rate is not less than the bank rate prescribed by the Reserve bank, the restriction
imposed under section 185(1) will not apply to such transactions.

65. Atlantic Garments Ltd., is a company engaged in the business of manufacturing of garments for all
seasons. The company have in all 14 directors.

The first meeting of the Board was held on 15th February, 2020. Thereafter, the subsequent meetings
of the Board were held on 29th February, 2020, 25th March, 2020, 30th August, 2020 and 25th
December, 2020.

In these meetings, the full strength of the Board was present except in the meeting of 25th March,
2020. In this meeting only 4 persons were present.
Decide whether the Board meeting held on 25th March 2020 is valid in compliance with the legal
requirements under the Companies Act, 2013. What shall be date of the meeting in case where if
meeting could not be held because of quorum. (RTP NOV 2021)

ANSWER
As per given section 174(1) of the Companies Act, 2013 the quorum for a meeting of the Board of
Directors of a company shall be one third of its total strength or two directors, whichever is higher, and
the participation of the directors by video conferencing or by other audio visual means shall also be
counted for the purposes of quorum under this sub-section.
Section 174(4) provides that where a meeting of the Board could not be held for want of quorum, then,
unless the articles of the company otherwise provide, the meeting shall automatically stand adjourned
to the same day at the same time and place in the next week or if that day is a national holiday, till the
next succeeding day, which is not a national holiday, at the same time and place.
Further explanation to section 174(4) provides that for the purposes of this section, (i) any fraction of a
number shall be rounded off as one; (ii) “total strength” shall not include directors whose places are
vacant.
Total Strength of directors =14
One-third of 14 = 4.67
Rounded off to = 5 (Five)
As in the meeting scheduled on 25th March 2020, only 4 persons were present, hence due to want of
required minimum quorum, the meeting shall have to be adjourned to the same day at the same time
and place in the next week or if that day is a national holiday, till the next succeeding day, which is not a
national holiday, at the same time and place.
The meeting of the Board was not valid as the required quorum was not present in the meeting. In this
case, the adjourned meeting was to be held on 1st April, 2020

Page No. 133

Page No. 134
 3 Inspection, Inquiry and Investigations

ATTEMPTS
MAY NOV MAY NOV NOV JAN JULY NOV
COVERAGE
2018 2018 2019 2019 2020 2021 2021 2021

STUDY Q.- 12, 14 to 23, 24

MAT

PAST NO NO NO
Q-3 Q-4, 5 Q-13 ------
EXAMS QUES QUES QUES

NO
MTP Q-2 Q-6, 7 Q-1, 11 NO QUES Q-25 ----
QUES

NO NO Q-26, NO
RTP Q-8, 9 Q-10, 13 NO QUES
QUES QUES 27, 28 QUES

Page No. 135

Multiple Choice Questions

1.MTP Mar 2019

A group of creditors of X Limited makes a complaint to the Registrar of Companies. They asserted that
the management of the company is indulged in destruction and falsification of the accounting records
of the company. The complainants request the Registrar to take an immediate steps to stop the
management to tamper with the records. The complaint was received in the morning on 1st January
2019 and the ROC entered the premises within half an hour for the search. The course of action that
can be taken by Registrar are:

(a) Registrar may enter and search the place where such books or papers are kept and seize
them
(b) Registrar may enter and search the place where such books or papers are kept and can seize
only after obtaining an order from the special court
(c) Registrar may enter and search the place where such books or papers are kept only on the
order of the special court
(d) Registrar may enter and search the place where such books or papers are kept and give an
opportunity to the company to represent why such documents may not be seized.
Answer: Option B

Descriptive Questions

2.March 2018

Mr. Atul is an employee of the company ABC Limited and an investigation is going on him under
the provisions of Companies Act, 2013. The company wants to terminate Mr. Atul on the ground of
investigation going against him. They have filed the application to tribunal for approval of
termination. Company has not received any reply from the tribunal within 30 days of filling an
application. The company consider it as a deemed approval and terminated Mr. Atul.
 Is the contention of company being valid in law?
 What remedy is available to Mr. Atul, where no reply is received from the Tribunal within 30
days of application?
 What remedy to Mr. Atul, if reply of Tribunal has been received within 30 days of application?
Answer:

The provision of Section 218 of the Companies Act, 2013 states that, the company shall require to
take approval of the tribunal before taking action against the employee if there is any pendency of
any proceedings against any person concerned in the conduct and management of the affairs of the
company.

The company shall require approval in the following circumstances:

 discharge or suspension of an employee; or
 punishment to an employee by dismissal, removal, reduction in rank or otherwise; or
Page No. 136
 change in the terms of employment to the disadvantage of employee(s); The Tribunal shall notify its
objection to the action proposed in writing.
In case, the company other body corporate or person concerned does not receive the approval of the
Tribunal within 30 days of making the application, it may proceed to take the action proposed against
the employee. That means it can be considered as a deemed approval by the tribunal.

Appeal to the Appellate Tribunal: If the company, other body corporate or person concerned is
dissatisfied with the objection raised by the Tribunal, it may, within a period of 30 days of the receipt
of the notice of the objection, refer an appeal to the Appellate Tribunal in such manner and on
payment of fees of Rs. 1,000 as per the schedule of Fees.
The decision of the Appellate Tribunal on such appeal shall be final and binding on the Tribunal and on
the company, other body corporate or person concerned.
Based upon the above provisions, following are the answers:
 Yes, the termination of Mr. Atul made by the company is totally valid in law and company can do
so by considering deemed approval of tribunal.
 In this scenario, Mr. Atul has no any remedy available. As per the provision of the law appeal to
the appellate tribunal can be made only if the person is dissatisfied with the objection raised by the
tribunal. Hence, in this case, the tribunal has not replied, Mr. Atul cannot refer an appeal to
Appellate Tribunal.
 In this case, Mr. Atul can refer and appeal to Appellate Tribunal within 30 days of the receiving
letter of objection raised by the tribunal and with payment of Fees on Rs. 1,000 as per schedule of
Fees.

3.May 2018 Qn no 2(a) 7 Marks:

The business of Weak Fabrication Limited is conducted fraudulently and the management activities
are not in the interests of the Company. The paid up capital of the company is One crore rupees. A
group of shareholders numbering 110 members representing 1/9 of total voting power decided to
approach Tribunal (NCL T) to carryout investigation into the Company's affairs under the provisions of
the Companies Act, 2013. They seek your advice in the following matters, stating the relevant
provisions of the Companies Act, 2013.

(1) Whether the group can make valid application?

(2) Other than member, can any other person make application?
(3) Are the applicants required to furnish security for payment of cost and expenses of
Investigation?
(4) Whether the Group can make a valid application?

According to Section 213(a)(i) of the Companies Act, 2013, the Tribunal may on an application made by
not less than one hundred members or members holding not less than one-tenth of the total voting
power, in the case of a Company having a share capital, order, after giving a reasonable opportunity of

Page No. 137

being heard to the parties concerned, that the affairs of the company ought to be investigated by an
inspector or inspectors appointed by the Central Government.
In the instant case, the application by 110 members representing 1/9 of total voting power of Weak
Fabrication Limited to carryout investigation into the company’s affairs is valid.
2)Other than member, can any other member make an application?

According to Section 213(b)(i) of the Companies Act, 2013, the Tribunal may, on filling of an application
by other person (not being a member of Company), if satisfied, that there are circumstances
suggesting that the business of the Company is being conducted with intent to defraud its creditors,
members or any other person or otherwise for a fraudulent or unlawful purpose, or in a manner
oppressive to any of its members or that the Company was formed for any fraudulent or unlawful
purpose, may order after giving a reasonable opportunity of being heard to the parties concerned, that
the affairs of the Company ought to be investigated by an Inspector or Inspectors appointed by the
Central Government and where such an Order is passed, the Central Government shall appoint one or
more competent persons as Inspectors to investigate into the affairs of the Company in respect of such
matters and to report thereupon to it in such manner as the Central Government may direct.
Thus, any other person (other than a member) can also make an application.
3)Section 214 of the Companies Act, 2013 provides for security for payment of costs and expenses of
investigation:

Where an investigation is ordered by the Central Government in pursuance of an order made by the
Tribunal under Section 213, the Central Government may before appointing an Inspector under clause
(b) of Section 213, require the applicant to give such security not exceeding 25,000 rupees as may be
prescribed, as it may think fit, for payment of the costs and expenses of the investigation. Such security
shall be refunded to the applicant if the investigation results in prosecution.

4.Nov 2018 Qn no 2(a)(i)&(ii) 7 Marks:

(i) The shareholders of Kumar Ltd. passed a special resolution that the affairs of the Company ought to
be investigated. The Company submitted the special resolution to the Central Government.
Examine, explaining the relevant provision of the Companies Act, 2013, whether the power of the
Central Government to order an investigation is mandatory or discretionary?

(ii) Enumerate the procedures to be followed by the Serious Fraud Investigation Office to arrest a
person who has been found guilty of an offence committed under Section 447 of the Companies Act,
2013.

Answer:
(i) Investigation in the opinion of Central Government [Section 210(1) of the Companies Act, 2013]:
Where the Central Government is of the opinion, that it is necessary to investigate into the affairs of a
company,—

(a) on the receipt of a report of the Registrar or inspector under section 208;
(b) on intimation of a special resolution passed by a company that the affairs of the company

Page No. 138

 ought to be investigated; or
(c) in public interest,
it may order an investigation into the affairs of the company.
Hence, the power of the Central Government to order an investigation is discretionary.
(ii) As per section 212(6) of the Companies Act, 2013, offences covered under section 447 of this Act
shall be cognizable as well as non-bailable. So, the person found guilty for commission of an offence
under the said section, shall be liable to be arrested, by SFIO.
The Central Government by general or special order authorize the Director, Additional Director or
Assistant Director of SFIO in this behalf, on the basis of material in his possession reason to believe (the
reason for such belief to be recorded in writing) that any person has been guilty of any offence
punishable under sections referred to in sub-section (6) i.e. Section 447,to arrest such person and shall,
as soon as may be, inform him of the grounds for such arrest. [Section 212(8)].
Immediately after arrest, they shall forward a copy of the order, along with the material in his
possession, to the SFIO in a sealed envelope, in such manner as may be prescribed and the SFIO shall
keep such order and material for such period as may be prescribed. [Sub section (9)] and present the
person so arrested before the Judicial Magistrate or a Metropolitan Magistrate having jurisdiction
within twenty-four hours. The period twenty four hours shall exclude the time necessary for the journey
from the place of arrest to the Magistrate’s court. [Sub section (10)]. An Interim report is submitted, if so
directed, to the Central Government, till the completion of the investigation. [Sub section (11)&(12)].

5. Nov 2018

An investigation was ordered by the Central Government under Section 216 of the Companies Act,
2016, against PKR Limited for determining the true membership of the Company. In connection with
this investigation, it appears to the Tribunal that there is good reason to find out the relevant facts
about 9% Redeemable Cumulative Preference Shares (RCPS) issued by the Company on 15.10.2017 and
the Tribunal is of the opinion that unless restriction is imposed on further issue of such shares, the
purpose cannot be solved. Accordingly, the Tribunal, by an Order dated 15.08.2018, directed the
Company that the further issue of RCPS shall be subject to restrictions for a period of four years.
Despite the Order of the Tribunal as above, PKR Limited proceeded with further issue of RCPS on
20.08.2018 in order to fund the working capital requirements for its expansion project.

Referring to the provisions of the Companies Act, 2013, examine the following:

(i) Can the Tribunal restrict further issue of RCPS? If yes, then to what period?
(ii) What are the penal provisions in case of contravention to the above Order?
Answer:
Imposition of Restrictions upon Securities (Section 222 of the Companies Act, 2013)

(i) Tribunal may by order put restrictions upon securities [sub-section (1)]: Where it appears to the
Tribunal, in connection with any investigation under section 216 or on a complaint made by any
person in this behalf, that there is good reason to find out the relevant facts about any securities
issued or to be issued by a company and the Tribunal is of the opinion that such facts cannot be
found out unless certain restrictions, as it may deem fit, are imposed, the Tribunal may, by order,
Page No. 139
 direct that the securities shall be subject to such restrictions as it may deem fit for such period not
exceeding three years as may be specified in the order.
In the instant case, the Tribunal can restrict the further issue of RCPS for such period not
exceeding three years.
Punishment in case of contravention to an order: Where securities in any company are issued or
transferred or acted upon in contravention of an order of the Tribunal under sub-section (1), the
company shall be punishable with fine which shall not be less than one lakh rupees but which may
extend to twenty-five lakh rupees and every officer of the company who is in default shall be
punishable with imprisonment for a term which may extend to six months or with fine which shall
not be less than twenty-five thousand rupees but which may extend to five lakh rupees, or with
both.

6.Oct 2018

Origin paper Ltd. has been incurring business losses for past couple of years. The company therefore,
passes a special resolution for voluntary winding up. Meanwhile, complaints were made to the
tribunal and to the Central Government about foul play of the directors of the company, which
adversely affected the interests of shareholders of the company as well as public.

In this situation advise whether investigation may be initiated against the company under the provision
of the Companies Act, 2013. Further state whether application can be made to Tribunal for Relief in the
above affairs of the company once the investigation is initiated against the company.

Answer:
According to section 226 of the Companies Act, 2013, an investigation may be initiated and no such
investigation shall be stopped or suspended by reason only of, the fact that—

(i) an application has been made under section 241;

(ii) the company has passed a special resolution for voluntary winding up; or
(iii) any other proceeding for the winding up of the company is pending before the Tribunal.
In the instant case Origin Paper Ltd. has been incurring business losses for past couple of years. The
company passed a special resolution for voluntary winding up. Meanwhile complaints were made to the
Tribunal and to the Central Government about foul play of the directors of the company, which adversely
affected the interests of shareholders of the company as well as the public.
As the company has passed a special resolution for voluntary winding up of the company, then also the
investigation may be initiated against the company under section 226 of the Companies Act, 2013.
Yes, as per the above provision, though investigation was initiated against the company, it shall not bar
members to file an application to Tribunal for Relief under section 241 of the companies Act, 2013.
According to the said section, any member of a company may apply to the Tribunal for an order on the
complains that—
(1) the affairs of the company have been or are being conducted in a manner prejudicial to public
interest or in a manner prejudicial or oppressive to him or any other member or members or in a
manner prejudicial to the interests of the company; or

Page No. 140

(2) the material change taken place in the management or control of the company, whether by an
alteration in the Board of Directors, or manager, or in the ownership of the company’s shares, or if it
has no share capital, in its membership, or in any other manner whatsoever, and that by reason of
such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to
its interests or its members or any class of members,
The Central Government, if it is of the opinion that the affairs of the company are being conducted in a
manner prejudicial to public interest, it may itself apply to the Tribunal for an order.
Where any members of a company are entitled to make an application, any one or more of them having
obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all
of them.

7.Oct 2018

The Registrar, after inspection of the book of accounts of the PQR Ltd., submitted its report with
further recommendation of investigation into the affairs of the company. Explain the law as to the
recommendation for further investigation by the registrar.
Answer:
As per section 208 of the Companies Act, 2013, the Registrar or inspector shall, after the inspection of
the books of account or an inquiry under section 206 and other books and papers of the company
undersection 207, submit a report in writing to the Central Government along with such documents, if
any, and such report may, if necessary, include a recommendation that further investigation into the
affairs of the company is necessary giving his reasons in support.

Therefore, the registrar is authorised to submit in its report after conduct of inspection of the book of
accounts, the recommendation for further investigation into the affairs of the company.

8.RTP Nov-2018:
Some creditors of NTY Limited approached you to guide them to apply to the Tribunal for seeking an
order for conducting an investigation into the affairs of the company due to the fact that the business
of the company is being conducted with intention to defraud its creditors. Referring to the provisions
of the Companies Act, 2013, guide them regarding the circumstances under which and how a person,
not being a member of the company can apply to the Tribunal to seek an order for conducting an
investigation into the affairs of a company.

Answer:

According to Section 213(b)(i) of the Companies Act, 2013, the Tribunal may, on filling of an
application by any other person (not being a member of company) or otherwise, if the Tribunal is
satisfied that there are circumstances suggesting that the business of the company is being conducted
with intent to defraud its creditors, members or any other person or otherwise for a fraudulent or
unlawful purpose, or in a manner oppressive to any of its members or that the company was formed
for any fraudulent or unlawful purpose, may order after giving a reasonable

Page No. 141

opportunity of being heard to the parties concerned, that the affairs of the company ought to be
investigated by an inspector or inspectors appointed by the Central Government and where such an
order is passed, the Central Government shall appoint one or more competent persons as inspectors to
investigate into the affairs of the company in respect of such matters and to report thereupon to it in
such manner as the Central Government may direct.

The creditors of NTY Ltd should be guided in terms of the provisions stated above.

9.RTP Nov-2018:
A group of creditors of MBIND Bronze Limited makes a complaint to the Registrar o f Companies,
Himachal Pradesh alleging that the management of the company is indulging in destruction and
falsification of the accounting records of the company. The complainants request the Registrar to
take immediate steps to seize the records of the company so that the management may not be
allowed to tamper with the records. The complaint was received at 11 am on 6 January, 2018 and the
registrar has attempted to enter the premise of the company but has been denied by the company,
due to not having order from the special court.
Is the contention of company being valid in terms of Companies Act, 2013? Discuss.
Answer:
Section 209 of the Companies Act, 2013 states that, if the Registrar has reasonable ground to believe
that the books and papers of:

- A company or
- Relating to the key managerial personnel or
- any director or
- Auditor or
- Company secretary in practice if the company has not appointed a company secretary
are likely to be destroyed, mutilated, altered, falsified or secreted he may, after obtaining an order from
the special court for the seizure of such books and papers:
a. enter with such assistance as may be required and search the place where such books or papers
are kept, and

b. Seize such books and papers as he considers necessary after allowing the company to take
copies of or extracts from , such books or papers at its cost.

In the given scenario, the registrar has failed to obtain possession from special court. So, he is not
authorised to enter the premises of the company and seize the books of accounts of MBlND Bronze
Limited. Hence, the contention of MBIND Bronze Limited is valid in law.

11.RTP May 2019

Origin paper Ltd. has been incurring business losses for past couple of years. The company therefore,
passes a special resolution for voluntary winding up. Meanwhile, complaints were made to the
tribunal and to the Central Government about foul play of the directors of the company, which
adversely affected the interests of shareholders of the company as well as public. In this situation

Page No. 142

advise whether investigation may be initiated against the company under the provision of the
Companies Act, 2013. Further decide whether application can be made to Tribunal for Relief in the
above affairs of the company once the investigation is initiated against the company.

Answer

According to section 226 of the Companies Act, 2013, an investigation may be initiated
notwithstanding, and no such investigation shall be stopped or suspended by reason only of, the fact
that—

(i) an application has been made under section 241;

(ii) the company has passed a special resolution for voluntary winding up; or
(iii) any other proceeding for the winding up of the company is pending before the Tribunal.
In the instant case Origin Paper Ltd. has been incurring business losses for past couple of years. The
company passed a special resolution for voluntary winding up. Meanwhile complaints were made to the
Tribunal and to the Central Government about foul play of the directors of the company, which adversely
affected the interests of shareholders of the company as well as the public.
As the company has passed a special resolution for voluntary winding up of the company, then also the
investigation may be initiated against the company under section 226 of the Companies Act, 2013.
Yes as per the above provision, though investigation was initiated against the company, it shall not bar
members to file an application to Tribunal for Relief under section 241 of the companies Act, 2013.
According to the said section, any member of a company may apply to the Tribunal for an order on the
complains that—
(i) the affairs of the company have been or are being conducted in a manner prejudicial to public
interest or in a manner prejudicial or oppressive to him or any other member or members or in a
manner prejudicial to the interests of the company; or

(ii) the material change taken place in the management or control of the company, whether by an
alteration in the Board of Directors, or manager, or in the ownership of the company’s shares, or if
it has no share capital, in its membership, or in any other manner whatsoever, and that by reason
of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial
to its interests or its members or any class of members,
The Central Government, if it is of the opinion that the affairs of the company are being conducted in a
manner prejudicial to public interest, it may itself apply to the Tribunal for an order.
Where any members of a company are entitled to make an application, any one or more of them having
obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all
of them.

12.MTP Mar 2019

(a) Mr. Shram, is an employee of the company ABC Limited and investigation is going on him under
the provisions of Companies Act, 2013. The company wants to terminate the Mr. Shram on the ground
of investigation proceeding against him. ABC Ltd. filed the application to tribunal for approval of

Page No. 143

termination. However, not received any reply from the tribunal within 30 days of filling an
application. The companyconsider it as a deemed approval and terminated Mr. Shram. Examine the
given situations in the light of the stated facts as per the Companies Act, 2013-

 Is the contention of company being valid in law?

 What is remedy available to Mr. Shram?
 What is remedy available to Mr. Shram, if reply of Tribunal has been received within 30 days of
application?
Answer

The provision of Section 218 of the Companies Act, 2013, states that, the company shall require to
take approval of the tribunal before taking action against the employee if there is any pendency of any
proceedings against any person concerned in the conduct and management of the affairs company.

The company shall require approval in the following circumstances:

 discharge or suspension of an employee; or
 punishment to an employee by dismissal, removal, reduction in rank or otherwise; or
 change in the terms of employment to the disadvantage of employee(s); The Tribunal shall notify its
objection to the action proposed in writing.
In case, the company, other body corporate or person concerned does not receive the approval of the
Tribunal within 30 days of making the application, it may proceed to take the action proposed against the
employee. That means it can be consider as a deemed approval by the tribunal.

Appeal to the Appellate Tribunal

If the company, other body corporate or person concerned is dissatisfied with the objection raised by
the Tribunal, it may, within a period of 30 days of the receipt of the notice of the objection, refer an
appeal to the Appellate Tribunal in such manner and on payment of fees of INR 1,000 as per the
schedule of Fees.
The decision of the Appellate Tribunal on such appeal shall be final and binding on the Tribunal and on
the company, other body corporate or person concerned.
In the light of the above stated provisions, following are the answers:
 Yes, the termination of Mr. Shram made by the company is totally valid in law and company can do
so by considering deemed approval of tribunal.
 In this scenario, Mr. Shram has not any remedy available. As per the provision of the law appeal to
the appellate tribunal can be made only if the person is dissatisfied with the objection raised by the
tribunal. Hence, in this case the tribunal has not replied Mr. Shram cannot refer an appeal to
Appellate Tribunal.
 In this case, Mr. Shram can refer and appeal to appellate tribunal within 30 days of the receiving
letter of objection raised by the tribunal and with payment of Fees on Rs. 1,000 as per schedule of
Fees.

Page No. 144

13.A group of shareholders of M/s. FMG Limited made a complaint to the concerned Registrar of
Companies (RoC) that the business of the Company is being carried on for unlawful and fraudulent
purposes and filed an application to enquire into the affairs of the Company. Referring to and
analyzing the provisions of the Companies Act, 2013, decide: (PAST EXAM NOV 2019)

(i) Whether the RoC has the power to order for an inquiry into the affairs of the Company?
(ii) If yes, state the procedure to be followed by the RoC.
(iii) Whether the inquiry should be pursued by the RoC in case the complaint is withdrawn by the
same group of shareholders subsequent to the Order for enquiry?
(iv) Whether the Central Government has the power to direct the RoC to carry out the inquiry?
(i) Yes, the RoC has the power to order for an inquiry as he deems fit after providing the company a
reasonable opportunity of being heard, into the affairs of the company if he is satisfied on a
representation made to him by any person that the business of a company is being carried on for a
fraudulent or unlawful purpose or not in compliance with the provisions of this Act. [Section 206(4) of
the Companies Act, 2013]

(ii) Procedure followed by RoC: The Registrar may, after informing the company of the allegations
made against it by a written order, call on the company to furnish in writing any information or
explanation on matters specified in the order within such time as he may specify therein and carry out
such inquiry as he deems fit after providing the company a reasonable opportunity of being heard.

(iii) The inquiry can be pursued by the ROC in case the complaint is withdrawn by same group of
shareholders subsequent to the order for inquiry in terms of section 206(4).

(iv) Yes, the Central Government may, if it is satisfied that the circumstances so warrant, direct the
Registrar for the purpose to carry out the inquiry under section 206(4).

14.RTP May 2019 Decide the liability of the person for commission of the act during the course of
inspection, inquiry or investigation under the Companies Act, 2013:

(i) A person who is required to make statement during the course of investigation pending against
its company, is a party to the manipulation of documents related to the transfer of securities and
naming of holders in the register of members by the company.

(ii) An employee of the company publicized among his social networking of sound financial position
of his organization in order to incite them to purchase the shares of its company. In actuality, the
company was running in loss.
Answer

Section 229 of the Companies Act, 2013 states that where a person who is required to provide an
explanation or make a statement during the course of inspection, inquiry or investigation, or an officer or
other employee of a company or other body corporate which is also under investigation,—

(a) destroys, mutilates or falsifies, or conceals or tampers or unauthorisedly removes, or is a party to

Page No. 145

 the destruction, mutilation or falsification or concealment or tampering or unauthorised removal of,
documents relating to the property, assets or affairs of the company or the body corporate;
(b) makes, or is a party to the making of, a false entry in any document concerning the company or
body corporate; or
(c) provides an explanation which is false or which he knows to be false,
-he shall be punishable for fraud in the manner as provided in section 447. As per the above
provisions:

(i) With respect to this part of the question, the person shall be liable for fraud. Since, in the given
case, he is a party in the manipulation of documents relating to the transfer of securities and in
the register of members of the company which is under investigation.
(ii) Employee shall not be liable here, as the said company in which he is an employee, is not
undergoing investigation. Secondly, the person purchasing the shares can act with due diligence
before purchasing shares rather fully relying on the publicity made on social networking.

Study Material

15. Shareholders of Hide and Seek Ltd. are not satisfied about performance of the company. It is
suspected that some activities being run in the name of the company are not in the interest of the
company or its members. 101 out of total 500 share holders of the company have made an application
to the Central Government to appoint an inspector to carry out investigation and find out the true
picture.
With reference to the provisions of the Companies Act, 2013, mention whether the shareholders’
application will be accepted? Elaborate.
Answer:

The shareholders’ application will not be accepted as under 210 of the Companies Act, 2013, Central
Government may order an investigation into affairs of the company on the intimation of a special
resolution passed by a company that the affairs of the company ought to be investigated and then may
appoint the inspectors. Here, 101 out of total 500 shareholders of the company have made an application
to the Central Government to appoint an inspector to carry out investigation but it is not sufficient as the
company has not passed the special resolution.

16. Mr. Sharma who was a Key Managerial Personal (Manager) of XYZ Ltd. retired on 12th May 2018.
An examination of the final accounts of the company for the year ended on 31st March 2018, the
Registrar of Companies found some serious irregularities in writing off of the huge amounts of bad
debts and no satisfactory explanation was provided for the same from the company. In such a situation
the Registrar of Companies wants some explanation from the company and Mr. Sharma. Can the ROC
seek explanation from Mr. Sharma? Advice –

(a) No, Mr. Sharma can’t be called upon, as he does not hold the position in the company any
more.
(b) Mr. Sharma can be called upon within a period of one year from the date of completion of his

Page No. 146

 service.
(c) Mr. Sharma can be called upon for necessary explanation within a period of 180 days from the
date of leaving his office through a written notice served upon him.
(d) Mr. Sharma can be called upon by the Registrar through a written notice served on him without
any time period limit.
Answer: d) Hint: As per the provisions of Section 206(2) of the Companies Act, 2013, the Registrar
can call for any information or explanation or any other further documents related to the company
from the company or any officer if the company, which he thinks, is necessary for deciding any matter
of the company. Proviso to Section 206(2) provides that, where such information or explanation
relates to any past period, the officers who had been in the employment of the company for such
period, if so called upon by the Registrar through a notice served on him, in writing, shall also furnish
such information or explanation to the best of their knowledge. So, in the given case Mr. Sharma, the
ex-manager of the company can be called upon for such information/explanation which was related to
their period of service

17.A group of creditors of X Limited makes a complaint to the Registrar of Companies. They asserted
that the management of the company is indulged in destruction and falsification of the accounting
records of the company. The complainants request the Registrar to take an immediate steps to stop the
management to tamper with the records. The complaint was received in the morning on 1st January
2019 and the ROC entered the premises within half an hour for the search. The course of action that
can be taken by Registrar are:

a) Registrar may enter and search the place where such books or papers are kept and seize them.
b) Registrar may enter and search the place where such books or papers are kept and can seize only
after obtaining an order from the special court.
c) Registrar may enter and search the place where such books or papers are kept only on the order of
the NCLT.
d) Registrar may enter and search the place where such books or papers are kept and give an
opportunity to the company to represent why such documents may not be seized.
Answer: b) Hint: According to section 209 of the Companies Act, 2013, Registrar may enter and search
the place where such books or papers are kept and seize them only after obtaining an order from the
Special Court.

18. Provide various grounds on which the investigation is assigned to Serious Fraud Investigation
Office?

Answer

As per section 212 of the Companies Act, 2013, the Central Government may assign the investigation into
affairs of a company to the Serious Frauds Investigation Office on the basis of an opinion formed from
the following:

Page No. 147

 (a) After the inspection of books of account or papers or inquiry the Registrar shall submit a
written report to the Central Government. The report may recommend the need for
further investigation along with reasons in support. The Central Government on receipt of
such report can order an investigation under Serious Frauds Investigation Office.
(b) The company may pass a special resolution and can request Central Government to
investigate into the affairs of the company.
(c) The Central Government can order investigation under Serious Frauds Investigation Office,
in public interest.
The departments Central Government and State Governments can request for investigation under Serious
Frauds Investigation Office

19. Discuss the powers of Inspectors regarding investigation into affairs of related companies.

Answer:

Section 219 states that, if the inspector appointed under Sections 210, 212 or 213 to investigate into the
affairs company considers it necessary for the purposes of the investigation to investigate, he can do the
investigation of the affairs of other related companies or body corporate with the prior approval of the
Central Government.

 Holding or Subsidiary Company: which is or has been at the relevant time been the company’s
subsidiary or holding or subsidiary of its holding company;
 Related Party: which is or has been at the relevant time been managed by any person as a
managing director or manager who is or was at the relevant time the managing director or the
manager of the company;
 Deemed Control: whose Board of Directors’ comprises nominees of the company or is accustomed
to act in accordance with the directions of the company or any of its directors; or
 In Employment of Company: in case any person is or has at any relevant time been the
company’s managing director or manager or employee.
 The results of the investigation are relevant to the investigation of the affairs of the company for
which he is appointed
20. A group of creditors of XYZ Limited makes a complaint to the Registrar of Companies, Gujarat
alleging that the management of the company is indulging in destruction and falsification of the
accounting records of the company. The complainants request the Registrar to take immediate steps
to seize the records of the company so that the management may not be allowed to tamper with the
records. The complaint was received at 11 A.M. on 06th June, 2018 and the registrar has attempted to
enter the premise of company but has been denied by the company, due to not having order from
special court.

Is the contention of company being valid in terms of Companies Act, 2013?

Answer:

Page No. 148

Section 209, of the Companies Act, 2013 states that, if the Registrar has reasonable ground to believe
that the books and papers of

 A company or
 relating to the key managerial personnel or
 any director or
 auditor or
 company secretary in practice if the company has not appointed a company secretary
are likely to be destroyed, mutilated, altered, falsified or secreted he may, after obtaining an order from
the special court for the seizure of such books and papers,
(a) enter with such assistance as may be required and search the place where such books or papers are
kept; and
(b) seize such books and papers as he considers necessary after allowing the company to take copies or
extracts there from.
According the above provisions the registrar may enter, search and seize the books only after obtaining
an order from the Special Court.
In the given scenario, the registrar has failed to obtain permission from the special court so, he is not
authorized to enter the premises of the company and seize the books of accounts of XYZ Limited.
Hence, the contention of the XYZ Limited is valid in law.

21. Mr. Atul is an employee of the company ABC Limited and investigation is going on him under the
provisions of Companies Act, 2013. The company wants to terminate the employee on the ground of
investigation is going against him. They have filed the application to tribunal for approval of
termination. Company has not received any reply from the tribunal within 30 days of filling an
application. The company consider it as a deemed approval and terminated Mr. Atul.

 Is the contention of company being valid in law?

 What is remedy available to Mr. Atul?
 What is remedy available to Mr. Atul, if reply of Tribunal has been received within 30 days of
application?
Answer

The provision of Section 218 states that, the company shall require to take approval of the tribunal before
taking action against the employee if there is any pendency of any proceedings against any person
concerned in the conduct and management of the affairs company.

The company shall require approval in the following circumstances:

Page No. 149
 discharge or suspension of an employee; or
 punishment to an employee by dismissal, removal, reduction in rank or otherwise; or
 change in the terms of employment to the disadvantage of employee(s); The Tribunal shall notify its
objection to the action proposed in writing.

In case, the company, other body corporate or person concerned does not receive the approval of the
Tribunal within 30 days of making the application, it may proceed to take the action proposed against the
employee. That means it can be consider as a deemed approval by the tribunal.
Appeal to the Appellate Tribunal
If the company, other body corporate or person concerned is dissatisfied with the objection raised by the
Tribunal, it may, within a period of 30 days of the receipt of the notice of the objection, refer an appeal
to the Appellate Tribunal in such manner and on payment of fees of INR 1,000 as per the schedule of
Fees.
The decision of the Appellate Tribunal on such appeal shall be final and binding on the Tribunal and on
the company, other body corporate or person concerned.
 Yes, the termination of Mr. Atul made by the company is totally valid in law and company can do so
by considering deemed approval of tribunal.
 In this scenario, Mr. Atul has not any remedy available. As per the provision of the law appeal to
the appellate tribunal can be made only if the person is dissatisfied with the objection raised by
the tribunal. Hence, in this case the tribunal has not replied Mr. Atul cannot refer an appeal to
Appellate Tribunal.
 In this case, Mr. Atul can refer and appeal to appellate tribunal within 30 days of the receiving
letter of objection raised by the tribunal and with payment of Fees on
 Rs. 1,000 as per schedule of Fees.

22. A Ltd. (transferee) decides to acquire B Ltd. (transferor) by acquiring its shares via a process of
takeover u/s 235 of the Companies Act, 2013. A Ltd. prepared a scheme by which an offer was made to
the shareholders of B Ltd. The offer was made on 1st August, 2019. The offer remained open for 4
months. Such offer was approved by shareholders having 92% value of the shares. Subsequently A Ltd.
gave a notice to the remaining shareholders that it desires to acquire their shares. Such notice was
given on 5th January, 2019. Certain dissenting shareholders made an application to the tribunal that
acquisition of their shares should not be permitted. Such application was dismissed by the tribunal.
Hence A Ltd. acquired shares of 5% of the dissenting shareholders (out of balance 8%). The
shareholding of balance 3% shareholders continued to remain with them. Comment on the validity of
such a takeover by A Ltd.

Page No. 150

ANSWER:
The basic requirements as to acquisition of shares mentioned in Sec 235 of the Companies Act, 2013 are
as follows:-
1. The scheme or contract involving the transfer of shares in a company (transferor company) to another
company (transferee company) has been approved by the holders of not less than 9/10th(90%) in value of
the shares whose transfer is involved.
2. The approval of 9/10th shareholders in value shall be received within 4 months after making of an offer
in that behalf by the transferee company.

3. The transferee company shall express his desire to acquire the remaining shares of dissenting
shareholder in 2 months after the expiry of the said 4 months and shall give notice in the prescribed
manner to any dissenting shareholder that it desires to acquire his shares. The transferee company shall
be entitled as well as bound to acquire the shares of the dissenting shareholders where no application is
made by any dissenting shareholders to the tribunal in 1 month of receipt of notice of acquisition of
shares or where an application is made by any dissenting shareholder but such application is dismissed by
the tribunal. In the given case since application made by the dissenting shareholders has been dismissed
by the tribunal hence A Ltd is entitled and bound to acquire all the shares of the dissenting shareholders
i.e. entire 8% shareholding.
Since A Ltd only acquired 5% shareholding of the dissenting shareholders hence this is in contravention of
Sec 235 of the Companies Act, 2013. Hence the takeover is invalid.

23. The issued and paid up capital of MNC Limited is Rs. 5 crores consisting of 5,00,000 equity shares of
Rs. 100 each. The said company has 500 members. A petition was submitted before the Tribunal signed
by 80 members holding 10,000 equity shares of the company for the purpose of relief against
oppression and mismanagement by the majority shareholders. Examining the provisions of the
Companies Act, 2013, decide whether the said petition is maintainable. Also explain the impact on the
maintainability of the above petition, if subsequently 40 members, who had signed the petition,
withdrew their consent.
ANSWER:
Right to apply for oppression and mismanagement: As per the provisions of Section 244 of the
Companies Act, 2013, in the case of a company having share capital, members eligible to apply for
oppression and mismanagement shall be lowest of the following:
100 members; or
1/10th of the total number of members; or
Members holding not less than 1/10th of the issued share capital of the company.
The share holding pattern of MNC Limited is given as follows:
Rs. 5,00,00,000 equity share capital held by 500 members

The petition alleging oppression and mismanagement has been made by some members as follows:

(i) No. of members making the petition – 80

(ii) Amount of share capital held by members making the petition – Rs. 10,00,000

Page No. 151

The petition shall be valid if it has been made by the lowest of the following:

100 members; or
50 members (being 1/10th of 500); or

Members holding Rs. 50,00,000 share capital (being 1/10th of Rs. 5,00,00,000)
As it is evident, the petition made by 80 members meets the eligibility criteria specified under section 244
of the Companies Act, 2013 as it exceeds the minimum requirement of 50 members in this case.
Therefore, the petition is maintainable.
The consent to be given by a shareholder is reckoned at the beginning of the proceedings. The withdrawal
of consent by any shareholder during the course of proceedings shall not affect the maintainability of the
petition [Rajamundhry Electric Corporation Vs. V. Nageswar Rao A.I.R.].

24. A group of members holding 380 lakh issued share capital in Zolo Ltd. a listed public company
having total issued share capital of 15000 lakhs as per latest financial statements alleged that company
board of director is conducting an act which is ultra vires the articles or memorandum of the company
without altering the memorandum or articles of the company.
They make application to tribunal (NCLT) to restrain the company from doing such ultra-virus act. With
reference to the provision of Companies Act, 2013 ascertain whether the application will be admitted
by tribunal (NCLT).
ANSWER:

As according to section 245 of Companies Act, 2013, such number of member or members, depositor or
depositors or any class of them, as the case may be, as are indicated in sub-section (2) may, if they are of
the opinion that the management or conduct of the affairs of the company are being conducted in a
manner prejudicial to the interests of the company or its members or depositors, file an application
before the Tribunal on behalf of the members or depositors for seeking an orders, to restrain the
company from committing an act which is ultra-virus the articles or memorandum of the company.
Requisite number of members to make Application under Section 245(1) for Class Action for depositors is
as prescribed in rule 84(4) of the National Company Law Tribunal (Second Amendment) Rules, 2019.
Accordingly, in case of a company having a share capital the requisite number of member or members to
file an application under section 245(1) shall be:-

(a) at least five per cent. of the total number of members of the company; or

(b) one hundred members of the company, whichever is less; or

(c) In case of a listed company,member or members holding not less than two per cent. of the issued
share capital of the company.

In above case, members holds 2.53% (380/15000*100) of issued share capital of Zolo Ltd. which is a listed
company make application before tribunal (NCLT). Hence as members meet condition of 2% of issued
share capital, therefore their application can be admitted by the NCLT.

Page No. 152

25. Doomed Limited wanted to reduce the rank of Mr. happy (the Chief Operations Officer of the
company) during the pendency of investigation being conducted on the company on the order of the
Tribunal as per the provisions of the Act. Doomed Ltd. made an application to Tribunal regarding the
reduction of the rank of the Mr. happy on 2nd May, 2020 and received objection of the Tribunal on
29th May, 2020. What course of action/ remedy is available to Doomed Ltd. and to Mr. happy as per
the provisions of the Companies Act, 2013? (8 Marks) (mtp-I- july 2021)

ANSWER

As per Section 218 of the Companies Act, 2013, if during the course of any investigation of the affairs and
other matters of or relating to a company, other body corporate or person under section 210, section
212, section 213 or section 219 or of the membership and other matters of or relating to a company, or
the ownership of shares in or debentures of a company or body corporate, or the affairs and other
matters of or relating to a company, other body corporate or person, under section 216; or
During the pendency of any proceeding against any person concerned in the conduct and management of
the affairs of a company under Chapter XVI,
such company, other body corporate or person proposes—

(i) to discharge or suspend any employee; or

(ii) to punish him, whether by dismissal, removal, reduction in rank or otherwise; or

(iii) to change the terms of employment to his disadvantage, the company, other body corporate or
person, as the case may be, shall obtain approval of the Tribunal of the action proposed against the
employee and if the Tribunal has any objection to the action proposed, it shall send by post notice thereof
in writing to the company, other body corporate or person concerned.

Where if, no objection is received: If the company, other body corporate or person concerned does not
receive within 30 days of making of application, the approval of the Tribunal, then and only then, the
company, other body corporate or person concerned may proceed to take against the employee, the
action proposed.

Where if objection is received: If the company, other body corporate or person concerned is dissatisfied
with the objection raised by the Tribunal, it may, within a period of thirty days of the receipt of the notice
of the objection, prefer an appeal to the Appellate Tribunal in such manner and on payment of such fees
as may be prescribed.

Order of Appellate Tribunal: The decision of the Appellate Tribunal on such appeal shall be final and
binding on the Tribunal and on the company, other body corporate or person concerned.

In the above question, since the Doomed Ltd. have received the objection of the Tribunal within 30 days
from the date of making application, so the Doomed Ltd. can prefer an appeal against the order of the
Tribunal to the Appellate Tribunal within 30 days. No further appeal can be preferred against the order of
the Appellate Tribunal by the company or the employee concerned.

Page No. 153

Therefore, Doomed Limited can prefer an appeal against the order of objection of Tribunal within 30 days
to the Appellate Tribunal and if the decision of the Appellate Tribunal is against Mr. happy, then he
cannot appeal further against the order of the Appellate Tribunal

26. Mr. Shariff who was a Key Managerial Personnel (Manager) of XYZ Ltd. retired on 12th May 2020.
An examination of the final accounts of the company for the year ended on 31st March 2020, the
Registrar of Companies found some serious irregularities in writing off of the huge amounts of bad
debts and no satisfactory explanation was provided for the same from the company. In such a situation
the Registrar of Companies wants some explanation from the company and Mr. Shariff. In the light of
the Companies Act, 2013, examine the situation and advice on the act of Registrar seeking explanation
from Mr. Shariff. (RTP JULY 2021)

ANSWER

As per the provisions of Section 206(2) of the Companies Act, 2013, the Registrar can call for any
information or explanation or any other further documents related to the company from the company or
any officer if the company, which he thinks, is necessary for deciding any matter of the company. Proviso
to Section 206(2) provides that, where such information or explanation relates to any past period, the
officers who had been in the employment of the company for such period, if so called upon by the
Registrar through a notice served on him, in writing, shall also furnish such information or explanation to
the best of their knowledge. So, in the given case Mr. Shariff, the ex-manager of the company can be
called upon for such information/explanation which was related to their period of service

27. Anil, who is a Chartered Accountant with his own independent practice, is the arbitrator in an
arbitration between Tata Tea Inc., and Suzuki Ltd.
scenarios I - Prior to starting his practice, Anil had worked for five years with Tata Tea Inc.
II – During the proceedings before the arbitral tribunal, Anil would allow Tata Tea to take many
liberties, for instance taking as much time for making oral arguments, cross examining the witnesses,
for submitting documents, etc. Also the proceedings were adjourned (postponed) whenever so
requested by Tata Tea. When Suzuki Motors wanted to take extra time they were not allowed. In few
instances when they were permitted, they are asked to pay heavy cost to Tata Tea for delaying the
proceedings..
Suziki Ltd. on the basis of above scenarios wanted to challenge the appointment of Mr. Anil. State
whether the appointment of Mr. Anil as an arbitrator can be challenged?

(RTP JULY 2021)

ANSWER

As per section 12 of the Arbitration and Conciliation Act, 1996, when a person is approached in
connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances-
a. such as existence either direct or indirect of any past or present relationship with or interest in any of
the parties or in relation to the subject matter in dispute, whether financial, business, professional or
other kind, which is likely to give rise to justifiable doubts as to his independence or impartiality; and

Page No. 154

b. which are likely to affect his ability to devote sufficient time to the arbitration and in particular his
ability to complete the entire arbitration within a period of twelve months.
In the first case Anil had worked for five years with Tata Tea Inc. In this situation the law would deem Anil
to be lacking independence.
In second case, arbitrator by his / her behaviour gives an impression that he is favouring one party over
the other.
An arbitrator may be challenged only if circumstances exist that give rise to justifiable doubts as to his
independence or impartiality. In the given scenarios, it would be deemed that Anil to be lacking
independence and whereas in the second case it clearly reflects that arbitral tribunal favours and is partial
towards Tata Tea, and therefore lacks impartiality. Yes, appointment of Mr. Anil as an arbitrator can be
challenged.

28. (RTP JULY 2021)

Shri Hari Textiles Limited was incorporated in the year 2010. Its Registered Office is situated in
Connaught Place, New Delhi. It filed its audited annual financial statements for the financial year 2019-
20 well within time with the jurisdictional Registrar of Companies. The Registrar inspected the
statements and after reviewing them, felt the need to seek clarifications on certain matters.
Accordingly, a written notice was sent by the Registrar to the company and its officials directing them
to comply with the notice within thirty days of its receipt. However, the company and its officials failed
to reply within the time specified in the notice.
The Registrar initiated the inquiry and proceeded further for inspecting all the documents of the
company. While conducting the inquiry, the Registrar on prudent grounds believed that some of the
documents and other vital information in relation to the company would be destroyed or altered by the
official of the company. With a view to safeguard the documents, the Registrar obtained an order from
the Special Court and thereafter, seized all such material.
While inspecting some of the documents the Registrar came to know that the Board of Directors had
passed a resolution in a Board Meeting held on 10-04-2019 and thereby, increased the remuneration
payable to the directors including two whole-time directors and Managing Director to 12℅ of the net
profits of the company which was a sharp increase of 5% from the preceding financial year.
Prior to the inquiry, two directors of the company, namely, Mr. X and Mr. D got retired. The Registrar
found from the inspection of the documents that they were involved in certain dealings which included
selling of the assets of the company. On the basis of such information gathered from the inspected
documents, the Registrar sought some clarifications from both of them regarding the dubious
transactions. However, both Mr. X and Mr. D refused to appear before him showing their non-
availability in the town and also represented through a common representative that they were no
more a part of the Board of Directors of Shri Hari Textiles Limited.

After the completion of inspection and inquiry, the Registrar submitted a written report to the Central
Government in respect of his findings against the company. The reports mentioned that there were
major discrepancies in the assets and liabilities as well as profit and loss statements filed by the
company.
On receipt of report from the Registrar, the Central Government considered it necessary to investigate
the affairs of the company by the Serious Fraud Investigation Office (SFIO). Accordingly, by an order
SFIO was directed to conduct the investigation of Shri Hari Textiles Limited and submit its report within
the stipulated time. As instructed by the Central Government, SFIO authorised some of its inspectors to

Page No. 155

investigate the affairs of the company. The team deputed by the SFIO included experts in the field of
cost accounting, financial accounting, taxation, law and forensic auditing.
While inspecting the company, the team of SFIO came to know that the Income-tax authorities had
already initiated investigation against Shri Hari Textiles Limited.
Multiple Choice Questions (MCQs) [2 Marks each]

1. Shri Hari Textiles Limited and its officials failed to submit any reply to the written notice issued by
the Registrar within the time specified in the notice. How much fine can be imposed for such failure?

(a) The Company and every defaulting officer shall be punishable with a fine up to Rs. 1,00,000 and in
case of continuing failure, with an additional fine up to Rs. 500 for every day after the first during which
the failure continues.

(b) The Company and every defaulting officer shall be punishable with a fine up to Rs. 1,50,000 and in
case of continuing failure, with an additional fine up to Rs. 1,000 for every day after the first during
which the failure continues.

(c) The Company and every defaulting officer shall be punishable with a fine up to Rs. 1,00,000 and in
case of continuing failure, with an additional fine up to Rs. 5,000 for every day after the first during
which the failure continues.

(d) The Company and every defaulting officer shall be punishable with a fine up to Rs. 2,00,000 and in
case of continuing failure, with an additional fine up to Rs. 5,000 for every day after the first during
which the failure continues.

ANSWER- a

2. From the case scenario, it is observed that the Registrar seized certain important documents in the
course of inquiry. After inspection what procedure is to followed pertaining to such documents?

(a) The Registrar is required to submit such documents in the Special Court which permitted seizure.

(b) The Registrar is required to forward all such documents along with the inquiry report to the Central
Government.

(c) The Registrar is required to return such documents back to the company after making, if considered
necessary, the copies of them.

(d) The Registrar is required to retain such documents until further instruction is received from the
Special Court.

ANSWER- c

Page No. 156

3. What is the requisite requirement for increasing the remuneration of directors including whole-time
directors and Managing Director to 12% so that it shall be in accordance with the relevant provisions of
the Companies, Act, 2013?

(a) Board Resolution increasing the remuneration to 12% needs to be authorised at the General
Meeting and thereafter, duly sanctioned by the ROC.

(b) Board Resolution increasing the remuneration to 12% needs to be authorised at the General
Meeting and thereafter, duly sanctioned by the Tribunal.

(c) Board Resolution increasing the remuneration to 12% needs to be authorised at the General
Meeting subject to Schedule V.

(d) Board Resolution increasing the remuneration to 12% needs to be authorised at the General
Meeting and thereafter, duly sanctioned by the Central Government through Regional Director.

ANSWER- c

4. The case scenario states that the Registrar of Companies had called ex-directors of the company for
examining them during the inquiry. Is the Registrar empowered to call the ex-directors:

(a) The Registrar cannot call ex-directors of the company, without the order of the court.

(b) The Registrar may, by issuing a written notice, call the ex-directors for seeking the requisite
information.

(c) In case the Registrar is appointed by the Central Government to conduct investigation, then only he
can call ex-directors of the company.

(d) Except the Tribunal, no other authority is empowered to call ex-directors of a company for any
examination.

ANSWER- b

5. According to the case scenario, while inspecting the company, the team of SFIO came to know that
the Income-tax authorities had already initiated investigation against the company. From the given
options, choose the correct one that indicates as to how in amidst of such a situation, SFIO will be
continuing with the investigation.

(a) SFIO has to put its investigation on hold so long as the company is being investigated by Income-tax
authorities.

(b) SFIO will proceed with its investigation on the basis of report submitted by Income-tax authorities.

(c) SFIO will proceed with its investigation while Income-tax authorities shall keep on hold its
investigation.

Page No. 157

(d) SFIO will simultaneously continue its investigation along with the Income-tax authorities.

ANSWER- c

Page No. 158

 5 Compromises, Arrangements and Amalgamations

ATTEMPTS
MAY NOV MAY NOV NOV JAN JULY NOV
COVERAGE
2018 2018 2019 2019 2020 2021 2021 2021

STUDY Q.- 11, 15 to 20

MAT

PAST NO NO
Q-5, 6 Q-8 Q-13 Q-21, 22 ------
EXAMS QUES QUES

MTP Q-4 Q-9, 12 Q-2, 3 Q-14 Q-25 Q-23, 24 -----

RTP Q-7 Q-10 Q-11 Q-1 NO QUES Q-26 Q-26,27,

Page No. 159

Multiple Choice Questions

1.RTP Nov 2019

X Ltd. amalgamated with Y Ltd. The transferee company decided to dispose of the books and papers of
the X Ltd. in order to come up with maintenance of revised book and papers under the name of the
transferee company to bring all the financial details of the amalgamated company also in the records.
State the correct statement as to decision of the transferee company on the disposal of the Books
and papers of the X Ltd.

a) Decision of Transferee Company is invalid, as books and papers of the amalgamated company
shall be maintained for atleast three years.
b) Decision of Transferee Company is invalid, as books and papers of amalgamated company shall be
maintained for at least eight years.
c) Decision of Transferee Company will be valid only on the sanction of the prior permission of the
Central Government.
d) Decision of Transferee Company will be valid only after seeking prior permission of the requisite
number of the creditors/shareholders of the amalgamated company
Answer: (c)

2.MTP Apr 2019

Which amongst the following is a restriction on transferee company in event of merger or

amalgamation?

a) hold any shares in its own name

b) hold any shares in the name of any trust on its behalf
c) hold any shares in the name of any trust on behalf of any of its subsidiary
d) All of the above
Answer: Option D

3.MTP Mar 2019

ABHI Limited is a wholly owned subsidiary company of ETERNAL Limited. ETERNAL Ltd., makes an
application for merger of Holding and Subsidiary Companies under the section 232 of the Companies
Act, 2013. The Company Secretary of the ETERNAL Ltd., states that company cannot apply for merger
under section 232 of the said Act. In fact said that the company shall have to apply for merger as per
section 233 i.e. Fast Track Merger. State the correct statement in terms of the validity of the
difference in the opinion of the Company secretary-

(a) Opinion of the Company Secretary of the ETERNAL Ltd. is valid holding that merger shall be as
per section 233.
(b) Opinion of the Company Secretary of the ETERNAL Ltd. is invalid as merger shall be possible only
as per section 232.

Page No. 160

(c) Opinion of the Company Secretary of the ETERNAL Ltd. is invalid as the provisions given for fast
track merger in the section 233 are of the optional nature.
(d) Opinion of the Company Secretary of the ETERNAL Ltd. is invalid as the provisions given for fast
track merger in the section 233 can be made between only small companies.
ANSWER: Option C

Descriptive Questions

4.March 2018 Qn no 3(a) 3 Marks:

Long Lasting Ltd. applied to the Tribunal for the approval of proposed merger scheme. State the
process to be complied with for the approval of the proposed merger scheme drawn by the directors
of the Long Lasting Ltd. under the Companies Act, 2013.

Answer:

Filing of an application for purpose of reconstruction or companies involving merger/ amalgamation

or transfer of undertaking, property etc.: Where an application is made to the Tribunal under section
230 of the Companies Act, 2013 for the sanctioning of a compromise or an arrangement proposed
between a company and any such persons as are mentioned in that section, and it is shown to the
Tribunal—

(a) that the compromise or arrangement has been proposed for the purposes of, or in connection
with, a scheme for the reconstruction of the company or companies involving merger or the
amalgamation of any two or more companies; and
(b) that under the scheme, the whole or any part of the undertaking, property or liabilities of any
company (hereinafter referred to as the transferor company) is required to be transferred to
another company (hereinafter referred to as the transferee company), or is proposed to be divided
among and transferred to two or more companies,
the Tribunal may on such application, order a meeting of the creditors or class of creditors or the
members or class of members, as the case may be, to be called, held and conducted in such manner as
the Tribunal may direct and the provisions of sub-sections (3) to (6) of section 230 shall apply mutatis
mutandis.
Circulation of information for the meeting by the merging companies / the companies in respect of
which a division is proposed: As per section 232(2) where an order has been made by the Tribunal as
above, merging companies or the companies in respect of which a division is proposed, shall also be
required to circulate the following for the meeting so ordered by the Tribunal, -

(a) the draft of the proposed terms of the scheme drawn up and adopted by the directors of the
merging company;
(b) confirmation that a copy of the draft scheme has been filed with the Registrar;
(c) a report adopted by the directors of the merging companies explaining effect of compromise on
each class of shareholders, key managerial personnel, promotors and non-promoter shareholders
laying out in particular the share exchange ratio, specifying any special valuation difficulties;
(d) the report of the expert with regard to valuation, if any;
Page No. 161
(e) a supplementary accounting statement if the last annual accounts of any of the merging company
relate to a financial year ending more than six months before the first meeting of the company
summoned for the purposes of approving the scheme.
5.May 2018 Qn no 3(a) 3 Marks:

CPR Ltd. and TJC Ltd. are wholly owned by Government of Tamil Nadu. As a policy matter, the
Government issued administrative orders for merging TJC Ltd. with CPR Ltd. in the public interest.
State the authority with whom the application for merger is required to be filed under the provisions
of the Companies Act" 2013. Also state the provisions governing the preservation of Books and
Records of TJC Ltd. after merger under the said Act.

Answer:

Authority to whom the application for merger is to be made

According to Section 237 of the Companies Act, 2013, where the Central Government is satisfied that it
is essential in the public interest that two or more companies should amalgamate, the Central
Government may, by order notified in the Official Gazette, provide for the amalgamation of those
companies into a single company.
Thus, In the given situation of merger between two wholly owned Government companies in public
interest, there is no specific authority with whom the application for merger is required as the Central
Government shall by notification in the Official Gazette, will provide for the amalgamation of the two
said companies into a single company.
Preservation of books and records of amalgamated companies

According to Section 239 of the Companies Act, 2013, the books and papers of a Company which has
been amalgamated with, or whose shares have been acquired by, another Company shall not be
disposed of without the prior permission of the Central Government and before granting such
permission, that Government may appoint a person to examine the books and papers or any of them
for the purpose of ascertaining whether they contain any evidence of the commission of an offence in
connection with the promotion or formation, or the management of the affairs, of the transferor
company or its amalgamation or the acquisition of its shares.
6.May 2018

Pioneer Textiles Limited desired to amalgamate its enterprise with Latex Textiles Limited. A scheme
of amalgamation for this purpose was approved by an overwhelming majority of shareholders and
all creditors of both companies at meetings held under the provisions of Section 232 of the
Companies Act, 2013. Thereupon it was presented to the Company Law Tribunal for its sanction.
While the scheme was pending in the Tribunal, some of the dissentient shareholders of Pioneer
Textiles Limited requisitioned an extraordinary general meeting to negotiate with Latex Textiles
Limited as according to the requisitionists the exchange ratio was not fair and reasonable.

Examine whether the directors may refuse to call the extraordinary general meeting. Also discuss the
powers of the Tribunal in this respect.

Page No. 162

Answer:

According to Section 235 of the Companies Act, 2013,

Where a scheme or contract involving the transfer of shares or any class of shares in a Company (the
“Transferor Company”) to another company (the “Transferee Company”) has, within four months
after making of an offer in that behalf by the transferee company, been approved by the holders of
not less than nine-tenths in value of the shares whose transfer is involved, other than shares already
held at the date of the offer by, or by a nominee of the transferee company or its subsidiary Companies,
the transferee Company may, at any time within two months after the expiry of the said four months,
give notice in the prescribed manner to any dissenting shareholder that it desires to acquire his
shares.
(1) Where a notice under sub-section (1) is given, the transferee Company shall, unless on an
application made by the dissenting shareholder to the Tribunal, within one month from the date on
which the notice was given and the Tribunal thinks fit to order otherwise, be entitled to and bound
to acquire those shares on the terms on which, under the scheme or contract, the shares of the
approving shareholders are to be transferred to the transferee Company.
According to Section 232(3) of the Companies Act, 2013, the Tribunal, after satisfying itself that
the procedure specified in 232(1) and (2) has been complied with, may, by order, sanction the
compromise or arrangement or by a subsequent order, make provision to be made for any persons
who, within such time and in such manner as the Tribunal directs, dissent from the compromise or
arrangement.
In the light of the above stated provisions,
(i) Once the scheme of amalgamation has been approved by an overwhelming majority,
transferee Company gets the right to give notice to any dissenting shareholder that it desires
to acquire his shares. Further, as per the facts of the question, the dissenting shareholders
has not applied to the Tribunal against the scheme of amalgamation.
Hence, it is not mandatory for the directors to call the extraordinary general meeting.
(ii) According to Section 232(3) of the Companies Act, 2013, the Tribunal may make provision to
be made for any persons who, within such time and in such manner as the Tribunal directs,
dissent from the compromise or arrangement.
[Note: It is assumed that overwhelming majority as specified in the question signifies approval by
the holders of not less than nine-tenths in value of the shares (which is a pre- requisite to apply the
provisions of section 235 of the Companies Act, 2013)].

7.RTP May 2018

A meeting of members of Evergreen Limited was convened under the orders of the Court for the
purpose of considering a scheme of compromise and arrangement. The meeting was attended by 300
members holding 9,00,000 shares. 120 members holding 7,00,000 shares in the aggregate voted for
the scheme. 140 members holding 2,00,000 shares in aggregate voted against the scheme. 40
members holding 1,00,000 shares abstained from voting. Determine with reference to the relevant
provisions of the Companies Act, 2013 whether the scheme was approved by the requisite majority?
Answer

Page No. 163

As per section 230 (6) of the Companies Act, 2013 where majority of persons at a meeting held
representing 3/4th in value, voting in person or by proxy or by postal ballot, agree to any compromise
or arrangement and if such compromise or arrangement is sanctioned by the Tribunal by an order. The
majority of person representing 3/4 th Value shall be counted of the following:

 the creditors, or
 class of creditors or
 members or
 class of members, as the case may be,
The majority is dual, in number and in value. A simple majority of those voting is sufficient. Whereas the
‘three-fourths’ requirement relates to value. The three-fourths value is to be computed with reference to
paid-up capital held by members present and voting at the meeting.
In this case 300 members attended the meeting, but only 260 members voted at the meeting. As 120
members voted in favor of the scheme the requirement relating to majority in number (i.e. 131) is not
satisfied.
260 members who participated in the meeting held 9,00,000 shares, three-fourth of which works out to
6,75,000 while 120 members who voted for the scheme held 7,00,000 shares. The majority representing
three-fourths in value is satisfied.
Thus, in the instant case, the scheme of compromise and arrangement of Evergreen Limited is not
approved as though the value of shares voting in favor is significantly more, the number of members
voting in favor do not exceed the number of members voting against.
8.May 2019

A meeting of members of ABC Limited was convened as per the orders of the Court to consider a
scheme of compromise and arrangement. Notice of the meeting was sent to 1000 members holding in
aggregate 500000 equity shares. The meeting was attended by 800 members holding 350000 shares.
450 members holding 240000 shares voted in favour of the scheme; 200 members holding 60000
shares voted against the scheme. The remaining 150 members abstained from voting. Explain with
reference to the provisions of the Companies Act, 2013, whether the scheme is approved by the
requisite majority.
Answer:
As per section 230 (6), of the Companies Act, 2013 where majority of persons at a meeting held
representing 3/4th in value, voting in person or by proxy or by postal ballot, agree to any compromise or
arrangement and if such compromise or arrangement is sanctioned by the Tribunal by an order. The
majority of person representing 3/4th Value shall be counted of the following:

 the creditors, or
 class of creditors or
 members or
 class of members, as the case may be,
Usage of word “majority” in the provision is dual in nature i.e., may be taken into account in number & in

Page No. 164

value. A simple majority of those voting is sufficient. Whereas the ‘three-fourths’ requirement relates to
value. The three-fourths value is to be computed with reference to paid-up capital held by members
present and voting at the meeting.
In this case, out of 1000 members, 800 members attended the meeting and 450 members voted in favor
of the scheme, thus, the requirement relating to majority in number (i.e. more than 325) is satisfied.
Further, as per the facts, total 650 members participated in the meeting holding 3,00,000 shares.
According to the provision, three-fourth of which works out to 2,25,000, while 450 members who voted
for the scheme held 2, 40,000 shares.
Hence, the requirements as to the holding of 3/4th values of shares as a majority is also met.
Therefore, the scheme is approved by the requisite majority.
9.Oct 2018

ABC Limited was amalgamated and merged in XYZ Limited. Some workers of ABC Limited refuse to
join as workers of XYZ Limited and claim compensation for premature termination of service. XYZ
Limited resists the claim on the ground that their services are transferred to XYZ Limited by the order
of amalgamation and merger and, therefore, the workers must join service of XYZ Limited and cannot
claim any compensation. According to the provisions of the Companies Act, 2013, examine whether
the workers' contention is correct.
Answer:
An order under section 232 of the Companies Act, 2013 transferring the property, rights and liabilities
of one company to another does not automatically transfer contracts of personal service, which are in
their nature, incapable of being transferred and no contract of service is thereby created between an
employee of the transferor company on the one hand and the transferee company on the other.

In compliance with section 232(1) and (2), the tribunal may by order make a provision for the transfer of
the employees of the transferor company and the transferee company. And provisions shall also be
made for any persons who dissent from the compromise or arrangement scheme.

According to the above provisions, the workers/employees and their services cannot be transferred
without their consent. Tribunal may by order safeguard the interest of the employees/ workers.
Therefore, the workers of ABC Ltd. (Transferor) will succeed against XYZ Ltd.

10.RTP Nov-18:

Cotton On Yarn Ltd., and Country Cotton Blossom Ltd., are two listed companies engaged in the
Business of Textiles. The companies are not making profits and as such their share’s market price
have gone down. A substantial portion of their share capital is held by Central Government as well as
some Public Financial Corporations. In order to increase the share value, the Central Government
wants to amalgamate the aforesaid two companies into a single company. Examine the powers of
Central Government to amalgamate the two companies in public interest as per the provisions of the
Companies Act, 2013.
Answer:

Central Government may by order provide for amalgamation in public interest.

Page No. 165

According to Section 237 of the Companies Act, 2013, where the Central Government is satisfied that it
is essential in the public interest that two or more companies should amalgamate, the Central
Government, may, by order notified in the official gazette, provide for the amalgamation of those
companies into a single company with such constitution, with such property, powers, rights, interests,
authorities and privileges and with such liabilities, duties and obligations, as may be specified in the
order.
Continuation by or against the transferee company of any legal proceedings
The order may also provide for the continuation by or against the transferee company of any legal
proceedings pending by or against any transferor company and such consequential, incidental and
supplemental provisions as may, in the opinion of the Central Government, be necessary to give effect
to amalgamation.
Same interest rights or compensation
Every member or creditor including a debenture holder of each of the transferor companies before the
amalgamation shall have, as nearly as may be, the same in terest in or rights against the transferee
company as he had in the company of which he was originally a member or creditor and in case the
interest or rights of such member or creditor in or against the transferee company are less than the
interest in or rights against the original company, he shall be entitled to compensation to that extent,
which shall be assessed by such authority as may be prescribed and every such assessment shall be
published in the official gazette and the compensation so assessed shall be paid to the member or
creditor concerned by the transferee company.

11. (RTP MAY 2019)

Dragon Copper Limited was facing acute financial difficulty as operations were continuously
disrupted due to (a) non-availability of raw material (b) successive drought in its marketing areas and
loss of demand and (c) frequent breakdown due to non- replacement of old plant and machinery. On
the verge of liquidation, the Management proposes one last arrangement between creditors and the
company,

whereby the creditors have to forego 50% of their dues to the company. This has evoked strong
protest from some of the creditors who may block the arrangement. Examine the arrangement in the
light of the Companies Act, 2013 and advise the course of action/procedure to be adopted by the
company to implement the same.

Answer

Scheme of Compromise or arrangement (Section 230 of the Companies Act, 2013): The scheme
provides for sacrifice on the part of creditors as they have to forego 50% of their dues to the company.
The company is sick and therefore it can be considered as a company liable to be wound up within the
meaning of Section 230(a) of the Companies Act, 2013. The proposed scheme involves as a compromise
or arrangement with creditors and it attracts section 230.

While the company or any creditor or member can make application to the Tribunal under section 230
(6)(1), it is usual for the company to make an application. On such application, the Tribunal may order
that a meeting of creditors and/or members be called and held as per directions of the Tribunal.

Page No. 166

Company must arrange to send notice of meeting to every creditor containing a statement setting forth
the terms of compromise or arrangement explaining its effect. Material interest of directors, Managing
Director, or manager of the company in the scheme and the effect of scheme on their interest should
be fully disclosed [Section 230(1)(a). Advertisement issued by the company must comply with the
requirements of section 230(2). At the meetings convened, as per directions of the Tribunal, majority in
number representing at least ninety percent in value of creditors present and voting (either in person or
by proxy if allowed) must agree to compromise or arrangement.
Thereafter the company must present a petition to the Tribunal for confirmation of the compromise or
arrangement. The notice of application made by the companywill be served on the Central Government
and the Tribunal will take into consideration representation, If, any made by the Central Government.
The Tribunal will sanction the scheme, if it is satisfied that the company has disclosed all material facts
relating to the company e.g. latest financial position, auditors report on accounts of the company,
pendency of investigation of company, etc. Copy of Tribunal order must be filed with the Registrar of
Companies and then only the order will come into effect. Copy of Tribunal order must be annexed to
every Memorandum of Association issued thereafter.
If the Tribunal sanctions the scheme, it will be binding on all members and creditors even those who were
dissenting. (Case Law: S. K. Gupta Vs. K. P. Jain, AlR 1979 SC 374)

12.Aug 2018

How the compromise or arrangement scheme is adopted by the companies entering into any
contract under the companies Act, 2013?

Answer:

Section 230 of the Companies Act, 2013 deals with the powers of the Tribunal on the filing of
application for the compromise or arrangement. According to the contract, where a compromise or
arrangement is proposed between a company and its creditors or any class of them; or a company and
its members or any class of them, the Tribunal may, on the application of the company, creditor,
member of the company, or liquidator, may order a meeting of the creditors/ class of creditors, or of
the members/class of members, as the case may be, to be called, held and conducted in such manner
as the Tribunal directs. Where a meeting is proposed to be called in pursuance of an order of the
Tribunal, a notice of such meeting shall be sent.

Further section 230(4) provides that a notice shall provide that the persons to whom the notice is sent
may vote in the meeting either themselves or through proxies or by postal ballot to the adoption of the
compromise or arrangement within one month from the date of receipt of such notice.
Provided that any objection to the compromise or arrangement shall be made only by persons holding
not less than ten per cent of the shareholding or having outstanding debt amounting to not less than five
per cent of the total outstanding debt as per the latest audited financial statement.
Where, at a meeting held, majority representing three-fourths in value of the creditors/class of
creditors, or of the members/class of members, as the case may be, voting in person or by proxy or by
postal ballot, agree to any compromise or arrangement and if such compromise or arrangement is
sanctioned by the Tribunal by an order, the same shall be binding on the company, all the
creditors/class of creditors, or of the members/class of members, as the case may be, or, in case of a
company being wound up, on the liquidator, "appointed under this Act or under the Insolvency and
Page No. 167
Bankruptcy Code, 2016, as the case may be, "and the contributories of the company.
13.Nov 2019

At the meeting of the members of M/s QRS Limited, a scheme of compromise and arrangement was
approved by requisite majority. The National Company Law Tribunal (NCLT) after complying the
provisions, issued an Order, approving the scheme of compromise and arrangement.

List out the matters to be provided in the Order issued by NCLT under Section 230(7) of the
Companies Act, 2013. What shall be the order to be filed?

Answer

According to section 230(7) of the Companies Act, 2013, an order made by the Tribunal under sub-
section (6) shall provide for all or any of the following matters, namely:—

(a) where the compromise or arrangement provides for conversion of preference shares into equity
shares, such preference shareholders shall be given an option to ei ther obtain arrears of dividend
in cash or accept equity shares equal to the value of the dividend payable;
(b) the protection of any class of creditors;
(c) if the compromise or arrangement results in the variation of the shareholders' rights, it shall be
given effect to under the provisions of section 48;
(d) if the compromise or arrangement is agreed to by the creditors under sub-section (6), any
proceedings pending before the Board for Industrial and Financial Reconstruction established
under section 4 of the Sick Industrial Companies (Special Provisions) Act, 1985 shall abate;
(e) such other matters including exit offer to dissenting shareholders, if any, as are in the opinion of
the Tribunal necessary to effectively implement the terms of the compromise or arrangement.
The order of the Tribunal shall be filed with the Registrar by the company within a period of thirty days
of the receipt of the order. [Section 230(8)]
14.MTP Nov 2019 Eminence Ltd. after passing special resolution filed an application to the registrar
for removal of the name of company from the register of companies. On the complaint of certain
members, Registrar came to know that already an application is pending before the Tribunal for the
sanctioning of a compromise or arrangement proposal. The application was filed by the Eminence Ltd.
two months before the filing of this application to the Registrar.

Determine the given situations in the lights of the given facts as per the Companies Act, 2013:
(i) Legality of filing an application by Eminence Ltd. before the registrar.
(ii) Consequences if Eminence Ltd. files an application in the above given situation.
In case registrar notifies eminence Ltd as dissolved under section 248 in compliances to the required
provisions, what remedy will be available to the aggrieved party?

Answer

(a) According to the Section 248(2) of the Companies Act, 2013, a company may, after extinguishing
all its liabilities, by a special resolution, or consent of seventy-five per cent. members in terms of paid-up

Page No. 168

share capital, file an application in the prescribed manner to the Registrar for removing the name of the
company from the register of companies on all or any of the grounds specified in section 248(1) and the
Registrar shall, on receipt of such application, cause a public notice to be issued in the prescribed
manner. Further Section 249 provides restrictions on making application under section 248 .

An application under section 248 on behalf of a company shall not be made if, at any time in the previous
three months, the company—
(a) has changed its name or shifted its registered office from one State to another;
(b) has made a disposal for value of property or rights held by it, immediately before cesser of trade or
otherwise carrying on of business, for the purpose of disposal for gain in the normal course of trading
or otherwise carrying on of business;
(c) has engaged in any other activity except the one which is necessary or expedient for the purpose of
making an application under that section, or deciding whether to do so or concluding the affairs of
the company, or complying with any statutory requirement;
(d) has made an application to the Tribunal for the sanctioning of a compromise or arrangement and
the matter has not been finally concluded; or
(e) is being wound up under Chapter XX of this Act or under the Insolvency and Bankruptcy Code, 2016.
Violation of above conditions on filing of application: If a company files an application in violation of
restriction given above, it shall be punishable with fine which may extend to one lakh rupees.

Rights of registrar on non-compliance of conditions by the company: An application filed under above
circumstances, shall be withdrawn by the company or rejected by the Registrar as soon as conditions
are brought to his notice.

Aggrieved person to file an appeal against the order of registrar: As per section 252(1),any person
aggrieved by an order of the Registrar, notifying a company as dissolved under section 248, may file an
appeal to the Tribunal within a period of three years from the date of the order of the Registrar and if
the Tribunal is of the opinion that the removal of the name of the company from the register of
companies is not justified in view of the absence of any of the grounds on which the order was passed by
the Registrar, it may order restoration of the name of the company in the register of companies.
However a reasonable opportunity is given to the company and all the persons concerned.
According to the above provisions, following are the answers:
(i) As per the restrictions marked in the Section 249(d) stating that an application under section 248 on
behalf of a company shall not be made if, at any time in the previous three months, the company
has made an application to the Tribunal for the sanctioning of a compromise or arrangement and
the matter has not been finally concluded.
As per the facts application to the registrar for removal of the name of company from the register of
companies, was filed by the Eminence Ltd. within three months to the filing of an
application to the Tribunal for approval of compromise or arrangement proposal. Therefo re, filing of such
an application by Eminence Ltd is not valid.
(i) If a company files an application in above situation, it shall be punishable with fine which may extend
to one lakh rupees. An application so filed, shall be withdrawn by the company or rejected by the
Page No. 169
 Registrar as soon as conditions are brought to his notice.
(ii) According to the provision given in section 252(1),a person aggrieved by an order of the Registrar,
notifying Eminence Ltd. as dissolved under section 248, may:
 file an appeal to the Tribunal within a period of three years from the date of the order of the
Registrar, and
 if the Tribunal is of the opinion that the removal of the name of the company from the register of
companies is not justified in view of the absence of any of the grounds on which the order was
passed by the Registrar, it may order restoration of the name of the Eminence Ltd. in the register
of companies.
 A reasonable opportunity is given to the Eminence Ltd. and all the persons concerned.

Study Material

15. Under what circumstances the meeting of the creditors may be dispensed by the NCLT?

(a) if 70% of the creditors in value agree and confirm to the scheme by way of affidavit
(b) if 80% of the creditors in value agree and confirm to the scheme by way of affidavit
(c) if 90% of the creditors in value agree and confirm to the scheme by way of affidavit
(d) None of the above
Answer: c) Hint: As per Section 230 (9) of the Companies Act, 2013, the Tribunal may dispense with
calling of a meeting of creditor or class of creditors where such creditors or class of creditors, having at
least ninety per cent. value, agree and confirm, by way of affidavit, to the scheme of compromise or
arrangement.

16. PQR Limited and LMN Limited have proposed Scheme of Amalgamation between them under
Section 232 of the Companies Act 2013. They are seeking your advice on which of the following
approvals can be asked for in the petition to be filed before NCLT for the proposed scheme.

a) Change in Main Object Clause of Memorandum of Association;

b) Reduction of Share Capital;
c) Dissolution of the Transferor Company without winding up;
d) All of the above.
Answer: d) Hint: As per the provisions of Section 230, Section 232 of Section 233 of the Companies Act,
2013 and The Companies (Compromises, Arrangements and Amalgamations) Rules, 2016; the Scheme of
Amalgamation is a Complete Code for absorbing the objects of the Transferor Company, Increase in
Authorized Share Capital of the Transferee Company, Reduction of Share Capital required if any and the
dissolution of the Transferor Company without winding up. Hence, the petition for approval of the
proposed Scheme of Amalgamation between PQR Limited and LMN Limited can seek approval for all
three options namely Change in Main Object clause of MOA, Reduction of Share Capital and Dissolution
of the Transferor Company without winding up as effect of Amalgamation
Page No. 170
17. ABHI Limited is a wholly owned subsidiary company of ETERNAL Limited. ETERNAL Ltd., makes an
application for merger of Holding and Subsidiary Companies under the section 232 of the Companies
Act, 2013. The Company Secretary of the ETERNAL Ltd., states that company cannot apply for merger
under section 232 of the said Act. He further stated that the company shall have to apply for merger as
per section 233 i.e. Fast Track Merger. State the correct statement in terms of the validity of the
difference in the opinion of the Company secretary-

a) Opinion of the Company Secretary of the ETERNAL Ltd. is valid holding that merger shall be as per
section 233.
b) Opinion of the Company Secretary of the ETERNAL Ltd. is invalid as merger shall be possible only as
per section 232.
c) Opinion of the Company Secretary of the ETERNAL Ltd. is invalid as the provisions given for fast
track merger in the section 233 are of the optional nature.
d) Opinion of the Company Secretary of the ETERNAL Ltd. is invalid as the provisions given for fast
track merger in the section 233 can be made between only small companies
Answer: (c) Hint: As per section 233 (1), a scheme of merger or amalgamation may be entered between,

 2 or more small companies, or

 a holding company and its wholly-owned subsidiary company, or
 such other class or classes of companies as may be prescribed.
The provisions given for fast track merger in the section 233 are in the optional nature and not a
compulsion to the company. If a company wants to make application for merger as per section 232, it
can do so.
Hence, here the Company Secretary of the XYZ Eternal limited has erred in the law and his contention is
not valid as per law. The company shall have an option to choose between normal process of merger
and fast track merger

18. ABC Limited is a wholly owned subsidiary company of XYZ Limited. The Company wants to make
application for merger of Holding and Subsidiary Companies under Section 232. The Company
Secretary of the XYZ Limited is of the opinion that company cannot apply for merger as per section 232.
The company shall have to apply for merger as per section 233 i.e. Fast Track Merger. Is the contention
of Company Secretary being valid as per law?

Answer:

As per section 233 (1), notwithstanding the provisions of section 230 and section 232, a scheme of merger
or amalgamation may be entered between,

 2 or more small companies

 a holding company and its wholly-owned subsidiary company. If 100% of its share capital is held by
the holding company, except the shares held by the nominee or nominees to ensure that the number
of members of subsidiary company is not reduced below the statutory limit as provided in section
Page No. 171
 187
 such other class or classes of companies as may be prescribed.
The provisions given for fast track merger in the section 233 are in the optional nature and not a
compulsion to the company. If a company wants to make application for merger as per section 232, it can
do so.
Hence, here the Company Secretary of the XYZ limited has erred in the law and his contention is not valid
as per law. The company shall have an option to choose between normal process of merger and fast track
merger.

19. A meeting of members of ABC Limited was convened under the orders of the Court to consider a
scheme of compromise and arrangement. Notice of the meeting was sent in the prescribed manner to
all the 600 members holding in the aggregate 25,00,000 shares. The meeting was attended by 450
members holding 15,00,000 shares. 210 members holding 11,00,000 shares voted in favor of the
scheme. 180 members holding 3,00,000 shares voted against the scheme. The remaining members
abstained from voting.

Examine with reference to the relevant provisions of the Companies Act, 2013 whether the scheme is
approved by the requisite majority.

Answer

As per section 230 (6), of the Companies Act, 2013 where majority of persons at a meeting held
representing 3/4th in value, voting in person or by proxy or by postal ballot, agree to any compromise or
arrangement and if such compromise or arrangement is sanctioned by the Tribunal by an order. The
majority of person representing 3/4th Value shall be counted of the following:

 the creditors, or
 class of creditors or
 members or
 class of members, as the case may be,
The majority is dual, in number and in value. A simple majority of those voting is sufficient. Whereas the
‘three-fourths’ requirement relates to value. The three-fourths value is to be computed with reference to
paid-up capital held by members present and voting at the meeting.
In this case out of 600 members, 450 members attended the meeting, but only 390 members voted at
the meeting. As 210 members voted in favor of the scheme the requirement relating to majority in
number (i.e. 196) is satisfied. 390 members who participated in the meeting held 14,00,000, three-fourth
of which works out to 10,50,000 while 210 members who voted for the scheme held 11,00,000 shares.
As both the requirements are fulfilled, the scheme is approved by the requisite majority.

20. A meeting of members of DEF Limited was convened under the orders of the Court for the purpose
of considering a scheme of compromise and arrangement. The meeting was attended by 300 members
holding 9,00,000 shares. 120 members holding 7,00,000 shares in the aggregate voted for the scheme.
140 members holding 2,00,000 shares in aggregate voted against the scheme. 40 members holding
Page No. 172
1,00,000 shares abstained from voting. Examine with reference to the relevant provisions of the
Companies Act, 2013 whether the scheme was approved by the requisite majority?

As per section 230 (6), of the Companies Act, 2013 where majority of persons at a meeting held
representing 3/4th in value, voting in person or by proxy or by postal ballot, agree to any compromise or
arrangement and if such compromise or arrangement is sanctioned by the Tribunal by an order. The
majority of person representing 3/4th Value shall be counted of the following:

 the creditors, or
 class of creditors or
 members or
 class of members, as the case may be,
The majority is dual, in number and in value. A simple majority of those voting is sufficient. Whereas the
‘three-fourths’ requirement relates to value. The three-fourths value is to be computed with reference to
paid-up capital held by members present and voting at the meeting. In this case 300 members attended
the meeting, but only 260 members voted at the meeting.
As 120 members voted in favor of the scheme the requirement relating to majority in number (i.e. 131) is
not satisfied. 260 members who participated in the meeting held 9,00,000 shares, three-fourth of which
works out to 6,75,000 while 120 members who voted for the scheme held 7,00,000 shares.
The majority representing three-fourths in value is satisfied. Thus, in the instant case, the scheme of
compromise and arrangement of DEF Limited is not approved as though the value of shares voting in
favor is significantly more, the number of members voting in favor do not exceed the number of
members voting against.
21. (a) RMP Limited was facing acute financial difficulties as operations were continuously disrupted
and the Company was facing the brunt of:
(i) Non-Availability of Raw Materials,
(ii) Loss of demand for the Company's products,
(iii) Frequent lockdown due to workmen's unrest.

On the verge of liquidation, the Management proposed one last arrangement between creditors and
the Company, whereby, the creditors will have to forego 50%, of their dues to the Company. This has
evoked strong protest from some of the creditors who may block the arrangement.
Examine the arrangement in the light of the Companies Act, 2013 and advice the course of
action/procedure to be adopted by the company to implement the arrangement.
(4 Marks) (Past exam nov 2020)

(b) As a part of amalgamation, Harsha Limited acquired 90% of the issued capital of Ananya Limited.
The issued, subscribed and paid up capital of Ananya Limited is Rs. 100 Crore. Out of remaining
minority shareholding of Ananya Limited, Rs. 8 Crore are held by Mr. Raju. Mr. Raju was not satisfied
with the amount decided under the scheme and therefore negotiated for a higher price. As a result, he
received an extra amount of Rs. 10 Lakh. The other minority shareholders claim that Mr. Raju is not
entitled to the entire extra amount of Rs. 10 Lakh.

Page No. 173

Examine the validity of claim made by other minority shareholders under the relevant provisions of the
Companies Act, 2013. (3 Marks) (Past exam nov 2020)

Answer

(a) Procedure for adoption of the Scheme of Compromise or Arrangement (Section 230 of the
Companies Act, 2013)
The proposed scheme involves a compromise or arrangement with creditors and it attracts section 230.
Said section contains the powers of the Tribunal on the filing of application for the compromise or
arrangement. According to this section:

(1) In the given case, a compromise or arrangement is proposed between a company and its creditors, so
the Tribunal may, on the application of the company or creditor, order a meeting of the creditors or class
of creditors, to be called, held and conducted in such manner as the Tribunal directs.

(2) The company or any other person, by whom an application is made, shall disclose to the Tribunal by
affidavit all the material facts relating to the company.

(3) Where a meeting is proposed to be called in pursuance of an order of the Tribunal, a notice of such
meeting shall be sent to all the creditors and members and concerned persons individually at the address
registered with the company with the statement disclosing the details of scheme

(4) Such notice and other documents shall also be placed on the website of the company.

(5) The Tribunal may dispense with calling of a meeting of creditor or class of creditors where such
creditors or class of creditors, having at least ninety per cent value, agree and confirm, by way of affidavit,
to the scheme of compromise or arrangement.

(6) A notice shall provide that the persons to whom the notice is sent may vote in the meeting either
themselves or through proxies or by postal ballot to the adoption of the compromise or arrangement
within one month from the date of receipt of such notice.

(7) Where, at a meeting held, majority of persons representing three-fourths in value of the creditors, or
class of creditors, voting in person or by proxy or by postal ballot, agree to any compromise or
arrangement and if such compromise or arrangement is sanctioned by the Tribunal by an order, the same
shall be binding on the company, and all the creditors.

(8) The order of the Tribunal shall be filed with the Registrar by the company within a period of thirty days
of the receipt of the order.
Accordingly, RMP Limited is advised to file an application to the tribunal for compromise and
arrangement.

(b) Section 236 of the Companies Act, 2013, where the shares of minority shareholders have been
acquired in pursuance of this section, and as on or prior to the date of transfer following such acquisition,
the shareholders holding seventy-five per cent. or more minority equity shareholding negotiate or reach
an understanding on a higher price for any transfer, proposed or agreed upon, of the shares held by them

Page No. 174

without disclosing the fact or likelihood of transfer taking place on the basis of such negotiation,
understanding or agreement,-
the majority shareholders shall share the additional compensation so received by them with such
minority shareholders on a pro rata basis.
Accordingly, in the given case as Mr. Raju negotiated on extra amount of Rs. 10 lakh which was entirely
held by him. Therefore the claim contended by the minority shareholders is valid because in the light of
the above stated provision the extra amount received by Mr. Raju shall be allocated to all minority
shareholders on pro rata basis.

22. (a) Digital Era Limited (DEL), is a start-up Company, incorporated in the year 2017 under the
provisions of the Companies Act, 2013. The main object of the Company is to manufacture and market
two wheelers adopting a new technology of using hydrogen as a fuel to run the vehicle in lieu of petrol.
Despite several experiments, the technology of hydrogen fuelled engine for the two wheelers was not
successful. As per the requirements of the Companies Act, 2013, no business was commenced and no
financial statements were filed with the Registrar of Companies (RoC). Eventually the Board of
Directors of the Company resolved to apply to the RoC for getting the name of the Company struck-off
from the Register of Companies.

The RoC, after satisfying that all the compliances specified under Section 248 of the Companies Act,
2013 have been met by the Company and after publishing a notice for general public and also in the
official gazette, the name of the Company was struck-off from the Register of Companies w.e.f 7th
January,2020.

Earlier in the year 2018, Mr. Amrit, had supplied certain spares to the Company for Rs. 2,50,000 and
despite his several requests, the amount was not settled by the Company. In September 2020, he came
to know from his close aides that DEL has some assets available with them. Thereafter, with a view to
recover his dues from the Company, he approached you seeking your professional guidance. As a
competent professional, advise Mr. Amrit, the following, in the light of the provisions of the Companies
Act, 2013:

(i) Whether the assets of the company shall be made available for the discharge of its liabilities even
after the date of the order removing the name of the company from the Register of Companies?

(ii) Can an aggrieved person file an appeal against the order of the RoC? If so, state the legal provisions
in this regard.

(iii) When and under what circumstances can the RoC restore the name of the company?

(iv) State the circumstances and the time frame within which the Tribunal can order the name of the
company to be restored to the Register of Companies?

(v) Can the name of a company registered under Section 8 of the Companies Act, 2013 be removed
from the Register of Companies? (8 Marks) (Past exam nov 2020)

Answer

Page No. 175

(a) (i) Realisation of assets: According to section 248(6) of the Companies Act, 2013, the Registrar, before
passing an order under sub-section (5), shall satisfy himself that sufficient provision has been made for
the realisation of all amount due to the company and for the payment or discharge of its liabilities and
obligations by the company within a reasonable time and, if necessary, obtain necessary undertakings
from the managing director, director or other persons in charge of the management of the company.
Provided that notwithstanding the undertakings referred to in this sub-section, the assets of the company
shall be made available for the payment or discharge of all its liabilities and obligations even after the
date of the order removing the name of the company from the register of companies.
Hence, the assets of the company (DEL) shall be made available for the discharge of its liabilities even
after the date of order of removing the name of the company from the register of companies.

(ii) Appeal: According to section 252(1) of the Companies Act, 2013, any person aggrieved by an order of
the Registrar, notifying a company as dissolved under section 248, may file an appeal to the Tribunal
within a period of three years from the date of the order of the Registrar and if the Tribunal is of the
opinion that the removal of the name of the company from the register of companies is not justified in
view of the absence of any of the grounds on which the order was passed by the Registrar, it may order
restoration of the name of the company in the register of companies.
Before passing any order under this section, the Tribunal shall give a reasonable opportunity of making
representations and of being heard to the Registrar, the company and all the persons concerned.

(iii) Restoration of name of company: If the Registrar is satisfied, that the name of the company has been
struck off from the register of companies either inadvertently or

on the basis of incorrect information furnished by the company or its directors, which requires restoration
in the register of companies, he may within a period of three years from the date of passing of the order
dissolving the company under section 248, file an application before the Tribunal seeking restoration of
name of such company. [second proviso to section 252(1)]

(iv) If a Company, or any member or creditor or workman thereof feels aggrieved by the Company having
its name struck off from the Register of Companies, the Tribunal on an application made by the Company,
Member, Creditor or Workmen before the expiry of twenty years from the publication in the Official
Gazette of the notice under sub section (5) of Section 248 may, if satisfied that the Company was, at the
time of its name being struck off, carrying on business or in operation or otherwise it is just that the name
of the Company be restored to the Register of Companies, order the name of the Company to be restored
to the Register of Companies, and the tribunal may, by the order, give such other directions and make
such provisions as deemed just for placing the Company and all other persons in the same position or
nearly as may be as if the name of the Company had not been struck off from the Register of Companies.

(v) Exemption to section 8 companies: A company registered under section 8 of the Companies Act, 2013
cannot be removed from the register of companies. [Section 248(3)]

23. State which statement is correct as regards the preservation of books and papers of amalgamated
company: (mtp-II- july 2021)

(a) It can be disposed any time after 1 year with permission of Board of Directors of Transferee
Company.

Page No. 176

(b) It can be disposed with permission of Central Government after 5 years

(c) Not be disposed of without prior permission of the Central Government

(d) It cannot be disposed. (1 Mark)

ANSWER- c

24. (A) Prathmikhta Life Insurance Limited incorporated on 01.04.2020 could not commence its
business till 01.04.02021. The Company filed an application to the Registrar of Companies with a special
resolution to remove its name from the register of the companies maintained by the Registrar and give
effect to the dissolution of the Company. Rejecting the application on the ground that the application
has not been supported by approval of the regulatory authority, the Registrar asked the Company to re-
submit it after marking necessary compliances. Examine the validity of rejection of the application of
Prathmikhta Life Insurance Limited by explaining the procedure to be followed for removal of the name
of the Company and get it dissolved under the provisions of the Companies Act 2013 (the Act) without
taking a recourse to the regular winding-up procedure provided under chapter XX of the Act. (8 Marks)
(mtp-II- july 2021)

ANSWER

Approval of the Regulatory Body in case a Company is regulated under a Special Act:
Prathmikhta Life Insurance Ltd. is a company regulated under a Special Act, the Insurance Act, 1938. It
shall obtain approval of the regulatory body, “Insurance Regulatory and Development Authority” (IRDA)
constituted or established under that Act and such approval shall be enclosed with the application.
Here in the given case, no approval of the regulatory body i.e., IRDA was obtained, and therefore, the
rejection of application of Prathmikhta Life Insurance Limited, is valid.

Procedure for removal of name of the company

As per Section 248(2) of the Companies Act, 2013, a Company (Prathmikhta Life Insurance Ltd.) may, after
extinguishing all its liabilities, by a special resolution, or consent of seventy-five per cent of members in
terms of paid-up share capital, file an application to the Registrar for removing the name of the Company
from the Register of Companies on the ground that the said Company has failed to commence its business
within one year of its incorporation (i.e. from 1/4/2020 till 1/4/2021) and the Registrar shall, on receipt of
such application, cause a public notice to be issued.
A notice issued shall be published in the prescribed manner and also in the Official Gazette for the
information of the general public.
At the expiry of the time mentioned in the notice, the Registrar may, unless contrary is shown by the
Company, strike off its name from the Register of Companies, and shall publish notice thereof in the
Official Gazette, and on the publication in the Official Gazette of this notice, the Company shall stand
dissolved.
Prathmikhta Life Insurance Limited with approval of the IRDA, shall re-submit the application in
compliance with stated procedure and can get its name struck off from Register of Companies and get it
dissolved without taking recourse to the regular winding up procedure under the Companies Act, 2013.

Page No. 177

25. Under what circumstances the meeting of the creditors may be dispensed by the NCLT? (1 Mark)
(mtp-NOV 2020)

(a) if 70% of the creditors in value agree and confirm to the scheme by way of affidavit

(b) if 80% of the creditors in value agree and confirm to the scheme by way of affidavit

(c) if 90% of the creditors in value agree and confirm to the scheme by way of affidavit

(d) None of the above

ANSWER- c

26. X Inc Ltd is a holding company of Y Infrastructure Ltd. Insolvency resolution process was initiated
against the X Inc Ltd on 15th December 2020. In the mean time another financial creditor initiated
corporate insolvency resolution process against Y Infrastructure Ltd. Later X Inc Ltd filed an appeal
contending that resolution process against Y Infrastructure Ltd. should not continue till corporate
insolvency resolution process is decided in the case of X Inc Ltd. on the basis of initiation of
moratorium. Also the Resolution plan of X Inc Ltd. approved by CoC, was still pending before the
Adjudicating authority for its approval. In the light of given situation, examine whether corporate
insolvency resolution process initiated against the X Inc Ltd., can bar the corporate insolvency
resolution process initiated against the Y Infrastructure Ltd.? (RTP JULY 2021)

ANSWER

In the given case, both the X Inc Ltd. and Y Infrastructure Ltd. in the eyes of law are separate entity.
Further section 14 of IBC, 2016 which deals with moratorium, no where prohibits initiation of corporate
insolvency resolution process on the subsidiary company or its holding company. Further also that a
separate CIRP has been initiated against another corporate debtor by another financial creditor, which is
altogether separate and have no connection with the CIRP initiated against X Inc Ltd. or Y Infrastructure
Ltd.
Therefore, in the given case, corporate insolvency resolution process initiated against the X Inc Ltd, which
is a holding company, cannot bar the corporate insolvency resolution process initiated against the Y
Infrastructure Ltd which is its subsidiary or vice versa

27. (RTP NOV 2021)

The Committee of Creditors (CoC) of Ashoka Cement Limited under the Corporate Insolvency
Resolution Process (CIRP) have passed a resolution allowing the Resolution Professional (RP) of
Company for initiating the process of liquidation before NCLT under section 33 of the Insolvency and
Bankruptcy (Amendment) Code, 2019. Accordingly, the RP was appointed as liquidator of the Ashoka
Cement Limited. While forming the liquidation estate, the liquidator was in dilemma regarding the
inclusion and exclusion of the assets forming part of the liquidation estate. You as a Qualified Chartered
Accountant are required to advise the liquidator regarding the issues faced by him with respect to the
exclusion to be made in the liquidation estate of Ashoka Cement Limited as per the provisions of the
Code.
1. Assets in security collateral held by financial service providers.
Page No. 178
2. Any asset of the corporate debtor in respect of which a secured creditor has relinquished security
interest.
3. Assets owned by a third party which are in the possession of the corporate debtor.
4. Assets subject to the determination of ownership by the court or authority.

(a) Only (3)

(b) Both (2) and (4)

(c) Only (1)

(d) (1) and (3)

ANSWER- d

28. (RTP NOV 2021)

Kiara Limited holds 77% of the shares of Sunny Limited. Kiara Limited makes an application for merger
of Holding and Subsidiary Company under section 233 – Fast Track Merger of the Companies Act, 2013.
The legal counsel of Kiara Limited states that company cannot apply for merger under section 233 of
the said Act. He further stated that company shall have to apply for merger as per section 232 of the
Act i.e. Merger and Amalgamation of Companies. State the correct statement in terms of the validity of
the difference in the opinion of the legal counsel.

(a) Opinion of the legal counsel of Kiara Limited is valid as the provisions given for fast track merger in
section 233 can be made between only small companies.

(b) Opinion of the legal counsel of Kiara Limited is invalid as merger shall be possible only as per section
233 between Holding and Subsidiary Company.

(c) Opinion of the legal counsel of Kiara Limited is valid as the provisions given for fast track merger in
section 233 can be made between Holding and wholly owned subsidiary.

(d) Opinion of the legal counsel of Kiara Limited is invalid as merger of Holding and Subsidiary company
is possible under both section 232 and section 233.

ANSWER- c

29. Surya Ltd., wants to reorganise the company’ share capital by the consolidation of shares of
different classes and passed a resolution to this effect in the Board meeting and thereafter made an
application to the Tribunal. The Tribunal ordered that a meeting of the members be called. The
company sent notices to all the members.
In the meeting, some of the members made objections to such arrangements. However, the majority of
the members were interested in the resolution proposed by the company. Tribunal after scrutinising
the minutes of the meeting, sanctioned the proposed arrangement.
Examine in the light of the given facts, that in order to give effect to the arrangement which prescribes
the reorganisation of company’ share capital by the consolidation of shares of different classes,

Page No. 179

mention the requirements on the execution of the said arrangement under the Companies Act, 2013.
(RTP NOV 2021)

ANSWER

Section 230(1) of the Companies Act, 2013 provides that where a compromise or arrangement is
proposed—
(a) between a company and its creditors or any class of them; or
(b) between a company and its members or any class of them,
The Tribunal may, on the application of the company or of any creditor or member of the company, or in
the case of a company which is being wound up, of the liquidator, “appointed under this Act or under the
Insolvency and Bankruptcy Code, 2016, as the case may be,” order a meeting of the creditors or class of
creditors, or of the members or class of members, as the case may be, to be called, held and conducted
in such manner as the Tribunal directs.

Here the term, arrangement includes a reorganisation of the company’s share capital by the
consolidation of shares of different classes or by the division of shares into shares of different classes, or
by both of those methods.
Any compromise or arrangement needs the order of sanction by the Tribunal and the Tribunal may on an
application made by the company, order the company to call the meeting of the shareholders, pass such
resolution in the meetings and then forward the minutes to the Tribunal for its order.

The order of the Tribunal shall be filed with the Registrar by the company within a period of thirty days of
the receipt of the order.
The Tribunal may dispense with calling of a meeting of creditor or class of creditors where such creditors
or class of creditors, having at least ninety per cent. value, agree and confirm, by way of affidavit, to the
scheme of compromise or arrangement

Page No. 180

 6 Prevention of Oppression and Mismanagement

ATTEMPTS
MAY NOV MAY NOV NOV JAN JULY NOV
COVERAGE
2018 2018 2019 2019 2020 2021 2021 2021

STUDY Qstns- 31, 38 to 53

MAT

Q-32,
PAST Q-20, Q-24, NO
Q-16, 17 33, 34, Q-59 ------
EXAMS 21, 27 25, 26 QUES
35

Q-1, 5,
Q-12, 6, 7, 8, Q-2, 36, Q-56,
MTP Q-18, 19 Q-55 ------
13, 14 9, 10, 37 57, 58
28, 29

Q-2, 3,
RTP Q-15 Q-22, 23 Q-11, 31 Q-54, 55 Q-60 Q-61, 62
4, 30

Page No. 181

Multiple Choice Questions

1.MTP Mar 2019

Astistav Private Limited is a company with ten shareholders. A member holding less than one-tenth
of the share capital of the company apply to the Tribunal for relief against oppression and
mismanagement. State whether a member have a right to apply to the tribunal in above situation:

(a) A single Member cannot apply to the Tribunal for relief against oppression and mismanagement
(b) A member cannot apply as he is holding less than one-tenth of the share capital of the company
(c) A member can apply being one-tenth of the total number of members.
(d) A member cannot apply as the requirement of atleast hundred members is not complied with.
Answer: Option C

Descriptive Questions

2.RTP May 2018

The issued and paid up capital of Crown Jewels Limited is Rs. 5 crores consisting of 5,00,000 equity
shares of Rs. 100 each. The said company has 500 members. A petition was submitted before the
Tribunal signed by 80 members holding 10,000 equity shares of the company for the purpose of relief
against oppression and mismanagement by the majority shareholders. Examining the provisions of
the Companies Act, 2013, decide whether the said petition is maintainable. Also explain the impact
on the maintainability of the above petition, if subsequently 40 members, who had signed the
petition, withdrew their consent.

Answer

Right to apply for oppression and mismanagement: As per the provisions of Section 244 of the
Companies Act, 2013,

in the case of a company having share capital, members eligible to apply for oppression and
mismanagement shall be lowest of the following:

 100 members; or
 1/10th of the total number of members; or
 Members holding not less than 1/10th of the issued share

capital of the company. The share holding pattern of Crown Jewels Limited is given as follows:
Rs. 5,00,00,000 equity share capital held by 500 members
The petition alleging oppression and mismanagement has been made by some members as follows:
(i) No. of members making the petition – 80
(ii) Amount of share capital held by members making the petition – Rs. 10,00,000 The petition shall be
valid if it has been made by the lowest of the following:

Page No. 182

100 members; or
50 members (being 1/10th of 500); or
Members holding Rs. 50,00,000 share capital (being 1/10th of Rs. 5,00,00,000)
As it is evident, the petition made by 80 members meets the eligibility criteria specified under section
244 of the Companies Act, 2013 as it exceeds the minimum requirement of 50 members in this case.
Therefore, the petition is maintainable.
The consent to be given by a shareholder is reckoned at the beginning of the proceedings. The
withdrawal of consent by any shareholder during the course of proceedings shall not affect the
maintainability of the petition [Rajamundhry Electric Corporation Vs. V. Nageswar Rao A.I.R. (1956) Sc.
2013.].

3.March 2018

The members of company with no paid up share capital, filed a complaint against change in the
management of the company due to which it was likely that the affairs of the company will be
conducted in a manner that it will be prejudicial to the interest of its 25 members. Total number of
members of company were 100. On inquiry and investigation on the complaint, having a reasonable
ground to believe that the transfer or disposal of assets of the company may be against to the
interests of its shareholders. The Tribunal passed an order that such transfer or disposal of assets
shall not be made during one year of such order.

Evaluate on the basis of the given facts, the following situations according to the Companies Act, 2013:
(i) Eligibility of the members to file a complaint.
(ii) Where if the management dispose of the certain assets in contravention to the order of the
Tribunal.
Answer:

Section 244 of the Companies Act, 2013 provides the eligibility of members who hold the right to file
the application under section 241 for oppression and mismanagement with the Tribunal. These
qualification as provided in section 244 ensure that only the persons with sufficient interest in the
affairs of the company can file the petition under section 241 of the Act. According to the section in the
case of a company not having a share capital, not less than one-fifth of the total number of its members
are eligible to make an application before the Tribunal. Where any members of a company are entitled
to make an application under Section 244 (1), any one or more of them having obtained the consent in
writing of the rest, may make the application on behalf and for the benefit of all of them.

In the given scenario, requirement of minimum numbers of members is fulfilled i.e. it is more than
1/5th of the total number of its members of the company (1/5x 100= 20). So the members of the
company are eligible to file the petition to tribunal under section 241.
However, the Tribunal may, on an application made to it in this behalf, waive all or any of the
requirements specified in section 244, so as to enable the members to apply under section 241.

Page No. 183

(ii) According to section 221 of the Companies Act, 2013, if it appears to the Tribunal, on a complaint
made by members as specified under section 244(1) that the removal, transfer or disposal of funds,
assets, properties of the company is likely to take place in a manner that is prejudicial to the interests
of its members, Tribunal ordered that such transfer, removal or disposal shall not take place during such
period not exceeding three years as may be specified in the order or may take place subject to such
conditions and restrictions as the Tribunal may deem fit.
Here in the given case, management disposed of the certain assets within 1 year of such order of
Tribunal. So accordingly, the company shall be punishable with fine which shall not be less than one
lakh rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in
default shall be punishable with imprisonment for a term which may extend to three years or with fine
which shall not be less than f ifty thousand rupees but which may extend to five lakh rupees, or with
both.

4.Aug 2018

XYZ Ltd. proposed for amalgamation with the PQR Ltd. The issued and paid up capital of XYZ Ltd. is
Rs. 5 crore consisting of 5,00,000 equity shares of Rs. 100 each. The said company has 500 members.
It was believed by certain members of the company that the proposed Scheme of amalgamation
resulting into the transfer and disposal of funds and assets of the company to the transferee, will be
effecting their interest. So, 80 members holding 10,000 equity shares of the company decided to file
an application for relief before the Tribunal.

Examine the given situation in the light of the Companies Act, 2013-
(i) Whether the said petition will be maintainable.
(ii) In case where it appears to the Tribunal, that such proposal is likely to effect the interest of the
members, remedy available to the aggrieved members.
Answer:

Right to apply for oppression and mismanagement: As per the provisions of Section 244 of the
Companies Act, 2013, in the case of a company having share capital, members eligible to apply for
oppression and mismanagement shall be lowest of the following:

100 members; or
1/10th of the total number of members; or
Members holding not less than 1/10th of the issued share capital of the company. The share holding
pattern of MNC Limited is given as follows:
Rs. 5,00,00,000 equity share capital held by 500 members

The petition alleging oppression and mismanagement has been made by some members as follows:
(1) No. of members making the petition – 80
(2) Amount of share capital held by members making the petition – Rs. 10,00,000 The petition shall be
valid if it has been made by the lowest of the following:

Page No. 184

100 members; or
50 members (being 1/10th of 500); or
Members holding Rs. 50,00,000 share capital (being 1/10th of Rs. 5,00,00,000)
As it is evident, the petition made by 80 members meets the eligibility criteria specified under section 244
of the Companies Act, 2013 as it exceeds the minimum requirement of 50 members in this case.
Therefore, the petition is maintainable.
(ii) Further section 221 of the Companies Act, 2013 states that where it appears to the Tribunal, on
any complaint made by such number of members as specified under sub-section (1) of section 244
having a reasonable ground to believe that the removal, transfer or disposal of funds, assets,
properties of the company is likely to take place in a manner that is prejudicial to the interests of the
company or its shareholders or creditors or in public interest, it may by order direct that such transfer,
removal or disposal shall not take place during such period not exceeding three years as may be
specified in the order or may take place subject to such conditions and restrictions as the Tribunal may
deem fit.
In case of contravention of order of Tribunal, the company shall be punishable with fine which shall not
be less than one lakh rupees but which may extend to twenty-five lakh rupees and every officer of the
company who is in default shall be punishable with imprisonment for a term which may extend to three
years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh
rupees, or with both.

5.May 2018

JSK, a shareholder of CRI (Private) Ltd. filed an application before erstwhile Company Law Board,
alleging various acts of oppression and mis-management in the affairs of the Company and sought
certain relief measures. The petition was transferred to NCLT on its constitution. The NCLT passed an
order on 5th October, 2017 without the consent of the parties. Aggrieved by the order, the
shareholder decided to prefer an appeal. Nevertheless the shareholder was suffering from low blood
pressure. He was medically advised not to move and he did not move. Therefore, he preferred the
appeal with NCLAT on 5th December, 2017. Examine whether the appeal is admissible with reference
to time limitation?

Identify the provisions governing further appeal on the orders of NCLAT under Section 423 of the
Companies Act, 2013.

Answer:

(1) Appeal from Orders of Tribunal: According to Section 421 of the Companies Act, 2013, any person
aggrieved by an Order of the Tribunal may prefer an appeal to the Appellate Tribunal. However, no
appeal shall lie to the Appellate Tribunal from an Order which was made by the Tribunal with consent
of parties.

Time period of appeal: Every appeal in the above case, shall be filed within a period of forty-five days
from the date on which a copy of the order of Tribunal is made available to the person aggrieved.

Page No. 185

Provided that the Appellate Tribunal may entertain an appeal after the expiry of the said period of
forty-five days, but within a further period not exceeding forty-five days, if it is satisfied that the
appellant was prevented by sufficient cause from filing the appeal within that period.

In the given situation, NCLT passed an order on 5 th October, 2017 without the consent of the parties
on the acts of oppression and mis-management in the affairs of the company and for the obtaining
certain relief measures.
JSK, a shareholder, aggrieved by an order of NCLT, can prefer an appeal in the NCLAT within 45 days
from the date on which a copy of the order of Tribunal is made available to the person aggrieved.
However, on reasonable ground this period may be further extended by 45 days i.e. within 90 days from
the date on which a copy of the order of Tribunal is received by JSK.
Further Appeal on the orders of NCLAT: Section 423 of the Companies Act, 2013 provides that any person
aggrieved by any order of the Appellate Tribunal may file an appeal to the Supreme Court within sixty
days from the date of receipt of the order of the Appellate Tribunal to him on any question of law arising
out of such order.
Provided that the Supreme Court may, if it is satisfied that the appellant was prevented by sufficient
cause from filing the appeal within the said period, allow it to be filed within a further period not
exceeding sixty days
Assumption: In the question, date of order of the NCLT may be taken as the date on which a copy of
the order of Tribunal is made available to the person aggrieved to answer the question within the
provided information.

6.Aug 2018

Mr. B. Dutt is the Managing Director of Food Plaza Restaurants Private Limited (FPRPL). FPRPL was
incorporated in furtherance of a Joint Venture Agreement (“JVA”) between Mr. B. Dutt and Jack India
Pvt. Limited(JIPL) in 2017, both having 50% of equal share in the said company. FPRPL was to be
governed by the terms and conditions set out in its Memorandum of Association and its Articles of
Association.
During the course, JIPL held the Board meeting, without giving prior notice of such meeting to Mr.
B. Dutt, took decision to remove Mr. B Dutt with an allegation of mismanagement of fund in FPRPL.
JIPL pressurised him to sell his shares at Rs. 5 crore, against Rs. 15 crore which is the fair market
price of Mr. B. Dutt shares.
Advise whether Mr. B. Dutt has right to claim any relief and would he succeed in obtaining relief from
Tribunal on the ground of oppression by JIPL?

Answer:

As per the given instance, the act of JIPL to remove Mr. B Dutt, a Managing director from FPRPL and
pressurizing him to sell his shares much below the fair market price is an act of oppression and
violations of Section 241and 242 of the Companies Act,2013. Mr. B Dutt was not given prior notice of
board meeting and no chance to disprove the false allegations made against him.

According to Section 242(2) the Tribunal Without prejudice to the generality of the powers under sub-
Page No. 186
section (1) can order for –
the regulation of conduct of affairs of the company in future;
a. the purchase of shares or interests of any members of the company by other members thereof or
by the company;
b. in the case of a purchase of its shares by the company, the consequent reduction of its share
capital;
c. restrictions on the transfer or allotment of the shares of the company;
d. the termination, setting aside or modification, of any agreement entered between the company
and the managing director, any other director or manager, upon such terms and conditions as
may, in the opinion of the Tribunal, be just and equitable in the circumstances of the case;
e. the termination, setting aside or modification of any agreement between the company and any
person other than those referred to in clause (e):

Provided that no such agreement shall be terminated, set aside or modified except after due notice and
after obtaining the consent of the party concerned;
f. the setting aside of any transfer, delivery of goods, payment, execution or other act relating to
property made or done by or against the company within three months before the date of the
application under this section, which would, if made or done by or against an individual, be
deemed in his insolvency to be a fraudulent preference;
g. removal of the managing director, manager or any of the directors of the company;
h. recovery of undue gains made by any managing director, manager or director during the period of
his appointment as such and the manner of utilisation of the recovery including transfer to Investor
Education and Protection Fund or repayment to identifiable victims;
i. the manner in which the managing director or manager of the company may be appointed
subsequent to an order removing the existing managing director or manager of the company made
under clause (h);
j. appointment of such number of persons as directors, who may be required by the Tribunal to
report to the Tribunal on such matters as the Tribunal may direct;
k. imposition of costs as may be deemed fit by the Tribunal;
l. Any other matter for which, in the opinion of the Tribunal, it is just and equitable that provision
should be made.
The above mentioned case, falls within the purview of the Section 241 and 242 of the Companies Act
2013, ensuring that the transfer of shares to the company (JIPL) by the member will not effect to the
interests of the company or any of its shareholders. It gives broad powers to the Tribunal, leading to the
establishment of its jurisdiction, even when a separate JVA exist.
Under Section 242(2) of the Companies Act, 2013, the Tribunal can pass an order for purchase of
shares/interest of any members of the company by other members thereof or by the company if it
thinks fit. Mr. B. Dutt can be reappointed by Tribunal as the Managing director of the company and it
can also issue orders for the future conduct of the company along with provision of just and equitable
relief to the applicant (i.e. Mr. B Dutt).

Page No. 187

7.May 2019

A group of shareholders consisting of 30 members decide to file a petition before the Tribunal for
relief against oppression and mismanagement by the Board of Directors of M/s. Aravalli
Manufacturing Company Limited having a paid up Share Capital of Rs. 1 crore.

The company has a total of 500 members and the group of 30 members holds one-tenth of the total
paid-up share capital accounting for one- fifteenth of the issued share capital. The grievance of the
group is that due to the mismanagement by the Board of Directors, the company is incurring losses and
has not declared any dividend for the past five years. In the light of the provisions of the Companies.
Act, 2013, please advise the group of shareholders regarding the admission of the petition and the
relief thereof.

Answer:
Section 244 of the Companies Act, 2013 provides the right to apply to the Tribunal for relief against
oppression and mis-management. This right is available only when the petitioners hold the prescribed
limit of shares as indicated below:

(1) In the case of company having a share capital, not less than 100 members of the Company or not
less than one tenth of the total number of its members whichever is less or any member or
members holding not less than one tenth of the issued share capital of the company, provided that
the applicant(s) have paid all calls and other dues on the shares.
(2) In the case of company not having share capital, not less than one-fifth of the total number of its
members.
As per the facts, a group of 30 members decided to file a petition. Total number of members are 500 &
one tenth of 500 will be 50 and lower of above is 50. Thus, the group of shareholders who decides to
file the petition are less than 50. However, the group of 30 members holds one-fifteenth of the issued
share capital which is less than the required one tenth of the issued share capital. In view of this, the
group is not having requisite number of shares and shareholding for being eligible to approach the
Tribunal for relief.
Also, the shareholders may not succeed in getting any relief from the tribunal as continuous losses
cannot, by itself, be regarded as oppression (Ashok Betelnut Co. P. Ltd. vs. M.K. Chandrakanth). Similarly,
the failure to declare dividend or payment of low dividends also does not amount to oppression. (Thomas
VeddonV.J. Vs. Kuttanad Rubber Co. Ltd.)

8.Nov 2018

MNC Private Ltd. is a Company in which there are six shareholders. Mr. Srinath, who is a director and
also the legal representative of a deceased shareholder holding less than one tenth of the share
capital the Company made a petition to the Tribunal for relief against oppression and
mismanagement. Examine under the provisions of the Companies Act, 2013 whether the petition
made by Mr. Srinath valid and maintainable?

Page No. 188

Answer:

1. According to section 244 of the Companies Act, 2013, in the case of a company having share
capital, the following member(s) have the right to apply to the Tribunal under section 241:
(a) Not less than 100 members of the company or not less than one-tenth of the
total number of members, whichever is less; or
(b) Any member or members holding not less than one-tenth of the issued share capital of the company
provided the applicant(s) have paid all the calls and other sums due on the shares.
2. Legal heir of the deceased shareholder with minority status is entitled to file the petition.
In the given case, there are six shareholders. As per the condition (a) above, 10% of 6
i.e. 1 (round off 0.6) satisfies the condition. Therefore, in the light of the provisions of the Act, a single
member (even the legal representative of a deceased shareholder) can present a petition to the
Tribunal, regardless of the fact that he holds less than one-tenth of the company’s share capital.
Thus, the petition made by Mr. Srinath is valid and maintainable.

9.RTP Nov-2018:
A group of depositors in M/s. Bright Limited, a listed company, appointed Mr. Fair, an advocate as a
representative to file an application in the National Company Law Tribunal (NCLT) on the behalf of
the depositors to bring a Class Action suit against the management of the company as they are of the
opinion that the management and conduct of affairs of the company are being conducted in a manner
which is prejudicial to the interest of the depositors being oppressive.

Examine in the given situation, whether the appointment of Mr. Fair is valid as regards to the filling of
the application before the Tribunal in the light to the provisions of the Companies Act, 2013?
Answer:
In the given instance, an appointment of Mr. Fair was made by a group of depositors of M/s. Bright
Limited (listed company), as their representative to bring a Class Action Suit against the management of
the Company.

The given problem will be dealt with Section 432 read with the 245(10) of the Companies Act, 2013.
Section 432 states that a party to any proceeding or appeal before the Tribunal or Appellate Tribunal as
the case may be, may appear in person or authorize one or more Chartered Accountant or Company
Secretaries or Cost Accountants or legal practioners or any other person to present his case before the
Tribunal or Appellate Tribunal as the case may be.
Whereas, Section 245(10) of the Companies Act, 2013, provides that an application may be filed or any
other action may be taken under this section by any person, group of persons or any association of
persons representing the persons affected by any act or omission, specified in section 245(1) subject to
the compliances of this section .

In view of the above, the appointment of Mr . Fair is valid and an application of Mr. Fair who is a
representative of depositors, will be admitted by the Hon’ble Tribunal, provided, the requirement of
minimum number of members filing the application under Section 245(3)(ii) is fulfilled.

Page No. 189

10.MTP Apr 2019

Mansi Ltd. with the issued and paid up capital of Rs. 8 crores consisting of 8,00,000 equity shares of
Rs. 100 each, has 600 members. A petition was submitted before the Tribunal signed by 65 members
holding 20,000 equity shares of the company for the purpose of relief against oppression and
mismanagement by the majority shareholders. Examining the below situations in the light of the
provisions of the Companies Act, 2013:

(i) Whether the petition filed by the signed members is maintainable.

If subsequently 40 members, who had signed the petition, withdrew their consent. The impact on the
maintainability of the above petition.

Answer:

Right to apply for oppression and mismanagement: As per the provisions of Section 244 of the
Companies Act, 2013, in the case of a company having share capital, members eligible to apply for
oppression and mismanagement shall be lowest of the following:

(i) 100 members; or

(ii) 1/10th of the total number of members; or
(iii) Members holding not less than 1/10th of the issued share capital of the company.

The share holding pattern of Mansi Limited is given as follows:

Rs. 8,00,00,000 equity share capital held by 600 members
Particulars of the petition alleging oppression and mismanagement made by members are as follows:
(i) No. of members making the petition – 65
(ii) Amount of share capital held by members making the petition - - Rs. 20,00,000 The petition shall be
valid if it has been made by the lowest of the following:
100 members; or
60 members (being 1/10th of 600); or
Members holding Rs. 80,00,000 share capital (being 1/10th of Rs. 8,00,00,000)
As it is evident, the petition made by 65 members meets the eligibility criteria specified under section
244 of the Companies Act, 2013 as it exceeds the minimum requirement of 60 members in this case.
Therefore, the petition is maintainable.
The consent to be given by a shareholder is reckoned at the beginning of the proceedings. The withdrawal
of consent by any shareholder during the course of proceedings shall not affect the maintainability of the
petition [Rajamundhry Electric Corporation Vs. V. Nageswar Rao A.I.R.].

11.RTP May 2019

M/s DJ Limited, a listed company, as per the audited financial statements as on 31st March, 2018 is
having issued and paid-up equity share capital comprising of 10 lakhs shares of Rs. 10 each and issued
and paid up preference share capital of 5 Lakhs shares of Rs. 10 each respectively. The members of the

Page No. 190

company after complying with the provisions of section 169 of the Companies Act, 2013 removed one
Mr. Satish from the directorship of the company on 1st August 2018 before the completion of his term
of office. Mr. Satish is also one of the members of the company holding 110000 fully paid-up equity
shares. Mr. Satish has alleged oppression on his removal and has moved the jurisdictional Honourable
National Company Law Tribunal (NCLT) under section 241 read with section 244 of the Companies Act,
2013. The Board of Directors of the company is of the opinion that the application is not maintainable
as per the provisions of Section 244 of the Companies Act, 2013. Decide.

Also, state if any other recourse that is available with Mr. Satish under the provisions of the
Companies Act, 2013.
Answer
According to section 244(1) (a) of the Companies Act, 2013, the following members of a company shall
have the right to apply under section 241, namely:—

-in the case of a company having a share capital , not less than one hundred members of the company
or not less than one-tenth of the total number of its members, whichever is less, or any member or
members holding not less than one-tenth of the issued share capital of the company, subject to the
condition that the applicant or applicants has or have paid all calls and other sums due on his or their
shares.
However, the Tribunal may, on an application made to it in this behalf, waive all or any of the
requirements specified above so as to enable the members to apply under section 241.

In the instant case, the equity share capital of the company is Rs.1 crore (10 lakh shares of
Rs. 10 each) and preference share capital is Rs. 50 Lakh (5 lakh shares of Rs. 10 each). The total issued and
paid up share capital is Rs. 1.50 crore comprising of 15 lakh shares.
Mr. Satish is holding 110000 fully paid up equity shares. His holding is less than one-tenth of the issued
share capital of the company [1/10th of 15 Lakh i.e. 150000 shares].
Hence, his application is not maintainable as per provisions of section 244 of the Companies Act, 2013
and therefore the opinion of Board of directors is correct.
However, as per proviso to section 244(1), Mr. Satish may make an application to the Tribunal in this
behalf for the waiver of the above condition so that he may apply under section 241.

12.MTP Nov 2019

The members of company with no paid up share capital, filed a complaint against change in the
management of the company due to which it was likely that the affairs of the company will be
conducted in a manner that it will be prejudicial to the interest of its 25 members. Total number of
members of companywere 100. On inquiry and investigation of the complaint, having a reasonable
ground to believe that the transfer or disposal of assets of the companymay be against the interests of
its shareholders. The Tribunal passed an order that such transfer or disposal of assets shall not be
made during the period of one year of such order.

Evaluate on the basis of the given facts, the following situations according to the Companies Act, 2013:

Page No. 191

(i) Eligibility of the members to file a complaint.
(ii) Where if the management dispose of the certain assets in contravention to the order of the
Tribunal.

Answer

Section 244 of the Companies Act, 2013 provides the eligibility of members who hold the right to file
the application under section 241 for oppression and mismanagement with the Tribunal. These
qualification as provided in section 244 ensure that only the persons with sufficient interest in the affairs
of the company can file the petition under section 241 of the Act. According to the section in the case of
a company not having a share capital, not less than one-fifth of the total number of its members are
eligible to make an application before the Tribunal. Where any members

of a company are entitled to make an application under Section 244 (1), any one or more of them having
obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all
of them.

In the given scenario, requirement of minimum numbers of members is fulfilled i.e. it is more than 1/5th
of the total number of its members of the company (1/5x 100= 20). So the members of the company are
eligible to file the petition to tribunal under section 241.
(ii) According to section 221 of the Companies Act, 2013, if it appears to the Tribunal, on a complaint
made by members as specified under section 244(1) that the removal, transfer or disposal of funds,
assets, properties of the company is likely to take place in a manner that is prejudicial to the interests of
its members, Tribunal may order that such transfer, removal or disposal shall not take place during such
period not exceeding three years as may be specified in the order or may take place subject to such
conditions and restrictions as the Tribunal may deem fit.
Here in the given case, management disposed of the certain assets within 1 year of such order of
Tribunal. So accordingly, the company shall be punishable with fine which shall not be less than one
lakh rupees but which may extend to twenty-five lakh rupees and every officer of the company who is
in default shall be punishable with imprisonment for a term which may extend to three years or with
fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with
both.

13. Astistav Private Limited is a company with ten shareholders. A member holding less than one-tenth
of the share capital of the company apply to the Tribunal for relief against oppression and
mismanagement? State whether a member have a right to apply to the tribunal in above situation:

(a) A single Member cannot apply to the Tribunal for relief against oppression and mismanagement
(b) A member cannot apply as he is holding less than one-tenth of the share capital of the company
(c) A member can apply being one-tenth of the total number of members.
(d) A member cannot apply as the requirement of atleast hundred members is not complied with.
Answer: c) Hint: Under section 244 of the Companies Act, 2013, in the case of a company having
share capital, the following member(s) have the right to apply to the Tribunal under section 241:

Page No. 192

 (a) Not less than 100 members of the company or not less than one-tenth of the total number of
members, whichever is less; or
(b) Any member or members holding not less than one-tenth of the issued share capital of the
company provided the applicant(s) have paid all the calls and other sums due on the shares.
In the given case, since there are ten shareholders. As per the condition (a) above, 10% of 10 i.e. 1
satisfies the condition. Therefore, a single member can present a petition to the Tribunal, regardless of
the fact that he holds less than one-tenth of the company’s share capital.

14. With whom will the Central Government file an application if it is of the opinion that such a scheme
is not in public interest or in the interest of the creditors?

a) Cannot move an application

b) it may file an application before the Tribunal
c) it may file an application before the Parliament
d) It may be through Special Petition before Supreme Court.
Answer: b) Hint: As per section 241(2), the Central Government, if it is of the opinion that the affairs of
the company are being conducted in a manner prejudicial to public interest, it may itself apply to the
Tribunal for an order under this Chapter XVI of the Companies Act, 2013.

15. ABC Private Limited is a company in which there are eight shareholders. Can a member holding less
than one-tenth of the share capital of the company apply to the Tribunal for relief against oppression
and mismanagement? Give your answer according to the provisions of the Companies Act, 2013.

Answer: Under section 244 of the Companies Act, 2013, in the case of a company having share capital,
the following member(s) have the right to apply to the Tribunal under section 241:

(a) Not less than 100 members of the company or not less than one-tenth of the total number of
members, whichever is less; or
(b) Any member or members holding not less than one-tenth of the issued share capital of the
company provided the applicant(s) have paid all the calls and other sums due on the shares.
In the given case, since there are eight shareholders. As per the condition (a) above, 10% of 8 i.e. 1
satisfies the condition. Therefore, a single member can present a petition to the Tribunal, regardless of
the fact that he holds less then one-tenth of the company’s share capital

16. The issued and paid up capital of MNC Limited is Rs. 5 crores consisting of 5,00,000 equity shares
of Rs. 100 each. The said company has 500 members. A petition was submitted before the Tribunal
signed by 80 members holding 10,000 equity shares of the company for the purpose of relief against
oppression and mismanagement by the majority shareholders. Examining the provisions of the
Companies Act, 2013, decide whether the said petition is maintainable. Also explain the impact on the
maintainability of the above petition, if subsequently 40 members, who had signed the petition,
withdrew their consent.

Page No. 193

Answer:

Right to apply for oppression and mismanagement: As per the provisions of Section 244 of the Companies
Act, 2013, in the case of a company having share capital, members eligible to apply for oppression and
mismanagement shall be lowest of the following:

100 members; or
1/10th of the total number of members; or
Members holding not less than 1/10th of the issued share capital of the company. The share holding
pattern of MNC Limited is given as follows:
Rs. 5,00,00,000 equity share capital held by 500 members
The petition alleging oppression and mismanagement has been made by some members as follows:
(i) No. of members making the petition – 80
(ii) Amount of share capital held by members making the petition – Rs. 10,00,000 The petition shall be
valid if it has been made by the lowest of the following:
100 members; or
50 members (being 1/10th of 500); or
Members holding Rs. 50,00,000 share capital (being 1/10th of Rs. 5,00,00,000)
As it is evident, the petition made by 80 members meets the eligibility criteria specified under section
244 of the Companies Act, 2013 as it exceeds the minimum requirement of 50 members in this case.
Therefore, the petition is maintainable.
The consent to be given by a shareholder is reckoned at the beginning of the proceedings. The withdrawal
of consent by any shareholder during the course of proceedings shall not affect the maintainability of the
petition [Rajamundhry Electric Corporation Vs. V. Nageswar Rao A.I.R.].

17. A group of shareholders consisting of 25 members decide to file a petition before the Tribunal for
relief against oppression and mismanagement by the Board of Directors of M/s Fly By Night Operators
Ltd. The company has a total of 300 members and the group of 25 members holds one–tenth of the
total paid –up share capital accounting for one-fifteenth of the issued share capital. The main
grievance of the group is the due to mismanagement by the board of directors, the company is
incurring losses and the company has not declared any dividends even when profits were available in
the past years for declaration of dividend. In the light of the provisions of the Companies Act, 2013,
advise the group of shareholders regarding the success of (i) getting the petition admitted and (ii)
obtaining relief from the Tribunal.

Answer:

Section 244 of the Companies Act, 2013 provides the right to apply to the Tribunal for relief against
oppression and mis-management. This right is available only when the petitioners hold the prescribed
limit of shares as indicated below:

Page No. 194

(i) In the case of company having a share capital, not less than 100 members of the Company or not
less than one tenth of the total number of its members whichever is less or any member or
members holding not less than one tenth of the issued share capital of the company, provided that
the applicant(s) have paid all calls and other dues on the shares.
(ii) In the case of company not having share capital, not less than one-fifth of the total number of its
members.
Since the group of shareholders do not number 100 or hold 1/10th of the issued share capital or
constitute 1/10th of the total number of members, they have no right to approach the Tribunal for
relief.
However, the Tribunal may, on an application made to it waive all or any of the requirements specified
in (i) or (ii) so as to enable the members to apply under section 241.
As regards obtaining relief from Tribunal, continuous losses cannot, by itself, be regarded as oppression
(Ashok Betelnut Co. P. Ltd. vs. M.K. Chandrakanth).

Similarly, failure to declare dividends or payment of low dividends also does not amount to oppression.
(Thomas Veddon V.J. (v) Kuttanad Robber Co. Ltd).

Thus, the shareholders may not succeed in getting any relief from Tribunal.
18. A group of members of XYZ Limited has filed a petition before the Tribunal alleging various acts of
oppression and mismanagement by the majority shareholders of the company. The Petitioner group
holds 12% of the issued share capital of the company. During the pendency of the petition, some of the
petitioner group holding about 5% of the issued share capital of the company wish to disassociate
themselves from the petition and they along with the other majority shareholders have submitted
before the Tribunal that the petition may be dismissed on the ground of non- maintainability. Examine
their contention having regard to the provisions of the Companies Act, 2013.

Answer:

The argument of the majority shareholders that the petition may be dismissed on the ground of non-
maintability is not correct. The proceedings shall continue irrespective of withdrawl of consent by some
petitioners. It has been held by the Supreme Court in Rajmundhry Electric Corporation vs. V. Nageswar
Rao, AIR (1956) SC 213 that if some of the consenting members have subsequent to the presentation of
the petition withdraw their consent, it would not affect the right of the applicant to proceed with the
petition. Thus, the validity of the petition must be judged on the facts as they were at the time of
presentation. Neither the right of the applicants to proceed with the petition nor the jurisdiction of
Tribunal to dispose it of on its merits can be affected by events happening subsequent to the
presentation of the petition.

19. “Allotment of shares by the directors of the company by which the existing majority is reduced to
minority.” As per provisions of the Companies Act, 2013, the above act of the company should be
classified as……..? (1 Mark) (mtp-NOV 2020)

(a) Oppression

Page No. 195

(b) Mismanagement

(c) Material change in the company

(d) All of the above

ANSWER- a

20. (A) B, S, and D hold 33%, 33% and 34% of equity shares of BSD Private Limited respectively. S and D
are directors and D is looking after the whole of the management and administration of the company
without being formally appointed as a Managing Director. Since from last three years the company is
incurring heavy losses and could not declare a dividend. Being aggrieved, B filed a complaint before the
Tribunal on the grounds of oppression and mismanagement of the company such as running of a
company continuously in losses, non-declaration of dividend and managing the affairs of the company
by a director who has not been formally appointed as a managing director. The complaint is thereby
made soliciting the directors for payment of compensation by way of salary to him as like other
directors and such other direction as may be deemed suitable by the Tribunal to remove oppression
and mismanagement of the Company. Examine the maintainability of his complaint in law in the light
of the provisions of the Companies Act, 2013.
(8 Marks) (mtp-II- july 2021)

ANSWER

Mr. B has filed a complaint before the Tribunal on the grounds of oppression and mismanagement of the
BSD Private Limited on the following issues:

(i) Running of Company continuously in losses:

As regards obtaining relief from Tribunal, continuous losses cannot, by itself, be regarded as oppression
(Ashok Betelnut Co. P. Ltd. vs. M.K. Chandrakanth).

(ii) Non declaration of dividend:

Failure to declare dividends or payment of low dividends also does not amount to oppression. (Thomas
Veddon V.J. (v) Kuttanad Robber Co. Ltd).

(iii) Managing the affairs of the Company by a director who has not been formally appointed as a
Managing Director:
Where a person without being so appointed, was acting as a Managing Director and was discharging his
functions as such, whether with or without the knowledge of the members, a member cannot claim that
it was an act of oppression, by filing an application with the Tribunal.

(iv) Payment of Compensation by way of Salary

Mr. B has filed a complaint soliciting the direction for payment of compensation by way of salary to him
as like other directors and such other directions as may be deemed suitable by the Tribunal to remove
oppression and mismanagement of the Company. But as per decided case laws, shareholders can share
the dividend of the Company, if it is declared but cannot seek directions to be compensated. The payment
of salary is a question that concerns the Board of Directors and not the Tribunal.

Page No. 196

Hence, Mr. B neither may succeed in getting any relief from Tribunal nor getting any compensation by
way of salary.

21. (A) Investigation proceeding under the provisions of the Companies Act, 2013 is being carried out
against Fishy Ltd. During the investigation, the Tribunal has a reasonable ground to believe that a
removal, transfer or disposal of funds, assets or properties of the Company is likely to take place in a
manner that would be prejudicial to the interests of the Company. In this connection, the Tribunal
requested the Company's legal advisers and the Bankers respectively to disclose and furnish a copy of
the communication made by them to the Company. But they refused to disclose any information.
Under the circumstances, the Tribunal wishes to pass an order to:

(i) Freeze the assets of the Company.

(ii) Punish the Company for the contravention, if any of the order of Tribunal.

(iii) Compel the legal advisers and the bankers to provide the required information.
In the light of the provisions of the Companies Act, 2013 analyse whether the Tribunal has the power to
do so in respect of the above situations. (4 Marks)
(past exam jan 2021)

(B) Fifteen members of KUN Limited holding fifteen percent paid-up share capital (who have paid all
calls and other sums due on their shares) of the company applied to the Tribunal under Section 241 of
the Companies Act, 2013 for relief from oppression on the ground that the affairs of the company are
being conducted in a manner prejudicial to their interest. The Tribunal admitted the application and
upon enquiry found the allegation to be genuine. There upon the Tribunal on 1st October, 2020,
ordered for termination of Mr. BAP, the Managing Director of the company, with immediate effect. Mr.
BAP was appointed as the Managing Director of the company for a period of five years with effect from
1st April, 2017 having a clause in his letter of appointment that he would be entitled for compensation
for the remaining period; in case his services are terminated by the company before expiry of his
stipulated term of service. Mr. BAP claimed compensation for the remaining term of one and half year.
KUN Limited denied to pay the compensation but offered him to re-assume his office again after lapse
of a period of three years from 1st October, 2020. Referring to and analyzing the relevant provisions of
the Companies Act, 2013, decide, whether the claim of Mr. BAP is tenable and proposal of KUN Limited
is valid. (4 Marks) (past exam jan 2021)

Answer

(A) (i) As per Section 221 of the Companies Act, 2013, where it appears to National Company Law Tribunal
on reasonable ground to believe that removal or transfer or disposal of funds, assets or properties of
company is likely to take place in manner prejudicial to interests of company or its shareholders or
creditors or in public interest,
the Tribunal may by order direct that such transfer, removal or disposal shall not take place till three
years as may be specified in the order or may take place subject to such conditions and restrictions as the
Tribunal may deem fit.
Hence, the Tribunal may pass an order to freeze the assets of the company.

Page No. 197

(ii) In case of any removal, transfer or disposal of funds, assets, or properties of the company in
contravention of the order of the Tribunal as specified above the company shall be punishable with fine
which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees.
(iii) In requirement with Section 227 of the Companies Act, 2013 even during an investigation, the legal
adviser cannot be compelled to provide information of any privileged communication made to him in that
capacity, except as respects the name and address of his client, or by the bankers of any company, body
corporate, or other person, of any information as to the affairs of any of their customers, other than such
company, body corporate, or person, to the Tribunal or to the Central Government or to the Registrar or
to an inspector appointed by the Central Government.
Hence, the legal advisers and bankers of Fishy Ltd. cannot be compelled to provide required information.

(B) As per the provisions of section 243(1) of the Companies Act, 2013, where an order made under
section 242 terminates, sets aside or modifies an agreement such as is referred to in sub section (2) of
that section:
(a) Such order shall not give rise to any claims whatever against the company by any person for damages
or for compensation for loss of office or in any other respect either in pursuance of the agreement or
otherwise;
(b) No managing director or other director or manager whose agreement is so terminated or set aside
shall, for a period of five years from the date of the order terminating or setting aside the agreement,
without the leave of the Tribunal, be appointed, or act, as managing director or other director or manager
of the company.

Provided that the Tribunal shall not grant leave under this clause unless notice of the intention to apply
for leave has been served on the Central Government and that Government has been given a reasonable
opportunity of being heard in the matter.
In terms of the provisions stated above, the contention of Mr. BAP is not tenable since he will not be
eligible to get any compensation.
KUN Limited’s proposal offering Mr. BAP to resume his office before the expiry of a period of three years
is also not valid since there is a restriction of a period of five years from the date of termination of his
service.
But, with the leave of the Tribunal, Mr. BAP can be appointed, or act, as the Managing Director of the
company, provided that the Tribunal shall not grant leave under this clause unless notice of the intention
to apply for leave has been served on the Central Government and that Government has been given a
reasonable opportunity of being heard in the matter.

22. Case scenario 1 (RTP JULY 2021)

Balfor Ltd., is an unlisted company, having total 70 members, with a paid up capital of Rs. 42,00,000,
having turnover of Rs. 200 crore, as per the audited financial statements for the year ended on 31st
March, 2020.

5 members holding in total 4% stake in the company, met in person to discuss about the oppression
and mismanagement going on in Balfor Ltd. and to do something about it. One of the members, Mr.
Ravi, suggested that we five members should file a class action application to the Tribunal to get a
resolution in this matter, to which another member, Mr. Jay, told that he is in contact with 3 other
members of the company, holding in total 3% stake, who are also finding the activities going on in the

Page No. 198

company to be unjust. So, five plus three other members i.e. 8 members in total, will be able to file an
application to the Tribunal under section 244 of the Companies Act, 2013.

The application of complaint for oppression and mismanagement was filed to the Tribunal on 4th June,
2020, with the consent of aforesaid 8 members of the company. The said application provided the
details of an agreement made by Balfor Ltd. with Mr. Dev, a relative of director of Balfor Ltd., Mr. Raj,
with respect to continuous supply of raw materials to Balfor Ltd., for which Mr. Raj, had received
certain commission from Mr. Dev, in cash, for offering the contract to him. Also, another director, Mr.
Jayesh, had improperly transferred a property of Balfor Ltd. on 6th March, 2020, to Mr. Prakash.

The Tribunal on receipt of such application, made an order, directing investigation into the affairs of
Balfor Ltd. Also, the agreement made with Mr. Dev was ordered to be terminated after giving notice to
Mr. Dev and obtaining his consent. However, no compensation was ordered to be paid to Mr. Dev for
such cancellation of agreement. The contract with respect to property transferred by Mr. Jayesh was
also ordered to be set aside, as it would have been deemed to be a fraudulent preference, in case such
transaction was made by an individual in his insolvency.

Simultaneously, the Central Government ordered for the investigation into the affairs of Balfor Ltd., on
receipt of the order from the Tribunal and the task of such investigation was assigned to the Serious
Fraud Investigation Office. The Director of Serious Fraud Investigation Office, on getting such order
from the Central Government, designated 3 inspectors for such investigation and soon, the
investigation got started by the designated persons.

One of the Investigating officers, Mr. Vaibhav, issued summons, to 2 employees, of Balfor Ltd., Mr.
Karan and Mr. Arjun, respectively, as well as, to Mr. Daya, an employee of Kafor Ltd., an associate
company of Balfor Ltd., after taking the requisite approvals.

The aforesaid persons attended at the place at which they were summoned by Mr. Vaibhav and were
examined on oath, one after the other. During the said examination, Mr. Vaibhav, took down notes in
writing and he read over the notes taken by him, to all the persons examined, after the end of
examination. After hearing the said notes, Mr. Karan and Mr. Arjun, signed the document on which
such notes were written but Mr. Daya, refused to sign such document without any reasonable cause for
the same, on the same day, but then he thought there would be no issue in signing and so he signed the
same after 20 days.
Mr. Vaibhav, forwarded the notes taken by him to the Assistant Director of Serious Fraud Investigation
Office, Mr. Ramanuj, and on the basis of such notes, he derived that Mr. Arjun has committed an
offence under section 447 of the Companies Act, 2013 which Mr.

Ramanuj reconfirmed with Mr. Vaibhav, via email.

Mr. Ramanuj, accordingly, passed an order for arrest of Mr. Arjun, after recording in writing the
reasons for such arrest and he immediately forwarded the copy of order of such arrest to the
concerned authority along with the document containing notes taken by Mr. Vaibhav at the time of
examination of Mr. Arjun, which indicated that he has committed an offence under section 447 of the
Companies Act, 2013.

Page No. 199

Balfor Ltd., on coming to know of such arrest of Mr. Arjun, wanted to give termination to him and also
wanted to demote Mr. Karan to position of junior assistant from his position of senior assistant in the
company, during the pendency of investigation and for that purpose it made an application to the
Tribunal for the same on 10th October, 2020.

In response to the said application from Balfor Ltd., the Tribunal passed an order on 26th October, 2020
allowing the termination to be given to Mr. Arjun but it objected to the decision of the company for
reduction in rank of Mr. Karan from his current position, against which Balfor Ltd. filed an application
with the appellate tribunal on 15th November, 2020.

Multiple Choice Questions:

1. State in the light of the given facts , whether, the five members holding in total 4% stake in Balfor
Ltd., or the eight members, holding in total 7% stake in Balfor Ltd., were eligible for filing application
for class action or/ and u/s 244, respectively, of the Companies Act, 2013?

(a) For filing application for class action, 5 members were eligible and also for filing application u/s 244
of the Companies Act, 2013, 8 members were eligible.

(b) For filing application for class action, 5 members were not eligible and also for filing application u/s
244 of the Companies Act, 2013, 8 members were not eligible.

(c) For filing application for class action, 5 members were eligible but for filing application u/s 244 of
the Companies Act, 2013, 8 members were not eligible.
(d) For filing application for class action, 5 members were not eligible but for filing application u/s 244
of the Companies Act, 2013, 8 members were eligible.

ANSWER- a

2. Whether the decision of Tribunal can be considered as valid with respect to termination of
agreement made by Balfor Ltd. with Mr. Dev as well as setting aside the contract of transfer of
property, respectively?

(a) The decision of tribunal for termination of agreement made by Balfor Ltd. with Mr. Dev can be
considered as valid. Also, the decision of setting aside the contract of transfer of property, can be
considered as valid as such transfer was made within 6 months before the date of making application
to the tribunal.

(b) The decision of tribunal for termination of agreement made by Balfor Ltd. with Mr. Dev cannot be
considered as valid as no compensation was ordered to be paid to Mr. Dev. Also, the decision of setting
aside the contract of transfer of property, cannot be considered as valid as such transfer was not made
within 90 days before the date of making application to the tribunal.

(c) The decision of tribunal for termination of agreement made by Balfor Ltd. with Mr. Dev can be
considered as valid. Also, the decision of setting aside the contract of transfer of property, can be
considered as valid as such transfer was made within 3 months before the date of making application
to the tribunal.

Page No. 200

(d) The decision of tribunal for termination of agreement made by Balfor Ltd. with Mr. Dev cannot be
considered as valid as no compensation was ordered to be paid to Mr. Dev. However, the decision of
setting aside the contract of transfer of property,

can be considered as valid as such transfer was made within 3 months before the date of making
application to the tribunal.

ANSWER- c

3. Prior approval of which authority would have been sufficient for Mr. Vaibhav for examining Mr.
Daya, on oath, and how much maximum amount of fine could be levied on Mr. Daya for refusing to sign
the document containing the notes taken down by Mr. Vaibhav?

(a) Prior approval of Director of Serious Fraud Investigation Office would have been sufficient for Mr.
Vaibhav and maximum amount of fine that could be levied on Mr. Daya is Rs. 1,00,000.

(b) Prior approval of Central Government would have been sufficient for Mr. Vaibhav and maximum
amount of fine that could be levied on Mr. Daya is Rs. 40,000.

(c) Prior approval of Director of Serious Fraud Investigation Office would have been sufficient for Mr.
Vaibhav and maximum amount of fine that could be levied on Mr. Daya is Rs. 1,40,000.

(d) Prior approval of Central Government would have been sufficient for Mr. Vaibhav and no fine that
could be levied on Mr. Daya as he has signed the said document within 30 days of being examined on
oath.

ANSWER- c

4. Whether Mr. Ramanuj was having the authority to exercise power to make an order of arrest of Mr.
Arjun on the basis of notes of examination received from Mr. Vaibhav and to which authority, Mr.
Ramanuj would have forwarded the copy of arrest order along with the document containing notes?

(a) No, as such notes can’t be considered as a material or evidence in his possession to be used against
Mr. Arjun and Mr. Ramanuj would have forwarded the copy of arrest order along with the document
containing notes to the Serious Fraud Investigation Office.

(b) Yes, as such notes constitute valid evidence to be used against Mr. Arjun and Mr. Ramanuj would
have forwarded the copy of arrest order along with the document containing notes to the Central
Government.

(c) No, as such notes can’t be considered as a material or evidence in Mr. Ramanuj’s possession to be
used against Mr. Arjun and Mr. Ramanuj would have forwarded the copy of arrest order along with the
document containing notes to NCLT.

(d) Yes, as such notes constitute valid evidence to be used against Mr. Arjun and Mr. Ramanuj would
have forwarded the copy of arrest order along with the document containing notes to the Serious
Fraud Investigation Office.
Page No. 201
ANSWER- d

5. What was the last date available with Tribunal to give response to the application made by Balfor
Ltd. with respect to its employees as well as with Balfor Ltd. to file appeal with the appellate tribunal?

(a) 10th November, 2020 and 26th November, 2020, respectively.

(b) 9th November, 2020 and 25th November, 2020, respectively.

(c) 10th November, 2020 and 25th December, 2020, respectively.

(d) 9th November, 2020 and 26th November, 2020, respectively.

ANSWER- b

23. Mr. M, a member of XYZ Ltd. filed an application before the Tribunal complaining of oppression and
mismanagement w.r.t. an agreement entered by XYZ Ltd. effecting the interest of the company. Vide
order passed by the Tribunal under section 242 of the Companies Act, 2013, terminated the said
agreement. The agreement was entered by Mr. H and Mr. G who was managing director and the
executive director of the XYZ Ltd. Mr. Rasik, with whom the XYZ Ltd entered the agreement, filed a
petition claiming the loss caused due to termination of the said agreement. Also state the legal position
of Mr. H and Mr. G holding their place of office in the said situation. Examine the given facts and
address the issues in terms of the relevant provisions of Companies Act, 2013. ( RTP JULY 2021)

ANSWER

As per section 243 of the Companies Act, 2013 , where an order made under section 242 terminates, sets
aside or modifies an agreement which was entered by the company, were in a manner prejudicial to the
interests of the company,—
(a) such order shall not give rise to any claims whatever against the company by any person for damages
or for compensation for loss of office or in any other respect either in pursuance of the agreement or
otherwise;
(b) no managing director or other director or manager whose agreement is so terminated or set aside
shall, for a period of five years from the date of the order terminating or setting aside the agreement,
without the leave of the Tribunal, be appointed, or act, as the managing director or other director or
manager of the company:
Accordingly, Mr. Rasik, with whom the XYZ Ltd entered the agreement, filed a petition claiming the loss
caused due to termination of the said agreement, is not viable. Further, Mr. H and Mr. G, managing
director and the executive director of the XYZ Ltd. who entered agreement with Mr. Rasik which was
ordered to be terminated by the Tribunal, shall not act as the managing director or other director or
manager of the company, for a period of five years from the date of the order terminating or setting aside
the agreement, without the leave of the Tribunal

Page No. 202

 7 Winding Up

ATTEMPTS
MAY NOV MAY NOV NOV JAN JULY NOV
COVERAGE
2018 2018 2019 2019 2020 2021 2021 2021

STUDY Q.- 1, 7, 13, 14

MAT

PAST NO NO
Q-6 Q-6, 7 Q-12 Q-18 ------
EXAMS QUES QUES

Q-1, 2,8, NO NO
MTP Q-4 Q-6 Q-16, 17 -----
9 QUES QUES

NO
RTP Q-3 Q-5 Q-10 Q-11 NO QUES Q-19
QUES

Page No. 203

Multiple Choice Questions

1.MTP Mar 2019 QN no 18 and Study Material

When can a winding up order not be called a notice of discharge?

(a) when the business of the company is continued

(b) when the business of the company is closed since 2 years.
(c) On the discretion of the management
(d) Till the appointment of a provisional liquidator

Answer: Option A

2.MTP April 2019 Qn no 16

Who shall make an application to the Tribunal for constitution of a winding up committee to assist and
monitor the progress of liquidation proceedings by the Company Liquidator in carrying out the
function?

a) No application required
b) Company Liquidator
c) Management
d) Members

Answer: Option B

3.RTP May 2018

Winding up proceedings has been commended by the Tribunal against Paramount Limited, a
government company (Central Government is a member). Even after completion of one year from the
date of commencement of winding up proceedings, it has not possible to conclude the same. The
liquidator is of the opinion that the statement shall be filed with tribunal and registrar only.

(i) Decide validity to the opinion made by the liquidator and penalty that can be imposed on the
liquidator for contravention of the provision as per the Companies Act, 2013.
(ii) Discuss, if the Paramount Limited is a non-government company?
Answer:

Section 348 of the Companies Act, 2013 states that, if the winding up of a company is not concluded
within one year after its commencement then the Company Liquidator shall file a statement in such
form containing such particulars as may be prescribed. Such statement shall be filled within two months
of the expiry of such year and it shall be filled continuously thereafter until the winding up is concluded,

Page No. 204

at intervals of not more than one year or at such shorter intervals as may be prescribed. The statement
shall be duly audited, by a person qualified to act as auditor of the company and position of with respect
to the proceedings in the liquidation.

The statement shall be filled with the tribunal in the case of a winding up by the Tribunal. A copy shall
simultaneously be filed with the Registrar and shall be kept by him along with the other records of the
company.
Where a statement relates to a Government company in liquidation, the Company Liquidator shall
forward a copy thereof,

 to the Central Government, if that Government is a member of the Government company;

 to any State Government, if that Government is a member of the Government company; or
 to the Central Government and any State Government, if both the Governments are members of
the Government company.

Paramount Limited is a Government Company

In the current scenario, we can understand that the Paramount Limited is a government company in
which Central Government is a member and hence statement is also required to file to the Central
Government along with the Tribunal and Registrar. So, the opinion by the Company Liquidator is not
tenable in the eyes of the law and he is liable for penal action under the Act.
The company liquidator shall be punishable with fine which may extend to five thousand rupees for every
day during which the failure continues.

Paramount Limited is a Non-Government Company

In the current scenario, the Paramount Limited is a non-government company hence statement is only
required to file with the Tribunal and Registrar only. So, the opinion by the Company Liquidator is
tenable in the eyes of the law and he is not liable for any penal action under the Act.

March 2018

4.Skyline Ltd. was ordered to be wound up compulsory on a petition filed on 10th February, 2018
before Tribunal. The official liquidator who has taken control for the assets and other records of the
company has noticed that the Managing Director of the company has transferred certain properties
belonging to the company to one of its creditor “Vansh (Pvt.) Ltd”, in which his son was interested.
This was causing huge monetary loss to the company. The sale took place on 15th September, 2017.

(i) Examine what action the official liquidator can take in this matter having regard to the provisions
of the Companies Act, 2013.
(ii) Determine the rights and liabilities of fraudulently preferred persons by mortgage of charge of
property to him to secure the company’s debt.

Answer:

Page No. 205

(i) The official liquidator can invoke the provisions contained in Section 328 of the Companies Act,
2013 to recover the sale of assets of the company. According to Section 328, if the Tribunal is
satisfied that there is a preference transfer of property, movable or immovable, or any delivery of
goods, payment, execution made, taken or done by or against a company within six months before
making winding up application, the Tribunal may order as it may think fit and may declare such
transaction invalid and restore the position.

Since in the present case, the sale of immovable property took place on 15 th September, 2017
and the company went into liquidation on an application fil ed on 10th February, 2018 i.e., within 6
months of making winding up application and such transfer of property has resulted a loss to the
company.
The official liquidator will be able to succeed in proving the case under Section 328 by way of
fraudulent preference as the property was sold to a Vansh (Pvt.) company, a creditor in which the
son of the ex-managing director was interested.
Hence, the transaction made will be regarded as invalid and restore the position of the company as if
no transfer of immovable property has been made.
(ii) Determination of rights and liabilities of fraudulently preferred persons: According to section 331
of the Companies Act, 2013, where a company is being wound up and anything made, taken or
done after the commencement of this Act is invalid under section 328 as a fraudulent preference of
a person interested in property mortgaged or charged to secure the company’s debt, then, without
prejudice to any rights or liabilities arising, apart from this provision, the person preferred shall be
subject to the same liabilities, and shall have the same rights, as if he had undertaken to be
personally liable as a surety for the debt, -
 to the extent of the mortgage or charge on the property, or
 the value of his interest, Whichever is less.

RTP Nov-18:

5.M/s Sagar Retail Mega Mart Ltd. applied for winding up on 1 st April, 2018 before the Honourable
Tribunal by passing a special resolution as per the provision of section 271(1)(a) of the Companies Act,
2013 on account of fall in business and continued losses but not due to inability to pay debts. The
company was in the business of ordinary retail trade of multiple branded goods. A few shareholders
of the company have alleged before the Honourable Tribunal that the company had failed to
maintain proper books of accounts for over a period of more than three years immediately prior to
the date of winding up application and the sole reason cited by them in support of their allegation is
that no proper statements of all goods sold and purchased by the company have been kept as such
every officer in default must be punished as per the provisions of the Companies Act, 2013. Mr. Ravi
the CFO and officer in default do not refute the allegation of non-maintenance but is of the opinion
that this act as per the provision of the Companies Act, 2013 is not punishable. Decide whether the
opinion of the CFO is correct. Would your answer be different had the business of the company be
wholesale trade instead of ordinary retail trade?

Answer:

Failure to maintain proper books of accounts [Section 338(1) of the Companies Act, 2013]

Page No. 206

 where a company is being wound up, if it is shown that proper books of account were not kept by
the company throughout the period of two years immediately preceding the commencement of
the winding up,
 every officer of the company who is in default shall, unless he shows that he acted honestly and
that in the circumstances in which the business of the company was carried on, the default was
excusable,
 be punishable with imprisonment for a term which shall be not less than one year but which may
extend to three years and with fine which shall not be less than I lakh rupees but which may extend
to three lakh rupees.
Conditions when it shall be deemed that proper books of account have not been kept [Section
338(2) of the Act]: For the purposes of sub-Section (1), it shall be deemed that proper books of
account have not been kept in the case of any company,—

 where the business of the company has involved dealings in goods, statements of the annual stock
takings and, except in the case of goods sold by way of ordinary retail trade, of all goods sold and
purchased, have not been kept.
In the instant case, no proper statements of all goods sold and purchased by the company engaged in
ordinary retail trade is kept. It shall be deemed that proper books of account have been kept as
ordinary retail trade is an exception under sub- Section (2). Thus, opinion of CFO is correct.
If the company is engaged in wholesale trade instead of ordinary retail trade, then it is deemed that
proper statements of all goods sold and purchased by the company engaged in wholesale retail trade is
not kept for more than 3 years period immediately prior to the date of winding up application. Hence, in
this case, the CFO opinion will not hold good and will be punishable.

Oct 2018 Qn no 5(b) (ii) 2 Marks: ,May 2019 Qn no 5(b) 6 Marks: (PAST EXAM MAY 2018)

6.LED Bulb Ltd., has made default in filing financial statements and annual returns for a continuous
period of 4 financial years ending on 31 st March, 2017. The Registrar of Companies having jurisdiction
approached the Central Government to accord sanction to present a petition to Tribunal (NCLT) for
the winding up of the company on the above ground under Section 272 of the Companies Act, 2013

Examine the validity of the RoC move, explaining the relevant provisions of the Companies Act,
2013. State the time limit for passing an order by the Tribunal under Section ·273 of the Companies
Act, 2013?

Answer:

Validity of RoC’s action

According to Section 271(d) of the Companies Act, 2013, a Company may, on a petition under Section
272, be wound up by the Tribunal, if the Company has made a default in filing with the Registrar its
financial statements or annual returns for immediately preceding five consecutive financial years.
In the instant case, the move by RoC to present a petition to Tribunal for the winding up of LED Bulb Ltd.
is not valid as the Company has made default in filing financial statements and annual returns for a

Page No. 207

continuous period of 4 financial years ending on 31st March, 2017.
Time limit for passing of an Order under section 273: An order under section 273 of the Act shall be
made within ninety days from the date of presentation of the petition.

7.May 2019 Qn no 3(a) 8 Marks and Study Material

Info-tech Overtrading Ltd. was ordered to be compulsory wound up by an order dated 10th March, 2019
by the Tribunal. The official liquidator who has taken control of the assets and other records of the
company has noticed that :

(i) One of the contributory whose calls are pending to be paid is about to leave India for evading
payment of calls and;
(ii) A person having books of accounts of the company his possession may abscond to avoid
examination of books of accounts in respect of the affairs of the company.
Apprehending such possibilities, Tribunal detained such contributory for next 6 month disallowing him
to leave India as well as arrest & seized books of accounts from the person which may possibly abscond
to avoid examination of the affairs of the company.

Referring to the provisions of Companies Act, 2013, answer the following in current scenario:

(i) What is the validity of Tribunal's order for detention of contributory disallowing him to leave
India?

(ii) Is it correct from Tribunal's part to arrest and seize books of accounts from the person planning to
abscond to avoid examination of books of accounts in respect of the affairs of the company?

Answer:

According to section 301 of the Companies Act, 2013, at any time either before or after passing a winding
up order, if the Tribunal is satisfied that

 a contributory or
 a person having property, accounts or papers of the company in his possession
is about to leave India or otherwise to abscond, or is about to remove or conceal any of his property,
for the purpose of evading payment of calls or of avoiding examination respecting the affairs of the
company,
the Tribunal may cause—
(a) the contributory to be detained until such time as the Tribunal may order; and
(b) his books and papers and movable property to be seized and safely kept until such time as the
Tribunal may order.
In the instant case, by taking into account the above provisions:
(i) The Tribunal’s order for detention of contributory for next 6 months disallowing him to leave India,
is valid.
(ii) It is correct from Tribunal’s part to arrest and seize books of accounts from the person planning to
Page No. 208
 abscond to avoid examination of books of accounts in respect of the affairs of the company.

Section 245(3)(ii) is fulfilled.

8.MTP Mar 2019 QN no 3(a)(i) 4 Marks

AMC Ltd. was ordered to be wound up compulsory by an order dated 10th March, 2019by the
Tribunal. The official liquidator who has taken control for the assets and other records of the company
has noticed the following:

The Managing Director of the company has sold certain properties belonging to the company to a
private company in which his son was interested causing loss to the company to the extent of INR 50
lakhs. The sale took place on 15th October, 2018.
Examine what action the official liquidator can take in this matter, having regard to the provisions of
the Companies Act, 2013 .

Answer:

(i) The official liquidator can invoke the provisions contained in Section 328 of the Companies Act,
2013 to recover the sale of assets of the company. According to Section 328, if the Tribunal is satisfied
that there is a preference transfer of property, movable or immovable, or any delivery of goods,
payment, execution made, taken or done by or against a company within six months before making
winding up application, the Tribunal may order as it may think fit and may declare such transaction
invalid and restore the position.

Since in the present case, the sale of immovable property took place on 15th October, 2018 and the
company went into liquidation on 10th March, 2019 i.e., within 6 months before the winding up of the
company and since the sale has resulted in a loss of INR 50 lakhs to the company.
The official liquidator will be able to succeed in proving the case under Section 328 by way of fraudulent
preference as the property was sold to a private company in which the son of the ex-managing director
was interested.
Hence, the transaction made will be regarded as invalid and restore the position of the company as if no
transfer of immovable property has been made.

9.MTP Apr 2019 Qn no5(a) 8 Marks

Skyline Ltd. was ordered to be wound up compulsory on a petition filed on 10th February, 2018
before Tribunal. The official liquidator who has taken control for the assets and other records of the
company has noticed that the Managing Director of the company has transferred certain properties
belonging to the company to one of its creditor “Vansh (Pvt.) Ltd”, in which his son was interested. This
was causing huge monetary loss to the company. The sale took place on 15th September, 2017.

(i) Examine what action the official liquidator can take in this matter having regard to the provisions
of the Companies Act, 2013.
(ii) Determine the rights and liabilities of fraudulently preferred persons by mortgage of property

Page No. 209

to him to secure the company’s debt.
Answer
(i) The official liquidator can invoke the provisions contained in Section 328 of the Companies Act,
2013 to recover the sale of assets of the company. According to Section 328, if the Tribunal is
satisfied that there is a preference transfer of property, movable or immovable, or any delivery of
goods, payment, execution made, taken or done by or against a company within six months before
making winding up application, the Tribunal may order as it may think fit and may declare such
transaction invalid and restore the position.
Since in the present case, the sale of immovable property took place on 15th September, 2017 and
the company went into liquidation on an application filed on 10th February, 2018 i.e., within 6
months of making winding up application and such transfer of property has resulted a loss to the
company.

The official liquidator will be able to succeed in proving the case under Section 328 by way of
fraudulent preference as the property was sold to a Vansh (Pvt.) company, a creditor in which the son
of the ex-managing director was interested.
Hence, the transaction made will be regarded as invalid and restore the position of the company as if
no transfer of immovable property has been made.
(ii) Determination of rights and liabilities of fraudulently preferred persons: According to section 331 of
the Companies Act, 2013, where a company is being wound up and anything made, taken or done
after the commencement of this Act is invalid under section 328 as a fraudulent preference of a
person interested in property mortgaged or charged to secure the company’s debt, then, without
prejudice to any rights or liabilities arising, apart from this provision, the person preferred shall be
subject to the same liabilities, and shall have the same rights, as if he had undertaken to be
personally liable as a surety for the debt,-
 to the extent of the mortgage or charge on the property, or
 the value of interest, Whichever is less

10.RTP May 2019 Qn no 13

(ii) IJK Limited was wound up with effect from 15th March 2018 by an order of the Court. Mr. A, who
ceased to be a member of the company from 1st June 2017, has received a notice from the liquidator
that he should deposit a sum of Rs. 5000 as his contribution towards the liability on the shares
previously held by him. In this context explain whether Mr. A can be called as a contributory, whether
he can be made liable and whether there is any limitation on his liability.
Answer

Contributory: According to section 285 of the Companies Act, 2013, as soon as may be after the passing
of a winding up order by the Tribunal, the Tribunal shall settle a list of contributories.
While settling the list of contributories, the Tribunal shall include every person, who is or has been a
member, who shall be liable to contribute to the assets of the company an amount sufficient for
payment of the debts and liabilities and the costs, charges and expenses of winding up, and for the
adjustment of the rights of the contributories among themselves.

Page No. 210

Liability of the contributory: a person who has been a member shall not be liable to contribute if he
has ceased to be a member for the preceding one year or more before the commencement of the
winding up.
In the given case, M/s, IJK Ltd. was wound up on 15th March 2018. Whereas Mr. A ceased to be a
member of the company from 1st June, 2017. So, according to the above provision, Mr. A will be a
contributory and be liable to contribute as the time period of one year from the commencement of
winding up has not elapsed. So Mr. A is liable to deposit Rs. 5000 (if any unpaid on the shares in respect
of which he is liable as member [Section 285 (3) (d)]) as his contribution towards the liability on the
shares previously held by him.

11.RTP Nov 2019 Clarks Limited, has made default in filing financial statements and annual returns for
a continuous period of 4 financial years ending on 31st March, 2019. The Registrar of Companies
having jurisdiction approached the Central Government to accord sanction to present a petition to
Tribunal (NCLT) for the winding up of the company as per the above ground under Section 272 of the
Companies Act, 2013.

Examine the validity of the RoC move, explaining the relevant provisions of the Companies Act, 2013.
State the time limit for passing an order by the Tribunal under Section 273 of the Companies Act, 2013 ?

Validity of RoC's action: According to Section 271(d) of the Companies Act, 2013, a Company may, on a
petition under Section 272, be wound up by the Tribunal, if the Company has made a default in filing
with the Registrar its financial statements or annual returns for immediately preceding five consecutive
financial years.

In the instant case, the move by RoC to present a petition to Tribunal for the winding up of Clarks Limited
is not valid as the Company has made default in filing financial statements and annual returns for a
continuous period of 4 financial years ending on 31st March, 2019.
Time limit for passing of an Order under section 273: An order under section 273 of the Act shall be
made within ninety days from the date of presentation of the petition.

12.Nov 2019 Qn no 5(a) 4 Marks

Due to an unprecedented flood, all the fixed assets of a Company were damaged extensively beyond
renovation or repair. The cost of replacement of assets were huge and the sum insured on the fixed
assets did not cover all the assets. Therefore, the operations of the Company were permanently
discontinued. Meanwhile, based on a winding-up petition filed by the secured creditors, the High
Court passed a winding-up order. The workers of the Company opposed to the winding-up petition
and also filed an appeal against the winding-up order. The workers are not sure whether their appeal
would be heard in the winding-up proceedings. Examine, under the provisions of the Companies Act,
2013, whether the appeal filed by the workers would succeed and their dues / interest will be
protected in priority?

Answer

Page No. 211

According to section 279 of the Companies Act, 2013, when a winding up order has been passed or a
provisional liquidator has been appointed, no suit or other legal proceeding shall be commenced, or if
pending at the date of the winding up order, shall be proceeded with, by or against the company, except
with the leave of the Tribunal and subject to such terms as the Tribunal may impose.

It is further provided that any application to the Tribunal seeking leave under this section shall be
disposed of by the Tribunal within sixty days.
However, the above provision shall not apply to any proceeding pending in appeal before the Supreme
Court or a High Court.
According to section 325/326/327 of the Companies Act, 2013, in the winding up of a company under this
Act, the workmen's dues shall be paid in priority to all other debts ranking pari passu with secured
creditors.
As per the facts of the question, the High Court has already passed a winding up order of the company.
Hence, the workmen can appeal against the winding up order but only with the leave of the Tribunal
and subject to such terms as the Tribunal may impose. Further, the dues/ interest of the workmen will
be protected in priority as workmen's dues shall be paid in priority to all other debts ranking pari passu
with secured creditors.

Study Material

13. XYZ Limited is being would up by the tribunal. All the assets of the company have been charged
to the company’s bankers to whom the company owes Rs. 5 crores. The company owes following
amounts to others:

 Dues to workers – Rs. 1,25,00,000

 Taxes Payable to Government – Rs. 30,00,000
 Unsecured Creditors – Rs. 60,00,000
You are required to compute with the reference to the provision of the Companies Act, 2013 the
amount each kind of creditors is likely to get if the amount realized by the official liquidator from
the secured assets and available for distribution among creditors is only Rs. 4,00,00,000/-

Answer

Section 326 of the Companies Act, 2013 is talks about the overriding preferential payments to be
made from the amount realized from the assets to be distributed to various kind of creditors. According
to the proviso given in the section 326 the security of every secured creditor shall be deemed to be
subject to a pari passu change in favor of the workman to the extent of their portion.

Amount Realied*Workman's Dues

Workman s Share to Secured Asset=
Workman's Dues +Secured Loan

Page No. 212

 4,00,00,000*1,25,00,000
Workman's Share to Secured Asset =
1,25,00,000 +5,00,00,000

Workman's Share to Secured Assets=80,00,000 Amount available to secured creditor

is Rs. 400 Lakhs – 80 Lakhs = 320 Lakhs

Hence, no amount is available for payment of government dues and unsecured creditors.

14. When can an application be made to Tribunal for constitution of a winding up committee to assist
and monitor the progress of liquidation proceedings by the Company Liquidator in carrying out the
function?

(a) Within two weeks from the date of passing of winding up order
(b) Within three weeks from the date of passing of winding up order
(c) Within four weeks from the date of passing of winding up order
(d) None of the above.
Answer: b) Hint: Section 277 (4) of the companies Act, 2013, states that within three weeks from
the date of passing of winding up order, the Company Liquidator shall make an application to the
Tribunal for constitution of a winding up committee to assist and monitor the progress of liquidation
proceedings by the Company Liquidator in carrying out the function and such winding up committee
shall comprise of the following persons, namely:—

a) Official Liquidator attached to the Tribunal;

b) nominee of secured creditors; and
c) a professional nominated by the Tribunal

15. XYZ Limited is being wound up by the tribunal. All the assets of the company have been charged to
the company’s bankers to whom the company owes Rs. 5 crores. The company owes following amounts
to others:
Dues to workers – Rs. 1,25,00,000
Taxes Payable to Government – Rs. 30,00,000
Unsecured Creditors – Rs. 60,00,000

You are required to compute with the reference to the provision of the Companies Act, 2013 the
amount each kind of creditors is likely to get if the amount released by the official liquidator from the
secured assets and available for distribution among creditors is only Rs. 4,00,00,000/-
(8 Marks) (mtp-NOV 2020)

ANSWER

Section 326 of the Companies Act, 2013 talks about the overriding preferential payments to be made
from the amount realized from the assets to be distributed to various kind of creditors. According to the

Page No. 213

proviso given in the section 326 the security of every secured creditor shall be deemed to be subject to a
paripassu change in favor of the workman to the extent of their portion.

Amount available to secured creditor is Rs. 400 Lakhs – 80 Lakhs = 320 Lakhs
Hence, no amount is available for payment of government dues and unsecured creditors.

16. Insincere Limited on 22nd May, 2020 mortgaged one of the freehold land of the company in the
favor of the bank, from which Mr. Daman, a director of the company had taken housing loan for his
residential purpose. Since Insincere Ltd. had been running in losses and was unable to honor the
liabilities due towards the other creditors. As, the Board of Directors of the company was aware of the
financial crisis faced by the Insincere Ltd. and of creation of a mortgage in order to give preference to
Mr. Daman over other creditors. On 23rd September, 2020 some creditors of the company filed a
petition for the winding up before Tribunal. It passed an order for the winding up of the company on
5th November, 2020. Discuss on the nature of the transaction of mortgage created with bank in the
given circumstances in the light of the Companies Act, 2013. (8 Marks) (mtp-I- july 2021)

ANSWER

(a) As per Section 328 of the Companies Act, 2013,where a company has given preference to a person
who is one of the creditors of the company or a surety or guarantor for any of the debts or other liabilities
of the company, and the company does anything or suffers anything done which has the effect of putting
that person into a position which, in the event of the company going into liquidation, will be better than
the position he would have been in if that thing had not been done prior to six months of making winding
up application, the Tribunal, if satisfied that, such transaction is a fraudulent preference may order as it
may think fit for restoring the position to what it would have been if the company had not given that
preference.

If the Tribunal is satisfied that there is a preference transfer of property, movable or immovable, or any
delivery of goods, payment, and execution made, taken or done by or against a company within six
months before making winding up application, the Tribunal may order as it may think fit and may declare
such transaction invalid and restore the position.

In the question, the company had created a legal mortgage on 22nd May, 2020 and the creditors made a
petition for winding up of the company on 23rd September, 2020, so the above transaction of creation of
legal mortgage on the freehold land of the company falls within the ambit of section 328 of the Act.

Therefore, creation of mortgage of the freehold land of the company is the transaction covered under the
fraudulent preference since the mortgage is created 6 months preceding the date of making of winding

Page No. 214

up petition and therefore, the Tribunal may order as it may think fit and may declare such transaction on
creation of mortgage as invalid and restore the position

17. Mr. Sameer, holding 15% shares of Towe Ltd., an unlisted company, since 30th September 2019, is
unpaid to the extent of Rs. 10 lakh, filed a petition with Tribunal on 5th April, 2020, for winding up of
Towe Ltd. and a copy of the same was filed with Registrar of Companies (ROC).

The Registrar of Companies (ROC) submitted his views to the National Company Law Tribunal (NCLT) on
18th May, 2020. The ROC mentioned in his views that it was just and equitable that Towe Ltd. should
be wound up, on analyzing the information available with him with respect to the affairs of Towe Ltd.
The Tribunal appointed provisional liquidator, Mr. Raj, on 20th May, 2020, without giving, notice of the
same as well as without affording opportunity for making representations, to the company. Mr. Raj is
registered as an insolvency professional under the Insolvency and Bankruptcy Code, 2016 and he filed
the declaration with respect to his independence to the Tribunal on 25th May, 2020.

Tribunal passed its order for winding up of Towe Ltd. on 16th June, 2020 and the provisional liquidator,
Mr. Raj was appointed as the Company Liquidator. The Tribunal directed Mr. Sameer to deposit an
amount of Rs. 1 lakh as security for costs as a precondition to issue directions to Towe Ltd.

The intimation thereof, of passing such order was sent to Mr. Raj as well as to the Registrar of
Companies, by the Tribunal. The ROC on receipt of such order from Tribunal made an endorsement to
that effect in his records relating to Towe Ltd. and also made a notification in the Official Gazette that
such order of winding up has been made by the Tribunal.

Mr. Raj calculated that the outstanding liabilities and debts of Towe Ltd. which amounted to Rs. 70 lakh
and the expenses of winding up were estimated at Rs. 3 lakh.
Towe Ltd. has at present 8 members which are holding shares unpaid to the extent of Rs. 40 lakh, in
total.

Following were the past members of the company:-

(1) Mr. Kishan ceased to be member on 23rd March, 2019, from whom Towe Ltd. had unpaid calls on
shares amounting to Rs. 8 lakh. At the time when, Mr. Kishan ceased to be a member, the outstanding
liabilities of the company were only Rs. 5 lakh.

(2) Mr. Dhawan ceased to be member on 28th May, 2019, from whom Towe Ltd. had
unpaid calls on shares amounting to Rs. 16 lakh. At the time when, Mr. Dhawan ceased to be a
member, the outstanding liabilities of the company were only Rs. 13 lakh.

(3) Mr. Tanmay who ceased to be member on 17th June, 2019, was having unpaid calls on shares of
Towe Ltd. amounting to Rs. 15 lakh. At the time when, Mr. Tanmay ceased to be a member, the
outstanding liabilities of the company were only Rs. 10 lakh.

Towe Ltd. created a floating charge, as agreed, on the stock of the company on 23rd August, 2019, to
secure a current account with Munim Bank which was in debit by Rs. 12 lakh from 1st May, 2019 and

Page No. 215

thereafter the bank also advanced Rs. 15 lakh on 1st September, 2019, for meeting the operating
expenses of the company.

Munim Bank charged Rs. 1,18,500 as interest for financial year ended on 31st March, 2020, by debiting
the said current account of Towe Ltd. on the total amount of Rs. 27 lakh (Rs.12 lakh + Rs. 15 lakh). Towe
Ltd. remained solvent during the financial year 2019-20.
Multiple Choice Questions (5 questions of 2 Marks each): Total 10 Marks
(mtp-I- july 2021)

1. Whether Mr. Sameer was eligible to file petition for winding up against Towe Ltd.?

(a) No, as he is not holding fully paid up shares of Towe Ltd.

(b) No, as he is not holding shares for 12 months or more prior to presenting such petition for winding
up.

(c) Yes, as he is a holding not less than 10% of the shares of Towe Ltd.

(d) Yes, as he is holding shares for 6 months or more prior to presenting such petition for winding up.

ANSWER- d

2. What was the last date available with ROC to submit his views to NCLT on the petition filed by Mr.
Sameer and with the NCLT to pass order for winding up, respectively?

(a) 5th June, 2020 and 5th July, 2020 respectively.

(b) 4th June, 2020 and 4th July, 2020 respectively.

(c) 5th May, 2020 and 5th July, 2020 respectively.

(d) 5th May, 2020 and 4th July, 2020 respectively.

ANSWER- b

3. Whether the act of Tribunal can be considered valid for not giving notice of appointment of
provisional liquidator, Mr. Raj as well as opportunity for making representations, to Towe Ltd.?

(a) Partially invalid, as giving notice of appointment of provisional liquidator, Mr. Raj, is mandatorily for
the tribunal. However, whether to afford opportunity to Towe Ltd. for making representations is upon
the sole discretion of the tribunal.

(b) Valid, if in the opinion of the tribunal, there were some special reasons, whether recorded in writing
or not, for not giving notice as well as opportunity for making representations, if any, to Towe Ltd.

(c) Valid, if in the opinion of the tribunal, there were some special reasons, recorded in writing, for not
giving notice as well as opportunity for making representations, if any, to Towe Ltd.

Page No. 216

(d) Not valid, as giving notice of appointment of provisional liquidator, Mr. Raj as well as opportunity
for making representations, to Towe Ltd., is mandatorily required to be given by the tribunal.

ANSWER- c

4. How much amount, Mr. Kishan, Mr. Dhawan and Mr. Tanmay, would be liable to pay as a
contributory, if in case tribunal calls past members to satisfy the contributions?

(a) Mr. Kishan shall not be liable to pay any amount, Mr. Dhawan and Mr. Tanmay shall be liable to pay
Rs. 16 lakh and Rs. 10 lakh, respectively.

(b) Mr. Kishan, Mr. Dhawan and Mr. Tanmay shall be liable to pay Rs.5 lakhs, Rs. 13 lakh and Rs. 10
lakh, respectively.

(c) Mr. Kishan shall not be liable to pay any amount, Mr. Dhawan and Mr. Tanmay shall be liable to pay
Rs. 13 lakh and Rs. 10 lakh, respectively.

(d) Mr. Kishan and Mr. Dhawan shall not be liable to pay any amount and Mr. Tanmay shall be liable to
pay Rs. 10 lakh.

ANSWER-c

5. How much amount of floating charge created on the stocks of Towe Ltd. shall be valid and how much
of interest shall be allowed if no other rate is notified by the Central Government, other than the rate
of interest prescribed in the Act?

(a) Rs. 27 lakh and Rs. 1,18,500, respectively.

(b) Rs. 15 lakh and Rs. 98,750, respectively.

(c) Rs. 27 lakh and Rs. 98,750, respectively.

(d) Rs. 12 lakh and Rs. 1,18,500, respectively.

ANSWER- b

18. (a) By an order dated 25th June, 2020, NCLT had ordered for winding up of Kamath Trading Limited.
Consequently, Official Liquidator took control for the assets and other records of the Company. During
the winding up proceedings, the Official Liquidator came across a transaction where some of the
properties of the Company was sold to a small Private Company. Mr. Nag, who was interested in that
small Private Company happened to be the brother of Director of Kamath Trading Limited. The sale of
the said properties took place on 20th March, 2020 at a price which was Rs.58 Lakh less than the
market price

In the light of the facts given above, examine, with reference to relevant provisions of the Companies
Act 2013, what action the Tribunal can take in this regard? (4 Marks)

Page No. 217

(b) In the annual general meeting of XYZ Ltd. held on 28th May, 2020, while discussing on the matter of
retirement and reappointment of director Mr. X, allegations of fraud of Rs. 20 lakh in Bombay branch of
the Company were marked against him by some members. This resulted into disorder and confusion in
the meeting. The Chairman declared initiating an inquiry against the director. Mr. X, however, could
not be re-appointed in the meeting. The matter was published in the newspapers next day. On the
basis of such news, examine whether the Court can take cognizance of the matter and take action
against the Director on its own? Justify your answer with reference to the provisions of the Companies
Act, 2013. (4 Marks) (past exam nov 2020)

Answer

(a) The official liquidator can invoke the provisions contained in Section 328 of the Companies Act, 2013
to recover the sale of assets of the company. According to Section 328 of the Companies Act, 2013, if the
Tribunal is satisfied that there is a preference transfer of property, movable or immovable, or any delivery
of goods, payment, execution made, taken or done by or against a company within six months before
making winding up application, the Tribunal may order as it may think fit and may declare such
transaction invalid and restore the position.

Since in the present case, the sale of some properties took place on 20th March, 2020 and the company
went into liquidation on 25th June, 2020 i.e., within 6 months before the winding up of the company and
the sale has resulted in a loss of Rs. 58 lakhs to the company.
The official liquidator will be able to succeed in proving the case under Section 328 by way of fraudulent
preference as the property was sold to a small private company in which the brother of director of
Kamath Trading Limited was interested.
Hence, the transaction made will be regarded as invalid and restore the position of the Kamath Trading
Limited as if no transfer of property has been made.

(b) Section 439 of the Companies Act, 2013 provides that offences under the Act shall be non-cognizable.
As per this section:

1. Notwithstanding anything in the Code of Criminal Procedure, 1973, every offence under this Act except
the offences referred to in sub section (6) of section 212 shall be deemed to be non-cognizable within the
meaning of the said Code.

2. No court shall take cognizance of any offence under this Act which is alleged to have been committed
by any company or any officer thereof, except on the complaint in writing of the Registrar, a shareholder
or a member of the company, or of a person authorized by the Central Government in that behalf.

Thus, in the given situation, the court shall not initiate any suo moto action against the director Mr. X
without receiving any complaint in writing of the Registrar of Companies, a shareholder or a member of
the company or of a person authorized by the Central Government in this behalf.

19. What is the periodicity of submission of report by company liquidator with respect to the progress
of winding up of the company to the Tribunal:

(RTP JULY 2021)

Page No. 218

(a) Monthly

(b) Bi-monthly

(c) Quarterly

(d) Half yearly

ANSWER- c

Page No. 219

 8 Companies Incorporated Outside India

ATTEMPTS
MAY NOV MAY NOV NOV JAN JULY NOV
COVERAGE
2018 2018 2019 2019 2020 2021 2021 2021

STUDY Q.- 14 to 22
MAT

PAST NO NO
Q-3 Q-5, 6 Q-11 Q-27, 28 ------
EXAMS QUES QUES

MTP Q-2 Q-4 Q-8, 9 Q-12, 13 Q-23, 26 Q-24, 25 -----

NO NO
RTP Q-1 Q-7 Q-10 NO QUES Q-29
QUES QUES

Page No. 220

1. RTP May 2018

(i) As per provisions of the Companies Act, 2013, define the status of Hillways Ltd., a
Company incorporated in London, which has a share transfer office at Mumbai?
(ii) LMP Paper Ltd. is a company registered in Thailand. Although, it has no place of business
established in India, yet it is doing online business through telemarketing in India.
Explain whether it will be treated as a Foreign Company under the Companies Act, 2013?

(iii) In case, a foreign company does not deliver its documents to the Registrar of Companies
as required under section 380 of the Companies Act, 2013, state the penalties prescribed
under the said Act, which can be levied.
Answer

In terms of the definition of a foreign company under section 2 (42) of the Companies Act, 2013 a
“foreign company” means any company or body corporate incorporated outside India which:

(1) Has a place of business in India whether by itself or through an agent, physically or through
electronic mode; and
(2) Conducts any business activity in India in any other manner.

According to section 386 of the Companies Act, 2013, for the purposes of Chapter XXII of the
Companies Act, 2013 (Companies incorporated outside India), “Place of business” includes a share
transfer or registration office.
From the above definition, the status of Hillways Ltd. will be that of a foreign company as it is
incorporated outside India, has a place of business in India and it may be presumed that it carries on a
business activity in India.
 As per Section 2(42) read with the Companies (Registration of Foreign Companies) Rules, 2014 of
the Companies Act, 2013, any company or body corporate incorporated outside India which has a
place of business in India whether by itself or through an agent, physically or through electronic
mode; and conducts any business activity in India in any other manner is a foreign company.
Further the above said rules states the meaning of “electronic mode”. It means carrying out
electronically based, whether main server is installed in India or not, including, but not limited to –
(a) business to business and business to consumer transactions, data interchange and other digital
supply transactions;
(b) offering to accept deposits or inviting deposits or accepting deposits or subscriptions in securities in
India or from citizens of India;
(c) financial settlements, web based marketing, advisory and transactional services, data base services
and products, supply chain management;
(d) online services such as telemarketing, telecommuting, telemedicine, education and information
research; and
(e) all related data communication services whether conducted by e-mail, mobile devices, social
media, cloud computing, document management, voice or data transmission or otherwise.
Looking to the above description, it can be said that being involved in business activity through
telemarketing, LMP Paper Ltd., will be treated as foreign company.

Page No. 221

 The Companies Act, 2013 lays down the governing provisions for foreign companies in Chapter XXII
which is comprised of sections 379 to 393. The penalties for non- filing or for contravention of any
provision for this chapter including for non-filing of documents with the Registrar as required by
section 380 and other sections in this chapter are laid down in section 392 of the Act which
provides that if a foreign company contravenes the provisions of this Chapter, the foreign company
 shall be punishable with a fine which shall not be less than Rs. 1,00,000 but which may extend to Rs.
3,00,000
 and in the case of a continuing offence, with an additional fine which may extend to Rs. 50,000 for
every day after the first during which the contravention continues
every officer of the foreign company who is in default shall be punishable

 with imprisonment for a term which may extend to six months or

 with fine which shall not be less than Rs. 25,000
 or with both.

2.March 2018

X, a foreign company, with a place of business in India, ceases to carry on business in India. State the
legal position of such foreign company under the Companies Act, 2013.

Answer:

According to section 376 of the Companies Act, 2013, where any body corporate incorporated outside
India which has been carrying on business in India, ceases to carry on business in India, it may be
wound up as an unregistered company under part II of chapter XXI of the Companies Act, 2013,
notwithstanding that the body corporate has been dissolved or otherwise ceased to exist as such
under or by virtue of the laws of the country under which it is incorporated.

3.May 2018

Qinghai Huading Industrial Company Ltd., incorporated in China established a place of business at
Mumbai. The Charter / Documents constituting the Company is in Mandarian Chinese (Chinese local
language). It is required inter alia to file a certified translation of above documents with the
Registrar of Companies in India. Who can authenticate the translated charter/ documents as
per the provisions of the Companies Act, 2013 and Rules made there under governing foreign
companies in case such translation is made at Mumbai?

Answer:

According to Rule 10 of the Companies (Registration of Foreign Companies) Rules, 2014,

(i) All the documents required to be filed with the Registrar by the foreign companies shall be in
English language and where any such document is not in English language, there shall be attached a
translation thereof in English language duly certified to be correct in the manner given in these
rules.
(ii) Where such translation is made within India, it shall be authenticated by-
(a) an advocate, attorney or pleader entitled to appear before any High Court; or

Page No. 222

 (b) an affidavit, of a competent person having, in the opinion of the Registrar, an adequate
knowledge of the language of the original and of English.
In the instant case, Qinghai Huading Industrial company Ltd. can translate the related documents
within India and they shall be authenticated by the persons mentioned under the above Rules.

4.Aug 2018

X Inc, a foreign company, registered in UK and carrying on Trading Activity, with Principal Place of
Business in Chennai. Since the company did not obtain registration or make arrangement to file
Return, registrar having jurisdiction, intends to serve show cause notice on the Foreign Company. As
Standing Counsel for the department, advise the registrar on valid service of notice

Answer:

According to section 383 of the Companies Act, 2013, any process, notice, or other document required
to be served on a foreign company shall be deemed to be

sufficiently served, if addressed to any person whose name and address have been delivered to the
Registrar under section 380 of the Companies Act, 2013, and left at, or sent by post to, the address
which has been so delivered to the Registrar or by electronic mode. Hence, the registrar may serve the
show cause notice by following the above provisions.

5.Nov 2018

In the light of the provisions of the Companies Act, 2013 explain whether the following Companies can
be considered as a ‘Foreign Company':

(i) A Company which has no place of business established in India, yet, is doing online business
through telemarketing in India.
(ii) A Company which is incorporated outside India employs agents in India but has no place of
business in India.
(iii) A Company incorporated outside India having shareholders who are all Indian citizens.

Answer:

Foreign Company [Section 2(42) of the Companies Act, 2013]: “Foreign company” means any company
or body corporate incorporated outside India which-

 has a place of business in India whether by itself or through an agent, physically or through electronic
mode; and
 conducts any business activity in India in any other manner.
According to Rule 2 (c) of the Companies (Registration of Foreign Companies) Rules, 2014, “electronic
mode” means carrying out electronically based, whether main server is installed in India or not,
including, but not limited to -

(a) business to business and business to consumer transactions, data interchange and other digital
supply transactions;
(b) offering to accept deposits or inviting deposits or accepting deposits or subscriptions in

Page No. 223

 securities, in India or from citizens of India;
(c) financial settlements, web based marketing, advisory and transactional services, database services
and products, supply chain management;
(d) online services such as telemarketing, telecommuting, telemedicine, education and information
research; and
(e) all related data communication services,

whether conducted by e-mail, mobile devices, social media, cloud computing, document management,
voice or data transmission or otherwise.
In the light of the said provisions of the Companies Act, 2013, as enumerated above:
(i) A company which has no place of business in India but is doing online business through
telemarketing in India, will be considered as a ‘Foreign Company’.
(ii) A company incorporated outside India which has a place of business in India whether by itself or
through an agent, physically or through electronic mode, will be considered as foreign company.
Thus, a company incorporated outside India which does not have a place of business in India, will
not be considered a ‘Foreign Company’
(iii) A company incorporated outside India having shareholders who are all Indian
citizens shall be a ‘Foreign Company’
(*It is presumed that the company in question is incorporated outside India, so that provisions of
section 2(42) of the Companies Act, 2013 can be applied on it.)

6.Nov 2018

Ronnie Coleman Ltd., a foreign Company failed to deliver some documents to the Registrar of
Companies as required under Section 380 of the Companies Act, 2013. State the provisions of
penalty prescribed under the Act, which can be levied on Ronnie Coleman Ltd. for its failure to deliver
the documents.

Answer:

The Companies Act, 2013 lays down the governing provisions for foreign companies in Chapter XXII which
is comprised of sections 379 to 393. The penalties for non filing or for contravention of any provision for
this chapter including for non filing of documents with the Registrar as required by section 380 and
other sections in this chapter are laid down in section 392 of the Act which provides that if a foreign
company contravenes the provisions of this Chapter, the foreign company shall be punishable with a
fine which shall not be less than Rs. 1,00,000 but which may extend to Rs. 3,00,000 and in the case of
a continuing offence, with an additional fine which may extend to Rs. 50,000 for every day after the first
during which the contravention continues and every officer of the foreign company who is in default shall
be punishable with imprisonment for a term which may extend to six months or with fine which shall not
be less than Rs. 25,000 but which may extend to Rs. 5,00,000, or with both.

7.RTP Nov-18:

Examine and state whether the following Companies can be considered as ‘Foreign Company’ under
the Companies Act, 2013:

Page No. 224

 (i) A company which is incorporated outside India employs agents in India but has no place of
business in India.
(ii) A company incorporated outside India having shareholders who are all Indian citizens.
(iii) A company incorporated in India but all the shares are held by foreigners.
(iv) A company which has no place of business established in India, yet, is doing online business
through telemarketing in India.
Answer:

As per Section 2(42) of the Companies Act, 2013, a foreign company means any company or body
corporate incorporated outside India which-

(a) has a place of business in India whether by itself or through an agent, physically or through
electronic mode; and
(b) conducts any business activity in India in any other manner.
A company incorporated outside India and have not established a place of business in India, is not
deemed to be a Foreign Company. Thus establishing a place of business is an essential ingredient in the
definition. In the given case, the company has not established a place of business in India though
employs agents in India. It will not be deemed to be a foreign company.

(i) A company incorporated outside India, will not be deemed to be a Foreign Company even though
all the shareholders are Indian citizens, unless it has a place of business in India.
(ii) A company incorporated In India but having all foreign shareholders will be deemed to be an
Indian Company as it is not incorporated outside India though it has a place of business in India.
(iii) According to the Companies (Registration of Foreign Companies) Rules, 2014, “electronic mode"
means carrying out electronically based, whether main server is installed in India or not, including,
but not limited to:
(a) Business to business and business to consumer transactions, data inter-change and other
digital supply transactions
(b) Offering to accept deposits or inviting deposits or accepting deposits or subscriptions in India
or from citizens of India
(c) Financial settlements, web-based marketing, advisory and transactional services, data based
services and products and supply chain management,
(d) Online services such as telemarketing, telecommuting, telelmedicine, education and
information research.

(e) All related data communication services whether conducted by e-mail, mobile devices, social
media, cloud computing, data management, voice or data transmission or otherwise.
Therefore, looking to the above description, a company which has no place of business established in
India, yet doing online business through telemarketing in India will be treated as a foreign company.

8.MTP Mar 2019

(i) As per provisions of the Companies Act, 2013, what is the status of XYZ Ltd., a Company incorporated
in London, U.K., which has a share transfer office at Mumbai?

Page No. 225

(ii) ABC Ltd., a foreign company having its Indian principal place of business at Kolkata, West Bengal
is required to deliver various documents to Registrar of Companies under the provisions of the
Companies Act, 2013. You are required to state, where the said company should deliver such
documents.

Answer

In terms of the definition of a foreign company under section 2 (42) of the Companies Act, 2013 a
“foreign company” means any company or body corporate incorporated outside India which:

(a) Has a place of business in India whether by itself or through an agent, physically or through
electronic mode; and
(b) Conducts any business activity in India in any other manner
According to section 386 of the Companies Act, 2013, for the purposes of Chapter XXII of the
Companies Act, 2013 (Companies incorporated outside India), “Place of business” includes a share
transfer or registration office.
From the above definition, the status of XYZ Ltd. will be that of a foreign company as it is incorporated
outside India, has a place of business in India and it may be presumed that it carries on a business
activity in India.

9.MTP Apr 2019

Examine the given situations in the light of the Companies Act, 2013 as to the legal position of the
existence of the companies incorporated outside India:

(i) Status of XYZ Ltd., a Company incorporated in London, U.K., which has a share transfer office at
Mumbai.
(ii) RST Ltd. is a company registered in Thailand. It has no place of business established in India, yet
doing online business through telemarketing in India.
Answer:
In terms of the definition of a foreign company under section 2 (42) of the Companies Act, 2013 a
“foreign company” means any company or body corporate incorporated outside India which:

(a) Has a place of business in India whether by itself or through an agent, physically or through electronic
mode; and
(b) Conducts any business activity in India in any other manner

According to section 386 of the Companies Act, 2013, for the purposes of the Companies incorporated
outside India, “Place of business” includes a share transfer or registration office.
(i) From the above definition, the status of XYZ Ltd. will be that of a foreign company as it is incorporated
outside India, has a place of business in India and so may be presumed that it carries on a business
activity in India.
(ii) The term “online business “can be related to the term “online mode” of conduct of business. This is
to be read with the section 2(42) of the Companies Act, 2013, and with the Companies (Registration
of Foreign Companies) Rules, 2014. “Electronic mode” means carrying out electronically based,
whether main server is installed in India or not, including, but not limited to–

Page No. 226

 (a) business to business and business to consumer transactions, data interchange and other digital
supply transactions;
(b) offering to accept deposits or inviting deposits or accepting deposits or subscriptions in securities
in India or from citizens of India;
(c) financial settlements, web based marketing, advisory and transactional services, data base
services and products, supply chain management;
(d) online services such as telemarketing, telecommuting, telemedicine, education and information
research; and
(e) all related data communication services whether conducted by e-mail, mobile devices, social
media, cloud computing, document management, voice or data transmission or otherwise.
Since, RST Ltd. is a company registered in Thailand with no place of business established in India,
however doing online business through telemarketing in India. Looking to the above description as to
conduct of business through electronic mode, it can be said that being involved in business activity
through telemarketing, RST Ltd., will be treated as foreign company.

10.RTP May 2019

DEJY Company Limited incorporated in Singapore desires to establish a place of business at Mumbai.
You being a practising Chartered Accountant havebeen appointed by the company as a liaison officer,
for compliance of legal formalities on behalf of the company. Examining the provisions of the
Companies Act, 2013, state the documents you are required to furnish on behalf of the company, on
the establishment of a place of business at Mumbai.

Answer

Under section 380(1) of the Companies Act, 2013 every foreign company shall, within 30 days of the
establishment of place of business in India, deliver to the Registrar for registration of the following
documents:

(a) a certified copy of the charter, statutes or memorandum and articles, of the company or other
instrument constituting or defining the constitution of the company. If the instruments are not in the
English language, a certified translation thereof in the English language;
(b) the full address of the registered or principal office of the company;
(c) a list of the directors and secretary of the company containing such particulars as may be
prescribed;
In relation to the nature of particulars to be provided as above, the Companies (Registration of
Foreign Companies) Rules, 2014, provide that the list of directors and secretary or equivalent (by
whatever name called) of the foreign company shall contain the following particulars, for each of
the persons included in such list, namely:
(1) personal name and surname in full;
(2) any former name or names and surname or surnames in full;
(3) father’s name or mother’s name and spouse’s name;
(4) date of birth;
(5) residential address;

Page No. 227

 (6) nationality;
(7) if the present nationality is not the nationality of origin, his nationality of origin;
(8) passport Number, date of issue and country of issue; (if a person holds more than one passport
then details of all passports to be given)
(9) income-tax permanent account number (PAN), if applicable;
(10) occupation, if any;
(11) whether directorship in any other Indian company, (Director Identification Number(DIN), Name
and Corporate Identity Number (CIN) of the company in case of holding directorship);
(12) other directorship or directorships held by him;
(13) Membership Number (for Secretary only); and
(14) e-mail ID.
(d) the name and address or the names and addresses of one or more persons resident in India
authorised to accept on behalf of the company service of process and any notices or other
documents required to be served on the company;
(e) the full address of the office of the company in India which is deemed to be its principal place of
business in India;
(f) particulars of opening and closing of a place of business in India on earlier occasion or occasions;
(g) declaration that none of the directors of the company or the authorised representative in India has
ever been convicted or debarred from formation of companies and management in India or abroad;
and
(h) any other information as may be prescribed.

11.Nov 2019

In the light of the provisions of the Companies Act, 2013, examine whether the following Companies
can be considered as a 'Foreign Company':

(i) M/s Red Stone Limited is a Company registered in Singapore. The Board of Directors meets and
executes business decisions at their Board Meeting held in India.
(ii) M/s Blue Star Public Company Limited registered in Thailand has authorized Mr. 'Y' in India to
find and enter contracts with them on behalf of the company.
(iii) M/s Xex Limited Liability Company registered in Dubai has installed its main server in Dubai for
maintaining office automation software by Cloud Computing for its client in India.
Answer

According to section 2(42) of the Companies Act, 2013, “Foreign company” means any company or
body corporate incorporated outside India which-

(a) has a place of business in India whether by itself or through an agent, physically or through
electronic mode; and
(b) conducts any business activity in India in any other manner.

Page No. 228

According to the Companies (Registration of Foreign Companies) Rules, 2014, “electronic mode”
means carrying out electronically based, whether main server is installed in India or not, including, but
not limited to-

(a) business to business and business to consumer transactions, data interchange and other digital
supply transactions;
(b) offering to accept deposits or inviting deposits or accepting deposits or subscriptions in securities,
in India or from citizens of India;
(c) financial settlements, web based marketing, advisory and transactional services, database services
and products, supply chain management;
(d) online services such as telemarketing, telecommuting, telemedicine, education and information
research; and
(e) all related data communication services,
whether conducted by e-mail, mobile devices, social media, cloud computing, document management,
voice or data transmission or otherwise.
(i) In the given situation, M/s Red Stone Limited is registered in Singapore. However, it does not have
a place of business in India whether by itself or through an agent, physically or through electronic
mode; and does not conduct any business activity in India in any other manner. Mere holding of
board meetings and executing business decisions in India cannot be termed as conducting business
activity in India. Hence, M/s Red Stone Limited is not a foreign company as per the Companies Act,
2013.
(ii) In the given situation, M/s Blue Star is registered in Thailand. It has authorised Mr. Y in India to find
customers and enter into contract on behalf of the company. Thus, it can be said that M/s Blue Star
Limited has both place of business in India through an agent, physically or through electronic
mode; and is conducting business activity in India. Hence, M/s Blue Star Limited is a foreign
company as per the Companies Act, 2013.
(iii) In the given situation, M/s Xex Limited Liability Company is registered in Dubai and has installed its
main server in Dubai for maintaining office automation software by Cloud Computing for its client
in India. Thus, it can be said that M/s Xex Limited Liability Company has a place of business in India
through electronic mode and is conducting business activity in India. Hence, M/s Xex Limited
Liability Company is a foreign company as per the Companies Act, 2013.

12.MTP Nov 2019

As per provisions of the Companies Act, 2013, what is the status of XYZ Ltd., a Company incorporated in
London, U.K., which has a share transfer office at Mumbai?

Answer

In terms of the definition of a foreign company under section 2 (42) of the Companies Act, 2013 a
“foreign company” means any company or body corporate incorporated outside India which:

(a) Has a place of business in India whether by itself or through an agent, physically or through
electronic mode; and
(b) Conducts any business activity in India in any other manner

Page No. 229

According to section 386 of the Companies Act, 2013, for the purposes of Chapter XXII of the Companies
Act, 2013 (Companies incorporated outside India), “Place of business” includes a share transfer or
registration office.
From the above definition, the status of XYZ Ltd. will be that of a foreign company as it is incorporated
outside India, has a place of business in India and it may be presumed that it carries on a business activity
in India.

13.MTP Nov 2019

ABC Ltd., a foreign company having its Indian principal place of business at Kolkata, West Bengal is
required to deliver various documents to Registrar of Companies under the provisions of the
Companies Act, 2013. Advise, ABC Ltd. as to submission of desired documents to ROC.

Answer

The Companies Act, 2013 vide section 380 provides that every foreign company is required to deliver
to the Registrar for registration, within 30 days of the establishment of office in India, documents which
have been specified therein. According to the Companies (Registration of Foreign Companies) Rules, 2014,
any document which any foreign company is required to deliver to the Registrar shall be delivered to the
Registrar having jurisdiction over New Delhi.

Study Material

14. Examine with reference to the provisions of the Companies Act, 2013 whether the following
companies can be treated as foreign companies:
(i) A company incorporated outside India having a share registration office at Mumbai.
(ii) Indian citizens incorporated a company in Singapore for the purpose of carrying on business
there.
Answer

Section 2(42) of the Companies Act, 2013 defines a “foreign company” as any company or body corporate
incorporated outside India which:
(a) Has a place of business in India whether by itself or through an agent, physically or through
electronic mode; and
(b) Conducts any business activity in India in any other manner.
According to section 386 of the Companies Act, 2013, for the purposes of Chapter XXII of the Companies
Act, 2013 (Companies incorporated outside India), expression “Place of business” includes a share
transfer or registration office.
Accordingly, to qualify as ‘foreign company’ a company must have the following features:
(a) it must be incorporated outside India; and
(b) it should have a place of business in India.

Page No. 230

(c) That place of business may be either in its own name or through an agent or may even be through
the electronic mode; and
(d) It must conduct a business activity of any nature in India.
(i) Therefore, a company incorporated outside India having a share registration office at Mumbai
will be treated as a foreign company provided it conducts any business activity in India.
(ii) In the case of a company incorporated in Singapore for the purpose of carrying on business in
Singapore will not fall within the definition of a foreign company. Its incorporation by Indian
citizen is immaterial. In order to be a foreign company it has to have a place of business in
India and must conduct a business activity in India.
15. Videshi Ltd., a foreign company established with a principal place of business at Kolkata, West
Bengal. The company delivered various documents to Registrar of Companies. State the number of days
and place where the said company shall deliver such documents:

(a) Within 15 days to the Central Government

(b) Within 15 days to the Registrar having jurisdiction over New Delhi
(c) Within 30 days to the Registrar having jurisdiction over West Bengal
(d) Within 30 days to the Registrar having jurisdiction over New Delhi
Answer: d)

Hint: The Companies Act, 2013 vide section 380 requires every foreign company to deliver to the
Registrar for registration, within 30 days of the establishment of office in India, documents which have
been specified therein. According to the Companies (Registration of Foreign Companies) Rules, 2014, any
document which any foreign company is required to deliver to the Registrar shall be delivered to the
Registrar having jurisdiction over New Delhi.

16.Aster Limited, a foreign company with a place of business in India was established to conduct the
business online as to data interchange and other digital supply transactions. The said company failed
to deliver within the prescribed time period, some desired documents to the Registrar of Companies in
compliance to the Companies Act, 2013.

State the penalty cast on Aster Limited for the cause of its failure.

a) Aster Ltd. punishable with fine upto Rs. 3,00,000 + additional fine upto Rs. 50,000 in case of
continuing offence.
b) Aster Ltd. punishable with fine extending upto Rs. 25,000 + additional fine uptoRs. 50,000 in case of
continuing offence.
c) Aster Ltd. punishable with fine extending upto Rs. 5,00,000 + additional fine uptoRs. 50,000 in case
of continuing offence.
d) Aster Ltd. punishable with fine levied Rs. 1,00,000 to Rs. 3,00,000 + additional fine uptoRs. 50,000 in
case of continuing offence
Answer: d) Hint: As per section 392 of the Companies Act, 2013, if a foreign company fails to deliver
documents to the Registrar of Companies as required under section 380 of the Companies Act, 2013,
the foreign company shall be punishable with a fine which shall be not less than Rs. 1,00,000 but which

Page No. 231

may extend to Rs. 3,00,000 and in the case of a continuing offence, with an additional fine which may
extend to Rs. 50,000 for every day after the first during which the contravention continues.

17.Radix Ltd. is a company registered in Thailand. Although, it has no place of business established in
India, yet it is doing online business through remote delivery of healthcare services in India. State the
incorrect statement as to the nature of the Radix Ltd. in the light of the Companies Act, 2013-

a) It is not a foreign company as it has no place of business established in India.

b) It is a foreign company being involved in business activity through telemedicine.
c) It is a foreign company as its doing business through electronic mode.
d) It is a foreign company as it conducts business activity in India
Answer: a) Hint: According to section 2(42) of the Companies Act, 2013, “foreign company” means any
company or body corporate incorporated outside India which –

(a) has a place of business in India whether by itself or through an agent, physically or through
electronic mode; and
(b) conducts any business activity in India in any other manner.
According to the Companies (Registration of Foreign Companies) Rules, 2014, “electronic mode” means
carrying out electronically based, whether main server is installed in India or not, including, but not
limited to –

(a) business to business and business to consumer transactions, data interchange and other digital
supply transactions;
(b) offering to accept deposits or inviting deposits or accepting deposits or subscriptions in securities in
India or from citizens of India;
(c) financial settlements, web based marketing, advisory and transactional services, data base services
and products, supply chain management;
(d) online services such as telemarketing, telecommuting, telemedicine, education and information
research; and
all related data communication services whether conducted by e-mail, mobile devices, social media, cloud
computing, document management, voice or data transmission or otherwise.

Looking to the above description, it can be said that being involved in business activity through
telemedicine, Radix Ltd., will be treated as foreign company

18.

(i) As per provisions of the Companies Act, 2013, what is the status of XYZ Ltd., a company
incorporated in London, U.K., which has a share transfer office at Mumbai?
(ii) ABC Ltd., a foreign company having its Indian principal place of business at Kolkata, West Bengal
is required to deliver various documents to Registrar of Companies under the provisions of the
Companies Act, 2013. You are required to state, where the said company should deliver such
documents.
(iii) In case, a foreign company does not deliver its documents to the Registrar of Companies as

Page No. 232

 required under section 380 of the Companies Act, 2013, state the penalty prescribed under the
said Act, which can be levied.
Answer

(i) In terms of the definition of a foreign company under section 2 (42) of the Companies Act, 2013 a
“foreign company” means any company or body corporate incorporated outside India which:
(a) Has a place of business in India whether by itself or through an agent, physically or through
electronic mode; and
(b) Conducts any business activity in India in any other manner
According to section 386 of the Companies Act, 2013, for the purposes of Chapter XXII of the
Companies Act, 2013 (Companies incorporated outside India), “Place of business” includes a share
transfer or registration office.
From the above definition, the status of XYZ Ltd. will be that of a foreign company as it is
incorporated outside India, has a place of business in India and it may be presumed that it carries on
a business activity in India.
(ii) The Companies Act, 2013 vide section 380 requires every foreign company is required to deliver to
the Registrar for registration, within 30 days of the establishment of office in India, documents
which have been specified therein. According to the Companies (Registration of Foreign Companies)
Rules, 2014, any document which any foreign company is required to deliver to the Registrar shall
be delivered to the Registrar having jurisdiction over New Delhi.
(iii) The Companies Act, 2013 lays down the governing provisions for foreign companies in Chapter XXII
which is comprised of sections 379 to 393. The penalties for non filing or for contravention of any
provision for this chapter including for non filing of documents with the Registrar as required by
section 380 and other sections in this chapter are laid down in section 392 of the Act which provides
that if a foreign company contravenes the provisions of this Chapter, the foreign company shall be
punishable with a fine which shall not be less than Rs. 1,00,000 but which may extend to Rs.
3,00,000 and in the case of a continuing offence, with an additional fine which may extend to Rs.
50,000 for every day after the first during which the contravention continues and every officer of
the foreign company who is in default shall be punishable with imprisonment for a term which may
extend to six months or with fine which shall not be less than Rs. 25,000 but which may extend to
Rs. 5,00,000, or with both.

19.DEJY as Company Limited incorporated in Singapore desires to establish a place of business at

Mumbai. You being a practicing Chartered Accountant have been appointed by the company as a
liaison officer, for compliance of legal formalities on behalf of the company. Examining the provisions
of the Companies Act, 2013, state the documents you are required to furnish on behalf of the
company, on the establishment of a place of business at Mumbai.

Answer

Under section 380(1) of the Companies Act, 2013 every foreign company shall, within 30 days of the
establishment of place of business in India, deliver to the Registrar for registration the following
documents:

(a) a certified copy of the charter, statutes or memorandum and articles, of the company or other
Page No. 233
 instrument constituting or defining the constitution of the company. If the instruments are not in
the English language, a certified translation thereof in the English language;
(b) the full address of the registered or principal office of the company;
(c) a list of the directors and secretary of the company containing such particulars as may be
prescribed;
In relation to the nature of particulars to be provided as above, the Companies (Registration of
Foreign Companies) Rules, 2014, provide that the list of directors and secretary or equivalent
(by whatever name called) of the foreign company shall contain the following particulars, for each
of the persons included in such list, namely:
(1) personal name and surname in full;
(2) any former name or names and surname or surnames in full;
(3) father’s name or mother’s name and spouse’s name;
(4) date of birth;
(5) residential address;
(6) nationality;
(7) if the present nationality is not the nationality of origin, his nationality of origin;
(8) passport Number, date of issue and country of issue; (if a person holds more than one
passport then details of all passports to be given)
(9) income-tax permanent account number (PAN), if applicable;
(10) occupation, if any;
(11) whether directorship in any other Indian company, (Director Identification Number (DIN),
Name and Corporate Identity Number (CIN) of the company in case of holding directorship);
(12) other directorship or directorships held by him;
(13) Membership Number (for Secretary only); and
(14) e-mail ID.
(d) the name and address or the names and addresses of one or more persons resident in India
authorised to accept on behalf of the company service of process and any notices or other
documents required to be served on the company
(e) the full address of the office of the company in India which is deemed to be its principal place of
business in India;
(f) particulars of opening and closing of a place of business in India on earlier occasion or occasions;
(g) declaration that none of the directors of the company or the authorised representative in India
has ever been convicted or debarred from formation of companies and management in India or
abroad; and
(h) any other information as may be prescribed.

Page No. 234

According to the Companies (Registration of Foreign Companies) Rules, 2014, any document which any
foreign company is required to deliver to the Registrar shall be delivered to the Registrar having
jurisdiction over New Delhi.

20.ABC Limited, a foreign company failed to deliver some desired documents to the Registrar of
Companies as required under Section 380 of the Companies Act, 2013. State the provisions of penalty
prescribed under the said Act, which can be levied on ABC Limited for its failure.

Answer

If a foreign company fails to deliver documents to the Registrar of Companies as required under section
380 of the Companies Act, 2013, the foreign company shall be punishable with a fine which shall be
not less than Rs. 1,00,000 but which may extend to Rs. 3,00,000 and in the case of a continuing offence,
with an additional fine which may extend to Rs. 50,000 for every day after the first during which the
contravention continues.

Also, every officer of the foreign company who is in default shall be punishable with an imprisonment
for a term which may extend to six months or with a fine which shall not be less than Rs. 25,000 but
which may extend to Rs. 5,00,000 or with both. The penalty is provided in section 392 and thus ABC
Ltd. is liable for the contravention of section 380 of the Act.

21.Robertson Ltd. is a company registered in Thailand. Although, it has no place of business established
in India, yet it is doing online business through telemarketing in India. Whether it will be treated as a
Foreign Company under the Companies Act, 2013? Explain.

Answer
According to section 2(42) of the Companies Act, 2013, “foreign company” means any company or body
corporate incorporated outside India which –

(a) has a place of business in India whether by itself or through an agent, physically or through
electronic mode; and
(b) conducts any business activity in India in any other manner.
According to the Companies (Registration of Foreign Companies) Rules, 2014, “electronic mode” means
carrying out electronically based, whether main server is installed in India or not, including, but not
limited to–

(a) business to business and business to consumer transactions, data interchange and other digital
supply transactions;
(b) offering to accept deposits or inviting deposits or accepting deposits or subscriptions in securities in
India or from citizens of India;
(c) financial settlements, web based marketing, advisory and transactional services, data base
services and products, supply chain management
(d) online services such as telemarketing, telecommuting, telemedicine, education and information
research; and
(e) all related data communication services whether conducted by e-mail, mobile devices, social
media, cloud computing, document management, voice or data transmission or otherwise.

Page No. 235

Looking to the above description, it can be said that being involved in business activity through
telemarketing, Robertson Ltd., will be treated as foreign company

22.Galilio Ltd. is a foreign company in Germany and it established a place of business in Mumbai.
Explain the relevant provisions of the Companies Act, 2013 and rules made thereunder relating to
preparation and filing of financial statements, as also the documents to be attached alongwith the
financial statements by the foreign company.

Answer

Preparation and filing of financial statements by a foreign company:

According to section 381 of the Companies Act, 2013:
(i) Every foreign company shall, in every calendar year,—
(a) make out a balance sheet and profit and loss account in such form, containing such particulars
and including or having attached or annexed thereto such documents as may be prescribed,
and
(b) deliver a copy of those documents to the Registrar.
According to the Companies (Registration of Foreign Companies) Rules, 2014, every foreign
company shall prepare financial statement of its Indian business operations in accordance with
Schedule III or as near thereto as possible for each financial year including:

(1) documents that are required to be annexed should be in accordance with Chapter IX i.e.
Accounts of Companies.
(2) The documents relating to copies of latest consolidated financial statements of the parent
foreign company, as submitted by it to the prescribed authority in the country of its
incorporation under the applicable laws there.
(ii) The Central Government is empowered to direct that, in the case of any foreign company or class of
foreign companies, the requirements of clause (a) of section 381(1) shall not apply, or shall apply
subject to such exceptions and modifications as may be specified in notification in that behalf.
(iii) If any of the specified documents are not in the English language, a certified translation thereof in
the English language shall be annexed. [Section 381 (2)]
(iv) Every foreign company shall send to the Registrar along with the documents required to be
delivered to him, a copy of a list in the prescribed form, of all places of business established by the
company in India as at the date with reference to which the balance sheet referred to in section
381(1) is made.
According to the Companies (Registration of Foreign Companies) Rules, 2014, every foreign
company shall file with the Registrar, along with the financial statement, in
Form FC-3 with such fee as provided under Companies (Registration Offices and Fees) Rules, 2014 a
list of all the places of business established by the foreign company in India as on the date of
balance sheet.
According to the Companies (Registration of Foreign Companies) Rules, 2014, if any foreign
company ceases to have a place of business in India, it shall forthwith give notice of the fact to the
Registrar, and as from the date on which notice is so given, the obligation of the company to

Page No. 236

 deliver any document to the Registrar shall cease, if it does not have other place of business in
India.
(v) According to the Companies (Registration of Foreign Companies) Rules, 2014,
(a) Further, every foreign company shall, along with the financial statement required to be filed
with the Registrar, attach thereto the following documents; namely:-
(1) Statement of related party transaction
(2) Statement of repatriation of profits
(3) Statement of transfer of funds (including dividends, if any)
The above statements shall include such other particulars as are prescribed in the Companies
(Registration of Foreign Companies) Rules, 2014.

(b) All these documents shall be delivered to the Registrar within a period of 6 months of the
close of the financial year of the foreign company to which the documents relate.

23. Radix Ltd. is a company registered in Thailand. Although, it has no place of business established in
India, yet it is engaged in online business through remote delivery of healthcare services in India. State
the legal position as to the nature of the Radix Ltd. as a foreign company in the light of the Companies
Act, 2013. (8 Marks) (mtp-NOV 2020)

ANSWER

According to section 2(42) of the Companies Act, 2013, “foreign company” means any company or body
corporate incorporated outside India which –
(a) has a place of business in India whether by itself or through an agent, physically or through electronic
mode; and
(b) conducts any business activity in India in any other manner

According to the Companies (Registration of Foreign Companies) Rules, 2014, “electronic mode” means
carrying out electronically based, whether main server is installed in India or not, including, but not
limited to –
(a) business to business and business to consumer transactions, data interchange and other digital supply
transactions;
(b) offering to accept deposits or inviting deposits or accepting deposits or subscriptions in securities in
India or from citizens of India;
(c) financial settlements, web based marketing, advisory and transactional services, data base services
and products, supply chain management;
(d) online services such as telemarketing, telecommuting, telemedicine, education and information
research; and
(e) all related data communication services whether conducted by e-mail, mobile devices, social media,
cloud computing, document management, voice or data transmission or otherwise.
In view of the above provisions, Radix Ltd., will be treated as foreign company for being involved in
business activity through telemedicine

Page No. 237

24. Delegare Limited, incorporated in Singapore desires to establish a place of business at Mumbai. You
being a practicing Chartered Accountant have been appointed by the company as a liaison officer, for
compliance of legal formalities on behalf of the company. Examining the provisions of the Companies
Act, 2013, state the documents you are required to furnish on behalf of the company, on the
establishment of a place of business at Mumbai. (8 Marks) (mtp-I- july 2021)

ANSWER

a) Under section 380(1) of the Companies Act, 2013 every foreign company shall, within 30 days of the
establishment of place of business in India, deliver to the Registrar for registration the following
documents:
(1) a certified copy of the charter, statutes or memorandum and articles, of the company or other
instrument constituting or defining the constitution of the company. If the instruments are not in the
English language, a certified translation thereof in the English language;

(2) the full address of the registered or principal office of the company;

(3) a list of the directors and secretary of the company containing such particulars as prescribed under
the Companies (Registration of Foreign Companies) Rules, 2014,

(4) the name and address or the names and addresses of one or more persons resident in India
authorised to accept on behalf of the company service of process and any notices or other documents
required to be served on the company;

(5) the full address of the office of the company in India which is deemed to be its principal place of
business in India;

(6) particulars of opening and closing of a place of business in India on earlier occasion or occasions;

(7) declaration that none of the directors of the company or the authorised representative in India has
ever been convicted or debarred from formation of companies and management in India or abroad; and

(8) any other information as may be prescribed.

According to the Companies (Registration of Foreign Companies) Rules, 2014, any document which any
foreign company is required to deliver to the Registrar shall be delivered to the Registrar having
jurisdiction over New Delhi.

25. X Ltd., a foreign company along with the financial statement of FY 2020-2021 of its Indian business
operations have to file statement of related party transactions, repatriation of profits and statement of
transfer of funds with the Registrar latest by: (mtp-II- july 2021)

(a) April 30,2021

(b) June 30,2021

(c) September 30, 2021

Page No. 238

(d) December 31, 2021 (1 Marks)

ANSWER- c

26. In which of the following cases the issue of prospectus by a company incorporated outside India
will be invalid in law considering the provisions of Chapter XXII of Companies Act, 2013. (1 Mark) (mtp-
NOV 2020)

(a) The Consent to the issue of the prospectus required from any person, as an expert is attached to the
copy for the registration of prospectus to be delivered to the Registrar.
(b) In case where the prospectus is signed by the duly authorized agents of the directors and the copy
of power of attorney is not attached with the copy of prospectus to be delivered for Registration.
(c) A company incorporated outside India not having place of business in India.
(d) A Company to be incorporated outside India.

ANSWER- b

27. Phil Heath Systems Incorporated (PHSI), is a foreign Company registered in Australia and has
established a place of business in India. The financial statements pertaining to the Indian business
operations for the year ended 31st March, 2020 were prepared by the Company. Referring to the
provisions of the Companies Act, 2013, advise the Company on the following matters:

(i) Whether the accounts of the Company pertaining to Indian business operations shall be audited ? If
yes, by whom ?

(ii) What is the due date for filing the audited financial statements with the Registrar of Companies
(RoC) ?

(iii) What is the effect of the contracts entered by an Indian Company with PHSI in case PHSI has not
filed financial statements with the RoC?

(iv) In which e-forrn and within what period, the annual return of the Indian operations of the foreign
company shall be filed with the Registrar of Companies? (4 Marks) (past exam jan 2021)
ANSWER

Phil Health Systems Incorporated (PHSI), a foreign company, is registered outside India and has a place of
business in India. As it has prepared financial statements pertaining to the Indian business operations, it
reflects conducts of business activity in India. Therefore, provisions related to companies incorporated
outside India shall be applicable to it. Following are the answer in line with said nature of the company:

(i) According to the Companies (Registration of Foreign Companies) Rules, 2014, PHSI shall get its
accounts, pertaining to the Indian business operations, audited by a practicing Chartered Accountant in
India or a Firm or Limited Liability Partnership of practicing Chartered Accountants.

Page No. 239

(ii) The audited financial statements of Indian business operations of PHSI shall be delivered to the
Registrar within a period of six months of the close of the financial year of the foreign company to which
the documents relate i.e., latest by 30th September 2020.
Provided that the Registrar may, for any special reason, and on application made in writing by the foreign
company concerned, extend the said period by a period not exceeding three months i.e. latest by 31st
December 2020.

(iii) According to Section 393 of the Companies Act, 2013, any failure by a company to comply with the
provisions of Chapter XXII of the Companies Act, 2013 (chapter XXII deals with ‘Companies incorporated
Outside India’), shall not affect the validity of any contract, dealing or transaction entered into by the
company or its liability to be sued in respect thereof.
In the instant case, non-filing of financial statements by PHSI shall not invalidate the contracts entered by
Indian companies with PHSI.
However, PHSI shall not be entitled to bring in any suit, claim any set off, make any counter claim or
institute any legal proceeding in respect of any such contract until the company has filed the financial
statements.
(iv) According to the Companies (Registration of Foreign Companies) Rules, 2014, every foreign company
shall prepare and file an annual return in Form FC-4 along with prescribed fees, within a period of 60 days
from the last day of its financial year i.e. by 30th May 2020, to the Registrar containing the particulars as
they stood on the close of the financial year

28. Analyse under the provisions of the Companies Act, 2013, whether the following Companies can be
considered as a Foreign Company: (past exam jan 2021)

(i) A Company incorporated outside India and registered in Moscow, Russia has installed its main server
in Moscow for maintaining office automation software by cloud computing for its client in India.

(ii) A Company which is incorporated outside India employs agents in India but has no place of business
in India.

(iii) A Company incorporated outside India and registered in Australia has authorized Mr. X in India to
source customers and subsequently to enter into contracts with them on behalf of the Company.

(iv) A Company incorporated outside India and is registered in Mauritius. All the business models,
financial strategy, important decisions are carried and taken out at the Board Meetings held only in
India. (4 Marks)

Answer

(A) (i) As per the facts, a company is registered in Moscow, Russia and has installed its main server in
Moscow for maintaining office automation software by Cloud Computing for its client in India. Thus, it can
be said that this company has a place of business in India through electronic mode and is conducting
business activity in India. Hence, the above company is a foreign company by taking into account the
provisions of Section 2(42) of the Companies Act, 2013 read with the Companies (Registration of Foreign
Companies) Rules, 2014.

Page No. 240

(ii) In this case, a company is incorporated outside India and employs agents in India but does not have a
place of business in India. As per section 2(42) of the Companies Act, 2013, foreign company means any
company or body corporate incorporated outside India which has a place of business in India whether by
itself or through an agent, physically or through electronic mode. Since, the company though employed
agent in India but have no place of business in India, so it cannot be termed as foreign company.

(iii) In the given situation, a company is registered in Australia. It has authorised Mr. X in India to source
customers and enter into contract on behalf of the company. Thus, it can be said that this company has
both place of business in India through an agent, physically or through electronic mode; and is conducting
business activity in India. Hence, this company is a foreign company as per the Companies Act, 2013.

(iv) In the given situation, a company is registered in Mauritius. However, it does not have a place of
business in India whether by itself or through an agent, physically or through electronic mode; and does
not conduct any business activity in India in any other manner. Mere holding of board meetings and
executing business models, financial strategies and important decisions in India cannot be termed as
conducting business activity in India. Hence, the above company is not a foreign company as per the
Companies Act, 2013.

29. (RTP NOV 2021)

Tokushia Motors Ltd. was incorporated in Japan. Its share capital is held by the following persons-
Citizens of India – 10%
Indian Companies– 40%
The company has opened its representative office in Mumbai on 15th January, 2021, in order to receive
orders from the Indian Market and make available the delivery of Japanese luxury cars to the Indian
purchasers.
The company was not aware of the Indian Company Law, hence could not file the required documents
to the Registrar. The company could file all the required documents only on 28th February, 2021.

Based on the above facts, answer the following questions:

(i) Whether the provisions of Chapter XXII of the Companies Act, 2013 are applicable on Tokushia
Motors Ltd?
(ii) What documents are required to be filed by Tokushia Motors Ltd to the Registrar of Companies?
(iii) By what time all the requisite documents shall be filed?

ANSWER

(i) Section 379(2) of the Companies Act, 2013, provides that where not less than fifty per cent of the paid-
up share capital, whether equity or preference or partly equity and partly preference, of a foreign
company is held by one or more citizens of India or by one or more companies or bodies corporate
incorporated in India, or by one or more citizens of India and one or more companies or bodies corporate
incorporated in India, whether singly or in the aggregate, such company shall comply with the provisions
of this Chapter and such other provisions of this Act as may be prescribed with regard to the business
carried on by it in India as if it were a company incorporated in India.
In the given case, although the company was incorporated in Japan, however its share capital of not less
than 50% is held by the Indian citizens and Indian companies, hence in terms of section 379(2) all the
provisions pertaining to Chapter XXII of the Companies Act, 2013, shall be applicable on it.

Page No. 241

(ii) In terms of section 380(1) every foreign company shall, within thirty days of the establishment of its
place of business in India, deliver to the Registrar for registration—
(a) a certified copy of the charter, statutes or memorandum and articles, of the company or other
instrument constituting or defining the constitution of the company and, if the instrument is not in the
English language, a certified translation thereof in the English language;
(b) the full address of the registered or principal office of the company;
(c) a list of the directors and secretary of the company containing such particulars as may be prescribed;
(d) the name and address or the names and addresses of one or more persons resident in India
authorised to accept on behalf of the company service of process and any notices or other documents
required to be served on the company;
(e) the full address of the office of the company in India which is deemed to be its principal place of
business in India;
(f) particulars of opening and closing of a place of business in India on earlier occasion or occasions;
(g) declaration that none of the directors of the company or the authorised representative in India has
ever been convicted or debarred from formation of companies and management in India or abroad; and
(h) any other information as may be prescribed.
Further its sub-section (3) provides that where any alteration is made or occurs in the documents
delivered to the Registrar under this section, the foreign company shall, within thirty days of such
alteration, deliver to the Registrar for registration, a return containing the particulars of the alteration in
the prescribed form.

(iii) In the given, case the company had established its representative office in India on 15.01.2021, it was
required to file the documents latest by 14.02.2021 with the Registrar.

Page No. 242

 9 Miscellaneous Provisions

ATTEMPTS
MAY NOV MAY NOV NOV JAN JULY NOV
COVERAGE
2018 2018 2019 2019 2020 2021 2021 2021

STUDY Q.- 19, 20, 21, 22, 23, 24

MAT

PAST NO NO NO
Q-11, 12 Q-14 Q-30 ------
EXAMS QUES QUES QUES

Q-27,
MTP Q-10 Q-15 Q-1 to 9 Q-10, 13 Q-26 ----
28, 29

NO
RTP Q-25 Q-15, 16 Q-17, 20 Q-18 Q-10 Q-30, 31
QUES

Page No. 243

Multiple Choice Questions

MTP Mar 2019 QN no 5

1. Aakaar Solar Energy Private Limited was allowed the status of a ‘dormant company’ after a
certificate to this effect was issued on 1st July 2018 by the Registrar of Companies, Delhi and
Haryana. Mention the latest date after which the Registrar is empowered to initiate the process of
striking off the name of the company if Aakaar Solar Energy continues to remain as a dormant
company.

(a) After 30th June, 2023.

(b) After 30th June, 2019.

(c) After 30th June, 2020.

(d) After 30th June, 2021.

Answer: Option A

MTP Mar 2019 QN no 8

2.Nanny Marcons Private Limited was incorporated on 9th June, 2017. For the financial year 2017-
2018, it did not file its financial statements and annual returns. For the time being the company desires
to be treated as ‘inactive company’ since it does not intend to carry on any business permitted by its
Memorandum.

As to when ROC can issue certificate of status of dormant company to ‘Nanny Marcons’ on the basis of
non-submission of financial statements if the company makes an application to the Registrar in this
respect.

a) After non-submission of financial statements for the two financial years i.e. 2018-19 and 2019-20.
b) After non-submission of financial statements for the next financial year i.e. 2018-19.
c) After non-submission of financial statements for the three financial years i.e. 2018-19, 2019-20 and
2020-21.
d) After non-submission of financial statements for the four financial years i.e. 2018-19, 2019-20,
2020-21 and 2021-22.
Answer: Option B

MTP Mar 2019 QN no 19

3.In case a Valuer becomes interested in any property, stock etc of the company, he may be
appointed as Registered Valuer of the company after a cooling off period of:

(a) 3 years
(b) 5 years
(c) 1 year
(d) He will never be appointed as Registered Valuer of the company

Page No. 244

Answer: Option A

MTP Mar 2019 Qn no 20

4.Any person who is aggrieved by the order of Appellate Tribunal may approach to the Supreme Court
on any question of law within:-

(a) 30 Days
(b) 45 Days
(c) 60 Days
(d) 90 Days
Answer: Option C

MTP Apr 2019 Qn no 10

5.Mr. X, director of BRT Ltd. entered into an arrangement with his friend and acquired asset on the
name of the BRT Ltd. Prior approval for such arrangement was required by a resolution of the
company in general meeting. The notice for approval of the resolution by the company included the
particulars of the arrangement along with the value of the assets duly calculated by a registered
valuer. Later the Board of company discovered the loss arising out of incorrect statement in the
report made the valuer. State the liability of the valuer in the given situation-

a) valuer can claim immunity stating that company is not bound to accept his opinion being an
expert.
b) the valuer shall be punishable with fine only for the incorrect statement given in the report
c) valuer is liable to be convicted for the incorrect statement given in the report made with an
intent to defraud the company or its members .
d) valuer cannot be held liable for damages to the company as the company have seek the prior
approval of company in general meeting.
Answer Option C

6.MTP Apr 2019

Mr. Raman, is appointed as valuer in April, 2018 in ABC Ltd. He undertook the valuation of the
assets of the company in 2018. In case, Mr. Raman becomes interested in any property, stock etc. of
the company, he may not be eligible to undertake valuation in such property of the company till:

(a) 2019

(b) 2020

(c) 2021

(d) He will never be appointed as Registered Valuer of the company.

Answer Option C

Page No. 245

7.MTP April 2019 QN no 15

Where the Registrar has reasonable cause to believe, he shall send a notice to the company and all the
directors of the company, of his intention to remove the name of the company from the register of
companies and requesting them to send relevant details within a period of ---------days from the date
of the notice.

a) 15
b) 30
c) 45
d) 21
Answer:Option B

8.MTP Apr 2019 Qn no 17

What shall not be the duties of a Registered Valuer?

a) to make an impartial, true and fair valuation of any assets which may be required to be valued
b) to exercise due diligence while performing the functions as valuer
c) to undertake valuation of any assets in which he has a direct or indirect interest or becomes so
interested at any time during or after the valuation of assets.
d) to make the valuation in accordance with such rules as may be prescribed
Answer: Option C

9.MTP Apr 2019 QN no 20

Mr. Rufftuff was appointed as a Managing Director in the government company, Constant Limited. He
was of 70 years with good experience in the field of finance. He was appointed for 6 years .State the
correct statement as to term of appointment of Mr. Rufftuff in the said company:

a) He cannot be appointed at all

b) He can be appointed by passing special resolution for the period not exceeding 5 years
c) Central government may appoint on application of Board to him for the period of 5 years
d) He can be appointed by passing special resolution, or where no such special resolution is passed,
appointed by the Central Government on an application made by the Board, for the period
exceeding 5 years.
Answer: Option D

10.March 2018 Qn no 3(b) 8 Marks:, RTP May 2020 Qn no 10 , (MTP-NOV 2019)

Eminence Ltd. after passing special resolution filed an application to the registrar for removal of the
name of company from the register of companies. On the complaint of certain members, Registrar
came to know that already an application is pending before the Tribunal for the sanctioning of a
compromise or arrangement proposal. The application was filed by the Eminence Ltd. two months
before the filing of this application to the Registrar.

Determine the given situations in the lights of the given facts as per the Companies Act, 2013:
Page No. 246
(i) Legality of filing an application by Eminence Ltd. before the registrar.
(ii) Consequences if Eminence Ltd. files an application in the above given situation.
In case registrar notifies eminence Ltd as dissolved under section 248 in compliances to the required
provisions, what remedy will be available to the aggrieved party?

Answer:

According to the Section 248(2) of the Companies Act, 2013, a company may, after extinguishing all its
liabilities, by a special resolution, or consent of seventy-five per cent. members in terms of paid-up
share capital, file an application in the prescribed manner to the Registrar for removing the name of
the company from the register of companies on all or any of the grounds specified in sub-section (1)
and the Registrar shall, on receipt of such application, cause a public notice to be issued in the
prescribed manner.

Further Section 249 provides restrictions on making application under section 248 .
An application under section 248 on behalf of a company shall not be made if, at any time in the previous
three months, the company—
(a) has changed its name or shifted its registered office from one State to another;
(b) has made a disposal for value of property or rights held by it, immediately before cesser of trade or
otherwise carrying on of business, for the purpose of disposal for gain in the normal course of
trading or otherwise carrying on of business;
(c) has engaged in any other activity except the one which is necessary or expedient for the purpose
of making an application under that section, or deciding whether to do so or concluding the affairs
of the company, or complying with any statutory requirement;
(d) has made an application to the Tribunal for the sanctioning of a compromise or arrangement and
the matter has not been finally concluded; or
(e) is being wound up under Chapter XX of this Act or under the Insolvency and Bankruptcy Code,
2016.
Violation of above conditions on filing of application: If a company files an application in violation of
restriction given above, it shall be punishable with fine which may extend to one lakh rupees.

Rights of registrar on non-compliance of conditions by the company: An application filed under above
circumstances, shall be withdrawn by the company or rejected by the Registrar as soon as conditions
are brought to his notice.

Aggrieved person to file an appeal against the order of registrar: As per section 252(1),any person
aggrieved by an order of the Registrar, notifying a company as dissolved under section 248, may file an
appeal to the Tribunal within a period of three years from the date of the order of the Registrar and if
the Tribunal is of the opinion that the removal of the name of the company from the register of
companies is not justified in view of the absence of any of the grounds on which the order was passed
by the Registrar, it may order restoration of the name of the company in the register of companies.
However, a reasonable opportunity is given to the company and all the persons concerned.
According to the above provisions, following are the answers:
(i) As per the restrictions marked in the Section 249(d) stating that an application under section 248
on behalf of a company shall not be made if, at any time in the previous three months, the

Page No. 247

 company has made an application to the Tribunal for the sanctioning of a compromise or
arrangement and the matter has not been finally concluded.
As per the facts application to the registrar for removal of the name of company from the register of
companies, was filed by the Eminence Ltd. within three months to the filing of an application to the
Tribunal for approval of compromise or arrangement proposal. Therefore, filing of such an application by
Eminence Ltd is not valid.
(i) If a company files an application in above situation, it shall be punishable with fine which may
extend to one lakh rupees. An application so filed, shall be withdrawn by the company or rejected
by the Registrar as soon as conditions are brought to his notice.
(ii) According to the provision given in section 252(1), a person aggrieved by an order of the Registrar,
notifying Eminence Ltd. as dissolved under section 248, may:
 file an appeal to the Tribunal within a period of three years from the date of the order of the
Registrar, and
 if the Tribunal is of the opinion that the removal of the name of the company from the register
of companies is not justified in view of the absence of any of the grounds on which the order
was passed by the Registrar, it may order restoration of the name of the Eminence Ltd. in the
register of companies.
 A reasonable opportunity is given to the Eminence Ltd. and all the persons concerned.

11.May 2018 Qn no 3(b) 8 Marks:

Kojol Research Development Ltd. was registered to innovate unique business idea emerging from
research and development in a new area. It is a future project and the Company has no significant
accounting transactions and business activities. Therefore the company made an application to RoC
for obtaining the status of a Dormant Company. The application is under. process. In the
meantime, the Company without extinguishing all its liabilities filed an application to RoC for
removing the name of the Company, after passing a special resolution giving effect to this.

In the light of the provisions of the Companies Act, 2013, analyse the following:

1. Whether the application is tenable under the Act?

2. What are the restrictions imposed under the Act for making application by a Company to
remove the name of the Company from the register of RoC?
3. What are the penal consequences III case of violation of restrictions?

Answer:

(a) According to Section 248 (1) of the Companies Act, 2013, where the Registrar has reasonable cause
to believe that—
(a) a Company has failed to commence its business within one year of its incorporation, or;

(b) the subscribers to the memorandum have not paid the subscription which they have
undertaken to pay within the period of 180 Days from the date of incorporation of a company
and a declaration under sub section (1) of section 11 to this effect has not been filed within
Page No. 248
 180 days of its incorporation.
(c) a Company is not carrying on any business or operation for a period of two immediately
preceding financial years and has not made any application within such period for obtaining
the status of a dormant Company under section 455,
-he shall send a notice to the Company and all the Directors of the Company, of his intention to
remove the name of the Company from the register of Companies and requesting them to send
their representations along with copies of the relevant documents, if any, within a period of
thirty days from the date of the notice.
According to Section 248 (2) of the Companies Act, 2013, a Company may, after extinguishing all
its liabilities, by-
 a special resolution, or
 consent of seventy-five per cent. members in terms of paid-up share capital,
-file an application in the prescribed manner to the Registrar for removing the name of the
Company from the register of Companies on all or any of the grounds specified in sub-section
(1) and the Registrar shall, on receipt of such application, cause a public notice to be issued in
the prescribed manner:

Whether the application is tenable under the Act?

In the light of the above provisions, since the Company has applied for the status of dormant Company
and also without extinguishing its liabilities applied for the removal of the name of the Company from
Register of members, such an application shall not be tenable.

Restrictions

According to Section 249(1) of the Companies Act, 2013, An application under Section 248 of the
Companies Act, 2013, on behalf of a Company shall not be made if, at any time in the previous three
months, the Company—
(a) has changed its name or shifted its registered office from one State to another;
(b) has made a disposal for value of property or rights held by it, immediately before ceases of trade or
otherwise carrying on of business, for the purpose of disposal for gain in the normal course of
trading or otherwise carrying on of business;
(c) has engaged in any other activity except the one which is necessary or expedient for the purpose of
making an application under that section, or deciding whether to do so or concluding the affairs of
the company, or complying with any statutory requirement;
(d) has made an application to the Tribunal for the sanctioning of a compromise or arrangement and
the matter has not been finally concluded; or
(e) is being wound up under Chapter XX of this Act or under the Insolvency and Bankruptcy Code,
2016.

Penal Consequences

According to section 249(2) of the Companies Act, 2013, if a Company files an application in violation of
restriction as given in sub-section (1) as given above, it shall be punishable with fine which may extend

Page No. 249

to one lakh rupees.

12.May 2018 Qn no 2(c) 2 Marks:

All offences under the Companies Act, 2013 are non-cognizable except offences of fraud covered
under Section 447 of the Act. Explain the validity of the statement.

Answer:

Offences to be Non-cognizable: As per Section 439 (1) of the Companies Act, 2013, every offence under
the Companies Act, 2013, except the offences referred to in section 212(6), shall be deemed to be non-
cognizable under the Code of Criminal Procedure.

As per Section 212(6), offence covered under Section 447 of this Act shall be cognizable.
The given statement in the question is valid.

* The offences covered under Section 7(5) & (6), Section 34, Section 36, sub- section 38(1), Section
46(5), Section 56(7), Section 66(10), Section 140(5), Section 206(4),
Section 213, Section 229, Section 251(1), Section 339 (3) and Section 448 attract the punishment for fraud
provided in section 447.

13.Aug 2019 Qn no 3(b) 8 Marks:

Rudraksh Ltd. related to manufacturing of tyres works, was incorporated in January 2017. Due to
certain cause, it failed to commence its business for 1 year. In April, 2018, Rudraksh Ltd. filed a
application to the tribunal for the merger of the company with the Shri Narayan Ltd.

In between, in August 2018, Rudraksh Ltd. after extinguishing all its liabilities in compliance, filed an
application to the Registrar for the removal of its name from the register of companies.
Shri Narayan Ltd, came to know of the fact of their filing of an application for removal of names. It took
the plea that section 248 w.r.t. filing of application for removal of names shall not be applicable on the
Rudraksh Ltd., due to pendency of an application of a proposed merger scheme.
Determine as per the given facts, whether the objection made by the Shri Narayan Ltd. against the
filing of an application for removal of name by Rudraksh Ltd. is tenable.
Answer:
As per section 248 of the Companies Act, 2013, the name of the companies can be removed from the
register of companies either by registrar or through an application of the company by itself on the
ground as mentioned here-

(a) a company has failed to commence its business within one year of its incorporation, or;
(b) the subscribers to the memorandum have not paid the subscription which they have undertaken to
pay within the period of 180 Days from the date of incorporation of a company and a declaration
under sub section (1) of section 11 to this effect has not been filed within 180 days of its
incorporation.
(c) a company is not carrying on any business or operation for a period of two immediately preceding
financial years and has not made any application within such period for obtaining the status of a
dormant company under section 455,

Page No. 250

Further section 249 of the Companies Act, 2013 marks certain restrictions on the filing of an application
under section 248. Accordingly, an application under section 248 on behalf of a company shall not be
made if, at any time in the previous three months, if the company

(a) has changed its name or shifted its registered office from one State to another;
(b) has made a disposal for value of property or rights held by it, immediately before cesser of trade or
otherwise carrying on of business, for the purpose of disposal for gain in the normal course of
trading or otherwise carrying on of business;
(c) has engaged in any other activity except the one which is necessary or expedient for the purpose of
making an application under that section, or deciding whether to do so or concluding the affairs of
the company, or complying with any statutory requirement;
(d) has made an application to the Tribunal for the sanctioning of a compromise or arrangement and
the matter has not been finally concluded; or
(e) is being wound up under Chapter XX of this Act or under the Insolvency and Bankruptcy Code,
2016.
As per the given fact, failure of commencement of business by Rudraksh Ltd. within one year of
incorporation was a reasonable ground for the filing of an application for the removal of its name from
the register of companies. However, section 249 puts a restriction on the application of section 148 on
the basis of grounds given in the said section.
According to the stated ground, that if the company has made an application to the Tribunal at any time
in the previous three months from an application filed under section 248, for the sanctioning of a
compromise or arrangement scheme and the matter has not been finally concluded, there in such case,
that respective company cannot file application.
Here in the given stance, Rudraksh Ltd. filed a application to the tribunal in April, 2018 for the proposed
merger scheme of the company with the Shri Narayan Ltd. Whereas, Rudraksh Ltd. after extinguishing
all its liabilities in compliance, filed an application in August, 2018 to the Registrar for the removal of
its name from the register of companies. Filing of an application under section 248 is after the period of
three months from the date of filing of application for the sanction of proposal of Merger. So objection
raised by Shri Narayanan Ltd. is not tenable and Rudraksh Ltd. can file an application for removal of its
name from register of companies.

14.May 2019 Qn no 5(a) 8 Marks:

Gulmohar Ltd. is a company registered in India for last 5 years. Since last 2 financial years, it has not
been carrying on any business or operations and has not filed financial statements and annual returns
saying that it has not made any significant accounting transaction during the last two financial years.
Considering the current situation, Directors of the Company is contemplating to apply to Registrar of
Companies to obtain status of dormant or inactive company. Advise them on :

(i) Whether Gulmohar Ltd. is eligible to apply to Registrar of Companies to obtain dormant status for
the company?
(ii) Will your answer be different if Gulmohar Ltd is continuing payment of fees to Registrar of
Companies and payment of rentals for its office and accounting records for last two financials
years?
(iii) Is special resolution in general meeting a pre-requisite to make an application to Registrar of

Page No. 251

 Companies for obtaining the status of dormant company?
What will be your answer if it is found after making an application of dormant company to Registrar of
Companies that an investigation is pending against the company which was ordered 6 months ago?

Answer:

According to section 455 of the Companies Act, 2013, an inactive company may make an application to
the Registrar in such manner as may be prescribed for obtaining the status of a dormant company. Here,
“inactive company” means a company which has not been carrying on any business or operation, or has
not made any significant accounting transaction during the last two financial years, or has not filed
financial statements and annual returns during the last two financial years.

Gulmohar Ltd., since from last two years is not carrying on business or operations and has not filed
financial statements and annual returns saying it has not made any significant accounting transaction
during the last two financial years. Thus, it falls within the definition of inactive company as stated above
and hence is eligible to apply to Registrar of Companies to obtain the status of Dormant company.
(i) According to Explanation to section 455, “significant accounting transaction” means any transaction
other than—
(1) payment of fees by a company to the Registrar;
(2) payments made by it to fulfill the requirements of this Act or any other law;
(3) allotment of shares to fulfill the requirements of this Act; and
(4) payments for maintenance of its office and records.
Thus, Gulmohar Ltd. is still eligible to apply to the Registrar of Companies to obtain the status of
Dormant company even if it has continued ‘payment of fees to Registrar of Companies and payment of
rentals for its office and accounting records’ for last two years, as these transactions have been kept
outside the purview of significant accounting transactions.
(ii) According to the Rule 3 of the Companies (Miscellaneous) Rules, 2014, a company may make an
application in prescribed form to the Registrar for obtaining the status of a Dormant Company in
accordance with the provisions of section 455 after passing a special resolution to this effect in the
general meeting of the company or after issuing a notice to all the shareholders of the company for
this purpose and obtaining consent of at least 3/4th shareholders (in value).
Thus, special resolution is a pre- requisite to make an application to Registrar of Companies for
obtaining the status of dormant company.
(iii) According to the Rule 3 of the Companies (Miscellaneous) Rules, 2014, a company shall be eligible to
apply under this rule only, if no inspection, inquiry or investigation has been ordered or taken up or
carried out against the company.
According to section 455(6), the Registrar shall strike off the name of a dormant company from the
register of dormant companies, which has failed to comply with the requirements of section 455.
In the given case, Gulmohar Ltd. was not eligible to apply for the status of a dormant company as an
investigation was pending against the company which was ordered 6 months ago. But since, it has
already made an application and then it came to the light about the pending investigation against
the company, the Registrar shall not register it as a dormant company and if already registered as a
dormant company, strike off the name of a dormant company from the register of dormant
companies as the company has contravened the necessary requirements.

Page No. 252

15.Oct 2018 Qn no 3(b) 8 Marks:, RTP Nov 2018

JKL Research Development Limited is a registered Company. The company has a unique business idea
emerging from research and development in a new area. However, it is a future project and the
company has no significant accounting transactions and business activities at present. The company
desires to obtain the status of a 'Dormant Company'. Advise the company regarding the provisions of
the Companies Act, 2013 in this regard and the procedure to be followed in this regard.

Answer:
The provisions related to the Dormant companies is covered under section 455 of the Companies Act,
2013. According to provisions -

1. a company is formed and registered under this Act for the purpose of a future project or to hold an
asset or intellectual property and has no significant accounting transaction.
2. Such company or an inactive company may make an application to the Registrar in such manner as
may be prescribed for obtaining the status of a dormant company.
3. The Registrar shall allow the status of a dormant company to the applicant and issue a certificate
after considering application.
4. The Registrar shall maintain a register of dormant companies in such form as may be prescribed.
In case of a company which has not filed financial statements or annual returns for two financial years
consecutively, the Register shall issue a notice to that company and enter the name of such company in
the register maintained for dormant companies.
A dormant company shall have such minimum number of directors, file such documents and pay such
annual fee as may be prescribed to the Registrar to retain its dormant status in the register and may
become an active company on an application made in this behalf accompanied by such documents and
fee as may be prescribed. However, the Registrar shall strike off the name of a dormant company from
the register of dormant companies, which has failed to comply with the requirements of this section.
Thus, JKL Research Development Limited may follow the above procedure to obtain the status of a
‘Dormant Company’.

16.RTP Nov-18:
XYZ Ltd. had filed certain documents with Registrar of Companies (RoC). The said documents were
authenticated by the RoC and kept on record. In a suit against the company the RoC produced the said
documents in the court of law.

XYZ Ltd. intends to raise objection on the said documents on the ground that the documents need to
be authenticated with further proof or production of the original document as evidence. Advice XYZ
Ltd. as per the provisions of the Companies Act, 2013.

Answer:
Admissibility of certain documents as evidence:
Section 397 of the Companies Act, 2013 provides for admissibility of certain documents as evidence.
According to the provisions of that section, any document reproducing or derived from returns and
documents filed by a company with the Registrar on paper or in electronic form or stored on any
electronic data storage device or computer readable media by the Registrar, and authenticated by the

Page No. 253

Registrar or any other officer empowered by the Central Government in such manner as may be
prescribed, shall be deemed to be a document for the purpose of this Act and the rules made
thereunder and shall be admissible in any proceedings thereunder without further proof of production
of the original as evidence of any contents of the original of or any fact stated therein of which direct
evidence is admissible.
On the ground stated above, XYZ Ltd. cannot validly raise any objection on the documents already filed by
it with the Registrar.

17.RTP May 2019 Qn no 10

The Board of Directors of APCO Limited a listed company for carrying out the valuation of the
immovable properties standing in the name of the company as required under the provisions of the
Companies Act, 2013 proposes to appoint Mr. Mehta, an individual as the valuer. Referring to the
provisions of the Companies Act, 2013 read with the Companies (Registered Valuers and Valuation)
Rules, 2017, the Audit Committee is of the opinion that the Board of Directors does not have the right
to appoint the valuer. Decide.

Answer

Valuation by Registered Valuers (Section 247): According to the provisions of section 247 of the
Companies Act, 2013 read with the Companies (Registered Valuers and Valuation ) Rules, 2017, where a
valuation is required to be made in respect of any property, stocks, shares, debentures, securities or
goodwill or any other assets (herein referred to as the assets) or net worth of a company or its liabilities
under the provision of this Act, it shall be valued by a person having such qualifications and experience
and registered as a valuer in such manner, on such terms and conditions as may be prescribed and
appointed by the audit committee or in its absence by the Board of Directors of that company.

Hence, in the given instance, proposal for appointment of Mr. Mehta as the valuer by the Board of
directors of APCO Ltd. is against the said provision. In fact, valuer shall be appointed by the audit
committee or in its absence by the Board of Directors of that company.

18.Nov 2019 Qn no 5(b) 4 Marks

M/s KIL Limited, a listed company, proposed to acquire a plant for consideration other than cash from
Mr. KK, a director. The Managing Director of the Company identified Mr. JK a registered valuer under
the provisions of the Companies Act, 2013 for the purpose of valuation of the plant. Mr. KK acquired
the plant 48 months back from a partnership firm in which the spouse of Mr. JK is a partner. The
Managing Director of the Company issued an order appointing Mr. JK as a registered valuer. Examine
and decide whether the decision of appointment and the mode of appointment is valid under the
provisions of the Companies Act, 2013?

Answer

1. Restriction on acquiring assets for consideration other than cash: According to Section 192 (1) of the
Companies Act, 2013, no company shall enter into an arrangement by which-

(a) a director of the company or its holding, subsidiary or associate company or a person connected
with him acquires or is to acquire assets for consideration other than cash, from the company; or

Page No. 254

 (b) the company acquires or is to acquire assets for consideration other than cash, from such director
or person so connected.
2. Relaxation of restriction: The above restriction shall be relaxed i.e. the company may enter into an
arrangement involving non-cash transactions, if prior approval for such arrangement is accorded
by a resolution of the company in general meeting.
3. Contents of notice issued for approval of resolution: The notice for approval of the resolution in
general meeting issued by the company shall include the particulars of the arrangement. It shall
also include the value of the assets involved in such arrangement duly calculated by a registered
valuer.
4. As per section 247(2) of the Companies Act, 2013, the valuer shall not undertake valuation of any
assets in which he has a direct or indirect interest or becomes so interested at any time during a
period of 3 years prior to his appointment as valuer or 3 years after the valuation of assets was
conducted by him.

As per the facts of the question and the provisions of the Act, M/s KIL Limited acquired plant from
consideration other than cash from Mr. KK, a director. The Act has restricted such a non- cash
transaction from a director. The company can enter into such a transaction only if it obtains prior
approval for the same in general meeting. It is also required that notice for such meeting shall also
include the value of the assets involved in such arrangement duly calculated by a registered valuer.
As per further facts of the question, the Managing director of the company identified Mr. JK to be the
registered valuer. Mr. KK acquired the plant 48 months (i.e. 4 years) back from a partnership firm in which
the spouse of Mr. JK is a partner.
In the light of the facts of the question and provision of law, since more than 3 years (here 4 years) has
passed when Mr. KK acquired the asset from a partnership firm in which the spouse of Mr. JK is a
partner, Mr. JK can be validly appointed as a registered valuer.
However, according to section 247(1) of the Companies Act, 2013, where a valuation is required to be
made in respect of any property, it shall be valued by a person having such qualification and experience,
registered as a valuer and being a member of an organisation recognised, in such manner, on such terms
and conditions as may be prescribed and appointed by the audit committee or in its absence by the Board
of Directors of that company.
In view of above, the mode of appointment of Mr. JK is not valid as he is appointed by the Managing
Director of the company.
19.(i) Central Government and Government of Maharashtra together hold 40% of the paid-up share
capital of MN Limited. A government company also holds 20% of the paid-up share capital in MN
Limited.

(ii) PQ Limited is a subsidiary but not a wholly owned subsidiary of a government company.

Examine with reference to the provisions of the Companies Act, 2013 whether MN Limited and PQ
Limited can be considered as Government Company.
Answer
According to section 2(45) of the Companies Act, 2013, “Government company” means any company in
which not less than fifty-one per cent of the paid-up share capital is held by the Central Government, or
by any State Government or Governments, or partly by the Central Government and partly by one or

Page No. 255

more State Governments, and includes a company which is a subsidiary company of such a Government
company.
(i) The Central Government and Government of Maharashtra together hold 40% of the paid-up share
capital of MN Limited. A government company also holds 20% of the paid-up share capital in MN
Limited.
In this case, MN Limited is not a Government company because the holding of the Central
Government and Government of Maharashtra is 40% which is less than the 51% prescribed under
the definition of Government Company. The holding of the government company in MN Limited of
20% cannot be taken into account while counting the prescribed limit of 51%.
(ii) PQ Limited is a subsidiary but not a wholly owned subsidiary of a government company
In this case, PQ Limited is a government company as the definition of Government Company clearly
specifies that a Government Company includes a company which is a
subsidiary company of a Government company. Whether the subsidiary should be a wholly owned
subsidiary or not is not clearly mentioned under the definition of the Government company under
section 2(45).
20. Mr. Raman, is appointed as valuer in April, 2018 in ABC Ltd. He undertook the valuation of the
assets of the company in 2018. In case Mr. Raman becomes interested in any property, stock etc of the
company, he may be not be eligible to undertake valuation in such property of the company till: (RTP
MAY 2019)

(a) 2019
(b) 2020
(c) 2021
(d) He will never be appointed as Registered Valuer of ABC Ltd.
Answer: c) Hint: As per section 247(2) of the Companies Act, 2013, the valuer appointed under sub-
section (1) shall,— not undertake valuation of any assets in which he has a direct or indirect interest or
becomes so interested at any time during a period of three years prior to his appointment as valuer or
three years after the valuation of assets was conducted by him.
21.(MTP-MAY 2019)

Aakaar Solar Energy Private Limited was allowed the status of a ‘dormant company’ after a certificate
to this effect was issued on 1st July 2018 by the Registrar of Companies, Delhi and Haryana. Mention
the latest date after which the Registrar is empowered to initiate the process of striking off the name of
the company if Aakaar Solar Energy continues to remain as a dormant company.

(a) After 30th June, 2023.

(b) After 30th June, 2019.
(c) After 30th June, 2020.
(d) After 30th June, 2021.

Page No. 256

Answer: a) Hint: Refer Proviso to Rule 8 (1) of the Companies (Miscellaneous) Rules, 2014 which
states that the Registrar shall initiate the process of striking off the name of the company if such
company remains as a dormant company for a period of consecutive five years.

22.Nanny Marcons Private Limited was incorporated on 9th June, 2017. For the financial year 2017-
2018, it did not file its financial statements and annual returns. For the time being the company desires
to be treated as ‘inactive company’ since it does not intend to carry on any business permitted by its
Memorandum. As to when ROC can issue certificate of status of dormant company to ‘Nanny Marcons’
on the basis of non-submission of financial statements if the company makes an application to the
Registrar in this respect.

a) After non-submission of financial statements for the two financial years i.e. 2018-19 and 2019-20.
b) After non-submission of financial statements for the next financial year i.e. 2018-19.
c) After non-submission of financial statements for the three financial years i.e. 2018- 19, 2019-20
and 2020-21.
d) After non-submission of financial statements for the four financial years i.e. 2018-19, 2019-20,
2020-21 and 2021-22.
Answer: b) Hint: Refer Explanation (i) to Section 455 (1) which states that an ‘inactive company’ means
a company which has not filed financial statements and annual returns during the last two financial
years.

23. Explain the meaning of 'Fraud' in relation to the affairs of a company and the punishment
provided for the same in Section 447 of the Companies Act, 2013.

Answer:

As per the explanation given to section 447 of the Companies Act, 2013, ‘Fraud’ in relation to affairs
of a company or anybody corporate, includes any act, omission, concealment of any fact or abuse of
position committed by any person or any other person with the connivance in any manner, with intent
to deceive, to gain undue advantage from, or injure the interests of, the company or its shareholders
or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss.

“Wrongful gain” means the gain by unlawful means of property to which the person gaining is not
legally entitled

“Wrongful loss” means, the loss by unlawful means of property to which the person losing is legally
entitled.

Punishment:
(i) Without prejudice to any liability including repayment of any debt under this Act or any other
law for the time being in force, any person who is found to be guilty of fraud involving an
amount of at least ten lakh rupees or one per cent of the turnover of the company, whichever
is lower, shall be punishable with imprisonment for a term which shall not be less than six
months but which may extend to ten years and shall also be liable to fine which shall not be less
than the amount involved in the fraud, but which may extend to three times the amount

Page No. 257

 involved in the fraud.
(ii) Where the fraud in question involves public interest, the term of imprisonment shall not be less
than three years.
However, where the fraud involves an amount less than ten lakh rupees or one per cent of the turnover
of the company, whichever is lower, and does not involve public interest, any person guilty of such
fraud shall be punishable with imprisonment for a term which may extend to five years or with fine
which may extend to fifty lakh rupees or with both.

24. JKL Research Development Limited is a registered Public Limited Company. The company has a
unique business idea emerging from research and development in a new area. However, it is a future
project and the company has no significant accounting transactions and business activities at
present. The company desires to obtain the status of a 'Dormant Company'. Advise the company
regarding the provisions of the Companies Act, 2013 in this regard and the procedure t o be followed
in this regard.

Answer

The provisions related to the Dormant companies is covered under section 455 of the Companies Act,
2013. According to provisions-

1. a company is formed and registered under this Act for the purpose of a future project or to hold
an asset or intellectual property and has no significant accounting transaction.
2. Such company or an inactive company may make an application to the Registrar in such manner
as may be prescribed for obtaining the status of a dormant company.
3. The Registrar shall allow the status of a dormant company to the applicant and issue a
certificate after consideration of the application.
4. The Registrar shall maintain a register of dormant companies in such form as may be
prescribed.
In case of a company which has not filed financial statements or annual returns for two financial years
consecutively, the Register shall issue a notice to that company and enter the name of such company
in the register maintained for dormant companies.
A dormant company shall have such minimum number of directors, file such documents and pay such
annual fee as may be prescribed to the Registrar to retain its dormant status in the register and may
become an active company on an application made in this behalf accompanied by such documents and
fee as may be prescribed. However, the Registrar shall strike off the name of a dormant company from
the register of dormant companies, which has failed to comply with the requirements of this section.
Thus, JKL Research Development Limited may follow the above procedure to obtain the status of a
‘Dormant Company’.

25. (RTP MAY 2018)

(i) An officer of a company was allotted one room for two years in a guest house owned by the
Company at some other city where he used to stay while on tour. It came to notice of the company that
he had not vacated the said room after the expiry of two years and is holding the unauthorized
possession of that room and has been permitting to stay outsiders in the said room, at a rent of Rs. 500

Page No. 258

per day. The record shows that he had permitted the outsider for 45 days and collected Rs. 22,500 and
retained the said amount with him. As per the letter of allotment, there was no such clause which can
be invoked against him for making any recovery on account of such wrongful occupation. Analyse in the
given situation whether manager of the company can seek recovery from the officer of the company
under any of the provisions of his employment or the Companies Act.
(ii) Mr. Z, a director of Southern Highway Tolls Private Limited, is duly authorized by the Board of
directors to prepare and file returns, report or other documents to the Registrar of Companies on
behalf of the company. Though he filed all the required documents to Registrar in time, however,
subsequently it was found that the filed documents were false and inaccurate in respect to material
particulars (knowing it to be false) submitted to the Registrar. Discuss the penal provision under the
Companies Act, 2013 in the light of the given situation.
ANSWER

(i) Penalty for wrongful withholding of property: Section 452 of the Companies Act, 2013 provides for
Penalty for wrongful withholding of property. According to the section:
(1) If any officer or employee of a company -
(a) Wrongfully obtains possession of any property, including cash of the company; or
(b) having any such property including cash in his possession, wrongfully withholds it or knowingly applies
it for the purposes other than those expressed or directed in the articles and authorized by this Act, he
shall, on the complaint of the company or of any member or creditor or contributory thereof, be
punishable with fine which shall not be less than 1 lakh rupees but which may extend to 5 lakh rupees.
(2) The Court trying an offence may also order such officer or employee to deliver up or refund, within a
time to be fixed by it, any such property or cash wrongfully obtained or wrongfully withheld or knowingly
misapplied, the benefits that have been derived from such property or cash or in default, to undergo
imprisonment for a term which may extend to 2 years.
Hence, as per the provisions of the Companies Act, 2013 and not giving any emphasis on the terms of
employment, the manager of the company can recover possession of the room and the cash wrongfully
obtained and the benefits that have been derived from such property or cash.

(ii) Penalty for false statements (Section 448 of the Companies Act, 2013)
According to section 448 of the Companies Act, 2013, save as otherwise provided in this Act, if in any
return, report, certificate, financial/statement, prospectus, statement or other document required by, or
for, the purposes of any of the provisions of this Act or the rules made there under, any person makes a
statement, -
(a) which is false in any material particulars, knowing it to be false; or
(b) which omits any material fact, knowing it to be material,
he shall be liable under section 447.
In the present case, Mr. Z, a director of Southern Highway Tools Private Limited filed returns, report or
other documents to Registrar in time, however, subsequently it was found that the filed documents were
false and inaccurate in respect to material particulars (knowing it to be false) submitted to the Registrar.
Hence, Mr. Z shall be liable under section 447 for false statements

Penal Provisions: As per Section 447, any person who is found to be guilty under this section shall be
punishable with imprisonment for a term which shall not be less than 6 months but which may extend to
10 years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but

Page No. 259

which may extend to 3 times the amount involved in the fraud, provided that, where the fraud involves
public interest, the term of imprisonment shall not be less than 3 years.
Hence, Mr. Z a director of Southern Highway Tools Private Limited shall be punishable with imprisonment
and fine prescribed as aforesaid.

26. (mtp-NOV 2020)

Mela Nidhi Ltd. provides following information from its financial statements as on 31.03.2021, which are
audited by QR LLP, an audit firm which has completed 3 years of its 2nd term, in the company:

Particulars (Rs. in lakhs)

Total Deposits 260
Gross Income 90
Profits 40

One of the directors, Mr. Raj has completed his 10 years term in the company and Mr. Yash is willing to
propose his own candidature for directorship in the company through a notice.
The company accepted new deposits from 12 persons as follows

Number of People who made deposit Type of Deposit made

6 Term Deposit
4 Savings Deposit
2 Recurring Deposit

Apart from the aforementioned persons, Mr. Dev, an Indian citizen, wanted to make a term deposit for
Rs. 1 lakh, who recently returned from US after staying for 4 years, for carrying on business in India,
whose proposal is on hold with company.
Based on the above case scenario, answer the following questions no. 6 to 9.

1. What should be the minimum value of net owned funds and unencumbered term deposits that Mela
Nidhi Ltd. should have, considering the amount of total deposits?
(a) Rs. 13 lakhs and Rs. 26 lakhs respectively
(b) Rs. 26 lakhs and Rs. 26 lakhs respectively
(c) Rs. 10 lakhs and Rs. 26 lakhs respectively
(d) Rs. 20 lakhs and Rs. 13 lakhs respectively
ANSWER- a
2. If Mela Nidhi Ltd. provides locker facilities to its members then how much maximum income it could
have earned from such facilities and what maximum amount of dividend it can declare, if there was a
default in payment of interest by Mela Nidhi Ltd.?
(a) Rs. 22.5 lakhs and Rs. 10 lakhs respectively
(b) Rs. 18 lakhs and Rs. 8 lakhs respectively
(c) Rs. 9 lakhs and Rs. 4 lakhs respectively

Page No. 260

(d) Rs. 18 lakhs and Rs. 10 lakhs respectively

ANSWER- d
3. For how many years, Mr. Raj is not eligible for reappointment as director in Mela Nidhi Ltd. and what
amount of deposit Mr. Yash should make along with the notice of his candidature for directorship?
(a) 2 years and Rs. 10,000 respectively
(b) 2 years and no deposit is required in case of Nidhi company
(c) 5 years and Rs. 10,000 respectively
(d) 2 years and Rs. 1,00,000 respectively

ANSWER- a
4. What shall be the aggregate figure of minimum number of shares that would have been issued to the
aforementioned 12 persons and minimum number of shares that savings account holder and recurring
account holder should atleast held, if face value of shares is Rs. 10 each?
(a) 66 and 6 respectively
(b) 96 and 12 respectively
(c) 120 and 6 respectively
(d) 66 and 12 respectively

ANSWER- c
27. Best Nidhi Limited has been incorporated on 01/04/2020 as a Nidhi Company under section 406 of
the Companies Act, 2013 with 250 members. Its main object is to accept deposits from members and
lend loans to members for the mutual benefit of the members. It also provides locker facilities to
members. For FY 2020-2021, the income of the company (before deducting any expense) was Rs.
40,00,000. Expenses incurred during the year amounted to Rs.10,00,000. Calculate the maximum
amount of rental income that could have been earned during the FY 2020-2021 by the company.
(mtp-I- july 2021)

(a) Rs. 10,00,000

(b) Rs. 7,50,000

(c) Rs. 8,00,000

(d) Rs. 6,00,000 (2 Marks)

ANSWER-c

28. A valuer in a company will be appointed by the ----------- or in its absence, by the -------------of that
company.

Page No. 261

(a) Board of directors, Shareholders

(b) Board of Directors, Audit committee

(c) Shareholders, Audit committee

(d) Audit Committee, Board of Directors (1 Mark) (mtp-I- july 2021)

ANSWER-d

29. State whether, Mr. R, the director of Roma Ltd. who is already been subjected to a penalty for
default under the Companies Act, 2013, repeats such default, shall be liable for subsequent defaults –
(mtp-II- july 2021)

(a) No

(b) Yes, if default is committed with in period of 1 year from the date of commission of first default.

(c) Yes, if default is committed with in period of 1 year from the date of order passed by NCLT

(d) Yes, if default is committed with in period of 3 years from the date of order imposing such penalty
passed by the Adjudicating officer. (1 Mark)

ANSWER- d

30. After discontinuing business operations for two financial years, the directors and other persons in
charge of the management of CDR Limited with the intention of evading some liabilities of the
company, made an application to the Registrar for removal of its name. The Registrar scrutinised the
documents and allowed the name of the company to be removed from the Registrar of Companies. A
group of persons, who had supplied goods to the company and were not paid off, incurred loss as a
result of removal of the name of the company and were aggrieved of the above action. They
approached you for your advice whether they will succeed to claim their dues from anybody and
whether the persons in charge of the management of the company shall be considered as guilty by any
means. Referring to the provisions of the Companies Act, 2013, advise them.
(4 Marks) (past exam jan 2021)

ANSWER

Section 251 of the Companies Act, 2013 deals with the fraudulent application for Removal of Name.
Where it is found that an application by a company under sub-section (2) of section 248 has been made
with the object of evading the liabilities of the company or with the intention to deceive the creditors or
to defraud any other persons, the persons in charge of the management of the company shall,
notwithstanding that the company has been notified as dissolved—

(a) be jointly and severally liable to any person or persons who had incurred loss or damage as a result of
the company being notified as dissolved; and

Page No. 262

(b) be punishable for fraud in the manner as provided in section 447.

Here, in the given case, directors and other persons in charge of the management of the CDR Limited,
made an application to the Registrar for removal of its name from Register of Companies on basis of not
carrying on any business or operation for a period of two immediately preceding financial years.
According to section 248(2), a company may, after extinguishing all its liabilities, by a special resolution or
consent of seventy-five per cent. members in terms of paid-up share capital, file an application to the
registrar. From the given facts, CDR Limited without extinguishing its liabilities against a group of
creditors, who were not paid off and incurred loss, applied for removal of name. In light of stated
provision, it can be concluded that CDR Limited filed an application for removal of names with the object
of evading the liabilities of the company and with the intention to deceive the creditors. Accordingly,
creditors will succeed to claim their dues from the directors and other persons who are in charge of the
management of the CDR Limited.

30. (RTP NOV 2021)

Pankaj Nidhi Limited, incorporated under section 406 of the Companies Act, 2013. Pankaj Nidhi Limited
wants to enter into an agreement for acquiring another company by purchase of its securities. Now the
management of the Pankaj Nidhi Limited is in dilemma with respect to the requirment of entering into
such an agreement. Pankaj Nidhi Limited approached you to provide with the best course of action
considering the provisions of the Companies Act, 2013.

(a) As per the Nidhi Rules, 2014, Nidhi company can enter into an agreement for acquiring other
company by purchase of its securities provided the Nidhi company has passed a special resolution in its
general meeting or have obtained the previous approval of the Regional Director having jurisdiction
over such Nidhi.

(b) As per the Nidhi Rules, 2014, Nidhi company can enter into an agreement for acquiring other
company by purchase of its securities provided the Nidhi company has passed a special resolution in its
general meeting and also obtained the previous approval of the Regional Director having jurisdiction
over such Nidhi.

(c) As per the Nidhi Rules, 2014, Nidhi company can enter into an agreement for acquiring other
company by purchase of its securities provided the Nidhi company has passed a special resolution in its
general meeting and have obtained the previous approval of the Registrar of Companies (Roc) having
jurisdiction over such Nidhi.

(d) As per the Nidhi Rules, 2014, Nidhi company can enter into an agreement for acquiring other
company by purchase of its securities provided the Nidhi company has passed a special resolution in its
general meeting or have obtained the previous approval of the Registrar of Companies (Roc) having
jurisdiction over such Nidhi.

ANSWER- b

31. Adheera Limited, a company incorporated under the Companies Act, 2013, has not entered into
significant accounting transaction during the last one financial year. Accordingly, the management of
the company was thinking to obtain the status of the dormant company under section 455 of the

Page No. 263

Companies Act, 2013. The Registrar on the filings made during the last financial year found some
irregularities and ordered inspection of the books of

accounts under section 207 of the Companies Act, 2013. Now the management of the Company
consults you, to advise on the application to be made to Registrar for obtaining the status of the
dormant company considering the provisions of the Companies Act, 2013.
(1) The company shall be able to obtain the status of the dormant company after passing special
resolution to this effect in the general meeting of the company.
(2) The company shall not be able to obtain the status of the dormant company as company shall be
inactive i.e. not carrying significant accounting transactions during the last 2 financial years.
(3) The company shall be able to obtain the status of the dormant company after issuing notice to all
the shareholders of the company for this purpose and obtaining consent of at least 3/4th shareholders
in value.
(4) The company shall not be able to obtain the status of the dormant company as inspection u/s 207 of
the Act is going on against the Company. (RTP NOV 2021)

(a) Only (3)

(b) Either (2) or (4)

(c) Either (1) or (3)

(d) Both (2) and (4)

ANSWER- c

Page No. 264

 10 Compounding of offences, Adjudication, Special Courts

ATTEMPTS
MAY NOV MAY NOV NOV JAN JULY NOV
COVERAGE
2018 2018 2019 2019 2020 2021 2021 2021

STUDY Q.- 1, 10, 11, 12, 13, 14, 15, 16, 17, 18,19, 20
MAT

PAST NO NO NO NO
Q-5 Q-27 ------
EXAMS QUES QUES QUES QUES

MTP Q-2, 3 Q-4, 5 Q-6, 8, 9 Q-3 Q-25, 26 Q-24 -----

NO NO
RTP Q-22 Q-7, 23 Q-1 Q-8, 15, 21 Q-28
QUES QUES

Page No. 265

Multiple Choice Questions

1.(RTP MAY 2019)

Who is empowered to designate court of session as special courts for trial of offence of money
laundering?

(a) Central government in consultation with the Chief Justice of Supreme Court
(b) High court in consultation with the Chief Justice of Supreme Court
(c) Central government in consultation with the Chief Justice of Session Court
(d) Central government in consultation with the Chief Justice of High Court

Answer: Option D

Descriptive Questions

2.March 2018 Qn no 6(c)(ii) 4 Marks:

Mr. A is a judicial magistrate in a lower court. He was appointed to hold the office of the special
court for the speedy disposal of the pending cases under the Act. Decide in the light of the
Companies Act, 2013, whether the appointment of Mr. A is tenable.

Answer:

Appointment of judge: A Special Court shall consist of a single judge who shall be appointed by the
Central Government with the concurrence of the Chief Justice of the High Court within whose
jurisdiction the judge to be appointed is working. A person shall not be qualified for appointment as a
judge of a Special Court unless he is, immediately before such appointment, holding office of a
Sessions Judge or an Additional Sessions Judge.
Since in the given case, Mr. A, a judicial magistrate of a lower court was appointed to hold the office of
the special court for the speedy disposal of the pending cases under the Act. As per the above provision,
person shall be qualified for appointment as a judge of a Special Court if he, immediately before such
appointment, holding office of a Sessions Judge or an Additional Sessions Judge. Here Mr. A. was not
complying with the eligibility criteria, so his appointment as a judge of special court is not tenable.

3.March 2018 Qn no 2(c) 2 Marks:, (MTP-NOV 2019)

Excel Ltd. committed an offence under the Companies Act, 2013. The offences falls within the
jurisdiction of a special court of Bundi district in which the registered office of Excel Ltd was situated.
However, in that Bundi district, there were two special courts one in X place and other in Y place.
Identify the jurisdiction of the special court for trial of an offences committed by Excel Ltd.

Answer:

All offences which are punishable in this Act with imprisonment of 2 years or more, shall be triable only
by the special court established for the area in which the registered office of the company in relation to
Page No. 266
which the offence is committed. According to section 436 of the Companies Act, 2013 where there are
more special courts than one for such area, by such one of them as may be specified in this behalf by
the high court concerned.

Accordingly, in the given case, there are more than one special court in such area where registered office
of Excel Ltd. is situated. The jurisdiction for trail in special court will be specified by High Court of the State
(i.e. Rajasthan).

4.Aug 2018 Qn no 2(c) 2 Marks:

Describe the Power of special court on trial of an offence where it appears to the Special Court that
the nature of the case is such that the sentence of imprisonment for a term exceeding one year may
have to be passed.

Answer:

When at the commencement of, or in the course of, a summary trial, it appears to the Special Court
that –

 the nature of the case is such that the sentence of imprisonment for a term exceeding one year
may have to be passed, or that it is, for any other reason, undesirable to try the case summarily,
 the Special Court shall, after hearing the parties, record an order to that effect and thereafter recall
any witnesses who may have been examined and proceed to hear or rehear the case in
accordance with the procedure for the regular trial.

5.Oct 2018 Qn no 2(c) 2 Marks: (PAST EXAM NOV 2018)

What are the powers of the Central Government under the Companies Act, 2013 regarding Appeal
against acquittal?

Answer:

Appeal against acquittal: According to section 444 of the Companies Act, 2013, the Central
Government may, in any case arising under this Act, direct –

(i) any company prosecutor, or

(ii) authorise any other person either by name or by virtue of his office, to present an appeal from an
order of acquittal passed by any court, other than a High Court.

Appeal presented by such prosecutor or other person shall be deemed to have been validly presented to
the appellate court.

6.MTP Mar 2019 Qn no 5(a) (II) 4 Marks

Mr. Truth, a director of Horizan Private Limited, is duly authorized by the Board of directors to
prepare and file returns, report or other documents to the Registrar of Companies on behalf of the
company. Though he filed all the required documents to Registrar in time, however, subsequently it

Page No. 267

was found that the filed documents were false and inaccurate in respect to material particulars
(knowing it to be false) submitted to the Registrar.

State the penal provision under the Companies Act, 2013?

Answer

According to section 448 of the Companies Act, 2013, if in any return, report, certificate,
financial/statement, prospectus, statement or other document required by, or for, the purposes of any
of the provisions of this Act or the rules made there under, any person makes a statement,

(a) which is false in any material particulars, knowing it to be false; or

(b) which omits any material fact, knowing it to be material, he shall be liable under section 447.
In the present case, Mr. Truth, a director of Horizan Private Limited filed returns, report or
other documents to Registrar in time, however, subsequently it was found that the filed documents were
false and inaccurate in respect to material particulars (knowing it to be false) submitted to the Registrar.
Hence, Mr. Truth shall be liable under section 447 for false statements.
Penal Provisions: As per Section 447, any person who is found to be guilty under this section shall be
punishable with imprisonment for a term which shall not be less than 6 months but which may extend to
10 years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but
which may extend to 3 times the amount involved in the fraud, provided that, where the fraud involves
public interest, the term of imprisonment shall not be less than 3 years.
Hence Mr. Truth, a director of Horizan Private Limited shall be punishable with imprisonment and fine
prescribed as aforesaid.

7.RTP Nov-18:
What is the object of constituting Panel for Mediation and Conciliation under the Companies Act,
2013? Who can file application for mediation and conciliation?

Answer:
Under section 442 of the Companies Act, 2013, it is provided that the Central Government shall
maintain a panel of experts for mediation between the parties during pendency of any proceedings
before the Central Government or the Tribunal or the Appellate Tribunal under the Act. In common
parlance, mediation means intervention of some third party in a dispute with the intention to resolve
the dispute. Similarly, conciliation means the powers of adjusting or settling disputes in a friendly
manner through extra judicial means. The object behind the panel is to dispose the matter pending
before the Government / Tribunal as mentioned above.

Filing of application: Application for mediation and conciliation can be made by:

(a) any parties to the proceedings (It shall be accompanied with such fees and in such form as may be
prescribed)
(b) The Central Government or the Tribunal or the Appellate Tribunal before which any proceeding is
pending any, suo moto refer any matter pertaining to such proceeding to such number of experts
as it may deem fit.

Page No. 268

8.MTP Mar 2019 QN no 3(a)(ii) 4 Marks ,RTP May 2020 Question no 20

In the annual general meeting of XYZ Ltd., while discussing on the matter of retirement and
reappointment of director Mr. X, allegations of fraud and financial irregularities were marked against
him by some members. This resulted into chaos in the meeting. The situation was normal only after
the Chairman declared about initiating an inquiry against

Answer

Section 439 of the Companies Act, 2013 provides that offences under the Act shall be non- cognizable.
As per this section:

1. Every offence under this Act except the offences referred to in sub section (6) of section 212 shall be
deemed to be non-cognizable within the meaning of the said Code.
2. No court shall take cognizance of any offence under this Act which is alleged to have been
committed by any company or any officer thereof, except on the complaint in writing of the
Registrar, a shareholder, member of the company, or of a person authorized by the Central
Government in that behalf.
Thus, in the given situation, the court shall not initiate any suo moto action against the director Mr. X
without receiving any complaint in writing of the Registrar of Companies, a shareholder of the company
or of a person authorized by the Central Government in this behalf.

9.May 2019 Qn no 2(c) 2 Marks:

What are the powers of the Central Government under the Companies Act, 2013 regarding appeal
against acquittal?

Answer:

Power of the Central Government regarding Appeal against Acquittal [Section 444 of the Companies Act,
2013]
The Central Government may, in any case arising under this Act, direct -
 any company prosecutor or
 authorise any other person either by name or by virtue of his office,
to present an appeal from an order of acquittal passed by any court, other than a High Court, and an
appeal presented by such prosecutor or other person shall be deemed to have been validly presented to
the appellate court.
Study Material
10. Central Government for providing of speedy trial of offences under the Companies Act, 2013, shall
establish/ designate such numbers of special courts in an area-
(a) Only 1
(b) Not more than 2

(c) More than 2

Page No. 269

(d) As many as may be necessary

Answer: d) Hint: Section 435 of the Companies Act, 2013

11.Which of the following courts shall be deemed to be a special court for the prevailing of the
provisions of the Code of Criminal Procedure to the proceedings before a Special Court -
(1) Court of Session
(2) Metropolitan Magistrate

(3) Judicial Magistrate of the First Class

(4) Judicial Magistrate of the Second Class Choose the correct options-

(a) 1, 2 & 4
(b) 2, 3 & 4
(c) 1, 2, & 3
(d) 1, 3, & 4
Answer: c) Hint: Section 438 of the Companies Act, 2013

12.Which factors among the below given are taken into consideration while deciding the quantum of
fine/ punishment levied under this Act:
(1) failure in filing of any documents
(2) size of the Company
(3) injury to employees of the company
(4) nature of business carried on by the company
(a) 1 & 2 only
(b) 2 & 4 only
(c) 1 & 4 only

Answer: b) Hint: section 446A of the Companies Act, 2013

13.Mr. Rudra, an employee of the company filed a complaint against the company for the illegal issue
and transfer of securities before the special court. State the correct basis for rejection of the said
complaint:
(a) This is a non-cognizable offence, so out of the jurisdiction of the special court.

(b) The court is barred to entertain such complaint as is out of the jurisdiction of the special court.

(c) Employee is not a competent person to file a complaint against the company for an offence relating
to issue and transfer of securities
(d) Compliant can be filed by the Registrar, a shareholder or a member of the company, or of a person
authorised by the Central Government in respect to the same.

Page No. 270

Answer: c) Hint: As per section 439(3) of the Companies Act, 2013, no court shall take cognizance of
any offence under this Act which is alleged to have been committed by any company or any officer
thereof, except on the complaint in writing of the Registrar, a shareholder or a member of the company,
or of a person authorised by the Central Government in that behalf.

Provided that the court may take cognizance of offences relating to issue and transfer of securities and
non-payment of dividend, on a complaint in writing, by a person authorised by the Securities and
Exchange Board of India.
Provided further that nothing in this sub-section shall apply to a prosecution by a company of any of its
officers.

14. Which offences are deemed to be Non- cognizable under the Companies Act, 2013? Enumerate the
relevant provisions.

Answer:

Offences to be non-cognizable: According to section 439 of the Companies Act, 2013:

(i) Notwithstanding anything in the Code of Criminal Procedure, 1973, every offence under this Act
except the offences referred to in sub-section (6) of section 212 shall be deemed to be non-
cognizable within the meaning of the said Code.
No court shall take cognizance of any offence under this Act which is alleged to have been
committed by any company or any officer thereof, except on the complaint in writing of the
Registrar, a shareholder or a member of the company, or of a person authorised by the Central
Government in that behalf.

Whereas in case of a government companies, court shall take cognizance of an offence under this
Act which is alleged to have been committed by any company or any officer thereof on the
complaint in writing of a person authorized by the Central Government in that behalf. [Vide
Notification G.S.R. 463(E) dated 5th June 2015]
(ii) The court may take cognizance of offences relating to issue and transfer of securities and non-
payment of dividend, on a complaint in writing, by a person authorised by the Securities and
Exchange Board of India.
(iii) Nothing in this sub-section shall apply to a prosecution by a company of any of its officers.
(iv) Where the complainant is the Registrar or a person authorised by the Central Government, the
presence of such officer before the Court trying the offences shall not be necessary unless the
court requires his personal attendance at the trial.
(v) The above provisions shall not apply to any action taken by the liquidator of a company in respect
of any offence alleged to have been committed in respect of any of the matters in Chapter XX or in
any other provision of this Act relating to winding up of companies.
(vi) The liquidator of a company shall not be deemed to be an officer of the company.

Page No. 271

15. (RTP- MAY 2020)

In the annual general meeting of XYZ Ltd., while discussing on the matter of retirement and
reappointment of director Mr. X, allegations of fraud and financial irregularities were levelled against
him by some members. This resulted into chaos in the meeting. The situation was normal only after the
Chairman declared about initiating an inquiry against the director Mr. X, however, could not be re-
appointed in the meeting. The matter was published in the newspapers next day. On the basis of such
news, whether the court can take cognizance of the matter and take action against the director on its
own?

Justify your answer with reference to the provisions of the Companies Act, 2013.

Answer:

Section 439 of the Companies Act, 2013 provides that offences under the Act shall be non- cognizable. As
per this section:

1. Notwithstanding anything in the Code of Criminal Procedure, 1973, every offence under this Act
except the offences referred to in sub section (6) of section 212 shall be deemed to be non-
cognizable within the meaning of the said Code.
2. No court shall take cognizance of any offence under this Act which is alleged to have been
committed by any company or any officer thereof, except on the complaint in writing of the
Registrar, a shareholder or a member of the company, or of a person authorized by the Central
Government in that behalf.
Thus, in the given situation, the court shall not initiate any suo moto action against the director Mr. X
without receiving any complaint in writing of the Registrar of Companies, a shareholder of the company
or of a person authorized by the Central Government in this behalf.
16. What are provisions related to constitution and working of the Mediation and Conciliation Panel as
per Section 442 of the Companies Act, 2013?

Answer:

Mediation and Conciliation Panel: In common parlance, Mediation means intervention of some third
party in a dispute with the intention to resolve the dispute.

Conciliation means the process of adjusting or settling disputes in a friendly manner through extra judicial
means. This new provision introduced by the Companies Act, 2013 has come into force with effect from
1st April, 2014 vide notification dated 26th of March, 2014. Section 442 of the Companies Act, 2013 deals
with the constitution and functioning of the mediation and conciliation panel in order to dispose the
matter.

Section 442 lays the following law with respect to the constitution and working of the Mediation and
Conciliation Panel:
(1) Central Government to maintain the Panel of Mediators: The Central Government shall maintain a

Page No. 272

 panel of experts to be known as Mediation and conciliation panel for mediation between the
parties during the pendency of any proceedings before the Central Government or the Tribunal or
the Appellate Tribunal under this Act.
Hence, it is important that the case should be pending before the Central Government or the
Tribunal or the Appellate Tribunal under this Act.
(2) Panel consisting of experts: The panel shall consist of such number of experts having such
qualification as may be prescribed.
(3) Filing of application: Application for mediation and conciliation can be made by:
(i) any parties to the proceedings. (It shall be accompanied with such fees and in such form as may be
prescribed.)
(ii) The Central Government or the Tribunal or the Appellate Tribunal before which any
proceeding is pending may, suo motu refer any matter pertaining to such proceeding to such
number of experts as it may deem fit.
(4) Appointment of expert/s from panel: The Central Government or the Tribunal or the Appellate
Tribunal before which any proceeding is pending may appoint one or more experts from the Panel
as may be deemed fit.
(5) Fees, terms and conditions of the experts: The fee and other terms and conditions of experts of the
Mediation and Conciliation Panel shall be such as may be prescribed.
(6) Procedure for the disposal of matter: In order to dispose the matter, the Mediation and
Conciliation Panel shall follow such procedure as may be prescribed.
(7) Period for the disposal of matter: The Mediation and Conciliation Panel shall dispose of the matter
referred to it within a period of three months from the date of such reference and forward its
recommendations to the Central Government or the Tribunal or the Appellate Tribunal, as the case
may be.
(8) Filing of objection on the recommendation of the panel: Any party aggreived by the
recommendation of the Mediation and Conciliation Panel may file objections to the Central
Government or the Tribunal or the Appellate Tribunal, as the case may be.
17. What are the powers of the Central Government under the Companies Act, 2013 regarding:

(i) To appoint company prosecutors

(ii) To Appeal against acquittal
Answer

(i) Power of Central Government to appoint company prosecutors: This section 443 of the Companies Act,
2013 has come into force with effect from 12th September, 2013. This section lays down the provisions
seeking to provide that the Central Government may appoint company prosecutors with the same powers
as given under the Cr. PC on Public Prosecutors.

Page No. 273

Appointment of company prosecutors: The Central Government may appoint (generally, or for any case,
or in any case, or for any specified class of cases in any local area) one or more persons, as company
prosecutors for the conduct of prosecutions arising out of this Act; and

Powers and Privileges: The persons so appointed as company prosecutors shall have all the powers and
privileges conferred on Public Prosecutors appointed under section 24 of the Cr. PC.

Appeal against acquittal: According to section 444 of the Companies Act, 2013, the Central Government
may, in any case arising under this Act, direct –
any company prosecutor, or
authorise any other person either by name or by virtue of his office, to present an appeal from an order
of acquittal passed by any court, other than a High Court.

Appeal presented by such prosecutor or other person shall be deemed to have been validly presented to
the appellate court.

18. What is the object of Constituting Panel for Mediation and Conciliation under the Companies Act,
2013? Who can file application for mediation and conciliation?

Answer

Under section 442 of the Companies Act, 2013, it is provided that the Central Government shall maintain
a panel of experts for mediation between the parties during pendency of any proceedings before the
Central Government or the Tribunal or the Appellate Tribunal under the Act. In common parlance,
mediation means intervention of some third party in a dispute with the intention to resolve the dispute.
Similarly, conciliation means the powers of adjusting or settling disputes in a friendly manner through
extra judicial means. The object behind the panel is to dispose the matter pending before the
Government / Tribunal as mentioned above.
Filing of application: Application for mediation and conciliation can be made by:
(A) any parties to the proceedings (It shall be accompanied with such fees and in such form as may be
prescribed)
(B) The Central Government or the Tribunal or the Appellate Tribunal before which any proceeding is
pending may, suo moto refer any matter pertaining to such proceeding to such number of experts
as it may deem fit.
19. Mr. Joseph, a member of Armaments Ltd., is aggrieved due to failure of the company to make
payment of dividend declared in the AGM held in August, 2015. He makes a complaint, in writing,
before the court of competent jurisdiction within the prescribed period of limitation, but the court
refused to take cognizance of the alleged offence. Explain the legal position in this regard under the
Companies Act, 2013.

Also state the offences under the Companies Act, 2013 which are cognizable and which are non-
cognizable.

Page No. 274

Answer

Cognizance of offence: A court shall take cognizance of any offence under this Act which is alleged to
have been committed by any company or any officer thereof only on the written complaint of -

(a) The Registrar,

(b) A shareholder of the company
(c) A member of the company, or
(d) Of a person authorised by the Central Government in that behalf
Provided that the court may take cognizance of offences relating to issue and transfer of securities and
non-payment of dividend, on a complaint in writing, by a person authorised by the Securities and
Exchange Board of India.
In the present case, Mr. Joseph, a member of Armaments Ltd. is aggrieved due to failure of the company
to make payment of dividend declared in the AGM held in August 2015. He makes a complaint, in writing,
before the court of competent jurisdiction within the prescribed period of limitation, but the court
refused to take cognizance of the alleged offence.
Here, the Court shall take cognizance of the offence relating to non payment of dividend as the
shareholders have made a complaint in writing before the competent jurisdiction.
Cognizable and non-cognizable offences: Overriding the provisions given under the Code of Criminal
Procedure, 1973, every offence under the Companies Act, 2013 except the offences referred to in section
212(6) of the Companies Act, 2013, which deals with the investigation into affairs of company by serious
fraud investigation office, shall be deemed to be non-cognizable within the meaning of the said Code.
Therefore, the offences as covered under section 212(6) shall now be deemed to be cognizable where
police officer may arrest person without warrant and are non-bailable. The Companies Act, 2013
establishes the offence covered under section 212(6) as a public wrong which has to be prevented and
controlled. This non-bailable nature of the offences deter the offender and the others from committing
further and similar offences.

20. Before imposing penalty, the adjudicating authority issued a show cause notice to the company and
its officers on 15th July, 2020 to represent before the adjudicating authority. The notice was served on
them on 31st July 2020. State the time period within which the company and its officers who were
called upon may be present before the Adjudicating authority.
ANSWER:

Issue of written notice by an adjudicating officer: Rule 3 of the Companies (Adjudication of Penalties)
Rules, 2014 read with section 454 of the Companies Act, 2013, states that before adjudging penalty, the
adjudicating officer shall issue a written notice in the specified manner-
• to the company and
• to officer of the company who is in default or
• any other person, as the case may be
Page No. 275
to show cause, within such period as may be specified in the notice (not being less than fifteen days and
more than thirty days from the date of service thereon), why the penalty should not be imposed on it or
him.
Accordingly, the company and its officers shall be presented before the Adjudicating Authority on or
before 30th August 2020 (being not more than 30 days from the date of service of notice thereon).

21.RTP Nov 2020

Integrated Case scenario 1

DEF Limited is an unlisted public company, incorporated under the provisions of the Companies Act,
2013 having its registered office in the state of Rajasthan.
The Registrar after the inspection of the books of account or an inquiry under section 206 and other
books and papers of DEF Limited under section 207, submitted a report in writing to the Central
Government including a recommendation that further investigation into the affairs o f the company
was necessary, giving his reasons in support.
The Central Government was of the opinion, that it was necessary to investigate into the affairs of the
company by the Serious Fraud Investigation Office (SFIO).
The director, SFIO appointed an investigating officer who called on the directors of the company and
arrested the directors of the company. The directors demanded the reasons for such arrest which were
informed to them.

The directors of the company were produced before the jurisdictional Judicial Magistrate who released
them on bail though the prosecution opposed the application of bail in the court.
On completion of the investigation of the director, SFIO submitted the investigation report to the
Central Government. The Central Government, after examination of the report, directed the SFIO to
initiate prosecution against the company and its officers or employees, who are or have been in
employment of the company or any other person directly or indirectly connected with the affairs of
the company.
A charge sheet was presented against the accused directors of the company before the Special Court
and after the completion of the trial, the court convicted the directors and sentenced them with
imprisonment for a term of six months and a fine of Rupees Two Thousand each.
Given the above situation, your opinion is sought on the following matters:
[Questions 2-6]
2. If the Central Government is of the opinion to order the investigation into affairs of a company on
receipt of a report of the Registrar under section 208 of the Companies Act, state the correct
statement as to the initiation of order of the investigation into affairs of a company-
(a) It cannot order investigation by inspectors under the provisions of section 210 of the
Companies Act.
(b) It can order investigation by inspectors under the provisions of section 210 of the Companies
Page No. 276
 Act.
(c) It cannot order investigation by SFIO under the provisions of section 212 of the Companies Act.

(d) It can order investigation by inspectors under section 210 or by SFIO under section 212 of the
companies Act.
Answer: d)

3. Is Director, SFIO a competent authority to arrest the directors of DEF Limited, an unlisted public
company?
(a) Yes, Director, SFIO is competent authority to arrest the directors of the unlisted public
company.
(b) Yes, Director, SFIO is competent authority subject to approval of Central Government.
(c) No, Director, SFIO cannot arrest the directors of the unlisted public company.

(d) Yes, Director, SFIO is competent authority subject to approval of special court to arrest the
directors of the unlisted public company.
Answer: a)

4. Is it the duty of the director, SFIO to inform the arrestee the grounds of arrest?
(a) Yes, it is the duty of the director, SFIO to inform the grounds of arrest and as well as right of
arrestee to know the grounds of his arrest.
(b) No, it is not necessary to inform the grounds of arrest.

(c) No, the ground of arrest may be informed, if asked for.

(d) No, it is prerogative of the authority to arrest the accused, there is no need to inform the
grounds of arrest.
Answer: a)

5. Within how much time are the arrested directors of DEF Limited required to be produced before
jurisdictional judicial magistrate by the director, SFIO after arrest?
(a) Within 24 hours of such arrest.

(b) Within 48 hours of such arrest.

(c) Within 72 hours of such arrest.
(d) Within 80 hours of such arrest.

Answer: a)

6. When do the directors of DEF Limited vacate the office of director in the company?
(a) On the date when the directors were arrested by the SFIO.
(b) On the date when the charge sheet was submitted in the court by the SFIO.
(c) On the date when the directors were arrested and produced before jurisdictional Judicial
Page No. 277
 Magistrate.
(d) On the date when the directors were convicted by the Special Court.
Answer: d)
22. (RTP MAY 2018)

(i) Mr. D was appointed as a Technical Member of the National Company Law Tribunal (NCLT) on 1st
July, 2012 for a period of 5 years. He will be completing 62 years on 30th June, 2017. Explain whether
he can be re-appointed on the NCLT on completion of his tenure in 2017?

(ii) Identify the powers of the Central Government under the Companies Act, 2013 regarding:
(a) To appoint company prosecutors
(b) To Appeal against acquittal

ANSWER

(i) According to Section 413(1) of the Companies Act, 2013, the President and every other Member of the
Tribunal shall hold office for a term of five years from the date on which he enters upon his office and
shall be eligible for re appointment for another term of five years.

Under section 413 (2), a Member of the Tribunal shall hold office as such until he attains, -
(1) in the case of the President, the age of sixty-seven years;
(2) in the case of any other Member, the age of Sixty-five years.
In the instant case, Mr. D was appointed as a technical Member of the NCLT on 1st July, 2012 for a period
of 5 years. He will be completing 62 years on 30th June, 2017. He can also be re-appointed after his initial
term of five years is over. But since he shall be attaining the age of 65 years as on 30th June, 2020, he will
have to step down from the post on his attaining the age of 65 years i.e. on 30th June, 2020.

(ii) (a) Power of Central Government to appoint company prosecutors: This section lays down the
provisions seeking to provide that the Central Government may appoint company prosecutors with the
same powers as given under the Cr. PC on Public Prosecutors.

(1) Appointment of company prosecutors: The Central Government may appoint (generally, or for any
case, or in any case, or for any specified class of cases in any local area) one or more persons, as company
prosecutors for the conduct of prosecutions arising out of this Act; and

(2) Powers and Privileges: The persons so appointed as company prosecutors shall have all the powers
and privileges conferred on Public Prosecutors appointed under section 24 of the Cr. PC.

(b) Appeal against acquittal: According to section 444 of the Companies Act, 2013, the Central
Government may, in any case arising under this Act, direct –

(1) any company prosecutor, or

(2) authorise any other person either by name or by virtue of his office, to present an appeal from an
order of acquittal passed by any court, other than a High Court.

Page No. 278

Appeal presented by such prosecutor or other person shall be deemed to have been validly presented to
the Appellate Court

23. (RTP NOV 2018)

(i) Mr. PRTJ was appointed as a member of the National Company Law Appellate Tribunal. During the
month of April, 2018, he was adjudged as an insolvent by a competent authority. The Central
Government after consultation with the Chief Justice of India removed Mr. PRTJ from the membership
of the National Company Law Appellate Tribunal. Being aggrieved by the decision of the Central
Government, Mr. PRTJ approached you to confirm himself whether the decision of the Central
Government was appropriate since, he was not given a reasonable opportunity of being heard as a
matter of principle of natural justice. Advise him.

Also state the circumstances in which the Central Government after consultation with the Chief Justice
of India can remove any person from the office of President, Chairperson or any Member of the
National Company Law Appellate Tribunal.
Your answer should refer to the relevant provisions of the Companies Act, 2013

ANSWER

(i) According to Section 417(1) of the Companies Act, 2013, the Central Government may, after
consultation with the Chief Justice of India, remove from office the President, Chairperson or any
Member, who—
(a) has been adjudged an insolvent; or
(b) has been convicted of an offence which, in the opinion of the Central Government, involves moral
turpitude; or
(c) has become physically or mentally incapable of acting as such President, the Chairperson, or Member;
or
(d) has acquired such financial or other interest as is likely to affect prejudicially his functions as such
President, the Chairperson or Member; or
(e) has so abused his position as to render his continuance in office prejudicial to the public interest:
Provided that the President, the Chairperson or the Member shall not be removed on any of the grounds
specified in clauses (b) to (e)without giving him a reasonable opportunity of being heard.
As per the proviso stated above, in case of sub-clause (a), i.e. where there is a case of insolvency, there is
no requirement of giving an opportunity of being heard by the member of the NCLAT. Hence, the action
taken by the Central Government against PRTJ is valid.
Circumstances under which the Central government can remove the President, the Chairperson etc.,
According to Section 417(2) of the Companies Act, 2013, the President, the Chairperson or the Member
shall not be removed from his office except by an order made by the Central Government on the ground
of proved misbehaviour or incapacity after an inquiry made by a Judge of the Supreme Court nominated
by the Chief Justice of India on a reference made to him by the Central Government in which such
President, the Chairperson or Member had been informed of the charges against him and given a
reasonable opportunity of being heard.
In the instant case, it is advised that the decision of the Central Government to remove (without giving
reasonable opportunity of being heard) Mr. PRTJ, member of NCLAT who was adjudged as an insolvent by
a competent authority is appropriate as per the clause (a) of Section 417(1) of the Companies Act, 2013.

Page No. 279

(ii) Under section 442 of the Companies Act, 2013, it is provided that the Central Government shall
maintain a panel of experts for mediation between the parties during pendency of any proceedings
before the Central Government or the Tribunal or the Appellate Tribunal under the Act. In common
parlance, mediation means intervention of some third party in a dispute with the intention to resolve the
dispute. Similarly, conciliation means the powers of adjusting or settling disputes in a friendly manner
through extra judicial means. The object behind the panel is to dispose the matter pending before the
Government / Tribunal as mentioned above.
Filing of application: Application for mediation and conciliation can be made by:
(a) any parties to the proceedings (It shall be accompanied with such fees and in such form as may be
prescribed)
(b) The Central Government or the Tribunal or the Appellate Tribunal before which any proceeding is
pending any, suo moto refer any matter pertaining to such proceeding to such number of experts as it
may deem fit.

24. (mtp-II- july 2021)

The Registrar of Companies (ROC) by a written notice had required for certain information from Retq
Ltd., under section 206 of the Companies Act, 2013.
The ROC, through perusal of such information received in response to notice issued to Retq Ltd.,
observed that the complaints of the investors were not being redressed for a long time, from the
statements filed by Grievance Redressal Department of Retq Ltd., established in compliance of
Regulation 13 of the SEBI (LODR) Regulations, 2015, for the quarter ended March, 2020 and June, 2020,
which showed that the number of complaints pending at the beginning of the quarter and received
during the quarter, were much more than that disposed off during the said quarters as shown below:-

Particulars Quarter ended March, 2020 Quarter ended June, 2020

Complaints pending at the 120 130
beginning quarter
Complaints received during the 50 60
quarter
Complaints disposed of during 40 30
the quarter
Complaints remaining 130 160
unresolved at the end of the
quarter

Also, the ROC, noticed from the reports called from the Audit Committee, that many complaints were
filed with the Audit Committee by the employees under the Vigil Mechanism of the company, the
details of establishment of vigil mechanism was disclosed in Retq Ltd.’s website and board report as
well. However, the ROC also noticed that, one employee, Mr. Tapan, was reprimanded by the chairman
of Audit Committee for complaints filed repeatedly without any purpose or were of no value.

The ROC, thus on the basis of information available with him, passed an order for carrying out inquiry
by exercising its power under section 206 of the Companies Act, 2013, after informing the company the
grounds of allegation against it.

Page No. 280

After the inquiry was conducted, the ROC submitted its report to the Central Government which
included a recommendation for further investigation into the affairs of Retq Ltd. but the reasons for the
same were not mentioned.

Meanwhile, an Extra-ordinary General Meeting was conducted for passing a resolution for the purpose
of conducting investigation by a statutory authority into the affairs of Retq Ltd. by the Central
Government which could not materialize due to the reason that the votes were not adequate in favour
of such resolution.

However, 8 members holding 20% shares in Retq Ltd., out of total 120 members, made an application
to the tribunal as they were having good reason for seeking an order of investigation into the affairs of
the company. Such application was supported by evidence to show that an investigation into the affairs
of Retq Ltd. was necessary. The tribunal passed an order for conducting such investigation, as it was
satisfied that it was necessary.

The Central Government, thereafter, passed an order for investigation into the affairs of Retq Ltd. and
appointed 2 persons, Mr. Vipul and Mr. Mehul, as the inspectors. The said inspectors duly initiated the
task of investigation as per the procedure prescribed under section 217 of the Companies Act, 2013,
read with rule 6 of the Companies (Inspection, Investigation and Inquiry) Rules, 2014.

Multiple Choice Questions (Question nos. 6 to 9 of 2 Marks each):

1. Whether the details of establishment of vigil mechanism needs to be disclosed mandatorily on the
website of Retq Ltd. and also whether reprimanding, Mr. Tapan, just for filing repeated complaints by
the chairman of audit committee can be considered as a valid act?

(a) Yes, provided the company has a website. The act of reprimanding, Mr. Tapan, can be considered as
valid as the complaints filed by him were frivolous in nature.

(b) No, as disclosing such details in the board report suffices the requirements. The act of reprimanding,
Mr. Tapan, cannot be considered as valid as the chairman of audit committee does not have any
authority to do so.

(c) Yes, even if the company does not have website, then it needs to create one and then disclose such
details. The act of reprimanding, Mr. Tapan, can be considered as valid as the complaints filed by him
were frivolous in nature.

(d) Yes, provided the company has a website. The act of reprimanding, Mr. Tapan, only on the grounds
that the complaints filed by him were frivolous in nature, cannot be considered as valid.

ANSWER- a

2. Whether non-mentioning of reasons in his report recommending investigation by ROC, can be

considered valid and what type of resolution was required to be passed by Retq Ltd. so that
investigation could have been initiated into the affairs of Retq Ltd. by the Central Government?

Page No. 281

(a) No, as reasons are required to be given in order to support the recommendations for investigation
made by him. Special resolution was required to be passed by Retq Ltd.

(b) Yes, as giving reasons is optional as making recommendations for investigation itself depends upon
the discretion of ROC. Resolution with members holding not less than 90% of the shares, was required
to be passed by Retq Ltd.

(c) No, as reasons are required to be given in order to support the recommendations for investigation
made by him. Resolution with majority of members representing 3/4th in value of the shares was
required to be passed by Retq Ltd.

(d) Yes, as giving reasons is optional as making recommendations for investigation itself depends upon
the discretion of ROC. Ordinary resolution was required to be passed by Retq Ltd.

ANSWER-a

3. Whether the application to tribunal was filed by adequate number of members for purpose of
conducting investigation into the affairs of Retq Ltd. and whether the Central Government holds
discretion for ordering investigation in case of order passed by Tribunal for the same or report received
from the registrar recommending investigation?

(a) No, the application was not filed by adequate number of members. Central Government shall
mandatorily order for investigation in case of order passed by Tribunal and it holds discretion for
ordering investigation in case of report received from the registrar.

(b) Yes, the application was filed by adequate number of members. Also, the Central Government holds
discretion for ordering investigation in case of order passed by Tribunal or report received from the
registrar.

(c) No, the application was not filed by adequate number of members. Central Government shall
mandatorily order for investigation in case of order passed by Tribunal or in case of report received
from the registrar.

(d) Yes, the application was filed by adequate number of members. Central Government shall
mandatorily order for investigation in case of order passed by Tribunal and it holds discretion for
ordering investigation in case of report received from the registrar.

ANSWER- d

4. Whether opportunity of being heard is required to be given by ROC before issuing notice for
information and also by the Tribunal, before passing order for investigation, to Retq Ltd., respectively?

(a) Yes, opportunity of being heard is required to be given in case of ROC but not required to be given in
case of tribunal.

(b) Yes, opportunity of being heard is required to be given in case of both ROC as well as tribunal,
respectively.

Page No. 282

(c) No, opportunity of being heard is not required to be given in case of both ROC in case of both ROC as
well as tribunal, respectively.

(d) No, opportunity of being heard is not required to be given in case ROC but in case of tribunal, it is
required to be given.

ANSWER- d

25. Ultra Ltd. was incorporated on 13th May 2019. After one year of its incorporation the shareholders
of company came to know that some transaction inside the company was not in accordance with the
provision of Companies Act and also prejudicial in the interest of company and its members, so some
shareholder decided to make application to Central Government to conduct investigation into affairs of
the company by appointing inspector under the provision of Companies Act, 2013. (2 Marks) (mtp-NOV
2020)

Does application of shareholder can be acceptable under the provision of Companies Act, 2013.

(a) No, shareholder didn’t have right to make application under Section 210 of Companies Act, 2013.
(b) Yes, shareholder after passing special resolution can make application to Central government to
conduct the investigation under section 210 of Companies Act, 2013.
(c) Yes, shareholder can make application without special resolution as company business is not in
interest of company and member.
(d) No, shareholder even after passing special resolution cannot make application under Section 210 of
Companies Act, 2013.

ANSWER- b

26. In the annual general meeting of XYZ Ltd., while discussing on the matter of retirement and
reappointment of director Mr. X, allegations of fraud and financial irregularities were levelled against
him by some members. This resulted into chaos in the meeting. The situation was normal only after the
Chairman declared about initiating an inquiry against the director Mr. X, however, could not be re-
appointed in the meeting. The matter was published in the newspapers next day. On the basis of such
news, whether the court can take cognizance of the matter and take action against the director on its
own?
Justify your answer with reference to the provisions of the Companies Act, 2013. (4 Marks) (mtp-NOV
2020)

ANSWER

i) Section 439 of the Companies Act, 2013 provides that offences under the Act shall be non- cognizable.
As per this section:

Page No. 283

1. Notwithstanding anything in the Code of Criminal Procedure, 1973, every offence under this Act except
the offences referred to in sub section (6) of section 212 shall be deemed to be non-cognizable within the
meaning of the said Code.

2. No court shall take cognizance of any offence under this Act which is alleged to have been committed
by any company or any officer thereof, except on the complaint in writing of the Registrar, a shareholder
or a member of the company, or of a person authorized by the Central Government in that behalf.
Thus, in the given situation, the court shall not initiate any suo moto action against the director Mr. X
without receiving any complaint in writing of the Registrar of Companies, a shareholder of the company
or of a person authorized by the Central Government in this behalf.

27. In the capacity of an Adjudicating officer, the, Registrar passed an order against IDLE Limited, a
listed company, for not following some provisions of the Companies Act, 2013. Being aggrieved of the
order of the Adjudicating officer, IDLE Limited proceeded to the Tribunal. The Tribunal after giving both
the parties an opportunity of being heard upheld the order of the Adjudicating authority in a modified
manner. After lapse of a period of one year and five days, the Tribunal with a view to rectify a mistake
apparent from the record, amended the order passed by him earlier, when the mistake was brought to
his notice by the Adjudicating officer. IDLE Limited approached you and contended that the stipulated
period of 3 months within which the order should be passed by the Tribunal is already over, even the
delay period has exceeded the maximum allowed condonation period of 90 days and therefore the
order passed by the Tribunal cannot be revised. Referring to and analyzing the relevant provisions of
the Companies Act, 2013, advise IDLE Limited whether its contention is tenable. Will your answer differ
if IDLE Limited has already preferred an appeal against the original order of the Tribunal before the
amendment was made by the Tribunal ? (4 Marks) (past exam jan 2021)

ANSWER

As per the section 420 of the Companies Act, 2013, the Tribunal may, after giving the parties to any
proceeding before it, a reasonable opportunity of being heard, pass such orders thereon as it thinks fit.
The Tribunal may, at any time within 2 years from the date of the order, with a view to rectifying any
mistake apparent from the record, amend any order passed by it, and shall make such amendment, if the
mistake is brought to its notice by the parties. Provided that no such amendment shall be made in respect
of any order against which an appeal has been preferred under this Act.
In the given case, though mistake was bought to the notice of the Tribunal by Registrar, but the time
period for rectifying any mistake apparent from the record was within the prescribed period of 2 years
from the date of order, so contention of IDLE Ltd. stating that the order passed by the Tribunal cannot be
revised, is not correct.
Where if, IDLE Limited has already preferred an appeal against the original order of the Tribunal before
the amendment was made by the Tribunal, no such amendment shall be made in respect of such order.

28. Amar is a branch manager in Kismat Bank Ltd. During the course of recovery drive initiated by the
Bank, Amar collected around 50 lakh rupees from the defaulters / non-performing accounts. He did not
credited the amount so recovered, in the respective borrower’s loan account, but kept with himself.
Later he absconded along with amount so collected. A FIR was lodged by the Bank and the police, after
making intensive search, caught and arrested him. Chargesheet was issued and case was submitted in
the court.
Give the following answers in reference to the Companies Act, 2013:

Page No. 284

(i) In which category, cognizance or non-cognizance, the embezzlement of cash by Amar shall be
treated?
(ii) Non-cognizable offences are less serious than that of the cognizable offences.
Do you agree? Substantiate your plea by differentiating between these two.
(iii) Which offences, Special Court cannot deal with? Whether the said case can be dealt by the Special
court. (RTP NOV 2021)

ANSWER

i) Embezzlement of the cash and absconding is a cognizable offence which means a police officer can
arrest such person without the warrant of the magistrate.

(ii) Cognizable Offence:

“Cognizable offence” means an offence for which, and “cognizable case” means a case in which, a police
officer may, in accordance with the First Schedule or under any other law for the time being in force,
arrest without warrant.

Non- Cognizable Offence:

“Non-cognizable offence” means an offence for which, and “non-cognizable case” means a case in which,
a police officer has no authority to arrest without warrant

Cognizable offences are heinous crimes, whereas non-cognizable offences are not so serious. Cognizable
offences encompasses murder, rape, theft, kidnapping, counterfeiting, etc. whereas the, non-cognizable
offences include offences like forgery, cheating, assault, defamation and so forth.
By having an overview of the definitions of cognizable and non-cognizable offences as stated above, it is
clear that in the matter of cognizable offences, a police officer have authority to arrest any person
without warrant, but in case of non-cognizable offences, policy office do not have such authority.
Therefore non-cognizable offences are less serious than that of the cognizable offences.
(iii) Section 435 (1) provides that the Central Government may, for the purpose of providing speedy trial
of offences under this Act, except under section 452, by notification, establish or designate as many
Special Courts as may be necessary.

Section 452 of the Companies Act, 2013 provides that

If any officer or employee of a company—
(a) wrongfully obtains possession of any property, including cash of the company; or
(b) having any such property including cash in his possession, wrongfully withholds it or knowingly applies
it for the purposes other than those expressed or directed in the articles and authorised by this Act,

he shall, on the complaint of the company or of any member or creditor or contributory thereof, be
punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh
rupees. Hence, as per the provisions of the Companies Act, 2013, the Special Court cannot deal with the
matters on which section 452 applies. In the given case, since the branch manager, after collecting the
money from the borrowers, absconded [as defined as per section 452(1)(a) & (b)], which comes under the
purview of section 452, hence this matter shall not be dealt with by the Special Court

Page No. 285

 11 National Company Law tribunal and Appellate Tribunal

ATTEMPTS
MAY NOV MAY NOV NOV JAN JULY NOV
COVERAGE
2018 2018 2019 2019 2020 2021 2021 2021

STUDY Q.- 4, 5, 6
MAT

PAST NO NO NO NO NO
Q-3 ------
EXAMS QUES QUES QUES QUES QUES

NO NO NO
MTP Q-2 Q-9 Q-10, 11 ----
QUES QUES QUES

NO NO NO NO
RTP Q-1 Q-8 Q-7
QUES QUES QUES QUES

Page No. 286

RTP May 2018 QN no 11

1. Identify the powers of the Central Government under the Companies Act, 2013 regarding:
(a) To appoint company prosecutor
(b) To Appeal against acquittal
Answer:

(a) Power of Central Government to appoint company prosecutors: This section lays down the
provisions seeking to provide that the Central Government may appoint company prosecutors with the
same powers as given under the Cr. PC on Public Prosecutors.

 Appointment of company prosecutors: The Central Government may appoint (generally, or for any
case, or in any case, or for any specified class of cases in any local area) one or more persons, as
company prosecutors for the conduct of prosecutions arising out of this Act; and
 Powers and Privileges: The persons so appointed as company prosecutors shall have all the powers
and privileges conferred on Public Prosecutors appointed under section 24 of the Cr. PC.

(b) Appeal against acquittal: According to section 444 of the Companies Act, 2013, the Central
Government may, in any case arising under this Act, direct –
(1) any company prosecutor, or
(2) authorise any other person either by name or by virtue of his office, to present an appeal from an
order of acquittal passed by any court, other than a High Court.
Appeal presented by such prosecutor or other person shall be deemed to have been validly presented
to the Appellate Court.

2.Aug 2018 Qn no 6(c) 8 Marks:

A petitioner presented an application before the tribunal in July, 2017 and order was passed and
made available to parties in September, 2017. Aggrieved party filed an appeal before NCLAT in
November, 2017. The appeal was pending before NCLAT for 6 months.

Examine in the light of the Companies Act, 2013, the following issues –
(i) Whether the filling of an appeal before the NCLAT is in order.
(ii) Time period latest by which the NCLAT should dispose off the said appeal.

Answer:

According to sections 421 of the Companies Act, 2013, any person aggrieved by an order of the Tribunal
may prefer an appeal to the Appellate Tribunal within a period of forty -five days from the date on
which a copy of the order of the Tribunal is made available to the person. However extension of further
45 days may be granted as per proviso to section 421(3).

Whereas section 422 of the Companies Act, 2013, states that every application or petition presented

Page No. 287

before the Tribunal and every appeal filed before the Appellate Tribunal shall be dealt with and
disposed of by it as expeditiously as possible and every endeavour shall be made by the Tribunal or the
Appellate Tribunal, as the case may be, for the disposal of such application or petition or appeal within
3 months from the date of its presentation before the Tribunal or the filing of the appeal before the
Appellate Tribunal.
Where any application or petition or appeal is not disposed of within the period specified above, the
Tribunal or, as the case may be, the Appellate Tribunal, shall record the reasons for not disposing of the
application or petition or the appeal, as the case may be, within the period so specified; and the
President or the Chairperson, as the case may be, may, after taking into account the reasons so
recorded, extend the period referred to above, by such period not exceeding ninety days as he may
consider necessary.

Accordingly, as per the provisions, following are the answer:

(i) Filing of an appeal before NCLAT is in order as per section 421. As per the given facts, appeal is
made within 45 days from the date on which a copy of the order of the Tribunal is made available to
the person.
(ii) As per section 422, appeal preferred before the NCLAT, shall be disposed within 3 months from the
date of its presentation before the Appellate Tribunal. Where any application or petition or appeal
is not disposed of within the period specified above, the Appellate Tribunal, shall record the
reasons for the same; and the President or the Chairperson, may, after taking into account the
reasons so recorded, extend the period referred to above, by such period not exceeding ninety
days as he may consider necessary. So accordingly appeals should be disposed off by the NCLAT
latest by May 2018.

3.Nov 2018 Qn no 6(c) 8 Marks:

Aggrieved by an Order of NCLT dated 05.05.2018, passed without the consent of the parties, Madhruk
Ltd. decided to file an appeal before NCLAT. Meanwhile, the employees and officers of the Company
went on a strike from 10.05.2018 demanding higher pay and allowances and as a result of which, the
operational and management activities were badly affected. The strike was called-off on
15.06.2018. Thereafter, the appeal was filed on 25.06.2018 before NCLAT with a prayer for condoning
the delay in filing the appeal. A single judicial member of NCLT started the hearing. With reference to
the provisions of the Companies Act, 2013, examine the following:

(i) Whether the appeal is admissible?

(ii) Maximum period allowed for condonation

Is the appeal transferable to a Bench consisting of two members?

Answer:

(1) Appeal from Orders of Tribunal [Section 421 of the Companies Act, 2013]
(2) Appeal to AT: Any person aggrieved by an order of the Tribunal may prefer an appeal to the
Appellate Tribunal (AT).
Page No. 288
(3) When order made by consent of parties: No appeal shall lie to the Appellate Tribunal from an order
made by the Tribunal with the consent of parties.
(4) Period for filing of appeal: Every appeal under sub-section (1) (i.e. appeal to AT against order of
Tribunal) shall be filed within a period of 45 days from the date on which a copy of the order of the
Tribunal is made available to the person aggrieved and shall be in such form, and accompanied by
such fees, as may be prescribed.

However, the Appellate Tribunal may entertain an appeal after the expiry of the said period of forty-five
days from the date aforesaid, but within a further period not exceeding 45, if it is satisfied that the
appellant was prevented by sufficient cause from filing the appeal within that period.
In the instant case,
(i) The appeal is admissible as the order of NCLT was passed without the consent of the parties.
The maximum period allowed for condonation is 45 days if the AT is satisfied that the appellant
was prevented by sufficient cause from filing the appeal within that period. In the instant case, the
appeal filed on 25.06.2018 before NCLAT is tenable.
(ii) As per second proviso to section 419(3) if at any stage of the hearing of any such case or matter, it
appears to the Member that the case or matter is of such a nature that it ought to be heard by a
Bench consisting of two Members, the case or matter may be transferred by the President, or, as
the case may be, referred to him for transfer, to such Bench as the President may deem fit.

Study Material

4. Any person who is aggrieved by the order of Appellate Tribunal may approach to the Supreme Court
on any question of law within:-

(a) 30 Days
(b) 45 Days
(c) 60 Days
(d) 90 days

Answer: c) Hint: As per section 423 of the Companies Act, 2013, any person aggrieved by any order
of the Appellate Tribunal may file an appeal to the Supreme Court within sixty days from the date of
receipt of the order of the Appellate Tribunal to him on any question of law arising out of such order.

5.What is the procedure to file an appeal from orders of the Tribunal under the Companies Act, 2013?

Answer: Appeal from Orders of Tribunal [Section 421]

(1) Appeal to AT: Any person aggrieved by an order of the Tribunal may prefer an appeal to the
Appellate Tribunal (AT).

Page No. 289

(2) When order made by consent of parties: No appeal shall lie to the Appellate Tribunal from an
order made by the Tribunal with the consent of parties.
(3) Period for filing of appeal: Every appeal under sub-section (1) (i.e. appeal to AT against order of
Tribunal) shall be filed within a period of 45 days from the date on which a copy of the order of the
Tribunal is made available to the person aggrieved and shall be in such form, and accompanied by
such fees, as may be prescribed:
Provided that the Appellate Tribunal may entertain an appeal after the expiry of the said period of
forty-five days from the date aforesaid, but within a further period not exceeding 45, if it is satisfied
that the appellant was prevented by sufficient cause from filing the appeal within that period.

6. On an application filed before Tribunal from one of the shareholder of Company, Tribunal (NCLT)
passed order on 20th December 2019 without the consent of parties. Mr. Rama, one of the party to the
proceeding whose family condition was not good so didn’t take much interest in order of tribunal but
after few days due to aggrieved by the order, he filed an appeal before Appellate Tribunal (NCLAT) on
15th March 2020 showing sufficient cause of delay for not filling appeal up to 45 days from the date of
order. The Appellate Tribunal has passed an order dated 30th April 2020, Mr.Rama was not satisfied
and made application to Supreme Court on 30th September 2020 against the order of the Appellate
Tribunal.
Considering the given situation, examine whether Appeal filed before the Supreme Court is admissible
after showing cause of delay.

ANSWER:

According to Section 423 of the Companies Act, 2013, any person aggrieved by an order of the Appellate
Tribunal may prefer an appeal to the Supreme Court on any question of law arising out of Appellate
Tribunal’s order.
Every appeal shall be filed within a period of 60 days from the date on which a copy of the order of the
Appellate Tribunal is made available to the person aggrieved and shall be in such form, and accompanied
by such fees, as may be prescribed.
Supreme Court may entertain an appeal even after the expiry of the said period of 60 days from the date
aforesaid, but within a further period not exceeding 60 Days, if it is satisfied that the appellant was
prevented by sufficient cause from filing the appeal within period. In above case, since Mr. Rama even
aggrieved by order of Appellate Tribunal filed application before Supreme Court on 30th September 2020.
But as Supreme Court can entertain appeal only upto 60 days + 60 Days (Extension if sufficient cause).
Since this appeal was filed beyond 120 days by Mr. Rama, so, appeal filed before the Supreme Court is not
admissible.

7.RTP Nov’2020 Q no 18
On an application filed from shareholder of Company, Tribunal (NCLT) passed an order on 20th
December, 2019 without the consent of parties. Mr. Rama whose family’s condition was not good so
didn’t take much interest in order of tribunal but after few days due to aggrieved by an order, he
filled an appeal before Appellate Tribunal (NCLAT) on 15th March, 2020 showing sufficient cause of
delay for not filling appeal up to 45 days from the date of order.

Page No. 290

Even after receiving order from Appellate Tribunal dated 30th April, 2020, Mr. Rama was not
satisfied and desires to make application to Supreme Court on 30th October, 2020.

Considering the given situation, examine whether Appeal to be filed before the Supreme Court will
be admissible?
Answer
According to Section 423 of the Companies Act, 2013, any person aggrieved by an order of the
Appellate Tribunal may prefer an appeal to the Supreme Court.

Every appeal shall be filed within a period of 60 days from the date on which a copy of the order of the
Appellate Tribunal is made available to the person aggrieved and shall be in such form, and
accompanied by such fees, as may be prescribed.
Supreme Court may entertain an appeal even after the expiry of the said period of 60 days from the
date aforesaid, but within a further period not exceeding 60 days, if it is satisfied that the appellant was
prevented by sufficient cause from filing the appeal within period.
In above case, since Mr. Rama even aggrieved by an order of Appellate Tribunal desires to fill an
application before Supreme Court on 30th October 2020. But as Supreme Court can entertain appeal
only upto 60 days + 60 Days (Extension if sufficient cause). Since this appeal was to be filled beyond
120 days by Mr. Rama, so, appeal to be filed before the Supreme Court will not be admissible.

8. (RTP MAY 2019)

Mr. RG is a practicing Chartered Accountant and having 15 years of professional experience. Can he be
appointed as Technical Member of National Company Law Appellate Tribunal as per section 411 of the
Companies Act, 2013? Will your answer be different, if he is appointed as Technical Member of
National Company Law Tribunal?

ANSWER

Qualifications of Chairperson and members of Appellate Tribunal [Section 411]

Section 411 of the Companies Act, 2013 prescribes the qualifications of the chairperson and the members
of the Appellate Tribunal.
According to section 411(3), a technical member shall be a person of proven ability, integrity and standing
having special knowledge and professional experience of not less than twenty-five years in industrial
finance, industrial management, industrial reconstruction, investment and accountancy.".
Here, in the given case, Mr. RG is having professional experience of 15 years. Hence, Mr. RG cannot be
appointed as technical member of NCLAT.
However, as per section 409, Mr. RG is eligible to be appointed as technical member of NCLT as he is
meeting up the requirement by being into practice as a Chartered Accountant, for fifteen years

9. A group of members holding 380 lakh issued share capital in Zolo Ltd., a listed public company
having total issued share capital of 15,000 lakhs as per latest financial statements alleged that company
board of director is conducting an act which is beyond the scope of the articles or memorandum of the
company without altering the memorandum or articles of the company. They make application to
tribunal (NCLT) to restrain the company from doing such an act. With reference to the provision of

Page No. 291

Companies Act, 2013 ascertain whether the application will be admitted by tribunal (NCLT). (8 Marks)
(mtp-NOV 2020)

ANSWER

As according to section 245 of Companies Act, 2013, such number of member or members, depositor or
depositors or any class of them, as the case may be, as are indicated in sub-section (2) may, if they are of
the opinion that the management or conduct of the affairs of the company are being conducted in a
manner prejudicial to the interests of the company or its members or depositors, file an application
before the Tribunal on behalf of the members or depositors for seeking an orders, to restrain the
company from committing an act which is beyond the scope of or ultra-virus the articles or memorandum
of the company, Requisite number of members to make Application under Section 245(1) for Class Action
for depositors is as prescribed in rule 84(4) of the National Company Law Tribunal (Second Amendment)
Rules, 2019. Accordingly, in case of a company having a share capital the requisite number of member or
members to file an application under section 245(1) shall be:-

(a) at least five per cent. of the total number of members of the company; or

(b) one hundred members of the company, whichever is less; or

(c) In case of a listed company, member or members holding not less than two per cent. of the issued
share capital of the company.

In above case, members holds 2.53% (380/15000*100) of issued share capital of Zolo Ltd. which is a listed
company make application before tribunal (NCLT). Hence requirement of number of members holding
more than 2% of issued share capital is complied with. Therefore their application can be admitted by
NCLT.

10. Ruby Petals Limited, a small company, files an application with the NCLT stating that the fast track
corporate insolvency resolution process against it cannot be completed within the prescribed period of
90 days. On being satisfied, NCLT orders to extend the period of such process by 30 days. However,
Ruby Petals Limited again initiates an application for further extension of time period of insolvency
process by another 10 days. Which of the following option is applicable to such a situation:

(a) NCLT can extend the period by another 10 days because total extension does not
exceed 45 days.

(b) NCLT is empowered to grant another extension of 10 days if Ruby Petals deposits Rs. 50,000 as
penalty.

(c) NCLT is empowered to grant another extension of 10 days if Ruby Petals deposits Rs. 100,000 as
penalty.

(d) NCLT cannot extend the period by another 10 days because such extension shall not be granted
more than once. (1 Mark) (mtp-I- july 2021)

ANSWER-d
Page No. 292
11. The Tribunal while passing an order of winding up of a company, for advising the company
liquidator and to report to the Tribunal on winding up matters may direct for constitution of – (mtp-II-
july 2021)

(a) Audit committee

(b) Advisory committee

(c) Standing committee

(d) Liquidation committee (1 Mark)

ANSWER- b

Page No. 293

 Corporate Secretarial Practice –
12 Drafting of Notices, Resolutions, Minutes and Reports

ATTEMPTS
MAY NOV MAY NOV NOV JAN JULY NOV
COVERAGE
2018 2018 2019 2019 2020 2021 2021 2021

STUDY Q.- 2, 8, 9, 10, 11, 12, 13, 14, 15, 16

MAT

PAST NO NO NO NO NO
Q-6 ------
EXAMS QUES QUES QUES QUES QUES

NO NO NO
MTP Q-3 Q-18 Q-19 ----
QUES QUES QUES

NO NO NO
RTP Q-1 Q-4 Q-5 Q-7, 17
QUES QUES QUES

Page No. 294

1.RTP May 2018 Qn no 12

(i) Mr. Shukla is working as General Manager (Finance and Accounts) in Target Limited. The Board of
directors of the said company propose to entrust him with the duty of ensuring compliance with the
provisions of the Companies Act, 2013 so that the books of accounts, balance sheet, statement of
profit and loss and the cash flow statements can be prepared and maintained in accordance with law.
Prepare a Board Resolution for the said purpose considering the above facts.

(ii) Mr. N is appointed as an additional Director by the Board of Directors of MNR Company Limited
at its meeting held on 1st October, 2017 for a period as permitted by law. The Articles of Association
has conferred the power to appoint the additional director on the Board of Directors of MNR
Company Limited. Prepare a Board resolution for the said purpose in the light of the given facts.
Answer

(i) Board Resolution

Resolution passed at the meeting of Board of Directors of Target Limited held at its registered office
situated at ……………………… on ………….(date) at …………(Time).
“Resolved that pursuant to section 128(6) and 129 of the Companies Act, 2013, Mr. Shukla, who is already
the General Manager (Finance and Accounts) of the company, be and is hereby entrusted with additional
duties of ensuring compliance with the provisions of the Companies Act, 2013 so that the books of
accounts, balance sheet, statement of profit and loss and the cash flow statements are maintained in
accordance with the provisions of law.”
“Further Resolved that the said Mr. Shukla be and is hereby entrusted with the authority to do such acts
things o'r deeds as may be necessary or expedient for the purpose of discharging his above referred
duties.”

Sd/
Board of Directors Target Limited

(ii) Board Resolution for Appoinment of Additional Director

"Resolved that pursuant to the Articles of Association of the company and section 161(1) of the
Companies Act, 2013, Mr. N is appointed as an Additional Director of the MNR Company Limited with
effect from 1st October, 2017 to hold office up to the date of the next annual general meeting or the
last date on which the annual general meeting should have been held, whichever is earlier.

Resolved further that Mr. N will enjoy the same powers and rights as other directors. Resolved further
that Mr ______________________________ Secretary of MNR Company Limited be and is hereby
authorised to electronically file necessary returns with the Registrar of Companies and to do all
other necessary things required under the Act."

2.Draft a resolution proposed to be passed at a General Meeting of M/s. Red Rooster Limited a public
company giving consent to the Board of Directors for borrowing upto a specified amount in excess of

Page No. 295

the limits laid down under section 180(1)(c) of the Companies Act, 2013 and also state the
borrowings, which are to be excluded from the said limits.

Answer:
Draft of ordinary resolution under Section 180(1)(c) of the Companies Act, 2013
"Resolved that the company hereby consents to the Board of Directors borrowing monies not exceeding
Rs. …………… (Rupees ............................................................... ) in excess of the aggregate
of the *paid-up capital of the company, its free reserves and securities Premium, that is to say reserves
not set apart for any specific purpose, as provided in Section 180(1)(c) of the Companies. Act, 2013, and in
addition to any temporary loans obtained from the company’s bankers in the ordinary course of
business".

Borrowings

Section 180(1)(c) does not apply to the borrowing by a company by way of temporary loans obtained
from the company's bankers in the ordinary course of business. Therefore, in calculating the limits
stipulated in this provision, temporary loans obtained from the company's bankers in the ordinary course
of business shall be excluded.
The expression 'temporary loans' means loans repayable on demand or within six months from the date
of the loan such as short term cash credit arrangements, the discounting of bills and the issue of other
short terms loans of a seasonal character, but does not include loans raised for the purpose of financing
expenditure of capital nature [Explanation to Section 180 (1)(c)].
Through the enforcement of the Companies (Amendment) Act, 2017 w.e.f 9th February, 2018,
in section 180 in sub-section (1), in clause (c), for the words "paid-up share capital and free
reserves” the word “paid-up share capital, free reserves and securities premium" is substituted.

3.MTP Apr 2019 QN no 6(a) 8 Marks

MNC Ltd., a company, whose paid up capital was Rs. 4.00 Crores, has issued right shares in the ratio
of 1:1. The said company is listed with Mumbai Stock Exchange. Whether the company is required to
appoint any Audit Committee and if yes, draft a suitable Board Resolution to appoint an Audit
committee covering the aspects as provided in the Companies Act, 2013.

Answer

Under section 177(1) of the Companies Act, 2013 the Board of Directors of every listed company and
such other class or classes of companies, as may be prescribed, shall constitute an Audit Committee.
Therefore, MNC Ltd being a listed company will be bound to c onstitute an audit committee under the
Act.

Further under section 177(2) the Audit Committee shall consist of a minimum of three directors with
independent directors forming a majority.
Further, the majority of members of Audit Committee including its Chairperson shall be persons with
ability to read and understand the financial statement.
The draft Board Resolution for the constitution of an Audit Committee may be as follows:

Page No. 296

“Resolved that pursuant to the provision contained in section 177 of the Companies Act 2013 and the
applicable clause of Listing Agreement with the Mumbai Stock Exchange, an Audit Committee of the
Company be and is hereby constituted with effect from the conclusion of this meeting, with members as
under:
1. Mr. A -- An Independent Director.
2. Mr. B -- An Independent Director
3. Mr. C – An Independent Director
4. Mr. D -- An Independent Director
5. Mr. FE -- Financial Executive
6. Mr. MD -- Managing Director
Further resolved that the Chairman of the Committee, who shall be an Independent Director, be elected
by the committee members from amongst themselves.
Further resolved that the quorum for a meeting of the Audit Committee shall be the chairman of the
Audit Committee and 2 other members (other than the Managing Director),.
Further resolved that the terms of reference of the Audit Committee shall be in accordance with the
provisions of section 177(4) of the Companies Act, 2013.
Further resolved that the Audit committee shall conduct discussions with the auditors periodically about
internal control system, the scope of audit including the observations of the auditors.
Further resolved that the Audit Committee shall review the quarterly and annual financial statements
and submit the same to the Board with its recommendations, if any.
Further resolved that the recommendations made by the Audit Committee on any matter relating to
financial management including the audit report shall be binding on the Board. However, where such
recommendations are not accepted by the Board, the reasons for the same shall be recorded in the
minutes of the Board meeting and communicated to the shareholders.
Further resolved that the Company Secretary of the Company shall be the Secretary to the Audit
Committee.
Further resolved that the Chairman of the Audit Committee shall attend the annual general meeting of
the Company to provide any clarifications on matters relating to audit as may be required by the
members of the company.
Further resolved that the Board’s Report/Annual Report to the members of the Company shall include
the particulars of the constitution of the Audit Committee and the details of the non acceptance of any
recommendations of the Audit Committee with reasons therefor.”

4.RTP May 2019 Qn no 12

Board of Directors of the ABC Ltd., a listed company, in their meeting passed the resolution for an
appointment of Company Secretary and the Compliance Officer for the guidance to the Board with
regards to their duties, responsibilities and powers and the conduct of the affairs of the company. Draft

Page No. 297

the Resolution for an appointment of Mr. Nirman as Company Secretary and Compliance Officer of the
company.

Answer

To consider the appointment of Mr. Nirman as Company Secretary and Compliance Officer of ABC Ltd.:

“RESOLVED THAT pursuant to the provisions of section 203 of the Companies Act, 2013 read with Rule 8
of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, approval of the
Board be and is hereby given to appoint Mr. Nirman as Whole Time Company Secretary of ABC listed
company, with effect from 11 th January 2019, to perform the duties which shall be performed by a
Company Secretary under the Companies Act, 2013 and other duties as assigned to him by the Board
from time to time.
“RESOLVED FURTHER that Mr. Nirman be and is hereby appointed as Compliance Officer of the company
as per the Regulation 6 of the SEBI (LODR) Regulations, 2015 with effect from 11th January 2019.

5.RTP Nov 2019 Qn no 9

Draft a Specimen Board Resolution passed in the meeting of the Board of Directors of a recently
incorporated BLM Limited for obtaining Goods and Service Tax (GST) Registration in the GST System
Portal.

Answer

Resolution passed at the meeting of Board of Directors of BLM Limited held at its registered office
situated ---------------------- on ----------------, 2019 at ------------------- A.M.

RESOLVED THAT the Board do hereby appoint Mr. --------------- Director of the company
as Authorized Signatory for enrolment of the Company on the Goods and Service Tax (GST) System Portal
and to sign (physically or digitally as and when required) and submit various documents electronically
and/or physically and to make applications, communications, representations, modifications or
alterations and to give explanations on behalf of the Company before the Central GST and/or the
concerned State GST authorities as and when required.

FURTHER RESOLVED THAT Mr. ______, Director of the company be and is hereby authorized to represent
the Company and to take necessary actions on all issues related to goods and service tax including but
not limited to presenting documents/records etc. on behalf of the Company representing for registration
of the Company and also to make any alterations, additions, corrections, to the documents, papers,
forms, etc., filed with tax authorities and to provide explanations as and when required.
FURTHER RESOLVED THAT Mr. ------------, Director of the company be and is hereby authorized on behalf
of the company to sign the returns, documents, letters, correspondences etc. physically/digitally and to
represent on behalf of the company, for assessments, appeals or otherwise before the goods and service
tax authorities as and when required.

6.Nov 2019 Qn no 5(a)(i) 3 Marks

Page No. 298

Excel Ltd. committed an offence under the Companies Act, 2013. The offences falls within the
jurisdiction of a special court of Bundi district in which the registered office of Excel Ltd was situated.
However in that Bundi district, there were two special courts one in X place and other in Y place.
Identify the jurisdiction of the special court for trial of an offences committed by Excel Ltd.

Answer

All offences which are punishable in this Act with imprisonment of 2 years or more, shall be triable only
by the special court established for the area in which the registered office of the company in relation to
which the offence is committed. According to section 436 where there are more special courts than one
for such area, by such one of them as may be specified in this behalf by the high court concerned.

Accordingly, in the given case, there are more than one special court in Bundi district where registered
office of Excel Ltd. is situated. The jurisdiction for trail in special court will be specified by H.C of the State
(i.e. Rajasthan).

7.RTP May 2020 Question no 11

Draft a Board Resolution of disclosure of interest by Mr. J, director of ABC Ltd. in a proposed contract
to be entered into with M/s APL & Co. in which, such director is a partner.

Answer

Board Resolution of disclosure of Interest U/s 184

Resolved that pursuant to section 184(1) of the Companies Act, 2013 read with Rule 9(1) of the
Companies (Meetings of Board and its powers) Rules, 2014 , and other applicable provisions of the
Companies Act, 2013, the general notice of disclosure of interest or concern in Form MBP-1 received
from Mr. J, Director of the company, as placed before the meeting, be and hereby noted and taken on
record by the Board.
Resolved further that Mr. J, Director of the company, and Mr -------- Company Secretary
of the company be and hereby severally authorised to make necessary entries in the register maintained
for the purpose.
Further resolved that Mr ---------------- Company secretary and Mr. J director of the company, be and
are severally authorised to affix his/ her DSC and file e-form MGT-14 with the Registrar of Companies.

8.Draft a resolution proposed to be passed at a General Meeting of a Public Company giving consent
to the Board of Directors for borrowing upto a specified amount in excess of the limits laid down
under Section 180(1)(c) of the Companies Act, 2013.

Answer:
Draft of special resolution under Section 180 (1) (c) of the Companies Act, 2013

“Resolved that the company hereby accords the consent of members to the Board of Directors for
borrowing money together with the monies already borrowed by the company for an aggregate sum not
exceeding Rs.……(Rupees………………..) in excess of the aggregate of the paid-up capital of the company,
Page No. 299
its free reserves and securities premium, that is to say reserves apart from temporary loans taken by the
company from its bankers in the ordinary course of business, as provided in Section 180(1)(c) of the
Companies Act, 2013.
Resolved further that the powers given as above shall be exercised by the Board of Directors at a duly
convened meeting of the Board and not by passing resolution by circulation”.

9. Answer the following:

(i) Board of Directors of DBM Limited held a board meeting on 2nd May, 2018 at its registered
office. You are required to state the salient points to be taken into account while drafting the
minutes of the said board meeting.
(ii) Draft a board resolution for appointment of Mr. Paul as the managing director for 5 years
with effect from 1st June, 2019 of DBM Limited passed in the above stated board meeting
Answer: (i) While drafting the minutes of a board meeting following salient points should be kept in
mind:

(a) the minutes may be drafted in a tabular form or they may be drafted in the form of a series of
paragraphs, numbered consecutively and with relevant headings.
(b) the place, date and time of the meeting should be stated.

(c) The chairman of the meeting must be mentioned. The general phrase used in the Minutes is “Mr.---,
chairman of the meeting took the chair and called the meeting to order”.
(d) the minutes should clearly mention the attendance and the constitution of the meeting, i.e., persons
present and the capacity in which present, e.g. name of the person chairing the meeting, names of the
directors and secretary, identifying them as director or secretary, names of persons in attendance like
auditor, internal auditor etc. The minutes should also contain the subject of leave of absence granted,
if any, to any of the board members.
(e) The adoption of the Minutes of the previous Board Meeting must be the first item on the Agenda by
the directors giving their approval and the Chairman signing the Minutes as proof of approval of the
Minutes.
(f) Conduct of the business at the meeting should be recorded in the chronological sequence as per the
Agenda.
(g) In respect of each item of business the names of the directors dissenting or not concurring with any
resolution passed at the board meeting should be mentioned
(h) Reference about interested directors abstaining from voting is also required to be stated in the
minutes.
(i) Chairman’s signature and date of verification of minutes as correct
(j) Resolution passed at the meeting of board of directors of DBM Limited held at its registered office
situated at ………………… on 2nd May, 2019 at A.M.

Page No. 300

 “RESOLVED that subject to the approval by the shareholders in a general meeting and pursuant to the
provisions of the applicable provisions of the Companies Act, 2013, Mr. Paul be and is hereby
appointed as the Managing Director of the Company with effect from 1st June, 2019 for a period of
five years on a remuneration approved by the Remuneration Committee as enumerated below:
(k) Salary: Rs. per month

(l) Perquisites, Benefits and Facilities …………………………….

RESOLVED FURTHER that Mr. Paul, so long as he functions as the Managing Director of the Company shall
not be entitled to any sitting fee for attending the meeting of the board of directors or any committee
thereof and that he shall not be liable to retire by rotation.
RESOLVED FURTHER that the Secretary of the company be and is hereby directed and authorized to file
necessary returns with the Registrar of Companies and to do all other necessary things required
under the provisions of the Companies Act, 2013.”

10. Morbani Woods Limited decide to appoint Mr. Wahid as its Managing Director for a period of 5
years with effect from 1st May, 2019. Mr. Wahid fulfils all the conditions as specified under
Schedule V to the Companies Act, 2013.

The terms of appointment are as under:

(i) Salary Rs. 1 lakh per month;

(ii) Commission, as may be decided by the Board of Directors of the company;
(iii) Perquisites, Free Housing Medical reimbursement upto Rs. 10,000 per month, Leave Travel
concession for the family,
Club membership fee,

Personal Accident Insurance Rs. 10 lakh,

Gratuity, and Provident Fund as per Company’s policy.

You being the Secretary of the said Company, are required to draft a resolution to give effect to
the above, assuming that Mr. Wahid is already the Managing Director in a public limited company

Answer

Resolution passed at the meeting of board of directors of Morbani Woods Limited held at its registered
office situated at ……………………… on ………….(day) at………… A.M
“Resolved that consent of all the directors present at the meeting be and is hereby accorded to the
appointment of Mr. Wahid, who is already the Managing Director of another public limited company, and
fulfils the conditions as specified in Schedule V of the Companies Act, 2013, as the Managing Director of
the company for a period of 5 years effective from 1st May, 2019 subject to approval by a resolution of
shareholders in a general meeting and that Mr. Wahid may be paid remuneration as follows:
(i) Salary of Rs. 1 Lakh per month
Page No. 301
(ii) Commission
(iii) Perquisites: Free Housing, Medical reimbursement upto Rs. 10,000, Leave Travel Concession for the
family, Club membership fee, Personal Accident Insurance of 10 Lakhs, Gratuity, Provident Fund etc.
Resolved further that in the event of loss or inadequacy of profits, the salary payable to him shall be
subject to the limits specified in Schedule V.
Resolved further that the Secretary of the company be and is hereby authorize to prepare and file with
the Registrar of Companies necessary forms and returns in respect of the above appointment.”
Sd/-
Board of Directors
Morbani Woods Limited
11. The members of XYZ Limited decided to pass a resolution for appointing Mr. Smith as an
Independent director of the company. Draft a specimen resolution to be passed at the said
meeting.

Answer

Resolution passed at the meeting of XYZ Limited held at its registered office situated at ________ on
______ (day) at A.M.
“RESOLVED that pursuant to the provisions of Sections 149, 150, 152 and any other applicable provisions
of the Companies Act, 2013 and the rules made thereunder (including any statutory modification(s) or re-
enactment thereof for the time being in force) read with Schedule IV to the Companies Act, 2013,
Mr. Smith (holding DIN -------), Director of the Company who retires by rotation at the Annual General
Meeting and in respect of whom the Company has received a notice in writing from a member proposing
his candidature for the office of Director, be and is hereby appointed as an Independent Director of the
Company to hold office for five consecutive years for a term up to , 20---.”
12. Mr. N is appointed as an additional Director by the Board of Directors of MNR Company Limited
at its meeting held on 1st October, 2018 for a period as permitted by law.

Draft a resolution and state the body which appoints N.

Answer

Appointment of Additional Director: Resolution (Section 161 of the Companies Act, 2013)
According to section 161(1) of the Companies Act, 2013, the articles of a company may confer on its
Board of Directors the power to appoint any person as an additional director at any time.
Board Resolution

Resolution passed at the meeting of the board of directors of MNR Company Limited held at its
registered office situated at ________ on ______ (day) at _______________________ AM.

"Resolved that pursuant to the Articles of Association of the company and section 161(1) of the

Page No. 302

Companies Act, 2013, Mr. N is appointed as an Additional Director of the MNR Company Limited with
effect from 1st October, 2018 to hold office up to the date of the next annual general meeting or the last
date on which the annual general meeting should have been held, whichever is earlier.
Resolved further that Mr. N will enjoy the same powers and rights as other directors.
Resolved further that Mr_______________________ Secretary of MNR Company Limited be and is
hereby authorised to electronically file necessary returns with the Registrar of Companies and to do all
other necessary things required under the Act."
Assumption: As the question is silent about the Articles of Association, it is assumed that Articles of
Association has conferred the power to appoint the additional director on the Board of Directors of MNR
Company Limited

13. The Board of Directors of RPS Limited decides to pass a resolution by circulation for allotment of
1,000 equity shares to Mr. A. Draft a specimen Board Resolution to be passed by circulation for this
purpose.

Answer

RPS Limited

______(Place)

To

Mr X (Director)

(Address in India Only)

Dear Sir,

The following resolution which is intended to be passed as a resolution by circulation as provided in

Section 175 of the Companies Act, 2013 is circulated herewith as per the provisions of the said section.
If only you are Not Interested in the resolution, you may please indicate by appending your signature in
the space provided beneath the resolution appearing herein below as a separate perforated slip, if you
are in favour or against the said resolution. The perforated slip may please be returned if and when
signed within seven days of this letter.
However, it need not be returned if you are interested in the resolution.

Yours Faithfully

(Secretary)

RPS Limited

Resolution by circulation passed by directors as per circulation effected …………..20…………..

Resolved that 1,000 equity shares in the company be and hereby allotted to Mr. A. 202, Kher Gali, Sher
Page No. 303
Mark, Ludhiana, Punjab from whom full amount has been received.
It is further resolved that necessary return of allotment be filed in the office of the ROC under the
signature of Mr. Y, a Director.
For/Against
Signature
14. Elaborate the provisions of the Companies Act, 2013 regarding Notice of Board Meeting. Draft a
notice for the first meeting of the Board of Directors of India Timber Ltd.

Answer

Notice of Board Meeting:

Notice of Board Meeting is required pursuant to Section 173(3) of the Companies Act, 2013. According
to this section, a meeting of the Board shall be called by giving not less than seven days’ notice in writing
to every director at his address registered with the company and such notice shall be sent by hand
delivery or by post or by electronic means.
Further, a meeting of the Board may be called at shorter notice to transact urgent business subject to the
condition that at least one independent director, if any, shall be present at the meeting.
In case of absence of independent directors from such a meeting of the Board, decisions taken at such a
meeting shall be circulated to all the directors and shall be final only on ratification thereof by at least one
independent director, if any.
The Companies (Meetings of Board and its Powers) Rules, 2014, further provides that the notice of the
meeting shall inform the directors regarding the option available to them to participate through video
conferencing mode or other audio visual means, and shall provide all the necessary information to enable
the directors to participate through video conferencing mode or other audio visual means.
On receiving such a notice, a director intending to participate through video conferencing or audio visual
means shall communicate his intention to the Chairperson or the company secretary of the company. He
shall give prior intimation to the effect sufficiently in advance so that the company is able to make
suitable arrangements in this behalf.
If the director does not give any intimation of his intention to participate that he wants to participate
through the electronic mode, it shall be assumed that the director shall attend the meeting in person.
As per section 173(4) of the Companies Act, 2013, every officer of the company whose duty is to give
notice under this section and who fails to do so shall be liable to a penalty of Rs. 25,000.
Draft Notiice
India Timber Limited
Address …………..
Date ………….
To
Mr………………..
Address……………..(Each Director to be addressed individually)
Page No. 304
Dear Sir,
Notice is hereby given that first meeting of the Board of Directors will be held at the registered office of
the company at……….(address)………..(place) on…..(day), the..............(date) at… AM/PM.
You are requested to make it convenient to attend the meeting. An option is also available to you to
participate in the Board Meeting through video conferencing or audio visual means. Kindly
communicate your preference in this regard.
A copy of the agenda of the meeting is enclosed for your perusal
Yours Faithfully
For India Timber Limited

(Secretary)
15. R Ltd. wants to constitute an Audit Committee. Draft a board resolution covering the following
matters [compliance with Companies Act, 2013 to be ensured].

(1) Member of the Audit Committee

(2) Chairman of the Audit Committee
(3) Any 2 functions of the said Committee
Answer

Audit Committee – Board’s Resolution:

“Resolved that pursuant to Section 177 of the Companies Act, 2013 an Audit Committee consisting of the
following Directors be and is hereby constituted.
1. Mr Independent Director
2. Mr Independent Director
3. Mr Independent Director
4. Mr Independent Director
5. Mr Managing Director.
6. Mr Chief Financial Officer”
“Further resolved that the Chairman of the Audit Committee shall be elected by its members from
amongst themselves and shall be an independent director’.
“Further resolved that the quorum for a meeting of the Audit committee shall be three directors (other
than the Managing Director), out of which at least two must be independent directors”.
“Resolved further that the Audit Committee shall perform all the functions as laid down in section 177(4)
of the Companies Act, 2013 including but not limited to:
a. make the recommendation for appointment, remuneration and terms of appointment of the
auditors of the company;

Page No. 305

b. review and monitor the independence and performance of auditors of the company and the
effectiveness of the audit process”.
Further resolved that the Audit Committee shall review the quarterly and annual financial statements and
submit the same to the Board with its recommendations if any”.
16. (i) 17th Board meeting of Jai Entertainment Ltd. was held at its registered office situated at B- 17,
Industrial Area, Suncity. While discussing the matter of appointment of Mr. Kaabil as Managing
Director of the company, certain defamatory remarks were made by Mr. X, one of the directors. The
draft minutes submitted by the Company Secretary also incorporated the indecent remarks of Mr. X.
The chairman wants to remove those undesirable remarks from the minutes. Can he do so?

(ii) Draft the minutes of above referred meeting containing the matter regarding appointment of
Managing Director in addition to the usual items.

Answer

The minutes of a meeting are a written record of the business transacted; decisions and resolutions
arrived at the meeting.

Section 118 of the Companies Act, 2013, deals with Minutes of Proceedings of General Meeting,
Meetings of Board of Directors and Other Meetings and Resolutions Passed by Postal Ballot. The section
provides certain exemptions to matters from inclusion in the minutes.
Exemptions from inclusion in minutes of the meeting: There shall not be included in the minutes, any
matter which, in the opinion of the Chairman of the meeting, -

(a) is or could reasonably be regarded as defamatory of any person; or

(b) is irrelevant or immaterial to the proceedings; or
(c) is detrimental to the interests of the company.
Absolute discretion of chairman: The Chairman shall exercise absolute discretion in regard to the
inclusion or non-inclusion of any matter in the minutes on the grounds as specified above.
Hence, the Chairman can exercise his discretion of not including the undesirable remarks from the minute
of the 17th Board meeting of Jai Entertainment Ltd.
(ii) Draft Minutes
Minutes of 17th meeting of the Board of Directors of Jai Entertainment Limited held on ______________
the _______________________________________________ 2018, at B-17, Industrial Area, Suncity

Present :
1 Chairman
2 Director
3 Director

Page No. 306

In attendance Secretary
Item No. 1 : Leave of Absence

Leave of absence was granted to ____________________________Director.

Item No. 2 : Confirmation of minutes of the 16th Board meeting :

The minutes of the 16th meeting of the Board of Directors held on _______________________ were
considered and confirmed.
Item No. 3: Appointment of Managing Director:

The Board noted the appointment of Mr. Kaabil, director of the company as the Managing Director of the
company. In this connection, the following resolutions were passed:

“Resolved that Mr. Kaabil who fulfils the conditions specified in Parts I and II of Schedule V to the
Companies Act, 2013, be and is here by appointed as the Managing Director of the company for a period
of five years effective from
_________ and that he may be paid remuneration by way of salary, commission and perquisites in
accordance with Part II of Schedule V to the Act.
Resolved further that the Secretary of the Company be and is hereby directed to file the necessary
returns with the registrar of Companies and to do all acts and things as may be necessary in this
connection.”
Item No. 4: Next Board Meeting:

The next meeting of the Board will be held on ________the __________20 at the registered office of the
company. The meeting ended with a vote of thanks to the chair.
17. RTP NOV’20

Integrated Case Scenario 2

Hansraj Power Distribution Ltd. (HPDL) was incorporated in the year 2008. The annual turnover of the
company is two crore rupees. Mr. Raj Purohit, a Director of the company was appointed by company
four years back. Mr. Raj Purohit is eligible for retirement by rotation at this AGM. The AGM is schedule
to be held on 22nd August, 2020. He is also working as a director in Max International Limited and
Trinity Infrastructure Limited. Trinity Infrastructure Limited did not file its financial statements for the
last three years with the Registrar of Companies.

Trinity Infrastructure Limited also defaulted in paying interest on loans taken from a Public Financial
Institution in the last two years. The Board of HPDL has decided to propose Mr. Raj’s name for re-
appointment. Mr. Raj gave his consent for the same.
Application to the Tribunal for Compromise & Arrangement was submitted along with all the
documents. The Tribunal fixed the time and place of the meeting and appointed a Chairperson for the

Page No. 307

meeting.
A meeting of members of the company was held as per the orders of the Court to consider a scheme of
compromise and arrangement. Notice of the meeting was sent to all 1000 members. Notice of the
meeting was also sent to all the creditors or class of creditors and to the debenture-holders of the
company, individually at the address registered with the company which will be accompanied by a
statement disclosing the details of the compromise or arrangement, a copy of the valuation report, if
any, and explaining their effect on creditors, key managerial personnel, promoters and non-promoter
members, and the debenture-holders and the effect of the compromise or arrangement on any
material interests of the directors of the company or the debenture trustees.
In total, the 1000 members of the company holds in aggregate 10,00,000 equity shares. The meeting
was attended by 800 members holding 7,00,000 shares. Out of which 460 members holding 4,70,000
shares voted in favour of the scheme; 190 members holding 1,25,000 shares voted against the scheme.
The remaining 150 members holding 1,05,000 shares abstained from voting. All the members voted for
the scheme either in person or through proxies.
As prescribed under this Act, a notice along with all the documents was also sent to the Central
Government, the Income-Tax Authorities, the Reserve Bank of India, the Securities and Exchange
Board, the Registrar, the respective stock exchanges, and the Competition Commission of India. The
Securities and Exchange Board made objection to scheme of arrangements after 45 days of receiving all
the documents.

According to the last audit financial report, the outstanding debt on the company is Rs. 50 lakh rupees.
The creditors of the company is as follows:

X-One financial Company 200,000 rupees 4%

Mr. Mohan Shah 1,250,000 rupees 25%
Radhey Finance Company 200,000 rupees 4%
Soham Company 700,000 rupees 14%
Onex National bank 1,000,000 rupees 20%
DXY National bank 1,650,000 rupees 33%
So from the above mentioned Creditors’ list, X-One financial Company raised its objection in the
Tribunal, to the aforementioned scheme. The creditor file the petition in the Tribunal.
The Chairperson of the meeting submitted the report to the Tribunal within the time fixed by the
Tribunal. After hearing the creditors, the Tribunal finally approve the scheme of compromise and
arrangement between the company and its members. The order of the Tribunal is binding on the
company, all its members and creditors.
Answer the following questions in the light of the given information:
1. With reference to the provisions of the Companies Act, 2013, which value of the requisite majority
will be considered to approve the scheme?
(a) 3/4th of the total value of shares held by 650 members.
Page No. 308
 (b) 3/4th of the total value of shares held by 800 members.

(c) 3/4th of the total value of shares held by 1000 members.

(d) 3/4th majority of 1000 shares holders present and voting.
Answer: a)

2. According to the provision of the Companies Act, 2013, X-One financial company objected to the
compromise held on the scheme in between the company and its shareholders? According to their
respective percentage in debt owed to the company, choose the correct option?
(a) X-One Finance Company can raise the objection as aggregate loan amount needs to be more
than 2℅ of debt.
(b) X-One Finance Company jointly with Radhey Finance company can raise the objection as the
aggregate amount needs to be not less than 5℅.

(c) Only X-One Finance Company along with Soham Finance company can jointly raise the
objection as the aggregate amounts needs not to be less than 15℅.
(d) Only X-One Finance Company jointly with Soham Finance company and Radhey Finance
company can raise the objection the aggregate amounts needs not to be less than 20 ℅.
Answer: b)

3. Evaluate the representation made by SEBI, after 45 days of receiving the notice and all the
documents, is tenable or not?
(a) Not tenable. It is required to be made within 10 days

(b) Not tenable. It is required to be made within 15 days.

(c) Not tenable. It is required to be made within 30 days.
(d) Not tenable. It is required to be made within 45 days.
Answer: c)

4. While finally approving the scheme of compromise and arrangements between the company and
its members, which of the below mentioned certificate is necessary to be filed with the Tribunal?
(a) Certificate from the Central Government
(b) Certificate from the Registrar.
(c) Certificate from the audit and accounts committee of the company

(d) Certificate from the company's auditor.

Answer: d)

5. According to the above mentioned facts under the directorship of Mr. Raj Purohit, Trinity
Infrastructure Limited, defaulted in filing statements and paying the interest due on the loans. How

Page No. 309

 the default of Trinity Infrastructure Limited going to affect the directorship of Mr. Raj Purohit, in all
the three companies?
(a) Mr. Raj has to immediately vacate his office as a director in all the three companies.

(b) Mr. Raj needs to vacate his office as a director in (HPDL).

(c) Mr. Raj needs to vacate his office as a director only in (HPDL) and in Max International Limited.

(d) Mr. Raj need not resign in any of the company, as the default makes him only ineligible for re-
appointment
Answer: c)

18. The members of EBX Limited decided to pass a resolution for appointing Mr. S as an Independent
director of the company. Draft a specimen resolution to be passed at the said meeting. (4 Marks) (mtp-
NOV 2020)

ANSWER

Resolution passed at the meeting of EBX Limited held at its registered office situated at ________ on
______ (day) at _____ A.M.
“RESOLVED that pursuant to the provisions of Sections 149, 150, 152 and any other applicable provisions
of the Companies Act, 2013 and the rules made thereunder (including any statutory modification(s) or re-
enactment thereof for the time being in force) read with Schedule IV to the Companies Act, 2013, Mr. S
(holding DIN -------), Director of the Company who retires by rotation at the Annual General Meeting and
in respect of whom the Company has received a notice in writing from a member proposing his
candidature for the office of Director, be and is hereby appointed as an Independent Director of the
Company to hold office for five consecutive years for a term up to ---, 20---.”

19. Draft a specimen resolution of approval of Directors’ report of the financial year 2020-2021.
(4 Marks) (mtp-I- july 2021)

ANSWER

“Resolved that the draft of the Directors ‘Report for the year ended 31st March, 2020, as submitted
before the meeting, duly initiatalled by the Chairman of the meeting for the purpose of identification, be
and is hereby considered and approved by the Board and that the same be signed on behalf of the Board
of Directors of the company by Mr….. Director and Mr. ….., Director.
Resolved further that pursuant to provisions stipulated under sub-section 3 of the Section 179 of the
Companies Act, 2013 read with Companies (Meetings of Board and the powers) Rules, 2014, all the
directors of the company be and is hereby severally authorised to file the resolution with the Registrar of
Companies,…. Along with requisite e-Form.”

Page No. 310

 The securities Exchange Board of India Act, 1992 and
13 SEBI (LODR) Regulations 2015

ATTEMPTS

MAY NOV MAY NOV NOV JAN JULY NOV

COVERAGE
2018 2018 2019 2019 2020 2021 2021 2021

STUDY Q.- 16, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 35, 36
MAT

PAST NO NO NO
Q-9 Q-40 Q-41 ------
EXAMS QUES QUES QUES

Q-8, 10, Q-1,2, 3, Q-37,

MTP Q-6, 7 Q-18 Q-42 ----
11 4, 13 38, 39

Q-14,
RTP Q-5 Q-12 Q-16, 17 Q-19, 34 Q-43 Q-44
15, 32

Page No. 311

Multiple Choice Questions

1.MTP Mar 2019 QN no 9

Mr. KG filed a complaint against Mr. P alleging that Mr. P has communicated unpublished price
sensitive information to Mr. X. Mr. P took a plea that Mr. X requested him for such information and it
was done bonafidely. State the correct statement as to the liability of Mr. P in the given situation-

(a) Mr. P will not be liable as he communicated about unpublished price sensitive information on the
request of Mr. X
(b) Mr. P will not be liable as he communicated about unpublished price sensitive information to
Mr. X in the ordinary cause of business
(c) Mr. P will not be liable as he communicated about unpublished price sensitive information to Mr.
X as it was done without any malafide intention.
(d) Mr. P will be liable as he communicated about unpublished price sensitive information to Mr. X,
whether with or without his request for such information.
Answer: Option D

2.MTP Mar 2019 QN no 10

P Ltd. was holding 35% of the paid up equity capital of X Stock Exchange. The company appoints M
Ltd. as its proxy who is not a member of the X Stock Exchange, to attend and vote at the meeting of the
stock exchange. State the correct statement as to the appointment of M Ltd. as a proxy for P Ltd.
and on the voting rights of P Ltd. in the X Stock Exchange:

(a) X Stock Exchange can restrict the appointment of M Ltd., as proxy, and voting rights of P Ltd. in
the Stock Exchange.
(b) Central Government can restrict appointment of proxies and voting rights of P Ltd. in the X Stock
Exchange.
(c) Both (a) & (b)
(d) X Stock Exchange can restrict the appointment of M Ltd. & also voting rights of P Ltd. if rules of
the exchange so provides. Otherwise can restrict the voting rights of P Ltd. & appointment of
proxies through amendment in rules.
Answer: Option D

3.MTP Mar 2019 QN no 13

Mr. Ingenious, registered as an Intermediary, fails to enter into an agreement with his client and hence
penalised by SEBI under the SEBI Act. Advise Mr. Ingenious as to what remedies are available to him
against the order of SEBI.

(a) He may be given extension on the basis of the reasonable ground for not entering into an
agreement with his client

Page No. 312

(b) he shall be liable to a penalty for not entering into an agreement with his client which is required
under this Act.
(c) he shall be liable for imprisonment for not entering into an agreement with his client which is
required under this Act.
(d) Both (b) & (c)

Answer: Option B

4.MTP Mar 2019 Qn no 15

SEBI ordered Delhi Stock Exchange (DSE), to produce their books of accounts and audited financial
statements for the period 1st April 2016 to 31st March 2018 within 30 days of the receipt of the
communication by the stock exchange. The communication was received by the company on 30 th
April 2018 and no documents were furnished to SEBI in reply to the notice till 15 th May 2018. State the
consequences of not supplying the said documents to SEBI:

(a) Period of submission of said documents may be condoned on reasonable grounds

(b) Show cause notice may be served why DSE not be penalized for non-submitting of the
documents within the time limit.
(c) DSE shall punishable with a fine only
(d) DSE shall be punishable with fine and imprisonment both
Answer: Option C

Descriptive Questions

5.RTP May 2018 Qn no 14

(i) On completion of 60 years of age as on 31st March 2014, Mr. Jain retired as Professor from a
university. From 1st April 2014, he was appointed as Chairman of the Securities and Exchange Board
of India for a period of three years. Under the, provisions of the Securities and Exchange Board of
India Act, 1992, decide whether he can be re- appointed on the same post after expiry of the original
tenure? Also discuss whether it could be possible for him to relinquish the office before expiry of his
tenure?

(ii) List the quarterly compliances for a listed entity under the SEBI (Listing Obligations and
Disclosure Requirements) Regulations, 2015?
Answer

(i) Appointment of Chairman: As per Section 5 of the SEBI Act, 1992 and the rules prescribed under the
SEBI Act, 1992, the Chairman may hold office for a period of three years subject to the maximum age
limit of 65 years and can be re-appointed by the Central Government.

Page No. 313

Also, as per Section 4(5) of the Act, the Chairman shall be persons of ability, integrity and standing who
have shown capacity in dealing with problems relating to securities market or have special knowledge or
experience of law; finance; economics, accountancy, administration or in any other discipline which, in
the opinion of the Central Government, shall be useful to the Board.
In the instant case, Mr. Jain retired as professor from a university on completion of 60 years of age as
on 31st March, 2014 appointed as Chairman of SEBI from 1st April, 2014 for a period of 3 years.
This appointment is valid as on the date of appointment, he is of 60 years of age and he, as a retired
professor, is a person of ability, integrity and standing and have special knowledge or experience of law;
finance; economics, accountancy, administration or in any other discipline.

If Mr. Jain is reappointed as a chairman after expiry of the original tenure of 3 years, he can be re-
appointed but only upto 65 years of age i.e. upto 31st March, 2019 (i.e. only for two years).
Right to Relinquish the office: The Chairman shall equally have the right to relinquish office at any time
before the expiry of their tenure by giving a notice of three months in writing or salary and allowances in
lieu thereof to the Central Government.

Quarterly compliances– Listed Entity

A Listed company has to comply with the following quarterly compliances under the SEBI (Listing
Obligations and Disclosure Requirements) Regulations, 2015 :
1. Regulation 13(3):- Grievance Redressal Mechanism
The listed entity shall file with the recognized stock exchange(s) on a quarterly basis, within 21 days
from the end of each quarter, a statement giving the number of investor complaints pending at the
beginning of the quarter, those received during the quarter, disposed of during the quarter and those
remaining unresolved at the end of the quarter.
2. Regulation 27(2):- Other Corporate Governance Requirements
A listed entity shall submit quarterly compliance report on corporate governance in the format as
specified by the Board from time to time to the recognized stock exchange(s), within 15 days from close
of quarter.
3. Regulation 31(1): Holding of Specified Securities and Shareholding Pattern.
A listed entity shall submit a statement showing holding of securities and shareholding pattern separately
for each class of securities:-
(a) One day prior to listing of its securities on the stock exchange(s);
(b) On a quarterly basis, within 21 days from the end of each quarter; and,
(c) Within 10 days of any capital restructuring of the listed entity resulting in a change exceeding 2 % per
cent of the total paid-up share capital.
4. Regulation 33(3): Financial Results
The listed entity shall submit quarterly and year-to-date standalone financial results to the stock
exchange within 45 days of end of each quarter, other than the last quarter.

Page No. 314

5. Regulation 32(1): Statement of Deviation(S) Or Variation(S)
A listed entity shall submit to the stock exchange the following statement(s) on a quarterly basis for
public issue, rights issue, preferential issue etc. -
(a) indicating deviations, if any, in the use of proceeds from the objects stated in the offer document or
explanatory statement to the notice for the general meeting, as applicable;

(b) indicating category wise variation (capital expenditure, sales and marketing, working capital etc.)
between projected utilization of funds made by it in its offer document or explanatory statement to
the notice for the general meeting, as applicable and the actual utilization of funds.

6.March 2018 Qn no 4(b) 6 Marks:

Mr. Moral, a member of SEBI was engaged in conducting of inquiries and Audit of various stock
exchanges. A group of complainants suspected that Mr. Moral, have taken bribe in the conduct of
inquiries and Audit of stock exchanges. Therefore, he should be removed from his office. Examine
with reference to the SEBI Act the rationality of the complainants on removal of Mr. Moral as per the
SEBI Act, 1992.

Answer:

Removal of Member of the SEBI (Section 6 of the Securities and Exchange Board of India Act, 1992)

According to section 6 of the Securities and Exchange Board of India Act, 1992, the Central Government
shall have the power to remove a member appointed to the Board, if he:
(i) is, or at any time has been adjudicated as insolvent;
(ii) is of unsound mind and stands so declared by a competent court;
(iii) has been convicted of an offence which, in the opinion of the Central Government, involves a
moral turpitude.
(iv) has, in the opinion of the Central Government so abused his position as to render his continuance
in office detrimental to the public interest.
Before removing a member, he will be given a reasonable opportunity of being heard in the matter.
In the present case, a group of complainants have alleged that Mr. Moral, a member of the SEBI has a
taken up bribe in the inquiries and audit of the stock exchanges that came up before the Board and he
misused his position and committed an offence involved a moral turpitude. Therefore, he should be
removed from his office.
The Central Government may remove Mr. Moral from his office after giving him a reasonable
opportunity of being heard in the matter.

7.March 2018 Qn no 3(c) 3 Marks: (MTP-NOV 2019)

PQR Ltd., is a listed entity with its subsidiary, Twig Ltd. State the Corporate Governance requirements
with respect to the subsidiary of Listed Entity as per the SEBI (LODR) Regulations, 2015.

Page No. 315

Answer:

Regulation 24: Corporate Governance Requirements with respect to Subsidiary of Listed Entity.

The Board: Atleast one Independent Director on Board shall be a Director on Board of Unlisted Material
Subsidiary. The management of the unlisted subsidiary shall periodically bring to the notice of the
board of directors of the listed entity, a statement of all significant transactions and arrangements
entered into by the unlisted subsidiary.
A listed entity shall not dispose of shares in its material subsidiary resulting in reduction of its
shareholding (either on its own or together with other subsidiaries) to less than 50 % or cease the
exercise of control over the subsidiary without passing a special resolution in its General Meeting
except in cases where such divestment is made under a scheme of arrangement duly approved by a
Court/Tribunal.
Selling, disposing and leasing of assets amounting to more than 20% of the assets of the material
subsidiary on an aggregate basis during a financial year shall require prior approval of shareholders by
way of special resolution, unless the sale/disposal/lease is made under a scheme of arrangement duly
approved by a Court/Tribunal

8.Aug 2018 Qn no 3(c) 3 Marks:

List the common obligations of listed entities assigned under the SEBI (LODR) Regulations, 2015.

Answer:

A responsibility has been cast upon Key Managerial Personnel (KMP’S), Directors, and Promoters that
they shall comply with responsibilities or obligations assigned to them under the SEBI (LODR)
Regulations, 2015.

The following are the common obligations on Listed entities:-

Regulation 6: Compliance Officer And his Obligations

A listed entity shall appoint a qualified Company Secretary as the Compliance Officer. The Compliance
officer so appointed shall be responsible for ensuring conformity with regulatory compliance, co-
ordination and reporting to the Board, ensuring that correct procedures have been followed that would
result in correctness of information filed by listed entity under the regulations and monitoring email
address of grievance redressal division.
Regulation 7: Share Transfer Agent

The listed entity shall appoint a share transfer agent or manage the share transfer facility in house.

9.Nov 2018 Qn no 4(b) 6 Marks:

Mr. Ravi failed to pay the penalty imposed by the Adjudicating Officer for an offence committed under
Securities and Exchange Board of India Act, 1992. After the penalty has become due, Mr. Ravi,
otherwise than for adequate consideration, transferred his residential property to his sister and the

Page No. 316

fixed deposits with Banks in favour of his minor son. The minor son has become major and deposits
continue to be held by his son.

With reference to the provisions of SEBI Act, 1992 discuss,

(i) Whether the residential property and fixed deposits with Banks can be attached by the Recovery
Officer for the purpose of recovering the penalty?
(ii) Whether the Recovery Officer can seek assistance of local district administration for attaching the
property?
Answer:

As per requirement of section 28A of the Securities and Exchange Board of India Act, 1992, if a person
fails to pay the penalty imposed by the adjudicating officer, the Recovery Officer may draw up under
his signature a statement in the specified form specifying the amount due from the person and shall
proceed to recover from such person the amount specified in the certificate by modes specified in
the said section.
As per the explanation, the person's movable or immovable property or monies held in bank accounts
shall include any property or monies held in bank accounts which has been transferred directly or
indirectly on or after the date when the amount specified in certificate had become due, by the person to
his spouse or minor child or son's wife or son's minor child, otherwise than for adequate consideration,
and which is held by, or stands in the name of, any of the persons aforesaid; and so far as the movable
or immovable property or monies held in bank accounts so transferred to his minor child or his son's
minor child is concerned, it shall, even after the date of attainment of majority by such minor child
or son's minor child, as the case may be, continue to be included in the person's movable or immovable
property or monies held in bank accounts for recovering any amount due from the person under this
Act.
Further, Section 28A states that the Recovery Officer shall be empowered to seek the assistance of the
local district administration while exercising his powers.
In the light of the provisions enumerated above and facts of the question,
(i) The residential property shall not be attached by the Recovery Officer for the purpose of
recovering the penalty, as it has been transferred by Mr. Ravi to his sister and said transfer has
not been covered in the section.
The Fixed deposits with Bank that have transferred by Mr. Ravi in favour his minor son can be
attached by the Recovery Officer for the purpose of recovering the penalty. Further, these Fixed
deposits can even after the date of attainment of majority by such minor son, continue to be
included in Mr. Ravi’s monies held in bank accounts for recovering any amount due from him
under this Act.
(iii) Yes, the Recovery Officer can seek assistance of local district administration for attaching the
property.

10.Oct 2018 Qn no 1(b) 6 Marks:

Mr. X files a complaint against Mr. P, Chief Executive Officer of the Company before SEBI. After
enquiry SEBI finds that Mr. P. Mehta, on the basis of unpublished price sensitive information, has
Page No. 317
indulged in the trading of the securities of that company. Explain, on the basis of the said finding,
what action SEBI can take against Mr. P. Mehta under the Securities and Exchange Board of India Act,
1992

Answer:

Section 15G of the Securities and Exchange Board of India (SEBI) Act, 1992 deals with penalty fo r Insider
Trading. According to this, if any insider

(i) either on his own behalf or on behalf of any other person, deals in securities of a body corporate on
any stock exchange on the basis of any unpublished price sensitive information; or
(ii) communicates any unpublished price sensitive information to any person, with or without his
request for such information except as required in the ordinary cause of business or under any law,
or
(iii) counsels or procures for, any other person to deal in any securities of any body corporate on the
basis of unpublished price sensitive information,
shall be liable to a penalty of twenty-five crore rupees or three times the amount of profits made out
of insider trading, whichever is higher. As such SEBI can, after following the prescribed procedure,
impose a penalty on Mr. P. The maximum penalty that SEBI can impose is Rupees twenty-five crores
or three times the amount of profits made out of insider trading, whichever is higher.

11.Oct 2018 Qn no 4(b) 6 Marks:

Mr. R, an investor is not satisfied with the dealings of his stock broker who is registered with Chennai
Stock Exchange. Mr. R approaches you to guide him regarding the avenues available to him for
making a complaint against the stock broker under Securities and Exchange Board of India Act, 1992
and also the grounds on which such complaint can be made. You are required to briefly explain the
answer to his queries.

Answer:

(i) Securities and Exchange Board of India (SEBI) was established for regulating the various aspects of
stock market. One of its functions is to register and regulate the stock brokers. In the light of this, Mr. R
is advised that the complaint against the erring stock broker may be submitted to SEBI.

The grounds on which or the defaults for which complaints may be made to SEBI are as follows:
(a) Any failure on the part of the stock broker to issue contract notes in the form and manner specified
by the stock exchange of which the stock broker is a member.
(b) Any failure to deliver any security or any failure to make payment of the amount due to the
investor in the manner within the period specified in the regulations.
(c) Any collection of charges by way of brokerage which is in excess of the brokerage specified in the
regulations.

12.RTP Nov-18:

Page No. 318

State the types and functions of the various committees constituted under the SEBI(LODR)
Regulations, 2015?

Answer:

Audit Committee:

Every listed entity shall constitute a qualified and independent audit committee which shall have:
(a) The audit committee shall have minimum three directors as members.
(b) Two-thirds of the members of audit committee shall be independent directors.
(c) All members of audit committee shall be financially literate and at least one member shall have
accounting or related financial management expertise.
(d) The chairperson of the audit committee shall be an Independent Director and he shall be present
at Annual general meeting to answer shareholder queries.
(e) The Company Secretary shall act as the secretary to the audit committee.

(f) The audit committee at its discretion shall invite the finance director or head of the finance
function, head of internal audit and a representative of the statutory auditor and any other such
executives to be present at the meetings of the committee.
Meetings of Audit Committee:

(a) The audit committee shall meet at least four times in a year and not more than 120 days shall
elapse between two meetings.
(b) The Quorum for audit committee meeting shall either be two members or one third of the
members of the audit committee, whichever is greater, with at least 2 Independent directors.
(c) The audit committee shall have powers to investigate any activity within its terms of reference,
seek information from any employee, obtain outside legal or other professional advice and secure
attendance of outsiders with relevant expertise, if it considers necessary.
Nomination and Remuneration Committee:

The Board of directors shall constitute the nomination and remuneration committee as follows:
 The committee shall comprise of at least 3 directors;
 All directors of the committee shall be Non-Executive Directors; and
 At least 50 percent of the directors shall be independent directors.
The Chairperson of the nomination and remuneration committee shall be an independent director. The
chairperson of the listed entity, whether executive or non- executive, may be appointed as a member of
the Nomination and Remuneration Committee and shall not chair such Committee.
Stakeholders Relationship Committee:

The listed entity shall constitute a Stakeholders Relationship Committee to specifically look into the
mechanism of redressal of grievances of shareholders, debenture holders and other security holders.

Page No. 319

 The Chairperson of this committee shall be a Non-Executive director.
 The Board of Directors shall decide other members of this committee.

Risk Management Committee

 The Board of directors shall constitute a Risk Management Committee.

 The majority of members of Risk Management Committee shall consist of members of the board of
directors.

 The Chairperson of the Risk management committee shall be a member of the board of directors
and senior executives of the listed entity may be members of the committee.
 The Board of directors shall define the role and responsibility of the Risk Management Committee
and may delegate monitoring and reviewing of the risk management plan to the committee and
such other functions as it may deem fit.
 The provisions of this regulation regarding risk management committee shall be applicable to top
100 listed entities, determined on the basis of market capitalization, as at the end of the immediate
previous financial year.

13.MTP Apr 2019 Qn no 4(a) 4 Marks

Mr. Kumar filed a complaint against Mr. P alleging that Mr. P has communicated unpublished price
sensitive information to Mr. X. Mr. P took a plea that Mr. X requested him for such information and it
was done bonafidely. Examine the liability of Mr. P in the given situation in the light of the Securities
and Exchange Board of India (SEBI) Act, 1992.

Answer

Section 15G of the Securities and Exchange Board of India (SEBI) Act, 1992 deals with penalty for
Insider Trading. According to this, if any insider

(a) either on his own behalf or on behalf of any other person, deals in securities of a body corporate on
any stock exchange on the basis of any unpublished price sensitive information; or
(b) communicates any unpublished price sensitive information to any person, with or without his
request for such information except as required in the ordinary cause of business or under any law,
or
(c) counsels or procures for, any other person to deal in any securities of any body corporate on the
basis of unpublished price sensitive information,
Accordingly, Mr. P, is an insider as he communicated unpublished price sensitive information to Mr. X
on his request, therefore he shall be liable to a penalty of twenty-five crore rupees or three times the
amount of profits made out of insider trading, whichever is higher.

14.RTP May 2019 QN no 16

Page No. 320

(i) Securities and Exchange Board of India (SEBI) has undertaken inspection of books of accounts
and records of LR Ltd., a listed public company. Specify the measures which may be taken by SEBI
under the Securities and Exchange Board of India Act, 1992 to protect the interest of investors and
securities market, on completion of such inquiry.

Answer

(i) As per section 11 (4) of the Securities and Exchange Board of India Act, 1992, the Board may, by an
order, for reasons to be recorded in writing, in the interest of investors or securities market, take any of
the following measures, either pending investigation or inquiry or on completion of such investigation or
inquiry, namely:—

1. suspend the trading of any security in a recognised stock exchange;

2. restrain persons from accessing the securities market and prohibit any person associated with
securities market to buy, sell or deal in securities;
3. suspend any office-bearer of any stock exchange or self-regulatory organization from holding such
position;
4. impound and retain the proceeds or securities in respect of any transaction which is under
investigation;
5. attach, for a period not exceeding ninety days, bank accounts or other property of any intermediary
or any person associated with the securities market in any manner involved in violation of any of the
provisions of this Act, or the rules or the regulations made there under:
Provided that the Board shall, within ninety days of the said attachment, obtain confirmation of the
said attachment from the Special Court, established under section 26A, having jurisdiction and on
such confirmation, such attachment shall continue during the pendency of the aforesaid
proceedings and on conclusion of the said proceedings, the provisions of section 28A shall apply:

Provided further that only property, bank account or accounts or any transaction entered therein,
so far as it relates to the proceeds actually involved in violation of any of the provisions of this Act,
or the rules or the regulations made thereunder shall be allowed to be attached.
6. direct any intermediary or any person associated with the securities market in any manner not to
dispose of or alienate an asset forming part of any transaction which is under investigation.

15.RTP May 2019 Qn no 16(ii)

Upon complaints been received by SEBI, regarding the listed securities of Blue Rock Limited at the
Guwahati Stock Exchange, SEBI has passed an order to delist the securities of the company from the
said stock exchange. Blue Rock Limited is aggrieved by the order of the SEBI. Advise the company on
the further step that the company can take against the order of SEBI to delist the securities.
Answer

As per the facts of the case given in the question above, the aggrieved company, i.e. Blue Rock Limited
may appeal to the Securities Appellate Tribunal (‘SAT’) against the decision of SEBI within 45 days of date
from which the order has been passed, unless further extension has been granted by SAT on reasonable

Page No. 321

grounds.
As per Section 23L, the Tribunal shall give an opportunity of being heard to the respondent and may pass
the order confirming, modifying or setting aside the decision of SEBI.
SAT shall also send a copy of its order to every party to appeal and to the concerned adjudicating officer.
Also, the company, Blue Rock Limited should be assured that a speedy decision shall be taken, since the
Tribunal is required to dispose of in every 6 months from the date of receipt of appeal.

16. (RTP NOV 2019)

Mr. Zubin (Member of SEBI) was adjudged as an insolvent by the Adjudicating authority. As of that, a
group of complainants have alleged that Mr. Zubin while rendering of his services in office may be
biased in the performance of his duties. Working in such a state of position by him, may be
detrimental to the public interest and so should be removed from his office. Advise in the given
situation, the tenability of maintenance of complaint against Mr. Zubin.

Answer

Removal of Member of the SEBI (Section 6 of the Securities and Exchange Board of India Act, 1992)

According to section 6 of the Securities and Exchange Board of India Act, 1992, the Central Government
shall have the power to remove a member appointed to the Board, if he:
(i) is, or at any time has been adjudicated as insolvent;
(ii) is of unsound mind and stands so declared by a competent court;
(iii) has been convicted of an offence which, in the opinion of the Central Government, involves a moral
turpitude.
(iv) has, in the opinion of the Central Government so abused his position as to render his continuance in
office detrimental to the public interest.

Before removing a member, he will be given a reasonable opportunity of being heard in the matter. In
the present case, a group of complainants have alleged that Mr. Zubin, a member of the SEBI is being
adjudicated as an insolvent. His state of position may effect on rendering of his services in a biased
manner. This may be unfavorable to the public interest and so should be removed from his office.
Here, above complainants may approach the Central Government for removal of Mr. Zubin, and if the
Central Government is of the opinion that Mr. Zubin was not competent in rendering of his
services/duties in a office as a member of the Board. The Central Government may remove Mr. Zubin
from his office in compliance with the said provision.

17.Nov 2019 Qn no 4(b) 4 Marks

The composition of Audit Committee of M/s MKBTC Limited, an unlisted Public Company, as on 31-3-
2019 comprised of 7 Directors including 4 Independent Directors. The majority of the members of the
Audit Committee has the ability to read and understand the financial statements but none of them
has accounting or related financial management expertise. The Company listed its Securities in a
recognized Stock Exchange in the month of August 2019. Referring to the regulations of Securities and

Page No. 322

Exchange Board of India [Listing Obligations and Disclosure Requirements] Regulations 2015, decide
whether the existing

Audit Committee can continue after listing of its Securities?

Answer

Audit Committee: According to Regulation 18 of SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015, every listed entity shall constitute a qualified and independent audit committee
which shall have:

(a) Minimum three directors as members.

(b) Two-thirds of the members of audit committee shall be independent directors.

(c) All members of audit committee shall be financially literate and at least one member shall have
accounting or related financial management expertise.
As per the facts of the question, M/s MKBTC Limited, listed its securities in a recognised stock exchange in
the month of August, 2019. In order to comply with the requirements of SEBI (Listing Obligations and
Disclosure Requirements) Regulations, 2015, the company requires to do the following:
(i) The audit committee of M/s MKBTC Limited already has 7 directors as members, which is in
compliance.
(ii) The audit committee has 4 directors as independent directors. However, once the company gets
listed, at least 5 [7*(2/3)] directors shall be independent directors. Thus, they need to change the
composition of audit committee once the company gets listed on stock exchange.
(iii) In the existing audit committee though majority of the members have the ability to read and
understand the financial statement but none of them has accounting or related financial
management expertise.
However, once the company gets listed it is required that all members of audit committee shall be
financially literate and at least one member shall have accounting or related financial management
expertise. Hence, it is required that the company should appoint at least one member in the audit
committee who shall have accounting or related financial management expertise.
In view of above, the existing audit committee cannot continue after listing of its securities.

18.MTP Nov 2019

PQR Ltd., is a listed entity with its subsidiary, Twig Ltd. State the Corporate Governance requirements
with respect to the subsidiary of Listed Entity as per the SEBI (LODR) Regulations, 2015.

Answer

Regulation 24: Corporate Governance Requirements with respect to Subsidiary of Listed Entity.

The Board: Atleast one Independent Director on Board shall be a Director on Board of Unlisted Material
Subsidiary. The management of the unlisted subsidiary shall periodically bring to the notice of the board
of directors of the listed entity, a statement of all significant transactions and arrangements entered into

Page No. 323

by the unlisted subsidiary.
A listed entity shall not dispose of shares in its material subsidiary resulting in reduction of its
shareholding (either on its own or together with other subsidiaries) to less than 50 % or cease the
exercise of control over the subsidiary without passing a special resolution in its General Meeting except
in cases where such divestment is made under a scheme of arrangement duly approved by a
Court/Tribunal or under a resolution plan duly approved under section 31 of the IBC and such an event
is disclosed to the recognised stock exchange within one day of the resolution plan being approved.

Selling, disposing and leasing of assets amounting to more than 20% of the assets of the material
subsidiary on an aggregate basis during a financial year shall require prior approval of shareholders by
way of special resolution, unless the sale/disposal/lease is made under a scheme of arrangement duly
approved by a Court/Tribunal/ duly approved resolution plan.

19.RTP May 2020 Question no.16

SEBI on an complaint of Mr. KG enquires that Mr. Mehta, a Chief Executive Officer of the X Company,
on the basis of unpublished price sensitive information, has been indulged in the trading of the
securities of that company. Examine, on the basis of the said finding, what action SEBI can take
against Mr. Mehta under the Securities and Exchange Board of India Act, 1992.

Answer

Section 15G of the Securities and Exchange Board of India (SEBI) Act, 1992 deals with penalty for Insider
Trading. According to this, if any insider

(i) either on his own behalf or on behalf of any other person, deals in securities of a body corporate on
any stock exchange on the basis of any unpublished price sensitive information; or
(ii) communicates any unpublished price sensitive information to any person, with or without his
request for such information except as required in the ordinary cause of business or under any law,
or
(iii) counsels or procures for, any other person to deal in any securities of any body corporate on the
basis of unpublished price sensitive information,
shall be liable to a penalty of minimum Rs. 10 lacs which may extend upto twenty-five crore rupees or
three times the amount of profits made out of insider trading, whichever is higher. As such SEBI can,
after following the prescribed procedure, impose a penalty on Mr. Mehta. The maximum penalty that
SEBI can impose is Rupees twenty-five crores or three times the amount of profits made out of insider
trading, whichever is higher.

Study Material

20. Number of independent directors in Audit committee-

(a) one-third of the members of audit committee.

(b) Two-thirds of the members of audit committee shall be independent directors.

Page No. 324

(c) minimum 2
(d) minimum 3
Answer: b) Hint: As per SEBI (LODR) Regulations, two-thirds of the members of audit committee shall
be independent directors.

21. For how much capital restructuring, the listed entitiy shall submit a statement showing holding of
securities and shareholding pattern with the stock exchange:

a) resulting in a change exceeding 1% of the total paid-up share capital

b) resulting in a change exceeding 2% of the total paid-up share capital
c) resulting in a change exceeding 2.5% of the total paid-up share capital
d) resulting in a change exceeding 2% of the total issued share capital
Answer: b) Hint: As per SEBI (LODR) Regulations, a listed entity shall submit a statement showing
holding of securities and shareholding pattern separately for each class of securities:-

(a) One day prior to listing of its securities on the stock exchange(s);
(b) On a quarterly basis, within 21 days from the end of each quarter; and,
Within 10 days of any capital restructuring of the listed entity resulting in a change exceeding 2 % per
cent of the total paid-up share capital

22. SEBI has imposed a penalty on Hotel Leel Ventures Ltd. for violation of Takeover Code. The
directors of Management is seeking your advice to apprise them with the time period for filling an
appeal with SAT and Supreme Court? Suggest what will be the time period for filing appeal with SAT
and Supreme Court?

a) In case of filing appeal with SAT: Within 45 days from the date of order of the copy made by SEBI
or adjudicating officer and in case of filing appeal with Supreme Court: Within 60 days from the
date of communication of the decision or order of SAT.
b) In case of filing appeal with SAT: Within 60 days from the date of order of the copy made by SEBI
or adjudicating officer and in case of filing appeal with Supreme Court: Within 60 days from the
date of communication of the decision or order of SAT.
c) In case of filing appeal with SAT: Within 30 days from the date of order of the copy made by SEBI
or adjudicating officer and in case of filing appeal with Supreme Court: Within 60 days from the
date of communication of the decision or order of SAT.
d) In case of filing appeal with SAT: Within 60 days from the date of order of the copy made by SEBI
or adjudicating officer and in case of filing appeal with Supreme Court: Within 45 days from the
date of communication of the decision or order of SAT
Answer: a) Hint: Section 15T and 15Z of SEBI Act, 1992

23. Suppose SEBI has constituted its board as per requirements of section 4 of SEBI Act, 1992 with 3
whole time members under Section 4(1)(d) of the SEBI Act, 1992, but one of them resigned and to

Page No. 325

refill his post, it took 1 month. Examine acts done in between the vacancy period, as per SEBI Act
1992.

a) All acts become void ab-initio as per section 8 of the SEBI Act, 1992.
b) Only financial acts are void ab initio as per section 8 of the SEBI Act, 1992.
c) All acts are valid as per section 8 of the SEBI Act, 1992.
d) All acts should be rectified after composition of proper board as per section 8 of the SEBI Act,
1992.
Answer: c) Hint: Section 8 of SEBI Act, 1992

24. ABC & Co., Chartered Accountants, is a partnership firm, who is auditor of one of the listed
company Z ltd. for the financial year 2018-19. Mr. B is engaging partner of that audit with a team of
15 members. While doing audit of the financial statement of the company, two members of the
team, who are chartered accountant, passed the information to their friends and relatives that this
year company’s profit is increasing by 25% as compared to last audited financial year, before this
information came in to public domain through the company. They made profit from this information
by purchase at low price and after financial statements came in public domain and share prices
raised, they sold shares at enhanced price. Please state whether it is a case of insider trading. If yes,
then how much penalty for this act, under SEBI Act, 1992.

a) No, it is not insider trading, because that these persons are not restricted to use the information
to benefit themselves.
b) No, it is not insider trading, because it is not price sensitive information.
c) Yes, it is insider trading and penalty u/s 15G would be minimum Rs. 10 lacs which may extend
upto Rs. 25 cr. or 3 times of profit derived, whichever is higher.
d) Yes, it is insider trading and penalty u/s 12A would be Rs. 25 cr. or 3 times of profit derived,
whichever is lower.
Answer: c) Hint: Section 15G of the SEBI Act, 1992

25. A ltd., a listed company, wants to revise the rate of interest of its existing 12% bond by 1%i.e. 13%
bond from 14th August 2019, the said proposal is to be laid before board meeting to be held on 14th
July 2019. Upto which of the following date, A Ltd. has to intimate to stock exchange as per
regulation 29 of SEBI (LODR), 2015:

(a) 3rd July 2019.

(b) 3rd August 2019.
(c) 5th July 2019.
(d) 5th August 2019.
Answer: a) Hint: Regulation 29

Page No. 326

26. A group of complainants have alleged that Mr. Z, a Member of the Securities and Exchange Board
of India (SEBI) has pecuniary interest in some of the cases that came up before the Board and that he
misused his position and therefore, he should be removed from his office. The complainants seek
your advice. Advise

Answer

Removal of Member of the SEBI (Section 6 of the Securities and Exchange Board of India Act, 1992)
According to section 6 of the Securities and Exchange Board of India Act, 1992, the Central Government
shall have the power to remove a member appointed to the Board, if he:
(i) is, or at any time has been adjudicated as insolvent;
(ii) is of unsound mind and stands so declared by a competent court;
(iii) has been convicted of an offence which, in the opinion of the Central Government, involves a
moral turpitude.
(iv) has, in the opinion of the Central Government so abused his position as to render his continuance
in office detrimental to the public interest.
Before removing a member, he will be given a reasonable opportunity of being heard in the matter.
In the present case, a group of complainants have alleged that Mr. Z, a member of the SEBI has
pecuniary interest in some of the cases that came up before the Board and he misused his position and
therefore, he should be removed from his office.
Here, above complainants may approach the Central Government for removal of Mr. Z, a member of
the SEBI and if the Central Government is of the opinion that Mr. Z has so abused his position as to
render his continuation in office detrimental to the public interest, the Central Government may
remove Mr. Z from his office after giving him a reasonable opportunity of being heard in the matter

27. SEBI received complaints from some investors alleging that ABC Ltd. and some brokers are
indulging in price manipulation in the shares of ABC Ltd. Explain the powers that can be exercised by
SEBI under the Securities and Exchange Board of India Act, 1992 in case the allegations are found to
be correct.

Answer

Price manipulation in the shares of ABC Ltd. can be considered as fraudulent and unfair trade
practices relating to securities market. In this case SEBI may exercise the following powers under
section 11(4) of securities and Exchange Board of India Act, 1992.
-Suspend the trading of any security (in this case the securities of ABC Ltd.) in a recognized stock
exchange.
- Restrain persons (in this case ABC Ltd.) from accessing the securities market. It can also prohibit any
person associated with securities market (i.e. brokers who have indulged in price manipulation) to buy,
sell or deal in securities market.

Page No. 327

SEBI may issue the above orders for reasons to be recorded in writing. SEBI shall, either before or after
passing such orders give an opportunity of hearing to company and brokers concerned (proviso 2 to
Section 11(4)) SEBI may also appoint an adjudicating officer who may levy penalty under section 15 HA
after holding an enquiry in the prescribed manner.
According to section 15HA if any person indulges in fraudulent and unfair trade practices relating to
securities, he shall be leviable to a penalty which shall not be less than five lakh rupees but which may
extend to twenty-five crore rupees or three times the amount of profits made out of such practices,
whichever is higher.
Prohibition on manipulation and deceptive practices: Further according to section 12A, no person shall
directly or indirectly indulge in following (i.e.) (a) using in manipulative or deceptive device in
connection with purchase, sale or securities listed (b) Employ any scheme or device to defraud in
connection with dealing in securities which are listed (c) engage in an act which would operate as fraud
or deceit upon any person in connection with dealing in securities which are listed. SEBI may impose
penalty which shall not be less than one lakh rupees but which may extend to one crore rupees.
(Section 15 HB).
28. Clever who is registered as an Intermediary fails to enter into an agreement with his client and
hence penalised by SEBI under section 15B of the SEBI Act. Advise Mr. Clever as to what remedies are
available to him against the order of SEBI.

Answer

Remedies against SEBI order: Section 15B of the Securities and Exchange Board of India Act, 1992 lays
down that if any person, who is registered as an intermediary and is required under this Act or any rules
or regulations made there under, to enterr into an agreement with his client, fails to enter into such
agreement, he shall be liable to a penalty of one lakh rupees for each day during which such failure
continues or one crore rupees, whichever is less. Mr. Clever has been penalised under the above
mentioned provision. Two remedies are available to Mr. Clever in this matter:-

(i) Appeal to the Securities Appellate Tribunal: Section 15T of the SEBI Act, (1) any person
aggrieved,—
(a) by an order of the Board made, on and after the commencement of the Securities Laws
(Second Amendment) Act, 1999, under this Act, or the rules or regulations made
thereunder; or
(b) by an order made by an adjudicating officer under this Act; or
(c) by an order of the Insurance Regulatory and Development Authority or the Pension Fund
Regulatory and Development Authority, may prefer an appeal to a Securities Appellate
Tribunal having jurisdiction in the matter.
Every appeal shall be filed within a period of forty-five days from the date on which a copy of the
order made by the Board or the Adjudicating Officer or the Insurance Regulatory and
Development Authority or the Pension Fund Regulatory and Development Authority, as the case
may be, is received by him and it shall be in such form and be accompanied by such fee as may be

Page No. 328

 prescribed :
Provided that the Securities Appellate Tribunal may entertain an appeal after the expiry of the
said period of forty-five days if it is satisfied that there was sufficient cause for not filing it within
that period.
On receipt of an appeal under sub-section (1), the Securities Appellate Tribunal may, after giving
the parties to the appeal, an opportunity of being heard, pass such orders thereon as it thinks fit,
confirming, modifying or setting aside the order appealed against.
The Securities Appellate Tribunal shall send a copy of every order made by it to the Board, or the
Insurance Regulatory and Development Authority or the Pension Fund Regulatory and
Development Authority, as the case may be the parties to the appeal and to the concerned
Adjudicating Officer.
The appeal filed before the Securities Appellate Tribunal under sub-section (1) shall be dealt with
by it as expeditiously as possible and endeavor shall be made by it to dispose of the appeal finally
within six months from the date of receipt of the appeal.
(ii) Appeal to the Supreme Court: Section 15Z of the SEBI Act, 1992 provides that any person
aggrieved by any decision or order of the Securities Appellate Tribunal may file an appeal to the
Supreme Court within 60 days from the date of communication of the decision or order to him on
any question of fact or law arising out of such order. The Supreme Court may, if it is satisfied that
the appellant was prevented by sufficient cause from filing the appeal within the said period,
allow it to be filed within a further period not exceeding 60 days.

29. A group of investors are upset with the functioning of two leading stock brokers of Calcutta Stock
Exchange and want to make a complaint to SEBI for intervention and redressal of their grievances.
Explain briefly the purpose of establishing SEBI and what type of defaults by the stock brokers come
within the purview of SEBI Act, 1992.

Answer

The Securities and Exchange Board of India (SEBI) was established primarily for the purpose of
1. to protect the interests of investors in securities
2. to promote the development of securities market
3. to regulate the securities market and
4. For matters connected therewith and incidental thereto.
The following defaults by stock brokers come within the purview of SEBI Act:
(a) Any failure on the part of the stock broker to issue contract notes in the form and in the manner
specified by the Stock Exchange.
(b) Any failure on the part of the broker to deliver any security or to make payment of
the amount due to the investor in the manner or within the period specified in the regulations.

Page No. 329

(c) Any collection of charges by way of brokerage in excess of the brokerage as specified in the
regulations. (Section 15 F, SEBI Act, 1992)
30. Mr. Raman, an investor is not satisfied with the dealings of his stock broker who is registered with
Delhi Stock Exchange. Mr. Raman approaches you to guide him regarding the avenues available to
him for making a complaint against the stock broker under Securities and Exchange Board of India
Act, 1992 and also the grounds on which such complaint can be made. You are required to briefly
explain the answer to his queries.

Answer

Securities and Exchange Board of India (SEBI) was established for regulating the various aspects of stock
market. One of its functions is to register and regulate the stock brokers. In the light of this, Mr. Raman
is advised that the complaint against the erring stock broker may be submitted to SEBI.

The grounds on which or the defaults for which complaints may be made to SEBI are as follows:
(a) Any failure on the part of the stock broker to issue contract notes in the form and manner
specified by the stock exchange of which the stock broker is a member.
(b) Any failure to deliver any security or any failure to make payment of the amount due to the
investor in the manner within the period specified in the regulations.
(c) Any collection of charges by way of brokerage which is in excess of the brokerage specified in the
regulations.

31. On the complaint of Mr. Kamlesh Gupta, after enquiry SEBI finds that Mr. P. Mehta a Chief
Executive Officer of the Company, on the basis of unpublished price sensitive information, has
indulged in the trading of the securities of that company. Explain, on the basis of the said finding,
what action SEBI can take against Mr. P. Mehra under the Securities and Exchange Board of India Act,
1992.

Answer

Section 15G of the Securities and Exchange Board of India (SEBI) Act, 1992 deals with penalty for Insider
Trading. According to this, if any insider
(i) either on his own behalf or on behalf of any other person, deals in securities of a body corporate
on any stock exchange on the basis of any unpublished price sensitive information; or
(ii) communicates any unpublished price sensitive information to any person, with or without his
request for such information except as required in the ordinary cause of business or under any
law, or
(iii) counsels or procures for, any other person to deal in any securities of any body corporate on the
basis of unpublished price sensitive information,
shall be liable to a penalty of twenty-five crore rupees or three times the amount of profits made out of
insider trading, whichever is higher. As such SEBI can, after following the prescribed procedure, impose

Page No. 330

a penalty on Mr. P. Mehra. The maximum penalty that SEBI can impose is Rupees twenty-five crores or
three times the amount of profits made out of insider trading, whichever is higher

32. (RTP MAY 2019)

Securities and Exchange Board of India (SEBI) has undertaken inspection of books of accounts and
records of LR Ltd., a listed public company. Specify the measures which may be taken by SEBI under
the Securities and Exchange Board of India Act, 1992 to protect the interest of investors and
securities market, on completion of such inquiry

Answer

As per section 11 (4) of the Securities and Exchange Board of India Act, 1992, the Board may, by an
order, for reasons to be recorded in writing, in the interest of investors or securities market, take any of
the following measures, either pending investigation or inquiry or on completion of such investigation
or inquiry, namely:—

1. suspend the trading of any security in a recognised stock exchange;

2. restrain persons from accessing the securities market and prohibit any person associated with
securities market to buy, sell or deal in securities;
3. suspend any office-bearer of any stock exchange or self-regulatory organization from holding such
position;
4. impound and retain the proceeds or securities in respect of any transaction which is under
investigation;
5. attach, after passing of an order on an application made for approval by the Judicial Magistrate of
the first class having jurisdiction, for a period not exceeding one month, one or more bank account
or accounts of any intermediary or any person associated with the securities market in any manner
involved in violation of any of the provisions of this Act, or the rules or the regulations made
thereunder:
However only the bank account or accounts or any transaction entered therein, so far as it relates
to the proceeds actually involved in violation of any of the provisions of this Act, or the rules or the
regulations made thereunder shall be allowed to be attached;
6. direct any intermediary or any person associated with the securities market in any manner not to
dispose of or alienate an asset forming part of any transaction which is under investigation.

33. Mr. S, a member of MN Ltd., obtained an order from the Securities and Exchange Board of India
(SEBI) against the company. But the company failed to redress the grievance of Mr. S within the time
fixed. Consequently, SEBI imposed penalty on the company. The company, however, did not pay the
penalty also. State how the penalty can be recovered from the company?

Answer
According to Section 28A of the Securities and Exchange Board of India Act, 1992, if a person fails to
pay the penalty imposed by the adjudicating officer or fails to comply with any direction of the Board
Page No. 331
for refund of monies or fails to comply with a direction of disgorgement order issued under section 11B
or fails to pay any fees due to the Board, the Recovery Officer may draw up under his signature a
statement /certificate in the specified form specifying the amount due from the person and shall
proceed to recover from such person the amount specified in the certificate by one or more of the
following modes, namely:

 attachment and sale of the person’s movable property;

 attachment of the person’s bank accounts;
 attachment and sale of the person’s immovable property;
 arrest of the person and his detention in prison;
 appointing a receiver for the management of the person’s movable and immovable properties.
The expression ‘Recovery Officer’ means any officer of the Board who may be authorized by general or
special order in writing, to exercise the powers of a Recovery Officer. The Recovery Officer shall be
empowered to seek the assistance of the local district administration while exercising the powers

34.RTP Nov’2020 Q no 20

The composition of Audit Committee of MKBTC Limited, an unlisted Public Company, as on 31-3-
2019 comprised of 7 Directors including 4 Independent Directors. The majority of the members of the
Audit Committee has the ability to read and understand the financial statements but none of them
has accounting or related financial management expertise. The Company listed its Securities in a
recognized Stock Exchange in the month of August 2019. Referring to the regulations of Securities
and Exchange Board of India [Listing Obligations and Disclosure Requirements] Regulations 2015,
decide whether the existing Audit Committee can continue after listing of its Securities?

Answer

Audit Committee: According to Regulation 18 of SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015, every listed entity shall constitute a qualified and independent audit committee
which shall have:

(a) Minimum three directors as members.

(b) Two-thirds of the members of audit committee shall be independent directors.

(c) All members of audit committee shall be financially literate and at least one member shall have
accounting or related financial management expertise.
As per the facts of the question, MKBTC Limited, listed its securities in a recognised Stock Exchange in
the month of August, 2019. In order to comply with the requirements of SEBI (Listing Obligations and
Disclosure Requirements) Regulations, 2015, the company requires to do the following:
(i) The audit committee of MKBTC Limited already has 7 directors as members, which is in
compliance.
(ii) The audit committee has 4 directors as independent directors. However, once the company gets
listed, at least 5 [7*(2/3)] directors shall be independent directors. Thus, they need to change the
composition of audit committee once the company gets listed on stock exchange.
Page No. 332
 In the existing audit committee though majority of the members have the ability to read and
understand the financial statement but none of them has accounting or related financial
management expertise. However, once the company gets listed it is required that all members of
audit committee shall be financially literate and at least one member shall have accounting or
related financial management expertise. Hence, it is required that the company should appoint at
least one member in the audit committee who shall have accounting or related financial
management expertise. In view of above, the existing audit committee cannot continue after listing
of its securities.

35. DEJY is a Company Limited incorporated in Singapore desires to establish a branch office at
Mumbai. You being a practicing Chartered Accountant have been appointed by the company as a
liaison officer for compliance of legal formalities on behalf of the company. Examining the provisions of
the Companies Act, 2013,answer the following:

(i) Whether branch office will be considered as a company incorporated outside India.
(ii) If yes, state the documents you are required to furnish on behalf of the company, on the
establishment of a branch office at Mumbai.

ANSWER:

(i) According to section 2(42) of the Companies Act, 2013, “Foreign company” means any company or
body corporate incorporated outside India which-
(a) has a place of business in India whether by itself or through an agent, physically or through electronic
mode; and
(b) conducts any business activity in India in any other manner.
Further, branch offices are generally considered as reflection of the Parent Company’ office. Thus, branch
offices of a company incorporated outside India are considered as a place of business for conducting
business activity in India and will be required to follow provisions of this chapter and such other
provisions as may be specified elsewhere under Companies Act, 2013.

(ii) Under section 380(1) of the Companies Act, 2013 every foreign company shall, within 30 days of the
establishment of place of business in India, deliver to the Registrar for registration the following
documents:
(a) a certified copy of the charter, statutes or memorandum and articles, of the company or other
instrument constituting or defining the constitution of the company. If the instruments are not in the
English language, a certified translation thereof in the English language;
(b) the full address of the registered or principal office of the company;
(c) a list of the directors and secretary of the company containing such particulars as may be prescribed;

In relation to the nature of particulars to be provided as above, the Companies (Registration of Foreign
Companies) Rules, 2014, provide that the list of directors and secretary or equivalent (by whatever name
called) of the foreign company shall contain the following particulars, for each of the persons included in
such list, namely:
(1) personal name and surname in full;
(2) any former name or names and surname or surnames in full;
(3) father’s name or mother’s name and spouse’s name;

Page No. 333

(4) date of birth;
(5) residential address;

(6) nationality;
(7) if the present nationality is not the nationality of origin, his nationality of origin;
(8) passport Number, date of issue and country of issue; (if a person holds more than one passport then
details of all passports to be given)

(9) income-tax permanent account number (PAN), if applicable;

(10) occupation, if any;

(11) whether directorship in any other Indian company, (Director Identification Number (DIN), Name and
Corporate Identity Number (CIN) of the company in case of holding directorship);

(12) other directorship or directorships held by him;

(13) Membership Number (for Secretary only); and

(14) e-mail ID.

(d) the name and address or the names and addresses of one or more persons resident in India
authorised to accept on behalf of the company service of process and any notices or other documents
required to be served on the company;

(e) the full address of the office of the company in India which is deemed to be its principal place of
business in India;

(f) particulars of opening and closing of a place of business in India on earlier occasion or occasions;

(g) declaration that none of the directors of the company or the authorised representative in India has
ever been convicted or debarred from formation of companies and management in India or abroad; and

(h) any other information as may be prescribed.

According to the Companies (Registration of Foreign Companies) Rules, 2014, any document which any
foreign company is required to deliver to the Registrar shall be delivered to the Registrar having
jurisdiction over New Delhi.

36. Abroad Ltd., a foreign company without establishing a place of business in India, proposes to issue
prospectus for subscription of securities in India. Being a consultant of the company, advise on the
procedure of such an issue of prospectus by Abroad Ltd.

ANSWER:

As per section 389 of the Companies Act, 2013, no person shall issue, circulate or distribute in India any
prospectus offering for subscription in securities of a company incorporated or to be incorporated outside
India, whether the company has or has not established, or when formed will or will not establish, a place
of business in India, unless before the issue, circulation or distribution of the prospectus in India, a copy

Page No. 334

thereof certified by the chairperson of the company and two other directors of the company as having
been approved by resolution of the managing body has been delivered for registration to the Registrar
and the prospectus states on the face of it that a copy has been so delivered, and there is endorsed on or
attached to the copy, any consent to the issue of the prospectus required by section 388 and such
documents as may be prescribed under Rule 11 of the Companies (Incorporated outside India)
Rules,2014. Accordingly, the Abroad Ltd. a foreign company shall proceed with the issue of prospectus in
compliance with the above stated provisions of section 379 of the Act.

37. (mtp-I- july 2021)

An investor filed a complaint to a Recognized Stock Exchange (RSE) against Kolex Ltd. alleging that the
company has changed its registered office within Jaipur city itself in contravention of the provisions of
the Companies Act, 2013, as no ordinary or special resolution was passed in the general meeting,
before such change was made.
Kolex Ltd. had already replied via email to the aggrieved investor by quoting the relevant section, that
in case, if the registered office the company is to be changed within the same city, then only passing of
board resolution is required, which was duly complied with by Kolex Ltd.

The Recognized Stock Exchange, on receipt of such application from the investor inquired into the
details of the company and came to know that the company has been incurring losses for the last 2
consecutive financial years and also it has a negative net worth. In addition to it, the Recognized Stock
Exchange got report, from its analysts, that the securities of such company have remained infrequently
traded during the preceding 2 years.

The Recognized Stock Exchange after giving an opportunity of being heard, passed an order dated 8th
September, 2020, with respect to delisting the securities of Kolex Ltd. from its platform, by recording
the reasons of the same in writing.

At the time of aforesaid hearing and on analysis of the information and explanations asked for by the
official of Recognized Stock Exchange, he came to know that Kolex Ltd. has been indulged in market
manipulation and the said official immediately informed to the Securities Exchange Board of India
(SEBI) regarding the same and the SEBI after inquiring into the same, passed a cease and desist order
against Kolex Ltd., dated 5th October, 2020, as per section 11D of the SEBI Act, 1992, having reasonable
grounds to believe that the company has been indulged in market manipulation.

The aforesaid Recognized Stock Exchange furnished its periodical returns on 10th November, 2020, as
required, to SEBI containing the requisite particulars but didn’t furnish the details of delisted securities
of Kolex Ltd. believing that there is no need to furnish the same as only details pertaining to securities
delisted during previous 1 month are required to be furnished and in case of Kolex Ltd., 1 month has
already passed, since its delisting.

Along with furnishing of the aforesaid return, it also made an application on the same date to the
Securities Exchange Board of India, for renewal of its recognition in Form A, which was about to expire
on 15th February, 2021, along with the applicable fees.
Kolex Ltd. was aggrieved with the order passed by Recognized Stock Exchange with respect to delisting
as well as with the cease and desist order passed by the Securities Exchange Board of India and due to
which it filed appeals with Securities Appellate Tribunal (SAT), in respect of both the orders, within the
prescribed time limits.

Page No. 335

However, at the time of appellate proceedings by Securities Appellate Tribunal, the Presiding Officer of
SAT was removed on 25th February, 2021, by the Central Government, after giving a reasonable
opportunity of being heard in the matter, on the grounds that he has abused his position as to render
his continuation in office detrimental to the public interest.

The Central Government appointed Justice Ram as the new presiding officer on 25th March, 2021 i.e.
on the day of his 62nd birthday, in consultation with the Chief Justice of India.

Multiple Choice Questions (4 questions of 2 Marks each): Total 8 Marks

1. Which of the aforementioned grounds are valid for delisting the securities by RSE?

(a) The company has incurred losses during the preceding 2 consecutive years and it has negative net-
worth.

(b) The securities of the company have remained infrequently traded during the preceding 2 years.

(c) The company has changed its registered office in contravention of the provisions of Companies Act
by not passing ordinary or special resolution in the general meeting.

(d) None of the above (2 Marks)

ANSWER- d

2. Whether the aforesaid contention of RSE is valid, that here is no need to furnish the details of
delisted securities of Kolex Ltd.?

(a) No, as it is the duty of RSE to furnish the details of delisted securities during the previous 3 months,
to SEBI and 3 months have not passed since delisting of securities of Kolex Ltd.

(b) Yes, as it is the duty of RSE to furnish the details of delisted securities only during the previous 1
month, to SEBI and in given case, as 1 month has passed, the contention of RSE is valid.

(c) Partially yes, as it is the duty of RSE to furnish the details of delisted securities during the previous 2
months, to SEBI and in given case, as 2 months have passed, the contention of RSE is valid to that
extent.

(d) No, as it is the duty of RSE to furnish the details of delisted securities during the previous 6 months,
to SEBI and 6 months have not passed since delisting of securities of Kolex Ltd. (2 Marks)

ANSWER- a

3. What shall be the last date prior to the expiry of the period of recognition, by which, the RSE, shall
make an application to the SEBI for renewal of recognition, in case could not make application on 10th
November, 2020, and what shall be fees payable along with such application?

(a) 15th February, 2021 and applicable fees is Rs. 200

Page No. 336
(b) 15th November, 2020 and applicable fees is Rs. 200

(c) Application for renewal is to be made within 3 months after expiry i.e. by 15th May, 2021 and
applicable fees is Rs. 500.

(d) 15th December, 2020 and applicable fees is Rs. 500 (2 Marks)

ANSWER- b

4. What shall be the dates on which Kolex Ltd. would have filed appeals against delisting order of RSE
as well as cease and desist order of SEBI, respectively, assuming it filed appeals on the last prescribed
date against both the orders?

(a) 23rd October, 2020 and 20th October, 2020.

(b) 23rd September, 2020 and 19th November, 2020.

(c) 23rd September, 2020 and 20th October, 2020.

(d) 23rd October, 2020 and 19th November, 2020. (2 Marks)

ANSWER- b

5. In order to make Robotics Toys Private Limited as its subsidiary, Golden Rays Robots Limited raised
its investment in Robotics Toys from 40% to 60% of its paid-up capital. From the options given below,
choose the one which correctly indicates as to when the Robotics Toys shall be considered the
undertaking of Golden Rays Robots Limited.

(a) In order that Robotics Toys is considered as one of its undertaking, Golden Rays is required to invest
more than 10% of its ‘net worth’ calculated as per the audited balance sheet of the preceding year or
the Robotics Toys must have contributed in generation of 10% of the total income of Golden Rays
during the previous Financial Year.

(b) In order that Robotics Toys is considered as one of its undertaking, Golden Rays is required to invest
more than 20% of its ‘net worth’ calculated as per the audited balance sheet of the preceding year or
the Robotics Toys must have contributed in generation of 20% of the total income of Golden Rays
during the previous Financial Year.

(c) In order that Robotics Toys is considered as one of its undertaking, Golden Rays is required to invest
more than 25% of its ‘net worth’ calculated as per the audited balance sheet of the preceding year or
the Robotics Toys must have contributed in generation of 25% of the total income of Golden Rays
during the previous Financial Year.

(d) In order that Robotics Toys is considered as one of its undertaking, Golden Rays is required to invest
more than 30% of its ‘net worth’ calculated as per the audited balance sheet of the preceding year or
the Robotics Toys must have contributed in generation of 30% of the total income of Golden Rays
during the previous Financial Year. (2 Marks)

Page No. 337

ANSWER- b

38. (A) Z Limited, a Foreign Company, incorporated in Japan has a branch office in Hyderabad in India.
Mr. Bhartiya, the Indian Citizen holds preference shares of Z Limited which comprises 10% of the paid-
up share capital of the company. Deshi Limited, a company incorporated in India holds equity shares of
Z Limited which comprises 45% of the paid-up share capital of the company. During the financial year
2019-20, there has been alteration in the particulars of the documents mentioned under section 380 of
the Act and the company has failed to submit the alterations to the Registrar within 30 days. Analyse in
the light of the applicable laws the consequences of failure on the validity of any contracts entered into
by the foreign company? (8 Marks) ) (mtp-II- july 2021)

ANSWER

As per Section 379 of the Companies Act, 2013 where not less than fifty per cent of the paid-up share
capital, whether equity or preference or partly equity and partly preference, of a foreign company is held
by one or more citizens of India or by one or more companies or bodies corporate incorporated in India,
or by one or more citizens of India and one or more companies or bodies corporate incorporated in India,
whether singly or in the aggregate, such company shall comply with the provisions of this Chapter and
such other provisions of this Act as may be prescribed with regard to the business carried on by it in India
as if it were a company incorporated in India.
As per section 393 of the Act, any failure by a company to comply with the provisions of Chapter XXII of
the Act shall not affect the validity of any contract, dealing or transaction entered into by the company or
its liability to be sued in respect thereof, but the company shall not be entitled to bring any suit, claim any
set-off, make any counter-claim or institute any legal proceeding in respect of any such contract, dealing
or transaction, until the company has complied with the provisions of this Act applicable to it.
Chapter XXII of the Act comprises of Section 379 to 393.
In the above question, the provisions of the Companies Act, 2013 are applicable on Z Limited because an
aggregate of 55% of the paid-up share capital of the company are held by an Indian citizen and Indian
company. However, there has been non-compliance of section 380 of the Act by Z Limited.
Therefore, Provisions of the Companies Act, 2013 apply on the company. However, there has been
violation of section 380 of the Act, so as per section 393 of the Act, the validity of any contract entered
into by the foreign company shall not be affected, the company may be sued in respect of such contract
but shall not be entitled to bring any suit in respect of such contract until it has complied with the
relevant provisions related to the companies incorporated outside India under the Companies Act, 2013.

39. (mtp-II- july 2021)

Troy Ltd. is an unlisted public company, deriving its income mainly from trading in iron bars. It also
derives some income from investments in immovable properties. It is the only subsidiary company of
Wrim Ltd., a listed public company, which holds 55% equity in Troy Ltd. The shares of Wrim Ltd. are
listed on the Bombay Stock Exchange as well as on the National Stock Exchange.

Net income of Troy Ltd. was Rs. 66 crore whereas the standalone income of Wrim Ltd. was Rs. 154
crore, as shown in the audited financial statements of both the companies for the financial year ended
on 31st March, 2020. However, the net worth of Troy Ltd. was only 15% of the total net worth of both
the companies as per the consolidated financial statements. Also, the contribution of Troy Ltd. in the
consolidated turnover of both the companies was only 18%.

Page No. 338

The Audit Committee of Wrim Ltd. has all the 7 directors of the company, as its members. The said
Committee held a meeting on 25th April, 2020, for the purpose of reviewing the financial statements of
Troy Ltd. which had been limited reviewed by the statutory auditors of Wrim Ltd. as required by
Accounting Standard No. 21. Also, an omnibus approval was granted, in the said meeting, for some
transactions to be entered by Wrim Ltd. with the related parties.

The meeting was scheduled 2nd time in the year and it was chaired by Mr. Suresh, an Independent
Director of the company, who is also serving as an Independent Director on the Board of Troy Ltd. In
the meeting, apart from Mr. Suresh, Mr. Dharmendra, another Independent Director and Mr. Vimal, an
Executive Director with Chartered Accountancy qualification, were present.

On recommendation of Mr. Vaibhav, the Managing Director of Wrim Ltd., his brother, Mr. Jaimin, has
been appointed as the regular non-executive chairperson of the company, as Mr. Jainim possess the
requisite qualifications for the said post, as also opined by the chairperson of the Nomination and
Remuneration Committee of the company, Mr. Dharmedra. Mrs. Meena, is a qualified Chartered
Engineer who has been appointed as the Woman Director, in the Board Of Directors of Wrim Ltd.

The Board Of Directors of Wrim Ltd., in one of its meetings, made a proposal to dispose of 6% equity
holding in Troy Ltd., as the company received attractive offer for such shares from a foreign company
based in Netherland, also engaged in the business of iron bars trading. Also, the board made a proposal
to sell 22% assets of Troy Ltd. under a scheme of arrangement approved by NCLT as most of the
business of Troy Ltd. was going to be automated in the upcoming years and due to which, use of some
of the assets, as requiring intervention of workers, may become obsolete.

In the same meeting, the Board discussed on the quarterly financial statements of the company which
had been limited reviewed by the statutory auditors of the company. The minutes of the previous
Board Meeting of its subsidiary company, Troy Ltd., were also discussed, as it was placed in the Board
Meeting of Wrim Ltd.

Wrim Ltd. made the following compliances for the June’ 2020 quarter, as required by SEBI(LODR)
Regulations, 2015 :-
(1) It submitted its unaudited quarterly financial statements to the recognised stock exchange on 31st
July 2020.

(2) It submitted its quarterly compliance report on corporate governance on 10th July, 2020.
(3) It submitted a statement showing holding of securities and shareholding pattern separately for each
class of securities on 21st July, 2020. There was no capital restructuring done in the company during the
said quarter, resulting in change exceeding 2% of the total paid up share capital.

Multiple Choice Questions (Question nos.1- 5 of 2 marks each)

1. Whether Troy Ltd. can be considered as a material subsidiary of Wrim Ltd. and whether it will violate
the law, if no more independent director of Wrim Ltd. is appointed on the board of Troy Ltd., as Mr.
Suresh, an independent director, is already appointed there?

Page No. 339

(a) Yes, it can considered as a material subsidiary of Wrim Ltd. and as Mr. Suresh is on the board of Troy
Ltd., statutory requirements are satisfied and it will not violate the law if no more independent director
of Wrim Ltd. is appointed on the board of Troy Ltd.
(b) No, it cannot considered as a material subsidiary of Wrim Ltd. and apart from Mr. Suresh, one more
independent director of Wrim Ltd. needs to be appointed as independent director on the board of Troy
Ltd., to satisfy the statutory requirements, otherwise it will violate the law.
(c) No, it cannot considered as a material subsidiary of Wrim Ltd. and as Mr. Suresh is on the board of
Troy Ltd., statutory requirements are satisfied and it will not violate the law if no more independent
director of Wrim Ltd. is appointed on the board of Troy Ltd.
(d) Yes, it can considered as a material subsidiary of Wrim Ltd. and apart from Mr. Suresh, one more
independent director of Wrim Ltd. needs to be appointed as independent director on the board of Troy
Ltd., to satisfy the statutory requirements, otherwise it will violate the law.

ANSWER- a

2. How many directors and independent directors, apart from Mr. Suresh should have attended the
meeting of audit committee to constitute a valid quorum present for the meeting and what in
particular, the Audit Committee should have reviewed during the meeting at the time of reviewing the
financial statements of Troy Ltd.?
(a) 1 director and one more independent director, apart from Mr. Suresh, should have attended the
meeting of audit committee to constitute a valid quorum present for the meeting and the audit
committee should have reviewed in particular, the loans advanced by and taken by Troy Ltd.
(b) 3 directors and one more independent director, apart from Mr. Suresh, should have attended the
meeting of audit committee to constitute a valid quorum present for the meeting and the audit
committee should have reviewed in particular, the investments made by Troy Ltd.
(c) 1 director and one more independent director, apart from Mr. Suresh, should have attended the
meeting of audit committee to constitute a valid quorum present for the meeting and the audit
committee should have reviewed in particular, the main income source of Troy Ltd. i.e. sales and
operations of iron bars trading business.
(d) 2 directors and one more independent director, apart from Mr. Suresh, should have attended the
meeting of audit committee to constitute a valid quorum present for the meeting and the audit
committee should have reviewed in particular, the investments made by Troy Ltd.

ANSWER- d

3. What shall be the last date of submission of quarterly financial statements to the stock exchange for
Wrim Ltd., in case Wrim Ltd. was not able to submit the same on 31st July, 2020, and whether it can be
submitted in unaudited form also?
(a) 15th August, 2020 and no, it needs to be submitted in audited form.
(b) 31st August, 2020 and yes, it can be submitted in unaudited form.
(c) 31st July, 2020 and no, it needs to be submitted in audited form.

Page No. 340

(d) 15th August, 2020 and yes, it can be submitted in unaudited form.

ANSWER-d

4. How many more independent directors and woman directors should be atleast there on the board of
Wrim Ltd., apart from Mr. Suresh and Mrs. Meena, respectively?
(a) 3 more independent directors are required and no more woman director is required to be
appointed, as Mrs. Meena is already there.
(b) 3 more independent directors are required and 1 more woman director is required to be appointed,
apart from Mrs. Meena.
(c) 2 more independent directors are required and no more woman director is required to be
appointed, as Mrs. Meena is already there.
(d) No more independent woman director is required to be appointed due to presence of 1
independent director and 1 woman director, in the board, already.

ANSWER- a

5. Whether special resolution shall be required to be passed by the company in the general meeting, to
dispose of 6% equity holding in Troy Ltd., and also to sell 22% assets of Troy Ltd. under a scheme of
arrangement approved by NCLT?
(a) Yes, special resolution in the general meeting needs to be passed for disposing of 6% equity holding
in Troy Ltd. However, for selling 22% assets of Troy Ltd., special resolution shall not be required.
(b) Yes, special resolution in the general meeting needs to be passed for disposing of 6% equity holding
in Troy Ltd. as well as for selling 22% assets of Troy Ltd.
(c) There is no requirement of passing special resolution in the general meeting, only board resolution
for the same is sufficient.
(d) No, ordinary resolution in the general meeting is sufficient for disposing of 6% equity holding in Troy
Ltd. However, for selling 22% assets of Troy Ltd., board resolution for the same is sufficient.

ANSWER- a

40. As at 01.04.2019, the composition of the Board of Directors of M/s. Apex Ltd, an unlisted, Company
comprised of 7 directors as under:

S. No Name Designation
01 Mr. X Executive Chairman (Executive and Non-Independent)
02 Mr. Y Managing Director and CEO (Executive and Non-Independent)
03 Mrs. Z Women Director (Non-Independent)
04 Mr. A Independent
05 Mr. B Independent
06 Mr. C Independent
07 Mr. D Independent

Page No. 341

As at 01.04.2019, the constitution of the Audit Committee comprised of the following Directors:

Name Designation
Mr. Y Chairman
Mr. X Member
Mrs. Z Member
Mr. Y Member

The majority of the members of the Audit Committee have the ability to read and understand the
financial statements but none of them have accounting or related financial management expertise.
During January, 2020, the company went for an Initial Public Issue (IPO) and got its shares listed on a
recognized Stock Exchange. Referring to SEBI (Listing Obligations and Disclosure Requirements),
Regulations, 2015:

(i) State, how a qualified and an independent Audit Committee should be constituted?

(ii) Whether the present constitution of the Audit Committee is in order and whether it can continue
post listing of its securities in the Stock Exchange? (4 Marks)
(past exam nov 2020)

Answer

(i) Audit Committee: According to Regulation 18 of the SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015, every listed entity shall constitute a qualified and independent audit
committee which shall have:
(a) Minimum three directors as members.
(b) Two-thirds of the members of audit committee shall be independent directors.

(c) All members of audit committee shall be financially literate and at least one member shall have
accounting or related financial management expertise.

(ii) As per the facts of the question, M/s Apex Limited, listed its securities in a recognised stock exchange
in the month of January, 2020. In order to comply with the requirements of SEBI (Listing Obligations and
Disclosure Requirements) Regulations, 2015, the company requires to do the following:

A. The audit committee of M/s Apex Limited already has 3 directors as members, which is in compliance.

B. The audit committee has 3 directors which are Non-Independent. However, once the company gets
listed, at least 2 [3*(2/3)] directors shall be independent directors. Thus, they need to change the
composition of audit committee once the company gets listed on stock exchange.

C. In the existing audit committee though majority of the members have the ability to read and
understand the financial statement but none of them has accounting or related financial management
expertise. However, once the company gets listed it is required that all members of audit committee shall
be financially literate and at least one member shall have accounting or related financial management
expertise. Hence, it is required that the company should appoint at least one member in the audit
committee who shall have accounting or related financial management expertise.

Page No. 342

In view of above, the existing audit committee cannot continue after listing of its securities.
According to Section 177(1) of the Companies Act, 2013 and rule 6 of the Companies (Meetings of Board
and its Powers) Rules, 2014, if the Company was required to have the audit committee, the existing audit
committee is also not in order as it does not have majority of the members as independent directors.

41. Grow Well Limited, a public company (not a Section 8 Company) has recently been listed. The
promoters of the company are individuals only. It has 12 directors in its Board. The company
approached you seeking your advice regarding the following as per the circumstances stated below.

(i) What should be the optimum combination of executive and non-executive directors?

(ii) What should be the minimum number of independent directors in case the chairperson of the board
of directors is a non-executive director?

(iii) What should be the minimum number of independent directors in case the company does not have
a regular non-executive chairperson ?

(iv) What should be the minimum number of independent directors in case where the regular non-
executive chairperson is a promoter of Grow Well Limited or is related to any promoter or person
occupying management positions at the level of board of director or at one level below the board of
directors?
Referring to the relevant regulation of the SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015, advise the company on the above matters. (4 Marks) (past exam jan 2021)

Answer

Regulation 17(1) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

(i) According to said Regulation, company should have optimum combination of executive and non-
executive directors, with not less than 50% of directors comprising of non-executive directors. Hence, in
Grow Well Limited, there should be not less than 6 non-
executive directors.

(ii) According to said Regulation, where the chairperson of the board of directors is a non-executive
director, at least one-third of the board of directors of Grow Well Limited shall comprise of independent
directors i.e. minimum 4.

(iii) Where the listed entity does not have a regular non-executive chairperson, at least half of the board
of directors (i.e., 50%) shall comprise of independent directors i.e. minimum 6.

(iv) Where the regular non-executive chairperson is a promoter of the listed entity or is related to any
promoter or person occupying management positions at the level of board of director or at one level
below the board of directors, at least half of the board of directors of the listed entity shall consist of
independent directors i.e. minimum 6.

Page No. 343

 42. (a) Securities and Exchange Board of India (SEBI) has undertaken inspection of books of accounts
and records of LR Ltd., a listed public company. Specify the measures which may be taken by SEBI under
the Securities and Exchange Board of India Act, 1992 to protect the interest of investors and securities
market, on completion of such inquiry. (8 Marks) (mtp-NOV 2020)

ANSWER

As per section 11 (4) of the Securities and Exchange Board of India Act, 1992, the Board may, by an order,
for reasons to be recorded in writing, in the interest of investors or securities market, take any of the
following measures, either pending investigation or inquiry or on completion of such investigation or
inquiry, namely:—

1. suspend the trading of any security in a recognised stock exchange;

2. restrain persons from accessing the securities market and prohibit any person associated with
securities market to buy, sell or deal in securities;

3. suspend any office-bearer of any stock exchange or self-regulatory organization from holding such
position;

4. impound and retain the proceeds or securities in respect of any transaction which is under
investigation;

5. attach, for a period not exceeding ninety days, bank accounts or other property of any intermediary or
any person associated with the securities market in any manner involved in violation of any of the
provisions of this Act, or the rules or the regulations made thereunder:

Provided that the Board shall, within ninety days of the said attachment, obtain confirmation of the said
attachment from the Special Court, established under section 26A, having jurisdiction and on such
confirmation, such attachment shall continue during the pendency of the aforesaid proceedings and on
conclusion of the said proceedings, the provisions of section 28A shall apply:

Provided further that only property, bank account or accounts or any transaction entered therein, so far
as it relates to the proceeds actually involved in violation of any of the provisions of this Act, or the rules
or the regulations made thereunder shall be allowed to be attached.

6. direct any intermediary or any person associated with the securities market in any manner not to
dispose of or alienate an asset forming part of any transaction which is under investigation

43. Mr. Ingenious, who is registered as an Intermediary fails to enter into an agreement with his client
and hence penalised by SEBI under the SEBI Act 1992. Advise Mr. Ingenious as to what remedies are
available to him against the order of SEBI. (RTP JULY 2021)

ANSWER

Remedies against SEBI order: Section 15B of the Securities and Exchange Board of India Act, 1992 lays
down that if any person, who is registered as an intermediary and is required under this Act or any rules

Page No. 344

or regulations made there under, to enter into an agreement with his client, fails to enter into such
agreement, he shall be liable to a penalty of one lakh rupees for each day during which such failure
continues or one crore rupees, whichever is less. Mr. Ingenious has been penalised under the above
mentioned provision. Two remedies are available to Mr. Ingenious in this matter:-

(i) Appeal to the Securities Appellate Tribunal: Section 15T of the SEBI Act, 1992 states that any person
aggrieved,—

(a) by an order of the Board made, on and after the commencement of the Securities Laws (Second
Amendment) Act, 1999, under this Act, or the rules or regulations made thereunder; or

(b) by an order made by an adjudicating officer under this Act; or

(c) by an order of the Insurance Regulatory and Development Authority or the Pension Fund Regulatory
and Development Authority, may prefer an appeal to a Securities Appellate Tribunal having jurisdiction in
the matter.
Every appeal shall be filed within a period of forty-five days from the date on which a copy of the order
made by the Board or the Adjudicating Officer or the Insurance Regulatory and Development Authority or
the Pension Fund Regulatory and Development Authority, as the case may be, is received by him and it
shall be in such form and be accompanied by such fee as may be prescribed :
Provided that the Securities Appellate Tribunal may entertain an appeal after the expiry of the said period
of forty-five days if it is satisfied that there was sufficient cause for not filing it within that period.
On receipt of an appeal under sub-section (1), the Securities Appellate Tribunal may, after giving the
parties to the appeal, an opportunity of being heard, pass such orders thereon as it thinks fit, confirming,
modifying or setting aside the order appealed against.
The Securities Appellate Tribunal shall send a copy of every order made by it to the Board, or the
Insurance Regulatory and Development Authority or the Pension Fund Regulatory and Development
Authority, as the case may be the parties to the appeal and to the concerned Adjudicating Officer.

The appeal filed before the Securities Appellate Tribunal under sub-section (1) shall be dealt with by it as
expeditiously as possible and endeavor shall be made by it to dispose of the appeal finally within six
months from the date of receipt of the appeal.

(ii) Appeal to the Supreme Court: Section 15Z of the SEBI Act, 1992 provides that any person aggrieved by
any decision or order of the Securities Appellate Tribunal may file an appeal to the Supreme Court within
60 days from the date of communication of the decision or order to him on any question of fact or law
arising out of such order. The Supreme Court may, if it is satisfied that the appellant was prevented by
sufficient cause from filing the appeal within the said period, allow it to be filed within a further period
not exceeding 60 days.

44. Perfect Tyres Ltd. was incorporated in January, 2019 and came out with its first IPO in the month of
May 2020. The company’s shares were listed on the BSE and NSE after successful completion of the IPO
and allotment of equity shares made to the investors.
The Chairperson of the Board of Directors is a non-executive director. There are 13 directors, out of
which one is woman director.
Based on the stated facts in the light of the relevant law, advise on the following issues:

Page No. 345

(i) where if after listing of the shares, the total number of directors on the board are 13. Out of which,
one is woman director. What shall be the required number of independent directors in the company.

(ii) If the Board of directors do not have regular non-executive director, then what shall be the required
number of independent directors in the Board in the said case.
(RTP NOV 2021)

ANSWER

i) As per Regulation 17 of the SEBI(LODR) Regulations, 2015, the composition of board of directors of the
listed entity shall be as follows:
(a) board of directors shall have an optimum combination of executive and nonexecutive directors with at
least one woman director and not less than fifty per cent. of the board of directors shall comprise of non-
executive directors;
(b) where the chairperson of the board of directors is a non-executive director, at least one-third of the
board of directors shall comprise of independent directors and where the listed entity does not have a
regular non-executive chairperson, at least half of the board of directors shall comprise of independent
directors.
Any fraction in number, shall be rounded off to the nearest number.
So one-third of 13 comes to 4.33, rounded off to 5. So at least 5 independent directors should be there.
(ii) In line with above clause (b) of part (i), where the listed entity does not have a regular non-executive
chairperson, at least half of the board of directors shall comprise of independent directors.
So one-half of 13 comes to 6.5, rounded off to 7. So at least 7 independent directors should be there.

Page No. 346

 14 The Foreign Exchange Management Act, 1999

ATTEMPTS
MAY NOV MAY NOV NOV JAN JULY NOV
COVERAGE
2018 2018 2019 2019 2020 2021 2021 2021

STUDY Q.- 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 34
MAT

PAST NO NO
Q-6, 7 Q-9 Q-36 Q-44 ------
EXAMS QUES QUES

Q-37,
Q-8, 10, Q-1, 2, NO
MTP Q-5 Q-42, 43 38, 39, -----
11 13 QUES
40, 41

N1O
RTP Q-4 Q-12 Q-3 Q-14, 15 Q-16, 35 Q-45, 46
QUES

Page No. 347

Multiple Choice Questions

1.MTP Apr 2019 Qn no 1

Peter a citizen and resident of India, in the year 2011, got a job in a MNC in Germany. He planned to
shift. Due to travelling and shifting, studies of his daughter Lisa was effected a lot, so he decided to
admit her into Mayo College at Ajmer for her further studies. On 23rd March 2017, Peter, along with
his wife and daughter reached India from Germany. On 22nd April 2017, Lisa got admission in the
college and since then she is living in India only. Peter and his wife returned Germany on 1 st May
2017. Peter did not visited India during the financial year 2017-18, however his wife was in India from
2nd December 2017 to 2nd January 2018. During the financial year 2018-19, Peter was in India for 185
days due to his deployment and Lisa’s ill health. From the following who will be treated as person
resident in India for the financial year ended on 2018-19 ---

(a) Lisa
(b) Peter
(c) Peter’s wife
(d) Lisa and Peter’s wife

Answer: Option (a)

2.MTP Apr 2019 Qn no 2

Rahul, Son of Mr. Manish was going to USA under cultural exchange programme of his college. For
meeting Rahul’s expenses in USA, Mr. Manish purchased 5000 USD from an authorized person on 15th
February 2018. Rahul came back to India on 15th March 2018. At the time of his return to India he was
having 1850 unspent USD with him. From the following which option is the best suited for the above
situation –

(a) Unspent foreign exchange shall be surrendered to the authorized person within 180 days from the
date of his return to India.
(b) Unspent foreign exchange shall be surrendered to the authorized person within 180 days from the
date of purchase of foreign exchange.
(c) Unspent foreign exchange shall be surrendered to the authorized person within 90 days from the
date of his return to India.
(d) Unspent foreign exchange not exceeding 2000 USD may be retained by a person resident in India.

Answer: Option (d)

3.RTP Nov 2019 Question no 5

Mr. Ram had resided in India during the Financial Year 2017-2018 for less than 183 days. He again
came to India on 1st May, 2018 for higher studies and business and stayed upto 15th July, 2019. State

Page No. 348

the correct answer as to the residential status of Mr. Ram in the light of the given fact as per the
Foreign Exchange Management Act, 1999.

(1) Mr. Ram can be considered as 'Person resident in India' during the financial year 2018-2019
(2) Mr. Ram cannot be considered as ‘Person resident in India' during the financial year 2018-2019
(3) Mr. Ram can be considered as ‘Person resident in India' during the financial year
2019-2020
(a) Both the statement (1) & (3) are correct
(b) Both the statement (2) & (3) are correct
(c) Only statement (1) is correct
(d) Only statement (2) is correct

Answer: (b)

Descriptive Questions

4.RTP May 2018 Qn no 15

Ms. Ashima daughter of Mr. Mittal (an exporter), is residing in Australia since long. She wants to buy a
flat in Australia. Since she is unmarried, she wants to make her father Mr. Mittal a joint holder in that
flat, for which entire proceeds are to be paid by her.
(i) Mr. Mittal, wants to receive advance payments against his exports from a buyer outside India.
Explain the relevant provisions?

Answer:

Advance payment against export:

The following are the provisions governing the advance payments against exports : (1) Where an
exporter receives advance payments (with or without interest) from a buyer/ third party named in the
export declaration made by the Exporter, outside India, the exporter shall be under the obligation to
ensure that:
(i) The shipment of goods is made within one year from the date of receipt of advance payment.
(ii) The rate of interest, if any, payable on the advance payment does not exceed the rate of interest
London Inter-Bank Offered Rate (LIBOR) + 100

basis points and

(iii) The documents covering the shipment are routed through the authorised dealer through whom
advance payment is received.
Provided that in the event of the exporter’s inability to make the shipment, partly or fully, within one year
from the date of receipt of advance payment or towards, no remittance towards refund of un-utilised
portions of advance payment or towards payment of interest, shall be made after the expiry of the period
of one year, without the prior approval of the Reserve bank of India.
Exemption : Notwithstanding anything contained in clause (i) of sub-regulation (1), an exporter may

Page No. 349

receive advance payment where the export agreement itself duly provides for shipment of goods
extending beyond the period of one year from the date of receipt of advance payment.

5. March 2018 Qn no 6(d) 3 Marks:

Explain the meaning of “Capital Account Transactions” under the Foreign Exchange Management Act,
1999. Examine whether an Investment by person resident in India in Foreign Securities is permissible
or not under the above Act as Capital Account transactions.

Answer:

Meaning of Capital Account Transaction: It means a transaction which alters the assets or liabilities
including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of
a person resident outside India, and includes transactions referred to in sub- section (3) of section 6 of
FEMA Act, 1999.

The Reserve Bank of India has formed the Foreign Exchange Management (Permissible Capital Account
Transactions) Regulations, 2000.
As per these regulations, capital account transactions may be classified under the following heads.
(1) Permissible capital account transaction of persons resident in India (schedule 1)
(2) Permissible Capital transactions of persons resident outside India (schedule II).
(3) Prohibited capital account transactions.
A person resident in India may enter into any of the following capital account transactions provided
the regulations specified by the Reserve Bank of India in respect of such capital account transactions
are complied with.
In view of the above, an Investment by person resident in India in Foreign Securities is permissible
capital account transaction.

6.May 2018 Qn no 3(d) 6 Marks:

Mr. Bandha, a software Engineer, Indian Origin took employment in USA. He is a resident of USA for
a long time. He desires

(i) to acquire a farm house in Munar (Kerala).

(ii) to make investment in KLJ (Nidhi) Ltd., registered as Nidhi Company.
(iii) to make investment in Rose Real Estate Ltd., an Indian Company formed for the development of
township.
Mr. Unsatisfactory, brother of Mr. Bandha residing at Chennai is aggrieved by an order made by
Appellate Tribunal established under Foreign Exchange Management Act, 1999, desires to file further
appeal.

Page No. 350

With references to the provisions of Foreign Exchange Management Act, 1999, analyse whether there
are any restrictions in respect of the transactions desired by Mr. Bandha. Also determine the appeal
procedure to Mr. Unsatisfactory on the order of Appellate Tribunal under the said Act.

Answer:

Acquisition of a Farm House

Mr. Bandha, cannot acquire a farm house in Munnar (Kerala) because a person resident outside India
who is a citizen of India may acquire immovable property in India other than an agricultural property,
plantation, or a farm house.

Making Investments in KLJ Nidhi Limited

Mr. Bandha cannot make investment in KLJ (Nidhi) Ltd., as a person resident outside India is prohibited
from making investments in India in any form, in any Company, or partnership firm or proprietary
concern or any entity whether incorporated or not which is engaged or proposes to engage as Nidhi
Company.

Making Investments in Rose Real Estate Limited

The person resident outside India is prohibited from making investments in India in any form, in any
Company, or partnership firm or proprietary concern or any entity whether incorporated or not which is
engaged or proposes to engage in real estate business, or construction of farm houses. However,
development of townships shall not be included in the real estate business. Thus, Mr. Bandha can make
investment in Rose Real Estate Ltd.

Appeal to High Court (Section 35)

Any person aggrieved by any decision or order of the Appellate Tribunal may file an appeal to the High
Court within sixty days from the date of communication of the decision or order of the Appellate
Tribunal on any question of law arising out of such Order.
However, the High Court may, if it is satisfied that the Appellant was prevented by sufficient cause
from filing the appeal within the said period, allow it to be filed within a further period not exceeding
sixty days.
Mr. Unsatisfactory can file an appeal to the High Court, as per the above procedure.

7.May 2018 Qn no 2(d) 6 Marks:

Mr. Satish, General Secretary of a political party received an invitation from the American Labour
Party. He wants to avail foreign hospitality. Define the term "foreign hospitality". In the light of the
provisions of the Foreign Contribution (Regulation) Act, 2010, decide whether he can avail it. Discuss
also the exception, if any, under which the provisions of the said Act may be relaxed.

Answer:

Definition of “Foreign Hospitality”

Page No. 351

“Foreign hospitality” means any offer, not being a purely casual one, made in cash or kind by a foreign
source for providing a person with the costs of travel to any fore ign country or territory or with free
boarding, lodging, transport or medical treatment. [Section 2(i) of the Foreign Contribution (Regulation)
Act, 2010]
Whether Mr. Satish can avail foreign Hospitality?
As per Section 6 of the Act, Office bearers of political parties require prior approval from Ministry of
Home Affairs before accepting Foreign Hospitality. In the instant case, Mr. Satish, General
Secretary of a political party, before availing foreign hospitalit y shall require prior approval from
Ministry of Home Affairs.
Exceptions
It shall not be necessary to obtain any such permission for an emergent medical aid needed on account
of sudden illness contracted during a visit outside India. But, where such foreign hospitality has been
received, the person receiving such hospitality shall give an intimation to the Central Government as
to the receipt of such hospitality within one month from the date of receipt of such hospitality, and
the source from which, and the manner in which, such hospitality was received.

8.Aug 2018 Qn no 6(d) 3 Marks:

Mr. Manthan, is deputed to India by his company to develop a software programme for a period of 3
years from 1st January, 2016. He is paid salary to his Indian bank account. On 1st May, 2018 he wants
to remit his entire salaries ended till 30th April, 2018 to his home country USA. State in the light of
relevant provision, the way the remittance of the salary may be done as per the Foreign Exchange of
Management Act, 1999.

Answer:

As per Schedule III of the FEM (Current Account Transactions) Rules, 2000, a person who is resident but
not permanently resident in India, who is on deputation to the office or branch of a foreign company or
subsidiary or joint venture in India of such foreign company, may make remittance up to his net salary,
after deduction of taxes, contribution to provident fund and other deductions. Accordingly, Mr.
Manthan can remit the salary after payment of taxes and contributions related to social security schemes.

9.Nov 2018 Qn no 3(d) 6 Marks:

Bharat Computer Hardware Ltd. received an advance -payment for export of high-tech hardware to a
business concern in Singapore by entering into an export agreement to supply the hardware within six
months from the date of receipt of advance payment. The shipment of hardware was made after 9
months and the documents covering the shipment were routed through an authorized dealer
through whom the advance payment was received.

Examine whether Bharat Computer Hardware Ltd. has discharged its obligation in accordance with the
provisions of the Foreign Exchange Management Act, 1999?

Page No. 352

Is it possible to receive advance payment where the export agreement provides for shipment of
goods within 15 months from the date of receipt of advance payment? Also identify the maximum rate
of interest payable on the advance payment under the said Act.

Answer:

According to the Foreign Exchange Management (Export of Goods and Services) Regulations, 2015,

Advance payment against exports:

(1) Where an exporter receives advance payment (with or without interest), from a buyer / third
party named in the export declaration made by the exporter, outside India, the exporter shall be
under an obligation to ensure that –
(i) the shipment of goods is made within one year from the date of receipt of advance payment;
(ii) the rate of interest, if any, payable on the advance payment does not exceed the rate of interest
London Inter-Bank Offered Rate (LIBOR) + 100 basis points and
(iii) the documents covering the shipment are routed through the authorised dealer through whom the
advance payment is received;
Provided that in the event of the exporter's inability to make the shipment, partly or fully, within one
year from the date of receipt of advance payment, no remittance towards refund of unutilized portion of
advance payment or towards payment of interest, shall be made after the expiry of the period of one
year, without the prior approval of the Reserve Bank.
Notwithstanding anything contained in clause (i) of sub-regulation (1), an exporter may receive advance
payment where the export agreement itself duly provides for shipment of goods extending beyond the
period of one year from the date of receipt of advance payment.
In the light of the provisions as enumerated above,
Since Bharat Computer Hardware Ltd. has exported the hardware within 9 months of the date of
receipt of advance payment, it has discharged its obligations within the provisions of the Foreign
Exchange Management Act, 1999.

Yes, it is possible to receive advance payment where the export agreement provides for shipment of
goods extending beyond the period of one year (here in question 15 months) from the date of receipt of
advance payment.

The maximum rate of interest, if any, payable on the advance payment should not exceed the rate of
interest London Inter-Bank Offered Rate (LIBOR) + 100 basis points.

10.Oct 2018 Qn no 3(d) 6 Marks:

Mr. Rohan, an Indian Resident individual desires to obtain Foreign Exchange for the following
purposes:

(A) US$ 1,20,000 for studies abroad on the basis of estimates given by the foreign university.
(B) Gift Remittance amounting US$ 10,000.
Advise him whether he can get Foreign Exchange and if so, under what condition(s)?

Page No. 353

Answer:

(A) Remittance of Foreign Exchange for studies abroad: Foreign exchange may be released for studies
abroad up to a limit of US $ 2,50,000 for the studies abroad without any permission from the RBI.
Above this limit, RBI’s prior approval is required. Further proviso to Para I of Schedule III states that
indiuvial may be allowed remittances (without seeking prior approval of the RBI) exceeding USD
2,50,000 based on the estimate received from the institution abroad. In this case since US $ 1,20,000
is the drawal of foreign exchange, so permission of the RBI is not required.

(B) Gift remittance exceeding US $ 10,000: Under the provisions of Section 5 of FEMA 1999, certain
Rules have been made for drawal of foreign exchange for current account transactions. Gift remittance
is a current account transaction. Gift remittance exceeding US $ 2,50,000 can be made after obtaining
prior approval of the RBI. In the present case, since the amount to be gifted by an individual, Mr. Rohan
is USD 10,000, so there is no need for any permission from the RBI.

11.Oct 2018 Qn no 6(d) 3 Marks:

Explain the meaning of the term “Current Account Transaction” and the right of a citizen to obtain
Foreign Exchange under the Foreign Exchange Management Act, 1999 .

Answer:
The term “current account transaction” is defined in section 2(j) of Foreign Exchange Management

Act, 1999. It means a transaction other than a capital account transaction and includes:
(i) payments due in connection with foreign trade, other current business, services, and short –
term banking and credit facilities in the ordinary course of business.
(ii) payments due as interest on loans and as net income from investments.
(iii) remittances for living expenses of parents, spouse and children residing abroad and
(iv) expenses in connection with foreign travel education and medical care of parents, spouse and
children.
According to Section 5 of FEMA, 1999 any person may sell or draw foreign exchange to or from an
authorised person if such sale or drawal is a current account transaction. Provided that the Central
Government may in public interest and in consultation with the Reserve Bank, impose such reasonable
restrictions for current account transactions as may be prescribed.
Further, any person may sell or draw foreign exchange to or from an authorised person for a capital
account transaction subject to the provisions of section 6(2).

12.RTP Nov-18:

Mr. Hillary Benjamin, a citizen of India, left India for employment in U.S.A. on 1 st June, 2015. Mr.
Hillary Benjamin purchased a flat at New Delhi for Rs.60 lacs in September, 2016. His brother, Mr.
Henry Benjamin employed in New Delhi, also purchased a flat in the same building in September 2016
for Rs. 65 lacs.

Page No. 354

Mr. Henry Benjamin’s flat was financed by a loan from a Housing Finance Company and the loan was
guaranteed by Mr. Hillary Benjamin. Examine with reference to the provisions of the Foreign
Exchange Management Act, 1999 whether purchase of flat and guarantee by Mr. Hillary Benjamin are
Capital Account transactions and whether these transactions are permissible.

Answer:

Section 2(e) of Foreign Exchange Management Act, 1999 states that ‘capital account transactions'
means:

(a) a transaction which alters the assets or liabilities, including contingent liabilities, outside India of
person's resident in India
(b) a transaction which alters assets or liabilities in India of persons resident outside India and includes
transactions referred to in section 6(3).
According to the said definition, a transaction which alters the contingent liability will be
considered as capital account transaction in the case of person resident in India, but it is not so in
the case of person resident outside India.
Purchase of immovable property by Mr. Hillary Benjamin in India is a capital account transaction. It
has also been specifically provided in section 6(3)(i) as a capital account transaction.
Guarantee will be considered as a capital account transaction in the following cases:
(1) Guarantee in respect of any debt, obligation or other liability incurred by a person resident in India
and owed to a person resident outside India.
(2) Guarantee in respect of any liability, debt or other obligation incurred by a person resident outside
India.
In this case, Mr. Hillary Benjamin, a resident outside India gives a guarantee in respect of a debt
incurred by a person resident in India and owed to a person resident in India. Hence, it would
appear that guarantee by Mr. Hillary Benjamin cannot be considered as a capital account
transaction within the meaning of Section 2(e), particularly because it is a contingent liability.
All capital account transactions are prohibited unless specifically permitted. RBI is empowered to
issue regulations in this regard [Section 6(3)]. Permissible capital account transactions by persons
resident outside India are given in Schedule II to the Foreign Exchange Management (Permissible
Capital Account Transactions) Regulations, 2000. According to the said regulations both the purchase
of immovable property by Mr. Hillary Benjamin and guarantee by Mr. Hillary Benjamin are
permissible.

13.MTP April 2019 Qn no 2(b) 6 Marks

Mr. Sugam resided in India during the Financial Year 2016-17. He left India on 15th July, 2017 for
Australia for pursuing higher studies in Biotechnology for 2 years. What would be his residential status
under the Foreign Exchange Management Act, 1999 during the Financial Years 2017 -18?

Page No. 355

Mr. Sugam requires every year USD 25,000 towards tuition fees and USD 30,000 for incidental and
stay expenses for studying abroad. Is it possible for Mr. Sugam to get the required Foreign Exchange
and, if so, under what conditions?

Answer:

Residential Status: According to section 2(v) of the Foreign Exchange Management Act, 1999, ‘Person
resident in India’ means a person residing in India for more than 182 days during the course of
preceding financial year [Section 2(v)(i)]. However, it does not include a person who has gone out of India
or who stays outside India for employment outside India or for any other purpose in such
circumstances as would indicate his intention to stay outside India for an uncertain period.
Generally, a student goes out of India for a certain period. In this case, Mr. Sugam who resided in India
during the financial year 2016-17 left on 15.7.2017 for Australia for pursuing higher studies in
Biotechnology for 2 years, he will be resident for 2017-18, as he has gone to stay outside India for a
‘certain period’ (If he goes abroad with intention to stay outside India for an ‘uncertain period’ he will
not be resident with effect from 15-7-2017).
Foreign Exchange for studies abroad: According to Para I of Schedule III to Foreign Exchange
Management (Current Account Transactions), Amendment Rule, 2015 dated 26th May, 2015, individuals
can avail of foreign exchange facility for the studies abroad within the limit of USD 2,50,000 only. Any
additional remittance in excess of the said limit shall require prior approval of the RBI. Further proviso
to Para I of Schedule III states that individual may be allowed remittances (without seeking prior approval
of the RBI) exceeding USD 2,50,000 based on the estimate received from the institution abroad. In this
case the foreign exchange required is only USD 55,000 per academic year and hence approval of RBI is
not required.

14.RTP Nov 2019 Qn no 13

Mr. Daksh, an Indian National desires to obtain foreign exchange for the following purposes:

(i) Payment to be made for securing health insurance from a company abroad.
(ii) Payment of commission on exports under Rupee State Credit Route. Advise whether he can get
foreign exchange and if so, under what condition?
Answer

Any person may sell or draw foreign exchange to or from an authorized person if such sale or drawal is a
current account transaction. However, the Central Government may in public interest and in consultation
with the RBI, impose such reasonable restrictions for current account transactions as may be prescribed
(Section 5). The Central Government has framed Foreign Exchange Management (Current Account
Transactions) Rules, 2000.

The Rules stipulate some prohibitions and restrictions on drawal of foreign exchange for certain
purposes. In the light of provisions of these rules, the answer to the given problem is as follows:

Page No. 356

(i) Drawl of foreign exchange for securing health insurance from a company abroad does not fall under
any of the Schedules I, II or Ill. Therefore, such a transaction is permitted without any restriction or
condition.
(ii) Rule 3 read with Schedule I of Foreign Exchange Management (Current Account Transactions) Rules,
2000 prohibits payment of commission on exports under Rupees State Credit Route (except
commission upto 10% of invoice value of exports of tea and tobacco). Therefore, payment of
commission on exports under Rupee State Credit Route is prohibited unless such commission is
paid for export of tea and tobacco, and the commission does not exceed 10% of invoice value of
exports.

15.Nov 2019 MTP Qn no 3(b) (i) 3 Marks

Examine the given situations in the light of the respective laws:

Toy Ltd. is a Japanese company having several business units all over the world. It has a robotic unit
with its head quarter in Mumbai and has a branch in Singapore. Headquarter at Mumbai controls the
branch of robotic unit. Determine the residential status of robotic unit in Mumbai and that of the
Singapore branch in reference to FEMA, 1999?

Answer

Toy Ltd. being a Japanese company would be a person resident outside India. [Section 2(w)]. Section 2(u)
defines ‘person’. Under clause (vii) of section 2(u), thereof person would include any agency, office or
branch owned or controlled by such ‘person’. The term such ‘person’ appears to refer to a person who is
included in clauses (i) to (vi). Accordingly, robotic unit in Mumbai, being a branch of a company, would be
a ‘person’.
Section 2(v) defines ‘person resident in India’. Under clause (iii) ‘person resident in India’ would include
an office, branch or agency in India owned or controlled by a person resident outside India. Robotic unit
in Mumbai is owned or controlled by a person ‘resident outside India’. Hence, it would be ‘person
resident in India’.
However, robotic unit in Mumbai, though not ‘owned’ controls Singapore branch, which is a person
resident in India. Hence prima facie, it may be possible to hold a view that the Singapore branch is
‘person resident in India’.

16.RTP May 2020 Question no.12

Enumerate the given situations in the light of the term defined as Current Account Transaction under
FEMA.

(a) An Indian resident imports machinery from a vendor in UK for installing in his factory.
(b) An Indian resident imports machinery from a vendor in UK for installing in his factory on a credit
period of 3 months.

Page No. 357

(c) An Indian resident transfers US$ 1,000 to his NRI brother in New York as “gift”. The funds are sent
from resident’s Indian bank account to the NRI brother’s bank account in New York.
Answer

(1) An Indian resident imports machinery from a vendor in UK for installing in his factory.

Answer: As per accounts and income-tax law, machinery is a “capital expenditure”. However, under
FEMA, it does not alter (create) an asset in India for the UK vendor. It does not create any liability to a
UK vendor for the Indian importer. Once the payment is made, the Indian resident or the UK vendor
neither owns nor owes anything in the other country. Hence, the said transaction, is a Current Account
Transaction.

(2) An Indian resident imports machinery from a vendor in UK for installing in his factory on a credit
period of 3 months.
Answer: As per accounts and income-tax law, for the credit period of 3 months, there is a liability of the
Indian importer to the UK vendor. Technically under FEMA also, it is a liability outside India. However,
under definition of Current Account Transaction [S. 2(j)(i)], “short-term banking and credit facilities in
the ordinary course of business” are considered as a Current Account Transaction. Hence import of
machinery on credit terms is Current Account Transaction.

(3) An Indian resident transfers US$ 1,000 to his NRI brother in New York as “gift”. The funds are sent
from resident’s Indian bank account to the NRI brother’s bank account in New York.
Answer: Under accounts and income-tax law, gift is a “capital receipt”. However, under FEMA, once the
gift is accepted by the NRI, no one owns or owes anything to anyone in India or USA. The transactions is
over. Hence it is a Current Account Transaction.
Study Material
17. Mr. A had resided in India during the financial year 2015-2016 for less than 182 days. He had come
to India again on April 1, 2016 for employment. What would be his residential status during the
financial year 2016-2017?

Answer
Mr. A had come to India for taking up employment. During the financial year 2015-2016, he was in India
for less than 182 days. Since, he has not fulfilled the condition of staying in India for more than 182 days,
Mr. A will not be considered as a residential person for the financial year 2016- 2017. Here, as he come to
India on 1st April, 2016, so he may primarily cannot be considered as person resident in India from 1st
April 2016. However as he has come for employment, he will be considered as Indian resident from 1st
April 2016
18. Mr. X had resided in India during the financial year 2015-2016 for less than 182 days. He had come
to India on April 1, 2016 for business. He intends to leave the business on April 30, 2017 and leave India
on June 30, 2017. What would be his residential status during the financial year 2016- 2017 and during
2017-2018 up to the date of his departure?

Answer

Page No. 358

As explained in the above example, Mr. X will be considered ‘as person resident in India’ from 1st April
2016. As regards, financial year 2017-2018, Mr. X would continue to be an Indian resident from 1st April
2017.
If he leaves India for the purpose of taking up employment or for business/vocation outside India, or for
any other purpose as would indicate his intention to stay outside India for an uncertain period, he
would cease to be person resident in India from the date of his departure. It may be noted that even if
Mr. X is a foreign citizen, if he has not left India for any these purposes, he would be considered, ‘person
resident in India’ during the financial year 2017-2018. Thus it will depend on the purpose of leaving India
which will decide his status from 1st July 2017.

19. Mr. Z had resided in India during the financial year 2015-2016. He left India on 1st August, 2016 for
United States for pursuing higher studies for 3 years. What would be his residential status during
financial year 2016-2017 and during 2017-2018?

Answer

Mr. Z had resided in India during financial year 2015-2016 for more than 182 days. After that he has gone
to USA for higher studies. In other words, he has not gone out of, or stayed outside India for or on taking
up employment, or for carrying a business or any other purpose, in not circumstances as would indicate
his intention to stay outside India for an uncertain period. Accordingly, he would be ‘person resident in
India’ during the financial year 2016-2017. RBI has however clarified in its AP circular no. 45 dated 8th
December 2003, that students will be considered as non-residents. This is because usually students start
working there to take care of their stay and cost of studies.
For the financial year 2017-2018, he would not have been in India in the preceding financial year (2016-
2017) for period exceeding 182 days. Accordingly, he would not be ‘person resident in India’ during the
financial year 2017-2018.
20. Toy Ltd. is a Japanese company having several business units all over the world. It has a robotic unit
with its head quarter in Mumbai and has a branch in Singapore. Headquarter at Mumbai controls the
branch of robotic unit. What would be the residential status of robotic unit in Mumbai and that of the
Singapore branch?

Answer

Toy Ltd. being a Japanese company would be a person resident outside India. [Section 2(w)]. Section
2(u) defines ‘person’. Under clause (viii) thereof person would include any agency, office or branch
owned or controlled by such ‘person’. The term such ‘person’ appears to refer to a person who is
included in clauses (i) to (vi). Accordingly, robotic unit in Mumbai, being a branch of a company, would
be a ‘person’

Section 2(v) defines ‘person resident in India’. Under clause (iii) thereof ‘person resident in India’ would
include an office, branch or agency in India owned or controlled by a person resident outside India.
Robotic unit in Mumbai is owned or controlled by a person ‘resident outside India’. Hence, it would be
‘person resident in India’.

Page No. 359

However, robotic unit in Mumbai, though not ‘owned’ controls Singapore branch, which is a person
resident in India. Hence prima facie, it may be possible to hold a view that the Singapore branch is
‘person resident in India’

21. Miss Alia is an airhostess with the British Airways. She flies for 12 days in a month and thereafter
takes a break for 18 days. During the break, she is accommodated in ‘base’, which is normally the city
where the airways are headquartered. However, for security considerations, she was based on
Mumbai. During the financial year, she was accommodated at Mumbai for more than 182 days. What
would be her residential status under FEMA?

Answer

Miss Alia stayed in India at Mumbai ‘base’ for more than 182 days in the preceding financial year. She is
however employed in UK. She has not come to India for employment, business or circumstances which
indicate her intention to stay for uncertain period. Under section 2(v)(B), such persons are not
considered as Indian residents even if their stay exceeds 182 days in the preceding year. Thus, while
Miss Alia may have stayed in India for more than 182 days, she cannot be considered to be an Indian
resident.
If however she has been employed in Mumbai branch of British Airways, then she will be considered as
Indian resident.
22. In September 2016, Mr. P, went to USA, London and Germany on a month long business trip. For
this trip he got exchanged US$ 50000 from an authorized dealer. In December 2016 he remitted US$
50000 to his son in Canada, who was studying there. In January 2017 he sent his mother and wife to
America for his mother’s treatment and for the purpose he remitted US$ 75000 to his younger
brother, who was living there. In March 2017 his daughter got engaged and she opted for a
destination marriage to be held in May 2017, in Switzerland. While on trip to Dubai in the March end,
2017, he spent US $ 35000 for his daughter’s shopping in Dubai. Later, the event manager gave an
estimate of US $ 250000

for the wedding. As per the provisions of FEMA, for how much remittance does he need to take prior
approval of the Reserve bank of India.

a) He does not need any prior approval at all

b) For US $ 210000
c) For US $ 250000
d) For US $ 15000
Answer: a) Hint: He does not need any prior approval, because during the year April 2016-March 2017
his all foreign exchange transactions were amounted to US $ 210000 and an individual does not require
any prior approval for remittances made up to US $ 250000 during a year (as per the Schedule III of the
FEMA regulation).

23.Mr. Z was appointed as representative of ABC Company for a corporate programme organized in
USA. During the said period in USA, he was diagnosed with the severe kidney disease, so decided to
Page No. 360
have a kidney transplant done in USA. State the maximum amount that can be drawn by Mr. Z as
foreign exchange for the medical treatment abroad.

(a) USD 1,25,000

(b) USD 2,25,000
(c) USD 2,50,000
d) As estimated by a medical institute offering treatment
Answer: d) Hint: A person who has fallen sick after proceeding abroad may also be released foreign
exchange by an Authorised Dealer (without seeking prior approval of the Reserve Bank of India) for
medical treatment outside India exceeding the limit USD 2,50,000 on the basis of the estimation given
by the medical institute offering treatment.

24.Mr. Ram had resided in India during the Financial Year 2017-2018 for less than 183 days. He again
came to India on 1st May, 2018 for higher studies and business and stayed upto 15th July, 2019. State
the correct answer as to the residential status of Mr. Ram in the light of the given fact as per the
Foreign Exchange Management Act, 1999

(1) Mr. Ram can be considered as 'Person resident in India' during the financial year 2018-2019
(2) Mr. Ram cannot be considered as ‘Person resident in India' during the financial year 2018-2019
(3) Mr. Ram can be considered as ‘Person resident in India' during the financial year 2019- 2020
(a) Both the statement (1) & (3) are correct
(b) Both the statement (2) & (3) are correct
(c) Only statement (1) is correct
(d) Only statement (2) is correct
Answer b) Hint: Mr. Ram cannot be considered 'Person resident in India' during the financial year
2018-2019 notwithstanding the purpose or duration of his stay in India during 2018-2019. An individual
has to be present in India for more than 182 days in the preceding financial year. Mr. Ram does not
satisfy this condition for the financial year 2018-2019. But shall be considered as 'Person resident in
India' during the financial year 2019-2020.

25. Printex Computer’ is a Singapore based company having several business units all over the
world. It has a unit for manufacturing computer printers with its Headquarters in Pune. It has a
Branch in Dubai which is controlled by the Headquarters in Pune. What would be the residential
status under the FEMA, 1999 of printer units in Pune and that of Dubai branch.

Answer

Printex Computer being a Singapore based company would be person resident outside India [(Section
2(w)]. Section 2 (u) defines ‘person’ under clause (viii) thereof, as person would include any agency,
office or branch owned or controlled by such person. The term such person appears to refer to a person
Page No. 361
who is included in clause (i) to (vi). Accordingly, Printex unit in Pune, being a branch of a compan y
would be a ‘person’.

Section 2(v) defines a person resident in India. Under clause (iii) thereof person resident in India would
include an office, branch or agency in India owned or controlled by a person resident outside India.
Printex unit in Pune is owned or controlled by a person resident outside India, and hence it, would be a
‘person resident in India.’
However, Dubai Branch though not owned is controlled by Print unit in Pune which is a person resident
in India. Hence prima facie, it may be possible to hold a view that the Dubai Branch is a person resident
in India.
26. Mr. Ram had resided in India during the Financial Year 2014-2015 for less than 183 days. He
again came to India on 1st May, 2015 for higher studies and business and stayed upto 15th July,
2016. State under the Foreign Exchange Management Act, 1999.

(i) If Mr. Ram can be considered ‘person Resident in India’ during the Financial year 2015 -2016 and
(ii) Is citizenship relevant for determining such a status?
Answer

(i) No. Mr. Ram cannot be considered 'Person resident in India' during the financial year 2015-2016
notwithstanding the purpose or duration of his stay in India during 2015- 2016. An individual has to be
present in India for more than 182 days in the preceding financial year. Mr. Ram does not satisfy this
condition for the financial year 2015-2016.

(ii) No. Citizenship is no more relevant for determining the status.

27. Mr. Sane, an Indian National desires to obtain Foreign Exchange for the following purposes:

(i) Remittance of US Dollar 50,000 out of winnings on a lottery ticket.

(ii) US Dollar 1,00,000 for sending a cultural troupe on a tour of U.S.A.
Advise him whether he can get Foreign Exchange and if so, under what conditions?

Answer

Under provisions of section 5 of the Foreign Exchange Management Act, 1999 certain Rules have been
made for drawal of Foreign Exchange for Current Account transactions. As per these Rules, Foreign
Exchange for some of the Current Account transactions is prohibited. As regards some other Current
Account transactions, Foreign Exchange can be drawn with prior permission of the Central Government
while in case of some Current Account transactions, prior permission of Reserve Bank of India is
required.

(i) In respect of item No.(i), i.e., remittance out of lottery winnings, such remittance is prohibited and
the same is included in First Schedule to the Foreign Exchange Management (Current Account
Transactions) Rules, 2000. Hence, Mr. Sane can not withdraw Foreign Exchange for this purpose.

Page No. 362

(ii) Foreign Exchange for meeting expenses of cultural tour can be withdrawn by any person after
obtaining permission from Government of India, Ministry of Human Resources Development,
(Department of Education and Culture) as prescribed in Second Schedule to the Foreign Exchange
Management (Current Account Transactions) Rules, 2000. Hence, in respect of item (ii), Mr. Sane
can withdraw the Foreign Exchange after obtaining such permission.
In all the cases, where remittance of Foreign Exchange is allowed, either by general or specific
permission, the remitter has to obtain the Foreign Exchange from an Authorised Person as defined in
Section 2(c) read with section 10 of the Foreign Exchange Management Act, 1999.
28. State which kind of approval is required for the following transactions under th e Foreign
Exchange Management Act, 1999:

i. X, a Film Star, wants to perform along with associates in New York on the occasion of Diwali for
Indians residing at New York. Foreign Exchange drawal to the extent of US dollars 20,000 is
required for this purpose.
ii. R wants to get his heart surgery done at United Kingdom. Up to what limit Foreign Exchange
can be drawn by him and what are the approvals required?
Answer

Approval to the following transactions under FEMA, 1999:

(i) Foreign Exchange drawals for cultural tours require prior permission/approval of the Government
of India irrespective of the amount of foreign exchange required. Therefore, in the given case X,
the Film Star is required to seek permission of the Government of India.
(ii) Individuals can avail of foreign exchange facility within the limit of USD 2,50,000 only. Any
additional remittance in excess of the said limit for the expenses in connection with medical
treatment abroad, shall require prior approval of the Reserve Bank of India. Therefore, R can
draw foreign exchange up to the USD 2,50,000 and for additional remittance in excess of this
limit for bearing the expenses of medical treatment in UK, prior permission/approval of RBI will
be required. Provided, the individual may avail of exchange facility for an amount in excess of the
limit prescribed under the Liberalised Remittance Scheme if it is so estimated by a medical
institute offering treatment.
29. Referring to the provisions of the Foreign Exchange Management Act, 1999, examine whether V,
an exporter is bound to make declaration on gift exported from India to United Kingdom a jewellery
valued at Rs. 20,000 to his friend in Australia.

Answer

In accordance with provisions of the FEMA, 1999 as contained in section 7 read with section 8, it
imposes on an exporter to make appropriate declaration of the value of the goods being exported and
he is also required to repatriate the foreign exchange due to India in respect of such exports to India in
the manner within the time as may be prescribed. Under section 8, the exporter is under an obligation
to realise and repatriate to India such foreign. However, if there is an delay in the receipt of export, it

Page No. 363

will not be a violation which shall be punishable. Section 8 applies to a resident who shall take all the
reasonable steps, depending upon the individual case.

There are certain categories of export for which declaration need not be made. These are given under
the Regulation 4 of the Foreign Exchange Management (Export of Goods & Services) Regulations, 2015.
According to the regulation, export of goods by way of gift shall be accompanied by a declaration by the
exporter that they are not more than five lakh rupees in value. Taking into consideration the above,
since the value of gift of jewellery to V’s friend in Australia is less than Rs. 5 lac in value, the gift does
not need any declaration to be furnished by exporter to the specified authority.

30. Referring to the provisions of the Foreign Exchange Management Act, 1999, state the kind of
approval required for the following transactions:

(i) M requires U.S. $ 5,000 for remittance towards hire charges of transponders.
(ii) P requires U.S. $ 2,000 for payment related to call back services of telephones.
Answer

Under section 5 of the Foreign Exchange Management Act, 1999, and Rules relating thereto, some
current account transactions require prior approval of the Central Government, some others require
the prior approval of the Reserve Bank of India, some are free transactions and some others are
prohibited transactions. Accordingly,

(i) It is a current account transaction, where M is required to take approval of the Central
Government for drawal of foreign exchange for remittance of hire charges of transponders.
(ii) Withdrawal of foreign exchange for payment related to call back services of telephone is a
prohibited transaction. Hence, Mr. P will not succeed in acquiring US $ 2,000 for the said
purpose.
31. Mr. Suresh resided in India during the Financial Year 2013-14. He left India on 15th July, 2014 for
Switzerland for pursuing higher studies in Biotechnology for 2 years. What would be his residential
status under the Foreign Exchange Management Act, 1999 during the Financial Years 2014 -15 and
2015-16?

Mr. Suresh requires every year USD 25,000 towards tuition fees and USD 30,000 for incidental and
stay expenses for studying abroad. Is it possible for Mr. Suresh to get the required Foreign Exchange
and, if so, under what conditions?

Answer

Residential Status: According to section 2(v) of the Foreign Exchange Management Act, 1999,
‘Person resident in India’ means a person residing in India for more than 182 days during the course of
preceding financial year [Section 2(v)(i)]. However, it does not include a person who has gone out of
India or who stays outside India for employment outside India or for any other purpose in such
circumstances as would indicate his intention to stay outside India for an uncertain period.

Page No. 364

Generally, a student goes out of India for a certain period. In this case, Mr. Suresh who resided in India
during the financial year 2013-14 left on 15.7.2014 for Switzerland for pursuing higher studies in
Biotechnology for 2 years, he will be resident for 2014-15, as he has gone to stay outside India for a
‘certain period’ (If he goes abroad with intention to stay outside India for an ‘uncertain period’ he will
not be resident with effect from 16-7-2014.
Mr. Suresh will not be resident during the Financial Year 2015-2016 as he did not stay in India during
the relevant previous financial year i.e. 2014-15.
Foreign Exchange for studies abroad: According to Para I of Schedule III to Foreign Exchange
Management (Current Account Transactions), Amendment Rule, 2015 dated 26th May , 2015,
individuals can avail of foreign exchange facility for the studies abroad within the limit of USD 2,50,000
only. Any additional remittance in excess of the said limit shall require prior approval of the RBI. Further
proviso to Para I of Schedule III states that individual may be allowed remittances (without seeking prior
approval of the RBI) exceeding USD 2,50,000 based on the estimate received from the institution
abroad. In this case the foreign exchange required is only USD 55,000 per academic year and hence
approval of RBI is not required

32. Mrs. Chandra, a resident outside India, is likely to inherit from her father some immovable
property in India. Are there any restrictions under the provisions of the Foreign Exchange
Management Act, 1999 in acquiring or holding such property? State whether Mrs. Chandra can sell
the property and repatriate outside India the sale proceeds.

Answer

As per sub-section 5 of section 6 of the FEMA, 1999, a person resident outside India may hold, own,
transfer or invest in Indian currency, security or any immovable property situated in India if such
currency, security or property was acquired, held or owned by such person when he was resident in
India or inherited from a person who was resident in India.

Accordingly, in the problem, Mrs. Chandra, a resident outside India, may acquire or hold any immovable
property of his father in India by way of inheritance in both the conditions, firstly, where her father, a
resident outside India, had acquired the property in accordance with the provisions of the foreign
exchange law in force at the time of acquisition by him or as per the provisions of these Regulations or
secondly, where her father, a resident in India.
Repatriation of sale proceeds: A person referred to in sub-section (5) of section 6 of the Act, or his
successor shall not, except with the prior permission of the Reserve Bank, repatriate outside India the
sale proceeds of any immovable property.
Thus, accordingly Mrs. Chandra can sell the property and repatriate outside India the sale proceeds only
with the prior permission of the RBI.
33. (i)Mr. P has won a big lottery and wants to remit US Dollar 20,000 out of his winnings to his son
who is in USA. Advise whether such remittance is possible under the Foreign Exchange Management
Act, 1999.

Page No. 365

(ii)Mr. Z is unwell and would like to have a kidney transplant done in USA. He would like to know the
formalities required and the amount that can be drawn as foreign exchange for the medical
treatment abroad.

Answer

Remittance of Foreign Exchange (Section 5 of the Foreign Exchange Management Act, 1999): According
to section 5 of the FEMA, 1999, any person may sell or draw foreign exchange to or from an authorized
person if such a sale or drawal is a current account transaction. Provided that Central Government may,
in public interest and in consultation with the reserve bank, impose such reasonable restrictions for
current account transactions as may be prescribed.

As per the rules, drawal of foreign exchange for current account transactions are categorized under three
headings-
1. Transactions for which drawal of foreign exchange is prohibited,

2. Transactions which need prior approval of appropriate government of India for drawal of foreign
exchange, and
3. Transactions which require RBI's prior approval for drawl of foreign exchange.

(i) Mr. P wanted to remit US Dollar 20,000 out of his lottery winnings to his son residing in USA. Such
remittance is prohibited and the same is included in the Foreign Exchange Management (Current
Account Transactions) Rules, 2000.
Hence Mr. P cannot withdraw foreign exchange for this purpose.
(ii) “Remittance of foreign exchange for medical treatment abroad” requires prior permission or
approval of RBI where the individual requires withdrawal of foreign exchange exceeding USD
2,50,000. The Schedule also prescribes that for the purpose of expenses in connection with medical
treatment, the individual may avail of exchange facility for an amount in excess of the limit
prescribed under the Liberalized Remittance Scheme, if so required by a medical institute offering
treatment.
Therefore, Mr. Z can draw foreign exchange up to the USD 2,50,000 and no prior permission/ approval of
RBI will be required. For amount exceeding the above limit, authorised dealers may release foreign
exchange based on the estimate from the doctor in India or hospital or doctor abroad.
34.

(i) Mr. Rohan, an Indian Resident individual desires to obtain Foreign Exchange for the
following purposes:
(ii) (A) US$ 1,20,000 for studies abroad on the basis of estimates given by the foreign
university.
(B) Gift Remittance amounting US$ 10,000.

(iii) Advise him whether he can get Foreign Exchange and if so, under what condition(s)?
Answer

(A) Remittance of Foreign Exchange for studies abroad: Foreign exchange may be released for
Page No. 366
 studies abroad up to a limit of US $ 2,50,000 for the studies abroad without any permission from
the RBI. Above this limit, RBI’s prior approval is required. Further proviso to Para I of Schedule III
states that individual may be allowed remittances exceeding USD 2,50,000 based on the estimate
received from the institution abroad. In this case since US $ 1,20,000 is the drawal of foreign
exchange, so permission of the RBI is not required.
(B) Gift remittance exceeding US $ 10,000: Under the provisions of Section 5 of FEMA 1999, certain
Rules have been made for drawal of foreign exchange for current account transactions. Gift
remittance is a current account transaction. Gift remittance exceeding US $ 2,50,000 can be made
after obtaining prior approval of the RBI. In the present case, since the amount to be gifted by an
individual, Mr. Rohan is USD 10,000, so there is no need for any permission from the RBI.

35. RTP NOV 2020 Q no 13

Anna, a foreign citizen has made donations in kind to various individuals of Indian resident for their
personal use. When shall such donation in kind will be excluded from the definition of Foreign
Contribution considering the provisions of Foreign Contribution (Regulation) Act, 2010?
(a) If the market value, in India, of such article, on the date of such gift, is more than Rs. 1,00,000 but
less than 5,00,000.
(b) If the market value, in India, of such article, on the date of such gift, is more than Rs. 500,000 but
less than 10,00,000.
(c) Any donation in kind given for personal use is always excluded.
(d) If the market value, in India, of such article, on the date of such gift, is not more than Rs. 100,000.
Answer: d)

36. Under the auspices of the Foreign Exchange Management Act, 1999, (the Act) examine whether the
given situations fall under "Current Account Transactions" or not as defined in the Act?

(i) Mr. S, a resident in India, imports machinery from a vendor in UK for installing in his factory.

(ii) An Indian resident, imports machinery from a vendor in US for installing in his factory on a credit
period of 3 months.

(iii) An Indian resident, transfers US$ 1,000 to his NRI brother in New York as "gift". The funds are sent
from resident's Indian Bank account to the NRI brother's Bank account in New York. (3 Marks) (Past
exam nov 2020)

ANSWER

(i) An Indian resident imports machinery from a vendor in UK for installing in his factory. As per FEMA, it
does not alter (create) an asset in India for the UK vendor. It does not create any liability to a UK vendor
for the Indian importer. Once the payment is made, the Indian resident or the UK vendor neither owns
nor owes anything in the other country. Hence it is a Current Account Transaction.

Page No. 367

(ii) An Indian resident imports machinery from a vendor in UK for installing in his factory on a credit
period of 3 months. Under FEMA, it is a liability outside India. However, under definition of Current
Account Transaction [S. 2(j)(i)], “short-term banking and credit facilities in the ordinary course of
business” are considered as a Current Account Transaction. Hence import of machinery on credit terms is
a Current Account Transaction.

(iii) An Indian resident transfers US$ 1,000 to his NRI brother in New York as “gift”. The funds are sent
from resident’s Indian bank account to the NRI brother’s bank account in New York. As per FEMA, once
the gift is accepted by the NRI, no one owns or owes anything to anyone in India or USA, the transaction
is over. Hence it is a Current Account Transaction.

37. Mr. A is an authorized dealer holding a valid Authorization issued by the Reserve Bank of India
under section 10 of the FEMA, 1999. During the course of his business, he violated one of the conditions
subject to which the Authorization was granted to him. The Adjudicating Authority imposed a penalty
of Rs. 1,50,000 under section 13 (being 3 times the amount involved in the violation, i.e. Rs. 50,000).
Mr. A accepted the default. State the time limit before which Mr. A should pay the penalty, assuming
he does not prefer an appeal to the Appellate Authority:

(a) Within 30 days from the date of the Order imposing the penalty.

(b) Within 45 days from the date of the Order imposing the penalty.

(c) Within 60 days from the date of the Order imposing the penalty.

(d) Within 90 days from the date of the Order imposing the penalty. (1 Mark)
(mtp-I- july 2021)

ANSWER-d

38. A Limited, an Indian company holds a commercial plot in Chennai, India. It intends to sell the same.
M/s Super Seller is a real estate broker with Head Office in the USA. M/s Super Seller is appointed to
find buyers for the land. A company Glory Inc., based out of USA is identified as a buyer. Glory Inc., is
controlled from India and is hence a Person Resident in India under FEMA provisions. Glory Inc., agrees
to buy the land for USD 6,00,000 (assume 1 USD = Rs.70). M/s Super Seller is to be paid commission at
the rate of 7% of the sale proceeds. The commission is to paid to the H.O of M/s Super Seller in USA.
Decide, in light of the relevant provisions of FEMA, 1999, which of the following is correct (Ignoring TDS
implications arising under the Income Tax Act, 1961):

(a) Prior permission is not required for remittance of commission upto USD 25,000. For balance
commission of USD 17,000, permission of RBI is to be sought by A Limited.

(b) Prior permission is not required for remittance of commission upto USD 30,000. For balance
commission of USD 12,000, permission of RBI is to be sought by A Limited.

(c) Prior permission is not at all required for remittance of the entire commission.

Page No. 368

(d) Prior permission is required to be taken from The Reserve Bank of India for the entire amount of
commission. (2 Marks) (mtp-I- july 2021)

ANSWER- b

39. Z Ltd, a Starup is permitted to raise ECB under the automatic route with the minimum average
maturity period of : (mtp-I- july 2021)

(a) 1 years

(b) 3 years

(c) 5 years

(d) 10 years (1 Marks)

ANSWER-b

40. (b) What is an overseas direct investment? Differentiate between Automatic Route and Approval
Route for direct investment? (6 Marks) (mtp-I- july 2021)

ANSWER

Direct investment outside India/overseas direct investment means investments, either under the
Automatic Route or the Approval Route, by way of:

(i) contribution to the capital or subscription to the Memorandum of a foreign entity or

(ii) purchase of existing shares of a foreign entity either by market purchase or private placement or
through stock exchange, signifying a long-term interest in the foreign entity (JV or WOS).

Difference between Automatic Route and Approval Route for direct investment

Automatic route for direct investment or financial commitment outside India: An Indian Party has been
permitted to make investment/ undertake financial commitment in overseas Joint Ventures (JV)/ Wholly
Owned Subsidiaries (WOS), as per the ceiling prescribed by the Reserve Bank.
With effect from July 03, 2014, it has been decided that any financial commitment (FC) exceeding USD 1
(one) billion (or its equivalent) in a financial year would require prior approval of the Reserve Bank even
when the total FC of the Indian Party is within the eligible limit under the automatic route [i.e., within
400% of the net worth (Paid up capital + Free Reserves) as per the last audited balance sheet].

Approval route for direct investment or financial commitment outside India:

(i) Prior approval of the Reserve Bank would be required in all other cases of direct investment (or
financial commitment) abroad.

Page No. 369

(ii) Reserve Bank would, inter alia, take into account the following factors while considering such
applications:

(a) Prima facie viability of the JV / WOS outside India;

(b) Contribution to external trade and other benefits which will accrue to India through such investment
(or financial commitment);

(c) Financial position and business track record of the Indian Party and the foreign entity; and

(d) Expertise and experience of the Indian Party in the same or related line of activity as of the JV / WOS
outside India.

Therefore, under the approval route (proposals not covered by the conditions under the automatic route)
prior approval of the Reserve Bank would be required. For which a specific application in Form ODI with
the documents prescribed therein is required to be made through the Authorized Dealer Category – I
banks.

41. Minimum Average Maturity Period prescribed for ECB raised for working capital purposes or
general corporate purposes under the ECB framework is:

(a) 1 year

(b) 5 year

(c) 7 year

(d) 10 year (1 Mark) (mtp-II- july 2021)

ANSWER- d

42 . Mr. Raman, a non-resident, has a Special Investment Plan (SIP) with a mutual fund in India. Mr.
Raman, due to some financial problems, requested his brother Mr. Raghav who is an Indian resident, to
make the payment of few subsequent instalments of SIP on his behalf. You are required to advise Mr.
Raghav whether such transaction is permitted considering the provisions of Foreign Exchange
Management Act (FEMA), 1999. (2 Marks) (mtp-NOV 2020)

(a) Such transaction is not permitted as it amounts to payment for the credit of non-resident.

(b) Such transaction is permitted as Mr. Raghav can enter into such transaction on behalf of his non-
resident brother.

(c) Such transaction is not permitted as Mr. Raghav cannot enter into such transactions on behalf of his
non-resident brother.

Page No. 370

(d) Such transaction is permitted if Mr. Raghav obtains prior permission of the Reserve
Bank of India.

ANSWER- a

43. Milap Limited, a company incorporated in India, has obtained consultancy services from an entity
based in France for setting up the software programme in their company. The consideration for such
services is required to be paid in foreign currency. The compliance officer of Milap Limited requires
your advice regarding threshold limit of remittance that can be made without prior approval of RBI.
You as a qualified Chartered Accountant are required to advise the compliance officer considering the
provisions of Foreign Exchange Management Act, 1999 and regulations thereunder: (6 Marks) (mtp-
NOV 2020)

ANSWER

As per the Foreign Exchange Management Act, 1999 read with Schedule III of the FEM(Current Account
Transactions) Rules, 2000, thereunder, there are various facilities for persons other than individuals which
requires the prior approval of RBI for drawl of foreign exchange. One of such facility is remittances
exceeding USD 1,000,000 per project for other consultancy services procured from outside India. In the
given case, the person (i.e., Milap Limited) obtaining such service from outside India is a body corporate,
other than individual and accordingly to above provisions , where the remittances is exceeding the
prescribed threshold, there Milap Limited will require to seek prior approval of RBI for drawl of such
foreign exchange

44. GOGU Limited, a resident company in India, has achieved a turnover of Rs. 20,000 crore during the
financial year 2019-20. The paid-up share capital and Free Reserves of the company as on 31st March,
2020 as per the audited financial statements was Rs. 1500 crore and Rs. 500 crore respectively. The
company is planning to make an investment of INR 7800 crore in an Overseas Joint Venture in
Singapore. The company approached you whether it can make the desired investment under the terms
of automatic route for direct investment during the financial year 2020-21. The equivalent currency in
US $ comes to around USD 1.05 billion. Referring to the Foreign Exchange Management (Transfer of
Issue of Any Foreign Security) (Amendment) Regulations, 2004 and notifications issued by the Reserve
Bank of India, decide whether there is any restriction in the above investment. (3 Marks) (past exam
jan 2021)
ANSWER

Automatic route for direct investment or financial commitment outside India: As per Regulation 6 of the
Foreign Exchange Management (Transfer or Issue of Any Foreign Security) (Amendment) Regulations,
2004, an Indian Party has been permitted to make investment/ undertake financial commitment in
overseas Joint Ventures (JV) or Wholly Owned Subsidiaries (WOS), as per the ceiling prescribed by the
Reserve Bank.
With effect from July 03, 2014, it has been decided that any financial commitment (FC) exceeding USD 1
(one) billion (or its equivalent) in a financial year would require prior approval of the Reserve Bank even
when the total FC of the Indian Party is within the eligible limit under the automatic route [i.e., within
400% of the net worth (Paid up capital + Free Reserves) as per the last audited balance sheet].

Page No. 371

Here, ‘Indian Party’ includes a company incorporated in India.
As per the facts of the question and provision of law, GOGU Limited (Indian party) will require prior
approval of the Reserve Bank of India even though its total financial commitment is within the eligible
limit under automatic route [i.e. {400% of (1500+500) = Rs. 8,000 crore}], because financial commitment
is more than USD 1 billion.

45. A foreign tourist comes to India and he purchases a antiques from a shop. He would like to pay US$
30 in cash to the shopkeeper. Comment in the light of the FEMA, whether shopkeeper is permitted to
accept foreign currency? (RTP JULY 2021)

ANSWER

As per section 3 of the FEMA, save as otherwise provided in this Act, rules or regulations made
thereunder, or with the general or special permission of the Reserve Bank, no person shall receive
otherwise than through an authorised person, any payment by order or on behalf of any person resident
outside India in any manner.
Where any person in, or resident in, India receives any payment by order or on behalf of any person
resident outside India through any other person (including an authorised person) without a
corresponding inward remittance from any place outside India, then, such person shall be deemed to
have received such payment otherwise than through an authorised person;
Here in the given case, the foreign tourist wanted to pay foreign currency in cash on purchase of antiques
to shopkeeper which as per section 3, is not permissible to any person to receive any payment by order or
on behalf of any person resident outside India in any manner except received through an authorised
person. Therefore, the Shopkeeper cannot accept cash as it will be a receipt otherwise than through
Authorised Person except where the shopkeeper have taken a money changers license to accept foreign
currency

46. Mr. X, a resident of India planned a tour of 15 days to visit Paris and to meet his niece living there.
While returning to India, Mr. X was carrying with him INR 30,000. Her niece told him that limit is
marked on bringing Indian currency notes at the time of return to India. Identify the correct limit : (RTP
JULY 2021)

(a) INR 2000

(b) INR 5000

(c) INR 10,000

(d) INR 25,000

ANSWER-d

46. (ICAI ADDITIONAL QUESTION FOR PRACTICE)

Mr. Raees purchased a flat for Rs. 90 lakhs in the name of his daughter’s mother in law, who is a
resident of USA.
However, when her mother in law was contacted, she denied the ownership of this property. Discuss
the nature of the transaction in the light of the Foreign Exchange Management Act,1999 .

Page No. 372

ANSWER

A person resident in India may acquire immovable property outside India, -

(a) by way of gift or inheritance from a person referred to in sub-section (4) of Section 6 of the Act, or
referred to in clause (b) of regulation 4 (acquired by a person resident in India on or before 8th July 1947
and continued to be held by him with the permission of the Reserve Bank.)
(b) by way of purchase out of foreign exchange held in Resident Foreign Currency (RFC) account
maintained in accordance with the Foreign Exchange Management (Foreign Currency accounts by a
person resident in India) Regulations, 2015;
(c) jointly with a relative who is a person resident outside India, provided there is no outflow of funds
from India;
Explanation—For the purposes of these regulations, 'relative' in relation to an individual means husband,
wife, brother or sister or any lineal ascendant or descendant of that individual.

Thus, Mr. Raees, can purchase the property only in the name of the above mentioned relatives.
Daughter’s mother in law does not fall within the purview of the mentioned definition of relatives.
Hence, this transaction is not valid.

Page No. 373

 15 The Prevention of Money Laundering Act, 2002

ATTEMPTS
MAY NOV MAY NOV NOV JAN JULY NOV
COVERAGE
2018 2018 2019 2019 2020 2021 2021 2021

STUDY Q.- 23, 24, 25, 26, 27

MAT

PAST Q-33,
Q-5 Q-9 Q-7, 8 Q-17, 18 Q-42, 43 ------
EXAMS 40, 41

Q-34,
Q-3, 13,
Q-2, 12, 35, 36,
MTP Q-4 Q-6, 10 19, 20, Q-31, 32 ----
13, 14 37, 38,
21
39

RTP Q-3 Q-11 Q-15 Q-1, 16 Q-22, 28, 29, 30 Q-44, 45 Q-46

Page No. 374

Multiple Choice Questions
1.RTP Nov 2019

Mr. Ram gave two of his friends’ cash amount of Rs. two lakh each for their business purposes. Later at
the time of return, he asked both of them, in lieu of the same, to buy his product via credit card and
online transfers in installments through next couple of months’ time for which he issued bills to adjust
the amount in his account books.

Does this payment system through credit card and online transfer mode are covered under Money
Laundering Act?
a) No, because payment are made through credit cards & being an online transfers, it’s
a genuine transaction.
b) Yes, money laundering transactions done via credit card and online payments comes under the
Prevention of Money Laundering Act
c) No, it is not money laundering as none of Mr. Ram friends are benefiting from this transaction.
d) No, because the transactions are not done with shell companies.

Answer: (b)

2.MTP Apr 2019 Qn no 19

On the basis of material in possession with the Director, Mr. Q was under remand evidencing that he
is in possession of proceeds of crime falling under the offence said to be committed in PMLA.
Director may order for provisional attachment of the property of Mr. Q for a period------------------

a) Within 90 days from the date of the order

b) Exceeding 180 days from the date of the order
c) Within 180 days from the date of the order
d) Not exceeding 280 days from the date of the order

Answer: Option C

Descriptive Questions
3.RTP May 2018 Qn no 17, (MTP-NOV 2019)

(i) The Adjudicating Authority appointed under the Prevention of Money Laundering Act, 2002 issued
an order attaching certain properties of XYZ Limited alleged to be involved in money laundering for a
specified period. The company aggrieved by the order of the Adjudicating Authority seeks your advice
about the remedy that is available under the Act. Analyse and apply the relevant provisions of the
Prevention of Money Laundering Act, 2002 in relation to the above given situation.

(ii) Sohan Lal, a farmer, was found involved in embezzlement of opium cultivated by him. State the
punishment that can be awarded to him under the Prevention of Money Laundering Act, 2002.

Page No. 375

Answer

(i) Section 25 of the Prevention of Money Laundering Act, 2002 empowers the Central Government to
establish an Appellate Tribunal to hear appeal against order of the Adjudicating Authority and other
authorities under the Act.

Section 26 deals with the right and time frame to make an appeal to the Appellate Tribunal. Any person
aggrieved by an order made by the Adjudicating Authority may prefer an appeal to the Appellate
Tribunal within a period of 45 days from the date on which a copy of the order is received by him. The
appeal shall be in such form and be accompanied by such fee as may be prescribed. The Appellate
Tribunal may extend the period if it is satisfied that there was sufficient cause for not filing it within the
period of 45 days.
The Appellate Tribunal may after giving the parties to the appeal an opportunity of being heard, pass
such order as it thinks fit, confirming, modifying or setting aside the order appealed against.
The Act also provides further appeal. According to Section 42 any person aggrieved by any decision or
order of the Appellate Tribunal may file an appeal to the High Court within 60 days from the date of
communication of the order of the Appellate Tribunal.
In the light of the provisions of the Act explained above the company is advised to prefer an appeal to
Appellate Tribunal in the first instance.

(ii) Section 4 of the Prevention of Money Laundering Act, 2002 provides for the punishment for
Money-Laundering. Whoever commits the offence of money- laundering shall be punishable with
rigorous imprisonment for a term which shall not be less than 3 years but which may extend to 7 years
and shall also be liable to fine. But where the proceeds of crime involved in money-laundering relate to
any offence specified under paragraph 2 of Part A of the Schedule, the maximum punishment may
extend to 10 years instead of 7 years.
Paragraph 2 of Part A of Schedule to the Prevention of Money Laundering Act, 2002, covers Offences
under the Narcotic Drugs and Psychotropic Substances Act, 1985 Whereby, embezzlement of opium by
cultivator (section 19) is covered under paragraph 2 of Part A.
In the present case, Sohan Lal, a farmer, who was involved in embezzlement of opium cultivated by him
shall be liable for the rigorous imprisonment for a term which may extend to 10 years and shall also be
liable to fine.

4. March 2018 Qn no 1(C) 6 Marks:

(i) Raghu, a clerical staff in the Power Board, was assigned with the task of inspection of the file with
the requisite documents of the applicants who have applied for the new connections. Mr. Rajiv Shah,
for his new flat, applied for the power connection as per the required usage with all the supportive
documents. Raghu, conveyed Mr. Rajiv Shah, that his file has been rejected due to discrepancies in the
compliances. Indirectly he communicated that, if required, he may clear his file and put into process.
Mr. Rajiv Shah give him cash amount of Rs. 2 lacs to clear his file. State in the light of the above
situation, the liability of Raghu and Mr. Rajiv Shah in the commission of an offence as per the
Prevention of Money Laundering Act, 2002.
Page No. 376
(ii) The Adjudicating Authority appointed under the Prevention of Money Laundering Act, 2002 issued
an order attaching certain properties of XYZ Limited alleged to be involved in money laundering for a
specified period. The company, seeks your advice about the remedy available under the Prevention of
Money Laundering Act, 2002.

Answer:

(i) As per the section 3 of the Prevention of Money Laundering Act, 2002, offence of money laundering
is said to be committed when whosoever directly or indirectly attempts to indulge or knowingly assists
or knowingly is a party or is actually involved in any process or activity connected with the proceeds of
crime including its concealment, possession, acquisition or use and projecting or claiming it as
untainted property shall be guilty of offence of money - laundering.

In the given case, Mr. Rajiv Shah and Raghu, is knowingly a party to an offence of lend ing and accepting
of a bribe to move the file of applicant, which was prima facie rejected by the authority. Both Mr. Rajiv
Shah and Raghu, are guilty of offence of money laundering.
Section 4 of the PMLA, specifies punishment for money-laundering. Whoever commits the offence of
money-laundering shall be punishable with rigorous imprisonment for a term which shall not be less
than three years but which may extend to seven years and shall also be liable to fine.
So accordingly, Mr. Rajiv Shah and Raghu are punishable in compliance with the above provisions.
(ii) Appeal to Appellate Tribunal: According to section 25 of the Prevention of Money Laundering Act,
2002, the Appellate Tribunal constituted under section 12(1) of the Smugglers and Foreign Exchange
Manipulators (Forfeiture of Property) Act, 1976 shall be the Appellate Tribunal for hearing appeals
against the orders of the Adjudicating Authority and the other authorities under this Act.
The appeal shall be filed within a period of 45 days from the date on which a copy of the order made
by the Adjudicating Authority, However, period may be extended on the sufficient cause. The
Appellate Tribunal may after hearing the parties, pass such order as it thinks fit, confirming, modifying
or setting aside the order appealed against.
Any person aggrieved by any decision or order of the Appellate Tribunal, may file an appeal to the High
Court within 60 days from the date of communication of the order of the Appellate Tribunal. (Section
42)
In the light of the above provisions of the Act, the company is advised to prefer an appeal to Appellate
Tribunal in the first instance.

5.May 2018 Qn no 1(C) 6 Marks:

(i) Define the term "Payment System" under the provisions of the Prevention of Money Laundering
Act, 2002.

(ii) Mr. Honest, a notorious, was caught in possession of Counterfeit Currency Notes, an offence
specified under Part A - Paragraph 1 of the Schedule of the Prevention of Money Laundering Act,
2002. State the Punishment that can be awarded to him under the above Act. Also identify the
punishment for the offence specified under Part A - paragraph 2 of the Schedule of the Prevention of
Money Laundering Act, 2002.

Page No. 377

Answer:

(i) Payment System [Section 2(1)(rb) of the Prevention of Money Laundering Act, 2002]: "Payment
System" means a system that enables payment to be effected between a payer and a beneficiary,
involving clearing, payment or settlement service or all of them.
It includes the systems enabling credit card operations, debit card operations, smart card operations,
money transfer operations or similar operations.
(ii) Section 4 of the Prevention of Money Laundering Act, 2002 provides for the punishment for Money-
Laundering. According to the Section, whoever commits the offence of money-laundering shall be
punishable with rigorous imprisonment for a term which shall not be less than three years but which
may extend to seven years

and shall also be liable to fine. But where the proceeds of crime involved in money- laundering relate to
any offence specified under paragraph 2 of Part A of the Schedule, the maximum punishment may
extend to ten years instead of seven years.
Since, counterfeiting of currency notes is a predicate offence, specified under paragraph 1 of Part A of
the Schedule (and not under paragraph 2 of Part A of the Schedule), Mr. Honest can be punishable with
rigorous imprisonment for a term which shall not be less than three years but which may extend to
seven years and shall also be liable to fine.
Where the offence specified falls under Part A- Paragraph 2 of the Schedule of PMLA, maximum
punishment may extend to 10 years.

6.Aug 2018 Qn no 1(C) 6 Marks:

(i)Ali was assigned by Mr. X to deliver counterfeit currency-notes to one of his close friends to
Honkong for which hefty commission was fixed by the Mr. X. Advise, whether the said act can be
considered as money laundering. Who shall be liable for the commission of the money Laundering?

(ii) Ms. Farida with an intent to deceive the public, personated herself as a public servant and misused
his position and gained monetary benefits. She was arrested for the said cognizable and non-bailable
offence for a term of Imprisonment for 2 years and with fine. Discuss in the light of the Prevention of
Money Laundering Act, 2002, liability of Ms. Farida in the said situation.

Answer:

As per the Prevention of Money Laundering Act, 2002, whosoever directly or indirectly attempts to
indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity
connected with the proceeds of crime including its concealment, possession, acquisition or use and
projecting or claiming it as untainted property shall be guilty of offence of money laundering (Section
3).

“Proceeds of crime” means any property derived or obtained, directly or indirectly, by any person as a
result of criminal activity relating to a scheduled offence or the value of any such property [Section
2(1)(u)].
Every Scheduled Offence is a Predicate Offence. The occurrence of the scheduled Offence is a pre
requisite for initiating investigation into the offence of money laundering.
Page No. 378
In the given case, Mr. X assigned Ali to deliver counterfeit currency notes to be given to his friends in
Hongkong, which is an offence falling within the purview of scheduled offence in Part A of the PMLA,
2002 under section 489B of the IPC. This section deals with the using as genuine, forged or counterfeit
currency-notes or bank-notes. According to the section whoever sells to, or buys or receives from, any
other person, or otherwise traffics in or uses as genuine, any forged or counterfeit currency-note or
bank-note, knowing or having reason to believe the same to be forged or counterfeit, shall be liable
under the Prevention of Money Laundering Act.
Hence, Ali, Mr. X and his friends in Hongkong, all are said to be liable under the Prevention of Money
Laundering Act.
Section 45 of the Prevention of Money Laundering Act, 2002, provides of the offences that are
cognizable and non-bailable. According to which, person accused of an offence punishable for a term of
imprisonment of more than three years under Part A of the Schedule shall not be released on bail or on
his own bond except on the conditions stated therein the said section.
Given instance as to the commission of an offence, is out of the purview of the predicate offence as given
in the Schedule under the PMLA, 2002. Ms. Farida shall be liable for personating herself as a public
servant in other law but will not be liable for arrest under the PMLA.

7.May 2019 Qn no 3(b) 6 Marks:

Mr. Dawood Moosa, a known smuggler was caught in transfer of funds illegally exporting narcotic
drugs from India to some countries in Africa. State the maximum punishment that can be awarded to
him under Prevention of Money Laundering Act, 2002.

(ii) Mr. Robert has been arrested for a cognizable and non-bailable offence under Part- A of the
schedule punishable for a term of imprisonment for more than three years under the Prevention of
Money Laundering Act, 2002. He seeks your advice as to how can he be released on bail. Advise
him.

Answer:

Paragraph 2 of Part A of the Schedule to the Prevention of Money Laundering Act, 2002, covers
Offences under the Narcotic Drugs and Psychotropic Substances Act, 1985. Whereby, illegal import into
India, export from India or transshipment of narcotic drugs and psychotropic substances (section 23) is
covered under paragraph 2 of Part A.
Punishment: Section 4 of the said Act provides for the punishment for Money- Laundering. Whoever
commits the offence of money-laundering shall be punishable with rigorous imprisonment for a term
which shall not be less than 3 years but which may extend to 7 years and shall also be liable to fine. But
where the proceeds of crime involved in money-laundering relate to any offence specified under
paragraph 2 of Part A of the Schedule, the maximum punishment may extend to 10 years instead of 7
years. Thus, in the given case, the maximum punishment may extend to 10 years.
Section 45 of the Prevention of Money Laundering Act, 2002 provides that the offences under the Act
shall be cognizable and non bailable. Notwithstanding anything contained in the Code of Criminal
Procedure, 1973, no person accused of an offence [under this Act shall be released on bail or on his own
bond unless-

Page No. 379

(i) The Public Prosecutor has been given an opportunity to oppose the application for such release and
(ii) Where the Public Prosecutor opposes the application, the court is satisfied that there are reasonable
grounds for believing that he is not guilty of such offence and that he is not likely to commit any
offence while on bail.
In case of any person who is under the age of 16 years or in case of a woman or in case of a sick or
infirm or is accused either on his own or along with other co-accused of money-laundering a sum of less
than one crore rupees may be released on bail,if the the Special Court so directs.
In compliance to above provision, Mr. Robert can be released on bail.

8.May 2019 Qn no 6(c)(i) 3 Marks:

Who is a "Reporting Entity" under the Prevention of Money Laundering Act, 2002 and what are the
obligations cast on them under Sec. 12 of the Act? The Bank account of Amar has been attached by
the order of an Assistant Director for a period of 180 days. The lawyer of Amar objected to this
attachment. Decide the validity of the attachment.

Answer:
“Reporting entity” means a banking company, financial institution, intermediary or a person carrying on a
designated business or profession.

Section 12 of the Prevention of Money Laundering Act, 2002 provides for the obligation of Banking
Companies, Financial Institutions and Intermediaries.
According to section 12,
1. Maintenance of records: Every reporting entity shall –
(a) maintain a record of all transactions,
(b) furnish to the Director information relating to such transactions, whether attempted or
executed, the nature and value of the said transactions;
(c) verify the identity of its clients
(d) identify the beneficial owner, if any, of its clients,

maintain record of documents evidencing identity of its clients and beneficial owners as well as
account files and business correspondence relating to its clients.
2. Maintenance of records related to the transactions (i.e. for above clause a): The records shall be
maintained for a period of five years from the date of transaction between a client and the reporting
entity.
3. Maintenance of records related to evidencing identity of its clients and beneficial owners (i.e., for
above clause e): The records shall be maintained for a period of five years after the business
relationship between a client and the reporting entity has ended or the account has been closed,
whichever is later.
In the instant case, the bank account of Amar has been attached by the order of an Assistant Director
for a period of 180 days. As per section 5 of the Prevention of Money Laundering Act, 2002,
attachment of a property can be done by the Director or any other officer not below the rank of

Page No. 380

 Deputy Director. Here the order is issued by an Assistant Director who is below the rank of the
Deputy Director. Therefore, the objection of the lawyer of Amar is valid.

9.May 2019 Qn no 1(c) 6 Marks: (PAST EXAM NOV 2018)

(i)An Appellate Tribunal consisting of two members was formed to hear the appeal preferred by Mr.
Hari, being aggrieved by an Order made by the Adjudicating Authority under the Prevention of
Money Laundering Act, 2002. Two members of the Bench differ in their opinion on a particular point
referred in the appeal.
Explain the next course of action to be followed by the Bench members under the said Act.

(ii)Mr. Narayan willfully gives false information, refuses to give evidence and to sign statement made by
him in the course of proceedings under the provisions of Prevention of Money Laundering Act, 2002.
Explain the penal provisions and mode of recovery of fine or penalty enumerated under the said
Act.
Answer:
Decision to be by majority [Section 38 of the Prevention of Money Laundering Act, 2002]

If the Members of a Bench consisting of two Members differ in opinion on any point, they shall state the
point or points on which they differ, and make a reference to the Chairman who shall either hear the
point or points himself or refer the case for hearing on such point or points by third Member of the
Appellate Tribunal and such point or points shall be decided according to the opinion of the majority of
the Members of the Appellate Tribunal who have heard the case, including those who first heard it.
In the instant case, the above procedure has to be followed by the Bench members.
Punishment for false information or failure to give information, etc. [Section 63 of the Prevention of Money
Laundering Act, 2002]

1. Any person willfully and maliciously giving false information and so causing an arrest or a search to
be made under this Act shall on conviction be liable for imprisonment for a term which may extend
to two years or with fine which may extend to fifty thousand rupees or both.
2. If any person,-
(a) refuses to give evidence and
(b) refuses to sign statement made by him in the course of proceedings
he shall pay, by way of penalty, a sum which shall not be less than 500 rupees but which may extend
to 10,000 rupees for each such default or failure.

Mode of Recovery of fine or penalty [Section 69]

Where any fine or penalty imposed on any person under section 13 or section 63 is not paid within six
months from the day of imposition of fine or penalty, the Director or any other officer authorised by
him in this behalf may proceed to recover the amount from the said person in the same manner as
prescribed in Schedule II of the Income-tax Act, 1961 for the recovery of arrears and he or any officer
authorised by him in this behalf shall have all the powers of the Tax Recovery Officer mentioned in the

Page No. 381

said Schedule for the said purpose.

10.Oct 2018 Qn no 1(c) 6 Marks:

The Adjudicating Authority appointed under the Prevention of Money Laundering Act, 2002, issued an
order attaching certain properties of XYZ Limited alleged to be involved in money laundering for a
specified period. The company aggrieved by the order of the Adjudicating Authority seeks your advice
about the remedy that is available under the Act. Apply the relevant provisions of the Prevention of
Money Laundering Act, 2002 in relation to above given situation

(ii) Mr. Criminal (a minor)) was arrested for a cognizable and non-bailable offence punishable for a
term of imprisonment for more than three years under the Prevention of Money Laundering Act,
2002. He seeks your advise as to how can he be released on bail. Advise him. (MTP- MAY 2019)
Answer:
(i) Section 25 of the Prevention of Money Laundering Act, 2002 empowers the Central Government to
establish an Appellate Tribunal to hear appeal against order of the Adjudicating Authority and other
authorities under the Act.

Section 26 deals with the right and time frame to make an appeal to the Appellate Tribunal. Any person
aggrieved by an order made by the Adjudicating Authority may prefer an appeal to the Appellate
Tribunal within a period of 45 days from the date on which a copy of the order is received by him. The
appeal shall be in such form and be accompanied by such fee as may be prescribed. The Appellate
Tribunal may extend the period if it is satisfied that there was sufficient cause for not filing it within the
period of 45 days.
The Appellate Tribunal may after giving the parties to the appeal an opportunity of being heard, pass
such order as it thinks fit, confirming, modifying or setting aside the order appealed against.
The Act also provides further appeal. According to Section 42 any person aggrieved by any decision or
order of the Appellate Tribunal may file an appeal to the High Court within 60 days from the date of
communication of the order of the Appellate Tribunal.
In the light of the provisions of the Act explained above the company is advised to prefer an appeal to
Appellate Tribunal in the first instance.
(ii) In accordance with the provisions contained under section 45 of the Prevention of Money
Laundering Act, 2002, the offences under the Act shall be cognizable and non-bailable. In case of a
minor person who is an accused of an offence punishable for a term of imprisonment of more than 3
years under Part A of the Schedule shall be released by the Special Court on bail.

11.RTP Nov-18:
Explain the term “Offence of Money Laundering” within the meaning of the Prevention of Money
Laundering Act, 2002. Mr. Alfred, a known smuggler was caught in transfer of funds illegally
exporting narcotic drugs from India to some countries in South Africa. State the maximum
punishment that can be awarded to him under Prevention of Money Laundering Act, 2002.

Answer:

Page No. 382

Offence of Money Laundering: Section 2(i)(y) of the prevention of Money Laundering Act, 2002
defines the term “scheduled offence”, which accordingly means -

(i) the offences specified under Part A of the Schedule; or

(ii) the offences specified under Part B of the Schedule if the total value involved in such offences is
one crore rupees or more
(iii) The offences specified under Part C of the Schedule. This Schedule to the Act gives a list of all the
above offences.
Paragraph 2 of Part A of the Schedule to the Prevention of Money Laundering Act, 2002, covers Offences
under the Narcotic Drugs and Psychotropic Substances Act, 1985. Whereby, illegal import into India,
export from India or transshipment of narcotic drugs and psychotropic substances (section 23) is covered
under paragraph 2 of Part A.
Punishment:
Section 4 of the said Act provides for the punishment for Money- Laundering. Whoever commits the
offence of money-laundering shall be punishable with rigorous imprisonment for a term which shall not
be less than 3 years but which may extend to 7 years and shall also be liable to fine. But where the
proceeds of crime involved in money-laundering relate to any offence specified under paragraph 2 of Part
A of the Schedule, the maximum punishment may extend to 10 years instead of 7 years.

12.MTP Mar 2019 Qn no 3(b) 6 Marks

Mr. Ramesh was partner in the Firm, Rajkumar & sons. The said firm was established by Mr. Raj
Kumar, who is director of the Subh Labh Pvt. Limited which is a one person company. Subh Labh PVT.
LTD. have foreign income from the clientele being of outside India. Companies generation of foreign
income was invested by the Mr. Rajkumar in its firm without being disclosed in its financial records.
Mr. Ramesh was not aware of the such undisclosed flow of fund in the Firm. Give the following answer
considering the given facts-

(i) Liability of Mr. Ramesh being a partner of a firm, involved in use of income of Subh Labh Pvt. Ltd.
obtained from their foreign clientele.
(ii) Liability of Mr. Rajkumar being a director of the Subh Labh Pvt. Ltd.
Answer

Section 70 of the PMLA, 2002 states of the offences by companies. According to the provision where a
person committing a contravention of any of the provisions of this Act or of any rule, direction or order
made thereunder is a company, every person who, at the time the contravention was committed, was in
charge of and was responsible to the company, for the conduct of the business of the company as well as
the company, shall be deemed to be guilty of the contravention and shall be liable to be proceeded
against and punished accordingly.

Nothing contained in this sub-section shall render any such person liable to punishment if he proves that
the contravention took place without his knowledge or that he exercised all due diligence to prevent such
contravention.
Page No. 383
Where above contravention has been committed by a company and it is proved that the contravention
has taken place with the consent or connivance of, or is attributable to any neglect on the part of any
director, manager, secretary or other officer of any company, such director, manager, secretary or other
officer shall also be deemed to be guilty of the contravention and shall be liable to be proceeded against
and punished accordingly.
As per the explanation to the section term “Company” means any body corporate and includes a firm or
other association of individuals; and the term “Director”, in relation to a firm, means a partner in the
firm.
Accordingly, following are the answers:
(i) Though Mr. Ramesh was a partner of a firm, he was not aware of proceeds of crimes. He shall not
be liable for the punishment for an offence committed by Rajkumar & sons for using of undisclosed
foreign income of Subh Labh Pvt Ltd. However, the firm is liable for commission of the scheduled
offence.
(ii) Both Mr. Rajkumar, the director and Subh-Labh Pvt. Ltd., the company, are liable for the commission
of the scheduled offence as per the above provision.

13.MTP Apr 2019 Qn no 6(b) (i) 3 Marks, (MTP-NOV 2019)

What are the possible actions which can be taken against persons / properties involved in Money
Laundering?
Answer
Following actions can be taken against the persons involved in Money Laundering:-

(a) Attachment of property under Section 5, seizure/ freezing of property and records under Section 17
or Section 18. Property also includes property of any kind used in the commission of an offence
under PMLA, 2002 or any of the scheduled offences.
(b) Persons found guilty of an offence of Money Laundering are punishable with imprisonment for a
term which shall not be less than three years but may extend up to seven years and shall also be
liable to fine [Section 4].
(c) When the scheduled offence committed is under the Narcotics and Psychotropic substances Act,
1985 the punishment shall be imprisonment for a term which shall not be less than three years but
which may extend up to ten years and shall also be liable to fine.
(d) The prosecution or conviction of any legal juridical person is not contingent on the prosecution or
conviction of any individual.

14.MTP Apr 2019 QN no 3(b) 6 Marks

Raghu, an officer in the Power Board, was assigned with the task of inspection of the file with the
requisite documents of the applicants who have applied for the new connections. Mr. Rajiv Shah was
one among the applicants who applied for the power connection for his new flat, as per the required
usage with all the supportive documents. Raghu, conveyed Mr. Rajiv Shah, that his file has been
rejected due to discrepancies in the compliances. Indirectly he also communicated that, if required,

Page No. 384

he may clear his file and put into process. Mr. Rajiv Shah gave him cash Rs. 2 lacs to clear his file.
Analyse, in the light of the above situation, the liability of Raghu and Mr. Rajiv Shah in the commission
of an offence as per the Prevention of Money Laundering Act, 2002.

Answer:

As per the section 3 of the Prevention of Money Laundering Act, 2002, offence of money laundering is
said to be committed when whosoever directly or indirectly attempts to indulge or knowingly assists or
knowingly is a party or is actually involved in any process or activity connected with the proceeds of
crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted
property shall be guilty of offence of money-laundering.
In the given case, Mr. Rajiv Shah and Raghu, is knowingly a party to an offence of lending and accepting of
a bribe to move the file, which was prima facie rejected by the authority. Both Mr. Rajiv Shah and
Raghu, are guilty of offence of money laundering.
Section 4 of the PMLA, specifies punishment for money-laundering . Whoever commits the offence of
money-laundering shall be punishable with rigorous imprisonment for a term which shall not be less than
three years but which may extend to seven years and shall also be liable to fine.
So accordingly, Mr. Rajiv Shah and Raghu both are punishable in compliance with the above provisions.

15.RTP May 2019 Qn no 20

(i) The Adjudicating Authority appointed under the Prevention of Money Laundering Act, 2002 issued
an order attaching certain properties of XYZ Limited alleged to be involved in money laundering for a
specified period. The company aggrieved by the order of the Adjudicating Authority seeks your advice
about the remedy that is available under the Act. Advise explaining the relevant provisions of the
Prevention of Money Laundering Act, 2002.

Answer

Establishment of Appellate Tribunal

According to section 25 of the Prevention of Money Laundering Act, 2002, the Appellate Tribunal
constituted under sub-section (1) of section 12 of the Smugglers and Foreign Exchange Manipulators
(Forfeiture of Property) Act, 1976 shall be the Appellate Tribunal for hearing appeals against the orders of
the Adjudicating Authority and the other authorities under this Act.

Appeals to Appellate Tribunal

Section 26 deals with the right and time frame to make an appeal to the Appellate Tribunal. The Director
or any person aggrieved by an order made by the Adjudicating Authority under this Act may prefer an
appeal to the Appellate Tribunal.
The appeal shall be filed within a period of 45 days from the date on which a copy of the order made by
the Adjudicating Authority is received and it shall be in such form and be accompanied by prescribed

Page No. 385

fees. The appeal shall be in such form and be accompanied by such fee as may be prescribed. The
Appellate Tribunal may extend the period if it is satisfied that there was sufficient cause for not filing it
within the period of 45 days.

The Appellate Tribunal may after giving the parties to the appeal an opportunity of being heard, pass
such order as it thinks fit, confirming, modifying or setting aside the order appealed against.

Appeals to High Court

The Act also provides further appeal. According to Section 42 any person aggrieved by any decision or
order of the Appellate Tribunal may file an appeal to the High Court within 60 days from the date of
communication of the order of the Appellate Tribunal.
In the light of the provisions of the Act explained above the company is advised to prefer an appeal to
Appellate Tribunal in the first instance.

16.RTP Nov 2019 Qn no 18

Neeraj was given an offer by a company vendor to disclose him the lowest bid quoted by other
vendors. Neeraj accessed the computer of his Executive Director and passed on the lowest quotation
to the vendor and thus helped him in quoting the lowest among all the bids. Examine and analyse the
situation and conclude how Neeraj will be held liable under Prevention of Money Laundering Act?

Answer
In the given instance, Neeraj is liable for the commission of scheduled offence specified under Part A Para
22 of the PMLA, 2002. He is liable for an offence committed under section 72 of the Information
TechnologyAct, 2000. It provides for the offence for breach of confidentiality and privacy without
consent of the person concerned.

Here as per the stated facts, Neeraj acted without consent of the concerned person i.e. his executive
director and accessed the electronic records and passed on the official information to the vendor, thus
leading to the breach of confidentiality & privacy of the company. This sharing of confidential information
can produce large profits & ill gotten gains to Mr. Neeraj. Thus his involvement is connected with the
obtaining of profits from proceeds of crime. Therefore, he is liable under sections 3 and 4 of the PMLA,
2002 which provides rigorous imprisonment for a term which shall not be less than 3 years, but which
may extend to 7 years and shall be liable to fine.

17.Nov 2019 Qn no 3(b) 6 Marks

Mr. 'B' purchased a flat out of the proceeds earned by Drug Trafficking. The flat was attached by the
Director, Director of Enforcement after complying the procedures under Section 5 of the Prevention
of Money Laundering Act, 2002 (PMLA, 2002). Mr ‘B' got a stay from the High Court for any
proceedings under the said Act. The stay was subsequently vacated

Page No. 386

State the relevant provisions of the PMLA, 2002 for computing the period of provisional attachment
including extension, if any.

Whether Mr. 'C', son of Mr. 'B' can occupy the flat during the period of provisional attachment?
Answer
According to section 5 of the Prevention of Money Laundering Act, 2002, where the Director or any
other officer (not below the rank of Deputy Director authorised by the Director), has reason to believe
(the reason for such belief to be recorded in writing), on the basis of material in his possession, that—

(a) any person is in possession of any proceeds of crime; and

(b) such proceeds of crime are likely to be concealed, transferred or dealt with in any manner which
may result in frustrating any proceedings relating to confiscation of such proceeds of crime under
this Chapter,
he may, by order in writing, provisionally attach such property for a period not exceeding 180 days from
the date of the order, in such manner as may be prescribed.
Provided further that, any property of any person may be attached under this section if the Director or
any other officer not below the rank of Deputy Director authorised by him has reason to believe (the
reasons for such belief to be recorded in writing), on the basis of material in his possession, that if such
property involved in money-laundering is not attached immediately under this Chapter, the non-
attachment of the property is likely to frustrate any proceeding under this Act.
Computation of period of attachment: Provided also that for the purposes of computing the period of
180 days, the period during which the proceedings under this section is stayed by the High Court, shall
be excluded and a further period not exceeding 30 days from the date of order of vacation of such stay
order shall be counted.
No effect on the right to enjoy the property: This section shall not prevent the person interested in the
enjoyment of the immovable property attached from such enjoyment.

Here, “person interested”, in relation to any immovable property, includes all persons
claiming or entitled to claim any interest in the property.
In the given case, Mr. C, son of Mr. B can occupy the flat during the period of provisional attachment if he
claims to have any interest in the said property.

18.Nov 2019 Qn no 6(C) 4 Marks

Mr. 'K' used his car for smuggling cash and the Special Court found on conclusion of trial that an
offence of money laundering was committed by Mr. 'K' under the provisions of the Prevention of
Money Laundering Act, 2002 (PMLA, 2002). The car was under hypothecation to a Nationalized Bank
for the car loan obtained. Referring to provisions of the PMLA, 2002, examine whether the car can be
confiscated despite the existence of encumbrance?
Answer
Vesting of property in Central Government [Section 9]: Where an order of confiscation has been made
under section 8(5) or section 8(7) or section 58B or section 60(2A) of PMLA, 2002 in respect of any

Page No. 387

property of a person, all the rights and title in such property shall vest absolutely in the Central
Government free from all encumbrances.

However, where the Special Court or the Adjudicating Authority, as the case may be, after giving an
opportunity of being heard to any other person interested in the property attached under this Chapter, or
seized or frozen, is of the opinion that any encumbrance on the property or lease-hold interest has been
created with a view to defeat the provisions of this Chapter, it may, by order, declare such encumbrance
or lease-hold interest to be void and thereupon the aforesaid property shall vest in the Central
Government free from such encumbrances or lease-hold interest.
In the instant case, Mr. K used his car for smuggling cash and Special Court found on conclusion of trial
that an offence of money laundering was committed by Mr. K. The car was under hypothecation to a
Nationalized bank for the car loan obtained. As the encumbrance on the car has been created to defeat
the provisions and special court may order to declare such encumbrance to be void and therefore the
car can be confiscated and shall vest in the Central Government.

19.MTP Nov 2019 Qn no 3(b)(i) 3 Marks

The Adjudicating Authority appointed under the Prevention of Money Laundering Act, 2002 issued
an order attaching certain properties of XYZ Limited alleged to be involved in money laundering for a
specified period. The company aggrieved by the order of the Adjudicating Authority seeks your advice
about the remedy that is available under the Act. Analyse and apply the relevant provisions of the
Prevention of Money Laundering Act, 2002 in relation to the above given situation.

Answer:

Section 25 of the Prevention of Money Laundering Act, 2002 empowers the Central Government to
establish an Appellate Tribunal to hear appeal against order of the Adjudicating Authority and other
authorities under the Act.
Section 26 deals with the right and time frame to make an appeal to the Appellate Tribunal. Any person
aggrieved by an order made by the Adjudicating Authority may prefer an appeal to the Appellate
Tribunal within a period of 45 days from the date on which a copy of the order is received by him. The
appeal shall be in such form and be accompanied by such fee as may be prescribed. The Appellate
Tribunal may extend the period if it is satisfied that there was sufficient cause for not filing it within the
period of 45 days.
The Appellate Tribunal may after giving the parties to the appeal an opportunity of being heard, pass
such order as it thinks fit, confirming, modifying or setting aside the order appealed against.
The Act also provides further appeal. According to Section 42 any person aggrieved by any decision or
order of the Appellate Tribunal may file an appeal to the High Court within 60 days from the date of
communication of the order of the Appellate Tribunal.
In the light of the provisions of the Act explained above the company is advised to prefer an appeal to
Appellate Tribunal in the first instance.

Page No. 388

20.MTP Nov 2019 Qn no 3(b)(ii) 3 Marks
Sohan Lal, a farmer, was found involved in embezzlement of opium cultivated by him. State the
nature of the act committed by Sohan Lal in the light of the Prevention of Money Laundering Act,
2002.

Answer

In the present case, Sohan Lal, a farmer, who was involved in embezzlement of opium cultivated by
him shall be said to have committed a scheduled offence under the Paragraph 2 of Part A of Schedule
to the Prevention of Money Laundering Act, 2002. It covers offences under the Narcotic Drugs and
Psychotropic Substances Act, 1985 whereby, embezzlement of opium by cultivator (section 19) is an
offence which is illegal by law and hence the person involved in the proceeds of crimes arising out of the
commission of scheduled offences shall be liable for commission of trial under PMLA.
Accordingly, as per section 4 of the PMLA, 2002, Sohan lal shall be liable for the rigorous imprisonment
for a term which may extend to 10 years and shall also be liable to fine.

21.MTP Nov 2019 Qn no 6(b)(ii) 3 Marks

What are the possible actions which can be taken against persons / properties involved in Money
Laundering?

Answer

Following actions can be taken against the persons involved in Money Laundering:-

(a) Attachment of property under Section 5, seizure/ freezing of property and records under Section 17
or Section 18. Property also includes property of any kind used in the commission of an offence
under PMLA, 2002 or any of the scheduled offences.
(b) Persons found guilty of an offence of Money Laundering are punishable with imprisonment for a
term which shall not be less than three years but may extend up to seven years and shall also be
liable to fine [Section 4].
(c) When the scheduled offence committed is under the Narcotics and Psychotropic substances Act,
1985 the punishment shall be imprisonment for a term which shall not be less than three years but
which may extend up to ten years and shall also be liable to fine.
(d) The prosecution or conviction of any legal juridical person is not contingent on the prosecution or
conviction of any individual.

22.RTP May 2020 Question no 13

Mr. X was found to be guilty of offence of money-laundering by being involved in an activity

connected with proceeds of crime. Adjudicating Authority(AA) as per findings confirmed the
attachment of the property and ordered for the investigation. The investigation was initiated by the
AA on 1st February, 2019. The attachment of the property of Mr. X was still to be continued by 31st
January 2020. Enumerate in the given situation the validity of the attachment period.

Page No. 389

Answer

Order for attachment/retention of property etc.: As per section 8 of the PMLA, 2002, where the
Adjudicating Authority decides that any property is involved in money- laundering, he shall, by an order
in writing, confirm the attachment of the property or retention of property or record seized or frozen
under section 17 or section 18 and record a finding to that effect.

Period for attachment, retention, or freezing of the seized or frozen property or record: Whereupon
such attachment, retention, or freezing of the seized or frozen property or record, AA shall—

(a) continue during investigation, for a period not exceeding three hundred and sixty-five days or the
pendency of the proceedings relating to any offence under this Act before a court or under the
corresponding law of any other country, before the competent court of criminal jurisdiction
outside India, as the case may be; and
(b) become final after an order of confiscation is passed under section 8(7) or section 8(5) or section
58B or section 60(2A) by the Special Court .
For the purposes of computing the period of three hundred and sixty-five days under clause (a), the
period during which the investigation is stayed by any court under any law for the time being in force
shall be excluded.
Accordingly, the attachment of the property of Mr. X to be continued by 31 st January 2020 is valid as it
is within 365 days from the date of order of the investigation by the Adjudicating Authority.
Study Material
23. The offences under the Prevention of Money Laundering Act, 2002 shall be:

(a) Cognizable and Bailable

(b) Non- cognizable and non - bailable
(c) Cognizable and non-bailable
(d) Non- cognizable and bailable
Answer : (c) Hint : As per section 45 of the PMLA

24. Mr. Ram gave two of his friends’ cash amount of two lakh each in case of dire necessity for their
business purposes. Later at the time of return, he asked both of them, in lieu of the same, to buy his
product via credit card and online transfers in installments through next couple of months’ time for
which he issued bills to adjust the amount in his account books.

Does this payment system through credit card and online transfer mode are covered under money
laundering act?
a) No, payment are made through credit cards & online transfers hence all the transaction are
genuine
b) Yes, money laundering transactions done via credit card and online payments comes under the
Prevention of Money Act
c) No, it is not money laundering as none of Mr. Ram friends are benefiting from this transaction.
Page No. 390
d) No, because the transactions are not done with shell companies.
Answer: b) Hint : In terms of clause (b) of sub – section (1) of section 2 "payment system" means a
system that enables payment to be effected between a payer and a beneficiary, involving clearing,
payment or settlement service or all of them. It includes the systems enabling credit card operations,
debit card operations, smart card operations, money transfer operations or similar operations.

25. Explain the meaning of the term “Money Laundering”. Z, a known smuggler was caught in transfer
of funds illegally exporting narcotic drugs from India to some countries in Africa. State the maximum
punishment that can be awarded to him under Prevention of Money Laundering Act, 2002.

Answer

Money Laundering: Whosoever directly or indirectly attempts to indulge or knowingly assists or

knowingly is a party or is actually involved in any process or activity connected wi th the proceeds of
crime and projecting it as untainted property shall be guilty of offence of money laundering. [Section 3
of the Prevention of Money Laundering Act, 2002]

Paragraph 2 of Part A of the Schedule to the Prevention of Money Laundering Act, 2002, covers
Offences under the Narcotic Drugs and Psychotropic Substances Act, 1985. Whereby, illegal import
into India, export from India or transshipment of narcotic drugs and psychotropic substances (section
23) is covered under paragraph 2 of Part A.
Punishment: Section 4 of the said Act provides for the punishment for Money-Laundering. Whoever
commits the offence of money-laundering shall be punishable with rigorous imprisonment for a term
which shall not be less than 3 years but which may extend to 7 years and shall also be liable to fine.
But where the proceeds of crime involved in money-laundering relate to any offence specified under
paragraph 2 of Part A of the Schedule, the maximum punishment may extend to 10 years instead of 7
years.
26. Mr. Fraudulent has been arrested for a cognizable and non-bailable offence punishable for a term
of imprisonment for more than three years under the Prevention of Money Laundering Act, 2002.
Advise, as to how can he be released on bail in this case?

Answer

Section 45 provides that the offences under the Act shall be cognizable and non-bailable.
Notwithstanding anything contained in the Code of Criminal Procedure, 1973, no person accused of an
offence under this Act shall be released on bail or on his own bond unless-

(i) The Public Prosecutor has been given an opportunity to oppose the application for such release
and
(i) Where the Public Prosecutor opposes the application, the court is satisfied that there are
reasonable grounds for believing that he is not guilty of such offence and that he is not likely to
commit any offence while on bail.

Page No. 391

In case of any person who is under the age of 16 years or in case of a woman or in case of a sick or
infirm person or is accused either on his own or along with other co-accused of money-laundering a
sum of less than one crore rupees, may be released on bail, if the Special Court so directs.

27. The Adjudicating Authority appointed under the Prevention of Money Laundering Act, 2002 issued
an order attaching certain properties of XYZ Limited alleged to be involved in money laundering for a
specified period. The company aggrieved by the order of the Adjudicating Authority seeks your advice
about the remedy that is available under the Act. Advise explaining the relevant provisions of the
Prevention of Money Laundering Act, 2002.

Answer

Establishment of Appellate Tribunal

According to section 25 of the Prevention of Money Laundering Act, 2002, the Appellate Tribunal
constituted under sub-section (1) of section 12 of the Smugglers and Foreign Exchange Manipulators
(Forfeiture of Property) Act, 1976 shall be the Appellate Tribunal for hearing appeals against the
orders of the Adjudicating Authority and the other authorities under this Act.
Appeals to Appellate Tribunal

Section 26 deals with the right and time frame to make an appeal to the Appellate Tribunal. The
Director or any person aggrieved by an order made by the Adjudicating Authority under this Act may
prefer an appeal to the Appellate Tribunal.
The appeal shall be filed within a period of 45 days from the date on which a copy of the order made
by the Adjudicating Authority is received and it shall be in such form and be accompanied by
prescribed fees. The appeal shall be in such form and be accompanied by such fee as may be
prescribed. The Appellate Tribunal may extend the period if it is satisfied that there was sufficient
cause for not filing it within the period of 45 days.
The Appellate Tribunal may after giving the parties to the appeal an opportunity of being heard, pass
such order as it thinks fit, confirming, modifying or setting aside the order appealed against.
Appeals to High Court

The Act also provides further appeal. According to Section 42 any person aggrieved by any decision or
order of the Appellate Tribunal may file an appeal to the High Court within 60 days from the date of
communication of the order of the Appellate Tribunal.
In the light of the provisions of the Act explained above the company is advised to prefer an appeal to
Appellate Tribunal in the first instance.

28.RTP Nov 2020 Q no 12

Mr. Kamal is accused of an offence as mentioned in Part B of Schedule to the PMLA, 2002. What
must be the minimum amount of the offence for which Mr. Kamal is accused of?
(a) INR 25 Lakhs

Page No. 392

(b) INR 50 Lakhs

(c) INR 100 Lakhs

(d) INR 75 Lakhs
Answer: c)
29. RTP Nov’2020 Q no 21

Mr. Kunal used his car for smuggling cash and for other illegal activities. On trial before the Special Court, it
was found that an offence of money laundering was committed by Mr. 'Kunal'. Also found that the car was
under hypothecation to a Bank for the car loan obtained. Referring to provisions of the PMLA, 2002, examine
whether the car can be confiscated in the light of the given situation?

Answer

Vesting of property in Central Government [Section 9]: Where an order of confiscation has been made
under section 8(5) or section 8(7) or section 58B or section 60(2A) of PMLA, 2002 in respect of any
property of a person, all the rights and title in such property shall vest absolutely in the Central
Government free from all encumbrances.

However, where the Special Court or the Adjudicating Authority, as the case may be, after giving an
opportunity of being heard to any other person interested in the property attached under this
Chapter, or seized or frozen, is of the opinion that any encumbrance on the property or lease-hold
interest has been created with a view to
defeat the provisions of this Chapter, it may, by order, declare such encumbrance or lease -hold
interest to be void and thereupon the aforesaid property shall vest in the Central Government free
from such encumbrances or lease-hold interest.
In the instant case, Mr. Kunal used his car for smuggling cash and for other illegal activities for
committing of an offence under the purview of the Prevention of Money Laundering Act. The Special
Court found on conclusion of trial that an offence
of money laundering was committed by Mr. Kunal. The car was under hypothecation with the bank for
the car loan obtained. As the encumbrance on the car has been created to defeat the provisions and
special court may order to declare such encumbrance to be void and therefore the car can be
confiscated and shall vest in the Central Government.

30. RTP Nov’2020 Q no 24

Mr. Ramesh Kulkarni conducts private tuition classes from his residence. It was alleged by the
Enforcement Directorate that Mr. Kulkarni has under reported his income and collected income in
tax and used the proceeds to purchase a house property in Marol, Mumbai.

The ED officers through written orders provisionally attached the properties on suspicion of it being
derived from the proceeds of crime. Comment on the validity of the provisional attachment on the
order issued by the ED officers.

Page No. 393

Answer

As per Section 5(5) of the Prevention of Money Laundering Act, 2002, the Director or any other officer
who provisionally attaches any property under sub-section (1) shall, within a period of thirty days from
such attachment, file a complaint stating the facts of such attachment before the Adjudicating
Authority.

As per Section 8(4) of the Prevention of Money Laundering Act, 2002, where the provisional order of
attachment made under sub-section (1) of section 5 has been confirmed under sub-section (3), the
Director or any other officer authorised by him in this behalf shall forthwith take the possession of the
property attached under section 5 or frozen under sub-section (lA) of section 17, in such manner as
may be prescribed. Accordingly , the Director is to file a petition with the Adjudicating Authority within
30 days of attachment. After order of attachment is confirmed, the Director take possession of the
attached property.

31. (b) Mr. 'B' purchased a flat out of the proceeds earned by Drug Trafficking. The flat was attached by
the Director, Enforcement Directorate after complying the procedures under Section 5 of the
Prevention of Money Laundering Act, 2002. Mr. ‘B' got a stay from the High Court for any proceedings
under the said Act. The stay was subsequently vacated.
State the relevant provisions of the PMLA, 2002 for computing the period of provisional attachment
including extension, if any.
Whether Mr. 'C', son of Mr. 'B' can occupy the flat during the period of provisional attachment?
(6 Marks) (mtp-NOV 2020)

ANSWER

According to section 5 of the Prevention of Money Laundering Act, 2002, where the Director or any other
officer (not below the rank of Deputy Director authorised by the Director), has reason to believe (the
reason for such belief to be recorded in writing), on the basis of material in his possession, that—
(a) any person is in possession of any proceeds of crime; and
(b) such proceeds of crime are likely to be concealed, transferred or dealt with in any manner which may
result in frustrating any proceedings relating to confiscation of such proceeds of crime under this Chapter,
he may, by order in writing, provisionally attach such property for a period not exceeding 180 days from
the date of the order, in such manner as may be prescribed.
Provided further that, any property of any person may be attached under this section if the Director or
any other officer not below the rank of Deputy Director authorised by him has reason to believe (the
reasons for such belief to be recorded in writing), on the basis of material in his possession, that if such
property involved in money-laundering is not attached immediately under this Chapter, the non-
attachment of the property is likely to frustrate any proceeding under this Act.
Computation of period of attachment: Provided also that for the purposes of computing the period of 180
days, the period during which the proceedings under this section is stayed by the High Court, shall be
excluded and a further period not exceeding 30 days from the date of order of vacation of such stay order
shall be counted.
No effect on the right to enjoy the property: This section shall not prevent the person interested in the
enjoyment of the immovable property attached from such enjoyment.

Page No. 394

Here, “person interested”, in relation to any immovable property, includes all persons claiming or entitled
to claim any interest in the property.
In the given case, Mr. C, son of Mr. B can occupy the flat during the period of provisional attachment if he
claims to have any interest in the said property.

32. The Adjudicating Authority appointed under the Prevention of Money Laundering Act, 2002 issued
an order attaching certain properties of XYZ Limited alleged to be involved in money laundering for a
specified period. The company aggrieved by the order of the Adjudicating Authority seeks your advice
about the remedy that is available under the Act. Advise explaining the relevant provisions of the
Prevention of Money Laundering Act, 2002.
(3 Marks) (RTP MAY 2019) (mtp-NOV 2020)

ANSWER

Establishment of Appellate Tribunal

According to section 25 of the Prevention of Money Laundering Act, 2002, the Appellate Tribunal
constituted under sub-section (1) of section 12 of the Smugglers and Foreign Exchange Manipulators
(Forfeiture of Property) Act, 1976 shall be the Appellate Tribunal for hearing appeals against the orders of
the Adjudicating Authority and the other authorities under this Act.
Appeals to Appellate Tribunal
Section 26 deals with the right and time frame to make an appeal to the Appellate Tribunal. The Director
or any person aggrieved by an order made by the Adjudicating Authority under this Act may prefer an
appeal to the Appellate Tribunal.
The appeal shall be filed within a period of 45 days from the date on which a copy of the order made by
the Adjudicating Authority is received and it shall be in such form and be accompanied by prescribed fees.
The appeal shall be in such form and be accompanied by such fee as may be prescribed. The Appellate
Tribunal may extend the period if it is satisfied that there was sufficient cause for not filing it within the
period of 45 days

The Appellate Tribunal may after giving the parties to the appeal an opportunity of being heard, pass such
order as it thinks fit, confirming, modifying or setting aside the order appealed against.
Appeals to High Court
The Act also provides further appeal. According to Section 42 any person aggrieved by any decision or
order of the Appellate Tribunal may file an appeal to the High Court within 60 days from the date of
communication of the order of the Appellate Tribunal.
In the light of the provisions of the Act explained above the company is advised to prefer an appeal to
Appellate Tribunal in the first instance

33. Three Companies belong to Gopal group based out of Bengaluru. Each of the three companies are
into businesses as under:

Company A Chit Funds

Company B Housing Finance
Company C Payment System
Operator

Page No. 395

In the light of the relevant provisions of the Prevention of Money Laundering Act, 2002, examine the
following:

(i) Who is a "beneficial owner" under the Prevention of Money Laundering Act, 2002?

(ii) Whether each of the above businesses fall within the definition of "Financial Institution"?

(iii) What are the obligations of a financial institution regarding maintenance of records?

(iv) Whether a Civil Court have jurisdiction to entertain any suit or proceeding in respect of any matter
which the Appellate Tribunal is empowered by or under this Act?

(v) Can an injunction be granted by any Court or other Authority in respect of any action taken or to be
taken in pursuance of any power conferred on the Appellate Tribunal?

(6 Marks) (Past exam nov 2020)

(b) (i) “Beneficial owner” means an individual who ultimately owns or controls a client of a reporting
entity or the person on whose behalf a transaction is being conducted and includes a person who
exercises ultimate effective control over a juridical person. As in the given case, Company A, Company B,
and Company C belongs to Gopal Group, who exercises ultimate control over them, therefore, Gopal
Group is the Beneficial owner.

(ii) “Financial institution” means a financial institution as defined in clause (c) of section 45 I of the
Reserve Bank of India Act, 1934 and includes a chit fund company, a housing finance institution, an
authorised person, a payment system operator, a non-banking financial company and the Department of
Posts in the Government of India.
In the instant case, Company A, Company B and Company C falls within the definition of “Financial
Institution” conducting the business of chit fund, housing finance institution, payment system operator
respectively.

(iii) Section 12 of the Prevention of Money Laundering Act, 2002 provides for the obligation of Banking
Companies, Financial Institutions and Intermediaries i.e. the reporting entity to maintain records of
transactions.

Maintenance of records: According to sub-section 12 (1), every reporting entity shall–

• maintain a record of all transactions, including information relating to transactions (mentioned in next
point) in such manner as to enable it to reconstruct individual transactions;

• furnish to the Director information relating to such transactions, whether attempted or executed, the
nature and of value;

• maintain record of documents evidencing identity of its clients and beneficial owners as well as account
files and business correspondence relating to its clients.

Page No. 396

(iv) Civil court not to have jurisdiction [Section 41]
No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which the
Director, an Adjudicating Authority or the Appellate Tribunal is empowered by or under this Act to
determine.

(v) Injunction: No injunction shall be granted by any court or other authority in respect of any action
taken or to be taken in pursuance of any power conferred by or under this Act on the Appellant Tribunal.

34. In the case, the Director, on the basis of information in his possession, has reason to believe that
Mr. X, is in possession of proceeds of crime involved in money-laundering. He authorised Mr. Y, officer
subordinate to him to seize property found as a result of such search. Mr. Y seized the said property on
10.2.2020 and filed an application requesting for retention of such property seized before Adjudicating
Authority. Enumerate the law as regards the retention of the seized property and Compute the time
period for retention of such seized property by Mr. Y. (6 Marks) (mtp-I- july 2021)

ANSWER

Retention of seized property

As per section 20 of the Prevention of Money Laundering Act, 2002 [PMLA], property seized under section
17 or 18 of the Prevention of Money Laundering Act or frozen under section 17(1A) of the Prevention of
Money Laundering Act can be retained by authorised officer, if he has reason to believe that such
property is required to be retained for adjudication under section 8 of Prevention of Money Laundering
Act .The property can be retained for a period of 180 days from day on which the asset was seized or
frozen. Details of property seized or frozen have to be informed to Adjudicating Authority in prescribed
manner.
The seized property is required to be returned to person from whom it was seized after 180 days, unless
Adjudicating Authority permits retention of property beyond this period.

Time period for retention of such seized property : As per section 17(4) of the PMLA, 2002, the authority
seizing any record or property under sub-section (1) or freezing any record or property under sub-section
(1A) shall, within a period of thirty days from such seizure or freezing, as the case may be, file an
application, requesting for retention of such record or property seized under sub-section (1) or for
continuation of the order of freezing served under sub-section (1A), before the Adjudicating Authority.
As Mr. Y seized the property of Mr. X on 10.2.2020. He can file an application requesting for retention of
such property seized before Adjudicating Authority latest by 13th March, 2020.

35. State on the nature of liability caused on an offence committed under the Prevention of Money
Laundering Act, 2002. (3 Marks) (mtp-I- july 2021)

ANSWER

Money Laundering basically is knowingly dealing with proceeds of crime, directly or indirectly. The Act
provides both for civil and criminal liability.

Criminal liability under the Prevention of Money Laundering Act

Page No. 397

Crime which results in tainted money is a separate offence under various laws as specified in Schedule to
Prevention of Money Laundering Act. These offences are punishable under those Acts. The punishment is
to the person/s who is/are involved in actually committing that offence.
The offence as specified in section 4 of the Prevention of Money Laundering Act is a separate offence. The
punishment under section 4 of Prevention of Money Laundering Act is not only to those who are actually
involved in dealing with tainted money but also on those who are knowingly involved, directly or
indirectly, in dealing with proceeds of crime.
This is a criminal offence, which will be tried by special courts designated for this purpose under section
2(z) of the Prevention of Money Laundering Act. The trial will be both for charges under the specific Act
which is a crime and also offence of money laundering under Prevention of Money Laundering Act.
However, it is not 'joint trial'.

Civil Liability i.e. confiscation of tainted property

In addition to criminal liability, the property involved in money laundering can be attached and frozen by
Central Government and later confiscated.

36. Mr. Ramnik purchased a property out of an unaccounted money in the joint name of his wife and
son. On complaint, Adjudicating Authority, served a notice to seek information regard the sources of
income and other particulars. State as per the PMLA, 2002, to whom notice may be served by the
Adjudicating Authority:

a) Mr. Ramnik

(b) Mr. Ramnik’s wife

(c) Mr. Ramnik’s son

(d) To all the three i.e., Mr. Ramnik, his wife and son. (1 Mark) (mtp-II- july 2021)

ANSWER- d

37. Based on the provisions of the PMLA,2002, analyse with reasons, the contentions of the
Adjudicating Authority with regard to the following:
(a) Whether interest created in a property prior to event of money laundering leading up to the
attachment of property, takes priority over the attachment? (mtp-II- july 2021)

ANSWER

As per Section 5(4) of the Prevention of Money Laundering Act, 2002, nothing in this section shall prevent
the person interested in the enjoyment of the immovable property attached under Section 5(1) from such
enjoyment.
“Person interested”, in relation to any immovable property, includes all persons claiming or entitled to
claim any interest in the property.
Accordingly, an order of attachment under money laundering Act is not said to be illegal merely because a
person interested (i.e., third party) had a prior interest in such property and further issuance of an order
of attachment under PML Act cannot, by itself, render illegal the prior statutory right of a person
interested in attached property.

Page No. 398

Therefore, interest created in a property prior to attachment of property, takes priority over attachment.

38. Whether a mere nexus between the attached property where it did not qualify as "proceeds of
crime" under the PMLA and the party accused of money laundering was sufficient for the attachment
to take place? (6 Marks) (mtp-II- july 2021)
ANSWER

According to Section 5 of the Prevention of Money Laundering Act, 2002, where the Director or any other
officer for the purposes of this section, has reason to believe, on the basis of material in his possession,
that—
(a) any person is in possession of any proceeds of crime; and
(b) such proceeds of crime are likely to be concealed, transferred or dealt with in any manner which may
result in frustrating any proceedings relating to confiscation of such proceeds of crime under this Chapter,
he may, by order in writing, provisionally attach such property for a period not exceeding one hundred
and eighty days from the date of the order, in such manner as may be prescribed.
Hence, it is necessary that the attached property should qualify as ‘proceeds of crime’.
However, mere nexus between the attached property whether it qualify as a proceeds of crime / not, the
party accused of money laundering, is sufficient for the attachment of such property to take place

39. Discuss the jurisdiction for the nature of offences triable by the special court under the Prevention
of Money Laundering Act. What will be the consequences, if the court which has taken cognizance of
the scheduled offence, is other than the offence of money laundering on which Special Court has taken
cognizance upon a complaint made by an authority. (3 Marks) (mtp-II- july 2021)

ANSWER

Section 44 of the Prevention of Money Laundering states that an offence punishable under section 4 and
any scheduled offence connected to the offence under that section shall be triable by the Special Court
constituted for the area in which the offence has been committed A Special Court while trying the
scheduled offence or the offence of money-laundering shall hold trial in accordance with the provisions of
the Code of Criminal Procedure, 1973, as it applies to a trial before a Court of Session.
Further , as per clause (c) of section 44 of the PMLA, if the court which has taken cognizance of the
scheduled offence is other than the Special Court which has taken cognizance of the complaint of the
offence of money-laundering , it shall, on an application by the authority authorised to file a complaint
under this Act, commit the case relating to the scheduled offence to the Special Court and the Special
Court shall, on receipt of such case proceed to deal with it from the stage at which it is committed.

40. The Adjudicating Authority under the Prevention of Money Laundering Act, 2002 (the Act) made an
order under Section 8(3), confirming the provisional attachment of property made under Section 5(1) of
the said Act. Mr. Rana, owner of the attached property, aggrieved by the order, wanted to make an
appeal to the Appellate Tribunal. However, before making an appeal Mr. Rana is adjudicated as an
insolvent. Explain, with reference to the relevant provisions of the said Act, whether appeal could be
made to Appellate Tribunal in the present case? (3 Marks)
(past exam nov 2020)
ANSWER

Continuation of proceedings in the event of death or insolvency [Section 72 of PMLA, 2002]

Page No. 399
Where-
(a) any property of a person has been attached under section 8 and no appeal against the order attaching
such property has been preferred; or
(b) any appeal has been preferred to the Appellate Tribunal, and-
(i) in a case referred to in clause (a), such person dies or is adjudicated an insolvent before preferring an
appeal to the Appellate Tribunal; or

(ii) in a case referred to in clause (b), such person dies or is adjudicated an insolvent during the pendency
of the appeal,
then, it shall be lawful for the legal representatives of such person or the official assignee or the official
receiver, as the case may be, to prefer an appeal to the Appellate Tribunal or as the case may be, to
continue the appeal before the Appellate Tribunal, in place of such person and the provisions of section
26 shall, so far as may be, apply, or continue to apply, to such appeal.

Hence, in the instant case, the appeal can be made to the Appellate Tribunal by the official assignee or
the official receiver of Mr. Rana.

41. By means of an order in writing, the Adjudicating Authority (AA) appointed under the Prevention of
Money Laundering Act, 2002, attached certain properties under Section 8 of the Act belonging to Mr.
AAA alleged to be involved in money laundering. Aggrieved by the order of the AA, Mr. AAA preferred
an appeal before the Appellate Tribunal (AT). Subsequently, after proper hearing, an order was passed
by the AT upholding the decision of the AA. Aggrieved by the order of the AT, Mr. AAA preferred a
further appeal before the Honorable High Court. During the pendency of the appeal before the High
Court, unfortunately, Mr. AAA dies. In the light of the provisions of the Prevention of Money
Laundering Act, 2002 :

(i) What is the time limit for preferring an appeal before the High Court against the order of the AT ?

(ii) By how many days an extension of time can be sought if the appellant was prevented by sufficient
cause from filing the appeal within the said period ?

(iii) On the death of Mr. AAA can the appeal be further continued in the High Court? If so, by whom?

(iv) What will be the position if Mr. AAA dies before appeal has been preferred in the Honorable High
Court ?

(v) What shall be the jurisdiction of the High Court, if the Central Government is the aggrieved party? (6
Marks) (past exam jan 2021)

ANSWER

(i) According to Section 42 of the Prevention of Money Laundering Act, 2002, a person aggrieved by any
order of the Appellate Tribunal can file an appeal to the High Court within 60 days from the date of
communication of the order on question of law/fact.

Page No. 400

(ii) The High Court, if satisfied that the appellant was prevented by sufficient cause from filing the appeal
within the said period, it can allow filing of appeal within a further period not exceeding sixty days.

(iii) On the death of Mr. AAA, the appeal filed with High Court can be continued even after the death of
Mr. AAA by legal representatives of Mr. AAA. [Section 72(2)]
(iv) In case Mr. AAA dies before filing an appeal with High Court, it shall be lawful for the legal
representative of Mr. AAA to prefer an appeal with High Court. [Section 72(2)]

(v) Where the Central Government is the aggrieved party, the High Court within the jurisdiction of which
the respondent, or in a case where there are more than one respondent, any of the respondents,
ordinarily resides or carries on business or personally works for gain shall be the jurisdiction. [Section 42]

42. Bharat Sevak, an NGO granted a certificate of registration to receive foreign contribution in terms of
the provisions of the Foreign Contribution (Regulation) Act, 2010. The organization intends to invest
some of the contribution amount in some mutual funds, which is projected to give good results and
thereby strengthening the financial position of the organization. Bharat Sevak is also planning to defray
around 65% of the amount of foreign contribution received towards administrative expenses. Advise
the organization in the light of the provisions of the Foreign Contribution (Regulation) Act, 2010,
whether it can give effect to the above two proposals. (3 Marks) (past exam jan 2021)
ANSWER

Restriction to utilize foreign contribution for administrative purpose [Section 8 of Foreign Contribution
(Regulation) Act, 2010 read with Rule 4 of FCR, Rule 2011]

Every person, who is registered and granted a certificate or given prior permission under this Act and
receives any foreign contribution, shall—

(a) utilise such contribution for the purposes for which the contribution has been received:
Provided that any foreign contribution or any income arising out of it shall not be used for speculative
business;

(b) not defray such sum, exceeding fifty per cent of such contribution, received in a financial year, to meet
administrative expenses:
Provided that administrative expenses exceeding fifty per cent of such contribution may be defrayed with
prior approval of the Central Government.

(i) In the instant case, Bharat Sevak intends to invest some foreign contribution in mutual fund which is a
speculative activity under Rule 4 of FCR, Rule 2011. Thus, Bharat Sevak cannot give effect to this proposal.

(ii) Bharat Sevak is planning to defray around 65% of the amount towards administrative expenses. This
proposal is also not valid as it is exceeding 50% of contribution. But this proposal can be given effect if
prior approval of Central Government has been taken.

43. SSG Bank Limited has recently started its operations. The bank approached you for your advice
regarding the maintenance of records as a reporting entity in terms of the provisions of the Prevention

Page No. 401

of Money Laundering Act, 2002. Referring to and analyzing the relevant provisions of the Prevention of
Money Laundering Act, 2002, advice the Bank. (3 Marks) (past exam jan 2021)
ANSWER

Section 12 of the Prevention of Money Laundering Act, 2002, provides for the obligation of Banking
Companies, Financial Institutions and Intermediaries i.e. the reporting entity to maintain records of
transactions. SSG Bank Limited have been advised to maintain records in the compliance to said section.
Accordingly, every reporting entity shall –

(i) maintain a record of all transactions, including information relating to transactions covered under point
(ii) below, in such manner as to enable it to reconstruct individual transactions. Here records shall be
maintained for a period of five years from the date of transaction between a client and the reporting
entity.

(ii) furnish to the Director within such time as may be prescribed, information relating to such
transactions, whether attempted or executed, the nature and value of which may be prescribed;

(iii) maintain record of documents evidencing identity of its clients and beneficial owners as well as
account files and business correspondence relating to its clients. The records here shall be maintained for
a period of five years after the business relationship between a client and the reporting entity has ended
or the account has been closed, whichever is later.

44. Comment upon nature of offence committed under the Prevention of Money Laundering Act? In the
case, a spouse sold their property in 175 lakh to Mr. Y. In lieu of the sale, they obtained amount 100
lakh through RTGS in his account and rest amount of 75 lakh in cash which he transferred to wife’s
offshore bank account . Examine the liability of the spouse in the given case in the light of the PMLA,
2002. Also state whether they will be liable to be released on bail. ( RTP JULY 2021)

ANSWER

Nature of offence committed under the Act: Section 45 of the PMLA, 2002, provides that the offences
under the Act shall be cognizable and non-bailable. Person accused of an offence under this Act shall not
be released on bail or on his own bond unless-
(i) The Public Prosecutor has been given an opportunity to oppose the application for such release, and
(ii) Where the Public Prosecutor opposes the application, the court is satisfied that there are reasonable
grounds for believing that he is not guilty of such offence and that he is not likely to commit any offence
while on bail.
Exceptions: In case of any person who is under the age of 16 years or in case of a woman or in case of a
sick or infirm or is accused either on his own or along with other co-accused of money-laundering a sum
of less than one crore rupees, may be released on bail, if the Special Court so directs.
As per the said section the spouse, are liable for commission of an offence of money laundering by
transferring an unaccounted money obtained through sale of their property to an offshore bank account
of his wife with an intent to evade tax. As the husband and his wife, i.e., the spouse jointly acted in the
commission of the act of money-laundering of a sum less than one crore rupees, so both the Husband and
wife, are falling under the exception. Therefore, they shall be released on bail, if the Special Court so
directs

Page No. 402

45. Proceedings under the Prevention of Money Laundering Act, 2002 were initiated against Mr. Suraj.
Through an order, property of Mr. Suraj has been attached under section 8. Mr. Suraj Preferred an
appeal to the Appellate Tribunal. Mr. Suraj is adjudicated an insolvent during the pendency of the
appeal. What will happen to the proceedings initiated under PMLA in the given case? (RTP JULY 2021)

(a) Proceedings will be dispensed with

(b) His legal representatives will continue proceedings before the Appellate Tribunal

(c) The official assignee or the official receiver, as the case may be, continue the appeal before the
Appellate Tribunal.

(d) Creditors will continue the proceedings before the Appellate Tribunal

ANSWER- c

46. Sudip of Jaipur was posted as Tehsildar in a Tehsil Headquarter near Jaipur. After a year of his
joining he purchased a ready built house in Jaipur in the name of his wife. He ostensibly shown the
business income of his wife and availed loan of 90% of the value of house from a bank and also gave a
guarantee of house loan.
The Bank in this case, did not ensured the business activity of his wife, (address of business place,
Income tax Return filed, how long she is doing business etc.) and solely relying that Sudip is giving the
guarantee, it sanctioned the loan.
After availing the loan, he continued to deposit some amount in the house loan account of his wife,
regularly (apart from the EMI) and within a year, liquidated the loan account. One of the employee in
his office made compliant to ED of taking of bribe/commission by him on regular basis and so
liquidating the account in just a year.
Examine whether Sudip was involved in the money laundering activity in the light of the given facts.
(RTP NOV 2021)

ANSWER

As per the Section 3 of the Prevention of Money Laundering Act -

Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is
actually involved in any process or activity connected with the proceeds of crime including its
concealment, possession, acquisition or use and projecting or claiming it as untainted property shall be
guilty of offence of money-laundering.
The process or activity connected with proceeds of crime is a continuing activity and continues till such
time a person is directly or indirectly enjoying the proceeds of crime by its concealment or possession or
acquisition or use or projecting it as untainted property or claiming it as untainted property in any
manner whatsoever.
Section 2(1)(u) “proceeds of crime” means any property derived or obtained, directly or indirectly, by any
person as a result of criminal activity relating to a scheduled offence or the value of any such property or
where such property is taken or held outside the country, then the property equivalent in value held
within the country or abroad;
Section 2(1)(y) of the PML Act provides that –
“scheduled offence” means— (i) the offences specified under Part A of the Schedule;

Page No. 403

Under Schedule -Part A - Paragraph 8: Offences under the Prevention of Corruption Act, 1988 specifies
Section 7- Offence relating to public servant being bribed.
In the light of the above mentioned sections, act of Sudip is a case of money laundering i.e. converting of
black income earned through bribe and efforts in converting it into white money and raising the house
loan in the name of wife.

47. (ICAI ADDITIONAL QUESTION FOR PRACTICE)

What are the possible actions which can be taken against persons / properties involved in Money
Laundering?

ANSWER

Following actions can be taken against the persons involved in Money Laundering:-
(a) Attachment of property under Section 5, seizure/ freezing of property and records under Section 17 or
Section 18. Property also includes property of any kind used in the commission of an offence under PMLA,
2002 or any of the scheduled offences.
(b) Persons found guilty of an offence of Money Laundering are punishable with imprisonment for a term
which shall not be less than three years but may extend up to seven years and shall also be liable to fine
[Section 4].
(c) When the scheduled offence committed is under the Narcotics and Psychotropic substances Act, 1985
the punishment shall be imprisonment for a term which shall not be less than three years but which may
extend up to ten years and shall also be liable to fine.
(d) The prosecution or conviction of any legal juridical person is not contingent on the prosecution or
conviction of any individual

Page No. 404

 16 The Foreign Contribution Regulation Act, 2010

ATTEMPTS
MAY NOV MAY NOV NOV JAN JULY NOV
COVERAGE
2018 2018 2019 2019 2020 2021 2021 2021

STUDY Q.- 4, 15, 16, 17, 18, 19, 20, 21, 23, 24, 25, 26
MAT

PAST NO NO
Q-5 Q-8 Q-12 Q-28 ------
EXAMS QUES QUES

MTP Q-2 Q-3, 7 Q-1, 9 Q-2, 13 NO QUES Q-27 -----

NO
RTP Q-6 Q-10, 19 Q-11 Q-14, 22 Q-29 Q-30, 31
QUES

Page No. 405

Multiple Choice Questions
1.MTP Mar 2019 Qn no 4

Surya Ltd., incorporated and registered in New Delhi with a foreign shareholding more than 50% due to
liberalisation in Foreign Direct Investment (FDI) policy. State the correct statement as to the status
of the Surya Ltd.

(a) Surya limited shall not considered as foreign source because of its registration in India.
(b) Surya Ltd would be ‘foreign source’ have foreign shareholding more than 50% of foreign
company.
(c) Surya Ltd would be ‘foreign source’ have foreign contribution through various international
agencies.
(d) Both (b) & (c)

Answer: Option B

Descriptive Questions
2.March 2018 Qn no 2(d) (i) 3 Marks:, (MTP-NOV 2019)

Examine the given situations in the light of the legal provisions covered in the relevant Acts:

Mr. Indian received foreign contribution of amount 1.10 lakh from his relative residing abroad.
Examine whether foreign remittances received by Mr. Indian to be treated as foreign contribution as
per the FCRA, 2010.

Answer:

No. As per Section 4(e) of FCRA, 2010 read with Rule 6 of FCRR, 2011, even the persons prohibited
under section 3, i.e., persons not permitted to accept foreign contribution, are allowed to accept
foreign contribution from their relatives. However, in terms of Rule 6 of FCRR, 2011, any person
receiving foreign contribution in excess of one lakh rupees or equivalent thereto in a financial year from
any of his relatives shall inform the Central Government in prescribed Form within thirty days from the
date of receipt of such contribution.

So Mr. Indian shall inform the Central Government of his receiving of the foreign contribution of 1.10
lakh from his relative due to receiving of foreign contribution in excess of 1 lakh rupees.

3.Aug 2018 Qn no 6(e) 3 Marks:

List the restrictions marked for the grant of the registration and grant of prior permission for
acceptance of foreign contribution according to FCRA, 2010.

Answer:

In terms of Sec.12 (4) of FCRA, 2010, the following restrictions/conditions have been marked for the
grant of registration and prior permission for acceptance of foreign contribution:

Page No. 406

The 'person' making an application for registration or grant of prior permission-
i. is not fictitious or benami;
ii. has not been prosecuted or convicted in activities aimed at conversion from one religious faith to
another;
iii. has not been prosecuted or convicted for creating communal tension / disharmony
iv. has not been found guilty of diversion or mis-utilisation of its funds;
v. is not engaged or likely to engage in propagation of sedition or violent methods to achieve its
ends;
vi. is not likely to use the foreign contribution for personal gains or divert it for undesirable purposes;
vii. has not contravened any of the provisions of this Act;
viii. has not been prohibited from accepting foreign contribution;
ix. the person being an individual, neither been convicted nor any prosecution for any offence is
pending against him.
x. the person being other than an individual, any of its directors or office bearers has neither been
convicted nor any prosecution for any offence is pending against him.

4.(i) Discuss whether foreign remittances received from a relative are to be treated as foreign
contribution as per the FCRA, 2010?

(ii) In the light of the Foreign contribution Regulation Act, 2010, discuss whether foreign contribution be
received in and utilised from multiple Bank Accounts?
Answer
(i) No. As per Section 4(e) of the Foreign Contribution Regulation Act, 2010 and Rule 6 of Foreign
Contribution Regulation Rules, 2011, even the persons prohibited under section 3, i.e., persons not
permitted to accept foreign contribution, are allowed to accept foreign contribution from their
relatives. However, in terms of Rule 6 of Foreign Contribution Regulation Rules, 2011, any person
receiving foreign contribution in excess of one lakh rupees or equivalent thereto in a financial year from
any of his relatives shall inform the Central Government in prescribed Form within thirty days from the
date of receipt of such contribution.

(ii) The foreign contribution should be received only in the exclusive single foreign contribution account of
a Bank (also called designated FC account), as mentioned in the order for registration or prior permission
granted and should be separately
maintained by the associations. However, one or more accounts (called Utilization Account) in one or
more banks may be opened by the association for ‘utilising’ the foreign contribution after it has been
received in the designated FCRA bank account, provided that no funds other than that foreign
contribution shall be received or deposited in such account or accounts and in all such cases, intimation is
to be given online within 15 days of opening of such account.

Nov 2018 Qn no 2(d) 6 Marks:

5. An Association registered under the Foreign Contribution (Regulation) Act, 2010 (the Act) received
donation from a club registered in Singapore. The Association proposes:

Page No. 407

(a) To transfer 10% of the donation to "Home for Aged Society", an unregistered person and 15% to
"Welfare Club" a registered person under the Act,
(b) To invest portion of the donation in Chits promising high returns.

5.In the light of provisions of the Foreign Contribution (Regulation) Act, 2010 decide whether the
Association can carryout the above proposals and if so state the procedures to be followed under
the said Act?

Answer:

(i) According to Section 7 of the Foreign Contribution (Regulation) Act, 2010, a person who is
registered and granted a certificate and receives any foreign contribution, shall not transfer such
foreign contribution to any other person unless such other person is also registered and had been
granted the certificate or obtained the prior permission under this Act.

However, that such person may transfer, with the prior approval of the Central Government, a part of
such foreign contribution to any other person who has not been granted a certificate or obtained
permission to an extent not exceeding ten per cent of the total value thereof and for this purpose, make
an application to the Central Government in prescribed Form. [Read with Rule 24 of FCRR, 2011]
In the instant case, the association can transfer 10% of the donation to “Home for Aged Society” an
unregistered person after making an application to the Central Government in prescribed form and can
also transfer 15% to “Welfare Club” a registered person under the Act.
(ii) According to proviso to Section 8 of the FCRA, 2010 any foreign contribution shall not be used for
speculative business.
Speculative activities have been defined in Rule 4 of FCRR, 2011 as under:-

(a) any activity or investment that has an element of risk of appreciation or depreciation of the original
investment, linked to market forces, including investment in mutual funds or in shares;
(b) participation in any scheme that promises high returns like investment in chits or land or similar
assets not directly linked to the declared aims and objectives of the organization or association.
In the instant case, the association cannot invest portion of the donation in Chits promising high
returns.

6.RTP Nov-18:
Mr. Peter, a Member of the Legislature in India, visited Sydney, Australia to attend World Trade
Conference as a representative of Government of India after obtaining due permission of the Central
Government as per the provisions of Foreign Contribution (Regulation) Act, 2010. His expenditure on
foreign travel was borne by Bret Lee Limited, a foreign company. While attending the conference, Mr.
Peter suddenly encountered chest pain and he was immediately admitted in the nearby hospital for
medical care and treatment. The medical expenses of Rs. 2,00,000/- was borne by Bret Lee Limited.
Mr. Peter seeks your advice about the procedure to be followed in the above situation under the
provisions of Foreign Contribution (Regulation) Act, 2010. Please advise suitably.

Answer:

Page No. 408

Section 6 of the Foreign Contribution (Regulation) Act, 2010 prescribes that no member of a Legislature
shall while visiting any country accept, except with the prior permission of the Central Government for
any foreign hospitality. Foreign Hospitality [as per section 2(m)]

means any offer not being a purely casual one, made in cash or kind by a foreign source for providing a
person with the costs of travel to any foreign country with free boarding lodging or medical treatment.
Therefore, prior approval is required from Central Government for the medical expenses. Provided that
it shall not be necessary to obtain any such permission for an emergent medical aid needed on account
of sudden illness contracted during a visit outside India, but where such foreign hospitality has been
received, the person receiving such hospitality shall give, within one month from the date of receipt of
such hospitality an intimation to the Central Government as to the receipt of such hospitality, and the
source from which and the manner in which such hospitality was received by him.
As per Rule 7 of Foreign Contribution (Regulation) 2011, foreign hospitality may be received by member
of Legislature in the following manner.

In case of emergent medical aid needed on account of sudden illness during a visit abroad, the
acceptance of foreign hospitality shall be required to be intimated to the Central Government within
One Month of such receipt giving full details including the source, approximate value in Indian Rupees,
and the purpose for which and the manner in which it was utilized.
Hence, Mr. Peter has to follow the above procedure.

7.Oct 2018 Qn no 2(d) 6 Marks:

Mr. Peter, a Member of the Legislature in India, visited Sydney, Australia to attend World Trade
Conference as a representative of Government of India after obtaining due permission of the Central
Government as per the provisions of Foreign Contributors (Regulation) Act, 2010. His expenditure on
foreign travel was borne by Bret Lee Limited, a foreign company. While attending the conference, Mr.
Peter suddenly encountered chest pain and he was immediately admitted in the nearby hospital for
medical care and treatment. The medical expenses of Rs. 2,00,000/ - was borne by Bret Lee Limited.
Mr. Peter seeks your advice about the procedure to be followed in the above situation under the
provisions of Foreign Contribution (Regulation) Act, 2010. Please advise suitably.
Answer:
Section 6 of the Foreign Contribution (Regulation) Act, 2010 prescribes that no member of a Legislature
shall while visiting any country accept, except with the prior permission of the Centr al Government for
any foreign hospitality. Foreign Hospitality [as per section 2(m)] means any offer not being a purely
casual one, made in cash or kind by a foreign source for providing a person with the costs of travel to
any foreign country with free boarding lodging or medical treatment. Therefore, prior approval is
required from Central Government for the medical expenses. Provided that it shall not be necessary to
obtain any such permission for an emergent medical aid needed on account of sudden illness
contracted during a visit outside India, but where such foreign hospitality has been received, the
person receiving such hospitality shall give, within one month from the date of receipt of such
hospitality an intimation to the Central Government as to the receipt of such hospitality, and the source
from which and the manner in which such hospitality was received by him.

As per Rule 7 of Foreign Contribution (Regulation) 2011, foreign hospitality may be received by member
of Legislature in the following manner.
Page No. 409
In case of emergent medical aid needed on account of sudden illness during a visit abroad, the
acceptance of foreign hospitality shall be required to be intimated to the Central Government within one
month of such receipt giving full details including the source, approximate value in Indian Rupees, and
the purpose for which and the manner in which it was utilized.
Hence, Mr. Peter has to follow the above procedure.

8.May 2019 Qn no 4(b) 6 Marks:

After giving a reasonable opportunity of being heard, Central Government cancelled the certification of
registration of Toastea Ltd, a company registered under FCRA on the ground of public interest 2.5
years have passed since such cancellation.

Company has submitted its written declaration not to involve in such activity again and request to
restore the registration. Advise Toastea Ltd. on its eligibility for re-registration or grant of prior
permission. Also state the circumstance under which Government can cancel the certificate of
registration granted to a person under the Foreign Contribution (Regulation) Act, 2010.

Answer:

Restoration of Registration: As per section 14(3) of the Foreign Contribution (Regulation) Act, 2010, any
person whose certificate has been cancelled under this section shall not be eligible for registration or
grant of prior permission for a period of three years from the date of cancellation of such certificate.

In the instant case, Toastea Ltd. is not eligible for re-registration or grant of prior permission as only 2.5
years have passed since such cancellation. So, requirement of 3 years of cooling period from the date of
cancellation of such certificate for re-registration is not complied with.
Circumstances for cancellation of certificate of registration [Section 14(1) of the Foreign Contribution
(Regulation) Act, 2010]

(i) The Central Government may, by an order, cancel the certificate if —

(a) the holder of the certificate has made a statement in, or in relation to, the application for the
grant of registration or renewal thereof, which is incorrect or false; or
(b) the holder of the certificate has violated any of the terms and conditions of the certificate or
renewal thereof; or
(c) in the opinion of the Central Government, it is necessary in the public interest to cancel the
certificate; or
(d) the holder of certificate has violated any of the provisions of this Act or rules or order made
there under; or
(e) if the holder of the certificate has not been engaged in any reasonable activity in its chosen
field for the benefit of the society for two consecutive years or has become defunct.

9.MTP Mar 2019 Qn no 4(b) 6 Marks

A foreign co., Srikripa Ltd. established by few Indians in Singapore. Being a strong believer of Sai, the
management of the company used to donate a huge amount to the sai trust, in Mumbai, India.
Page No. 410
Enumerate in the given situation whether the donation so made by Srikripa Ltd. is a foreign
contribution. Is the acceptance of such donation by the Sai trust is valid

Answer
As per the definition of Foreign Contribution given in section 2(1)(h) of FCRA, 2010, “Foreign contribution”
means the donation, delivery or transfer made by any foreign source,—

(i) of any article, (except given as a gift for personal use), if the market value, in India, of such
article, on the date of such gift, is not more than such sum as may be specified from time
to time, by the Central Government by the rules made by it in this behalf;
(ii) of any currency, whether Indian or foreign;
(iii) security and includes any foreign security under the Foreign Exchange Management Act,
1999.
As per explanation to the section, a donation, delivery or transfer of any article, currency or foreign
security referred to in this clause by any person who has received it from any foreign source, either
directly or through one or more persons, shall also be deemed to be foreign contribution within the
meaning of this clause.
Whereas the foreign source as per the definition given in section 2(j) of the FCRA includes a foreign
company. Since the Srikripa Ltd. is a foreign company, so donation made by the Srikripa Ltd is a foreign
contribution for the religious and charitable purpose.
Whereas, Sai Trust can accept foreign contribution with prior permission of Central Government, if it is
not registered under the FCRA. But where if the Sai trust is registered under the FCRA, [section 11 of
FCRA, 2010], it may accept the foreign contribution within the limit without seeking prior permission.

10.RTP May 2019 Qn no 19(ii)

X is an association having registration to transfer the Foreign Contribution received by it to another
organization? Is the valid act of X? If yes, then what is the process to do so? Is there any restriction
on transfer of funds to other organisations?
Answer

Yes, X can transfer the Foreign Contribution received by it to another organization as section 7 of FCRA,
2010. According to the provision no person who –

a. is registered and granted a certificate or has obtained prior permission under this Act; and
b. receives any foreign contribution,
shall transfer such foreign contribution to any other person unless such other person is also registered
and had been granted the certificate or obtained the prior permission under this Act:
Provided that such person may transfer, with the prior approval of the Central Government, a part of
such foreign contribution to any other person who has not been granted a certificate or obtained
permission under this Act in accordance with the rules made by the Central Government.”
Restrictions on transfer: Rule 24 of FCRR, 2011, prescribes the procedure for transferring foreign
contribution to any unregistered person as under:
Page No. 411
Limit on transfer of Foreign Contribution: A person who has been granted a certificate of registration or
prior permission under section 11 and intends to transfer part of the foreign contribution received by him
to a person who has not been granted a certificate of registration or prior permission under the Act, may
transfer such foreign contribution to an extent not exceeding ten per cent of the total value thereof and
for this purpose, make an application to the Central Government in the prescribed Form.

Declaration to be annexed : Every application made under sub-rule (1) shall be accompanied by a
declaration to the effect that-

(a) the amount proposed to be transferred during the financial year is less than ten per cent of the total
value of the foreign contribution received by him during the financial year;

(b) the transferor shall not transfer any amount of foreign contribution until the Central Government
approves such transfer.

Eligibility of the recipient A person who has been granted a certificate of registration or prior permission
under section 11 shall not be required to seek the prior approval of the Central Government for
transferring the foreign contribution received by him to another person who has been granted a
certificate of registration or prior permission under the Act provided that the recipient has not been
proceeded against under any of the provisions of the Act.

Responsibility for Proper Utilisation of the foreign Contribution :Both the transferor and the recipient shall
be responsible for ensuring proper utilisation of the foreign contribution so transferred and such transfer
of foreign contribution shall be reflected in the returns in Form FC – 6 to be submitted by both the
transferor and the recipient.

11.RTP Nov 2019 Qn no 15

A foreign company, Max Ltd. was established by few Indians in Singapore. The management of the
company used to donate a huge amount to the religious trust, in Mumbai, India. Enumerate in the
given situation in the light of the Foreign Contribution and Regulation Act, 2010 whether the donation
so made by Max Ltd. is a foreign contribution? Is the acceptance of such donation by the Religious
trust is valid?

Answer

As per the definition of Foreign Contribution given in section 2(1)(h) of FCRA 2010, "Foreign
contribution” means the donation, delivery or transfer made by any foreign source,-

(a) of any article, (except given as a gift for personal use), if the market value, in India, of such article,
on the date of such gift, is not more than such sum as may be specified from time to time, by the
Central Government by the rules made by it in this behalf:
(b) of any currency, whether Indian or foreign; security and includes any foreign security under the
Foreign Exchange Management Act,1999
As per explanation to the section, a donation, delivery or transfer of any article, currency or foreign
security so referred to in this clause by any person who has received it from any foreign source, either
directly or through one or more persons,

Page No. 412

shall also be deemed to be foreign contribution within the meaning of this clause.
Whereas the foreign source as per the definition given in section 2(j) of the FCRA includes a foreign
company. Since the Max Ltd. is a foreign company, so donation made by the Max Ltd is a foreign
contribution for the religious and charitable purpose.
Whereas, Religious Trust can accept foreign contribution with prior permission of Central Government, if
it is not registered under the FCRA But where if the Religious trust is registered under the FCRA [section
11 of FCRA 2010], it may accept the foreign contribution within the limit without seeking prior
permission.

12.Nov 2019 Qn no 5(C) 6 Marks

In the light of the provisions of the Foreign Contribution (Regulation) Act, 2010 examine and decide
whether the following persons in India are permitted to receive the amount/articles in the following
situations:

(i) M/s KG & C; a partnership firm obtained loan from a club registered in London for its business
purpose.
(ii) Hello FM, a registered association, received funds from a foreign company for establishing
Frequency Model Radio Station to broadcast audio news.
Mr. Happy received a wrist watch as marriage anniversary gift from his uncle, a citizen of USA. The
market value of the wrist watch is Rs.25,000.

Answer

(i) As per section 2(j) of the FCRA, 2010, “foreign source” includes a society, club or other association
or individuals formed or registered outside India. Accordingly in the given case, amount (i.e., loan)
received by M/s KG & Co., being a partnership firm not covered under the above provisions, from club
registered in London for its business purpose, is permissible.

(ii) As per section 3 of the FCRA, 2010, no foreign contribution shall be accepted by any association or
company engaged in the production or broadcast of audio news or audio visual news or current affairs
programs through any electronic mode, or any other electronic form as defined in the Information
Technology Act, 2000 or any other mode of mass communication; Accordingly, Hello FM is not
permitted to receive any fund from a foreign company.

(iii) As per the provisions of the Foreign Contribution (Regulation) Act, 2010, “foreign contribution”
means the donation, delivery or transfer made by any foreign source, of any article, not being an article
given to a person as a gift for his personal use, if the market value, in India, of such article, on the date
of such gift, is not more than such sum as may be specified from time to time, by the Central
Government by the rules made by it in this behalf; (This sum has been specified as Rs. 25,000/-
currently). In the given situation, Mr. Happy received the wrist watch (market value Rs. 25,000) as
marriage anniversary gift from his uncle, a citizen of USA. Since, the value of the wrist watch is within
the prescribed limit, hence, Mr. Happy is permitted to receive the article.

13.MTP Nov 2019 Qn no 4(b)(i) 3 Marks

Page No. 413

Mr. Indian received foreign contribution of amount 1.10 lakh from his relative residing abroad. Examine
whether foreign remittances received by Mr. Indian to be treated as foreign contribution as per the
FCRA, 2010.

Answer

No. As per Section 4(e) of FCRA, 2010 read with Rule 6 of FCRR, 2011, even the persons prohibited under
section 3, i.e., persons not permitted to accept foreign contribution, are allowed to accept foreign
contribution from their relatives. However, in terms of Rule 6 of FCRR, 2011, any person receiving
foreign contribution in excess of one lakh rupees or equivalent thereto in a financial year from any of his
relatives shall inform the Central Government in prescribed Form within thirty days from the date of
receipt of such contribution.
So Mr. Indian shall inform the Central Government of his receiving of the foreign contribution of 1.10
lakh from his relative due to receiving of foreign contribution in excess of 1 lakh rupees.

14.RTP May 2020 Question no 15

Bhrat Ltd. is a subsidiary of Global Ltd., which is a MNC registered in Hongkong. The Bhrat Ltd. had
obtained the permission to receive foreign contribution in a designated account in the SBI. Later it
was discovered that the obtained foreign contribution were deposited in other account for its
functioning. Advise on the given situation as to depositing of the amount of foreign contribution from
designated account to any other account. And state the duty of the bank on the said transactions
made?

Answer:

Every person who has been granted a certificate or given prior permission shall receive foreign
contribution in a single account only through such one of the branches of a bank as he may specify in
his application for grant of certificate. However, person may open one or more accounts in one or more
banks for utilising the foreign contribution received by him. No funds other than foreign contribution
shall be received or deposited in such account or accounts.

Every bank or authorised person in foreign exchange shall report to such authority as may be specified —
(a) prescribed amount of foreign remittance;
(b) the source and manner in which the foreign remittance was received; and
(c) other particulars, in such form and manner as may be prescribed.
As per the above stated provisions, Foreign contributions should be received only in the branch of Bank
as specified in the application for grant of registration certificate. If permission is obtained to receive
foreign contribution in a designated account, and depositing the same in other account, is an offence.
However, for utilisation of the funds, one or more banks are permissible [proviso to section 17(1) of
FCRA, 2010].

Obligations of Bank receiving foreign contribution of its customer

Page No. 414

According to Rule 16 of FCR, Rule 2011, the bank shall report to the Central Government within forty-
eight hours any transaction in respect of receipt or utilisation of any foreign contribution by any person
whether or not such person is registered or granted prior permission under the Act.

Study Material
15.As per the FCRA, the restrictions on ‘foreign contribution’ are applicable if the foreign contribution is
from ‘foreign source’. Who among the following are excluded from the purview of foreign source in the
Act-

(a) United nations

(b) World Bank
(c) International monetary Fund
(d) All of the above
Answer: d) Hint: Foreign source includes Foreign Government, international agency (but not UN or its
agencies, World Bank, IMF etc.), foreign company, multi-national corporation, company where more than
50% capital is held by foreigner or foreign company, foreign trust, foreign citizen etc. [section 2(1)(j) of
FCRA, 2010.

16.Surya Ltd., incorporated and registered in New Delhi with a foreign shareholding more than 50% due
to liberalisation in Foreign Direct Investment (FDI) policy.

State the correct statement as to the status of the Surya Ltd.

a) Surya limited shall not be considered as foreign source because of its registration in India.
b) Surya Ltd would be ‘foreign source’ having foreign shareholding more than 50% of foreign company.
c) Surya Ltd would be ‘foreign source’ having foreign contribution through various international
agencies.
d) Both (b) & (c)
Answer: b) Hints: Many companies in India have foreign shareholding more than 50% due to liberalisation
in Foreign Direct Investment (FDI) policy. These would be ‘foreign source’ as per section 2(1)(j)(vi) of FCRA.
Receipt of donations/contributions directly or indirectly by persons and organisations from these
companies are presently violative of the FCRA.

17.An association was holding the certificate of registration making it eligible for acceptance of foreign
contribution established for the betterment of poor children. Central Government later cancelled the
certificate of the association for violation of the terms and conditions of certificate for being not
engaged in chosen activity for the poor children. Such association again applied for the registration.
State weather the association is eligible for registration-

a) Yes, it can apply freshly at any time

b) No, permanently becomes disqualified
c) yes, after 3 years from the date of cancellation of certificate
Page No. 415
d) after reasonable opportunity of being heard, and on warning, same registration will be restored.
Answer: c) Hint: As per section 14 of the FCRA, cooling period of 3 years is prescribed for registration of
any person whose certificate has been cancelled by the Central Government.

18. State under what circumstances Government can cancel the certificate of registration granted to a
person under FCRA?

Answer

Yes. As per section 14 of the FCRA, Central Government may cancel the certificate, after carrying out an
inquiry, on the following grounds –

(a) the holder of the certificate has made an incorrect/false statement in the application for the
grant of registration or renewal
(b) the holder of the certificate has violated any of the terms and conditions of the certificate or
renewal thereof
(c) in the opinion of the Central Government, it is necessary in the public interest to cancel the
certificate
(d) the holder of the certificate has violated any of the provisions of this Act or rules or order made
thereunder.
(e) if the holder of the certificate has not been engaged in any reasonable activity in its chosen field
for the benefit of the society for two consecutive years or has become defunct.

In any person whose certificate has been cancelled under this section shall not be eligible for
registration or grant of prior permission for a period of three years from the date of cancellation of
such certificate.

19. (RTP MAY 2019)

X, is an association having registration to transfer the Foreign Contribution received by it to another

organization? Is the valid act of X? If yes, then what is the process to do so? Is there any restriction on
transfer of funds to other organisations?

Answer

Yes X can transfer the Foreign Contribution received by it to another organization as per section 7 of
FCRA, 2010. According to the provision no person who –

o is registered and granted a certificate or has obtained prior permission under this Act; and
o receives any foreign contribution,
shall transfer such foreign contribution to any other person unless such other person is also registered
and had been granted the certificate or obtained the prior permission under this Act:

Page No. 416

Provided that such person may transfer, with the prior approval of the Central Government, a part of
such foreign contribution to any other person who has not been granted a certificate or obtained
permission under this Act in accordance with the rules made by the Central Government.”
Restrictions on transfer: Rule 24 of FCRR, 2011, prescribes the procedure for transferring foreign
contribution to any unregistered person as under:

(1) A person who has been granted a certificate of registration or prior permission under section 11
and intends to transfer part of the foreign contribution received by him to a person who has not
been granted a certificate of registration or prior permission under the Act, may transfer such
foreign contribution to an extent not exceeding ten per cent of the total value thereof and for this
purpose, make an application to the Central Government in the prescribed Form.
(2) Every application made under sub-rule (1) shall be accompanied by a declaration to the effect
that-
(a) the amount proposed to be transferred during the financial year is less than ten per cent of
the total value of the foreign contribution received by him during the financial year;
(b) the transferor shall not transfer any amount of foreign contribution until the Central
Government approves such transfer.
(3) A person who has been granted a certificate of registration or prior permission under section 11
shall not be required to seek the prior approval of the Central Government for transferring the
foreign contribution received by him to another person who has been granted a certificate of
registration or prior permission under the Act provided that the recipient has not been proceeded
against under any of the provisions of the Act.
Both the transferor and the recipient shall be responsible for ensuring proper utilisation of the foreign
contribution so transferred and such transfer of foreign contribution shall be reflected in the returns in
Form to be submitted by both the transferor and the recipient."

20. Can foreign contribution be received in and utilised from multiple Bank Accounts?

Answer

The foreign contribution should be received only in the exclusive single foreign contribution account of
a Bank (also called designated FC account), as mentioned in the order for registration or prior
permission granted and should be separately maintained by the associations. However, one or more
accounts (called Utilization Account) in one or more banks may be opened by the association for
‘utilising’ the foreign contribution after it has been received in the designated FCRA bank account,
provided that no funds other than that foreign contribution shall be received or deposited in such
account or accounts and in all such cases, intimation is to be given online within 15 days of opening of
such account.

Page No. 417

21.Can capital assets purchased with the help of foreign contributions be acquired in the name of the
Mr Ram, an office bearers of the association?

Answer

No. Every asset purchased with foreign contribution should be acquired and possessed in the name of
the association since an association has a separate legal entity distinct from its members.

22.RTP Nov 2020 Q no 23

XYZ Foundation, a society registered under the Societies Registration Act, 1860, has received foreign
contribution from a Mala Company LLC, a company incorporated in Singapore. XYZ Foundation
deposited the amount of foreign contribution in a bank and earned interest on it. XYZ Foundation
desires to invest maturity proceeds from deposits in mutual funds. You are required to advise whether
XYZ Foundation is allowed to make such investment considering the provisions of the Foreign
Contribution (Regulation) Act, 2010

(Note: XYZ Foundation has obtained certificate of registration under section 11 of the Act).

Answer

As per the explanation 2 to the definition of the Foreign Contribution under the Act, the interest
accrued on the foreign contribution deposited in any bank referred to in section 17(1) or any other
income derived from the foreign contribution or interest thereon shall also be deemed to be foreign
contribution within the meaning of this clause.

Further as per section 8 of the Act, every person, who is registered and granted a certificate or given prior
permission under this Act and receives any foreign contribution, shall utilise such contribution for the
purpose for which the contribution has been received.
Provided that any foreign contribution or any income arising out of it shall not be used for speculative
business, where as speculative business includes investment in mutual fund. XYZ Foundation cannot use
the contribution as well as the interest component for the Investment in Mutual Fund.

23. X, an association having registration wishes to transfer the Foreign Contribution received by it to
another organization? Can it do so? Is there any restriction on transfer of funds to other organisations?

ANSWER:

Under the amended Section 7 of FCRA, 2011 No person who -

(a) is registered and granted a certificate or has obtained prior permission under this Act; and (b) receives
any foreign contribution,
shall transfer such foreign contribution to any other person.
Earlier, foreign contribution accepted with the permission of the Central Government could be
transferred to any other person who is registered under FCRA, 2010 or has obtained prior permission. It
can be seen that the legislature has placed a blanket prohibition on transfer of foreign contribution
Page No. 418
received by any person to any other person. The intention is to prevent recipients of foreign contribution
acting as mere conduits or facilitating agents for obtaining foreign contributions.

24.Mr. X, an individual of Indian origin but currently a citizen of a foreign country gives a donation.
State whether the donation given by Mr. X will be treated as ‘foreign contribution’?

ANSWER:

Yes. Donation from an Person of Indian origin who has acquired foreign citizenship is treated as foreign
contribution. This will also apply to Person of Indian Origin / Overseas Citizen of India cardholders.
However, this will not apply to 'Non-resident Indians', who still hold Indian citizenship and they are not
foreigners. Therefore, donation given by Mr. X, an individual of Indian origin with foreign nationality will
be treated as foreign contribution.

25.Mr. Rohit, a relative of Mr. Suman, who is residing in France remitted foreign contribution of Rs. 2
lakhs to her for arrangement of religious programme for the believers of Gurudev. Whether foreign
remittances received from a relative are to be treated as foreign contribution as per FCRA,2010?

ANSWER:

No. As per Section 4(e) of FCRA, 2010 and Rule 6 of FCRR, 2011, even the persons prohibited under
section 3, i.e., persons not permitted to accept foreign contribution, are allowed to accept foreign
contribution from their relatives. However, in terms of Rule 6 of FCRR, 2011, any person receiving foreign
contribution in excess of one lakh rupees or equivalent thereto in a financial year from any of his relatives
shall inform the Central Government in Form FC-1 within thirty days from the date of receipt of such
contribution.
Here in the given situation, since the amount remitted by Mr. Rohit is more than Rs. One lakh, so Ms.
Suman is required to inform the Central Government in Form FC-1 within thirty days from the date of
receipt of such contribution.

26.Mr. Ramakant Hathi, an Indian Administrative Service (IAS) officer has received an invitation to visit
Germany for representing India in an Annual Summit programme. Mr. Ramakant Hathi, on his visit has
met with a sudden illness and received foreign hospitality of amount 65,000 in the form of emergent
medical treatment. Under the given scenario, you are required to advise Mr. Ramakant Hathi regarding
his responsibility to intimate the receipt of Foreign Hospitality as per the provisions of the Foreign
Contribution (Regulation) Act, 2010 and rules made thereunder.

ANSWER:

As per section 6 of the Foreign Contribution (Regulation) Act, 2010, various categories of persons are
required to take prior permission of the Central Government before accepting Foreign Hospitality, while
visiting any country or territory outside India. Government servants are one of such persons who are
required to take prior permission. Provided it shall not be necessary to obtain any such permission for an
emergent medical aid needed on account of sudden illness contracted during a visit outside India.

Page No. 419

Further as per Rule 7 of Foreign Contribution Rules 2011 and amendments thereto, in case of emergent
medical treatment aid needed on account of sudden illness during a visit abroad, the acceptance of
foreign hospitality shall be required to be intimated to the Central Government within one month of such
receipt giving full details including the source, approximate value in Indian rupees, and the purpose for
which and the manner in which it was utilised. However, no such intimation is required if the value of
such hospitality in emergent medical aid is upto one lakh rupees or equivalent.

Accordingly, Mr. Ramakant Hathi is not required to intimate such details of acceptance of foreign
hospitality as the value of such hospitality in emergent medical treatment is within the limits specified in
Rule 7 of Foreign Contribution (Regulation) Rules, 2011.

27. X Ltd. Submitted an application on 31st August, 2020 for renewal of certificate to Central
Government for acceptance of foreign contribution under FCRA, 2010, shall be renewed latest by:

(a) 30th September 2020

(b) 29th November 2020

(c) 28th February 2021

(d) 31st July 2021 (1 Mark) (mtp-II- july 2021)

ANSWER- b

28. Mr. Soumak is an editor of a daily business news on BNN TV. He received a salary of US $ 180,000
from Mr. Bob. Mr. Bob is a US citizen resident in India and operates BNN TV business operations in
India. Mr. Bob received such payment i.e. salary given to Mr. Soumak from his parent Company BNN
Inc. of USA. Examine under the provisions of the Foreign Contribution (Regulation) Act, 2010, whether
receipt of salary by Mr. Soumak is prohibited? (3 Marks) ) (past exam nov 2020)

ANSWER

According to section 3 of the Foreign Contribution (Regulation) Act, 2010, no foreign contribution shall be
accepted by any editor.
Also, as per section 4, nothing contained in section 3 shall apply to the acceptance, by any person
specified in that section, of any foreign contribution where such contribution is accepted by him, subject
to the provisions of section 10, by way of salary, wages or other remuneration due to him or to any group
of persons working under him, from any foreign source or by way of payment in the ordinary course of
business transacted in India by such foreign source.
Hence, taking into account the above provisions, receipt of salary by Mr. Soumak from parent company
BNN Inc. of USA is not prohibited.

29. X, a registered association transfers the Foreign Contribution received by it to another person?
Comment upon the validity of said act of X in terms of Foreign Contribution (Regulation) Act, 2010?
(RTP JULY 2021)

ANSWER
Page No. 420
In the light of section 7 of the FCRA, 2010, no person who –

• is registered and granted a certificate or has obtained prior permission under this Act; and
• receives any foreign contribution,

shall transfer such foreign contribution to any other person.

According to the section, the act of X, an association of transferring the Foreign Contribution to another
person, is not valid.

30. Amol Open University of Languages, a private university established under a State Act was meant to
provide degree/ diploma/ certificate course to the students, through an online leaning platform of
various foreign languages. The examination was also decided to be held online through their
PC/Laptop.
Several Foreign Governments intend to offer donations / contributions for the development of their
language. Mr. Bhupendra, the Registrar applied for the registration of the university and was granted
certificate to receive foreign exchange for the purpose of preparing the educational material (print or
soft copy), paying of honorarium to teachers and IT related infrastructure for online classes only. Mr.
Bhupendra faced financial problems for building the infrastructure of the University Campus. Advise
Mr. Bhupendra, whether foreign contribution received for language development, can be used by him
for building the infrastructure of the University Campus. (RTP NOV 2021)

ANSWER

Section 8(1) of the FCRA, 2010 provides that every person, who is registered and granted a certificate or
given prior permission under this Act and receives any foreign contribution,—
(a) shall utilise such contribution for the purposes for which the contribution has been received.
Provided that any foreign contribution or any income arising out of it shall not be used for speculative
business.
(b) shall not defray as far as possible such sum, not exceeding twenty per cent. of such contribution,
received in a financial year, to meet administrative expenses:
Provided that administrative expenses exceeding twenty per cent. of such contribution may be
defrayed with prior approval of the Central Government.
(2) The Central Government may prescribe the elements which shall be included in the administrative
expenses and the manner in which the administrative expenses referred to in sub-section (1) shall be
calculated.
Accordingly, the purpose for which the Certificate of Registration has been granted, cannot be diverted.
The end use of the funds has to ensured to utilise in that purpose only. Therefore, Mr. Bhupendra, the
registrar of Amol Open University cannot use the foreign contribution for building the infrastructure of
the University Campus.

31. Anna, a foreign citizen has made donated variety of articles in kind, to various individuals of Indian
residence for their personal use. When shall such donation of articles in kind be excluded from the
definition of Foreign Contribution considering the provisions of Foreign Contribution (Regulation) Act,
2010.
(RTP NOV 2021)

Page No. 421

(a) If the market value, in India, of such article, on the date of such gift, is more than Rs. 1,00,000 but
less than 5,00,000.

(b) If the market value, in India, of such article, on the date of such gift, is more than Rs. 500,000 but
less than 10,00,000.

(c) Any donation in kind given for personal use is always excluded.

(d) If the market value, in India, of such article given for personal use, on the date of such gift, is not
more than Rs. 1,00,000.

ANSWER- d

Page No. 422

 17 The Arbitration and Conciliation Act, 1996

ATTEMPTS
MAY NOV MAY NOV NOV JAN JULY NOV
COVERAGE
2018 2018 2019 2019 2020 2021 2021 2021

STUDY Q.- 14, 15, 16, 17, 18,19, 20, 21, 22

MAT

PAST NO NO
Q-5 Q-23 Q-26 Q-27 -----
EXAMS QUES QUES

MTP Q-3, 4 Q-6, 7 Q-9 Q-12 NO QUES Q-24, 25 -----

NO
RTP Q-2 Q-8 Q-10, 17 Q-1, 11 Q-13 Q-28, 9
QUES

Page No. 423

Multiple Choice Questions

1.RTP Nov 2019

Mr. A. Mr. B and Mr. C are partners in XYZ partnership firm. The firm made an agreement in writing
to refer a dispute between them in business to an arbitrator. Inspite of this agreement Mr. B files a suit
against Mr. A and Mr. C relating to the dispute in a court. Examine on the admission of the suit filed by
Mr. B in the court in the light of the Arbitration and Conciliation Act, 1996.

(a) Yes it can be admitted by the court, as the said court has jurisdiction over the matter and it
overpowers arbitration agreement
(b) Yes it can be admitted by the court, only in the case of challenge to the arbitral award in appeal
(c) Yes, it can be admitted by the court, if Mr. A and Mr. C mutually agrees.
(d) No it cannot be admitted by the court, as the jurisdiction of court is ousted because of existence
of a valid arbitration agreement

Answer: (d)

Descriptive Questions

2.RTP May 2018 Qn no 18

In 2016, Company Amar, food processor manufacturing unit entered into a joint venture agreement
with Company USHA, the largest manufacturer of Food processors for supply of parts of mixer &
grinder for manufacturing its latest model. Both the companies are registered under the Companies
Act 2013. Agreement carries the term that all disputes shall be arbitrated in Mumbai. Discuss the type
of arbitration agreement made between them.

Examine what will happen if the agreement does not have any clause relating to arbitration and
disputes arose between them concerning quality of material supplied in 2017?

3.March 2018 Qn no 6(e) 3 Marks:

Raman garments manufacturer entered into an arbitration agreement with its regular customers on
the supply of dress material on demand in advance. At the same time, also hold the term that in case
of disputes they may refer to the arbitration for the settlement of the matter. Raman garments
manufacturer fail to make delivery of supply of dress material to Mr. X, a regular customer. MR. X
already made Raman garments manufacturer aware of this important order in advance. Since Raman
garments manufacturer was not able to meet the said the order well in time, he took the plea of
theft and setting of fire to the property in the manufacturing unit.

The said matter was referred to the arbitration. State the validity as to the submission of the sa id
dispute to the arbitration in the light of the Arbitration and Conciliation Act, 1996 .

Answer:

Page No. 424

As per the arbitration agreement, the disputes submitted/ proposed to be submitted to arbitration
must be arbitrable. In other words that law must permit arbitration in that matter only which are
capable of arbitration. There are certain disputes that the law retains exclusively for the court, and
the same cannot be submitted for arbitration. The rationale is that given the nature of disputes, the
courts are the only appropriate forum for adjudicating the matter.

In the given matter, it clearly reveals of non-performance of the duties of the Raman garments
manufacturer within the specified timelines. To safeguard himself from the non-performance of the
contract, took the cause of theft and setting of fires in the manufacturing unit. Accordingly, in the
given situation, the submitted disputes before arbitration is not arbitrable as they are the offences of
criminal natures. Such types of disputes is to be tried by the court of proper jurisdiction.
Therefore, the submission of the dispute in the situation to arbitration is invalid.

4.March 2018 Qn no 2(d)(ii) 3 Marks:

Ms. Rajkumari launch her boutique. She contacted with M/s Shyamlal merchants for supply of dress
materials. The communication between the parties were over email. There was a term of service
between the parties containing that “any disputes regarding quality or delivery shall be submitted to
arbitration conducted under the guidance of Indian Clothes Manufacturers Association. Please place
your order if the above terms and conditions are agreeable to you.” Ms. Rajkumari placed an order.
Comment on the validity of the such arbitration agreement according to the Arbitration and
Conciliation Act, 1996.

Answer:

As per the Arbitration and Conciliation Act, 1996 an agreement must be in writing. There is however no
requirement for the same to be in writing in one document. There is also no particular form or
template for an arbitration agreement. The communication over email of the term of services is proper
valid agreement and the same have been stood affirmed by reason of their conduct. This would be an
arbitration agreement in writing contained in correspondence between the parties.

5.May 2018 Qn no 6(e) 3 Marks:

Smart Automobiles Limited and Apex Four wheelers Limited entered into an agreement regarding
annual maintenance services to be provided by Smart Automobiles for all vehicles within the state of
Uttar Pradesh for five years. The agreement was containing a clause that in the event of a dispute
between the parties the matter would be submitted to arbitration. At the end of the fifth year, the
service agreement was not renewed.

Decide whether the arbitration. agreement should not be treated as terminated. Also describe the
other grounds of termination of an arbitration agreement.

Answer:

Page No. 425

Termination of an arbitration agreement

Just the way parties can enter into an arbitration agreement, they can also terminate an arbitration
agreement. Thus, an arbitration agreement could be put to an end by:
1. Mutual consent: like any contract, the parties involved can joint ly agree to put an end to a
particular arbitration agreement.

2. Termination of principal contract: an arbitration agreement always operates in relation to a

principal contract. If the principal contract is terminated through discharge or novation, the
arbitration agreement terminates with the contract. However, if the principal contract is breached,
then the arbitration agreement survives because of the operation of the doctrine of separability.
In the given instance, at the end of the fifth year, the Service Agreement was not renewed. Hence,
the contract terminates, and along with it the arbitration agreement.

6.Aug 2018 Qn no 2(d) 6 Marks:

ABC Pvt. Ltd. is a construction company. Mr. Builder is a Chief Engineer of the ABC Pvt. Ltd. A common
arbitration agreement was framed by ABC Pvt. Ltd. in case of disputes if arises under any contract.
According to the term of an agreement , any question, claim, right, matter, thing, whatsoever, in any
way arising out of or relating to the contract designs, drawings, specifications estimates, instructions, or
orders, or those conditions or failure to execute the same whether arising during the progress of the
work, or after the completion, termination or abandonment thereof, the dispute shall, in the first
place, be referred to the Chief Engineer who has jurisdiction over the work specified in the contract.
The Chief Engineer shall within a period of ninety days from the date of dispute bought into notice, give
written notice of his decision to the contractor. Chief Engineer's decision shall be final. Examine on the
validity of such arbitration agreement.

Answer:

As per the requirements of a valid arbitration agreement, parties to the arbitration agreement must
agree that the determination of their substantive rights by a neutral third person acting as the arbitral
tribunal would be final and binding upon them.

Since in the given case, the arbitration agreement formed by the XYZ Pvt. Ltd. contained a clause that
any questions, claim right, matter, thing, whatsoever, in any way arising out o f or relating to the
contract designs, drawings, specifications estimates, instructions, or orders, or those conditions or
failure to execute the same whether arising during the progress of' the work, or after the completion,
termination or abandonment thereof, the dispute shall, firstly, be referred to the Chief Engineer , Mr.
Builder. He will has jurisdiction over the work specified in the contract. He shall within a period of
ninety days from the date of dispute bought into notice, give written notice of his decision to the
contractor. Chief Engineer's decision shall be final and binding on both the parties.
Here Chief Engineer is not a neutral party and has a Control over the work specified in the contract, so
this is not a valid arbitration agreement.

Page No. 426

7.Oct 2018 Qn no 6(e) 3 Marks:

Differentiate between Litigation and arbitration.

Answer:

DIFFERENCES

LITIGATION ARBITRATION

Takes place in court The place of arbitration is chosen by the parties.

A judge is assigned by the court. The
litigants have no say on who will judge
their disputes.
The procedure followed by the court is
fixed and determined by the Rules of
the court. In India it would be governed
by the Code of Civil procedure and
rules applicable to the particular court.
The proceedings are generally open to
public. In other words there is very little
privacy and confidentiality.
Court decisions are subject to
numerous appeals.
It is often difficult to enforce judgments
of court of one country in a foreign
country.
The arbitrator(s) is selected by the parties. Parties
therefore are able to choose people with the
appropriate expertise, educational qualifications,
trade experience, etc., as arbitrators.
The parties have adequate flexibility to choose the
procedures that would apply to their arbitration. They
could either construct such procedures or adopt
procedures of an arbitral institution.
Confidentiality is one of the most important
characteristic of arbitration. In other words apart from
the parties (including their lawyers) no other person
is permitted to participate in the arbitral proceedings.
Arbitral awards can be challenged on very limited
grounds.
Enforcing an arbitral award in foreign nations is much
easier and is governed by international treaties such as
The Recognition and Enforcement of Foreign Arbitral
Awards, 1958.

8.RTP Nov-18:

On 1st day of April, 2016, Arnold Food Processors limited, a company engaged in food processor
manufacturing unit entered into a joint venture agreement with Ronnie and Coleman Company
Limited, the largest manufacturer of Food processors for supply of parts of mixer and grinder for
manufacturing its latest model. Both the companies are registered under the Companies Act, 2013.
Agreement carries the term that all disputes shall be arbitrated in Delhi. In the light of The Arbitration
and Conciliation Act, 1996, discuss:

(i) The type of arbitration agreement made between them.

(ii) Examine what will happen if the agreement does not have any clause relating to arbitration

Page No. 427

 where disputes arose between them concerning quality of material supplied in 2017.
Answer:

There are two basic types of arbitration agreement:

(i) Arbitration clause - a clause contained within a principal contract. The parties undertake to submit
disputes in relation to or in connection with the principal contract that may arise in future to
arbitration.
(ii) Submission agreement - an agreement to refer disputes that already exist to arbitration. Such an
agreement is entered into after the disputes have arisen.
In first case, the agreement already carries the term that all disputes shall be arbitrated in Delhi at the
time of entering into joint venture agreement. This would be an arbitration clause as it is contained in
the principal contract (JVA) and no disputes have arisen till yet. It concerns future disputes that may
arise.
In the second case, the Principal contract (JVA) does not have any term relating to arbitration. Disputes
arose between the parties concerning quality of supplied goods in 2017. To resolve this dispute, parties
later entered into an agreement "That all disputes including quality of goods supplied by Ronnie and
Coleman Company Limited to Arnold Food Processors Limited shall be submitted to arbitration. The
parties hereby agree to abide by the decision of the arbitrator”. Such an agreement that is made after the
disputes have arisen would be called a submission agreement.

9.MTP Apr 2019 Qn no 4(B) 6 Marks

In 2017, Company Amar, food processor manufacturing unit entered into a joint venture agreement
with Company USHA, the largest manufacturer of Food processors for supply of parts of mixer &
grinder for manufacturing its latest model. Both the companies are registered under the Companies
Act, 2013. Agreement carries the term that all disputes shall be arbitrated in Mumbai. State the type
of arbitration agreement made between them.
What will happen if the agreement does not have any clause relating to arbitration? Disputes arose
between them concerning quality of material supplied in 2018. Examine the given situation in the light
of the Arbitration & Conciliation Act, 1996

Answer

There are two basic types of arbitration agreement:

(i) Arbitration clause - a clause contained within a principal contract. The parties undertake to submit
disputes in relation to or in connection with the principal contract that may arise in future to
arbitration.
(ii) Submission agreement - an agreement to refer disputes that already exist to arbitration. Such an
agreement is entered into after the disputes have arisen.
In first case ,the agreement already carries the term that all disputes shall be arbitrated in Mumbai at
the time of entering into joint venture agreement. This would be an arbitration clause as it is contained in
the principal contract (JVA) and no disputes have arisen till yet. It concerns future disputes that may arise.

Page No. 428

In the second case, the Principal contract (JVA) does not have any term relating to arbitration. Disputes
arose between the parties concerning quality of supplied goods in 2018. To resolve this dispute, parties
later entered into an agreement “That all disputes including quality of goods supplied by Company
USHA to Company Amar shall be submitted to arbitration. The parties hereby agree to abide by the
decision of the arbitrator.” Such an agreement that is made after the disputes have arisen would be
called a submission agreement.

10.RTP May 2019 Qn no 20(ii)

In 2016, Company Amar, food processor manufacturing unit entered into a joint venture agreement
with Company USHA, the largest manufacturer of Food processors for supply of parts of mixer &
grinder for manufacturing its latest model. Both the companies are registered under the Companies
Act 2013. Agreement carries the term that all disputes shall be arbitrated in Mumbai. State the type of
arbitration agreement made between them

Answer

There are two basic types of arbitration agreement are:

(a) Arbitration clause - a clause contained within a principal contract. The parties undertake to submit
disputes in relation to or in connection with the principal contract that may arise in future to
arbitration.
(b) Submission agreement - an agreement to refer disputes that already exist to arbitration. Such an
agreement is entered into after the disputes have arisen.

In this case, the agreement already carries the term that all disputes shall be arbitrated in Mumbai at
the time of entering into joint venture agreement. This would be an arbitration clause as it is contained
in the principal contract (JVA) and no disputes have arisen till yet. It concerns future disputes that may
arise.

11.RTP Nov 2019 Qn no 17

On 1st day of April, 2018, Almond Food Processors limited, a company engaged in food processor
manufacturing unit entered into a joint venture agreement with Ronnie and Coleman Company
Limited, the largest manufacturer of Food processors. Both the companies are registered under the
Companies Act, 2013. Agreement carries the term that all disputes shall be arbitrated in Delhi. In the
light of the Arbitration and Conciliation Act, 1996, discuss:

(i) The type of arbitration agreement made between them.

(ii) Examine what will happen if the agreement does not have any clause relating to arbitration where
disputes arose between them concerning quality of material supplied in 2019.

Answer

There are the basic types of arbitration agreement:

Page No. 429

(i) Arbitration clause - a clause contained within a principal contract. The parties undertake to submit
disputes in relation to or in connection with the principal contract that may arise in future to
arbitration.
(ii) Submission agreement - an agreement to refer disputes that already exist to arbitration. Such an
agreement is entered into after the disputes have arisen.
In first case, the agreement already carries the term that all disputes shall be arbitrated in Delhi at the
time of entering into joint venture agreement. This would be an arbitration clause as it is contained in
the principal contract (JVA) and no disputes have arisen till yet. It concerns future disputes that may
arise.
In the second case, the Principal contract (JVA) does not have any term relating to arbitration. Disputes
arose between the parties concerning quality of supplied goods in 2019. To resolve this dispute, parties
later entered into an agreement "That all disputes including quality of goods supplied by Ronnie and
Coleman Company Limited to Almond Food Processors Limited shall be submitted to arbitration”. The
parties hereby agree to abide by the decision of the arbitrator". Such an agreement that is made after
the disputes have arisen would be called a submission agreement.

12.MTP Nov 2019 4(b) (ii) 3 Marks

Ms. Rajkumari launch her boutique. She contacted with M/s Shyamlal merchants for supply of dress
materials. The communication between the parties were over email. There was a term of service
between the parties containing that “any disputes regarding quality or delivery shall be submitted to
arbitration conducted under the guidance of Indian Clothes Manufacturers Association. Please place
your order if the above terms and conditions are agreeable to you.” Ms. Rajkumari placed an order.
Comment on the validity of the such arbitration agreement according to the Arbitration and
Conciliation Act, 1996

Answer

As per the Arbitration and Conciliation Act, 1996 an agreement must be in writing There is however no
requirement for the same to be in writing in one document. There is also no particular form or template
for an arbitration agreement. The communication over email of the term of services is proper valid
agreement and the same have been stood affirmed by reason of their conduct. This would be an
arbitration agreement in writing contained in correspondence between the parties.

13.RTP May 2020 Question no 17

Mr. R, the respondent had placed an order of purchase of various quantities of phosphoric acid from
the Mr. P, the petitioner. The purchase order noted that the terms and conditions were to be as per
the Fertilizer Association of India (FAI). Terms and Conditions for Sale and Purchase of Phosphoric
Acid were as per Clause 15 of the FAI which also provided terms for settlement of disputes by
arbitration. Enumerate in the light of the given circumstances as to existence of a valid arbitration
agreement between the parties as per the Arbitration and Conciliation Act, 1996

Page No. 430

Answer

Arbitration agreement through reference: The Arbitration and Conciliation Act, 1996 envisages a
possibility of an arbitration agreement coming into being through incorporation. In other words,
parties to an agreement could agree to arbitrate by referring to another contract containing an
arbitration agreement. The requirement is that the reference must leave no doubt in the mind of the
reader that the parties indeed wanted to incorporate the arbitration agreement into the agreement
between them.[Section 7(5)]

Accordingly, as per the said provision, yes this a valid reference for an arbitration agreement to come
into existence. It was held by the Supreme Court of India in Groupe Chimique Tunisien SA v. Southern
Petrochemicals Industries Corpn Ltd 2006 (2) ArbLR 435 (SC) that for a reference to constitute an
arbitration agreement the contract should be in writing and reference should be such as to make that
arbitration clause a part of the contract. Both the conditions were held to be fulfilled in the present
instance.

Study Material

14. Mr. Komal and Mr. Rajesh, entered into arbitration agreement for the disputes that arise, if any in
their business transactions. Due to certain fault on the part of Mr. Rajesh, the dispute came before the
arbitration for settlement. In the meantime, Mr. Komal dies. Mr. Rajesh shed of their liabilities on the
plea that arbitration agreement has come to end with the death of the other party. Decide the
affirmative statement in the given situation-

(a) Arbitration agreement get terminated due to death of the party.

(b) It shall be remain enforceable by or against the legal representatives of the deceased.
(c) Since it is a private law between the parties, it will be terminated with the death of the party.
(d) Both (a) & (c)
Answer: c) Hint: As per section 40 of the Arbitration and Conciliation Act,1 996, an arbitration
agreement shall not be discharged by the death of any party thereto either as respects the deceased or
as respects any other party, but shall in such event be enforceable by or against the legal
representative of the deceased.

15.Mr. A. Mr. B and Mr. C are partners in XYZ partnership firm. The firm made an agreement in writing
to refer a dispute between them in business to an arbitrator. Inspite of this agreement Mr. B files a suit
against Mr. A and Mr. C relating to the dispute in a magisterial court. Examine on the admission of the
suit filed by Mr. B in the court in the light of the Arbitration and Conciliation Act, 1996.

a) Yes it can be admitted by the Magisterial court , as the said court has jurisdiction over the matter
and it overpowers arbitration agreement
b) Yes it can be admitted by the Magisterial court, only in the case of challenge to the arbitral award in
appeal
c) Yes, it can be admitted by the court, if Mr. A and Mr. C mutually agrees.

Page No. 431

d) No it cannot be admitted by the court, as the jurisdiction of court is ousted because of existence of
a valid arbitration agreement
Answer: d) Hint: The jurisdiction of court is ousted as a valid arbitration agreement exists. As per
Section 8, if there is an arbitration agreement between the parties, the dispute shall not be submitted
to the court, but instead shall be submitted to arbitration

16.Mr. X wants to start a bakery and so he contacts Mr. Y Confectioners & Bakers for supply of cakes
and biscuits. The communication between the parties were over email. On e-mail, there was a term of
service between the parties containing that “any disputes regarding quality or delivery shall be
submitted to arbitration conducted under the guidance of Indian Confectionary Manufacturers
Association. Please place your order if the above terms and conditions are agreeable to you.” X placed
an order. State which statement is correct with respect to the arbitration agreement made between X
and Y:

a) It is not valid agreement, as the terms of service is not contained in same document of agreement
b) It is not valid, as the agreement is not laid down in particular format / formally.
c) It is not valid, as communication over email of the term of services is not proper.
d) It is valid arbitration agreement in writing contained in correspondence between the parties over
email.
Answer: d) Hint: As per the arbitration and Conciliation Act, an agreement must be in writing. There is
however no requirement for the same to be in writing in one document. There is also no particular form
or template for an arbitration agreement. The communication over email of the term of services is a
proper valid agreement and the same have been stood affirmed by reason of their conduct. This would
be an arbitration agreement in writing contained in correspondence between the parties.

17.(RTP MAY 2019)

In 2016, Company Amar, food processor manufacturing unit entered into a joint venture agreement
with Company USHA, the largest manufacturer of Food processors for supply of parts of mixer &
grinder for manufacturing its latest model. Both the companies are registered under the Companies
Act 2013. Agreement carries the term that all disputes shall be arbitrated in Mumbai. State the type
of arbitration agreement made between them.

What will happen if the agreement does not have any clause relating to arbitration? Disputes arose
between them concerning quality of material supplied in 2017

Answer

There are two basic types of arbitration agreement are:

(a) Arbitration clause - a clause contained within a principal contract. The parties undertake to
submit disputes in relation to or in connection with the principal contract that may arise in future
to arbitration.

Page No. 432

(b) Submission agreement - an agreement to refer disputes that already exist to arbitration. Such an
agreement is entered into after the disputes have arisen.
In first case, the agreement already carries the term that all disputes shall be arbitrated in Mumbai at
the time of entering into joint venture agreement. This would be an arbitration clause as it is contained
in the principal contract (JVA) and no disputes have arisen till yet. It concerns future disputes that may
arise.
In the second case, the Principal contract (JVA) does not have any term relating to arbitration. Disputes
arose between the parties concerning quality of supplied goods in 2017. To resolve this dispute, parties
later entered into an agreement “That all disputes including quality of goods supplied by Company
USHA to Company Amar shall be submitted to arbitration. The parties hereby agree to abide by the
decision of the arbitrator.” Such an agreement that is made after the disputes have arisen would be
called a submission agreement.

18. How important are the ideas of independence and impartiality in arbitration?

Is the arbitrator required to disclose anything to the parties?

Is membership of the same sports club as one of the parties problematic?

Answer

(a) The arbitrator are under a duty of disclose any relations with parties or their lawyer that might
give rise to justifiable doubts as to their independence and impartiality.
(b) Such an association is too remote to count as a relation that might lead to doubts of bias.

19. Can an arbitrator resign on their own account? Do they have to give reasons for their
resignation? Could an award be challenged on the ground that the arbitrator had resigned without
giving any proper justifications?

Answer

An arbitrator can resign when they want, without giving reasons for their resignation. This action does
not affect the validity either of the arbitration proceedings or the arbitral award.

20. Mr. X wants to start a bakery and so he contacts Mr. Y Confectioners & Bakers for s upply of
cakes and biscuits. The communication between the parties were over email. On e-mail, there was a
term of service between the parties containing that “any disputes regarding quality or delivery shall
be submitted to arbitration conducted under the guidance of Indian Confectionary Manufacturers
Association. Please place your order if the above terms and conditions are agreeable to you.” X
placed an order. State the legal position as the validity of the arbitration agreement.

Answer

As per the arbitration and Conciliation Act, an agreement must be in writing There is however no
requirement for the same to be in writing in one document. There is also no particular form or template
for an arbitration agreement. The communication over email of the term of services is a proper valid

Page No. 433

agreement and the same have been stood affirmed by reason of their conduct. This would be an
arbitration agreement in writing contained in correspondence between the parties.

21.RTP Nov’2020 Q no 14

Milan Limited entered into an agreement with Vinne Limited for the supply of confectionary biscuits
and cakes for a period of 5 years. The Arbitration clause of the agreement states, “That all the
disputes shall be submitted to arbitration.” After a period, it was found that the pri ncipal contract is
invalid in the light of the Indian Contract Act, 1872. You are required to select the best option in the
given scenario considering the provisions of the Arbitration and Conciliation Act, 1996.

(a) The arbitration clause in the principal agreement also stands invalid due to the principal contract
becoming invalid.
(b) The arbitration clause is an independent agreement of the principal agreement and cannot be
treated as invalid merely because the principal contract was invalid.
(c) The arbitration clause shall be exercisable only if the Judicial Authority under the Arbitration and
Conciliation Act, 1996 allows to treat it as an independent agreement.
(d) The arbitration clause in the principal agreement stands valid only till the time the principal
contract was in force and valid.
Answer: b)

22. XYZ Company Ltd entered into an agreement with PQR Company Ltd for the supply of terrain tyres
to PQR Company Ltd for a period of 5 years. The agreement had referred to the terms and conditions
contained in the Indian Tyre Manufacturing Association for sale and purchase of manufacturing tyres.
Clause 14 of the terms provided that if any dispute arises between the parties, the same shall be
mutually decided by the parties or shall be referred for arbitration if the parties so determine. You are
required to state whether the parties under the agreement will be able to refer the dispute, if any, to
the arbitration considering the given scenario and the provisions of the Arbitration and Conciliation Act,
1996.

ANSWER:

The provisions of the Arbitration and Conciliation Act, 1996 outlines the requirements of a valid
arbitration agreement. One of such requirements is clarity of consent i.e. the intention to go to
arbitration must be clear in other words there must be consensus ad idem. Utilization of vague words
cannot be considered as adequate.

Further the Arbitration and Conciliation Act, 1996 envisages the possibility of an arbitration agreement
coming into being through incorporation i.e. arbitration agreement through reference. In other words,
parties to an agreement could agree to arbitrate by referring to another contract containing an
arbitration agreement.

In the given scenario, it was an arbitration agreement through reference, but the terms and conditions of
the said agreement were not clear and vague and therefore the said agreement is not a valid arbitration

Page No. 434

agreement as the italicized portion in the agreement clearly highlights the need for further agreement
between the parties.
Accordingly in the given instance, the parties will not be able to refer the disputes, if any, to arbitration
since the terms and conditions of arbitration agreement through reference are vague and not clear and
thus the arbitration agreement is not valid in law.

23. (PAST EXAM NOV 2018)

Examine the validity of the following statements with reference to The Arbitration and Conciliation Act,
1996:
(i) Every Court would be a Judicial Authority but every Judicial Authority would not be a Court.
(ii) The disputes submitted to arbitration must be arbitrable

ANSWER

(i) Judicial authority - The term judicial authority is not defined in Act. The Supreme Court in SBP v. Patel
Engineering observed "A judicial authority as such is not defined in the Act. It would certainly include the
court as defined in Section 2(e) of the Act and would also, include other courts and may even include a
special tribunal like the Consumer Forum." Therefore, it is a concept wider than courts as ordinarily
understood and would include special tribunals and quasi-judicial authorities. The functions performed
would include reference to arbitration. Every court would be a judicial authority, but every judicial
authority would not be a court.

(ii) Arbitrability: The disputes submitted/ proposed to be submitted to arbitration must be arbitrable. In
other words the law must permit arbitration in that matter. There are certain disputes that the law
retains exclusively for the court, and the same cannot be submitted for arbitration. The rationale is that
given the nature of disputes, the courts are the only appropriate forum for adjudicating the matter.
For example, criminal offences, matrimonial disputes, guardianship matters, testamentary matters,
mortgage suit for sale of a mortgaged property, etc. cannot be arbitrated

24. Under which circumstances the arbitration process comes to an end as per the Arbitration and
Conciliation Act, 1996:

(a) When Arbitrator denies to pass final award

(b) When arbitrator fails to pass the award within 12 months

(c) When the parties decide to no longer continue with issue.

(d) Where the parties decide to refer the matter before the court. (1 Mark)

(mtp-II- july 2021)

ANSWER- b

Page No. 435

25. Mr. Ghia started a juice point in the heart of the City. He contacted Mr. Bhajiwala for supply of
fruits and vegetables. On the communication made over email, they decided the payment, terms and
other conditions of service. Initially, Mr. Ghia was regular in making payment to Mr. Bhajiwala for the
supply of fruits and vegetables, but later on gapped and defaulted in making payments. Mr. Bhajiwala
filed a suit against Mr. Ghia in a Court. However Mr. Ghia, contended that the matter should be settled
through Arbitration. Considering the relevant provision of the Arbitration and Conciliation Act, 1996,
determine the validity of the contention stated by Mr. Ghia. (6 Mark) (mtp-II- july 2021)

ANSWER

Arbitration is a private method of dispute resolution. Under the Indian law every individual has the right
to approach the court for resolution of his/her dispute that may involve infringement of right(s) vested
upon that individual. This protection is so stringent that it cannot be contracted away. The Indian
Contract Act, 1872 however notes an exception in favour of arbitration.
Arbitration cannot happen without the parties consenting to submit their dispute to arbitration. Consent
of the parties therefore is the most fundamental requirement for an arbitration to happen. An arbitration
agreement records the consent of the parties that in the event of a dispute between them that matter
instead of being taken to court, will be submitted for resolution to arbitration. Arbitration agreement
therefore is necessary to start arbitration.
In the instant case, there is no express arbitration agreement entered between the parties (Mr. Ghia &
Mr. Bhajiwala) as regards to reference of disputes for arbitration. Further, Mr. Bhajiwala filed a suit
against Mr. Ghia in the court but Mr. Ghia contended that the matter of dispute should be settled
through Arbitration. Here, since no express arbitration agreement for dispute resolution was made
between the parties, Mr. Ghia contention to submit the dispute for arbitration, is not correct. Even the
court cannot refer the parties to arbitration unless there's a written consent by parties by way of joint
application or memo or an affidavit.

26. Shyam started a fresh juice shop and contacted Naresh for supply of fruits and vegetables. Most of
the communication between them happened over email. On the email, they decided the payment,
terms and other conditions of service. For initial 5 months, Shyam was regular in making payment to
Naresh for the fruits bought, but later on stopped making payments. Naresh filed a suit against Shyam
in a Magisterial Court but Shyam contended that the matter should be settled through Arbitration.
Referring to provision of the Arbitration and Conciliation Act, 1996, state, whether the contention of
Shyam is correct? (3 Marks) (past exam nov 2020)

ANSWER

Arbitration is a private method of dispute resolution. Under the Indian law every individual has the right
to approach the court for resolution of his/her dispute that may involve infringement of right(s) vested
upon that individual. This protection is so stringent that it cannot be contracted away. The Indian
Contract Act, 1872 however notes an exception in favour of arbitration.
Arbitration cannot happen without the parties consenting to submit their dispute to arbitration. Consent
of the parties therefore is the most fundamental requirement for an arbitration to happen. An arbitration
agreement records the consent of the parties that in the event of a dispute between them that matter
instead of being taken to court, will be submitted for resolution to arbitration. Arbitration agreement
therefore is necessary to start arbitration.

Page No. 436

In the instant case, there is no express arbitration agreement between the parties (Naresh &Shyam) as
regards to reference of disputes for arbitration. Further, Naresh filed a suit against Shyam in the
Magisterial court but Shyam contended that the matter of dispute should be settled through Arbitration.
Here, since no express arbitration agreement was made between the parties, Shyam contention to submit
the dispute for arbitration, is not correct. Even the court cannot refer the parties to arbitration unless
there's a written consent by parties by way of joint application or memo or an affidavit.

27. (D) By virtue of the arbitration agreement between Mr. C and Mr. P, a matter between them which
could not be resolved smoothly, was referred to the arbitrator tribunal having three arbitrators. Two
among the arbitrators were of the opinion that Mr. C has to pay a compensation of Rs. 2 crore to Mr. P.
The third arbitrator was of the opinion that Mr. P is not eligible to get any compensation from Mr. C.
The award was then written and signed by the first two arbitrators, while the third arbitrator refused to
sign. The fact that the third arbitrator refused to sign and the reason behind that was stated in the
award. Mr. C contended that since all the arbitrators did not sign, the award is invalid. In the light of
the provisions of the Arbitration and Conciliation Act, 1996, decide, whether the contention of Mr. C is
tenable? (3 Marks) (past exam jan 2021)

ANSWER

According to Section 31(1)(a) of the Arbitration and Conciliation Act, 1996, it requires that an arbitral
award to be in writing and having the signature of majority of the members of the arbitral tribunal. It is
not an award unless these two conditions are fulfilled. It is quite possible that a particular arbitrator may
not agree with the contents of the award.
Therefore, the law only requires majority of the arbitrators to sign. The law however requires the award
to note why the signature of an arbitrator was missing.
In the instant case, the arbitral award is written and signed by two arbitrators along with the fact and the
reason of refusal to sign by third arbitrator. So, this award is valid.
Hence, the contention of Mr. C that since all the arbitrators did not sign, the award is invalid, is not
tenable.

28. John is a writer. He entered into an agreement with Mumbai Publishing House (MPH). It contains
various clauses such as time limit within which the manuscript is to be given, payment of royalty of 10%
of amount received by the publisher, recovery of royalty amount in case of sales return, revision in the
material, etc. The agreement also contains a clause that in case of dispute, the matter may be referred
to arbitration, at the sole discretion of the publisher.
For the FY 2017-18, John received the royalty amount of Rs. 2.50 lakh. During the FY 2018-19 the
syllabus of management subject was changed and the author wrote manuscript for 2nd edition.

The statement of royalty payment for the FY 2018-19 was given by the publisher as under:

1. Royalty payable @ 10% of amount received by the publisher 1,85,000

2. Less: Sales return of 1st edition of the book (-) 95,000
3. Less: Future Sales return expected for during FY 2019-20 (-) 45,000
4. Gross amount payable 45,000
5. Less: TDS @10% (-) 4,500
6. Net amount paid 40,500

Page No. 437

When John compared the amount of royalty which he received in previous FY which was Rs. 2.50 lakh,
whereas in the next year the publisher paid the amount for FY 2018-19 only of Rs. 40.5 thousand.
John’s arguments were:
▪ Future sale return and royalty deduction cannot be made.
▪ The retail book seller cannot return the book after 3 months, then why the publisher has allowed /
accepted the sale return even after the lapse of 3 months. This resulted in big deduction of sales return.

In the light of the provided facts, answer the following questions as per the Arbitrating and Conciliation
Act, 1996:

(i) In the absence of separate arbitration agreement, whether the matter can be referred to the
Arbitration?
(ii) In the contract agreement, it was mentioned that in case of dispute, the matter may be referred to
arbitration, at the sole discretion of the publisher. Whether the arbitration clause, as written in the
contract agreement is perfect? Give your comments.
(RTP NOV 2021)

ANSWER

(i) Section 7(2) of the Arbitration and Conciliation Act, 1996 provides that an arbitration agreement may
be in the form of an arbitration clause in a contract or in the form of a separate agreement.
Further section 7(5) states that the reference in a contract to a document containing an arbitration clause
constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that
arbitration clause part of the contract.
In the given case, the arbitration clause was there in the contract agreement. There is no need to have a
separate arbitration clause. It is sufficient, if it have a clause in the contract agreement itself.

(ii) Section 7(1) of the Arbitration and Conciliation Act, 1996, provides that “arbitration agreement”
means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or
which may arise between them in respect of a defined legal relationship, whether contractual or not.
In the contract agreement the words written were “the matter may be referred to arbitration, at the sole
discretion of the publisher”.
Here the matter “may be referred to” have been used and further “at the sole discretion of the
publisher”. It means that referring of the matter to the arbitration was at the sole discretion of the
publisher and was not mutually agreed on. Although the author would have signed the contract
agreement, but the matter of referring was arbitrary i.e. at the sole discretion of the publisher itself. If the
publisher do not want to refer the matter to the arbitration, then no recourse is available to the author,
except to move to the civil court.

29. Under which circumstances the arbitration process comes to an end as per the Arbitration and
Conciliation Act, 1996: (RTP NOV 2021)

(a) When Arbitrator denies to pass final award

(b) When arbitrator fails to pass the award within 12 months

Page No. 438

(c) When the parties decide to no longer continue with issue.

(d) Where the parties decide to refer the matter before the court.

ANSWER- b

30. (ICAI ADDITIONAL QUESTION FOR PRACTICE)

Raman garments manufacturer entered into an arbitration agreement with its regular customers on the
supply of dress material on demand in advance. At the same time, also hold the term that in case of
disputes they may refer to the arbitration for the settlement of the matter. Raman garments
manufacturer fail to make delivery of supply of dress material to Mr. X, a regular customer. MR. X
already made Raman garments
manufacturer aware of this important order in advance. Since Raman garments manufacturer was not
able to meet the said the order well in time, he took the plea of theft and setting of fire to the property
in the manufacturing unit.
The said matter was referred to the arbitration. State the validity as to the submission of the said
dispute to the arbitration in the light of the Arbitration and Conciliation Act, 1996.

ANSWER

As per the arbitration agreement, the disputes submitted/ proposed to be submitted to arbitration must
be arbitrable. In other words that law must permit arbitration in that matter only which are capable of
arbitration. There are certain disputes that the law retains exclusively for the court, and the same cannot
be submitted for arbitration. The rationale is that given the nature of disputes, the courts are the only
appropriate forum for adjudicating the matter.

In the given matter, it clearly reveals of non-performance of the duties of the Raman garments
manufacturer within the specified timelines. To safeguard himself from the non-performance of the
contract, took the cause of theft and setting of fires in the manufacturing unit. Accordingly in the given
situation, the submitted disputes before arbitration is not arbitrable as they are the offences of criminal
natures. Such types of disputes is to be tried by the court of proper jurisdiction.
Therefore the submission of the dispute in the situation to arbitration is invalid

Page No. 439

 18 The Insolvency and Bankruptcy Code, 2016

ATTEMPTS
MAY NOV MAY NOV NOV JAN JULY NOV
COVERAGE
2018 2018 2019 2019 2020 2021 2021 2021

STUDY Q.- 1, 30, 31, 32, 33, 34, 35, 36, 37, 38, 39, 40, 41,
MAT 42, 43, 44, 45, 46, 47, 51, 52

PAST Q-10, 11 Q-14, 15 Q-17, 18 Q-24, 25 Q-65, 66 Q-64, 67 ------

EXAMS

Q-53,
Q-2, 3,
Q-12, 54, 55,
MTP Q-7, 8 4, 5, 10, Q-26, 27 Q-60, 61, 62, 63 ------
13, 16 56, 57,
19
58, 59

Q-21, Q-70, 71,

RTP Q-6 Q-9 Q-1, 20 Q-28, 29, 49, 50 Q-68, 69
22, 23 72

Page No. 440

Multiple Choice Questions

1.(RTP MAY 2019)

Under the IBC, The resolution plan shall be approved by the Committee of Creditors by a vote of not
less than---------------percent of voting share of the financial creditors.

(a) 51%
(b) 66%
(c) 75%
(d) 95%
Answer: Option B

2.MTP Mar 2019 Qn no 3

ABC and Co, the tax consultants of X Limited for which an interim resolution professional – Mr A, has
been appointed under the Corporate Insolvency resolution process has refused to furnish information
to Mr A on the grounds of client confidentiality. Are they right?

(a) Yes, they are right

(b) No, the Code provides powers to the IRP to access all information from various parties
(c) Partly right, they can do so only after consent of the directors
(d) Mr A is not right in even asking for this information
ANSWER : OPTION B

3.MTP Mar 2019 Qn no 17

With whom will the Central Government file an application if it is of the opinion that such a scheme
is not in public interest or in the interest of the creditors?

(a) Cannot move an application

(b) it may file an application before the Tribunal
(c) it may file an application before the Parliament
(d) it may be through special leave filed before Supreme Court

Answer: Option B

4.MTP Apr 2019 Qn no 11

In case of a contravention of the resolution plan, an application for liquidation can be made by

Page No. 441

a) Only the original applicant
b) Only by the corporate debtor
c) By any person other than the corporate debtor whose rights have been prejudicially affected
d) By the financial creditors only

Answer: Option C

5.MTP April 2019 Qn no 13

For initiation of Voluntary liquidation, a declaration of solvency ( no debts or assets are sufficient to
discharge liabilities ) should be given by

a) Two directors
b) Two directors and 80% shareholders
c) Two directors and 80% shareholders and statutory auditors
d) Majority of the directors
Answer: Option D

Descriptive Questions

6.RTP May 2018 QN no 20

(i) Wisdom Ltd. commits a default against the debts taken from the financial creditors. Mr. F, a
financial creditor initiated the corporate insolvency resolution process against the Wisdom Ltd. Mr.
X, another financial creditor, thereof files an application for initiating corporate insolvency resolution
process with the Adjudicating Authority. Examine with reference to the validity as to the filing of an
application by Mr. X for initiation of corporate insolvency resolution process?

(ii) Standard International Ltd. who is a foreign trade creditor having its office in Hong Kong wanted
to file a petition under insolvency and bankruptcy code 2016 on default of the debtor in India. It
moved a petition under section 9 of the code seeking commencement of insolvency process. The
foreign company was not having any office or bank account in India. Because of this, it couldn’t
submit a “certificate from financial institution “as required under the code. Examine whether the
petition is permissible under the Insolvency & Bankruptcy Code, 2016?
ANSWER:
In the given problem, on commission of default by the Wisdom Ltd., Mr. F filed an application for
initiating corporate insolvency resolution process before adjudicating authority. Further, Mr. X another
financial creditor moved an application for initiation of insolvency resolution process against the
Wisdom Ltd.

According to the section 6 of the Code, where any corporate debtor commits a default, a financial
creditor, Operational creditor or the Corporate debtor itself may initiate insolvency resolution process

Page No. 442

against such corporate debtor.
But as per Section 13 of the Code, once an application is admitted by the Adjudicating authority, it shall
by an order declare a moratorium for the purposes referred to in section 14. Then causes a public
announcement of the initiat ion of CIRP by IRP and call for the submission of claims under section 15
and appoint an IRP in the manner as laid down in section 16 of the Code. Public announcement lays
down all the relevant information related to the CIRP. So that the all creditors entitled under the law
can raise their claim in this case.

So, no further application for initiation of CIRP can be initiated by Mr. X., however he is entitled under
the law to raise his claim in this case against the Wisdom Ltd.
(ii) Section 1 of the Insolvency and Bankruptcy Code, 2016 specifies of the extent, commencement and
applicability of the Code. According to this, it extends to the whole of India and shall apply for
insolvency, liquidation, voluntary liquidation or bankruptcy of any company incorporated under the
Companies Act, 2013 or under any previous law.
In view of this, the IBC Code, 2016 applies to the corporate debtor incorporated under the Companies
Act, 2013 or under any previous laws.
As per the definition of the Creditor given in section 3(10) of the Insolvency and Bankruptcy Code, 2016,
it means any person to whom a debt is owed and includes a financial creditor, an operational creditor, a
secured creditor, an unsecured creditor, and a decree holder. So, Standard International Ltd. is a
creditor under the purview of the Code.
As per the facts given in question, Standard International Ltd., is a foreign trade creditor. He wanted to
file a petition under the under Section 9 of the Insolvency and Bankruptcy Code, 2016 for commencement
of Insolvency process against the defaulter in India. Standard International Ltd. was not having any office
or bank account in India.
As per the requirement of section 9 of the Code, along with application certain documents were needed
to be furnished by the creditor to the Adjudicating authority. Being a foreign trade creditor, Standard
International Ltd was also required to provide a copy of certificate from the financial institutions
maintaining accounts of the creditor confirming that there is no payment of an unpaid operational debt
by the corporate debtor. Since, Standard International Ltd. was not having any office or bank account in
India, it cannot furnish certificate from financial institution as defined under the section 3(14) of the
code. So, Petition under section 9 of the Code is not permissible.

7.March 2018 Qn no 5(c) 6 Marks:

X Ltd. was intending to initiate voluntarily liquidation proceedings. A declaration was made on
affidavit of the some of the directors of the X Ltd. verifying full inquiry of the affairs of the company.
They gave the opinion that the company will be able to pay its debts in full from the proceeds of
assets to be sold in the voluntary liquidation.

Analysing the given situation, comment whether X Ltd can initiate voluntary liquidation proceeding in
compliance with the conditions given in the Insolvency and Bankruptcy Code, 2016. What are the
required documents to be accompanied with the declaration?

Page No. 443

Also, state the consequences, where if the articles fixed the period of duration for which company
may be carried and that period expires.

Answer:

Section 59 of the Insolvency & Bankruptcy Code, 2016 empowers a corporate person intending to
liquidate itself voluntarily if it has not committed any default to initiate voluntary liquidation
proceedings under the provisions of this Code.

Any corporate person registered as a company shall meet the following conditions to initiate a voluntary
liquidation process:-
(a) A declaration from majority of the directors of the company verified by an affidavit stating
i. That they have made a full inquiry into the affairs of the company and have formed an opinion
that either the company has no debts or that it will be able to pay its debts in full from the
proceeds of assets to be sold in the voluntary liquidation; and
ii. That the company is not being liquidated to defraud any person.

(b) The declaration shall be accompanied with the following documents, namely:
i. Audited financial statements and a record of business operations of the company for the
previous two years or for the period since its incorporation, whichever is later;
ii. A report of the valuation of the assets of the company, if any, prepared by a registered valuer.
(c) After making the declaration the corporate debtor shall within four weeks -
i. Pass a special resolution at a general meeting stating that the company should be liquidated
voluntarily and insolvency professional to act as the liquidator may be appointed.

ii. Pass a resolution at a general meeting stating that the company be liquidated voluntarily as a
result of expiry of the period of its duration (fixed by its articles or on the occurrence of any
event in respect of which the articles provide that the company shall be dissolved, if any) and
appointing an insolvency professional to act as the liquidator.
In the given situations, according to the above provisions, a declaration was made on
affidavit of the some of the directors of the X Ltd. verifying full inquiry of the affairs of the
company, is not in compliance as the majority was the requirement for initiation of the
voluntary liquidation proceedings. And the further declaration that the company is not being
liquidated to defraud any person is not given in the affidavit. The documents to be
accompanied with declaration shall be as per the point (b) given above.
Where if the articles fixed the period of duration of continuation and that period expires, X
Ltd. after making declaration, shall within 4 weeks pass a resolution at a general meeting
stating that the company be liquidated voluntarily as a result of expiry of the period of its
duration as fixed by its articles and appointing an insolvency professional to act as the
liquidator.

Page No. 444

8.March 2018 Qn no 4(d) 3 Marks:

State the manner of initiation of corporate insolvency resolution process by financial creditor under
the Insolvency and Bankruptcy Code, 2016.

9.RTP Nov-18:
What is the Insolvency Resolution Process for financial creditors?

Answer:

Initiation of corporate insolvency resolution process by financial creditor [Section 7 of the Insolvency
and Bankruptcy Code, 2016]

As per the Code, financial creditor either by itself or jointly with other financial creditors or any other
person on behalf of the financial creditor as may be notified by the central government may file
an application against a corporate debtor before the Adjudicating Authority (National Company Law
Tribunal) when a default has occurred.
The financial creditor shall, along with the application furnish the relevant information as to the record of
default, name of resolution professional and other required information.
The Adjudicating Authority shall, within fourteen days of the receipt of the application, ascertain the
existence of a default from the records of an information utility or on the basis of other evidence
furnished by the financial creditor. Adjudicating Authority if, satisfied that a default has occurred and
complying with other requirements of the section, it may, by order, admit such application; or if,
default has not occurred, it may, by order, reject such application.
The corporate insolvency resolution process shall commence from the date of admission of the
application

10.May 2018 Qn no 5(C) 6 Marks ;MTP Apr 2019 Qn no 5(b) 6 Marks

Rose Garden Ltd. was incurring continuous losses and its financial position went bad to worse. Black
Stone (Private) Ltd., a trade creditor, issued notice under Section 271 of the Companies Act, 2013 for
winding up of Rose Garden Ltd. on the ground that it was unable to pay its debts. After some time,
Black Stone (Private) Ltd. being an operational creditor filed a petition before the Adjudicating
Authority to initiate insolvency process under the Insolvency and Bankruptcy Code, 2016. Demand
Notice and copy of invoice were not served to Rose Garden. Ltd. since a notice was earlier issued for
winding up. All other formalities were complied with. The Adjudicating Authority initiated Insolvency
Resolution Process by admitting the application and appointed Resolution Professional. After
complying required formalities, the Adjudicating Authority issued orders for moratorium and other
relief within the stipulated time. Being aggrieved by the order of Adjudicating Authority, Rose Garden
Ltd. (Corporate debtor) filed an appeal before NCLAT under the Insolvency and Bankruptcy Code,
2016. Determine will the Company succeed in its appeal?
Answer

As per Section 8 of the Insolvency and Bankruptcy Code, 2016, once a default has occurred, the
operational creditor has to deliver a demand notice or a copy of invoice demanding payment of debt in

Page No. 445

default to the corporate debtor.
Since in the given case, demand notice and copy of invoice was not served to the Rose Garden Ltd., so
the requirement for the initiation of the corporate insolvency resolution process by operational creditor
under section 9 of the Code, was not in compliance. So, the admission of application in line with the
compliance of other required formality as to issue of order of moratorium and other relief, given by the
NCLT was against the law.
As Rose Garden Ltd. (Corporate debtor) was aggrieved by the Order of the Adjudicating Authority on
the non-compliance of requirement of Section 8, Rose Garden Ltd. will succeed in its appeal filed
before the National Company Law Appellate Tribunal.
Further, as IBC is a special law, having an overriding effect on the Companies Act, 2013, therefore serving
of notice for winding up as per the Companies Act, will not be considered as a sufficient compliance of the
requirement for prevailing of section 8 of the Insolvency and Bankruptcy Code.

11.May2018 Qn no 4(d) 4 Marks:

You are appointed as Interim Resolution Professional in XYZ Company Ltd. under the Insolvency and
Bankruptcy Code, 2016. State the time limit to make Public Announcement? Also state the protocol
for issuance of public notice. Who shall bear the expenses of public announcement?

Answer:

1) Time Limit for making Public Announcement

Interim Resolution Professional shall make the Public Announcement immediately after his appointment.
“Immediately” here means not more than three days from the date of appointment of the Interim
Resolution Professional. Hence, the time limit to make Public Announcement is within 3 days from the
date of appointment of the Interim Resolution Professional.
2) Protocol for issuance of Public Notice
As per Section 15 of the Insolvency and Bankruptcy Code,2016, public announcement shall include the
following:-
(a) Name & Address of Corporate Debtor under the Corporate Insolvency Resolution Process.
(b) Name of the authority with which the corporate debtor is incorporated or registered.
(c) Details of interim resolution Professional who shall be vested with the management of the
Corporate Debtor and be responsible for receiving claims.
(d) Penalties for false or misleading Claims.
(e) The last date for the submission of the claims.
(f) The date on which the Corporate Insolvency Resolution Process ends which shall be the 180th day
from the date of admission of the application under section 7,9 or section 10 as the case may be.

Page No. 446

3) Expenses of Public Announcement
The expenses of public announcement shall be borne by the applicant which may be reimbursed by
the Committee of Creditors, to the extent it ratifies them.

12.Aug 2018 Qn no 5(c) 6 Marks:

Mr. Ramlal, an Insolvency professional was appointed as a resolution professional for a corporate
insolvency process initiated against the corporate debtor, Monotech Ltd. Mr. Ramlal is a partner of
consulting firm M/s supervision and company which is entity recognized under the IBBI. It was
discovered that M/s supervision and company had a transaction with the Monotech Ltd. amounting
to 11% of its gross turnover in the last financial year 2017-2018.

Analyse the given situation as per the Insolvency and Bankruptcy Code, 2016, and advise on the validity
of appointment of Mr. Ramlal as resolution professional against Monotech Ltd.
What if, the creditor of the Monotech Ltd. opines that the resolution professional appointed is
required to be replaced.
Answer:

As per Regulation 3 of Insolvency and Bankruptcy (Insolvency Resolution Process for Corporate Persons)
Regulation, 2016, an insolvency professional shall be eligible for appointment as a resolution
professional for a corporate insolvency process if he and all partners and directors of the insolvency
professional entity of which he is partner or director are independent of the corporate debtor. However
such an Insolvency professional who is appointed as an resolution professional shall not be an employee
or proprietor or a partner of a legal or consulting firm that has or had any transaction with the
corporate debtor amounting to ten per cent or more of the gross turnover of such firm in the last three
financial years, subject to compliance of other requirements.

In the given instance, Mr. Ramlal, was appointed as Resolution professional for a corporate insolvency
process initiated against the Monotech Ltd. During the process, it was discovered that Mr. Ramlal is a
partner of a consultant firm M/s supervision and company, which has made transaction of 11% of the
gross turnover of the firm in the financial year 2017 -2018 with Monotech Ltd.
Accordingly, Mr. Ramlal being a partner of the Firm had made a transaction of more than 10% of the
gross turnover of the firm in the previous financial year 2017-2018. So his appointment as resolution
professional against Monotech Ltd for initiation of CIRP, is not valid.

Replacement of Resolution Professional: As per the Code, if a debtor or a creditor is of the opinion that
the resolution professional appointed is required to be replaced, he may apply to the Adjudicating
Authority (AA) for replacement of such professional. As per Section 27 of the Code, the Committee of
Creditors (CoC) may replace the insolvency Resolution Professional with another resolution professional
by passing a resolution for the same to be approved by a vote of sixty six per cent of voting shares of
the creditors. The Committee of Creditors shall forward the name of the new proposed Insolvency
Professional to the Adjudicating Authority, and after the confirmation of the proposed insolvency
resolution professional by the Board he shall be appointed in the same manner as laid down in Section 16

Page No. 447

which deals with the Appointment of IRP.

13.Aug 2018 Qn no 4(d) 3 Marks:

Discuss the Principles on the basis of which the Insolvency Professional Agency (IPA) is enrolled and
regulate insolvency professionals as its members in accordance with the I & B Code, 2016 .

Answer:

The Code provides for establishment of insolvency professionals agencies (IPA) to enroll and regulate
insolvency professionals as its members in accordance with the Insolvency and Bankruptcy Code 2016
and read with relevant regulations.

Principles governing registration of Insolvency Professional Agency

 to promote the professional development of and regulation of insolvency professionals

 to promote the services of competent insolvency professionals to cater to the needs of debtors,
creditors and such other persons as may be specified
 to promote good professional and ethical conduct amongst insolvency professionals
 to protect the interests of debtors, creditors and such other persons as may be specified
 to promote the growth of insolvency professional agencies for the effective resolution of
insolvency and bankruptcy processes under this Code.

14.Nov 2018 Qn no 4(d) 4 Marks:

As on March 31, 2018, the audited balance sheet of M/s. Sharp Industries Limited, revealed total
assets of Rs.1 crore. M/s. Sharp Industries Limited, in the capacity of a Corporate Debtor, filed an
application on July 1, 2018 with the Adjudicating Authority for initiating a fast track corporate
insolvency resolution process. Explain under the provisions of Insolvency and Bankruptcy Code,
2016 the following:

(i) Whether the application made by M/s. Sharp Industries Ltd. for initiating a fast track corporate
insolvency resolution process is admissible
(ii) The time period including the extension of time period, if any, within which the fast track
corporate insolvency resolution process shall be completed?
Answer:

Application by corporate debtor: An application for fast track insolvency resolution can be made by any
corporate debtor falling under any of the below mentioned category:-

(a) a corporate debtor with assets and income below a level as may be notified by the Central
Government; or
(b) a corporate debtor with such class of creditors or such amount of debt as may be notified by the
Central Government; or

Page No. 448

(c) such other category of corporate persons as may be notified by the Central Government.

Time period for completion of fast track corporate insolvency resolution process

The fast track corporate insolvency resolution process shall be completed within a period of 90 days
from the insolvency commencement date.
Extension: The aggrieved may make an application to the Adjudicating Authority if it is satisfied that the
fast track corporate insolvency resolution process cannot be completed within a period of 90 days, it
may, by order; extend the duration of such process to a further period which shall not be exceeding
45 days.
In the light of the provisions above and the fact of the question:
(i) The application made by M/s Sharp Industries for initiating fast track corporate insolvency resolution
process is admissible if it falls within the purview of the mentioned categories of corporate debtor.
(ii) The fast track corporate insolvency resolution process shall be completed within 135 days (90+45)
from the insolvency commencement date.

15.Nov 2018 Qn no 5(c) 6 Marks:

XY Ltd. filed a petition under Insolvency and Bankruptcy Code, 2016 with NCLT against DF Ltd.
(Corporate Debtor) and the petition was admitted. There were only three financial creditors including
XY Ltd. During the Corporate Insolvency Resolution process, the Corporate Debtor settled the claims of
all the 3 financial creditors. Whether such settlement agreement could be termed as a valid
resolution plan? Also discuss whether a financial creditor in respect of whom there is no default can file
an application before Adjudicating Authority (NCLT) for initiating corporate insolvency resolution
process. Discuss.

Answer:
As per section 7 of the Insolvency and Bankruptcy Code, 2016, a financial creditor either by itself or
jointly with other financial creditors, may file an application for initiating corporate insolvency
resolution process against a corporate debtor before the Adjudicating Authority when a default has
occurred.

As per the facts given, the Adjudicating Authority admitted the petition. During the Corporate
Insolvency Resolution Process (CIRP), the DF (Corporate debtor) settled the claims of all the 3 financial
creditors.
However, as per the Code, during the insolvency resolution process, the IRP/RP was appointed to collate
the claims in a collective mechanism to propose a time bound solution to resolve the situation of
insolvency and prepare the resolution plan as agreed to by the debtors and creditors and submit the
same to Committee of Creditors for its approval.
Since in the give case, debtor itself settled the claims without following the said procedure. Therefore,
such a settlement agreement cannot be termed as valid resolution plan.
As per requirement of the Code, the process of insolvency is triggered by occurrence of default. Default

Page No. 449

means non-payment of debt when whole or any part or instalment of the amount of debt has become
due and payable and is not repaid by the debtor or the corporate debtor, as the case may be. [Section
3(12)].So a financial creditor in respect of whom there is no default, cannot file an application for
initiating insolvency resolution process.

16.Oct 2018 Qn no 5(c) 6 Marks:

The following particulars relate to Big Rammy (Private) Ltd. which has gone into Corporate Insolvency
Resolution Plan (CIRP):

Sr. Particulars Amount

No. in
Rs.
1 Amount realized from the sale of liquidation of assets 14,00,000
2 Secured creditor who has relinquished the security 5,00,000
3 Unsecured financial creditors 4,00,000
4 Income-tax payable within a period of 2 years preceding 50,000
the liquidation commencement date
5 Cess payable to state government within a period of one 20,000
year preceding the liquidation commencement date
6 Fees payable to resolution professional 75,000
7 Expenses incurred by the resolution professional in running 25,000
the business of the Big Rammy (Private) Ltd. on going
concern
8 Workmen salary payable for a period of thirty months 3,00,000
preceding the liquidation commencement date. The
workmen salary is equal per month
9 Equity shareholders 10,00,000

State the priority order in which the liquidator shall distribute the proceeds under the Insolvency and
Bankruptcy Code 2016.

Answer:
As per section 53 of the Insolvency and Bankruptcy Code, 2016, the proceeds from the sale of
liquidation assets shall be distributed in the following order of priority:

Insolvency Resolution Process Cost and Liquidation cost to be paid in full

(i) Fees payable to Resolution Professional in full 75,000

(ii) Expenses incurred by the Resolution professional in running the 25,000
business on going concern

Page No. 450

 (iii) Workmen salary outstanding for a period of 24 months 2,40,000
(proportionate to 24 months only). The balance Rs. 60,000 is
considered as remaining debts and dues and will be settled
before preference shareholder/equity
shareholder.
(iv) Secured creditor who has relinquished the security 5,00,000
(v) Unsecured Financial Creditors 4,00,000
(vi) Income- tax payable with in the period 2 years 50,000
(vii) Cess to State Government payable with in a period of one year 20,000
(vii) Balance amount in workmen salary 60,000
Total distribution in the above priority 13,70,000
Amount realized from the sale of liquidation of assets 14,00,000
Balance available to Equity share holder on pro rata basis 30,000

17.May 2019 Qn no 5(b) 6 Marks:

The following particulars relate to M/s. Star House (P) Limited which has gone into Corporate
Insolvency Resolution Process (CIRP):

S. No. Particulars Amount in Rupees

1. Amount realized from the sale of liquidation of 7,00,000
Assets
2. Secured Creditors who has relinquished the 2,50,000
security
3. Unsecured Financial Creditors. 2,00,000
4. Income Tax Payable within a period of two years 25,000
preceding the liquidation commencement date.
5. Cess Payable to State Government within a period10,000
of one year preceding the liquidation
commencement date.
6. Fees payable to resolution professional. 37,500
7. Expenses incurred by the resolution professional in 17,500
running the business of M/s. Star House (P) Limited
on
going concern.
8. Workmen salary payable for a period of thirty 1,50,000
months
preceding the liquidation commencement date.
The workmen salary is equal per month.
9. Equity Shareholders. 5,00,000

State the priority order in which the liquidator shall distribute the proceeds under the Insolvency &
Bankruptcy Code, 2016.

Page No. 451

Answer:

The priority order in which the liquidator shall distribute the proceeds will be as under:

Particulars Amount (in Rs.)

Amount realised from the sale of liquidation of assets 7,00,000
Less: (i) Fees payable to resolution professional 37,500
(ii) Expenses incurred by the resolution professional in running 17,500 (55,000)
the business of M/s Star House (P) Ltd. on going concern

Balance available 6,45,000

Less: (i) Secured creditors who has relinquished the security 2,50,000
(ii) Workmen salary payable for a period of 24 months 1,20,000 (3,70,000)
preceding the liquidation commencement date
[1,50,000*(24/30)]
Balance available 2,75,000

Less: Unsecured Financial Creditor 2,00,000 (2,00,000)

Balance available 75,000

Less: (i) Income tax payable 25,000

(ii) Cess payable to State Government 10,000 (35,000)

Balance available 40,000

Less: Balance Workmen salary payable (apart for a period of 24 30,000 (30,000)
months preceding the liquidation commencement date)
[1,50,000 – 1,20,000]

Balance Available for equity shareholders 10,000

18.May 2019 Qn no 6(c)(ii) 3 Marks:

Continental Rubber Limited is a supplier of raw materials to Smooth Latex Limited. It filed a petition
before the NCLT for the recovery of Rs. 10,00,000 from Smooth Latex Limited. Smooth Latex Limited,
the Corporate Debtor, has other financial creditors to the extent of Rs. 1,50,00,000 and they also joined
together and filed petitions to NCLT. The Corporate Debtor has a total of 40 financial creditors and 2
operational creditors. Further, all the financial creditors are having equal voting rights/shares.

Page No. 452

Notice was issued on 1st August, 2018 for the conduct of the first meeting to be held on 5th August,
2018 at a common venue. The meeting was attended by all 40 financial creditors and 2 operational
creditors. A resolution was passed to appoint Mr. TK as a Resolution Professional. 25 of the financial
creditors voted in favour of the resolution and 10 voted against the resolution and 5 financial creditors
and 2 operational creditors abstained from voting. Decide whether the resolution passed is valid? In
the light of the provisions of Insolvency and Bankruptcy Code, 2016 read with rules framed
thereunder, explain the requirements of issue of notice and quorum for the conduct of the meeting.

Answer:

According to section 22 of the Insolvency and Bankruptcy Code, 2016,

First Meeting of Creditors

 The first meeting of the committee of creditors shall be held within seven days of the constitution
of the committee of creditors.
 The committee of creditors in the first meeting may by a majority vote of not less than sixty-six per
cent. of the voting share of the financial creditors, either resolve to appoint the interim resolution
professional as a resolution professional or to replace the interim resolution professional by another
resolution professional.
 Notice of the Meeting

The resolution professional shall give notice of each meeting of the committee of creditors to:-
(a) Members of Committee of creditors, including the authorised representatives referred to in sub-
sections (6) and (6A) of section 21 and sub-section (5);
(b) Members of the suspended Board of Directors or the partners of the corporate persons, as the case
may be;
(c) Operational creditors or their representatives if the amount of their aggregate dues is not less than
ten per cent. of the debt.
Quorum for the Meeting

A meeting of committee of creditors shall quorate if members of the committee of creditors

representing at least thirty three percent of the voting rights are present either in person or by
video/audio means.
• If the requisite quorum for committee of creditors is not fulfilled the meeting cannot be held and
the meeting shall automatically stand adjourned at the same time and place on the next day.
• The adjourned meeting shall quorate with the members of the committee attending the meeting.
As per the facts of the question and the provisions of law:
(1) The first meeting of committee of creditors was validly held within three days of the constitution of
the committee of creditors.
(2) The requisite quorum was present in the meeting as all 40 financial creditors attended the meeting.
(3) The Act requires that not less 66% of the financial creditors shall resolve to appoint resolution
professional. However, in the given case 71.4% [(25/35)* 100] voted in favour of Mr. TK. Hence, the

Page No. 453

 said appointment is valid.

19.MTP Apr 2019 Qn no 6(b)(ii) 3 Marks

Discuss the process of appointment of resolution professional by the Committee of creditors under the
IBC, 2016.

Answer

Appointment of resolution professional by CoC

The Committee of Creditors (CoC), may, in the first meeting, by a majority vote of not less than sixty six
per cent of the voting share of the financial creditors, either resolve to appoint the interim resolution
professional as a resolution professional or to replace the interim resolution professional by another
resolution professional
(section 22(2) of Insolvency Code, 2016).
If they decide to continue interim resolution professional, subject to a written consent from the interim
resolution professional in the specified form they will inform its decision to the interim resolution
professional, the corporate debtor and the Adjudicating Authority (section 22(3)(a) of Insolvency Code,
2016).
However, if they decide to replace the interim resolution professional, the CoC shall file application
before the Adjudicating Authority for the appointment of Resolution Professional, along with a
written consent from the proposed resolution professional in the specified form (section 22(3)(b) of
Insolvency Code, 2016).
The Adjudicating Authority (NCLT) shall inform name of proposed new Resolution Professional to IBBI.
The resolution professional can be appointed only with approval of Board (IBBI). Till then, the interim
resolution professional will continue.

20.RTP May 2019Qn no 17

The financial creditor, Mr. Raman, was an investor and a debenture holder of ‘Optionally Convertible
Debenture Bond (OPDB)’ payable on maturity, was issued by the M/s Asset Ltd. (corporate debtor).
The zero interest OCD bonds amounted to 2 crore matured in 2016 . The liability to redeem the
debentures on maturity along with a redemption premium lay on the debtor, which was not made. Mr.
Raman filed the Corporate Insolvency resolution process before the NCLT. Advise in the light of the
given facts, the following situations:

(i) State whether Mr. Raman is eligible for filing of application for initiation of CIRP?
(ii)
Do the redemption of debenture payable on the maturity date amounts to debt?
Answer

As per Section 5(7) of the Insolvency and Bankruptcy Code, 2016, financial creditor means any person to
whom a financial debt is owed and includes a person to whom such debt has been legally assigned or
transferred to.

Page No. 454

Whereas the term Financial debt defined under Section 5(8) means a debt along with interest, if any,
which is disbursed against the consideration for the time value of money and includes any amount
raised pursuant to the issue of bonds, notes, debentures, loan stock or any similar instrument.
As per the facts, Mr. Raman, was an investor and a debenture holder of ‘Optionally Convertible Debenture
Bond (OPDB)’ issued by the Asset Ltd. With the debenture payable, as on the maturity date with interest,
it was disbursed against consideration for the time value of the money. Thus, it can be said that
debentures on maturity will come under that purview of Section 5(8)(c). Since Mr. Raman is a person to
whom a financial debt is owed, he will come within the definition of Financial creditor. Being a
debenture-holder and shareholder of the company he, being a creditor is entitled to claim debt amount.
Therefore, as per section 7, Mr. Raman is entitled to file an application to initiate CIRP against the M/s
Asset Ltd.

21.RTP Nov 2019 Question no. 3

Mr. Satya, file a petition for default of non –payment of the debt against Mr. X. The amount in default
claimed by petitioner was Rs. 30 lakh. Mr. X (Respondent) pleaded before the adjudicating authority
that the amount of claim was not belonging to the applicant/petitioner. Mr. Satya, asserted that he
himself with his son owns Rs. 26 Lakh to the respondent. Though nowhere in the petition and the
supportive documents, he admitted that he himself with his Son owns Rs. 26 Lakh to the respondent.
Considering the above facts in the light of the Insolvency and Bankruptcy Code, state the ac tion that
will be taken by the Adjudicating Authority-

(a) NCLT will admit the application of Mr. Satya, as he jointly with his son owned the debt to the Mr.
X, so he is a valid petitioner.
(b) NCLT will admit the application filed by Mr. Satya on behalf of his son.
(c) NCLT will reject the application considering that no default has occurred against Mr. Satya, and
his stand as a financial creditor is not proved in the petition.
(d) NCLT will dismiss the application on the ground of non- existence of dispute against Mr. Satya.
Answer: (C)

22.RTP Nov 2019 Qn no 4

How many times Corporate Insolvency Resolution Process period can be extended?

(a) shall not be granted more than once

(b) shall be granted more than once
(c) shall be granted more than twice on the reasonable cause
(d) cannot be granted at all
Answer: (a)

23.RTP Nov 2019 Qn no 14

Creative India Limited owes a sum of Rs. 2,80,000 to S, who assigns this debt to his two creditors, Mr. R
– to the extent of Rs. 1,40,000 and Mr. M - to the extent of Rs. 1,40,000.

Page No. 455

Mr. M makes a demand for his money from the company by giving a legal notice. The company could
not meet Mr. M’s demand or otherwise satisfy him till the expiry of four weeks from the date of notice.
Mr. M, therefore, moves to NCLT with an application for initiation of Insolvency and Bankruptcy Code,
2016, decide whether an application filed by Mr. M can be accepted by NCLT.
Answer

Financial creditor can initiate corporate insolvency resolution process himself or jointly with other
financial creditors against corporate debtor on default of payment of debt of Rs. 1,00,000 or
more. Assignee of financial debt is also financial creditor as per section 5(7) of the IBC, 2016. Mr. M's
application can be accepted by NCLT if company fails to pay debt within stipulated time. Application
should be supported with a copy of the assignment or transfer agreement and other relevant
documents as may be required to demonstrate the assignment or transfer.

24.Nov 2019 Qn no 5(C) 6 Marks

In view of the deep recession prevailing in, the market for the past three years, M/s. Infra Limited
(Corporate Debtor), which was facing the brunt of financial crisis, could not pay salaries and wages to
its workmen and employees for the past 6 months. The workmen and the employees, who are the
members of a recognized Trade Union "Infra Labor Federation", made a complaint in this regard.
Thereafter, the Trade Union approached and urged the Management of the Company in person and
through representations in writing to settle the arrears of wages and salaries due to its members.
The Corporate Debtor neither disputed nor took any actions to settle the amount. Under the
circumstances, Infra Labor Federation filed an application before the Adjudicating Authority i.e. with
the National Company Law Tribunal for initiating a Corporate Insolvency Resolution Process under
the Insolvency and Bankruptcy Code, 2016.

In the light of the provisions of the Insolvency and Bankruptcy Code, 2016, examine the following:

(i) Validity of the Application.

(ii) What will be the "Initiation date" for initiating the Corporate Insolvency Resolution Process?
Answer
Workmen & Employees as Operational Creditor: The Insolvency and Bankruptcy Code, 2016 considers
all employees and workmen as operational creditors.

As per section 5(20) of the Code, "Operational creditor" means a person to whom an operational debt is
owed and includes any person to whom such debt has been legally assigned or transferred;”

Whereas Operational Debt as per Section 5 (21) of the Code means a claim in respect of the provision of
goods or services including employment or a debt in respect of the repayment of dues arising under any
law for the time being in force and payable to the Central Government, any State Government or any
local authority.”

Accordingly, if there is any dues arising in the course of employment, then that will be considered as an
operational debt and the person to whom such operational debt is owed shall be treated as the
Operational Creditor. Therefore, workmen & employees shall be treated as Operational Creditor of the

Page No. 456

Corporate Debtor.
The term “person” as defined under section 3(23) of the IBC, 2016 includes “any other entity
established under any statute”. A trade union, when registered under the Trade Union Act, 1926 would
come within the purview of any other entity “established” under the statute.

Filing of an application by Operational Creditor: Application can be filed by the Operational Creditor in
the NCLT if there is a debt, in compliance with sections 8 & 9 of the Code.

Prior to filling the application before NCLT, an employee has to comply with the procedure of sending
the demand notice to the Corporate Debtor. If the Corporate Debtor has not paid the amount of debt
even after sending the demand notice, neither intimated to the operational creditor about the
existence of any regarding the dispute pertaining to the due debts.
After the expiry of ten days, if the operational creditor does not receive his payment or the confirmation
of a dispute that existed even before the demand notice was sent, he may file an application before the
Adjudicating Authority for initiating a corporate insolvency resolution process.
The date of filing of the application before the NCLT will be the initiation date for initiating the Corporate
Insolvency Resolution Process (Section 5(11)).
Accordingly, in the light of the given provisions, following are the answers:
(i) Application filed by trade union, Infra Labor Federation on behalf of the workmen & employees in
the said instance is valid as operational debt had been being legally assigned to the trade union in
terms of section 5(20) of the Code and is included in the definition in section 3(23) of IBC, 2016.
(ii) Trade union, Infra Labour Federation may file an application before the Adjudicating Authority for
initiating a corporate insolvency resolution process after expiry of 10 days from the date of serving
demand notice to the M/s Infra Ltd and the date of filing of the application before the NCLT will be
the date of initiation.

25.Nov 2019 Qn no 6(d) 3 Marks

The Committee of Creditors of M/s XYZ Limited proposes to appoint Mr. Ajit, an Insolvency
Professional, as Insolvency Resolution Professional in the matter of corporate insolvency process of
M/s XYZ Limited. Mr. Ajit was a promoter of M/s ABC Limited which is a holding company of M/s XYZ
Limited. Examine and decide whether Mr. Ajit is eligible for appointment as an Insolvency Resolution
Professional under the Provisions of Insolvency and Bankruptcy Code, 2016.
Answer
As per Regulation 3 of Insolvency and Bankruptcy (Insolvency Resolution process for corporate persons)
Regulation, 2016, an insolvency professional shall be eligible for appointment as a resolution
professional for a corporate insolvency resolution process if he and all partners and directors of the
insolvency professional entity of which he is partner or director, are independent of the corporate
debtor.

In the given instance, Committee of Creditors of M/s XYZ Ltd. proposed to appoint Mr. Ajit, as IRP in the
matter of corporate insolvency resolution process of M/s XYZ Ltd. However, Mr. Ajit was a promoter of

Page No. 457

M/s ABC Ltd. which is a holding company of M/s XYZ Ltd.
Accordingly, Mr. Ajit, is a related party of the corporate debtor. Therefore, Mr. Ajit is not eligible for
appointment as an insolvency resolution professional in terms of the said legal provisions of the Code.

26.MTP Nov 2019 Qn no 5(b) 6 Marks

X Ltd. was intending to initiate voluntarily liquidation proceedings. A declaration was made on
affidavit of the some of the directors of the X Ltd. verifying full inquiry of the affairs of the company.
They declared that the company will be able to pay its debts in full from the proceeds of assets to be
sold in the voluntary liquidation.
Analyse the given situation and comment whether X Ltd can initiate voluntary liquidation proceeding
in compliance with the conditions given in the Insolvency and Bankruptcy Code, 2016. What are the
required documents to be accompanied with the declaration?
Also, state the consequences, where if the articles fixed the period of duration for which company may
be continued and that period expires.

Answer

Section 59 of the Insolvency & Bankruptcy Code, 2016 empowers a corporate person intending to
liquidate itself voluntarily if it has not committed any default, to initiate voluntary liquidation proceedings
under the provisions of this Code.

Any corporate person registered as a company shall meet the following conditions to initiate a voluntary
liquidation process:-
(a) A declaration from majority of the directors of the company verified by an affidavit stating
i. That they have made a full inquiry into the affairs of the company and have formed an opinion
that either the company has no debts or that it will be able to pay its debts in full from the
proceeds of assets to be sold in the voluntary liquidation; and
ii. That the company is not being liquidated to defraud any person.
(b) The declaration shall be accompanied with the following documents, namely:
i. Audited financial statements and a record of business operations of the company for the
previous two years or for the period since its incorporation, whichever is later;
ii. A report of the valuation of the assets of the company, if any, prepared by a registered valuer.
(c) After making the declaration the corporate debtor shall within four weeks -
i. Pass a special resolution at a general meeting stating that the company should be liquidated
voluntarily and insolvency professional to act as the liquidator may be appointed.
ii. Pass a resolution at a general meeting stating that the company be liquidated voluntarily as a
result of expiry of the period of its duration (fixed by its articles or on the occurrence of any
event in respect of which the articles provide that the companyshall be dissolved, if any) and
appointing an insolvency professional to act as the liquidator.

Page No. 458

Here, in the given situations, according to the above provisions, a declaration made with an affidavit of
the some of the directors of the X Ltd. verifying that companyhave made full inquiry of the affairs of the
company, is not in compliance, as the majority was the requirement for initiation of the voluntary
liquidation proceedings. And the further declaration that the company is not being liquidated to defraud
any person is not given in the affidavit. The documents to be accompanied with declaration shall be as
per the point (b) given above in the stated provision.
Where if the articles fixed the period of duration of continuation of the Company and that period
expires, X Ltd. after making declaration, shall within 4 weeks pass a resolution at a general meeting
stating that the company be liquidated voluntarily as a result of expiry of the period of its duration as
fixed by its articles and appointing an insolvency professional to act as the liquidator.

27.MTP Nov 2019 Qn no 6(b)(i) 3 Marks

Wisdom Ltd. commits a default against the debt taken from the financial creditor, Mr. F. He initiated
the corporate insolvency resolution process against the Wisdom Ltd. as the company defaulted in
the payment of financial debt of Rs. 2 lakh. In the mean time, Mr. X, another financial creditor, thereof
files an application for initiating corporate insolvency resolution process with the Adjudicating
Authority. Examine with reference to the validity as to the filing of an application by Mr. X for
initiation of corporate insolvency resolution process?

Answer

In the given problem, on commission of default by the Wisdom Ltd. against Mr. F, entitled him to file an
application for initiating corporate insolvency resolution process before adjudicating authority. Further,
Mr. X another financial creditor also moved an application for initiation of insolvency resolution process
against the Wisdom Ltd.
According to the section 6 of the Code, where any corporate debtor commits a default, a financial
creditor, Operational creditor or the Corporate debtor itself may initiate insolvenc y resolution process
against such corporate debtor.
As per the facts given in the question default has been committed only against Mr. F and not against Mr.
X. So Mr. F is prima facie entitled to file an application for initiation of the CIRP.
Further, section 7 of the Code specifies financial creditor either by itself jointly wi th other financial
creditor may file an application only when default has occurred. Since in the given case, default has
occurred only against Mr. F and so further no application for initiation of CIRP can be initiated by Mr. X,
however he being a creditor, is entitled under the Code to raise his claim in this case against the
Wisdom Ltd. in compliance with the Insolvency and Bankruptcy Code, 2016.

28.RTP May 2020 Question no 14

ABZ Ltd. an unlisted company with total assets of Rs. one crore as per financial statement as on 31st
March, 2018, defaulted in the payment of the financial debt against the financial creditor Mr. X. Mr. X
filed an application for initiation of insolvency process against ABZ Ltd. under the fast track corporate
insolvency resolution process on 31st May 2019. Discuss the relevancy for disposal through the

Page No. 459

mechanism of the fast track corporate insolvency resolution process and the legal position of holding
of fast track corporate insolvency resolution process by Mr. X in the term of the IBC, 2016. Compute
the time period for completion of fast track process in the said situation.

Answer

Relevancy : Fast track corporate insolvency resolution process is a speedy process for corporate
insolvency resolution for small corporates.

As per section 55 of the IBC, 2016, it is applicable to following corporate debtors - (a) a corporate
debtor with assets and income below a level as may be notified by the Central Government; or (b) a
corporate debtor with such class of creditors or such amount of debt as may be notified by the Central
Government; or (c) such other category of corporate persons as may be notified by the Central
Government.
Applicability of the provisions - The provisions are applicable to - (a) small company under section
2(85) of Companies Act (b) a start-up (other than partnership firm)[as defined by Ministry of Commerce
and Industry notification No. GSR 501(E) dated 23 -5-2017] (c) an unlisted company with total assets
not exceeding Rs. one crore as per financial statement immediately preceding the financial year [SO
1911(E) dated 14-6-2017].
Time period for completion of fast track process

The fast track corporate insolvency resolution process shall be completed within a period of 90 days
from the insolvency commencement date. It can be extended by Adjudicating Authority by further 45
days, if resolution passed at a meeting of the committee of creditors and supported by a vote of seventy
five per cent of the voting shares [section 56(3) of Insolvency Code, 2016].

According to the provisions, fast track corporate insolvency resolution process shall be completed by 29 th
of August 2019. On further extension uptil by 13th of October, 2019 in compliance with above provision.

29.RTP May 2020 Question no 19 , (MTP- MAY 2019)

Mr. Mediator was proposed to be appointed as a resolution professional for the corporate insolvency
resolution process initiated against BMR Ltd. Mr. R, a relative of director of BMR Ltd. is a partner in
the insolvency professional entity in which Mr. Mediator is partner. In the light of the given facts,
examine the nature of the proposal of the appointment of Mr. Mediator for the conduct of the CIRP
as per the Insolvency and Bankruptcy Code, 2016.

Answer

As per Regulation 3 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for
Corporate Persons) Regulations, 2016, an insolvency professional shall be eligible to be appointed as a
resolution professional for a corporate insolvency resolution process of a corporate debtor if he, and all
partners and directors of the insolvency professional entity of which he is a partner or director, are
independent of the corporate debtor.

Explanation– A person shall be considered independent of the corporate debtor, if he:

Page No. 460

(a) is eligible to be appointed as an independent director on the board of the corporate debtor under
section 149 of the Companies Act, 2013, where the corporate debtor is a company;
(b) is not a related party of the corporate debtor; or
(c) is not an employee or proprietor or a partner:
(i) of a firm of auditors or secretarial auditors in practice or cost auditors of the corporate debtor
in the last three financial years.
(ii) of a legal or a consulting firm, that has or had any transaction with the corporate debtor
amounting to five per cent or more of the gross turnover of such firm, in the last three financial
years.
As per the given facts, Mr. Mediator was proposed to be appointed as a resolution professional for the
insolvency resolution process initiated against BMR Ltd.
Whereas, Mr. R, a relative of director of BMR Ltd. is a partner in the insolvency professional entity in
which Mr. Mediator is partner.
Since, Mr. R is the partner in Insolvency Professional Entity in which Mr. Mediator is also a partner, so,
Mr. Mediator is not eligible for appointment as Resolution Professional as he is not independent of the
corporate debtor, because Mr. R is relative of Director of BMR Ltd. (Corporate Debtors).

30. RAB Bank Limited, a banking company, has defaulted in the payment of dues to their catering
contractor. Can the contractor, as an operational creditor initiate insolvency process against the
bank-

(a) Yes, operational creditors are entitled

(b) No, financial service providers are excluded
(c) Yes, banking companies are covered under this code
(d) No, catering is an excluded service under the Code
Answer: b) Hint: [No, financial service providers are excluded as per the explanation to section 1 of
the I&B Code, 2016

31.The time line of 180 days for the Corporate Insolvency Resolution process commences from the

a) Date of Debt
b) Date of preferring the application
c) Date of admission of application by NCLT
d) 90 days after the debt is due
Answer: c) Hint : Refer Section 5(14) & 5(12) of the Code.

Page No. 461

32.Ruby Ltd. filed an application to the NCLT stating that corporate insolvency resolution process
against him, cannot be completed within the 90 days under the fast track insolvency resolution
process. Considering application and on being satisfied, NCLT ordered to extend the period of such
process by 30 days. Later, again Ruby Ltd. initiated an application for further extension of time period
of insolvency process by 15 days. Decide in the given situation, whether NCLT, can extend timelines
by further 15 days.

a) Yes, because extension of duration in toto, is not exceeding 45 days.

b) Yes , depends of the facts , if it is justified , NCLT may extend the timelines.
c) No, extension of the fast track insolvency resolution process shall not granted more than once.
d) (a) & (b)
Answer: c) Hint: As per section 56 of the I&B Code, 2016, the extension of the fast track corporate
insolvency resolution process under this section shall not be granted more than once.

33.Whether an operational creditor can assign or legally transfer any operational debt to a financial
creditor:

a) Yes. However, the transferee shall be considered as an operational creditor to such extent of
transfer.
b) Yes but the transferee shall be considered as a financial creditor in relation to such transfer
c) No. An operational creditor cannot assign or legally transfer any operational debt to a financial
creditor.
d) No. An operational creditor can assign or legally transfer an operational debt only to an
operational creditor.
Answer: a) Hint: Refer Section 21(5) of the Insolvency and Bankruptcy Code.

34.shall be responsible for carrying out the entire Corporate Insolvency resolution process and
managing the operations of the corporate debtor during the process.

a) Committee of creditors
b) Adjudicating Authority
c) Insolvency professionals
d) Resolution Professional
Answer: d) Hint: As per section 23 of the IBC.

35.ABC and Co, the tax consultants of X Limited for which an interim resolution professional – Mr. A,
has been appointed under the Corporate Insolvency resolution process has refused to furnish
information to Mr. A on the grounds of client confidentiality. Are they right?

a) Yes, they are right

Page No. 462

b) No, the Code provides powers to the IRP to access all information from various parties
c) Partly right, they can do so only after consent of the directors
d) Mr. A is not right in even asking for this information
Answer: b) Hint: No, because as Per Section 17 of the I&B Code, the officers and managers of the
corporate debtor shall report to the interim resolution professional and provide access to such
documents and records of the corporate debtor as may be required by the interim resolution
professional

36.Mr. Satya, file a petition for default of non –payment of the debt against Mr. X. The amount in
default claimed by petitioner was Rs. 30 lakh. Mr. X (Respondent) pleaded before the adjudicating
authority that the amount of claim was not belonging to the applicant. Mr. Satya, asserted that he
himself with his son owns Rs. 26 Lakh to the respondent. Though nowhere in the petition he
admitted that he himself with his Son owns Rs. 26 Lakh to the respondent. Considering the above
facts in the light of the Insolvency and Bankruptcy Code, state the action to be taken by the
Adjudicating Authority-

a) NCLT will admit the application of Mr. Satya, as he jointly with his son owned the debt to the Mr.
X, so he is a valid petitioner.
b) NCLT will admit the application filed by Mr. Satya on behalf of his son.
c) NCLT will reject the application considering that no default has occurred against Mr. Satya, and
his stand as a financial creditor is not proved in the petition.
d) NCLT will dismiss the application on the ground of non-clarity as to existence of dispute.
Answer: c) Hint: Refer section 7(5) of the IBC.

37.Person who has provided goods or services and the payment for same is due from the corporate
debtor, is a:

(a) Financial Creditor

(b) Operational creditor

(c) Corporate applicant
(d) Both (a) & (b)

Answer: b) Hint: As per the IBC, an Operational Creditor means a person to whom an Operational debt is
owed. Operational creditor refers to anyone who has provided goods or services and the payment for
same is due from the corporate debtor

38. When will the provisions of insolvency and liquidation of corporate persons be applicable on a
corporate person?

Answer

Page No. 463

The provisions relating to the insolvency and liquidation of corporate debtors shall be applicable only
when the amount of the default is one lakh rupees or more. However, the Central Government may, by
notification, specify the minimum amount of default of higher value which shall not be more than one
crore rupees.

39. What is the Insolvency Resolution Process for financial creditors?

Answer

A financial creditor either itself or along with other financial creditors may lodge an application before
the Adjudicating Authority (National Company Law Tribunal) for initiating corporate insolvency
resolution process against a corporate debtor who commits a default in payment of its dues.

The financial creditor shall along with the application give evidence in support of the default committed
by the corporate debtor. He shall also give the name of the interim resolution professional.
Where the Adjudicating Authority is satisfied that a default has occurred and the application by the
financial creditor is complete and there is no disciplinary proceedings pending against the proposed
resolution professional, it may admit such application made by the financial creditor. Otherwise, the
application may be rejected. However, the applicant may rectify the defect within seven days of receipt
of notice of rejection from the Adjudicating Authority.

40. What is the Insolvency Resolution Process for operational creditors?

Answer

On the occurrence of default, an operational creditor shall first send a demand notice and a copy of
invoice to the corporate debtor.

The corporate debtor shall within a period of ten days of receipt of demand notice notify the
operational creditor about the existence of a dispute, if there is any and record of pendency of any suit
or arbitration proceedings. He shall also provide the details of repayment of unpaid operational debt in
case the debt has or is being paid.
After the expiry of ten days, if the operational creditor does not receive his payment or the
confirmation of a dispute that existed even before the demand notice was sent, he may file an
application before the Adjudicating Authority for initiating a corporate insolvency resolution process.
The Adjudicating Authority shall within fourteen days of receipt of the application, admit or reject the
application. However, before rejecting the application, an opportunity shall be given to the applicant to
rectify the defect within seven days of receipt of rejection.

41. What are the eligibility criteria for appointment of an Insolvency Professional as a Resolution
Professional for a corporate insolvency resolution process?

Answer

Page No. 464

As per Regulation 3 of Insolvency and Bankruptcy (Insolvency Resolution) Regulation, 2016, an
insolvency professional shall be eligible for appointment as a resolution professional for a corporate
insolvency resolution process if he and all partners and directors of the insolvency professional entity of
which he is partner or director are independent of the corporate debtor i.e.,

 He is eligible to be appointed as an independent director on the board of the corporate debtor u/s
149 of the Companies Act, 2013, where the corporate debtor is a company.
 He is not a related party of the corporate debtor.
 He is not an employee or proprietor or a partner of a firm of auditors or company secretaries in
practice or cost auditors of the corporate debtor in the last three financial years.
He is not an employee or proprietor or a partner of a legal or consulting firm that has or had any
transaction with the corporate debtor amounting to five per cent or more of the gross turnover of such
firm in the last three financial years

42. What is the procedure of Insolvency Resolution Process for a Corporate Applicant?

Answer

Where a corporate debtor has committed a default, a corporate applicant thereof may file an
application for initiating corporate insolvency resolution process with the Adjudicating Authority.

The corporate applicant shall furnish the information relating to books of account and other documents
and a resolution professional shall be appointed as interim resolution professional.
The Adjudicating Authority may either accept or reject the application within fourteen days of receipt of
application. However, applicant should be allowed to rectify the defect within seven days of receipt of
notice of such rejection.
43. Is there any time limit for completion of the Insolvency Resolution Process?

Answer

Section 12 of the Code states that any Insolvency Resolution Process shall be completed within a period
of one hundred and eighty days from the date of admission of the application to initiate the process.

However, the National Company Law Tribunal (NCLT) may on an application made by the resolution
professional, under a resolution passed by the Committee of Creditors, by a vote of 75% of voting
shares, after consideration provide one extension which shall not extend more than 90 days.
44. What is the effect of order of moratorium?

Answer

Moratorium has been explained in Section 14 of the Code, during the moratorium period the following
acts shall be prohibited:

(a) The institution of suits or continuation of any pending suits or proceedings against the corporate

Page No. 465

 debtor including execution of any judgment, decree or order in any court of law, tribunal,
arbitration panel or other authority;
(b) Transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or
any legal right or beneficial interest therein;
(c) Any action to foreclose, recover or enforce any security interest created by the corporate debtor in
respect of its property including any action under the SARFAESI Act, 2002
(d) The recovery of any property by an owner or lessor where such property is occupied by or in the
possession of the corporate debtor.
45. What is a Resolution plan?

Answer

A resolution plan is a proposal agreed to by the Debtors and Creditors of an entity in a collective
mechanism to propose a time bound solution to resolve the situation of insolvency.

As per Section 30, the Insolvency Resolution Professional (IRP) within the prescribed time
i.e. 180 days or in case of extension 270 days, where Fast Track Resolution within 90 days or in case of
extension 135 days, is required to submit the Resolution Plan to Adjudicating Authority (NCLT) prepared
by the Resolution applicant on the basis of information memorandum.
The Resolution Plan should provide for:
(i) payment of insolvency resolution costs;
(ii) repayment of the debts to operational creditors;
(iii) management of affairs of the Company after approval of the resolution plan;

(iv) implementation and supervision of the resolution plan;

(v) does not contravene provisions of the law for the time being in force; and

(vi) conforms to such other requirement as may be specified by the Board.

46. When can a corporate person initiate voluntary liquidation process?

Answer

Section 59 of the Code empowers a corporate person intending to liquidate itself voluntarily if it has
not committed any default to initiate voluntary liquidation proceedings under the provisions of this
Code.

Any corporate person registered as a company shall meet the following conditions to initiate a
voluntary liquidation process:-
(a) A declaration from majority of the directors of the company verified by an affidavit stating

i. That they have made a full inquiry into the affairs of the company and have formed an opinion

Page No. 466

 that either the company has no debts or that it will be able to pay its debts in full from the
proceeds of assets to be sold in the voluntary liquidation; and
ii. That the company is not being liquidated to defraud any person.
(b) The declaration shall be accompanied with the following documents, namely:
i. Audited financial statements and a record of business operations of the company for the
previous two years or for the period since its incorporation, whichever is later;
ii. A report of the valuation of the assets of the company, if any, prepared by a registered valuer.
(c) After making the declaration the corporate debtor shall within four weeks -
i. Pass a special resolution at a general meeting stating that the company should be liquidated
voluntarily and insolvency professional to act as the liquidator may be appointed.
ii. Pass a resolution at a general meeting stating that the company be liquidated voluntarily as a
result of expiry of the period of its duration (fixed by its articles or on the occurrence of any
event in respect of which the articles provide that the company shall be dissolved, if any) and
appointing an insolvency professional to act as the liquidator

47. Mr. Ram, an operational creditor filed an application for corporate insolvency resolution process.
He does not proposed for appointment of an interim resolution professional in the application. State
the provisions given by the Code in the given situation. State the term of such appointed IRP (MTP-
MAY 2019)

Answer

Appointment of IRP: As per Section16 of the Code where the application for corporate insolvency
resolution process is made by an operational creditor and no proposal for an interim resolution
professional is made in the said application. The Adjudicating Authority

shall make a reference to the Board for the recommendation of an insolvency professional who may act
as an interim resolution professional.
The Board shall recommend the name of an insolvency professional to the Adjudicating Authority
against whom no disciplinary proceedings are pending, within ten days of the receipt of a reference
from the Adjudicating Authority.
Period of appointment of IRP: The term of the interim resolution professional shall continue from his
appointment till the date of appointment of the resolution professional by CoC in first meeting of CoC
under section 22 of the Insolvency & Bankruptcy Code, 2016.

49. (RTP NOV 2020)

MX Limited was admitted in the Corporate Insolvency Resolution Process (CIRP) under section 7 of
the Insolvency and Bankruptcy Code (Code). The Resolution Professional (RP) of the MX Limited

Page No. 467

(Corporate Debtor) conducted the Committee of Creditors (CoC) meeting but the same was adjourned
due to lack of quorum. Accordingly, in the adjourned meeting, a resolution was passed by the CoC
members present, representing 51% of the voting rights for liquidation of the Corporate Debtor
before the expiry of the Corporate Insolvency Resolution Process (CIRP). You as a qualified Chartered
Accountant in the team of RP is required to advise RP whether the resolution of liquidation passed is
valid in law considering the provisions of the Insolvency and Bankruptcy Code.

(a) The resolution passed for liquidation is not valid in law as it has not been approved by minimum
of 90% of the voting shares of the financial creditors.
(b) The resolution passed for liquidation is not valid in law as it has not been approved by minimum
of 66% of the voting shares of the financial creditors.
(c) The resolution passed for liquidation is not valid in law as it cannot be passed before the expiry
of the CIRP.
(d) The resolution passed for liquidation is valid in law as it has been passed by 51% of the voting
shares of the financial creditors
Answer: b)

50 .RTP Nov’2020 Q no 22

Quality Rubber Limited, a supplier of raw materials filed a petition before the NCLT for the recovery
of Rs. 10,00,000 against Smart Latex Limited. Smart Latex Limited, the Corporate Debtor, has other
financial creditors to the extent of Rs. 1,50,00,000 and they also joined together and filed petitions to
NCLT. The Corporate Debtor has a total of 40 financial creditors and 2 operational creditors. Further,
all the financial creditors are having equal voting rights/shares.

Notice was issued on 1st August, 2019 for the conduct of the first meeting to be held on 5 th August,
2019 at a common venue. The meeting was attended by all 40 financial creditors and 2 operational
creditors. A resolution was passed to appoint Mr. Naveen as a Resolution Professional. 25 of the
financial creditors voted in favour of the resolution and 10 voted against the resolution and 5 financial
creditors and 2 operational creditors abstained from voting.
Decide in terms of the given information whether the resolution passed to appoint Mr. Naveen
is valid? In the light of the provisions of Insolvency and Bankruptcy Code, 2016 read with rules framed
thereunder, explain the requirements of valid quorum for the conduct of the meeting.

Answer

According to section 22 of the Insolvency and Bankruptcy Code, 2016, the first meeting of the
committee of creditors shall be held within seven days of the constitutio n of the committee of
creditors. The committee of creditors in the first meeting may by a majority vote of not less than sixty-
six percent of the voting share of the financial creditors, either resolve to appoint the interim resolution

Page No. 468

professional as a resolution professional or to replace the interim resolution professional by another
resolution professional.

A meeting of committee of creditors shall quorate if members of the committee of creditors representing
at least thirty three percent of the voting rights are present either in person or by video/audio means.
The adjourned meeting shall quorate with the members of the committee attending the meeting.
As per the facts of the question and the provisions of law, the requisite quorum was present in the
meeting as all 40 financial creditors attended the meeting and 5 abstained from voting.

The Act requires that not less 66% of the financial creditors shall resolve to appoint resolution
professional. However, in the given case 71.4% [(25/35)* 100 ] voted in favour of Mr. Naveen. Hence,
the said appointment is valid.

51 What is the significance of the Corporate Insolvency Resolution Commencement Date?

ANSWER:

The commencement date of the corporate insolvency resolution is the beginning of moratorium or a calm
period till the completion of the corporate insolvency resolution process during which all suits and legal
proceedings etc. against the Corporate Debtor are held in abeyance to give time to the entity to resolve
its status

52 Can a resolution professional act as a liquidator?

ANSWER:

Yes, under section 34 (1), where the Adjudicating Authority passes an order for liquidation of the
corporate debtor under section 33, the resolution professional appointed for the corporate insolvency
resolution process under chapter II shall, subject to submission of a written consent by the resolution
professional to the Adjudicatory Authority, may act as the liquidator for the purposes of liquidation unless
replaced by the Adjudicating Authority.

53. Mr. Romil was appointed as an IRP during the Corporate Insolvency Resolution Process on 3rd of
March, 2019. He can make a Public announcement - (mtp-I- july 2021)

(a) latest by 6th March 2019

(b) latest by 7th March 2019

(c) latest by 10th March 2019

(d) latest by 14th March 2019 (1 Mark)

ANSWER-a

Page No. 469

54. Shivdeep submitted his claim as an operational creditor to the liquidator of Chiranjeevi Food
Products Limited, a company under liquidation. If Shivdeep wants to alter his claim, state the time
period within which he can do so after its submission.
(mtp-I- july 2021)

(a) Five days

(b) Ten days

(c) Fourteen days

(d) Fifteen Days (1 Mark)

ANSWER-c

55. Defaulter Limited, an unlisted company registered in India with total assets amounting to Rs. 3
crore and turnover of Rs. 50 lakh as per financial statement immediately preceding the financial year
was facing financial crisis. The financial creditors of the firm wanted to file a petition for initiating the
insolvency resolution process with the Adjudicating Authority. The financial creditors want an early
recovery of their dues. In view of the above position, state whether insolvency process can be initiated
under fast track process under the IBC and maximum period for the completion of process? (6 Marks)
(mtp-I- july 2021)

ANSWER

Vide Notification no. SO 1911(E) dated 14-6-2017, read with section 55(2) of the Insolvency and
Bankruptcy Code, the Central Government prescribed the following class of corporate debtors on whom
the provisions pertaining to the fast track corporate insolvency resolution process are applicable-

(a) Small company under section 2(85) of the Companies Act

(b) A start-up (other than partnership firm)

(c) An unlisted company with total assets not exceeding Rupees one crore as per financial statement of
immediately preceding the financial year.

As per section 56 of the Code, the fast track corporate insolvency resolution process shall be completed
within a period of 90 days from the insolvency commencement date. The Adjudicating Authority may on
receipt of an application extend the duration of such process by 45 days.

Provided that any extension of fast track corporate insolvency resolution process under this section shall
not be granted more than once.
In the above question, the fast track insolvency resolution process is not applicable on the Defaulter Ltd.
because the total assets exceed rupees one crore, so the financial creditors of the company cannot file an

Page No. 470

application under the fast track insolvency. Turnover of the company has no relevance in deciding
whether fast track corporate insolvency resolution is applicable on the company or not.

Therefore, an application for fast track insolvency resolution cannot be made. The insolvency resolution
process shall be completed within 180 days from the insolvency commencement date and extendable by
maximum 90 days.

56. Ever Lasting Ltd. went into liquidation. XYZ Bank Ltd. the secured creditor, decided to realize its
security interest by informing liquidator of such security interest and identify assets subject to which
such security interest has to be realized. Liquidator denied the XYZ Bank Ltd. to enforce its security
interest as said secured creditor is not a part of Committee of creditors. Throw a light on the stated
situation and examine on the validity of the stand taken by the Liquidator. (3 Marks) (mtp-I- july 2021)

ANSWER

As per Provisions laid down in section 52 of the Insolvency and Bankruptcy Code, 2016, an option is given
to secured creditor to realize its security interest by informing liquidator in respect of such security
interest and identify assets subject to which such security interest has to be realized. Therefore, it is not
mandatory under Code proceedings for financial creditor to be a part of CoC (Committee of Creditors) to
enforce its security interest. Hence, application filed by Financial creditor was to be accepted.
Therefore the stand taken by the liquidator on his denial to the XYZ Bank Ltd. to enforce its security
interest on the account that secured creditor is not a part of Committee of creditors, is not valid.

57. A meeting of committee of creditors shall quorate if members of the CoC representing -----------are
present either in person or by video/audio means:

(a) at least thirty three percent of the voting rights

(b) at least Fifty one percent of the voting rights

(c) at least sixty six percent of the voting rights

(d) at least ninety percent of the voting rights (1 Mark) (mtp-II- july 2021)

ANSWER- a

58. OLAF Limited (Corporate Debtor) borrowed a loan of Rs. 250 crore for expansion of his business
under the consortium arrangement in the proportion of 50%, 30% and 20% from A, B & C Banks
respectively. The corporate insolvency resolution process has begun by order of the Tribunal on an
application made by the Financial Creditor. The Interim Insolvency Resolution Professional, constituted
a Committee of Creditors (CoC) which noted that total financial debt owed by the Corporate Debtor is
Rs. 500 crore in aggregate. Examine who shall be the member of CoC and what shall be their voting
share in the CoC as per the provisions of the Insolvency and Bankruptcy Code, 2016. (6 Marks) )
(mtp-II- july 2021)

ANSWER

Page No. 471

In case of Joint Financial Creditors:
As per the provisions of the Insolvency and Bankruptcy Code, 2016, where the corporate debtor owes
financial debts to two or more financial creditors as part of a consortium or agreement, each such
financial creditor shall be part of the Committee of Creditors (CoC) and their voting share shall be
determined on the basis of the financial debts owed to them. Voting share shall be based on the
proportion of financial debt owed to such financial creditor in relation to the financial debt owed by the
Corporate debtor. [Section 5(28)].
On the basis of above provision, A, B and C shall be the members of CoC and their voting share in the CoC
shall be in proportion of their debt (i.e. in proportion of 50%, 30% and 20% respectively) to the total debt
of the Corporate Debtor (loan amount of Rs. 250 crore under consortium arrangement).
Voting Share in the CoC
The Interim Insolvency Resolution Professional (IIRP) noted total financial debt (Rs. 500 cr) owed by the
OLAF Ltd. Therefore, the voting share of A, B & C in the given case shall be as under:
A = (50% X Rs.250 Crore) / Rs.500 Crore = 25%
B = (30% X Rs.250 Crore) / Rs. 500 Crore = 15%
C = (20% X Rs.250 Crore) / Rs. 500 Crore = 10%

59. Discuss on the statement “Resolution applicant ineligible if connected person is ineligible”.
(3 Marks) (mtp-II- july 2021)

ANSWER

As per explanation to section 29A of the Insolvency and Bankruptcy Code, "Connected person" means—
(i) any person who is the promoter or in the management or control of the resolution applicant; or
(ii) any person who shall be the promoter or in management or control of the business of the corporate
debtor during the implementation of the resolution plan; or
(iii) the holding company, subsidiary company, associate company or related party of a person referred to
in clauses (i) and (ii).
Thus, if resolution applicant associated with any 'connected person' who is ineligible under section 29A of
Insolvency & Bankruptcy Code, will be ineligible as 'resolution applicant' and hence cannot submit a
resolution plan.

60. What is the mandatory period for completion of Corporate Insolvency Resolution Process (CIRP)
against a corporate debtor: (1 Mark) (mtp-NOV 2020)

(a) 180 days which includes the time taken in legal proceedings in relation to such resolution process of
the corporate debtor.

(b) 270 days which includes the time taken in legal proceedings in relation to such resolution process of
the corporate debtor.

(c) 330 days which includes the time taken in legal proceedings in relation to such resolution process of
the corporate debtor.

(d) 365 days which includes the time taken in legal proceedings in relation to such resolution process of
the corporate debtor.

Page No. 472

ANSWER- c

61. Shivdeep submitted his claim as an operational creditor to the liquidator of Chiranjeevi Food
Products Limited, a company under liquidation. If Shivdeep wants to vary his claim, state the time
period within which he can do so after its submission. (1 Mark (mtp-NOV 2020)

(a) Five days

(b) Ten days

(c) Fourteen days

(d) Fifteen Days

ANSWER- c

62. The following particulars relate to Star House (P) Limited which has gone into Corporate Insolvency
Resolution Process(CIRP): On the basis of the information, lay down the priority order in which the
liquidator shall distribute the proceeds under the Insolvency & Bankruptcy Code, 2016. (mtp-NOV 2020)

S. No. Particulars Amount in (Rs.)

1. Amount realized from the sale of liquidation of Assets 7,00,000
2. Secured Creditors who has relinquished the security 2,50,000
3. Unsecured Financial Creditors. 2,00,000
4. Income Tax Payable within a period of two years 25,000
preceding the liquidation commencement date.
5. Cess Payable to State Government within a period of 10,000
one year preceding the liquidation commencement
date.
6. Fees payable to resolution professional. 37,500
7. Expenses incurred by the resolution professional in 17,500
running the business of M/s. Star House (P) Limited on
Going concern.
8. Workmen salary payable for a period of thirty months 1,50,000
Preceding the liquidation commencement date. The
workmen salary is equal per month.
9. Equity Shareholders. 5,00,000

ANSWER

The priority order in which the liquidator shall distribute the proceeds will be as under:

Page No. 473

63. Explain the time limit for completion of the Corporate Insolvency Resolution Process? (mtp-NOV
2020)
(3 Marks)

ANSWER

Section 12 of the Insolvency and Bankruptcy Code states that any Corporate & Insolvency Resolution
Process shall be completed within a period of one hundred and eighty days from the date of admission of
the application to initiate the process.
However, the National Company Law Tribunal (NCLT) may on an application made by the resolution
professional, under a resolution passed by the Committee of Creditors, by a vote of 66% of voting shares,
after consideration provide one extension which shall not extend more than 90 days.
Second proviso to Section 12 (3) states that the corporate insolvency resolution process (CIRP) shall
compulsorily be completed within 330 days from the insolvency commencement date including any
extension of the time period of corporate insolvency resolution process granted under Section 12 and
also the time taken in legal proceedings in relation to such resolution process of the corporate debtor

64. Omega Limited is undergoing a Corporate Insolvency Resolution Process under the Insolvency and
Bankruptcy Code, 2016 (lBC Code, 2016). Mr. Ravi was appointed as the Resolution Professional. On
perusal of the books of accounts of Omega Limited, Mr. Ravi noted a few undervalued transactions had
taken place during a period of six months preceding the insolvency commencement date. However,
despite having sufficient information, he did not report such transactions to the Adjudicating Authority.
Now, the members of Corporate Debtors propose to make an application to the Adjudicating Authority
to report the undervalued transactions. Referring to the provisions of IBC Code, 2016, answer the
following :-

(i) Whether the members of Corporate Debtors have a legal right to do so?

Page No. 474

(ii) What orders the Adjudicating Authority can pass In such a situation? (3 Marks)
(past exam jan 2021)

ANSWER

As per section 47 of the Insolvency and Bankruptcy Code, 2016 where an undervalued transaction has
taken place with any person within the period of one year preceding the insolvency commencement date
under section 46 of the Code, and the liquidator or the resolution professional has not reported it to the
Adjudicating Authority, a creditor, member or a partner of a corporate debtor, may make an application
to the Adjudicating Authority to declare such transactions void and reverse their effect.

(i) Yes, in terms of above stated provision, members of corporate debtors have a legal right to file an
application to the Adjudicating Authority to report the undervalued transactions.

(ii) The Adjudicating Authority, after examination of the application is satisfied that—

(a) undervalued transactions had occurred; and

(b) liquidator or the resolution professional, after having sufficient information or opportunity to avail
information of such transactions did not report such transaction to the Adjudicating Authority.

Adjudicating Authority shall pass an order—

(a) restoring the position as it existed before such transactions and reversing the effects.

(b) requiring the Board to initiate disciplinary proceedings against the liquidator or the resolution
professional as the case may be.

65. Pursuant to Section 33 of the Insolvency and Bankruptcy Code, 2016 (IBC, 2016) a liquidation order
was passed against Luci Soya Limited (LSL) (Corporate Debtor) by the Adjudicating Authority (NCLT).
Mr. Solanki was appointed as the liquidator by the NCLT. Upon resuming his mantle, Mr. Solanki
started collecting claims from all the creditors within the time frame as prescribed in the IBC, 2016.
While initiating the liquidation process as per provisions of the IBC, 2016, Mr. Solanki proposed to
include the equity shares of one of its subsidiary as part of the liquidation estate in relation to the
corporate debtor. Besides this, one of the unsecured financial creditor demanded that, at the time of
distribution of liquidation proceeds, his dues may be paid before the government dues are paid. Mr.
Solanki also observed that pending legal proceedings against the corporate debtor, 'A' Ltd, an
operational creditor, has filed a case with the Arbitral Tribunal praying for an arbitral award against LSL.

On the basis of the above information and in the light of the Insolvency and Bankruptcy Code, 2016,
answer the following:

(i) Whether the proposal of Mr. Solanki to include the equity shares of the subsidiary Company of LSL as
part of liquidation estate is tenable?

(ii) How should Mr. Solanki deal with the demand of the unsecured financial creditor?

Page No. 475

(iii) Whether 'A' Ltd will succeed in its prayer for an arbitral award against LSL?
(6 Marks) (past exam nov 2020)

ANSWER

(i) Liquidation estate: As per section 36 of the Insolvency and Bankruptcy Code, 2016, for the purposes of
liquidation, the liquidator shall form an estate of the assets, which will be called the liquidation estate in
relation to the corporate debtor.
Liquidation estate shall comprise all liquidation estate assets which shall include any assets over which
the corporate debtor has ownership rights, including shares held in any subsidiary of the corporate
debtor.
Hence, the proposal of Mr. Solanki to include the equity shares of subsidiary company of LSL as part of
liquidation estate is tenable.

(ii) According to section 53 of the IBC, 2016, out of proceeds from the sale of the liquidation assets,
financial debts owed to unsecured creditors shall be distributed in priority over the amount due to the
Central Government and the State Government. [clauses (d) and (e)]
Hence, Mr. Solanki has to fulfill the demand of unsecured financial creditor, at the time of distribution of
liquidation proceeds, to pay his dues before the Government dues are paid.

(iii) Section 33(5) of the Code provides that when a liquidation order has been passed, no suit or legal
proceeding shall be instituted by or against the corporate debtor.
The institution of suits or continuation of any pending suits or proceedings against the corporate debtor
including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or
other authority.
Hence, Mr. A will not succeed in its prayer for an arbitral award against LSL.

66. Abhi Limited entered into an agreement with Atulya Gas Limited for purchase of natural gas, which
is not specified as an essential supply. On failure of Abhi Limited to make payments, Atulya Gas Limited
issued notice to Abhi Limited that further supply of gas would be stopped if payments are not made
immediately. On further non payment, Atulya Gas Limited filed a petition before NCLT for initiating
Corporate Insolvency Resolution process against Abhi Limited. On 15th March, 2020 the petition was
admitted, on 30th April, 2020, Atulya Gas Limited disconnected gas supply to Abhi Limited for non-
payment. As a result of disconnection of gas supply, operations of Abhi Limited came to a halt. The
Resolution professional filed a petition to NCLT seeking Atulya Gas Limited to resume the supply of
natural gas, as natural gas was an important material for production of electricity by Abhi Limited.

Referring to the provisions of Insolvency and Bankruptcy Code, 2016, answer the following: (past exam
nov 2020)

(i) When the moratorium period will expire in this case?

(ii) Whether Resolution Professional will be successful in his petition filed with NCLT?
(3 Marks)

Page No. 476

ANSWER

(i) According to section 14 of the IBC, with the admission of an insolvency application and
commencement of Corporate Insolvency Resolution process, the Adjudicating authority will declare
moratorium period during which no action can be taken against the company or the assets of the
company to keep the Company as a going concern.
A calm period for 180 days is declared, during which all suits and legal proceedings etc. against the
Corporate Debtor are held in abeyance to give time to the entity to resolve its status. It is called the
Moratorium Period.

In the instant case, Atulya Gas Ltd. filed a petition before NCLT for initiating Corporate Insolvency
Resolution process against Abhi Ltd. on 15thMarch, 2020. Hence, Moratorium period will expire within
180 days i.e. by 11th September 2020.

(ii) Section 14 also provides some exemptions under Moratorium according to which the supply of
essential goods or services to the corporate debtor as may be specified shall not be terminated or
suspended or interrupted during moratorium period.

Hence, since as per the agreement between Abhi Limited and Atyulya Gas Limited it’s specified that
natural gas is not an essential supply for production of electricity. Therefore, resolution professional will
not be successful in his petition filed with NCLT to resume the supply of Natural Gas disconnected by
Atulya Gas Ltd.

67. (C) As at 31st March, 2020, XYZ Limited had the following debts:

Creditors Name Nature of Debt Amount (INR in Lakhs)

A Financial Debt 200
B Financial Debt 250
C Financial Debt (Related Party) - Not 150
Regulated by the Financial Sector Regulator.
D Operational Debt 150
E Operational Debt 250
Total 1000

Due to impact of heavy losses and liquidity crunch, XYZ Limited could not pay the above debts. Since
the debts were overdue for a long time, creditor A filed an application with the Adjudicating Authority
(NCLT) to initiate a Corporate Insolvency Resolution Process against XYZ Limited and the application
was accepted. Stating the provisions of the Insolvency and Bankruptcy Code, 2016 answer the following
with reference to the above financial data:

(i) Who will all form part of the Committee of Creditors ('CoC') from the above list of Creditors?

(ii) Whether the above Operational Creditors have a right to vote in CoC Meeting?

(iii) What is the compulsory agenda to be discussed in the first meeting of CoC ?

Page No. 477

(iv) What shall be the quorum of the CoC meeting if it is conducted through video conferencing ? (6
Marks) (past exam jan 2021)

ANSWER

(i) As per section 21 of the Insolvency and Bankruptcy Code, 2016, the Committee of creditors shall
comprise of all financial creditors of a corporate debtor. The Resolution Professional shall identify the
financial creditors and constitutes a creditors committee. A related party of the corporate debtor cannot
form part of the committee of creditors. In the given case, A & B will form CoC.

(ii) The directors, partners and operational creditor or representative of operational creditors do not have
right to vote in the meeting of Committee of Creditors, however, they may attend the meetings of
Committee of Creditors. D & E, operational creditors will not have a right to vote in CoC meeting.

(iii) As per section 22 of the Insolvency and Bankruptcy Code, 2016, Committee of Creditors in its first
Meeting by majority (not less than 66% of voting shares) appoint Interim Resolution Professional or any
other Insolvency Professional to act as Resolution Professional.
(iv) Section 21 of the Insolvency and Bankruptcy Code, 2016 provides of quorum for the meeting of
committee of creditors. A meeting of committee of creditors shall quorate if members of the committee
of creditors representing at least thirty three percent of the voting rights are present either in person or
by video/audio means

68. Who shall determine the amount of claim due to a creditor under the Insolvency and Bankruptcy
Code during the Corporate Insolvency Resolution Process (CIRP)? (RTP JULY 2021)

(a) Committee of creditors

(b) Resolution professional

(c) Adjudicating Authority

(d) Corporate debtor

ANSWER- b

69. Can an Adjudicating Authority order the liquidation of a corporate debtor even after approving the
resolution plan: (RTP JULY 2021)

(a) Yes, if the resolution plan is contravened.

(b) The Adjudicating Authority may order the liquidation of a corporate debtor even after approving the
resolution plan on receiving an application from a third party who is unaffected by such liquidation

(c) Yes, the Adjudicating Authority may order for the liquidation of a corporate debtor if the committee
of creditor does not approve the resolution plan after its approval by the Adjudicating Authority

Page No. 478

(d) No, the Adjudicating Authority cannot order the liquidation of a corporate debtor after approving
the resolution plan.

ANSWER- a

70. (RTP NOV 2021)

Vivaan Contractors Limited, a public company incorporated under the Companies Act, 2013 is engaged
in engineering and construction business. Over the past 2 years, the company has been struggling to
pay dues to its various stakeholders such as lenders of working capital, suppliers of material,
subcontractors, etc. The amount lend by the lenders for working capital is secured by first charge over
current assets including receivables and stock and fixed assets are provided as collaterals. Mr. Ravi, CFO
being an authorized person to make an application, files for Corporate Insolvency Resolution Process
(CIRP) to the Adjudicating Authority at Mumbai on 29th March 2020. The Adjudicating Authority
admitted the application and passed an order for initiating CIRP under section 10 of the Insolvency and
Bankruptcy Code (IBC) and accordingly declared moratorium under section 14 of the Code. The order
passed by the Adjudicating Authority did not provide for the appointment of Interim Resolution
Professional (IRP) and thus, Mr. Rahul was appointed as IRP by a separate order dated 30th April 2020.
The said order copy was however received to Mr. Ravi on 3rd May 2020 and on the very same day Mr.
Rahul was informed regarding his appointment. Subsequently, Mr. Rahul made a public announcement
and took over the control of the assets of the Corporate Debtor.

1. As per the given facts in the case scenario, in which category the lenders for working capital would
fall for the constitution of Committee of Creditors?

(a) Financial Creditors

(b) Secured Creditors
(c) Either (a) or (b)
(d) Both (a) and (b)

ANSWER- d

2. What amongst the following is necessary for filing an application for CIRP by the authorized
representative of Vivaan Contractors Limited?

(a) Resolution passed by all the directors approving the filing of application.
(b) Special resolution passed by shareholders of Corporate Debtor approving the filing of application.
(c) Resolution passed by all the directors followed by approval through special resolution of
shareholders of the Corporate Debtor.
(d) Ordinary resolution passed by shareholders of Corporate Debtor approving the filing of application.

ANSWER- b

Page No. 479

3. Which date shall be considered as the insolvency commencement date for the purpose of computing
the time period for Corporate Insolvency Resolution Process?

(a) 29th March 2020

(b) 30th April 2020
(c) 3rd May 2020
(d) 6th May 2020

ANSWER- b

4. Which date shall be the last date of the completion of the Corporate Insolvency Resolution Process
including any extension granted under section 12 of the Code.

(a) 21st February 2021

(b) 25th March 2021

(c) 24th September 2020
(d) 28th March 2020

ANSWER- b

5. Under the case scenario, by which date Mr. Rahul, Interim Resolution Professional should have the
made the public announcement under section 15 of the Code

(a) 3rd May 2020

(b) 30th April 2020
(c) 6th May 2020
(d) 5th May 2020

ANSWER- c

71. A meeting of committee of creditors shall quorate if members of the CoC representing -----------are
present either in person or by video/audio means: (RTP NOV 2021)

(a) at least thirty three percent of the voting rights

(b) at least Fifty one percent of the voting rights

(c) at least sixty six percent of the voting rights

(d) at least seventy five percent of the voting rights

Page No. 480

ANSWER- a

72. Jewar Ltd., a diamond manufacturing company, is undergoing Corporate Insolvency Resolution
Process (CIRP). The CIRP had initiated on 1st January 2020. Mr. Shubh was acting as the Interim
Resolution Professional who was later appointed as Resolution Professional by the Committee of
Creditor. Mr. Shubh has been working hard since day 1 to get a resolution plan approved before the
last day of the CIRP. However, due to external factors, as on 31st May, 2020, he realized that he is
unable to decide as to which resolution plan can be taken to the committee of creditors for approval
and also that he will need another 3 months to get a resolution plan approved. You are his partner in
an Insolvency Professional Entity. Advise as to: (RTP NOV 2021)

1. The factors that need to be considered before taking the resolution plan to the committee of
creditors
2. Whether Mr. Shubh can seek an extension for completion of the CIRP?

ANSWER

1. Mr. Shubh, the resolution profession will have to consider the following factors while examining the
resolution plan before taking it to the Committee of Creditors for approval:
a. Whether the resolution plan provides for the payment of insolvency resolution process costs in a
manner specified by the Board in priority to the payment of other debts of the corporate debtor
b. Whether the resolution plan provides for the payment of debts of operational creditors in such manner
as may be specified by the Board which shall not be less than higher of:

(i) the amount to be paid to such creditors in the event of a liquidation of the corporate debtor under
section 53; or
(ii) the amount that would have been paid to such creditors, if the amount to be distributed under the
resolution plan had been distributed in accordance with the order of priority in sub-section (1) of section
53,
c. Whether the resolution plan provides for the management of the affairs of the Corporate debtor after
approval of the resolution plan;
d. Whether the resolution plan provides for the implementation and supervision of the resolution plan
e. Whether the resolution plan contravene any of the provisions of the law for the time being in force
f. Whether the resolution plan confirms to such other requirements as may be specified by the Board.

2. Relevant Provision of the Insolvency and Bankruptcy Code for extension of period for completion of
CIRP
As per Section 12, the corporate insolvency resolution process shall be completed within a period of 180
days from the date of admission of the application to initiate such process.
The resolution professional shall file an application to the Adjudicating Authority to extend the period of
the corporate insolvency resolution process beyond 180 days, if instructed to do so by a resolution passed
at a meeting of the committee of creditors by a vote of 66% of the voting shares.
On receipt of the application, if the Adjudicating Authority is satisfied that the subject matter of the case
is such that corporate insolvency resolution process cannot be completed within 180 days, it may by

Page No. 481

order extend the duration of such process beyond 180 days by such further period as it thinks fit, but not
exceeding 90 days.
Provided that any extension of the period of corporate insolvency resolution process under this section
shall not be granted more than once
Provided further that the corporate insolvency resolution process shall mandatorily be completed within
a period of 330 days from the insolvency commencement date, including any extension of the period of
corporate insolvency resolution process granted under this section and the time taken in legal
proceedings in relation to such resolution process of the corporate debtor.
In the given case, Mr. Shubh can seek an extension of maximum 90 days by making an application of the
National Company Law Tribunal i.e. till 29th August, 2020.

73. (ICAI ADDITIONAL QUESTION FOR PRACTICE)

Mr. Madhyam, was appointed as an Interim resolution professional during the Corporate Insolvency
Resolution
Process. What are the duties to be performed by Mr. Madhyam in the given capacity?

ANSWER

According to Section 18, Mr. Madhyam as an Interim Resolution Professional shall perform the
following duties:
(a) collect all information relating to the assets, finances and operations of MMPL including information
relating to:
Its business operations for the previous two years;
Its financial and operational payments for the previous two years ;
A list of assets and liabilities of MMPL as on the initiation date; and
Other specified matters;
(b) receive and collate all the claims submitted by PNB and other creditors, pursuant to the public
announcement made by him under sections 13 and 15;
(c) constitute a committee of creditors;
(d) monitor the assets of MMPL and manage its operations until a Resolution Professional (RP) is
appointed by the committee of creditors
(e) file information collected with the information utility, if necessary (not applicable in the present case
study); and
(f) take control and custody of the assets over which MMPL has ownership rights like plot, factory
building, debtors, etc.
(g) perform such other duties as may be specified by IBBI.

74. (ICAI ADDITIONAL QUESTION FOR PRACTICE)

X Ltd. was intending to initiate voluntarily liquidation proceedings. A declaration was made on affidavit
of the some of the directors of the X Ltd. verifying full inquiry of the affairs of the company. They gave
the opinion that the company will be able to pay its debts in full from the proceeds of assets to be sold
in the voluntary liquidation. Analysing the given situation, comment whether X Ltd can initiate
voluntary liquidation proceeding in compliance with the conditions given in the Insolvency and
Bankruptcy Code, 2016. What are the required documents to be accompanied with the declaration?
Also, state the consequences, where if the articles fixed the period of duration for which company may
be carried and that period expires.

Page No. 482

ANSWER

Section 59 of the Insolvency & Bankruptcy Code, 2016 empowers a corporate person intending to
liquidate itself voluntarily if it has not committed any default to initiate voluntary liquidation proceedings
under the provisions of this Code.
Any corporate person registered as a company shall meet the following conditions to initiate a voluntary
liquidation process:-

(a) A declaration from majority of the directors of the company verified by an affidavit stating

i. That they have made a full inquiry into the affairs of the company and have formed an opinion that
either the company has no debts or that it will be able to pay its debts in full from the proceeds of assets
to be sold in the voluntary liquidation; and

ii. That the company is not being liquidated to defraud any person.

(b) The declaration shall be accompanied with the following documents, namely:

i. Audited financial statements and a record of business operations of the company for the previous two
years or for the period since its incorporation, whichever is later;
ii. A report of the valuation of the assets of the company, if any, prepared by a registered valuer.

(c) After making the declaration the corporate debtor shall within four weeks -

i. Pass a special resolution at a general meeting stating that the company should be liquidated voluntarily
and insolvency professional to act as the liquidator may be appointed.

ii. Pass a resolution at a general meeting stating that the company be liquidated voluntarily as a result of
expiry of the period of its duration (fixed by its articles or on the occurrence of any event in respect of
which the articles provide that the company shall be dissolved, if any) and appointing an insolvency
professional to act as the liquidator.

In the given situations, according to the above provisions, a declaration was made on affidavit of the
some of the directors of the X Ltd. verifying full inquiry of the affairs of the company, is not In compliance
as the majority was the requirement for initiation of the voluntary liquidation proceedings.
And the further declaration that the company is not being liquidated to defraud any person is not given in
the affidavit. The documents to be accompanied with declaration shall be as per the point (b) given
above.

Where if the articles fixed the period of duration of continuation and that period expires, X Ltd. after
making declaration, shall within 4 weeks pass a resolution at a general meeting stating that the company
be liquidated voluntarily as a result of expiry of the period of its duration as fixed by its articles and
appointing an insolvency professional to act as the liquidator

Page No. 483

 # STATUTORY UPDATE FOR DECEMBER 2021 EXAMS

1. Amendments made through the enforcement of various sections of the Companies (Amendment)
Act, 2020 through different Notifications.
Ministry of Law and Justice on 28th September 2020 enacted the Companies (Amendment) Act, 2020.
This was an Act further to amend the Companies Act, 2013. According to this amendment Act, different
dates may be appointed for different provisions of this Act and any reference in any such provision to the
commencement of this Act shall be construed as a reference to the coming into force of that provision

Amendment in Relevant Sections of the

Notification
MCA vide Notification S.O. 4646(E) dated 21st
December, 2020, the Central Government
hereby appoints the 21st day of December,
2020 as the date on which the following
provisions of the said Act shall come into force.
Companies Act, 2013
In section 165 of the principal Act, for sub-
section (6), the following sub-section shall be
substituted, namely:—
"(6) If a person accepts an appointment as a
director in violation of this section, he shall be
liable to a penalty of two thousand rupees for
each day after the first during which such
violation continues, subject to a maximum of two
lakh rupees.".
In section 167 of the principal Act, in sub-section
(2),—
(a) the words "with imprisonment for a term
which may extend to one year or" shall be
omitted;
(b) for the words "five lakh rupees, or with both",
the words "five lakh rupees" shall be substituted.
For section 172 of the principal Act, the following
section shall be substituted, namely:—
"172. If a company is in default in complying with
any of the provisions of this Chapter and for
which no specific penalty or punishment is
provided therein, the company and every officer
of the company who is in default shall be liable
to a penalty of fifty thousand rupees, and in case
of continuing failure, with a further penalty of
five hundred rupees for each day during which
such failure continues, subject to a maximum of
three lakh rupees in case of a company and one
lakh rupees in case of an officer who is in
default.".
In section 178 of the principal Act, in sub-section

Page No. 484

 (8), for the words "punishable with fine which
shall not be less than one lakh rupees but which
may extend to five lakh rupees and every officer
of the company who is in default shall be
punishable with imprisonment for a term which
may extend to one year or with fine which shall
not be less than twenty-five thousand rupees but
which may extend to one lakh rupees, or with
both", the words "liable to a penalty of five lakh
rupees and every officer of the company who is
in default shall be liable to a penalty of one lakh
rupees" shall be substituted.
In section 184 of the principal Act, in sub- section
(4), for the words "punishable with
imprisonment for a term which may extend to
one year or with fine which may extend to one
lakh rupees, or with both", the words "liable to a
penalty of one lakh rupees" shall be substituted.
In section 187 of the principal Act, for sub-
section (4), the following sub-section. shall be
substituted, namely:—
"(4) If a company is in default in complying with
the provisions of this section, the company shall
be liable to a penalty of five lakh rupees and
every officer of the company who is in default
shall be liable to a penalty of fifty thousand
rupees."
In section 188 of the principal Act, in sub-section
(5),—
(a) in clause (i), for the words "punishable with
imprisonment for a term which may extend to
one year or with fine which shall not be less than
twenty-five thousand rupees but which may
extend to five lakh rupees, or with both", the
words "liable to a penalty of twenty-five lakh
rupees" shall be substituted;
(b) in clause (ii), for the words "punishable with
fine which shall not be less than twenty-five
thousand rupees but which may extend to five
lakh rupees", the words "liable to a penalty of
five lakh rupees" shall be substituted.
In section 204 of the principal Act, in sub-section
(4), for the words "punishable section 204. with
fine which shall not be less than one lakh rupees
but which may extend to five lakh rupees", the
words "liable to a penalty of two lakh rupees"

Page No. 485

 shall be substituted.
In section 232 of the principal Act, for sub-
section (8), the following sub-section section
232. shall be substituted, namely:—
"(8) If a company fails to comply with sub-section
(5), the company and every officer of the
company who is in default shall be liable to a
penalty of twenty thousand rupees, and where
the failure is a continuing one, with a further
penalty of one thousand rupees for
each day after the first during which such failure
continues, subject to a maximum of three lakh
rupees.".
In section 242 of the principal Act, in sub-section
(8),—
(a) the words "with imprisonment for a term
which may extend to six months or" shall be
omitted;
(b) for the words "one lakh rupees, or with
both", the words "one lakh rupees" shall be
substituted.
In section 243 of the principal Act, in sub-section
(2),—
(a) the words "with imprisonment for a term
which may extend to six months or" shall be
omitted;
(b) for the words "five lakh rupees, or with both",
the words "five lakh rupees" shall be substituted.
In section 284 of the principal Act, for sub-
section (2), the following sub-sections shall be
substituted, namely:—
"(2) If any person required to assist or cooperate
with the Company Liquidator under sub-section
(1) does not assist or cooperate, the Company
Liquidator may make an application to the
Tribunal for necessary directions.
(3) On receiving an application under sub-section
(2), the Tribunal shall, by an order, direct the
person required to assist or cooperate with the
Company Liquidator to comply with the
instructions of the Company Liquidator and to
cooperate with him in discharging his functions
and duties.".
In section 302 of the principal Act,—
(a) for sub-section (3), the following sub-section
shall be substituted, namely:—

Page No. 486

 "(3) The Tribunal shall, within a period of thirty
days from the date of the order,—
(b) sub-section (4) shall be omitted.
In section 347 of the principal Act, in sub-section
(4),—
(a) the words "with imprisonment for a term
which may extend to six months or" shall be
omitted;
(b) for the words "fifty thousand rupees, or with
both", the words" fifty thousand rupees" shall be
substituted.
In section 356 of the principal Act, for sub-
section (2), the following sub-section shall be
substituted, namely:—
"(2) The Tribunal shall—
(a) forward a copy of the order, within thirty days
from the date thereof, to the Registrar who shall
record the same; and
(b) direct the Company Liquidator or the person
on whose application the order was made, to file
a certified copy of the order, within thirty days
from the date thereof or such further period as
allowed by the Tribunal, with the Registrar who
shall record the same."
In section 392 of the principal Act,—
(a)the words "with imprisonment for a term
which may extend to six months or" shall be
omitted;
(b) for the words "five lakh rupees, or with both",
the words "five lakh rupees" shall be substituted.
In section 450 of the principal Act, for the words
"punishable with fine which may extend to ten
thousand rupees, and where the contravention is
continuing one, with a further fine which may
extend to one thousand rupees for every day
after the first during which the contravention
continues", the words "liable to a penalty of ten
thousand rupees, and in case of continuing
contravention, with a further penalty of one
thousand rupees for each day after the first
during which the contravention continues,
subject to a maximum of two lakh rupees in case
of a company and fifty thousand rupees in case
of an officer who is in default or any other
person" shall be substituted.

Page No. 487

MCA Vide Notification 325(E) dated 22nd
January, 2021, the Central Government hereby
appoints the 22nd day of January, 2021 as the
date on
which the mentioned provisions of the said Act
shall come into force.
Page No. 488
In section 379 of the principal Act, in sub-section
(1), the proviso shall be omitted.
After section 393 of the principal Act, the
following section shall be inserted, namely:—
"393A. The Central Government may, by
notification, exempt any class of—
In section 435 of the principal Act, in sub-section
(1), for the words "offences under this Act, by
notification", the words and figures "offences
under this Act, except under section 452, by
notification" shall be substituted.
For section 446B of the principal Act, the
following section shall be substituted, namely:—
'446B. Notwithstanding anything contained in
this Act, if penalty is payable for non-compliance
of any of the provisions of this Act by a One
Person Company, small company, start-up
company or Producer Company, or by any of its
officer in default, or any other person in respect
of such company, then such company, its officer
in default or any other person, as the case may
be, shall be liable to a penalty which shall not be
more than one-half of the penalty specified in
such provisions subject to a maximum of two
lakh rupees in case of a company and one lakh
rupees in case of an officer who is in default or
any other person, as the case may be.
Explanation.—For the purposes of this section,—
(a)"Producer Company" means a company as
defined in clause (l) of section 378A;(b)"start-up
company" means a private company
incorporated under thisAct or under the
Companies Act, 1956 and recognised as start-up
in accordance with the notification issued by the
Central Government in the Department for
Promotion of Industry and Internal Trade.'.
In section 454 of the principal Act, in sub-section
(3), the following proviso shall be inserted,
namely:—
"Provided that in case the default relates to non-
compliance of sub-section (4) of section 92 or
sub-section (1) or sub-section (2) of section 137
and such default has been rectified either prior
to, or within thirty days of, the issue of the notice
by the adjudicating officer, no penalty shall be
imposed in this regard and all proceedings under
 this section in respect of such default shall be
deemed to be concluded.".

MCA Vide Notification S.O. 1303(E) dated 24th
March 2021
the Central Government hereby appoints the
24th March, 2021 as the date on which the
provisions of section 45 of the said Act shall
come into force.
In section 247 of the principal Act, in sub-section
(3), for the words "punishable with fine which
shall not be less than twenty-five thousand
rupees but which may extend to one lakh
rupees", the words "liable to a penalty of fifty
thousand rupees" shall be substituted.

MCA vide Notification S.O. 1255(E) Dated 18th
March, 2021 the Central Government hereby
appoints the 18th March, 2021 as the date on
which the provisions of section 32 and section
40 of the said Act shall come into force.
In section 149 of the principal Act, in sub-section
(9), the following proviso shall be inserted,
namely:—
"Provided that if a company has no profits or its
profits are inadequate, an independent director
may receive remuneration, exclusive of any fees
payable under sub-section (5) of section 197, in
accordance with the provisions of Schedule V.".
In section 197 of the principal Act, in sub-section
(3), after the words "whole-time director or
manager,", the words "or any other non-
executive director, including an independent
director" shall be inserted

2. Ministry of Corporate Affairs vide Notification S.O. 1256(E), dated 18th March, 2021 hereby amends
Schedule V of the Companies Act 2013, as follows:—
In Schedule V of the Companies Act, 2013, in PART II, under the heading ― REMUNERATION
A. in Section I, in the first para, after the words ―managerial person or persons, the words ―or other
director or directors shall be inserted;
B. in Section II,-- (i) after the words ―managerial person, wherever occurred, the words ―or other
director shall be inserted;

(ii) for Table (A):, the following shall be substituted, namely.-

(1) (2) (3)

Sl. No. Where the effective Limit of yearly Limit of yearly

capital remuneration payable remuneration payable
(in rupees) is shall not exceed (in shall not exceed (in
Rupees) in case of a rupees) in case of other
managerial person director
(i) Negative or less than 5 60 lakhs 12 Lakhs
crores.

Page No. 489

 (ii) 5 crores and above but 84 lakhs 17 Lakhs
less than 100 crores.
(iii) 100 crores and above but 120 lakhs 24 Lakhs
less than 250 crores.
(iv) 250 crores and above. 120 lakhs plus 0.01% of 24 Lakhs plus 0.01% of
the effective capital in the effective capital in
excess of Rs.250 crores: excess of Rs.250 crores:

C. in Section III, – (i) after the words ―managerial person, wherever occurred, except in clause (i) of the
proviso, the words ―or other director shall be inserted;
(ii) after the words ―managerial persons, wherever occurred, the words ―or other directors shall be
inserted;
(iii) following explanation shall be inserted at the end, namely:-

“Explanation.– For the purposes of Section I, Section II and Section III, the term ―or other director shall
mean a non-executive director or an independent director.

3. Amendment in Rule 6 of the Companies (Appointment and Qualification of Directors) Rules, 2014
vide Notification dated G.S.R. 774(E) dated 18th December, 2020.
Said Rule 6 of the Companies (Appointment and Qualification of Directors) Rules, 2014 was completely
replaced by the Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019,
vide Notification dated 22nd October 2019 w.e.f 1st day of December 2019. Further this rule was
regularly amended through various notifications in following order

Through series of Notifications i.e., the Companies (Appointment and Qualification of Directors)
Amendment Rules, 2020, dated 28.02.2020, the Companies (Appointment and Qualification of Directors)
Second Amendment Rules 2020,dated 29.04.2020, the Companies (Appointment and Qualification of
Directors) Third Amendment Rules,2020,dated 23.06.2020, the Companies (Appointment and
Qualification of Directors) Fourth Amendment Rules,2020, dated 28.09.2020, and through the Companies
(Appointment and Qualification of Directors ) Fifth Amendment Rules, 2020, w.e.f. 18.12.2020.

Revised Rule 6 in line with these amendments are as follows:

6. Compliances required by a person eligible and willing to be appointed as an independent director.
(1) Every individual –

(a) who has been appointed as an independent director in a company, on the date of commencement of
the Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019, shall within a
period of thirteen months from such commencement; or

(b) who intends to get appointed as an independent director in a company after such commencement,
shall before such appointment,
apply online to the institute for inclusion of his name in the data bank for a period of one year or five
years or for his life-time, and from time to time take steps as specified in sub-rule (2), till he continues to
hold the office of an independent director in any company:

Page No. 490

Provided that any individual, including an individual not having DIN, may voluntarily apply to the institute
for inclusion of his name in the data bank.

(2) Every individual whose name has been so included in the data bank shall file an application for
renewal for a further period of one year or five years or for his life-time, within a period of thirty days
from the date of expiry of the period upto which the name of the individual was applied for inclusion in
the data bank, failing which, the name of such individual shall stand removed from the data bank of the
institute:
Provided that no application for renewal shall be filed by an individual who has paid life-time fees for
inclusion of his name in the data bank.

(3) Every independent director shall submit a declaration of compliance of sub-rule (1) and sub-rule (2) to
the Board, each time he submits the declaration required under sub-section (7) of section 149 of the Act.

(4) Every individual whose name is so included in the data bank under sub-rule (1) shall pass an online
proficiency self-assessment test conducted by the institute within a period
of Two years from the date of inclusion of his name in the data bank, failing which, his name shall stand
removed from the databank of the institute:
Provided that an individual shall not be required to pass the online proficiency self-assessment test when
he has served for a total period of not less than three years as on the date of inclusion of his name in the
data bank,-

(A) as a director or key managerial personnel, as on the date of inclusion of his name in the databank, in
one or more of the following, namely:-

(a) listed public company; or

(b) unlisted public company having a paid-up share capital of rupees ten crore or more; or
(c) body corporate listed on any recognized stock exchange or in a country which is a member State of the
Financial Action Task Force on Money Laundering and the regulator of the securities market in such
member State is a member of the International Organization of Securities Commissions; or
(d) bodies corporate incorporated outside India having a paid-up share capital of US$ 2 million or more;
or
(e) statutory corporations set up under an Act of Parliament or any State Legislature carrying on
commercial activities; or
(B) in the pay scale of Director or above in the Ministry of Corporate Affairs or the Ministry of Finance or
Ministry of Commerce and Industry or the Ministry of Heavy Industries and Public Enterprises and having
experience in handling the matters relating to corporate laws or securities laws or economic laws; or
(C) in the pay scale of Chief General Manager or above in the Securities and Exchange Board or the
Reserve Bank of India or the Insurance Regulatory and Exchange Board or the Reserve Bank of India or the
Insurance Regulatory and Development Authority of India or the Pension Fund Regulatory and
Development Authority and having experience in handling the matters relating to corporate laws or
securities laws or economic laws:
Provided further that for the purpose of calculation of the period of three years referred to in the first
proviso, any period during which an individual was acting as a director or as a key managerial personnel in
two or more companies or bodies corporate or statutory corporations at the same time shall be counted
only once.

Page No. 491

Explanation: For the purposes of this rule,-
(a) the expression “institute” means the ‘Indian Institute of Corporate Affairs at Manesar’ notified under
sub-section (1) of section 150 of the Companies Act, 2013 as the institute for the creation and
maintenance of data bank of Independent Directors;

(b) an individual who has obtained a score of not less than fifty percent in aggregate in the online
proficiency self-assessment test shall be deemed to have passed such test;
(c) there shall be no limit on the number of attempts an individual may take for passing the online
proficiency self-assessment test.

SECURITIES LAWS: SEBI ACT,1992

Through Finance Act, 2021 w.e.f 1st April, 2021, in section 12, the below provision has been added after
1(B):
(1C) No person shall sponsor or cause to be sponsored or carry on or cause to be carried on the activity of
an alternative investment fund or a business trust as defined in clause (13A) of section 2 of the Income-
tax Act, 1961, unless a certificate of registration is granted by the Board in accordance with the
regulations made under this Act.

ECONOMIC LAWS: FEMA, 1999

Vide Notification No. FEMA 23(R)/(4)/2021-RB , dated January 08, 2021, the Foreign Exchange
Management (Export of Goods and Services) (Amendment) Regulations, 2021 has been enacted,

In exercise of the powers conferred by clause (a) of sub-section (1), sub-section (3) of section 7 and clause
(b) of sub-section (2) of section 47 of the Foreign Exchange Management Act, 1999 (42 of 1999), the
Reserve Bank of India makes the following amendments in the Foreign Exchange Management (Export of
Goods & Services) Regulations, 2015 through the enforcement of the Foreign Exchange Management
(Export of Goods and Services) (Amendment) Regulations, 2021.
In the Principal Regulations, in regulation 4, for sub-regulation (ea), the following shall be substituted,
namely:-
“(ea) re-export of leased aircraft/helicopter and/or engines/auxiliary power units (APUs), either
completely or in partially knocked down condition repossessed by overseas lessor and duly de-registered
by the Directorate General of Civil Aviation (DGCA) on the request of Irrevocable Deregistration and
Export Request Authorisation (IDERA) holder under ‘Cape Town Convention’ or any other termination or
cancellation of the lease agreement between the lessor and lessee subject to permission by
DGCA/Ministry of Civil Aviation for such export/s.”

ECONOMIC LAWS: PMLA, 2002

1. Vide Notification G.S.R. 798(E) [F. NO. P-12011/14/2020-ES CELL-DOR], Dated 28-12-2020,in exercise
of the powers conferred by sub-clause (iv) of clause (sa) of sub-section (1) of section 2 of the Prevention
of Money-laundering Act, 2002 , the Central Government hereby rescinds the notification of the
Government of India, Ministry of Finance, Department of Revenue, No. 8/2017, dated 15 November,
2017, published in the Gazette of India, Part II, Section 3, Sub-section (ii), extraordinary, vide GSR 1423 (E)
dated the 16 November 2017, except as respects things done or omitted to done before such recession
and notifies the "Real Estate Agents", as a person engaged in providing services in relation to sale or

Page No. 492

purchase of real estate and having annual turnover of Rupees twenty lakhs or above, as "persons carrying
on designated businesses or professions".

2. Vide Notification G.S.R. 799(E) [F. NO. P-12011/14/2020-ES CELL-DOR], Dated 28-12-2020, in exercise
of the powers conferred by sub-clause (iv) of clause (sa) of sub-section (1) of section 2 of the Prevention
of Money-laundering Act, 2002 , the Central Government hereby notifies the dealers in precious metals,
precious stones as persons carrying on designated businesses or professions - if they engage in any cash
transactions with a customer equal to or above Rupees ten lakhs, carried out in a single operation or in
several operations that appear to be linked.

3. Vide Notification G.S.R. 59(E) [F. NO. P-12011/24/2017-ES CELL-DOR-PART(1)], Dated 28-1-2021, in
exercise of the powers conferred by sub-section (1) of section 11A of the Prevention of Money-laundering
Act, 2002 , the Central Government on being satisfied that the reporting entities mentioned below
comply with standards of privacy and security under the Aadhaar (Targeted Delivery of Financial and
Other Subsidies, Benefits and Services) Act, 2016 (18 of 2016) and it is necessary and expedient to do so,
and after consultation with the Unique Identification Authority of India established under sub-section (1)
of section 11 of the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services)
Act, 2016 and the regulatory authority, namely the Reserve Bank of India, hereby notifies the reporting
entity specified below to undertake Aadhaar authentication service of the Unique Identification Authority
of India under section 11A of the Prevention of Money-laundering Act, 2002, namely:—
"National Payments Corporation of India."

ECONOMIC LAWS: FCRA, 2010

Vide Notification G.S.R. 695(E) [F. NO. II/21022/23(12)/2020-FCRA-III], dated 10-11-2020, in exercise of
the powers conferred by section 48 of the Foreign Contribution (Regulation) Act, 2010, the Central
Government hereby makes the following rules further to amend the Foreign Contribution (Regulation)
Rules, 2011, through the enforcement of the Foreign Contribution (Regulation) (Amendment) Rules, 2020
w.r.e.f 29.04.2011. Revised Rule is given here with the changes highlighted for the references, made out
of various amendments till 30th April, 2021.

3. Guidelines for declaration of an organisation to be of a political nature, not being a political party. –
(1) The Central Government may specify any organisation as organisation of political nature on one or
more of the following grounds: -
(i) organisation having avowed political objectives in its Memorandum of Association or bylaws;
(ii) any Trade Union whose objectives include activities for promoting political goals;
(iii) any voluntary action group with objectives of a political nature or which participates in political
activities;
(iv) front or mass organisations like Students Unions, Workers' Unions, Youth Forums and Women's wing
of a political party;
(v) organisation of farmers, workers, students, youth based on caste, community, religion, language or
otherwise, which is not directly aligned to any political party, but whose objectives, as stated in the
Memorandum of Association, or activities gathered through other material evidence, include steps
towards advancement of Political interests of such groups;
(vi) any organisation, by whatever name called, which habitually engages itself in or employs common
methods of political action like 'bandh' or 'hartal', 'rasta roko', 'rail roko' or 'jail bharo' in support of public
causes.

Page No. 493

(2) The organisations specified under clauses (v) and (vi) of sub-rule (1) shall be considered to be of
political nature, if they participate in active politics or party politics, as the case may be.

4. Speculative activities. - (1) The following activities shall be treated as speculative activities:-
(a) any activity or investment that was an element of risk of appreciation or depreciation of the original
investment, linked to market forces, including investment in mutual funds or in shares;
(b) participation in any scheme that promises high returns like investment in chits or land or similar assets
not directly linked to the declared aims and objectives of the organisation or association.
(2) A debt-based secure investment shall not be treated as speculative investment.
(3) Every association shall maintain a separate register of investments.
(4) Every register of investments maintained under sub-rule (3) shall be submitted for audit.

5. Administrative expenses. - The following shall constitute administrative expenses:-

(i) salaries, wages, travel expenses or any remuneration realised by the Members of the Executive
Committee or Governing Council of the person;
(ii) all expenses towards hiring of personnel for management of the activities of the person and salaries,
wages or any kind of remuneration paid, including cost of travel, to such personnel;
(iii) all expenses related to consumables like electricity and water charges, telephone charges, postal
charges, repairs to premise(s) from where the organisation or Association is functioning, stationery and
printing charges transport and travel charges by the Members of the Executive Committee or Governing
Council and expenditure on office equipment;
(iv) cost of accounting for and administering funds;
(v) expenses towards running and maintenance of vehicles;
(vi) cost of writing and filing reports;
(vii) legal and professional charges; and
(viii) rent of premises, repairs to premises and expenses on other utilities:
Provided that the expenditure incurred on salaries or remuneration of personnel engaged in training or
for collection or analysis of field data of an association primarily engaged in research or training shall not
be counted towards administrative expenses:
Provided further that the expenses incurred directly in furtherance of the stated objectives of the welfare
oriented organisation shall be excluded from the administrative expenses such as salaries to doctors of
hospital, salaries to teachers of school etc.

7. Intimation of receiving foreign contribution from relatives. - Any person receiving foreign contribution
in excess of one lakh rupees or equivalent thereto in a financial year from any of his relatives shall inform
the Central Government [regarding the details of the foreign contribution received by him in electronic
form] in Form FC-1 within thirty days from the date of receipt of such contribution.

6A. When articles gifted for personal use do not amount to foreign contribution. - Any article gifted to a
person for his personal use whose market value in India on the date of such gift does not exceed [one
lakh rupees] shall not be a foreign contribution within the meaning of sub-clause (i) of clause (h) of sub-
section (1) of section (2).

7. Receiving foreign hospitality by specified categories of persons. - (1) Any person belonging to any of
the categories specified in section 6 who wishes to avail of foreign hospitality shall apply [to the Central
Government in electronic form] in Form FC-2 for prior permission to accept such foreign hospitality.

Page No. 494

(2) Every application for acceptance of foreign hospitality shall be accompanied by an invitation letter
from the host or the host country, as the case may be, and administrative clearance of the Ministry or
department concerned in case of visits sponsored by a Ministry or department of the Government.
(3) The application for grant of permission to accept foreign hospitality must reach the appropriate
authority ordinarily two weeks before the proposed date of onward journey.
(4) In case of emergent medical aid needed on account of sudden illness during a visit abroad, the
acceptance of foreign hospitality shall be required to be intimated to the Central Government within [one
month] of such receipt giving full details including the source, approximate value in Indian Rupees, and
the purpose for which and the manner in which it was utilised.
Provided that no such intimation is required if the value of such hospitality in emergent medical aid is
upto one lakh rupees or equivalent thereto.

8. Action in respect of article, currency or security received in contravention of the Act. - (1) The Central
Government may issue a prohibitory order for contravention of the Act in respect of any article, currency
or securities.
(2) The prohibitory order issued under sub-rule (1) shall be served on the person concerned in the
following manner:-
(a) by delivering or tendering it to that person or to his duly authorised agent; or
(b) by sending it to him by 'registered post with acknowledgement due' or 'speed post' to the address of
his last known place of residence or the place where he carries on, or is known to have last carried on,
business or the place where he personally works for gain or is known to have last worked for gain and, in
case the person is an organisation or an association, to the last known address of the office of such
organisation or association; or
(c) if it cannot be served in any of the manner aforesaid, by affixing, it on the outer door or some other
conspicuous part of the premises in which that person resides or carries on, or is known to have last
carried on, business or personally works for gain or is known to have last worked personally for gain and,
in case the person is an organisation or an association, on the outer door or some other conspicuous part
of the premises in which the office of that organisation or association is located, or is known to have been
last located, and the written report whereof should be witnessed by at least two persons.

9. Application for obtaining 'registration' or 'prior permission' to receive foreign contribution. - (1)(a) An
application for certificate of registration by a person under sub-section (1) of section 11, for acceptance of
foreign contribution shall be made [in electronic form] in Form FC-3A [with an affidavit executed by each
office bearer and key functionary and member in Proforma 'AA' appended to these rules] and an
application for obtaining prior permission by a person under sub-section (2) of section 11, for acceptance
of foreign contribution, shall be made [in electronic form] in Form FC-3B [with an affidavit executed by
each office bearer and key functionary and member in Proforma 'AA' appended to these rules].
(b) The applicant shall upload the signed or digitally signed application along with scanned documents as
specified by the Central Government from time to time;
(d) Any person making an application for registration under clause (a) of sub-rule (1) shall have an FCRA
Account.
(e) The person may open one or more accounts in one or more banks for the purpose of utilising the
foreign contribution after it has been received and, in all such cases, intimation [in electronic form] in
form [FC-6D]] shall be furnished to the Secretary, Ministry of Home Affairs, New Delhi within fifteen days
of the opening of any account.
(f) A person seeking registration under clause (b) of sub-section (4) of section 12 of the Act shall meet the
following conditions, namely: -

Page No. 495

(i) it shall be in existence for three years and have spent a minimum amount of rupees fifteen lakh on its
core activities for the benefit of society during the last three financial years:
Provided that the Central Government, in exceptional cases or in cases where a person is controlled by
the Central Government or a State Government may waive the conditions;
(ii) if the person wants inclusion of its existing capital investment in assets like land, building, other
permanent structures, vehicles, equipment in the computation of its spending during last three years,
then the chief functionary shall give an undertaking that the assets shall be vested henceforth with the
person till the validity of the certificate and they shall be utilised only for the activities covered under the
Act and the rules made thereunder and shall not be diverted for any other purpose till the validity of its
certificate of registration remains valid.
(1A) Every application seeking registration under clause (a) of sub-rule (1), made before the
commencement of these rules but not disposed of, shall be considered after furnishing the details of
FCRA Account.
(2) [* * *]
(d) Any person making an application for obtaining prior permission under clause (a) of sub-rule (1) shall
have an FCRA Account.]
(e) person seeking prior permission under this rule may open one or more accounts in one or more banks
for the purpose of utilising the foreign contribution after it has been received and in all such cases
intimation [ [in electronic form] in form [FC-6D]] shall be furnished to the Secretary, Ministry of Home
Affairs, New Delhi within fifteen days of the opening of any account.
(f) A person seeking prior permission for receipt of specific amount from a specific donor for carrying out
specific activities or projects mentioned in clause (c) of sub-section (4) of section 12 of the Act shall meet
the following criteria, namely: -
(i) submit a specific commitment letter from the donor indicating the amount of foreign contribution and
the purpose for which it is proposed to be given;
(ii) for the Indian recipient persons and foreign donor organisations having common members, prior
permission shall be granted to the person subject to it satisfying the following conditions, namely: -

(A) the chief functionary of the recipient person shall not be a part of the donor organisation;

(B) seventy-five per cent. of the office-bearers or members of the governing body of the person shall not
be members or employees of the foreign donor organisation;

(C) in case of foreign donor organisation being a single individual that individual shall not be the chief
functionary or office bearer of the recipient person; and

(D) in case of a single foreign donor, seventy-five per cent. of the office bearers or members of the
governing body of the recipient person shall not be the family members or close relatives of the donor.

(2A) Every application for obtaining prior permission under clause (a) of sub-rule (1) made before the
commencement of these rules but not disposed of, shall be considered after furnishing the details of
FCRA Account.

(3) No person shall prefer a second application for registration or prior permission within a period of six
months after submitting an application either for the grant of prior permission for the same project or for
registration.

Page No. 496

(4) (a) An application made for the grant of prior permission shall be accompanied by a fee of rupees five
thousand only, which shall be paid through the payment gateway specified by the Central Government.

[(b) An application made for the grant of registration shall be accompanied by a fee of rupees ten
thousand only, which shall be paid through the payment gateway specified by the Central Government.

(c) The fee may be revised by the Central Government from time to time.
[***]

(5) Notwithstanding anything contained in sub-rules (1) to (4), every application made for registration or
prior permission under the Foreign Contribution (Regulation) Act, 1976 (49 of 1976) but not disposed of
before the date of commencement of these rules shall be deemed to be an application for registration or
prior permission, as the case may be, under these rules, subject to the condition that the applicant
furnishes the prescribed fees for such registration or prior permission, as the case may be.

9A. Permission for receipt of foreign contribution in application for obtaining prior permission. – If the
value of foreign contribution on the date of final disposal of an application for obtaining prior permission
under clause (a) of sub-rule (1) of rule 9 is over rupees one crore, the Central Government may permit
receipt of foreign contribution in such instalments, as it may deem fit:
Provided that the second and subsequent instalment shall be released after submission of proof of
utilisation of seventy five per cent. of the foreign contribution received in the previous instalment and
after field inquiry of the utilisation of foreign contribution.

10. Validity of certificate. - (1)] Every certificate or registration granted to a person under the Act shall be
valid for a period of five years from the date of its issue.
(2) The validity of certificate surrendered under section 14A of the Act shall be deemed to have expired
on the date of acceptance of the request by the Central Government.

11. Maintenance of accounts. - Every person who has been granted registration or prior permission
under section 12 shall maintain a separate set of accounts and records, exclusively, for the foreign
contribution received and utilized.

12. Renewal of registration certificate. - (1) Every certificate of registration issued to a person shall be
liable to be renewed after the expiry of five years from the date of its issue on proper application.

(2) An application for renewal of the certificate of registration shall be made to the Central Government in
electronic before in Form FC-3C accompanied with an affidavit executed by each office bearer, key
functionary and member in Proforma 'AA' appended to these rules within six months from the date of
expiry of the certificate of registration.
(2A) Every person seeking renewal of the certificate of registration under section 16 of the Act shall open
an FCRA Account and mention details of the account in his application for renewal of registration.
(2B) Every application for renewal of the certificate of registration made under sub-rule (2) before
commencement of these rules, but not disposed of, shall be considered after furnishing the details of
FCRA Account.
[* * *]

Page No. 497

(4) An application made for renewal of the certificate of registration shall be accompanied by a fee of
rupees five thousand only, which shall be paid through payment gateway specified by the Central
Government.

(5) No person whose certificate of registration has ceased to exist shall either receive or utilise the foreign
contribution until the certificate is renewed.

(6) If no application for renewal of registration is received or the application is not accompanied by
requisite fee before the expiry of the validity of the certificate of registration, the validity of the certificate
of registration shall be deemed to have ceased from the date of completion of the period of five years
from the date of the grant of certificate of registration.

Note 1: A certificate of registration granted on the 1st January, 2012 shall be valid till the 31st December,
2016 and a request for renewal of certificate of registration shall be submitted in electronic form
accompanied by requisite fee after the 30th June, 2016 and within the 31st December, 2016.

Note 2: If no application is received or is not accompanied by renewal fee, the validity of the certificate of
registration issued on the 1st January 2012 shall be deemed to have ceased after the 31st December,
2016 and the applicant shall neither receive nor utilise the foreign contribution until the certificate of
registration is renewed.
(6A) The amount of foreign contribution lying unutilised in the FCRA Account and utilisation account of a
person whose certificate of registration is deemed to have ceased under sub-rule (6) and assets, if any,
created out of the foreign contribution, shall vest with the prescribed authority under the Act until the
certificate is renewed or fresh registration is granted by the Central Government.
(7) If the validity of the certificate of registration of a person has ceased in accordance with the provisions
of these rules, a fresh request for the grant of a certificate of registration may be made by the person to
the Centra1 Government as per the provisions of rule 9.
(8) In case a person provides sufficient grounds, in writing, explaining the reasons for not submitting the
certificate of registration for renewal within the stipulated time, his application may be accepted for
consideration along with the requisite fee [and with late fee of Rs.5000/- (Five Thousand rupees only)],
but not later than [one year] after the expiry of the original certificate of registration.

13. Declaration of receipt of foreign contribution. - (a) A person who has been granted a certificate of
registration or prior permission shall place the audited statement of accounts on receipts and utilisation
of the foreign contribution, including income and expenditure statement, receipt and payment account
and balance sheet for every financial year beginning on the first day of April within nine months of the
closure of the financial year on its official website or on the website as specified by the Central
Government.
(b) A person receiving foreign contribution in a quarter of the financial year shall place details of foreign
contribution received on its official website or on the website as specified by the Central Government
within fifteen days following the last day of the quarter in which it has been received clearly indicating the
details of donors, amount received and date of receipt.

14. Extent of amount that can be utilised in case of suspension of the certificate of registration. - The
unspent amount that can be utilised in case of suspension of a certificate of registration may be as under -

Page No. 498

(a) In case the certificate of registration is suspend under sub-section (1) of section 13 of the Act, up to
twenty-five per cent of the unutilised amount may be spent, with the prior approval of the Central
Government, for the declared aims and objects for which the foreign contribution was received
(b) The remaining seventy-five per cent of the unutilised foreign contribution shall be utilised only after
revocation of suspension of the certificate of registration.

15. Custody of foreign contribution in respect of a person whose certificate has been cancelled. - If the
certificate of registration of a person who has opened an FCRA Account under section 17 is cancelled, the
amount of foreign contribution lying unutilised in that Account shall vest with the prescribed authority
under the Act.
[15A. Voluntary surrender of certificate. - Every person who has been granted certificate of registration
under section 12 of the Act may make an application in electronic form in Form FC-7 for surrender of the
certificate of registration in terms of section 14A of the Act.]

16. Reporting by banks of receipt of foreign contribution. - The bank shall report to the Central
Government within forty-eight hours any transaction in respect of receipt or utilisation of any foreign
contribution by any person whether or not such person is registered or granted prior permission under
the Act.

17. Intimation of foreign contribution by the recipient. - (1) Every person who receives foreign
contribution under the Act, shall submit a signed or digitally signed report [in electronic form] in Form FC-
4 with scanned copies of income and expenditure statement, receipt and payment account and balance
sheet for every financial year beginning on the 1st day of April within nine months of the closure of the
financial year.

(2) The annual return in Form [FC-4] shall reflect the foreign contribution received in the exclusive bank
account and include the details in respect of the funds transferred to other bank accounts for utilisation.

(3) If the foreign contribution relates only to articles, the intimation shall be submitted in Form [FC-1].

(4) If the foreign contribution relates to foreign securities, the intimation shall be submitted in Form [FC-
1].

(5) Every report submitted under sub-rules (2) to (4) shall be duly certified by a chartered accountant.

(6) Every such return in Form [FC-4] shall also be accompanied by a copy of statement of account from
the bank where the exclusive foreign contribution account is maintained by the person, duly certified by
an officer of such bank.

(7) The accounting statements referred to above in the preceding sub-rule shall be preserved by the
person for a period of six years.

(8) A 'Nil' report shall be furnished even if no foreign contribution is received during a financial year.
Provided that where foreign contribution has not been received or utilised during a financial year, it shall
not be required to enclose certificate from Chartered Accountant or income and expenditure statement
or receipt and payment account or balance sheet with Form FC-4.

Page No. 499

17A. Change of designated bank account, name, address, aims, objectives or Key members of the
association. - A person who has been granted a certificate of registration under section 12 or prior
permission under section 11 of the Act shall intimate in electronic form within fifteen days, of any change
in the following, namely: -
(i) name of the association or its address within the State for which registration/ prior permission has
been granted under the Act [in Form FC-6A;
(ii) its nature, aims and objects and registration with local/relevant authorities [in Form FC-6B;
(iii) bank and/or branch of the bank and/or designated foreign contribution account number [in Form FC-
6C]; [***]
(iiia) bank and/or branch of the bank for the purpose of utilising the foreign contribution after it has been
received in Form FC-6D; and
(iv) office bearers or key functionaries or members mentioned in the application for grant of registration
or prior permission or renewal of registration, as the case may be, in Form FC-6E.
Provided that the change shall be effective only after final approval by the Central Government.

18. Foreign contribution received by a candidate for election. - Foreign contribution received by a
candidate for election, referred to in section 21, shall be furnished in Form [FC-1] [in electronic form]
within forty-five days from the date on which he is duly nominated as a candidate for election.

19. Limit to which a judicial officer, not below the rank of an Assistant Sessions Judge may make
adjudication or order confiscation. - An officer referred in clause (b) of sub-section (1) of section 29 may
adjudge confiscation in relation to any article or currency seized under section 25, if the value of such
article or the amount of such currency seized does not exceed Rs. 10,000,000/- (Ten Lakh only).

20. Revision. - An application for revision of an order passed by the competent authority under section 32
of the Act shall be made to the Secretary, Ministry of Home Affairs, Government of India, New Delhi on a
plain paper and it shall be accompanied by a fee of rupees three thousand only, which shall be paid
through the payment gateway specified by the Central Government.

21. Compounding of offence. - An application for compounding of an offence under section 41 may be
made to the Secretary, Ministry of Home Affairs, New Delhi in electronic form and shall be accompanied
by fee of rupees three thousand only, which shall be paid through the payment gateway specified by the
Central Government.

22. Returns by the Investigating Agency to the Central Government. - The Central Bureau of
Investigation or any other Government investigating agency that conducts any investigation under the Act
shall furnish reports to the Central Government on a quarterly basis, indicating the status of each case
that was entrusted to it, including information regarding the case number, date of registration, date of
filing charge sheet, court before which it has been filed, progress of trial, date of judgment and the
conclusion of each case.

23. Authority to whom an application or intimation to be sent. - Any information or intimation about
political or speculative activities of a person as mentioned in rule 3 or rule 4, shall be furnished to the
Secretary to the Government of India in the Ministry of Home Affairs, New Delhi. Such information or
intimation shall be sent by registered post [or in electronic form].

Page No. 500

[24. ***]

ECONOMIC LAWS: Insolvency & Bankruptcy Code, 2016

1. The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021

The President promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 on 4th
April 2021. The Cabinet had approved on 31st March 2021 the proposal to make amendments in the
Insolvency and Bankruptcy Code, 2016 (Code), through the Insolvency and Bankruptcy Code
(Amendment) Ordinance, 2021.

The amendments aims to provide an efficient alternative insolvency resolution framework for corporate
persons classified as micro, small and medium enterprises (MSMEs) under the Code, for ensuring quicker,
cost-effective and value maximising outcomes for all the stakeholders, in a manner which is least
disruptive to the continuity of MSMEs businesses and which preserves jobs. The initiative is based on a
trust model and the amendments honour the honest MSME owners by trying to ensure that the
resolution happens and the company remains with them.

It is expected that the incorporation of Pre-Packaged insolvency resolution process for MSMEs in the
Code will alleviate the distress faced by MSMEs due to the impact of the pandemic & the unique nature of
their business, duly recognizing their importance in the economy. It provides an efficient alternative
insolvency resolution framework for corporate persons classified as MSMEs for timely, efficient & cost-
effective resolution of distress thereby ensuring positive signal to debt market, employment preservation,
ease of doing business and preservation of enterprise capital. Other expected impact and benefits of the
amendment in Code are lesser burden on Adjudicating Authority, assured continuity of business
operations for corporate debtor (CD), less process costs & maximum assets realization for financial
creditors (FC) and assurance of continued business relation with CD and rights protection for operational
Creditors (OC).

The Amendment Ordinance seeks to amend sections such as 4, 5, 11, 33, 34, 61, 65, 77, 208, 239, 240 &
insert new sections such as 11A, 67A, 77A and a new chapter as IIIA on Pre-Packaged insolvency
resolution process for MSMEs in the Code based on recommendations made by the Insolvency Law
Committee (ILC).

Details of the amendments are given at under:

1. This Ordinance may be called the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021. It
shall come into force at once.

2. Amendment of Section 4- Application of this Part II of the Code

After the given proviso in the said section, the following proviso shall be inserted, namely:—
“Provided further that the Central Government may, by notification, specify such minimum amount of
default of higher value, which shall not be more than one crore rupees, for matters relating to the
prepackaged insolvency resolution process of corporate debtors under Chapter III-A.”.

3. Amendment of Section 5- Definitions covered under this part of the Code.

(i) after clause (2), the following clause shall be inserted, namely: —
‘(2A) “base resolution plan” means a resolution plan provided by the corporate debtor under clause (c) of
ub-section (4) of section 54A;’;

Page No. 501

(ii) in clause (5), in sub-clause (b), after the words “corporate insolvency resolution process”, the words
“or the pre-packaged insolvency resolution process, as the case may be,” shall be inserted;
(iii) in clause (11), after the words “corporate insolvency resolution process”, the words “or prepackaged
insolvency resolution process, as the case may be” shall be inserted;
(iv) in clause (15), after the words, “process period”, the words “or by the corporate debtor during the
pre-packaged insolvency resolution process period, as the case may be,” shall be inserted;
(v) in clause (19), after the words “for the purposes of”, the words and figures “Chapter VI and” shall be
inserted;
(vi) after clause (23), the following clauses shall be inserted, namely: —
(23A) “preliminary information memrandum” means a memorandum submitted by the corporate debtor
under clause (b) of sub-section (1) of section 54G;
(23B)“pre-packaged insolvency commencement date” means the date of admission of an application for
initiating the pre-packaged insolvency resolution process by the Adjudicating Authority under clause (a) of
sub-section (4) of section 54C;
(23C) “pre-packaged insolvency resolution process costs” means—

(a) the amount of any interim finance and the costs incurred in raising such finance;

(b) the fees payable to any person acting as a resolution professional and any expenses incurred by him
for conducting the pre-packaged insolvency resolution process during the prepackaged insolvency
resolution process period, subject to sub-section (6) of section 54F;

(c) any costs incurred by the resolution professional in running the business of the corporate debtor as a
going concern pursuant to an order under sub-section (2) of section 54J;

(d) any costs incurred at the expense of the Government to facilitate the pre-packaged insolvency
resolution process; and

(e) any other costs as may be specified;

(23D) “pre-packaged insolvency resolution process period” means the period beginning from the pre-
packaged insolvency commencement date and ending on the date on which an order under sub-section
(1) of section 54L, or sub-section (1) of section 54N, or sub-section (2) of section 54-O, as the case may be,
is passed by the Adjudicating Authority;’;
(vii) in clause (25), after the words, brackets and figures “of sub-section (2) of section 25”, the words,
figures and letter “or pursuant to section 54K, as the case may be” shall be inserted;
(viii) in clause (27), after the words “corporate insolvency resolution process”, the words “or the
prepackaged insolvency resolution process (PPIRP), as the case may be,” shall be inserted.

4. Amendment of section 11- Persons not entitled to make application.

(i) in clause (a), after the words “corporate insolvency resolution process”, the words “or a prepackaged
insolvency resolution process” shall be inserted;
(ii) after clause (a), the following clause shall be inserted, namely:––
“(aa) a financial creditor or an operational creditor of a corporate debtor undergoing a prepackaged
insolvency resolution process; or”;
(iii) after clause (b), the following clause shall be inserted, namely:—
“(ba) a corporate debtor in respect of whom a resolution plan has been approved under Chapter III-A,
twelve months preceding the date of making of the application; or”.

Page No. 502

5. After section 11 of the principal Act, following new section 11A shall be inserted,.
“11A. (1) Where an application filed under section 54C is pending, the Adjudicating Authority shall pass
applications under section an order to admit or reject such application, before 54C and under considering
any application filed under section 7 or section 7 or section 9 or section 10 during the pendency of such
section 9 or application under section 54C, in respect of the same section 10. corporate debtor.

(2) Where an application under section 54C is filed within fourteen days of filing of any application under
section 7 or section 9 or section 10, which is pending, in respect of the same corporate debtor, then,
notwithstanding anything contained in sections 7, 9 and 10, the Adjudicating Authority shall first dispose
of the application under section 54C.
(3) Where an application under section 54C is filed after fourteen days of the filing of any application
under section 7 or section 9 or section 10, in respect of the same corporate debtor, the Adjudicating
Authority shall first dispose of the application under sections 7, 9 or 10.
(4) The provisions of this section shall not apply where an application under section 7 or section 9 or
section 10 is filed and pending as on the date of the commencement of the Insolvency and Bankruptcy
Code (Amendment) Ordinance, 2021.”.

6. In section 33 of the principal Act, which deals with the initiation of liquidation, in sub-section (3), after
the words, “approved by the Adjudicating Authority”, the words, figures, brackets and letter “under
section 31 or under sub-section (1) of section 54L,” shall be inserted.

7. Amendment of section 34- Appointment of liquidator and fee to be paid.

In section 34 of the principal Act, in sub-section (1), after the words and figures, “under Chapter II”, the
words, figures and letter “or for the pre-packaged insolvency resolution process under Chapter III-A” shall
be inserted.

8. After Chapter III of the principal Act, the following Chapter III-A, shall be inserted, namely:—

PRE-PACKAGED INSOLVENCY RESOLUTION PROCESS

Corporate debtors eligible for pre-packaged insolvency resolution process.

54 A.(1) An application for initiating pre-packaged insolvency resolution process may be made in respect
of a corporate debtor classified as a micro, small or medium enterprise under sub-section (1) of section 7
of the Micro, Small and Medium Enterprises Development 27 of 2006. Act, 2006.
(2) Without prejudice to sub-section (1), an application for initiating pre-packaged insolvency resolution
process may be made in respect of a corporate debtor, who commits a default referred to in section 4,
subject to the following conditions, that––
(a) it has not undergone pre-packaged insolvency resolution process or completed corporate insolvency
resolution process, as the case may be, during the period of three years preceding the initiation date;
(b) it is not undergoing a corporate insolvency resolution process;
(c) no order requiring it to be liquidated is passed under section 33

i that the corporate debtor shall file an application for initiating pre-packaged insolvency resolution
process within a definite time period not exceeding ninety days;
ii that the pre-packaged insolvency resolution process is not being initiated to defraud any person; and

Page No. 503

iii the name of the insolvency professional proposed and approved to be appointed as resolution
professional under clause (e);

(d) it is eligible to submit a resolution plan under section 29A;

(e) the financial creditors of the corporate debtor, not being its related parties, representing such number
and such manner as may be specified, have proposed the name of the insolvency professional to be
appointed as resolution professional for conducting the pre-packaged insolvency resolution process of
the corporate debtor, and the financial creditors of the corporate debtor, not being its related parties,
representing not less than sixty-six per cent. in value of the financial debt due to such creditors, have
approved such proposal in such form as may be specified:
Provided that where a corporate debtor does not have any financial creditors, not being its related
parties, the proposal and approval under this clause shall be provided by such persons as may be
specified;

(f) the majority of the directors or partners of the corporate debtor, as the case may be, have made a
declaration, in such form as may be specified, stating, inter alia, —

(g) the members of the corporate debtor have passed a special resolution, or at least three-fourth of the
total number of partners, as the case may be, of the corporate debtor have passed a resolution,
approving the filing of an application for initiating pre-packaged insolvency resolution process.

(3) The corporate debtor shall obtain an approval from its financial creditors, not being its related parties,
representing not less than sixty-six per cent. in value of the financial debt due to such creditors, for the
filing of an application for initiating pre-packaged insolvency resolution process, in such form as may be
specified:

Provided that where a corporate debtor does not have any financial creditors, not being its related
parties, the approval under this sub-section shall be provided by such persons as may be specified.

(4) Prior to seeking approval from financial creditors under sub-section (3), the corporate debtor shall
provide such financial creditors with —

(a) the declaration referred to in clause (f) of sub- section (2);

(b) the special resolution or resolution referred to in clause (g) of sub-section (2);

(c) a base resolution plan which conforms to the requirements referred to in section 54K, and such other
conditions as m ay be specified; and

(a) the declaration, special resolution or resolution, as the case may be, and the approval of financial
creditors for initiating pre-packaged insolvency resolution process in terms of section 54A;
(b) the name and written consent, in such form as may be specified, of the insolvency professional
proposed to be appointed as resolution professional, as approved under clause (e) of sub-section (2) of
section 54A, and his report as referred to in clause (a) of sub-section (1) of section 54B;

Page No. 504

(d) such other information and documents as may be specified.

Duties of resolution professional before initiation of pre-packaged insolvency resolution process.

54B. (1) The insolvency professional, proposed to be appointed as the resolution professional, shall have
the following duties commencing from the date of the approval under clause (e) of sub-section (2) of
section 54A, namely:—

(a) prepare a report in such form as may be specified, confirming whether the corporate debtor meets
the requirements of section 54A, and the base resolution plan conforms to the requirements referred to
in clause (c) of sub-section (4) of section 54A;

(b) file such reports and other documents, with the Board, as may be specified; and

(c) perform such other duties as may be specified.

(2) The duties of the insolvency professional under sub-section (1) shall cease, if, —

(a) the corporate debtor fails to file an application for initiating pre-packaged insolvency resolution
process within the time period as stated under the declaration referred to in clause (f) of subsection (2) of
section 54A; or

(b) the application for initiating pre-packaged insolvency resolution process is admitted or rejected by the
Adjudicating Authority, as the case may be.

(3) The fees payable to the insolvency professional in relation to the duties performed under sub-section
(1) shall be determined and borne in such manner as may be specified and such fees shall form part of the
prepackaged insolvency resolution process costs, if the application for initiation of pre-packaged
insolvency resolution process is admitted.

Application to initiate pre-packaged insolvency resolution process.

54C. (1) Where a corporate debtor meets the requirements of section 54A, a corporate applicant thereof
may file an application with the Adjudicating insolvency Authority for initiating pre-packaged insolvency
resolution resolution process.

(2) The application under sub-section (1) shall be filed in such form, containing such particulars, in such
manner and accompanied with such fee as may be prescribed.

(3) The corporate applicant shall, along with the application, furnish—

(c) a declaration regarding the existence of any transactions of the corporate debtor that may be within
the scope of provisions in respect of avoidance of transactions under Chapter III or fraudulent or wrongful
trading under Chapter VI, in such form as may be specified;
(d) information relating to books of account of the corporate debtor and such other documents relating
to such period as may be specified.

Page No. 505

(4) The Adjudicating Authority shall, within a period of fourteen days of the receipt of the application, by
an order,––
(a) admit the application, if it is complete; or
(b) reject the application, if it is incomplete:

Provided that the Adjudicating Authority shall, before rejecting an application, give notice to the applicant
to rectify the defect in the application within seven days from the date of receipt of such notice from the
Adjudicating Authority.
(5) The pre-packaged insolvency resolution process shall commence from the date of admission of the
application under clause (a) of sub-section (4).

Time-limit for completion of pre-packaged insolvency resolution process.

54D. (1) The pre-packaged insolvency resolution process shall be completed within a period of one
hundred and twenty days from the pre-packaged insolvency commencement date.

(2) Without prejudice to sub-section (1), the resolution professional shall submit the resolution plan, as
approved by the committee of creditors, to the Adjudicating Authority under sub-section (4) or
subsection (12), as the case may be, of section 54K, within a period of ninety days from the pre-packaged
insolvency commencement date.

(3) Where no resolution plan is approved by the committee of creditors within the time period referred to
in sub-section (2), the resolution professional shall, on the day after the expiry of such time period, file an
application with the Adjudicating Authority for termination of the pre-packaged insolvency resolution
process in such form and manner as may be
specified.

Declaration of moratorium and public announcement during prepackaged insolvency resolution process
54E. (1) The Adjudicating Authority shall, on the pre-packaged insolvency commencement date, along
with the order of admission under section 54C —

(a) declare a moratorium for the purposes referred to in sub-section (1) read with sub-section (3) of
section 14, which shall, mutatis mutandis apply, to the proceedings under this Chapter;

(b) appoint a resolution professional —

(i) as named in the application, if no disciplinary proceeding is pending against him; or

(ii) based on the recommendation made by the Board, if any disciplinary proceeding is pending against
the insolvency professional named in the application.
(c) cause a public announcement of the initiation of the pre-packaged insolvency resolution process to be
made by the resolution professional, in such form and manner as may be specified, immediately after his
appointment.

(2) The order of moratorium shall have effect from the date of such order till the date on which the
prepackaged insolvency resolution process period comes to an end.

Page No. 506

Duties and powers of resolution professional during pre-packaged insolvency resolution process.
54F. (1) The resolution professional shall conduct the pre-packaged insolvency resolution process of a
corporate debtor during the pre-packaged insolvency resolution process period.
(2) The resolution professional shall perform the following duties, namely:—
(a) confirm the list of claims submitted by the corporate debtor under section 54G, in such manner as
may be specified;
(b) inform creditors regarding their claims as confirmed under clause (a), in such manner as may be
specified;
(c) maintain an updated list of claims, in such manner as may be specified;
(d) monitor management of the affairs of the corporate debtor;
(e) inform the committee of creditors in the event of breach of any of the obligations of the Board of
Directors or partners, as the case may be, of the corporate debtor, under the provisions of this Chapter
and the rules and regulations made thereunder;
(f) constitute the committee of creditors and convene and attend all its meetings;
(g) prepare the information memorandum on the basis of the preliminary information memorandum
submitted under section 54G and any other relevant information, in such form and manner as may be
specified;
(h) file applications for avoidance of transactions under Chapter III or fraudulent or wrongful trading
under Chapter VI, if any; and
(i) such other duties as may be specified.

(3) The resolution professional shall exercise the following powers, namely:—

(a) access all books of accounts, records and information available with the corporate debtor;
(b) access the electronic records of the corporate debtor from an information utility having financial
information of the corporate debtor;
(c) access the books of accounts, records and
(d) attend meetings of members, Board of
(e) appoint accountants, legal or other professionals in such manner as may be specified;
(f) collect all information relating to the assets, (i) business operations for the previous two

(ii) financial and operational payments for the previous two years from the date of prepackaged
insolvency commencement date;

(iii) list of assets and liabilities as on the initiation date; and

(iv) such other matters as may be specified;

(g) take such other actions in such manner as may be specified.

Page No. 507

(4) From the date of appointment of the resolution professional, the financial institutions maintaining
accounts of the corporate debtor shall furnish all information relating to the corporate debtor available
with them to the resolution professional, as and when required by him.

(5) The personnel of the corporate debtor, its promoters and any other person associated with the
management of the corporate debtor shall extend all assistance and cooperation to the resolution
professional as may be required by him to perform his duties and exercise his powers, and for such
purposes, the provisions of sub-sections (2) and (3) of section 19 shall, mutatis mutandis apply, in relation
to the proceedings under this Chapter.

(6) The fees of the resolution professional and any expenses incurred by him for conducting the
prepackaged insolvency resolution process shall be determined in such manner as may be specified:
Provided that the committee of creditors may impose limits and conditions on such fees and expenses:

Provided further that the fees and expenses for the period prior to the constitution of the committee of
creditors shall be subject to ratification by it.

(7) The fees and expenses referred to in sub-section (6) shall be borne in such manner as may be
specified.

List of claims and preliminary information memorandum.

54G. (1) The corporate debtor shall, within two days of the pre-packaged insolvency commencement
date, submit to the resolution professional the following information, updated as on that date, in such
form and manner as may be specified, namely:—

(a) a list of claims, along with details of the respective creditors, their security interests and guarantees, if
any; and

(b) a preliminary information memorandum containing information relevant for formulating a resolution
plan.

(2) Where any person has sustained any loss or damage as a consequence of the omission of any material
information or inclusion of any misleading information in the list of claims or the preliminary information
memorandum submitted by the corporate debtor, every person who—

(a) is a promoter or director or partner of the corporate debtor, as the case may be, at the time of
submission of the list of claims or the preliminary information memorandum by the corporate debtor; or

(b) has authorised the submission of the list of claims or the preliminary information memorandum by the
corporate debtor,
shall, without prejudice to section 77A, be liable to pay compensation to every person who has sustained
such loss or damage.

(3) No person shall be liable under sub-section (2), if the list of claims or the preliminary information
memorandum was submitted by the corporate debtor without his knowledge or consent.

Page No. 508

(4) Subject to section 54E, any person, who sustained any loss or damage as a consequence of omission of
material information or inclusion of any misleading information in the list of claims or the preliminary
information memorandum shall be entitled to move a court having jurisdiction for seeking compensation
for such loss or damage.

Management of affairs of corporate debtor

54H. During the pre-packaged insolvency resolution process period,—

(a) the management of the affairs of the corporate debtor shall continue to vest in the Board of Directors
or the partners, as the case may be, of the corporate debtor, subject to such conditions as may be
specified;

(b) the Board of Directors or the partners, as the case may be, of the corporate debtor, shall make every
endeavour to protect and preserve the value of the property of the corporate debtor, and manage its
operations as a going concern; and

(c) the promoters, members, personnel and partners, as the case may be, of the corporate debtor, shall
exercise and discharge their contractual or statutory rights and obligations in relation to the corporate
debtor, subject to the provisions of this Chapter and such other conditions and restrictions as may be
prescribed.

Committee of creditors
54-I. (1) The resolution professional shall, within seven days of the pre-packaged insolvency
commencement date, constitute a committee of creditors, based on the list of claims confirmed under
clause (a) of sub-section (2) of section 54F:
Provided that the composition of the committee of creditors shall be altered on the basis of the updated
list of claims, in such manner as may be specified, and any such alteration shall not affect the validity of
any past decision of the committee of creditors.

(2) The first meeting of the committee of creditors shall be held within seven days of the constitution of
the committee of creditors.

(3) Provisions of section 21, except sub-section (1) thereof, shall, mutatis mutandis apply, in relation to
the committee of creditors under this Chapter:
Provided that for the purposes of this sub-section, references to the “resolution professional” under
subsections (9) and (10) of section 21, shall be construed as references to “corporate debtor or the
resolution professional”.

Vesting management of corporate debtor with resolution professional

54J. (1) Where the committee of creditors, at any time during the pre-packaged insolvency resolution
corporate process, by a vote of not less than sixty-six per cent. of the voting shares, resolves to vest the
management of the corporate debtor with the resolution professional, the resolution professional shall
make an application for this purpose to the Adjudicating Authority, in such form and manner as may be
specified.

(2) On an application made under sub-section (1), if the Adjudicating Authority is of the opinion that

Page No. 509

during the pre-packaged insolvency resolution process—

(a) the affairs of the corporate debtor have been conducted in a fraudulent manner; or

(b) there has been gross mismanagement of the affairs of the corporate debtor,
it shall pass an order vesting the management of the corporate debtor with the resolution professional.

(a) the committee of creditors does not approve the base resolution plan under sub-section (4); or
(b) the base resolution plan impairs any claims owed by the corporate debtor to the operational creditors,
the resolution professional shall invite prospective

(3) Notwithstanding anything to the contrary contained in this Chapter, the provisions of —

(a) sub-sections (2) and (2A) of section 14;

(b) section 17;

(c) clauses (e) to (g) of section 18;

(d) sections 19 and 20;

(e) sub-section (1) of section 25;

(f) clauses (a) to (c) and clause (k) of sub- section (2) of section 25; and

(g) section 28,

shall, mutatis mutandis apply, to the proceedings under this Chapter, from the date of the order under
subsection (2), until the pre-packaged insolvency resolution process period comes to an end.

Consideration and approval of resolution plan

54K. (1) The corporate debtor shall submit the base resolution plan, referred to in clause (c) of sub-
section (4) of section 54A, to the resolution professional within two days of the pre-packaged insolvency
commencement date, and the resolution professional shall present it to the committee of creditors.

(2) The committee of creditors may provide the corporate debtor an opportunity to revise the base
resolution plan prior to its approval under sub-section (4) or invitation of prospective resolution
applicants under sub-section (5), as the case may be.

(3) The resolution plans and the base resolution plan, submitted under this section shall conform to the
requirements referred to in sub-sections (1) and (2) of section 30, and the provisions of sub-sections (1),
(2) and (5) of section 30 shall, mutatis mutandis apply, to the proceedings under this Chapter.

(4) The committee of creditors may approve the base resolution plan for submission to the
Adjudicating Authority if it does not impair any claims owed by the corporate debtor to the operational
creditors.

Page No. 510

(5) Where —
resolution applicants to submit a resolution plan or plans, to compete with the base resolution plan, in
such manner as may be specified

(6) The resolution applicants submitting resolution plans pursuant to invitation under sub-section (5),
shall fulfil such criteria as may be laid down by the resolution professional with the approval of the
committee of creditors, having regard to the complexity and scale of operations of the business of the
corporate debtor and such other conditions as may be specified.
(7) The resolution professional shall provide to the resolution applicants, —
(a) the basis for evaluation of resolution plans

for the purposes of sub-section (9), as approved by the committee of creditors subject to such conditions
as may be specified; and
(b) the relevant information referred to in section 29, which shall, mutatis mutandis apply, to the
proceedings under this Chapter, in such manner as may be specified.
(8) The resolution professional shall present to the committee of creditors, for its evaluation, resolution
plans which conform to the requirements referred to in sub-section (2) of section 30.
(9) The committee of creditors shall evaluate the resolution plans presented by the resolution
professional and select a resolution plan from amongst them.
(10) Where, on the basis of such criteria as may be laid down by it, the committee of creditors decides
that the resolution plan selected under sub-section (9) is significantly better than the base resolution
plan, such resolution plan may be selected for approval under subsection (12):

Provided that the criteria laid down by the committee of creditors under this sub-section shall be subject
to such conditions as may be specified.
(11) Where the resolution plan selected under sub-section (9) is not considered for approval or does not
fulfil the requirements of sub-section (10), it shall compete with the base resolution plan, in such manner
and subject to such conditions as may be specified, and one of them shall be selected for approval under
subsection (12).
(12) The resolution plan selected for approval under sub-section (10) or sub-section (11), as the case may
be, may be approved by the committee of creditors for submission to the Adjudicating Authority:

Provided that where the resolution plan selected for approval under sub-section (11) is not approved by
the committee of creditors, the resolution professional shall file an application for termination of the pre-
packaged insolvency resolution process in such form and manner as may be specified.
(13) The approval of the resolution plan under sub-section (4) or sub-section (12), as the case may be, by
the committee of creditors, shall be by a vote of not less than sixty-six per cent. of the voting shares, after
considering its feasibility and viability, the manner of distribution proposed, taking into account the order
of priority amongst creditors as laid down in sub-section (1) of section 53, including the priority and value
of the security interest of a secured creditor and such other requirements as may be specified.

(14) While considering the feasibility and viability of a resolution plan, where the resolution plan
submitted by the corporate debtor provides for impairment of any claims owed by the corporate debtor,

Page No. 511

the committee of creditors may require the promoters of the corporate debtor to dilute their
shareholding or voting or control rights in the corporate debtor:
Provided that where the resolution plan does not provide for such dilution, the committee of creditors
shall, prior to the approval of such resolution plan under sub-section (4) or sub-section (12), as the case
may be, record reasons for its approval.

(15) The resolution professional shall submit the resolution plan as approved by the committee of
creditors under sub-section (4) or sub-section (12), as the case may be, to the Adjudicating Authority.
Explanation I.––For the removal of doubts, it is
hereby clarified that, the corporate debtor being a resolution applicant under clause (25) of section 5,
may submit the base resolution plan either individually or jointly with any other person.

Explanation II.––For the purposes of sub-

sections (4) and (14), claims shall be considered to be impaired where the resolution plan does not
provide for the full payment of the confirmed claims as per the updated list of claims maintained by the
resolution professional.

Approval of resolution plan

54L. (1) If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of
creditors under sub-section (4) or sub-section (12) of section 54K, as the case may be, subject to the
conditions provided therein, meets the requirements as referred to in sub-section (2) of section 30, it
shall, within thirty days of the receipt of such resolution plan, by order approve the resolution plan:
Provided that the Adjudicating Authority shall, before passing an order for approval of a resolution plan
under this sub-section, satisfy itself that the resolution plan has provisions for its effective
implementation.

(2) The order of approval under sub-section (1) shall have such effect as provided under sub-sections (1),
(3) and (4) of section 31, which shall, mutatis mutandis apply, to the proceedings under this Chapter.
(3) Where the Adjudicating Authority is satisfied that the resolution plan does not conform to the
requirements referred to in sub-section (1), it may, within thirty days of the receipt of such resolution
plan, by an order, reject the resolution plan and pass an order under section 54N.
(4) Notwithstanding anything to the contrary contained in this section, where the Adjudicating Authority
has passed an order under sub-section (2) of section 54J and the resolution plan approved by the
committee of creditors under sub-section (4) or subsection (12), as the case may be, of section 54K, does
not result in the change in the management or control of the
corporate debtor to a person who was not a promoter or in the management or control of the corporate
debtor, the Adjudicating Authority shall pass an order —

(a) rejecting such resolution plan;

(b) terminating the pre-packaged insolvency resolution process and passing a liquidation order in respect
of the corporate debtor as referred to in subclauses (i), (ii) and (iii) of clause
(b) of sub-section (1) of section 33; and

(c) declaring that the pre-packaged insolvency resolution process costs, if any, shall be included as part of
the liquidation costs for the purposes of liquidation of the corporate debtor.

Page No. 512

Appeal against order under section 54L

54M. Any appeal from an order approving the resolution plan under sub-section (1) of section 54L, shall
be on the grounds laid down in sub-section (3) of section 61.
Termination of pre-packaged insolvency resolution process.
54N. (1) Where the resolution professional files an application with the Adjudicating Authority,—

(a) under the proviso to sub-section (12) of section 54K; or

(b) under sub-section (3) of section 54D, the Adjudicating Authority shall, within thirty days of the date of
such application, by an order, —
(i) terminate the pre-packaged insolvency resolution process; and
(ii) provide for the manner of continuation of proceedings initiated for avoidance of transactions under
Chapter III or proceedings initiated under section 66 and section 67A, if any.

(2) Where the resolution professional, at any time after the pre-packaged insolvency commencement
date, but before the approval of resolution plan under subsection (4) or sub-section (12), as the case may
be, of section 54K, intimates the Adjudicating Authority of the decision of the committee of creditors,
approved by a vote of sixty-six per cent. of the voting shares, to terminate the pre-packaged insolvency
resolution process, the Adjudicating Authority shall pass an order under sub-section (1).
(3) Where the Adjudicating Authority passes an order under sub-section (1), the corporate debtor shall
bear the pre-packaged insolvency resolution process costs, if any.
(4) Notwithstanding anything to the contrary contained in this section, where the Adjudicating Authority
has passed an order under sub-section (2) of section 54J and the pre-packaged insolvency resolution
process is required to be terminated under sub-section (1), the Adjudicating Authority shall pass an order
— (a) of liquidation in respect of the corporate debtor as referred to in sub-clauses (i), (ii) and (iii) of
clause (b) of sub-section (1) of section 33; and

(b) declare that the pre-packaged insolvency resolution process costs, if any, shall be included as part of
the liquidation costs for the purposes of liquidation of the corporate debtor.

a. terminate the pre-packaged insolvency

b. appoint the resolution professional referred

c. declare that the pre-packaged insolvency

Initiation of corporate insolvency resolution process.

54-O.
(1) The committee of creditors, at any time after the pre-packaged insolvency commencement date but
before the approval of resolution plan under sub- section (4) or sub-section (12), as the case may be, of
section 54K, by a vote of sixty-six per cent. of the voting shares, may resolve to initiate a corporate
insolvency resolution process in respect of the corporate debtor, if such corporate debtor is eligible for
corporate insolvency resolution process under Chapter II.

Page No. 513

(2) Notwithstanding anything to the contrary contained in Chapter II, where the resolution professional
intimates the Adjudicating Authority of the decision of the committee of creditors under sub-section (1),
the Adjudicating Authority shall, within thirty days of the date of such intimation, pass an order to —
resolution process and initiate corporate insolvency resolution process under Chapter II in respect of the
corporate debtor;
to in under clause (b) of sub-section (1) of section 54E as the interim resolution professional, subject to
submission of written consent by such resolution professional to the Adjudicatory Authority in such form
as may be specified; and
resolution process costs, if any, shall be included as part of insolvency resolution process costs for the
purposes of the corporate insolvency resolution process of the corporate debtor.

(3) Where the resolution professional fails to submit written consent under clause (b) of sub-section (2),
the Adjudicating Authority shall appoint an interim resolution professional by making a reference to the
Board for recommendation, in the manner as provided under section 16.
(4) Where the Adjudicating Authority passes an order under sub-section (2) — (a) such order shall be
deemed to be an order of

(b) the corporate insolvency resolution process shall commence from the date of such order;

(c) the proceedings initiated for avoidance of admission of an application under section 7 and shall have
the same effect; transactions under Chapter III or proceedings initiated under section 66 and section 67A,
if any, shall continue during the corporate insolvency resolution process;

(d) for the purposes of sections 43, 46 and 50, references to “insolvency commencement date” shall
mean “pre-packaged insolvency commencement date”; and
(e) in computing the relevant time or the period for avoidable transactions, the time-period for the
duration of the pre-packaged insolvency resolution process shall also be included, notwithstanding
anything to the contrary contained in sections 43, 46 and 50.

Application of provisions of Chapters II, III, VI, and VII to this Chapter

54P. (1) Save as provided under this Chapter, sections 24, 25A, 26, 27, 28, 29A, 32A, 43 to 51, and the
provisions of Chapters VI and VII of this VI, and VII to Part shall, mutatis mutandis apply, to the pre-
packaged insolvency resolution process, subject to the following, namely:―
(a) reference to “members of the suspended Board of Directors or the partners” under clause (b) of sub-
section (3) of section 24 shall be construed as reference to “members of the Board of Directors or the
partners,unless an order has been passed by the Adjudicating Authority under section 54J”;
(b) reference to “clause (j) of sub-section (2) of section 25” under section 26 shall be construed as
reference to “clause (h) of sub-section (2) of section 54F”;
(c) reference to “section 16” under section 27 shall be construed as reference to “section 54E”;
(d) reference to “resolution professional” in sub-sections (1) and (4) of section 28 shall be construed as
“corporate debtor”;

Page No. 514

(e) reference to “section 31” under sub-section (3) of section 61 shall be construed as reference to “sub-
section (1) of section 54L”;
(f) reference to “section 14” in sub-sections (1) and (2) of section 74 shall be construed as reference to
“clause (a) of sub-section (1) of section 54E”;
(g) reference to “section 31” in sub-section (3) of section 74 shall be construed as" reference to “sub-
section (1) of section 54L”.

(2) Without prejudice to the provisions of this Chapter and unless the context otherwise requires, where
the provisions of Chapters II, III, VI and VII are applied to the proceedings under this Chapter, references
to —
(a) “insolvency commencement date” shall be construed as references to “pre-packaged insolvency
commencement date”;
(b) “resolution professional” or “interim resolution professional”, as the case may be, shall be construed
as references to the resolution professional appointed under this Chapter;
(c) “corporate insolvency resolution process” shall be construed as references to “pre-packaged
insolvency resolution process”; and

(d) “insolvency resolution process period” shall be construed as references to “pre-packaged insolvency
resolution process period.”.’.

2. Vide Notification S.O. 4638 (E) [F. NO. 30/33/2020-INSOLVENCY], dated 22-12-2020
In exercise of the powers conferred by section 10A of the Insolvency and Bankruptcy Code, 2016 (31 of
2016), the Central Government hereby extended the period of suspension of insolvency proceedings by
further period of three months from the 25th December, 2020, for the purposes of the said section.

3. Vide MCA Notification S.O.1543(E) dated 9th April, 2021, in exercise of the powers conferred by the
second proviso to section 4 of the Insolvency and
Bankruptcy Code, 2016 (31 of 2016), as amended by the Insolvency and Bankruptcy Code (Amendment)
Ordinance, 2021, the Central Government hereby specifies ten lakh rupees as the minimum amount of
default for the matters relating to the pre-packaged insolvency resolution process of corporate debtor
under Chapter III-A of the Code

Page No. 515