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CA Final – Corporate and Economic Laws Questions

 

Q 1. XYZ Limited is an unlisted public company having a paid-up capital of twenty crore rupees as on 31st March, 2015 and a turnover of one hundred fifty crore rupees during the year ended 31st March, 2015. The total number of directors is thirteen.

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

  1. State the minimum number of independent directors that the company should appoint.
  2. How many independent directors are to be appointed in case XYZ Limited is a listed company?

Answer

  1. 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:

a) The Public Companies having paid up share capital of 10 crore rupees or more; or

b)The Public Companies having turnover of 100 crore rupees or more; or

c)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, 2015 and a turnover of Rs. 150 crores during the year ended 31st March, 2015. Thus, as per the Companies (Appointment and Qualification of Directors) Rules, 2014, XYZ Limited shall have at least 2 directors as independent directors.

  2. 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.

In the present case, XYZ Limited is a listed company and the total number of directors is 13. Hence, in this case, XYZ Limited shall have at least 5 directors (1/3 of 13 is 4.33 rounded as 5) 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.

As the explanation to rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 specifies that for the purpose of the assessment of the paid up share capital or turnover or outstanding loans, debentures and deposits, as the case may be, their existence on the last date of latest audited financial statements shall be taken into account.

In the present case, it is mentioned that paid up capital of XYZ Limited is Rs. 20 crore on 31st March, 2015 and turnover is Rs. 150 crore during the year ended 31st March, 2015. So, it is assumed that 31st March, 2015 is the last date of latest audited financial statements.

Q 2

A and B were appointed as first directors on 4th April, 2014 in Sun Glass Ltd. Thereafter, C, D and E were appointed as directors on 6th July 2014 and F, G and H were also appointed as directors on 7th August 2014 in the company. In the Annual General meeting (AGM) of the company held after the above appointments, A and B were proposed to be retired by rotation and re-appointed as directors.

At the AGM, resolution for A’s retirement and re-appointment was passed. However, before the resolution for ‘B’ could be taken up for consideration, the meeting was adjourned. In the adjourned meeting also, the said resolution could not be taken up and the meeting was ended without passing the resolution for B’s retirement and re- appointment.

In the light of above and with reference to relevant provision of the Companies Act, 2013, answer the following:

i) Whether proposals for retirement by rotation and re-appointment of A and B only were sufficient?

ii) What will be the status of B as a director in the company?

Answer

According to section 152(6)(a)(i) 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.

Further, section 152(6)(c) of the Act states that at the first annual general meeting of a public company held next after the date of the general meeting at which the first directors are appointed and at every subsequent annual general meeting, one-third of such of the directors for the time being as are liable to retire by rotation, or if their number is neither three nor a multiple of three, then, the number nearest to one-third, shall retire from office.

Section 152(6) (d) further states that the directors to retire by rotation at every annual general meeting shall be those who have been longest in office since their last appointment, but as between persons who became directors on the same day, those who are to retire shall, in default of and subject to any agreement among themselves, be determined by lot.

Section 152(7) (a) provides that if the vacancy of the director retiring by rotation, is not so filled-up and the meeting has not expressly resolved not to fill the vacancy, the meeting shall stand adjourned till the 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 vacancy of the retiring director 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:

  1. At that meeting or at the previous meeting a resolution for the re-appointment of such director has been put to the meeting and lost;
  2. the retiring director has, by a notice in writing addressed to the company or its Board of directors, expressed his unwillingness to be so re-appointed;
  3. He is not qualified or is disqualified for appointment;
  4. a resolution, whether special or ordinary, is required for his appointment or re- appointment by virtue of any provisions of this Act; or
  5. Section 162 is applicable to the case.

i) In the given case there are total 8 directors, out of which A and B were appointed as first directors of Sun Glass Ltd.

As per the provisions of section 152 of the Companies Act, 2013, the number of directors liable to retire by rotation at the next Annual General Meeting are 2 [1/3 of (2/3 of 8)].

Therefore, in the given case, 2 directors will be liable to retire by rotation at the next AGM of the Company, which in this case will be A and B as they are who have been longest in office since their last appointment. Thus, the proposals for retirement by rotation and re- appointment of A and B only were sufficient.

ii) According to section 152(6)(c), at the annual general meeting, one-third of rotational directors shall retire from office. Thus, B shall retire at the Annual General Meeting in which he was due to retire even though it was adjourned without the resolution for B’s retirement could have been taken up.

Further, at the adjourned meeting also, the vacancy of the retiring director 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 as he does not fall in the category of any of the exceptions mentioned in section 152(7) (b). Hence, B will be deemed to be re- appointed as a director in the company.

Q 3

Surya, a director in New Age Limited holding Directors Identification Number (DIN) wants to make certain changes in the particulars of his DIN. What procedure would you follow to get changes incorporated in the DIN already allotted to Surya?

Answer

Intimation of changes in particulars specified in DIN application

  1. According to Companies (Appointment and Qualification of Directors) Rules, 2014, every individual who has been allotted a DIN under these rules shall, in the event of any change in his particulars as stated in Form DIR-3, intimate such change(s) to the Central Government within a period of thirty days of such changes(s) in form DIR – 6 in the following manner, namely:

a) The applicant shall download Form DIR – 6 from the portal, fill in the relevant changes, verify the Form (DIR-7) and attach duly scanned copy of the proof of the changed particulars and submit electronically.;

b) The form shall be digitally signed by a Chartered Accountant in practice or a Company Secretary in practice or a Cost Accountant in practice;

c) The applicant shall submit the Form DIR -6.

2. The Central Government, upon being satisfied, after verification of such changed particulars from the enclosed proofs, shall incorporate the said changes and inform the applicant by way of a letter by post or electronically or in any other mode confirming the effect of such change in the electronic database maintained by the Ministry.

3. The DIN cell of the Ministry shall also intimate the change(s) in the particulars of the director submitted to it in Form DIR-6 to the concerned Registrar(s) under whose jurisdiction the registered office of the company(s) in which such individual is a director is situated.

4. The concerned individual shall also intimate the change(s) in his particulars to the company or companies in which he is a director within 15 days of such change.

Q 4

ABC Ltd. is a listed company having 50,00,000 equity shares of 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 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

Procedure for appointment of director elected by small shareholders:

Sec. 151 of Companies Act, 2013 provides that 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.

Rule 7 of the Companies (Appointment and Qualification of Directors) Rules, 2014 provides that a listed company, may upon notice of not less than 1,000 small shareholders or 1/10th of the total number of such shareholders, whichever is lower have a small shareholders' director elected by the small shareholders.

Small shareholders intending to propose a person as a candidate for the post of small shareholders shall leave a notice of their intention with the company at least 14 days before the meeting under their signatures 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.

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.

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 –

  1. His Director Identification Number;
  2. That he is not disqualified to become a director under the Act; and
  3. His consent to act as a director of the company.

A person shall not be appointed as small shareholders' director of a company, if the person is not eligible for appointment in terms of Sec 164.

Status of Small Shareholder Director:

Rule 7 of the Companies (Appointment and Qualification of Directors) Rules, 2014 provides that such director shall be considered as an independent director subject to, his being eligible u/s 149(6) and his giving a declaration of his independence in accordance with Sec. 149(7).

Exceptions subject to which small shareholder directors are appointed:

The appointment small shareholders' director shall be subject to the provisions of section 152 except that-

  1. Such director shall not be liable to retire by rotation;
  2. Such director's tenure as small shareholders' director shall not exceed a period of 3 consecutive years; and
  3. On the expiry of the tenure, such director shall not be eligible for re-appointment

Q 5

Queens Limited is a company listed at Bombay Stock Exchange. Company’s Articles empower the Board of Directors to appoint additional director. The Board of Directors, therefore, appoints Mr. K. as the additional director. It may, however, be pointed out that earlier, the proposal to appoint Mr. K. as a director on the Company’s Board was rejected by the members at the company’s Annual General Meeting.

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

  1. Whether Mr. K’s appointment as additional director by the Board of Directors is valid?
  2. Whether the Company’s Annual General Meeting can appoint Mr. K. as the additional director when the proposal to appoint comes before the meeting for the first time?
  3. In case the AGM of the company is not held within the stipulated time, decide whether Mr. K. who was appointed by the Board as additional director, for the first time, can continue to act as a director?

Answer.

Problem as asked in the question is based on the provisions of the Companies Act, 2013 as contained under section 161 (1) according to which:

a) The Articles of a company may confer upon its Board of Directors the power to appoint any person as an additional director at any time.

b)A person, who fails to get appointed as a director in a general meeting of the company cannot be appointed as an additional director in the same company.

c)Additional director shall hold office up to the date of the next AGM or the last date, on which the AGM should have been held, whichever is earlier.

In the given case, the answers to sub-questions are:

  1. The appointment of Mr. K. as additional director by the Board of Directors is not valid because before appointing him as an additional director, the proposal to appoint Mr. K. as a director on the Company’s Board was rejected by the members at the company’s Annual General Meeting.
  2. 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. Therefore, in the present case, the company’s Annual General Meeting cannot appoint Mr. K. as the additional director when the proposal to appoint comes before the meeting for the first time because the company’s Articles empower the Board of Directors to appoint additional director.
  3. In case the AGM of the company is not held within the stipulated time, Mr. K. cannot continue as additional director, since he can hold the office of directorship only 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. Such an additional director shall vacate his office latest on the date on which the annual general meeting ought to 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 could not be called within the time prescribed.

Q 6

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

  1. Brown Limited, having a turnover of Rs. 60 crore in the financial year 2016-17 appoints Ms. Rose as the women director on 1st March 2017. Ms. Rose already holds directorship in twelve companies including ten public companies. She is whole time Cost Accountant in practice.
  2. Ms. Jasmine holds directorship in eight public companies including managing directorship in two companies and directorship in six companies. In addition, she also holds alternate directorship in three companies and independent directorship in three subsidiary companies of Brown Limited.

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)]

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.

  1. In the instant case, Ms. Rose was appointed as a women director on 1st March, 2017 in Brown Limited. She was already holding directorship in twelve companies including ten public companies. She is whole time Cost Accountant in practice.

As Ms. Rose was already a director in ten public companies, her appointment in Brown Limited is not valid as it will lead to her directorship in 11 public companies.

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 in the other remaining companies

2. In the instant case, Ms. Jasmine holds directorship in eight public companies including managing directorship in two companies and directorship in six companies. In addition, she also holds alternate directorship in three companies and independent directorship in three subsidiary companies of Brown Limited.

Ms. Jasmine was already holding directorship in eight public companies and alternate directorship in three companies (assuming these companies as private) and independent directorship in three subsidiary companies of Brown Limited. Directorship in three subsidiary companies of Brown Limited will be considered as directorship in three more public companies.

Hence, total holding of directorship by Ms. Jasmine in public companies amounts to 11 (8+3) which is invalid.

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 in the other remaining companies.

Assumption: As nothing is mentioned that whether three companies in which Ms. Jasmine is holding alternate directorship are private or public, we are assuming that these companies are private in nature. Even if the student writes the answer based on assumption that Ms. Jasmine is holding alternate directorship of a public company, conclusion will not change.

 

Q 7

There are four directors in Shine Paper Limited. 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. Whether as per provisions of the Companies Act, 2013, he will be treated as managing director of the company? Also narrate the procedure of appointment of a managing director in a company.

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:

  1. Virtue of articles of a company or
  2. An agreement with the company or
  3. 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:

  1. The power to affix the common seal of the company to any document or
  2. To draw and endorse any cheque on the account of the company in any bank or
  3. To draw and endorse any negotiable instrument or (iv)To sign any certificate of share or
  4. 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)]

  1. 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.
  2. The terms and conditions and remuneration approved by Board of Directors as above shall be subject to the approval of shareholders by a resolution at the next general meeting of the company.
  3. In case such appointment is at variance to the conditions specified in the Schedule V of the Companies Act, 2013, the appointment shall be approved by the Central Government.
  4. 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.

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.

Q 8

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

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.

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 C HH Limited.

Q 9

Advise Super Specialties Ltd. in respect of the following proposals under consideration of its Board of directors:

  1. Appointment of Managing Director who is more than 70 years of age;
  2. Payment of commission of 4% of the net profits per annum to the directors of the company;
  3. Payment of remuneration of Rs. 40,000 per month to the whole time director of the company running in loss and having an effective capital of Rs. 95.00 lacs.

Answer

  1. 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.It is also provided that where no such special resolution is passed but votes cast in favour of the motion exceeds the votes, if any, cast against the motion and the C.G. 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 70 years may be made.
  2. Under section 197 (7) of the Companies Act, 2013, independent directors may be paid profit related commission as may be approved by the members. However, 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, the remuneration payable to directors who are neither managing directors or 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 be approved by the members by ordinary resolution.
  3. 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, without Central Government approval, pay remuneration to the managerial person not exceeding Rs 60 Lakhs for the year if the effective capital of the company is negative or upto Rs 5 Crores. In the present case, the proposed remuneration can be paid without the approval of Central Government.

Q 10:

Mr. Ram, a Managing Director of MIV Ltd., was appointed 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, as paid to other directors. The effective capital of the company is Rs.100 crores.

In addition, the company also appointed Mr. Bharat, a director, for professional services rendered as software engineer. It was agreed to pay suitable additional remuneration to Mr. Bharat whenever his services are utilized. Referring to the provisions of Companies Act, 2013, as contained in Schedule V, examine the validity of the payment of remuneration to Mr. Ram, and Mr. Bharat an additional remuneration for rendering his services.

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. 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 Rs. 100 crores to 250 crores. 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 Lacs in the year as remuneration to Mr. Ram is valid in case he accepts it, as under the said schedule he is entitled to a remuneration of RS. 120 Lakhs in the year and his terms of appointment provide for payment of the remuneration as per schedule V.

Whereas with respect to payment to Mr. Bharat, the company proposes to pay suitable additional remuneration to Mr. Bharat, a director, for professional services rendered as software engineer, whenever such services are utilized. According to 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 with and subject to the provisions of this section, either

  1. By the articles of the company, or
  2. By a resolution or,
  3. 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 inclsive of the remuneration payable to him for the services rendered by him in any other capacity. However, any remuneration for services rendered by any such director in other capacity shall not be so included if-

  1. The services rendered are of a professional nature; and
  2. in the opinion of the Nomination and Remuneration Committee, if the company is covered under sub-section (1) of section 178, are 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. Bharat, a director for professional services rendered as software engineer will not be included in the maximum managerial remuneration and is allowed but opinion of Nomination and Remuneration

Committee is to be obtained.

Q 11

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

Answer:

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:

  1. 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
  2. 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 be years, whichever is shorter, calculated on the basis of remuneration earned by him during a period of his term or 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:

  1. 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.
  2. Remainder time period left to be served in office has Mr. Gopi not been removed, 1st April, 2018 to 30th June, 2022, 4 years & 3 months

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.

Ch 3 - Meetings of Board and its Powers

Q 12

The Board of Directors of Infotech Consultants Limited, registered in Kolkata, proposes to hold the next board meeting in the month of May, 2014.They seek, your advice in respect of the following matters:

  1. Can the board meeting be held in Chennai, when all the directors of the company reside at Kolkata?
  2. Is it necessary that the notice of the board meeting should specify the nature of business to be transacted?

Advise with reference to the relevant provisions of the Companies Act, 2013.

Answer

  1. There is no provision in the Companies Act, 2013 under which the board meetings must be held at any particular place. The Companies Act lays down the provisions for holding meetings by video conferencing, sending notices, procedures at the meeting etc. Therefore, there is no difficulty in holding the board meeting at Chennai even if all the directors of the company reside at Kolkata and the registered office is situated at Kolkata 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.
  2. 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. As a matter of good secretarial practice, the notice should include full details and particulars of the business to be transacted at the Board Meetings.

The articles of association of the company may make it mandatory to do so in almost all cases.

Q 13

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

Answer

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 national holiday, till the next succeeding day which is not a national holiday, at the same time and place.

Q 14

Some urgent items are left over in the agenda of Board meeting which concluded and decision cannot be deferred till its next meeting. Advice the company about how the resolution shall be passed now.

Answer

Resolutions may be passed in respect of Board approvals in one of the two ways, either at the board meetings or by circulation. The items which could not be concluded and decided at the board meeting, if cannot be deferred till the next meeting may be passed by circulation, provided they do not include such items as are required to be passed only at the meeting of the directors under section 179(3) of the Companies Act, 2013.

In order to pass any resolution of the Board by circulation the following steps must be taken and completed as laid down in section 175(1):

  1. The draft of the proposed resolution must be circulated along with all relevant and necessary papers;
  2. The above documents must be delivered to all the directors, members or the committee, as the case may be, at their addresses registered with the company in India;
  3. The documents must be delivered by hand delivery or by post or by courier, or through such electronic means as may be prescribed;
  4. The resolution must be approved by a majority of the directors or members, who are entitled to vote on the resolution.
  5. There must not be any objection from not less than one-third of the total number of directors of the company for the time being, requiring that such resolution under circulation must be decided at a meeting.

Further, the resolution so passed shall be noted at a subsequent meeting of the Board or the committee thereof, and be made part of minutes of such meeting.

Q 15

Mr. MTP was appointed as a director at the Annual General Meeting of a limited company held on 30th September, 2013 and he carried on his duties and functions as a director. In the month of August, 2014, it was found out that there were certain irregularities in his appointment and on 31st August, 2014, his appointment was declared invalid. But Mr. MTP continued to act as director even after 31st August, 2014. You are required to state, with reference to the provisions of the Companies Act, 2013, whether the acts done by Mr. MTP are valid and binding upon the company ?

Answer

In accordance with section 176 of the Companies Act, 2013 acts 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 further provide 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 of the Companies Act, 2013, the acts done by Mr. MTP upto the date of the irregularity in his appointment coming to the notice of the company will be deemed as valid and binding on the Company.

Any act done by him after the date on which the irregularity or defect in his appointment was noticed by the company will be deemed invalid. The acts done by Mr. MTP after 31st August, 2014 shall be deemed to be invalid and not binding upon the Company.

Q 16

  1. R Ltd. wants to constitute an Audit Committee. Draft a board resolution covering the following matters [compliance with Companies Act, 2013 to be ensured].
  • Member of the Audit Committee
  • Chairman of the Audit Committee
  • Any 2 functions of the said Committee

2.What would be the minimum likely turnover or capital of this company?

 

3. 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 not restricted under Section 144?

Answer

i) 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. M------ 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:

  1. make the recommendation for appointment, remuneration and terms of appointment of the auditors of the company;
  2. 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 has prescribed that the following classes of companies shall constitute Audit Committee:

  1. All public companies with a paid up capital of 10 crore rupees or more;
  2. All public companies having turnover of 100 crore rupees or more;
  3. All public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding 50 crore rupees or more.

 

Hence, in the present question, the likely turnover 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:

  • Internal control systems,
  • The scope of audit, including the observations of the auditors,
  • Review of financial statement before their submission to the Board,

2)Discuss any related issues with the internal and statutory auditors and the management of the company.

Q 17

Advise the Board of Director of Spectra Papers Ltd. regarding validity and extent of their powers, under the provisions of the Companies Act, 2013 in relation to the following matters:

  1. Buy-back of the shares of the Company, for the first time, upto 10% of the paid up equity share capital without passing a special resolution.
  2. Delegation of Power to the Managing Director of the company to invest surplus funds of the company in the shares of some companies.

Answer

i) According to clause (b) of section 179(3), The Board of Directors of a company shall exercise the power to authorise 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 authorising 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,

Thus, we can say that in the case of buy-back of shares of the Company, for the first time, upto 10% of the 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.

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 meetings of the Board.

The board may under the proviso to section 179(3) of the Companies Act, 2013 delegate the power to invest the funds of the company by a Board Resolution passed at a duly convened Board Meeting. However, the investment in shares of other companies will be governed by the applicable provisions of the Companies Act, 2013 (i.e. section 186 of the Companies Act, 2013). Since the investment of funds is governed by section of the Companies Act, 2013, thus, specific provisions of section 186 will be applicable for such investment.

According to section 186(5), 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.

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.

Q 18

M/s Jai Industries Limited earned net profit for the last three years as under:

Financial Year

Net profit (Rs. in crores)

2013-1 4          

  30                                   

2014-15

40

2015-16

50

During the financial year 2016-17, the Board of Directors of the company contributed to a Charitable Fund Rs. 1.25 crores in July, 2016. Again in January 2017, the Board of Directors passed resolution to contribute to another Charitable Fund Rs. 1.00 crore.

Decide the validity of the decision of the Board of Directors regarding the contribution on both the occasions with reference to the provisions of the Companies Act, 2013.

Answer

According to Section 181 of the Companies Act, 2013, the Board of Directors of a company may contribute to bona fide charitable and other funds.

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, exceeds five per cent of its average net profits for the three immediately preceding financial years.

In the instant case, the average Net Profit of M/s Jai Industries Limited in the three immediately preceding financial years (2013-14, 2014-15 and 2015-16) is 40 Crores [30+40+50/3].

Thus, if M/s Jai Industries Limited wants to contribute more than Rs. 2 crores *40 crores * 5%+ in Charitable fund, it has to take the prior permission of the company in general meeting.

In July 2016, the Board of Directors of M/s Jai Industries Limited contributed to a Charitable Fund Rs. 1.25 crores. This contribution is within the limit of Rs. 2 crore, thus no prior permission of the company in general meeting shall be required.

In January 2017, the Board of Directors passed resolution to contribute to another Charitable Fund Rs. 1.00 crore. For this contribution, prior permission of the company in general meeting shall be required as the aggregate contribution in Charitable Fund in the year 2017 is Rs. 2.25 crores which is exceeding Rs. 2 Crore. *Rs. 1.25 crores + Rs. 1 Crore].

Q 19

State the circumstances in which a director of a company is required under the Companies Act, 2013 to disclose his interest in a contract or arrangement to be entered into by the company. Examine whether the validity of the contract is affected by non- disclosure of interest by the director.

Answer

Circumstances in which disclosure of Interest by director is necessary - Section 184 of the Companies Act, 2013 provides for disclosure of interest by director. According to this section whenever any director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered into shall disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed and shall not participate in such meeting.

Following are the circumstances where disclosure is necessary:

Whenever any director of the company, who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered into —

  1. 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 is a promoter, manager, Chief Executive Officer of that body corporate; or
  2. With a firm or other entity in which, such director is a partner, owner or member, as the case may be.

However, where any director who is not so concerned or interested at the time of entering into such contract or arrangement, he shall, if he becomes concerned or interested after the contract or arrangement is entered into, disclose his concern or interest forthwith when he becomes concerned or interested or at the first meeting of the Board held after he becomes so concerned or interested.

Validity of the contract on non-disclosure of interest: 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.

Q 20

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 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.

  1. 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.?
  2. Is there any contravention of section 188 (1)? If yes, then state the liability of the wrongdoer.
  3. 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/s Tristar 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)]

  1. 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.
  2. 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 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.

3. 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.

Q 21

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

Place of maintenance of Register of Contracts or Arrangements:

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.

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 -

  1. Name of the director;
  2. Amount proposed to be paid;
  3. Event due to which compensation become payable;
  4. Date of Board meeting recommending such payment;
  5. Basis for the amount determined;
  6. Reason or justification for the payment;
  7. Manner of payment - whether payable in cash or otherwise and how;
  8. Sources of payment; and
  9. Any other relevant particulars as the Board may think fit.

 

                    Ch 4 - Inspection, Inquiry and Investigation

Q 22

A group of creditors of Mac Trading Limited makes a complaint to the Registrar of Companies, Hyderabad 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 10 A.M. on 1st July 2015 and the ROC entered the premises at 10.30 A.M. for the search. Examine the powers of the Registrar to seize the books of the company.

Or

A group of creditors of MBIND Bronze Limited makes a complaint to the Registrar of 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

Search and seizure - Section 209 of the Companies Act, 2013 provides that where upon information in his possession or otherwise, the Registrar or inspector has reasonable ground to believe that the books and papers of -

  1. A company, or
  2. Relating to the key managerial personnel, or
  3. Any director, or
  4. Auditor, or
  5. 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—

  1. Enter, with such assistance as may be required, and search, the place or places where such books or papers are kept; and
  2. 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.

According to the above provisions, 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.

Since in the given question, Registrar entered the premises for the search and seizure of books of the company without obtaining an order from the Special Court, he is not authorised to seize the books of the Mac Trading Limited.

Q 23

Mrs. Preeti, a lady aged about 32 years and Managing Director of M/s Growmore plantations Ltd., has been arrested for an offence covered under section 447 of the Companies Act, 2013 on a complaint made by the Director, Serious Fraud Investigation Officer. Mrs. Preeti seeks your legal advice as to the conditions under which she can be released on bail and the role of Special Court in this regard.

Answer

According to Section 212(6) of the Companies Act, 2013, notwithstanding anything contained in the Code of Criminal Procedure, 1973, offence covered under section 447 shall be cognizable and no person accused of any offence under those sections shall be released on bail or on his own bond unless—

  1. The Public Prosecutor has been given an opportunity to oppose the application for such release; and
  2. 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.

A person, who, is under the age of sixteen years or is a woman or is sick or infirm, may be released on bail, if the Special Court so directs.

The Special Court shall not take cognizance of any offence referred to this sub- section except upon a complaint in writing made by—

  • The Director, Serious Fraud Investigation Office; or
  • Any officer of the Central Government authorised, by a general or special order in writing in this behalf by that Government.

Hence, in the instant case, Mrs. Preeti has been arrested for an offence covered under section 447 of the Act on a complaint made by the Director, SFIO.

As Mrs. Preeti is a woman, she may be released on bail if the Special Court so directs.

Q 24

Pursuant to Section 210 of the Companies Act, 2013 an Inspector was appointed to investigate the affairs of Sterling Trading Limited. Mr. Ahmed the General Manager (Operations) who is aware of certain misdeeds of the management, desires to know whether he is entitled to any protection against dismissal by the company if he discloses the misdeeds during the course of examination by the Inspector. Advise him explaining the relevant provisions of the Companies Act, 2013.

Answer

According to 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 under section 210, 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—

  1. To discharge or suspend any employee; or
  2. To punish him, whether by dismissal, removal, reduction in rank or otherwise; or
  3. 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.

Action against Employee: If the company, other body corporate or person concerned does not receive within thirty days of making of application under sub- section (1), 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.

In the instant case, the above mentioned protection is available to Mr. Ahmed, the General Manager of Sterling Trading Limited

Q 25

What are the duties of the inspector as enumerated in section 223 of the Companies Act, 2013, in relation to his report.

Answer

Section 223 of the Companies Act, 2013 deals with Inspector’s report. The following provisions are applicable in respect of the Inspector’s report on investigation:

  1. Submission of interim report and final report [Sub section (1)]: An inspector appointed under this Chapter (Chapter XIV- Inspection, Inquiry and Investigation) may, and if so directed by the Central Government shall, submit interim reports to that Government, and on the conclusion of the investigation, shall submit a final report to the Central Government.
  2. Report to be writing or printed [Sub section (2)]: Every report made under sub section (1) above, shall be in writing or printed as the Central Government may direct.
  3. Obtaining copy or report [Sub section (3)]: A copy of the above report may be obtained by making an application in this regard to the Central Government.
  4. Authentication of report [Sub section (4)]: The report of any inspector appointed under this Chapter shall be authenticated either—

 

a) By the seal, if any, of the company whose affairs have been investigated; or

b) By a certificate of a public officer having the custody of the report, as provided under section 76 of the Indian Evidence Act, 1872, and such report shall be admissible in any legal proceeding as evidence in relation to any matter contained in the report.

5. Exceptions: Nothing in this section shall apply to the report referred to in section 212 of the Companies Act, 2013.

Q 26

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 the public 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,-

  1. destroys, mutilates or falsifies, or conceals or tampers or unauthorisedly removes, or is a party to 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;
  2. Makes, or is a party to the making of, a false entry in any document concerning the company or body corporate; or
  3. 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 provision:

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.

Question 27

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:

  1. 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.
  2. The company may pass a special resolution and can request Central Government to investigate into the affairs of the company
  3. The Central Government can order investigation under Serious Frauds, Investigation Office, in public interest.
  4. The departments Central Government and State Governments can request for investigation under Serious Frauds investigation Office.

Q 28

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

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 SEIO n 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 or Special court 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’ court. [Sub section (10)]. An Interim report is submitted, if so directed, to the Central Government, till the completion of the investigation.

Q 29

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 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?

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:

  1. The creditors, or
  2. Class of creditors or
  3. Members or
  4. 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 favour 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 favour is significantly more, the number of members voting in favour do not exceed the number of members voting against.

Q 30

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.

Answer

According to Section 235 of the Companies Act, 2013,

  1. 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.
  2. 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,

a) 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.

b) 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)].

Q 31

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.

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 interest 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.

Q 32

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.

Q 33

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 favour of the scheme. 180 members holding 3,00,000 shares voted against the scheme. The remaining 60 members holding 1,00,000 shares 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:

  1. the creditors, or
  2. class of creditors or
  3. 3 members or
  4. 4 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.

 

Q 34

A group of shareholders holding 20% of the issued share capital of DEF Limited have filed a petition before the Tribunal alleging the following:

  1. Various acts of illegal, invalid and irregular transactions entered into the name of the company.
  2. Losses incurred due to mismanagement by the board of directors.
  3. Non-declaration of dividend despite having sufficient profits in the past years.

Examine the merits of the above petitions made under Section 241 of the Companies Act, 2013 in the light of the judicial pronouncements made in this regard.

Answer

According to Sections 244 of the Companies Act, 2013, a group of shareholders of DEF Limited must hold at least 10% of the issued share capital of the Company or satisfy other requirements under section 244 of the Companies Act, 2013. Since the group holds 20% of the issued share capital they are entitled to file a petition before the Tribunal under Section 241 of the Companies Act, 2013 by alleging that the affairs of the Company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members of the Company. However, on the basis of Sheth Mohanlal Ganpatram vs. Shri Sayaji Jubilee Cotton and Jute Mills Company Ltd., mere illegal, invalid or irregular transactions entered into in the name of the company do not constitute a ground for invoking the provisions of section 241 unless it is proved that they are oppressive to any shareholder or prejudicial to the interest of the company or to the public interest.

Similarly, losses incurred due to mismanagement by the board of directors, cannot, by itself, be regarded as oppression (Ashok Betelnut Co. P. Ltd. vs. M.L. Chandrakanth).

Also, failure to declare dividends or payment of low dividends also does not amount to oppression. (Thomas Veddon V.J. vs. Kuttanad Robber Co. Ltd.).

Thus, in the present case, the petition filed by the group of shareholders will fail unless they can prove to the satisfaction of the Tribunal that the acts complained of in the petition are oppressive and prejudicial to the interest of the company and the public interest.

Q 35

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:

  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 :
  • 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.]

Q 36

M/s Sunshine Oils Limited, a listed company as at 31st March, 2018 as per the audited financial statements is having 200 depositors with Rs. 50 Crores of deposit in the company. Out of the total 200 depositors 20 depositors of the company have formed a group and have appointed Mr. Ram (a practicing advocate who is not one of the depositor) as their representative to file an application in the National Company Law Tribunal (NCLT) 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. Will the application of Mr. Ram be admitted by the Honourable Tribunal. Discuss with reference to the provisions of the Companies Act, 2013?

Answer

M/s. Sunshine Oils Limited, a listed company as at 31st March, 2018, as per the audited financial statements is having 200 depositors with Rs. 50 crores of deposit in the company. Out of total 200 depositors, 20 depositors of the company have formed a group and have appointed Mr. Ram (a practising Advocate who is not one of the depositors) as their representative. To bring a class action suit against the management of the Company.

Section 245(3)(ii) of the Companies Act, 2013 prescribes that the requisite number of depositors to file an application shall not be less than 100 depositors or not less than such percentage of the total number of depositors as may be prescribed, whichever is less. However, Section 245(3)(ii) of the Companies Act, 2013 is silent regarding the minimum percentage of the depositors and no Rules have been prescribed till date.

Further, as per Section 432, 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.

Section 245(10) states that subject to the compliances of this section, 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 sub-section(1). In view of the above, the application of Mr. Ram 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.

Q 37

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?

Answer

i)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:

  1. Not less than 100 members of the company or not less than one-tenth of the total number of members, whichever is less; or
  2. 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.

ii)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.

Q 38

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 of 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 is valid and maintainable?

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 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 representatives 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.

In the given case, Mr. Srinath can make the application in status of a legal heir of deceased SHS.

Q 39

LED Bulb Ltd., has made default in filing financial statements and annual returns for a continuous period of 4 financial years ending on 31st 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 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.

Q 40

M/s, 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. 5,000 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.

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.

Q 41

In relation to winding up of a company, explain clearly the meaning of the term ‘overriding preferential payments’. Examine the provisions of the Companies Act and decide whether the following debts of a company under the winding up shall be ‘Preferential Payments’ and shall be paid in priority to the claim of unsecured creditors:

  1. Wages amounting to Rs. 30,000 only of an employee for services rendered for a period of 8 months within the preceding 12 months next before the relevant date.
  2. Rs. 1 Lac due to an employee from provident fund and Rs. 50,000 towards gratuity.
  3. Rs. 20,000/- payable by the company on account of expenses incurred in respect of investigation held u/s 213 of the Companies Act, 2013.

Answer

Section 326 of Companies Act, 2013 deals with the overriding Preferential Payments. Accordingly, notwithstanding anything contained in this Act or any other law for the time being in force, in the winding up of a company, (a) Workmen’s dues and (b) debts due to secured creditors to the extent such debts rank pari passu with such dues, shall be paid in priority to all other debts.

As per section 327 of Companies Act, 2013, in a winding up, subject to the provisions of section 326, there shall be paid in priority to all other debts:

  1. all revenues, taxes, cesses and rates due from the company to the Central Government or a State Government or to a local authority at the relevant date, and having become due and payable within the twelve months immediately before that date;
  2. all wages or salary including wages payable for time or piece work and salary earned wholly or in part by way of commission of any employee in respect of services rendered to the company and due for a period not exceeding four months within the twelve months immediately before the relevant date, subject to the condition that the amount payable under this clause to any workman shall not exceed such amount as may be notified;
  3. all accrued holiday remuneration becoming payable to any employee, or in the case of his death, to any other person claiming under him, on the termination of his employment before, or by the winding up order, or, as the case may be, the dissolution of the company;
  4. unless the company is being wound up voluntarily merely for the purposes of reconstruction or amalgamation with another company, all amount due in respect of contributions payable during the period of twelve months immediately before the relevant date by the company as the employer of persons under the Employees’ State Insurance Act, 1948 or any other law for the time being in force;
  5. unless the company has, at the commencement of winding up, under such a contract with any insurer as is mentioned in section 14 of the Workmen’s Compensation Act, 1923, rights capable of being transferred to and vested in the workmen, all amount due in respect of any compensation or liability for compensation under the said Act in respect of the death or disablement of any employee of the company: Provided that where any compensation under the said Act is a weekly payment, the amount payable under this clause shall be taken to be the amount of the lump sum for which such weekly payment could, if redeemable, be redeemed, if the employer has made an application under that Act;
  6. all sums due to any employee from the provident fund, the pension fund, the gratuity fund or any other fund for the welfare of the employees, maintained by the company; and
  7. The expenses of any investigation held in pursuance of sections 213 and 216, in so far as they are payable by the company.

Q 42

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 the 15th September 2017.

Determine the rights and liabilities of fraudulently preferred persons by mortgage of charge of property to him to secure the company’s debt.

Answer

Determination of rights and liabilities of fraudulently preferred persons:

As per 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,

  1. To the extent of the mortgage or charge on the property or
  2. The value of his interest, whichever is less not liable for any penal action under the Act.

Q 43

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?

Answer

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 ie, 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.

 

             Ch 9 – Companies Incorporated Outside India

 

Q 44

Mr. Ziyan an Indian citizen holds 25% of the paid up capital of Laurel Steven Limited, a company which was incorporated in Singapore with a paid up capital of 10 million Singapore Dollars. Swaraj Limited a company registered in India holds 30% of the paid up capital of Laurel Steven Limited. Laurel Steven Limited has recently established a share transfer office at New Delhi. The Company seeks your advice as to what formalities it should observe as a foreign company under the Companies Act, 20l3.

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, “Place of business” includes a share transfer or registration office.

Further, Section 379 states that where not less than 50% 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 case given in the question, the following facts are given:

a) Laurel Steven Ltd. was incorporated in Singapore and has a place of business (share transfer office) in New Delhi; hence, it is a foreign company.

b) Its shareholding comprises of 25% held by Mr. Ziyan who is a citizen of India and 30% by Swaraj Limited which is a company registered in India. Together the two Indian shareholders hold 55% of the share capital of Laurel Steven Ltd.

Therefore, although Laurel Steven Ltd. is a foreign company, due to the holding of more than 50% of its share capital by two Indian entities, it will be covered under section 379 and will be treated as a company incorporated in India or as an Indian Company.

However, it may be noted that under section 379, the application of the Companies Act, 2013 on Laurel Steven Ltd. will be only in respect of business carried by it in India and not in relation to its business anywhere outside India.

Under Section 380 of the Act, a foreign company is required to file for registration within 30 days of the establishment of a place of business in India the following documents with the Registrar:

  1. A certified copy of the instrument constituting or defining the constitution of the company.
  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 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 who is authorized for correspondence on behalf of 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 authorized 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

Q 45

Trans Asia Limited is registered as a public company u/s 4 (7) of the erstwhile Companies Act, 1956 which is a subsidiary of Galilio Limited, a foreign company. Trans Asia Limited carries on business in India describing itself as a foreign company. Can it do so? State the actions that can be taken against the company for improper use or description as foreign company under the provisions of the Companies Act, 2013.

Answer

Foreign Company *Section 2(42): “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.

In the instant case, Trans Asia Limited is registered as a public company u/s 4(7) of the erstwhile Companies Act, 1956 which is a subsidiary of Galilio Limited, a foreign company. Though Trans Asia Limited is a subsidiary of a foreign company but since it is registered in India, it is not a foreign company. Hence, it cannot describe itself as a foreign company.

Action against the improper use/description as foreign co.: As per Rule 12 of the Companies (Registration of Foreign Co.) Rules, 2014, if any person or persons trade or carry on business in any manner under any name or title or description as a foreign company registered under the Act or the rules made thereunder, that person or each of those persons shall, unless duly registered as foreign company under the Act and rules made thereunder, shall be liable for investigation under section 210 of the Act and action consequent upon that investigation shall be taken against that person.

Q 46

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 along with the financial statements by the foreign company.

Answer

(a) 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 FC3 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 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.

Q 47

The liability of members of Style Limited, a company incorporated in Singapore, is limited. The company plans to start a place of business in Mumbai from 1st Dec., 2016. It has taken an office space in Andheri (West), Mumbai for that purpose. The person who is to take charge of Mumbai Office seeks your advice regarding the provisions of the Companies Act, 2013, in respect of displaying of the company’s name etc at its Mumbai office as well as in its business letters and other documents. Advise him with reference to the provisions of the Companies Act, 2013 governing foreign companies.

Answer

Display of names etc. of foreign company: Section 382 of the Companies Act, 2013 provides that every foreign company shall—

  1. conspicuously exhibit on the outside of every office or place where it carries on business in India, the name of the company and the country in which it is incorporated, in letters easily legible in English characters, and also in the characters of the language or one of the languages in general use in the locality in which the office or place is situate;
  2. cause the name of the company and of the country in which the company is incorporated, to be stated in legible English characters in all business letters, bill- heads and letter paper, and in all notices, and other official publications of the company; and
  3. If the liability of the members of the company is limited, cause notice of that fact—
  • to be stated in every such prospectus issued and in all business letters, bill- heads, letter paper, notices, advertisements and other official publications of the company, in legible English characters; and
  • to be conspicuously exhibited on the outside of every office or place where it carries on business in India, in legible English characters and also in legible characters of the language or one of the languages in general use in the locality in which the office or place is situate.

Hence, the person who is to take charge of Mumbai Office of Style Limited may follow the above provisions in respect of displaying of the company’s name etc. at its Mumbai office as well as in its business letters and other documents

 

                          Ch 10 – Miscellaneous Provisions

 

Q 48

Buina Limited has discontinued its business since 2015 and has not been filing annual returns. The Registrar of companies issued a notice for striking off the company. Since no reply was received within the time specified in the notice, the name of the company was struck off from the register of companies. There were tax arrears and a notice was sent to the company by the tax recovery officer. The Directors contended that since the company's name has been struck off, the company does not exist and not liable to pay the tax. Referring to and analysing the relevant provisions of the Companies Act, 2013 examine the validity of the Company's claim.

Answer

According to Section 248(6) of the Companies Act, 2013, the Registrar, before passing an order for removal of name of the Company, 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.

Also, as per sub-section (7), the liability, if any, of every Director, Manager or other Officer who was exercising any power of Management, and of every Member of the Company dissolved under sub-section (5), shall continue and may be enforced as if the Company had not been dissolved.

Hence, in the instant case, Bunia Limited’s claim not to pay the tax is not valid.

Q 49

  1. 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.
  2. 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 more State Governments, and includes a company which is a subsidiary company of such a Government company.

  1. 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%.

2. 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).

Q 50

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:

  1. 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 10 lakh rupees or 1% of the turnover of the company, whichever is lower, 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.
  2. Provided that here the fraud in question involves public interest, the term of imprisonment shall not be less than 3years
  3. Provided further that where the fraud involves an amount less than 10 lakh rupees or 1% 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 5 years or with fine which may extend to 50 lakh rupees or with both.

Q 51

Rudraksh Ltd. 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:

  1. Accountability for non- filing of financial statements and annual returns for last two financial years, of the Rudraksh Ltd.
  2. Nature of the proposal for an appointment of Mr. Ram & Mr. Rahim in the Rudraksh Ltd. for improvement of financial position of the company.

Answer

  1. As per the stated facts, Ruraksh 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, neither Rudraksh Ltd. filed an application to the Registrar for obtaining the status nor has filed the financial statements or annual returns for 2 financial years consecutively, therefore, the Registrar shall issue a notice to the company and enter the name of the company in the register maintained for dormant companies.
  2. 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. It 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 required.

 

Q 52

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:

  1. Whether Gulmohar Ltd. is eligible to apply to Registrar of Companies to obtain dormant status for the company?
  2. 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?
  3. Is special resolution in general meeting a pre-requisite to make an application to Registrar of Companies for obtaining the status of dormant company?
  4. 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

i) 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.

ii) 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 fulfil the requirements of this Act or any other law;
  3. Allotment of shares to fulfil 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.

iii) 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.

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.

iv) 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.

Q 53

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.

Q 54

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:

  1. Any parties to the proceedings (It shall be accompanied with such fees and in such form as may be prescribed)
  2. 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.

Q 55

The Central Government wants to appoint Mr. Honest as Company Prosecutor. Can it do so? Mention the provisions regarding the power of Central Government to appoint Company Prosecutors along with their powers and privileges under the Companies Act, 2013.

Answer

Power of Central Government to appoint Company Prosecutors [Section 443 of the Companies Act, 2013]: 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.

The persons so appointed as company prosecutors shall have all the powers and privileges conferred by the Code of Criminal Procedure, on Public Prosecutors appointed under section 24 of the Code.

Accordingly, the Central Government may appoint Mr. Honest as Company Prosecutor for conducting any prosecution, appeal or other proceeding on behalf of the Central Government in the Tribunal/Court.

Q 56

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.

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,

  1. The Registrar,
  2. A shareholder of the company, or a member
  3. 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 authorized 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 21216) as a public wrong which has to be prevented and controlled. This non-bailable nature of the offences deters the offender and the others from committing further and similar offences.

Q 57:

The central Government is contemplating trail of a certain offence committed by TT Limited under the Companies Act, 2013. The said offence is punishable with an imprisonment of two years or more and a police report on the facts of the case has been prepared. Further, the said offence can be charged under the Code of Criminal Procedure, 1973. In the given scenario, outline a legal note as to how the trial of offences would proceed for prosecution and the Court jurisdiction in which the trial of offences would take place?

Answer:

As per Section 435 of the Companies Act, 2013, the Central Government may, for the purpose of providing speedy trial of offences under this Act, except under section 452, established or designated Special Courts with a single judge holding office as Session Judge or Additional Session Judge, in case of offences punishable under this Act with imprisonment of two years or more. Further section 436 provides following legal provision that deals with trial of offences for prosecution and courts jurisdiction in which trial of offences would take place:

i) all offences specified under sub section (1) of section 435 (except section 452) shall be triable only by the Special Court established or designated for the area in which the registered office of the company in relation to which the offence is committed, or

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;

ii) where a person accused of, or suspected of the commission of, an offence under this Act is forwarded to a magistrate, such Magistrate may authorise the detention of such person in such custody as he thinks fit for a period not exceeding fifteen days in the whole where such Magistrate is a Judicial Magistrate and seven days in the whole where such Magistrate is an Executive Magistrate

Provided that where such Magistrate considers that the detention of such person is unnecessary, he shall order such person to be forwarded to the Special Court having jurisdiction.

iii)The Special Court may exercise, in relation to the person forwarded to it under clause (b), the to try a same power which a Magistrate having jurisdiction case, in relation to an accused person who has been forwarded to him under that section and

 

(iv)A Special Court may, upon perusal of the police report of the facts constituting an offence under this Act or upon a complaint in that behalf, take cognizance of that offence without the accused being committed to it for trial.

When trying an offence under this Act, a Special Court may also try an offence other than an offence under this Act with which the accused may, under the Code of Criminal Procedure, 1973 be charged at the same trial.

 

                      Ch 12 – National Company Law Tribunal and Appellate Tribunal

 

Q 58

Aggrieved by an order of Hon'ble NCLT, dated 3rd April, 2018, passed without the consent of parties, Solan Minerals Limited decided to file an appeal before Hon'ble NCLAT. The order was received by the company on 4th April, 2018. The employees and officers went on a strike for a period of 10 days from 22nd May, 2018 demanding higher bonus and pay. In view of this, the management of the company was forced to a grinding halt during the strike period. Thereafter, the appeal was filed on 6th June, 2018 before the Hon'ble NCLAT and the company prayed for condonation of delay. Referring to and analysing the applicable provisions of the Companies Act, 2013, decide the following:

  1. Whether the proposed appeal would be admitted by the Hon'ble NCLAT.
  2. What is the maximum period allowed by the NCLAT for condonation of delay?

Answer

Appeal from Orders of Tribunal [Section 421 of the Companies Act, 2013]

  1. Appeal to Appellate Tribunal: Any person aggrieved by an order of the Tribunal may prefer an appeal to the Appellate Tribunal (AT).
  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 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.
  4. Extension of period: 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.

Thus,

i) In the instant case, the appeal was filed on 6th June, 2018 before the NCLAT, and Company prayed for condonation of delay. As per the provisions of the Act, the appeal should have been filed with NCLAT by 19th May, 2018 (i.e. 45 days from 4th April, 2018). Though the appeal could have been admitted on the grounds that the order of NCLT was passed without the consent of the parties. But the appeal was not tendered within the prescribed time. Further, the delay of condonation cannot be given as the strike started in the company from 22nd May, 2018 i.e. after 45 days of receiving the order of the NCLT and thus, the appellant was not prevented by sufficient cause from filing the appeal within the prescribed period. Hence the proposed appeal by Solan Minerals Limited will not be admitted by the NCLAT.

ii) 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.

Q 59

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

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.

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 5th 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.

 

        Ch 13 – Corporate Secretarial Practice- Drafting of Resolution, Minutes, Notices and Reports

 

Q 60

i)Board of Directors of DBM Limited held a board meeting on 2nd May, 2014 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, 2014 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:

  1. 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.
  2. The place, date and time of the meeting should be stated.
  3. 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”.
  4. 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.
  5. 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.
  6. Conduct of the business at the meeting should be recorded in the chronological sequence as per the Agenda.
  7. 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.
  8. Reference about interested directors abstaining from voting is also required to be stated in the minutes.
  9. Chairman’s signature and date of verification of minutes as correct.

ii)Resolution passed at the meeting of board of directors of DBM Limited held at its registered office situated at ……………………… on 2nd May, 2014 at     A.M.

“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, 2014 for a period of five years on a remuneration approved by the Remuneration Committee as enumerated below:

  1. Salary: `.......................... per month
  2. 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.”

Q 61

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

Specimen Board Resolution: Purchase of Equity Shares

 

Resolution passed at the meeting of the board of directors of XYZ Limited held at its registered office situated at on (day) at A.M.

 

“Resolved unanimously that pursuant to provisions of Section 186(2) of the Companies Act, 2013, the company be and is hereby authorized to purchase 35,000 equity shares of Rs. 100 each of PQR Limited, the investment in addition to other investments made to date in the aggregate being within the limits prescribed under the said section.”

 

“Resolved further that Mr. ………………., a Director of the company, be and is hereby authorised to sign/execute the necessary documents in this connection.”

 

Sd/-

 

Board of Directors XYZ Limited

Q 62

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 Notice

 

India Timber Limited

 

Address: Dated:

To Mr.

Address:

 

(Each director to be addressed individually) 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 Ltd

(Secretary)

 

Q 63

The Board of Directors of Luxury Limited in consistent with the Articles of Association of the company, appointed Mr. More as an additional Director at its meeting held on 1st October, 2016 for a period as permitted by law.

Draft a resolution stating appointment of Mr. More in the said company.

Answer

Board Resolution for appointment of an additional director

"Resolved that pursuant to the Articles of Association of the company and section 161(1) of the Companies Act, 2013, Mr. More is appointed as an Additional Director of the Luxury Limited with effect from 1st October, 2016 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. More will enjoy the same powers and rights as other directors.

Resolved further that Mr. Secretary of Luxury Limited be and is hereby authorized to electronically file necessary returns with the Registrar of Companies and to do all other necessary things required under the Act."

 

Q 64

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;

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:

  1. 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
  2. The rules or the regulations made thereunder shall be allowed to be attached;

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.

Q 65

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

  1. 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
  2. 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
  3. Counsels or procures for, any other person to deal in any securities of anybody corporate on the basis of unpublished price sensitive information, shall be liable to a penalty:

i) 25 crore rupees

ii) 3 times amount of profits made out of insider trading,

iii) Whichever is higher?

As such SEBI can, after following the prescribed procedure, impose a penalty on Mr. P.Mehra

Q 66

Mr. Clever who is registered as an Intermediary fails to enter into an agreement with his client and hence penalized 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 enter into an agreement with his client, fails to enter into such agreement, he shall be liable to a penalty:

  1. 1 lakh rupees for each day during which such failure continues or
  2. 1 crore rupees, whichever is less.

Mr. Clever has been penalized under the above mentioned provision. Two remedies are available to Mr. Clever in this matter: -

  1. Appeal to the Securities Appellate Tribunal (SAT):

Section 15T of the SEBI Act, 1992 provides that any person aggrieved by an order of the Board made, on and after the commencement of the Security Laws (Second Amendment) Act, 1999, under this Act or the rules or regulations made there under may prefer an appeal to a Securities Appellate Tribunal having jurisdiction in the matter.

Such appeal shall be filed within a period of 45 days from the date on which a copy of the order made by the Board is received and it shall be in such form and be accompanied by such fee as may be prescribed.

What if delay happens?

The Tribunal may entertain an appeal after the expiry of the said period if it is satisfied that there was sufficient cause for not filing it within the said period.

The Tribunal may, after giving the parties an opportunity of being heard, pass such orders as it thinks fit, confirming, modifying or setting aside the order appealed against.

2. Appeal to the Supreme Court (SC):

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 or fact or law arising out of such order.

What if delay happens?

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.

Q 67

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 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:

  1. Attachment and sale of the person’s movable property;
  2. Attachment of the person’s bank accounts;
  3. Attachment and sale of the person’s immovable property;
  4. Arrest of the person and his detention in prison;
  5. 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.

Q 68

Mr. Ram, citizen of India, left India for employment in U.S.A. on 1st June, 2002. Mr. Ram purchased a flat at New Delhi for Rs. 15 lakhs in September, 2003. His brother, Mr. Gopal employed in New Delhi, also purchased a flat in the same building in September, 2003 for Rs. 15 lakhs. Mr. Gopal's flat was financed by a loan from a Housing Finance Company and the loan was guaranteed by Mr. Ram.

Examine with reference to the provisions of Foreign Exchange Management Act, 1999 whether purchase of flat and guarantee by Mr. Ram 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

 

  1. A transaction which alters the assets or liabilities, including contingent liabilities, outside India of person's resident in India
  2. A transaction which alters assets or liabilities in India of person 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. Ram 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:

i) 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.

Guarantee in respect  of any liability, debt or other obligation incurred by a person resident outside India.

Conclusion:

In this case, Mr. Ram, 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. Ram 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 person’s resident outside India are given in Schedule II to Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000.

According to the said regulations both the purchase of immovable property by Mr. Ram and guarantee by Mr. Ram are permissible.

Q 69

Lifesys Limited, a billion dollar, Indian company wishes to create a chair in a reputed university in the U.S. This chair is for the department of computer science. The company wishes to obtain your advice in regard to the following with reference to the FEMA, 1999.

  1. Is such “chair” creation permissible?
  2. What is the maximum amount that can be denoted for such chair?
  3. Any formalities to be complied with?

Answer

As per Schedule III of the Foreign Exchange Management (Current Account Transactions) Rules, 2000, read with section 5 of the Foreign Exchange Management Act, 1999 donations exceeding one per cent of their foreign exchange earnings during the previous three financial years or USD 5,000,000, whichever is less, can be remitted by persons other than individuals for creation of Chairs in reputed educational institutes with the prior approval of the Reserve Bank of India. As per Schedule III of the Foreign Exchange Management (Current Account Transactions) Rules, 2000, read with section 5 of the Foreign Exchange Management Act, 1999 donations exceeding one per cent of their foreign exchange earnings during the previous three financial years or USD 5,000,000, whichever is less, can be remitted by persons other than individuals for creation of Chairs in reputed educational institutes with the prior approval of the Reserve Bank of India.

Considering the above provision-

  1. In the first case, “chair” creation for the department of computer science in reputed university in the U.S. is permissible.
  2. Maximum amount that can be donated for such chair will be one per cent of their foreign exchange earnings during the previous three financial years or USD 5,000,000, whichever is less without prior approval of the Reserve Bank of India.
  3. In case where donations exceeds one per cent of their foreign exchange earnings during the previous three financial years or USD 5,000,000, it shall require prior approval of Reserve Bank of India.

Q 70

In terms of the provisions of the Foreign Exchange Management Act, 1999, Mr. SAM is a person of Indian origin resident outside India. He wants to acquire some immovable properties in India not being agricultural property, plantation or a farm house. Referring to the provisions of the Foreign Exchange Management Act, 1999, state the permitted sources, means and restrictions imposed in this regard, Also state the provisions where the acquisition will be in the form of gift or inheritance by Mr. SAM.

Answer

Acquisition of immovable properties in India by a person of Indian origin resident outside India:

A person of Indian origin resident outside India may acquire immovable property in India other than an agricultural property, plantation, or a farm house.

Sources: In case of acquisition of immovable property, payment of purchase price, if any, shall be made out of

  1. Funds received in India through normal banking channels by way of inward remittance from any place outside India or
  2. Funds held in any non-resident account maintained in accordance with the provisions of the Act and the regulations made by the Reserve Bank.

Restriction: It is also provided that no payment of purchase price for acquisition of immovable property shall be made either by traveller’s cheque or by currency notes of any foreign country or any mode other than those specifically permitted by this clause.

Acquisition in the form of gift

A person of Indian origin resident outside India may acquire any immovable property in India other than agricultural land/farm house/plantation property by way of gift from a person resident in India or from a person resident outside India who is a citizen of India or from a person of Indian origin resident outside India.

Acquisition in the form of inheritance

A person of Indian origin resident outside India may acquire any immovable property, in India by way of inheritance from a person resident outside India who had acquired such property in accordance with the provisions of the foreign exchange law in force at the time of acquisition by him or the provisions of these Regulations or from a person resident in India.

Q 71

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) State the provisions of FEMA governing such type of transaction? ii) On applying the relevant provisions, can Mr. Mittal join her daughter in acquiring such a flat in Australia? iii) Mr. Mittal wants to receive advance payments against his exports from a buyer outside India. Explain the relevant provisions?

Answer

i) The provisions governing the acquisition and transfer of immovable property outside India. 1. A person resident in India may acquire immovable property outside India:

  1. By way of gift or inheritance from a person referred to in sub-section (4) of Section 6 of the FEMA 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 Reserve Bank.
  2. 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.
  3. Jointly with a relative who is a person resident outside India, provided there is no outflow of funds from India. 2. A person resident in India may acquire immovable property outside India, by way of Inheritance or gift from a person resident in India who has acquired such property in accordance with the foreign exchange provision in force at the time of such acquisition. 3. A Company incorporated in India having overseas offices, may acquire immovable property outside India for its business and for residential purposes of its staff, in accordance with the direction issued by the Reserve Bank of India from time to time.

ii) In the light of above discussions in 1(c), it is quite clear that Mr. Mittal, a resident in India, can join his daughter who is a resident outside India, in acquiring a Flat at Australia.

iii) 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:

 

  1. The shipment of goods is made within one year from the date of receipt of advance payment.

 

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

 

 

  1. 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.

 

2. 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.

Q 72

The Reserve Bank of India issued certain directions to Dream Construction Limited, an authorised person under the Foreign Exchange Management Act, 1999 to file certain returns. The Company failed to file the said returns. Decide, as to what penal provisions are applicable against the said authorised person under the said Act.

Answer

Penal provisions: Section 11(3) of the Foreign Exchange Management Act, 1999 states that where any authorized person contravenes any direction given by the Reserve Bank of India under the said Act or fails to file any return as directed by the Reserve Bank of India, the Reserve Bank of India may, after giving reasonable opportunity of being heard impose a penalty which may extend to Rs. 10,000/- and in the case continuing contraventions with an additional penalty which may extend to Rs. 2,000/- for every day during which such contravention continues.

Q 73

Mr. Bandha, a software Engineer, Indian Origin took employment in USA. He is a resident of USA for a long time. He desires

  1. To acquire a farm house in Munar (Kerala).
  2. To make investment in KLJ (Nidhi) Ltd., registered as Nidhi Company.
  3. 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.

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

  1. 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.

2. 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.

3. 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.

 

                                Ch. 3 – Prevention of Money Laundering Act, 2002

 

 

Q 74

Explain the term "Offence of Money Laundering" within the meaning of the Prevention of Money Laundering Act, 2002. State the punishment for the offence of money laundering. or 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 with 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. Illegal import into India, export from India or transhipment 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

Q 75

PMT Limited, a banking company maintained the record of all transactions for a period of 5 years from the date of cessation of the transactions between the clients and the company. Decide whether the company has fulfilled its obligation under the provision of Money laundering Act, 2002.

Answer

Obligation of Banking Companies:

Sec. 12 of the Prevention of Money Laundering Act, 2002 provides for the obligation of Banking Companies, Financial Institutions and Intermediaries of securities market. Such Obligations are;

i) Maintenance of records: Every reporting entity shall

  1. Maintain a record of all transactions, including information relating to transaction covered under clause (b), in such a manner as to enable it to reconstruct individual transactions;
  2. furnish to the Director within such time as may be prescribed, information relating to such transactions, whether attempted or executed, the nature and the value of which prescribed,
  3. Verify the identity of its clients in such manner and subject to such condition, as may be prescribed;
  4. Identify the beneficial owner, if any, of such of its clients, as may be prescribed;
  5. Maintain records of documents evidencing identity of its clients and beneficial owners as well as account files and business correspondence relating to its clients.

ii) Maintain of records: The records referred to in clause (a) shall be maintained for a period of 5 years from the date of transaction between a client and reporting entity. The records referred to in clause (e) shall be maintained for a period of 5 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 given case, PMT Limited, a banking company maintained the record of all transaction for a period of 5 years from the date of cessation of the transactions between the clients and the company.

Conclusion: The Company has fulfilled its obligation as records are maintained for 5 years as required by law.

Q 76

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.

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.

Q 77

Mr. Gambler 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. He seeks your advise as to how can he be released on bail. Advise him.

Or

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

In accordance with the provisions of the Money Laundering Act, 2002, as contained under Section 45, 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 punishable for a term of imprisonment of more than 3 years under Part A of the Schedule shall be released on bail or on his own bond unless:

The public Prosecutor has been given an opportunity to oppose the application for such release and 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 person, the Special Court can direct the release of such person on bail.

`Mr. Gambler may refer the above section 45 so that he can be released on bail.

Q 78

Mr. Manoranjan, an officer investigating a case of money laundering, is of the view that important evidence relating to the case is available in a foreign country, (Contracting State) with which agreement for exchange of information has already been entered into.

Advise Mr. Manoranjan, referring to the provisions of the Prevention of Money Laundering Act, 2002, about the procedure to be followed for collecting such evidence.

Answer

According to Section 57 of the Prevention of Money Laundering Act, 2002, the following procedure may be followed for collecting evidence relating to the case that Mr. Manorajan is investigating:

a) Issue of letter of request: If, in the course of an investigation into an offence or other proceedings under this Act, an application is made to a Special Court by the Investigating Officer or any officer superior in rank to the Investigating Officer that any evidence is required in connection with investigation into an offence or proceedings under this Act and he is of the opinion that such evidence may be available in any place in a contracting State, and the Special Court, on being satisfied that such evidence is required in connection with the investigation into an offence or proceedings under this Act, may issue a letter of request to a court or an authority in the contracting State competent to deal with such request to-

  1. examine facts and circumstances of the case,
  2. Take such steps as the Special Court may specify in such letter of request, and
  3. Forward all the evidence so taken or collected to the Special Court issuing such letter of request.

 

b) Transmission of letter of request: The letter of request shall be transmitted in such manner as the Central Government may specify in this behalf.

 

c) Letter of request to be deemed as evidence: Every statement recorded or document or thing received shall be deemed to be the evidence collected during the course of investigation.

 

 

                                 Ch. 4 – The Foreign Contribution (Regulation) Act, 2010

 

Q 79

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

Q 80

Whether foreign remittances received from a relative are to be treated as foreign contribution as per FCRA 2010?

Answer

Foreign remittances received from a relative

  • AS per Sec 4(e) of the Foreign Regulation Act 2010 and Rules of Foreign Contribution Regulation Rules 2011, even the persons prohibited u/s 3 i.e., person not permitted to accept foreign contribution, are allowed to accept foreign contribution from their relatives.
  • However, in terms of Rule6 of Foreign Contribution Regulation Rules 2011 any person receiving foreign contribution in excess of Rs. 1 lakh or equivalent thereto in financial year from any of his relatives shall inform the C.G in prescribed Form within 30 days from the date of receipt of such contribution.

Conclusion: Foreign remittance received from a relative is not treated as foreign contribution.

Q 81

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 –

  1. is registered and granted a certificate or has obtained prior permission under this Act; and
  2. 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:

  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.
  4. 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.

Q 82

An Association registered under the Foreign Contribution (Regulation) Act, 2010 (the Act) received donation from a club registered in Singapore. The Association proposes:

  1. 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,
  2. To invest portion of the donation in Chits promising high returns.

In the light of provisions of the Foreign Contribution (Regulation) Act, 2010 decide whether the Association can carry out the above proposals and if so state the procedures to be followed under the said Act?

Answer

  1. 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.

2. 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:-

  • 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;
  • 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.

Q 83

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]

The Central Government may, by an order, cancel the certificate if —

  1. 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
  2. The holder of the certificate has violated any of the terms and conditions of the certificate or renewal thereof; or
  3. In the opinion of the Central Government, it is necessary in the public interest to cancel the certificate; or
  4. The holder of certificate has violated any of the provisions of this Act or rules or order made there under; or
  5. 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.

 

         Ch. 5 – The Arbitration and Conciliation Act, 1996

 

Q 84

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:

  1. 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.
  2. 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.

Q 85

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

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 jointly 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.

Q 86

How important are the ideas of independence and impartiality in arbitration?

  1. Is the arbitrator required to disclose anything to the parties?
  2. Is membership of the same sports club as one of the parties problematic?

Answer

  1. 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.
  2. Such an association is too remote to count as a relation that might lead to doubts of bias.

Q 87

Examine the validity of the following statements with reference to The Arbitration and Conciliation Act, 1996:

  1. Every Court would be a Judicial Authority but every Judicial Authority would not be a Court.
  2. The disputes submitted to arbitration must be arbitrable.

Answer

  1. 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.
  2. 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.

Q 88

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. MMR. 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 tine 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 is 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 are not arbitrables as they are the offences of criminal natures. Such types of disputes are to be tried by the court of proper jurisdiction.

Therefore, the submission of the dispute in the situation to arbitration is in valid.

 

Q 89

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.

Q 90

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. Provided further that the corporate insolvency resolution process shall mandatorily be completed within a period of three hundred and thirty 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:

Provided also that where the insolvency resolution process of a corporate debtor is pending and has not been completed within the period referred to in the second proviso, such resolution process shall be completed within a period of ninety days from the date of commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2019”.

Q 91

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 an Adjudicating Authority. State 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., 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 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 initiation 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 against the same debtor (i.e. Wisdom Ltd.) can be initiated. So, Mr. X, cannot file an application on initiation of CIRP, however, is entitled under the law to raise his claim in this case against the Wisdom Ltd.

Q 92

Standard International Ltd. who is a foreign trade creditor having its office in Hong Kong wanted to file a petition under the Insolvency and Bankruptcy Code, 2016 on default of the debtor in India. It moved a petition u/s 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 could not submit a "Certificate from a financial institution" as required under the Code. Whether the petition is permissible under the Insolvency and Bankruptcy Code, 2016? Decide.

Answer

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. So, Petition under Section 9 of the Code is not permissible.

Q 93

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 Rose Garden Ltd. 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 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.

Q 94

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:-

  • Name & Address of Corporate Debtor under the Corporate Insolvency Resolution Process.
  • Name of the authority with which the corporate debtor is incorporated or registered.
  • Details of interim resolution Professional who shall be vested with the management of the Corporate Debtor and be responsible for receiving claims.
  • Penalties for false or misleading Claims.
  • The last date for the submission of the claims.
  • The date on which the Corporate Insolvency Resolution Process ends.

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.

Q 95

BDLK Limited decided to go for voluntary winding up and accordingly the Board of Directors at a meeting of the Board are about to take the necessary steps to initiate the winding up proceedings. The Board of Directors of the company approached you for guidance in this regard. Please list out the steps required under the Insolvency & Bankruptcy Code 2016 before approval of such liquidation proposal with specific reference to meetings and actions of relevant stakeholders.

Answer

Voluntary Winding Up: As per Section 59 of the Insolvency and Bankruptcy Code, 2016, the voluntary liquidation of a corporate person shall meet such conditions and procedural requirements as may be specified by the Board (IBBI).

Conditions of initiation of voluntary liquidation proceedings: Voluntary liquidation proceedings of a corporate person registered as a company shall meet the following conditions, namely:—

1. A declaration from majority of the directors of the company verified by an affidavit stating that -

  • they have made a full inquiry into the affairs of the company and they have formed an opinion that either the company has no debt 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
  • The company is not being liquidated to defraud any person;

2. The declaration given above shall be accompanied with the following documents namely:

  •  Audited financial statements and record of business operations of the company for the previous two years or for the period since its incorporation, whichever is later;
  • A report of the valuation of the assets of the company, if any prepared by a registered valuer;

3. Within four weeks of a declaration under sub-clause (a) above, there shall be—

  • A special resolution of the members of the company in a general meeting requiring the company to be liquidated voluntarily and appointing an insolvency professional to act as the liquidator; or
  • a resolution of the members of the company in a general meeting requiring the company to be liquidated voluntarily as a result of expiry of the period of its duration, if any, fixed by its articles, or on the occurrence of any event in respect of which the articles provide that the company shall be dissolved, as the case may be and appointing an insolvency professional to act as the liquidator:

Provided that the company owes any debt to any person, creditors representing two thirds in value of the debt of the company shall approve the resolution passed under sub-clause (c) within seven days of such resolution.

Notification to Registrar of company and the Board: The Company shall notify the Registrar of Companies and the Board about the resolution to liquidate the company within seven days of such resolution or the subsequent approval by the creditors, as the case may be.

Q 96

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:

  1. State whether Mr. Raman is eligible for filing of application for initiation of CIRP?
  2. 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. 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.

Q 97

As on March 31, 2019, 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, 2019 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:

  1. Whether the application made by M/s. Sharp Industries Ltd. for initiating a fast track corporate insolvency resolution process is admissible?
  2. The time period including the extension of time period, if any, within which the fast track corporate insolvency resolution process shall be completed?

Answer

Fast Track Corporate Insolvency Resolution Process:

As per Sec. 55 of Insolvency and Bankruptcy Code, 2016, an application for fast track corporate insolvency resolution process may be made in respect of the following corporate debtors, namely: to

  1. A small company as defined u/s 2(85) of Companies Act, 2013; or
  2. A Start-up (other than the partnership firm); or
  3. An unlisted company with total assets, as reported in the financial statement of the immediately preceding financial year, not exceeding 1 crore.

Conclusion: Based on the provisions as stated above, M/s. Sharp Industries Ltd. can initiate a fast Track corporate insolvency resolution process as its total asset as reported in the financial statement of the immediately preceding financial year, not exceeding 1 crore.

Time period for completion of fast track corporate insolvency resolution process: Sec. 56 of Insolvency and Bankruptcy Code, 2016 provides the following:

  1. Fast track corporate insolvency resolution process shall be completed within a period of 90 days from the insolvency commencement date.
  2. The Resolution Professional shall file an application to the Adjudicating Authority to extend the period of the fast track corporate insolvency resolution process beyond 90 days if instructed to do so by a resolution passed at a meeting of the committee of creditors and supported by a vote of 75% of the voting share,
  3. On receipt of an application, if the Adjudicating Authority is satisfied that the subject matter of The case is such that fast track corporate insolvency resolution process cannot be completed a period of 90 days. It may, by order extend the duration of such process beyond the said period of 90 days try such further period, as it thinks fit, but her period, as it thinks fit, but not exceeding 45 days.

Q 98

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.

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:-

  1. Members of Committee of creditors, including the authorised representatives referred to in sub-sections (6) and (6A) of section 21 and sub-section (5);
  2. Members of the suspended Board of Directors or the partners of the corporate persons, as the case may be;
  3. 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.

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 said appointment is valid.

Q 99

Best Bank, a financial creditor sent a demand notice for a claim of Rs. 10.2 crores on XYZ Limited, a corporate debtor on 6th February, 2018. When the petition was filed before NCLT under Insolvency and Bankruptcy Code, 2016, Best Bank claimed that the XYZ Limited has defaulted Rs. 29.8 crores instead of original amount of Rs. 10.2 crores. NCLT appointed an interim insolvency resolution professional. XYZ Limited made an appeal with NCLAT demanding that the Best Bank's claim is not maintainable as there is a difference in the amount mentioned in the demand notice and the application filed under the Code. Decide whether the contention of XYZ Limited is correct.

 

Also, state who can file Corporate Insolvency Resolution process under the Code.

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. The financial creditor shall, along with the application furnish

  1. Record of the default  recorded with the  information utility or such other record or evidence of default as may be specified;
  2. The name of the resolution professional proposed to act as an interim resolution professional; and
  3. Any other information as may be specified by the Board.

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.

Here, in the given instance, Best Bank (Financial creditor) filed a petition against the XYZ Ltd. (Corporate debtor) for the default of Rs. 29.8 crore instead the earlier demanded amount of Rs. 10.2 Crore. As per the above provision, NCLT (Adjudicating Authority) shall, 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. When NCLT is satisfied, it admits the submitted application for initiation of corporate insolvency process. Therefore, contention of XYZ Ltd. as to filing of appeal before NCLAT demanding that the best bank's claim is not maintainable due to difference in the claim amount is incorrect.

Who can file insolvency resolution process: As per section 6 of the Code, where any corporate debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate corporate insolvency resolution process in respect of such corporate debtor.

Q 100

Mr. SP booked office space with Elegant Construction Limited. At the time of booking Rs. 36 lakhs was paid. Remaining amount of Rs. 10 lakhs was paid at the time of taking delivery. He entered into a Memorandum of Understanding (MOU) with the company having various terms and conditions of the sale/allotment. According to the MOU, Elegant Construction Limited was required to build and deliver the possession of the unit within 2 years from the date of execution of the MOU. It also stipulated payment of an assured return of Rs. 82,000 per month (subject to TDS u/s 194A of IT Act, 1961) till possession of the unit was delivered to Mr. SP. Elegant Construction Limited failed to pay the assured return. Thereafter, Mr. SP filed an application for initiating insolvency resolution process. Decide about the validity of the said application in view of the provisions of Insolvency and Bankruptcy Code, 2016 as regards the definition of a "Financial Creditor" under Section 5 (7) read with Section 5 (8) of the Code.

Answer

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 [Section 5(7) of the IBC] Financial Debt means a debt along with interest, if any, which is disbursed against the consideration for the time value of money. The financial debt besides with other debts, includes any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing [Section 5(8) of the IBC] As per the given facts, Mr. SP booked office space with Elegant Construction Limited. He entered into MOU with the condition stating to build and deliver the possession of the unit within 2 years from the date of execution of MOU. MOU also stipulated payment of an assured return of Rs. 82,000 per month till possession of the unit was delivered. Elegant Construction Limited failed to pay the assured sum. Mr. SP filed an application for initiating insolvency resolution process against the Elegant Construction Limited. In the light of the stated provisions in the given circumstances, assured returns are regular payment and qualify as financial debt. As to the promise to pay the assured return of Rs. 19,68,000 (i.e. 82,000 x 24 months) by Elegant Construction Limited to Mr. SP makes the Mr. SP (applicant) as Financial creditor. Initiation of corporate insolvency resolution process by financial creditor as per section 7 of the Code, a financial creditor by itself, may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred. A default includes a default in respect of a financial debt owed to the applicant financial creditor of the corporate debtor. Hence, an application for initiating corporate insolvency resolution process against Elegant Construction Limited is valid.

Q 101

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.

Q 102

Mr. Atul was appointed as the Insolvency Resolution Professional for XYZ Ltd. An application to replace the Insolvency resolution professional was filed before the Adjudicating Authority by some Financial Creditors. The financial Creditors propose to appoint Mr. K as the insolvency professional instead of Mr. Atul. Referring to the relevant provisions of the Insolvency and Bankruptcy Code 2016, decide whether Mr. Atul can be replaced and if so, state the procedure to be followed to appoint another IRP in place of existing one.

Answer

Replacement of Resolution Professional (Section 27 of the Insolvency and Bankruptcy Code, 2016)

  1. Where, at any time during the corporate insolvency resolution process, the committee of creditors (comprising all financial creditors of the corporate debtor) is of the opinion that a resolution professional appointed under Section 22 is required to be replaced; it may replace him with another resolution professional.
  2. The committee of creditors [COC] may, at a meeting, by a vote of sixty-six per cent of voting shares, resolve to replace the resolution professional appointed under Section 22 with another resolution professional, subject to a written consent from the proposed resolution professional in the specified form.
  3. The committee of creditors shall forward the name of the insolvency professional proposed by them to the Adjudicating Authority.
  4. The Adjudicating Authority shall forward the name of the proposed resolution professional to the Board for its confirmation and a resolution professional shall be appointed in the same manner as laid down in section 16.
  5. Where any disciplinary proceedings are pending against the proposed resolution professional, the resolution professional appointed under Section 22 shall continue till the appointment of another resolution professional under this Section.

Hence, in the instant case, Mr. Atul can be replaced by the COC comprising of financial creditors of corporate debtors, by following the above procedure.